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Global economy trending towards fragmentation
World leaders are so preoccupied with wars, power struggles, social tensions and political polarization that they appear largely unwilling to invest in preserving global economic integration. History, economic theory and current empirical trends indicate that this is a mistake
Bertrand Badré and Yves Tiberghien 22 May 2024

Today’s economic outlook is strangely contradictory. While global markets, led by technology and energy, have been ebullient over high short-term profits, the mood at the spring meetings of the World Bank and the International Monetary Fund last month was decidedly sombre. Two global institutions that normally speak in banalities issued strong warnings about the growing risks of economic fragmentation.

The idea that an interdependent global economy can work within a geopolitical system based on the national sovereignty of nearly 200 states has always reflected a certain amount of idealism. Or perhaps it was more like hubris. This strange marriage did, after all, collapse in the 1930s, with the division lasting through the end of World War II.

But idealism was not dead, and the global system was subsequently rebuilt on a foundation of agreed rules, shared international institutions, a degree of mutual forbearance, and crisis management. From the start, security considerations were kept as separate as possible from the economy, but this became especially important in the 1990s, when countries with radically different regimes began integrating into the global economy.

Today, however, the foundations of this system are eroding fast, and global economic integration has seemingly gone into reverse. As Gita Gopinath, the IMF’s first deputy managing director, recently explained, economic fragmentation could have far-reaching implications for trade, such as reduced efficiency gains, and increase the risk of macro-financial volatility. Fragmentation could also reduce capital flows to the Global South and undermine the provision of global public goods, including climate action.

Five key factors are driving this trend toward fragmentation. First, rising geopolitical risks have fuelled mistrust and reduced systemically important countries’ will to cooperate. Though policymakers rarely acknowledge it, a crisis over Taiwan – a flashpoint in the Sino-American rivalry – could well bring down the global economic system.

Second, key countries are increasingly allowing security considerations to shape economic policy, with some taking expansive action to secure access to inputs, infrastructure and technologies. While this is understandable, countries must exercise restraint. Whereas globalization happened gradually, a deglobalization process driven by security-motivated measures (which are almost guaranteed to trigger escalation by rivals and partners) would probably be fast and unwieldy, posing severe systemic risks.

The third factor underlying economic fragmentation is a deepening rift between the Global North and Global South. Public and private support for developing economies has collapsed at a time when many are wrestling with the legacy of the Covid-19 pandemic and confronting climate change. The decades-long trend toward convergence with developed economies has seemingly been interrupted, and resentment is building in the Global South. Net financial flows to developing countries have turned negative in 2023, and the trend is worsening in 2024. This partly explains the reluctance or refusal of many Global South countries to back the West on key geopolitical issues, such as sanctions against Russia in response to its war of aggression in Ukraine.

Fragmentation also reflects the rapid escalation of climate risks and disasters. With “once-a-lifetime” floods, mega-fires and droughts proliferating, many countries are at risk of destabilization within the next few years, and there is no global “safety net” in place. Meanwhile, as Harvard’s Dani Rodrik has pointed out, countries are competing for dominance in green technologies, rather than working together to accelerate progress.

Lastly, the exponential growth of artificial intelligence (AI) is fuelling national competition, rather than the global cooperation that is required. As MIT’s Daron Acemoglu and Simon Johnson have noted, regulations, policies and institutions will be essential to ensure that AI creates jobs, rather than only destroying them. Global South countries need a voice in AI regulatory efforts.

To be sure, the global economic system still has many sources of resilience. As the recent Indonesian, Indian, and Brazilian G20 presidencies have shown, most of the Global South remains committed to both interdependence and global governance. Furthermore, the private sector is still characterized by interdependence. We still have dedicated international organizations, global education networks and a global civil society.

But we must not underestimate the dangers ahead. There is good reason to think that the coming months and years will bring a series of shocks and crises. If leaders respond with tit-for-tat policies aimed at securing advantages over rivals, the integrated global economy could unravel. The speed of that process could overwhelm policymakers, and the path from economic pain to social upheaval to the abandonment of shared global rules may well prove to be short.

As it stands, leaders are so preoccupied with wars, power struggles, social tensions and political polarization that they appear largely unwilling to invest in saving the integrated global economy, let alone strengthening its capacity to deal with the existential risks we face. But history, economic theory and current empirical trends indicate that this is a mistake.

Even a partial collapse of our interdependent global economic and financial systems would be catastrophic, not least because it would undermine investment in global public goods. For politicians worried about migration’s effect on their countries, it is worth noting that, without massive investments in combating climate change, reversing desertification and reducing poverty, millions could be attempting to cross the Mediterranean by 2050.

National security must be a priority for policymakers. But measures to “secure” the economy must be combined with efforts to improve communication with rivals and invest in global public goods. To this end, world leaders should use the G20 and other plurilateral bodies to elevate working groups and institutions that support collective governance, with a focus on managing AI risks, addressing climate change and averting the collapse of the global economic system on which we depend.

Bertrand Badré is the CEO and founder of Blue like an Orange Sustainable Capital and a former managing director of the World Bank; and Yves Tiberghien is a professor of political science and director emeritus of the Institute of Asian Research at the University of British Columbia and a visiting scholar at the Taipei School of Economics and Political Science.

Copyright: Project Syndicate

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