The Evolving Global Economic Landscape and the Role of Developing Countries
The global economic environment has undergone significant changes in recent years, particularly for developing countries. These nations face a complex set of challenges, including slower economic growth, disrupted supply chains, reduced aid flows, and heightened financial market volatility. These headwinds are not isolated; they are part of a broader restructuring of the postwar economic and financial order, driven largely by developed nations.
This transformation has shifted the dynamics of international economic relations. For much of the post-World War II era, the global economy operated within a core-periphery framework, with the United States at its center. The US played a critical role in providing global public goods, leading multi-country policy coordination, and managing crises in accordance with widely accepted rules and standards. The ultimate goal was to achieve convergence and create an integrated, prosperous world economy.
However, several factors have undermined this model. First, there has been insufficient attention to the growing distributional imbalances that have led to widespread alienation and marginalization within influential segments of society. This has resulted in economics becoming subservient to politics rather than the other way around.
Second, the existing order struggled to integrate rapidly expanding large developing countries, such as China. Despite its massive economy, China’s relatively low per capita income created a persistent misalignment between its domestic development priorities and its new global responsibilities. The world found it difficult to absorb the external consequences of China’s economic strategy, generating tensions that international governance structures have struggled to resolve.
Third, the United States, once a stabilizing force, has become a source of volatility. Events such as the 2008 global financial crisis, the weaponization of tariffs against China, and the increasing use of payment-system sanctions have contributed to this shift. More recently, issues like the inequitable distribution of COVID-19 vaccines, the overuse of tariffs, the dismantling of America’s foreign-aid system, and continued indifference to humanitarian crises have further exacerbated this trend.
Key Policy Priorities for Developing Countries
Despite the challenges, developing countries have managed to navigate the changing landscape relatively well so far. Their success can be attributed to hard-won policy achievements, including the strengthening of macroeconomic frameworks and institutions in recent decades.
To maintain this positive trajectory in an increasingly challenging external environment, developing countries must focus on four key policy priorities:
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Preserve Macroeconomic Stability: Addressing structural and financial vulnerabilities is crucial. This includes tackling shallow domestic financial markets, weak regulatory frameworks, and governance deficits.
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Strengthen International Links: Building resilience, improving agility, and expanding optionality require coordinated, multiyear efforts to harmonize regulations, foster regional financial integration, and build trade infrastructure.
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Exploit New Opportunities from Innovations: Developing countries should prepare to leverage innovations, especially in traditional sectors and social sectors where investment in human capital yields high returns. AI, in particular, offers immense potential to revolutionize medicine, education, and agriculture, enabling these countries to leapfrog traditional development stages.
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Reassess Foreign Reserves: With many US assets appearing overvalued and US Treasuries becoming more volatile, developing countries with substantial foreign reserves must reconsider their traditional US overweight. This process will require careful asset disaggregation, revised asset-allocation methodologies, and new investment mindsets.
The Role of Multilateral Institutions
Multilateral institutions such as the World Bank and regional development banks have a crucial role to play in helping developing countries pursue these approaches. To become trusted advisers, these institutions must improve their ability to compile and disseminate best practices for new and evolving technologies that can enhance health, educational, and productivity outcomes.
They must also promote the uptake of these technologies, ensuring that their staff are equipped to answer questions about interacting with AI agents, leveraging innovations to deliver essential services, and managing associated risks. Additionally, multilateral institutions should encourage regional links and projects that facilitate trade, expand cross-border infrastructure, and promote shared resource management.
In a world increasingly shaped by frequent shocks, there is an urgent need to enhance contingency-funding facilities, such as by strengthening risk-sharing tools. This should not undermine the essential work these institutions perform in fragile countries, where traditional development models often struggle. In such contexts, out-of-the-box thinking is required to address serious governance and security challenges.
A Historic Opportunity for Developing Countries
AI and other emerging technologies present a rare opportunity for developing countries to unlock new pathways to inclusive economic growth. However, exploiting this opportunity is not automatic. Unless developing countries create the conditions necessary for the efficient and equitable diffusion of such innovations throughout their economies—starting with the health and education sectors—they risk falling further behind.
Failure to do so could deepen inequalities within and between countries and accelerate the fragmentation of the global order. The path forward requires a combination of strategic policy choices, institutional support, and a commitment to innovation and resilience.