As
policymakers and business leaders gather at the World Economic Forum in
Davos, they are facing a Gordian knot of challenges
.
From the global economic slowdown and climate change to the cost-of-living
crisis and high debt levels: there is no easy way to cut through it. Added
to this are geopolitical tensions that have made it even more difficult to
address vital global issues.
Indeed, even as we need more international cooperation on multiple fronts,
we are facing the specter of a new Cold War that could see the
world fragment into rival economic blocs. This would be a collective policy
mistake that would leave everyone poorer and less secure.
It would also be a stunning reversal of fortune. After all, economic integration has helped billions of people become wealthier,
healthier, and better educated. Since the end of the Cold War, the
size of the global economy roughly tripled, and
nearly 1.5 billion people were lifted out of extreme poverty.
This peace and cooperation dividend should not be squandered.
Rising fragmentation risks
And yet, not everyone has benefited from global integration. Dislocations
from trade and technological change have harmed some communities. Public
support for economic openness has declined in several countries. And since
the global financial crisis, cross-border flows of goods and capital have
been leveling-off.
But that’s only part of the story. Trade tensions between the world’s two
largest economies have been rising amid a global surge in new trade
restrictions. Meanwhile, Russia’s invasion of Ukraine has caused not only
human suffering, but also massive disruptions of financial, food, and
energy flows across the globe.
Of course, countries have always placed some restrictions on trade in
goods, services, and assets for legitimate economic and national security
considerations. Supply chain disruptions during the COVID-19 pandemic have
also increased the focus on economic security and making supply chains more
resilient.
Since the outbreak, mentions in companies’ earnings presentations of reshoring, onshoring, and near-shoring have increased almost
ten-fold. The risk is that policy interventions adopted in the name of
economic or national security could have unintended consequences, or they
could be used deliberately for economic gains at the expense of others.
That would be a dangerous slippery slope towards runaway geoeconomic fragmentation.
Estimates of the cost of fragmentation from recent studies vary widely. The
longer-term cost of trade fragmentation alone could range from 0.2 percent
of global output in a limited fragmentation scenario to almost 7 percent in
a severe scenario—roughly equivalent to the combined annual output of
Germany and Japan. If technological decoupling is added to the mix, some
countries could see losses of up to 12 percent of GDP.
Yet, according to new IMF staff analysis, the full impact would likely be even larger, depending on how
many channels of fragmentation are factored in. In addition to trade
restrictions and barriers to the spread of technology, fragmentation could
be felt through restrictions on cross-border migration, reduced capital
flows, and a sharp decline in international cooperation that would leave us
unable to address the challenges of a more shock-prone world.
This would be especially challenging for those who are most affected by
fragmentation. Lower-income consumers in advanced economies would lose
access to cheaper imported goods. Small, open-market economies would be
hard-hit. Most of Asia would suffer due to its heavy reliance on open
trade.
And emerging and developing economies would no longer benefit from
technology spillovers that have boosted productivity growth and living
standards. Instead of catching up to advanced economy income levels, the
developing world would fall further behind.
Focus on what matters most: trade, debt, and climate action
So, how can we confront fragmentation? By taking a pragmatic approach. This means focusing on areas where
cooperation is essential, and delay is not an option. It also means finding
new ways to achieve common objectives. Let me highlight three priorities:
First, strengthen the international trade system.
In a global economy beset with low growth and high inflation, we need a
much stronger trade engine. Trade growth is expected to decline in 2023,
which makes it even more critical to roll back the distortionary subsidies
and trade restrictions imposed in recent years.
Strengthening the role of trade in the global economy begins with vigorous
World Trade Organization reform and by concluding WTO-based market-opening agreements. But
finding agreement on complex trade issues remains challenging, given the
diverse World Trade Organization membership, increasing complexity of trade
policy, and heightened geopolitical tensions.
In some areas, plurilateral agreements, among subsets of WTO members, can
offer a path forward. Take the recent agreement on regulatory cooperation
in service industries—from finance to call centers—which can reduce the
cost of providing services across borders.
We also need to be pragmatic about strengthening supply chains. To be
clear, while most supply chains have been resilient, recent disruptions to
food and energy supplies have raised legitimate concerns. Still, policy
choices such as reshoring could leave countries more vulnerable to
shocks.
