NEW YORK—An uncomfortable reality is becoming increasingly difficult to ignore. The global economy is in a period of “more frequent and violent shocks,” as Nobel laureate Michael Spence puts it. Instead of facing isolated and temporary disruptions, we are confronting a structural shift toward unsettling volatility, deepening fragmentation, and a wider dispersion of outcomes for countries, companies, and households. The old world is gone, and virtually everyone risks losing out in the new one. The question is by how much and what to do about it.
The Iran war, which spread across the Middle East, exemplifies this new reality. Even though the local, regional, and global damage has been going from bad to worse, introducing a durable circuit breaker has proved difficult. As such, the economic damage is evolving and deepening, with early effects on energy prices and interest rates fueling broader inflation and raising the risk of lower growth and financial instability.
This phenomenon is not new. A circuit breaker has proven equally elusive for the Ukraine war, and we have seen the same dynamics in narrower economic and finance spheres, from the weaponization of tariffs and investment sanctions to supply-chain fragmentation. It is tempting to treat each of these as standalone episodes—and many policymakers and investors are doing just that. This is a mistake.
Rather than constituting isolated events, the current instability is the predictable result of the loss of three previously dominant narratives with no unifying ones to replace them. The first is globalization. Gone are the days when ever-deeper economic integration was seen to act as a stabilizing force. The promise that interdependency would reduce the risk of conflict has been replaced by the weaponization of trade and finance, and the exploitation of chokepoints. Because the world failed to address globalization’s adverse distributional effects early on, the essential trifecta of respected global standards, effective multilateral institutions, and the rule of law is now being dismantled in favor of unilateralism, fragmentation, and impunity.
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