Global economic instability as a global issue: VCE Politics Unit 3

What this dot point is asking

The design says interdependence has brought benefits but also raised the capacity for instability, conflict and inequality, and that institutions struggle to coordinate stability amid several overlapping crises. You must ask whether political stability and instability are linked to the interdependence of the global economy.

The answer

Short-term causes (last 10 years)

• The COVID-19 pandemic disrupted production, trade and public finances from 2020.
• Inflation and interest rate rises after 2021 followed supply disruption, energy price shocks and the war in Ukraine (from February 2022).
• Trade barriers and economic rivalry. The use of tariffs and export controls rose, including the new United States tariffs announced in 2025 and responses by trading partners. In February 2026 the United States Supreme Court ruled that the emergency law behind many of those tariffs does not authorise them, and the administration turned to other legal authorities, so check current tariff rates. The IMF's 2026 outlooks cite trade barriers and fragmentation among key risks. In 2026 the Middle East war and the resulting energy-price shock were also a major short-term cause of instability: the IMF titled its April 2026 outlook "Global Economy in the Shadow of War" and its July 2026 update "Global Economy in Crosscurrents of War and Technology", and its projection for 2026 global growth fell from 3.3 percent in the January update to 3.0 percent in the July update (as at the July 2026 update; check the latest outlook).
• Financial fragility. The collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse in March 2023 showed how stress in one institution can spread.
• Debt. Many low and middle income states face heavy debt servicing that limits spending on development.

Interconnectedness

Supply chains, finance and energy trade link economies. A shock can travel quickly: sanctions on a major energy exporter move prices everywhere, and a tariff on one product reroutes trade through other states. The same links mean cooperation brings shared gains, which is why the issue is political: governments decide how open to be.

Responses

• States use tariffs, subsidies, interest rate and fiscal policy, trade agreements and sanctions. Many pursue "economic security", reducing dependence on rival suppliers.
• Institutions of global governance. The International Monetary Fund provides surveillance and emergency lending; the World Bank finances development; the World Trade Organization sets trade rules and settles disputes, although its Appellate Body has been unable to function since 2019, weakening its enforcement.
• Regional groupings. Bodies such as ASEAN and the European Union coordinate trade and, in the EU's case, economic policy.
• Forums. The G20 brings major economies together to coordinate crisis responses, but has no binding authority.
• Non-state actors. Transnational corporations reroute supply chains and lobby; credit rating agencies and large investors influence borrowing costs.

International law

Trade agreements and WTO rules are the main legal framework. Their effectiveness depends on whether major economies accept rulings. Tariff measures taken on grounds of national security have tested those rules.

Challenges and stability or change

States prioritise domestic employment and security over system stability; there is no global economic authority; the main institutions reflect past power distributions that rising states question. Consequences include inequality, political pressure on governments and shifts of trade towards new partners and blocs.

Worked example

Question. Analyse how global interconnectedness contributes to economic instability.

Model answer. Interconnectedness lets shocks cross borders. Tariffs introduced by one large economy in 2025 forced exporters to find new markets and raised uncertainty for firms in many other states, and the IMF identified trade fragmentation as a risk to growth. At the same time, the same links give partners incentives to negotiate, as seen in the trade deals that reduced some tariff rates. Interdependence is therefore both a transmission channel for instability and a motive for cooperation.

Try this

Q1

Name one institution of global governance that responds to economic instability. Model answer: The International Monetary Fund (or World Bank, or World Trade Organization).

Q2

Explain why the G20 is limited as a response. Model answer: It coordinates but cannot bind its members, so outcomes depend on each government's willingness.

Q3

Discuss how economic instability can contribute to political change. Model answer: Rising prices and unemployment pressure governments, shift election outcomes and can prompt trade realignment.