'Very Bad For Global Economy If War Continues'

'Even if the war ends tomorrow, which is unlikely, and we go back to the pre-war status quo, the world will still need some time to get over the sudden shock of oil price increases.'

After more than a month, there is a temporary, uneasy ceasefire in the war the US and Israel launched against Iran. Nobody is sure how long it will last.

Will the Strait of Hormuz through which 20% of the world's oil tankers pass remain open?

How much will the global economy be affected by the oil crisis?

Will there be stagflation like many experts fear?

Dr Anil B Deolalikar is the professor of economics and founding dean of the School of Public Policy at University of California, Riverside.

"The Indian economy has been quite resilient and growing relatively steadily. But it has different problems, like a lot of its growth has been jobless growth," Professor Deolalikar tells Rediff's Shobha Warrier in the concluding segment of a two-part interview.

• Part 1 of the Interview: 'Influence Of The US Is Diminishing'

China has become India's largest trading partner in 2025-2026 overtaking the US, with bilateral trade hitting $137 billion...

China being the second largest economy in the world is going to continue taking on a more central position in global affairs and international trade.

Then, the way Africa is growing, it is going to become the most populated continent in the world in the next 30 to 40 years.

You will see a lot of trading shift to Africa.

India also will become more important though its economy is small compared to the US and China.

What it means is the relative dominance of the US will decline as other nations rise although the US will likely remain an economic superpower for at least the next 20-30 years, maybe even 40 years.

Do you see the economic dominance the 'developed' West had will move towards 'developing' Asia?

Of course, it has already happened. In 1960, the Chinese and Indian economies had a roughly 5% share of global GDP. Today it is 25% or more. And their share will continue to increase. So will that of the rest of Asia and Africa.

But I see Africa as a very important area of growth in the future because of their population growth. Demographers expect that Africa will account for 50% to 60% of all the people that will be added to the world's population in the next 30 years.

As early as 2050, Nigeria will be the third most populous country in the world after India and China.

So, we are likely to see Africa rise and become an increasingly important population and economic region in the world.

It means, we are moving from a unipolar world to a multipolar world where you will have China, the US, European Union, the Latin American Bloc, the African Bloc, the South East and South Asian Blocs.

Now that bilateral trade agreements between different countries are happening, do you see the dollar becoming less and less important in global trade?

Yes. No question about it. Again, the US still has an enormous first-mover advantage. And it has deep and highly liquid financial markets. As such, the US dollar will remain the dominant global currency even in 25-30 years. But it will become less dominant than it was in the past.

A lot of oil transactions are already taking place in the Chinese yuan; perhaps the new BRICS currency (The Unit) will also become increasingly important. It remains to be seen.

If the war in the Middle East ends, do you see an economic recovery happening globally? How long do you think it will take for the global economy to recover?

Recovery will happen, but it may take long.

I think even if the war ends tomorrow, which is unlikely, and we go back to the pre-war status quo, the world will still need some time to get over the sudden shock of oil price increases.

But in the next 9 to 18 months, things should slowly come back to normal.

And if the war continues...?

It will be very bad for the global economy if the war continues.

And if Iran completely closes the Strait of Hormuz, we are looking at a major global recession this year or next year.

There can be another scenario also. The war ends but Trump is back to the tariff war... He is already talking about high tariffs for the countries that help Iran...

Tariffs may be difficult to implement because the US supreme court has declared them illegal. So, the administration will have to find another way to put the tariffs back on. I think it is going to be a little difficult.

And then the mid-term elections are going to take place in the US in November. If the Democrats win a lot of additional seats in the House and the Senate, they could block many of the Trump policies.

Then, there will be more political, economic, and policy uncertainty.

Too many variables creating uncertainty are not good for the economy.

But then some would say that if the Democrats win the Congress, they may put a brake on some of the extreme and erratic polices of the current administration, and that could be good for the economy.

'Africa is going to be the big surprise in the next 50 years'

As an economist, what kind of future do you see for the economies of the world?

Most economists are surprised to see how resilient the US economy and the US consumers have been in the last 4-5 years.

It recovered from the pandemic very rapidly. People thought the tariffs were going to hurt the economy badly but somehow, it continued to grow.

The AI boom has a lot to do with the recent growth. It has offset some of the negative policies and the policy uncertainties.

The other economies are also strong, relatively speaking. China is going through a bit of a slowdown. They were growing at 10% plus for the last 40 years. So, growing at 4-5% is not all that bad.

The Indian economy has also been quite resilient and growing relatively steadily. But it has different problems, like a lot of its growth has been jobless growth.

Africa is going to be the big surprise in the next 50 years. Countries like Ethiopia, Rwanda, and Uganda have had fast growing economies.

Africa is no longer a basket case people used to think of before. Africa will become much more important in the global order.

So, no doomsday?

No doomsday. I don't think we are going to go through another depression or another Great Recession of the type we saw in 2008.

Part of the reason is AI-related productivity growth.

IMAGE: Dr Anil Deolalikar

But AI is also causing unemployment..

Yes, it is causing some unemployment, and it may cause even more labour displacement.

But then anytime a technological change happens, you go through a period of unemployment and labour displacement, and people have to look for new jobs and learn new skills.

When automobiles came in, all the horse carriage drivers went out of business. When electric streetlights came about, the entire profession of gas lamp lighters became obsolete. But the displaced workers were eventually absorbed into new jobs and occupations. It remains to be seen if that happens with AI.

Hopefully, AI will create new jobs that are more productive than before, and it will usher in an era of prosperity.

But if it does not, the world could be in deep trouble. No one knows right now what is likely to happen since AI is so new.

As the famous economist Joseph Schumpeter said innovation is the disruptive engine of capitalist growth whereby new products, new methods, and new industries constantly arise to destroy older, inefficient ones. This cycle results in long-term prosperity but brings about disruption and destruction in the short term like job losses, firm failures, industry closures.

Feature Presentation: Aslam Hunani/Rediff

• THE MIDDLE EAST CONFLICT