IMF research
shows that diversification can cut potential economic losses from supply
disruptions in half.
Meanwhile, countries should carefully weigh the costs, at home and abroad,
of national security measures on trade or investment. We also need to
develop guardrails to protect the vulnerable from unilateral actions. A
good example is the recently agreed requirement to exclude from food export
restrictions the exports to humanitarian agencies such as the World Food
Program.
But these efforts, while important, aren’t enough. We also need better
policies at home, from improving social safety nets, to investing in job
training, to increasing worker mobility across industries, regions, and
occupations. This is how we can ensure that trade works for all.
Second, help vulnerable countries deal with debt.
Fragmentation could make it even more difficult to
help many vulnerable emerging and developing economies that have been
hard hit by multiple shocks. Take one particular challenge that many
countries face: debt. Fragmentation will make it harder to
resolve sovereign debt crises, especially if key official creditors are
divided along geopolitical lines.
About 15 percent of low-income countries are already in debt distress and
an additional 45 percent are at high risk of debt distress. Among emerging
markets, about 25 percent are at high risk and facing default-like borrowing spreads.
There are signs of progress on the Group of Twenty’s Common Framework for debt treatment: Chad
recently reached an agreement with its official and private creditors;
Zambia is progressing toward a debt restructuring; and Ghana just became
the fourth country to seek treatment under the Common Framework, sending a
signal that it is seen as an important pathway for debt resolution. But
official creditors have a lot more work to do.
Countries seeking debt restructuring under the Framework will need
greater certainty on processes and standards, as well as shorter and more
predictable timelines.
And we need to improve processes for countries not covered by the Framework.
To support these improvements, the IMF, World Bank and Indian G20
presidency are working with borrowers and public and private creditors
to quickly establish a global sovereign debt roundtable, where we can
discuss current shortcomings and make progress to address them.
These and other pragmatic actions, such as further progress on majority
voting provisions in sovereign loans and climate resilient debt clauses,
can help improve debt resolution. That would reduce economic and financial
uncertainty, while helping countries get back to investing in their future.
Third, step up climate action.
Collective action is just as vital to address the climate crisis. Just last
year, we saw climate disasters on all five continents, with $165 billion in
damages in the United States alone. It shows the massive economic and
financial risks of unmitigated global warming.
But last year also brought some good news. The agreement at COP27 to set up
a loss and damage fund for the most vulnerable countries shows that
progress is possible with enough political will. Now we must take further
pragmatic steps to cut emissions and curb fossil fuels.
One potential game changer could be an international carbon price floor
among major emitters. It would focus on carbon pricing or equivalent
measures in an equitable process that would complement and reinforce the
Paris Agreement. Or consider the “just energy transition partnerships” between groups of donors and countries such as South Africa and Indonesia.
We also need to step up climate finance to help vulnerable countries adapt.
Innovative use of public balance sheets—such as credit guarantees, equity
and first-loss investments—can help mobilize billions of dollars in private
financing.
And, of course, we need
better data around climate projects: harmonized disclosure standards and principles will help, as will
taxonomies to align investments to climate goals.
The role of the IMF
In all these areas,
the IMF will continue to support its members—through policy advice,
capacity development efforts, and financial support.
Since the start of the pandemic, we have provided $267 billion in new
financing. And thanks to the collective will of our membership, we provided
a record $650 billion allocation of special drawing rights, boosting our
members’ reserves. This allowed many vulnerable countries to maintain
access to liquidity, freeing up resources to pay for vaccines and health
care.
And we are now helping countries with stronger reserves to channel their
SDRs to countries whose need is greater. This pragmatic measure could make
all the difference in many countries. So far, we have around $40 billion in
SDR pledges to our new Resilience and Sustainability Trust, which will help
low- and vulnerable middle-income countries address structural challenges
such as pandemics and climate change.
In other words, we know the global issues that matter most, and we know
that confronting fragmentation in these vital areas is essential.
Pragmatic measures to fight fragmentation may not be the simple sword swipe
that cuts the Gordian knot of global challenges. But any progress we can
make in rebuilding trust and boosting international cooperation will be
critical.
The discussions in Davos will be a hopeful sign that we can move in the
right direction and foster economic integration that brings peace and
prosperity to all.
