Why We Must Resist Geoeconomic Fragmentation, and How – Analysis – Eurasia Review

Only international cooperation can solve pressing global problems such as addressing food and other commodity shortages, removing barriers to growth, and safeguarding our climate.

As policymakers and business leaders head to Davos, the global economy faces perhaps its biggest test since World War II.

Russia’s invasion of Ukraine has worsened the Covid-19 pandemic – crisis after crisis – devastating lives, stunting growth and driving up inflation. High food and energy prices are weighing heavily on households around the world. Tighter financial conditions are putting additional pressure on heavily indebted countries, businesses and families. And countries and companies are reassessing global supply chains amid continued disruptions.

Add to this the sharply increased volatility in financial markets and the continuing threat of climate change, and we face a potential confluence of calamities.

Yet our ability to react is hampered by another consequence of the war in Ukraine: the greatly increased risk of geoeconomic fragmentation.

How did we come here? Over the past three decades, flows of capital, goods, services and people have transformed our world, aided by the diffusion of new technologies and ideas. these integration forces have boosted productivity and living standards, tripled the size of the global economy and lifted 1.3 billion people out of extreme poverty.

But the successes of integration have also brought complacency. Inequalities in income, wealth and opportunity have continued to widen in too many countries for a long time – and between countries in recent years. People have been left behind as industries have changed amid global competition. And governments have struggled to help them.

Tensions over trade, technology standards and security have been rising for many years, undermining growth and confidence in the current global economic system. Trade policy uncertainty alone reduced global gross domestic product in 2019 by almost 1%, according to an IMF study. And since the start of the war in Ukraine, our monitoring indicates that about 30 countries have restricted trade in food, energy and other essential commodities.

Additional charges disintegration would be enormous from one country to another. And people at all income levels would be affected – from well-paid professionals and middle-income factory workers who export, to low-wage workers who depend on food imports to survive. More and more people will embark on perilous journeys to seek opportunities elsewhere.

Consider the impacts of reconfigured supply chains and higher barriers to investment. They could make it harder for developing countries to sell to the rich world, acquire know-how and create wealth. Advanced economies are also expected to pay more for the same products, fueling inflation. And productivity would suffer because they would lose partners who are currently co-innovating with them. IMF research estimates that technological fragmentation alone can lead to losses of 5% of GDP for many countries.

Or think of the new transaction costs for people and businesses if countries develop in parallel, disconnected payment systems to mitigate the risk of potential economic sanctions.

So we have a choice: Surrender to the forces of geoeconomic fragmentation that will make our world poorer and more dangerous. Or reshaping the way we cooperate, to make progress in solving collective challenges.

Restoring Trust in the Global System—Four Priorities

To restore confidence that the rules-based global system can work well for all countries, we need to weave our economic fabric in new and better ways. If we can start by focusing on pressing issues where progress will clearly benefit everyone, we can build the trust to cooperate in other areas where there is disagreement.

Here are four priorities that can only be advanced by working together.

First, strengthen trade to increase resilience.

We can start now by lowering trade barriers to ease shortages and lower prices for food and other commodities.

Not only countries, but also businesses need to diversify their imports to secure supply chains and preserve the huge benefits of global integration for businesses. Although geostrategic considerations guide some procurement decisions, this need not necessarily lead to disintegration. Business leaders have an important role to play in this regard.

A new IMF study shows that diversification can halve potential GDP losses from supply disruptions. Automakers and others have found that designing products that can use aftermarket or more widely available parts can reduce losses by 80%.

Export diversification can also increase economic resilience. Policies that help include: improving infrastructure to help businesses shorten supply chains, increasing access to broadband, and improving the business environment. The WTO can also contribute through its overall support for more predictable and transparent trade policies.

Second, step up joint efforts to deal with the debt.

With around 60% of low-income countries highly vulnerable to debt, some will need debt restructuring. Without decisive cooperation to lighten their burdens, both they and their creditors will be worse off. But a return to debt sustainability will attract new investment and spur inclusive growth.

This is why the Common Framework for Debt Treatment of the Group of Twenty needs to be improved without delay. This means putting in place clear procedures and timelines for debtors and creditors, and making the framework available to other highly indebted vulnerable countries.

Third, modernize cross-border payments .

Another barrier to inclusive growth is inefficient payment systems. Take remittances: the average cost of an international transfer is 6.3%. It means some $45 billion per year are diverted into the hands of intermediaries and away from millions of low-income households.

A possible solution? Countries could work together to develop a public digital platform— a new payment infrastructure with clear rules — so that everyone can send money at minimum cost and with maximum speed and security. It could also connect various forms of currency, including central bank digital currencies.

Fourth, confronting climate change: the existential challenge that hovers above everything .

At the COP26 climate conference, 130 countries, representing more than 80% of global emissions, pledged to achieve zero carbon by around mid-century.

But we urgently need to bridge the gap between ambition and politics. To accelerate the green transition, the IMF has argued for a comprehensive approach that combines carbon pricing and investment in renewable energy, as well as compensation for those affected.

Progress for people

The harsh reality is that we have all been too slow to act as our economic fabric began to unravel. But if countries can find ways now to come together around these pressing issues that transcend national borders and affect us all, we can begin to lessen fragmentation and strengthen cooperation. There are encouraging signs.

When the pandemic hit, governments took coordinated monetary and fiscal action to prevent another Great Depression. International cooperation is essential to develop vaccines in record time. On global corporate taxation, 137 countries have agreed on reforms to ensure that multinational companies pay their fair share wherever they operate.

Last year, IMF members backed a historic $650 billion allocation of the Fund’s special drawing rights to bolster countries’ reserves. Even more recently, our members agreed to create the Resilience and Sustainability Trust, which provides affordable, longer-term funding to help our most vulnerable members cope with climate change and future pandemics.

In the pursuit of further progress, we must all adhere to a simple guiding principle: policies are for people. Instead of globalizing profits, we should act to locate the benefits of a connected world.

Start with communities in all countries that lost out in the “old globalization” and were further pushed back by the pandemic: invest in their health and education. Help displaced workers gain in-demand skills and transition into careers in expanding industries. For example, companies that export pay higher wages on average, as do greener jobs.

Multilateral institutions can also play a key role in reshaping global cooperation and resisting fragmentation, including by further strengthening their governance to ensure they reflect changing global economic dynamics – the upcoming review of the capital and voting shares by the IMF will provide such an opportunity. They can also leverage their mobilizing power and maximize the use of their diverse toolkits. The IMF can help, for example, with its range of financial instruments, its bilateral and global surveillance and its impartial approach among our members.

There is no silver bullet to combat the most destructive forms of fragmentation. But by working with all stakeholders on pressing common concerns, we can begin to weave a stronger and more inclusive global economy.

*About the authors:

  • Kristalina Georgieva, Managing Director of the IMF
  • Gita Gopinath is the first Deputy Managing Director of the International Monetary Fund (IMF) since January 21, 2022. In this role, she oversees the work of staff, represents the Fund in multilateral forums, maintains high-level contacts with member governments and board members, the media and other institutions, directs the Fund’s work on surveillance and related policies, and oversees research and flagship publications.
  • Ceyla Pazarbasiogluis Director of the IMF’s Strategy, Policy, and Review Department (SPR). In this capacity, she leads the work on the IMF’s strategic direction and the design, implementation, and evaluation of IMF policies. She also oversees the IMF’s interactions with international bodies, such as the G20 and the United Nations.

Source: This article was published by the IMF Blog


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