IMF: Why We Must Resist Geoeconomic Fragmentation—And How?

According to a team of experts from the International Monetary Fund (IMF), the world economy is going through the most serious shock since the Second World War. Geo-economic fragmentation is seen as an undesirable outcome of the current crisis. In the report, IMF experts explain how and why the world should avoid such a scenario.

Against the background of the ongoing crisis in Ukraine, food prices are rising all over the world, financial conditions are tightening, pressure is being exerted on countries, companies and people with high levels of debt, and the destabilization of global supply chains is going on. In addition, high levels of volatility in financial markets remain, and problems related to climate change are becoming more acute.

The IMF  experts concluded that the efforts of the world community aimed at integrating and spreading new technologies and ideas led to a loss of vigilance and "complacency". For a long time, social inequality has been deepening within countries, and recently a similar trend has been observed at the global level, and now it is about the aggravation of inequality between states.

Another problem is tension that has been accumulating in recent years in the field of trade, technological standards and security. This has slowed down global economic growth and weakened confidence in the established global economic system. Today, the situation has been worsened by the conflict in Europe, which has led to even greater trade restrictions – according to the IMF, about 30 countries have restricted the supply of food, energy and other goods to the world market.

The new economic crisis provoked by the further disintegration of the world economy will be painful for everyone – from highly paid professionals to the most low-income segments of the population. An increase in forced migration is also likely to occur.

There are already problems with supply chains, further deterioration of the situation will lead to higher investment barriers and complication of international trade. According to the authors of the report, it will become more difficult for developing economies to sell products to more developed countries, as well as import technologies from them. Developed economies against this background may face significant price increases and rising inflation.

Also, such a scenario assumes a deepening of technological fragmentation, which will lead to a significant decrease in economic productivity. According to IMF forecasts, technological fragmentation alone can cause a loss of 5% of GDP for many countries.

Another difficulty that experts point out is significant transaction costs. If the current trend goes further, countries will take measures to develop autonomous payment systems that are not integrated with others in order to mitigate risks.

In order to avoid such an outcome, the fund's experts propose four initiatives aimed at restoring confidence in the global economic system. The authors emphasize that the achievement of visible results is possible only with broad international cooperation, and suggest first of all to focus on strengthening international trade in order to maintain the stability of the world economy.

It is assumed that as part of the implementation of the first step, measures will be taken to reduce trade barriers to increase the availability of food and other consumer goods, as well as to counter the deficit. Another measure should be the diversification of imports, which is necessary not only for countries, but also for companies. This will ensure the preservation of supply chains and get the business benefits associated with global integration. Despite the fact that some decisions about the choice of raw materials sources will be made based on geostrategic considerations, this should not lead to disintegration. An important role in this issue is assigned to business leaders. An IMF study has shown that diversification can halve potential GDP losses from supply destabilization.

The next step should be joint actions to resolve the debt problem. In recent years, about 60% of countries with low economic indicators have faced an aggravation of the debt issue, the pandemic and the current geo-economic situation have made them even more vulnerable. Many of these countries require debt restructuring, and solving this problem is impossible without cooperation between debtor and creditor countries. The authors propose the development of clear procedures and deadlines for the settlement of relations between these parties.

According to experts, cross-border payment systems are also subject to improvement. The current state of the system is considered by the authors as a barrier to inclusive growth. The solution in this area can be the development and implementation of a single global digital platform that will provide everyone with access to translations with minimal costs and maximum speed and security.

The fourth component of the IMF's plan is the fight against climate change, which is still being conducted insufficiently. An early transition to a green economy is needed. To speed up the process, the IMF is proposing a comprehensive approach that combines setting tariffs on emissions, investing in renewable energy sources and compensating those who have suffered as a result of such a transition.

Despite the fact that the world community did not react to the weakening of economic ties on time, the authors emphasize that today there are some trends that can contribute to positive further developments.

According to IMF experts, the international community has demonstrated its readiness to jointly cope with crises, a striking example was the pandemic. At its height, the states took joint measures to coordinate monetary and budgetary policies, which made it possible to avoid a deep economic crisis. International cooperation has also played a crucial role in the development of vaccines. Last year, the IMF’s membership supported a historic $650 billion allocation of the Fund’s Special Drawing Rights to strengthen countries’ reserves.  Even more recently, IMF members agreed to create the Resilience and Sustainability Trust, providing longer-term affordable financing to help more vulnerable members address climate change and future pandemics.

IMF experts believe that these factors and precedents of cooperation in times of crisis can lead to the consolidation of the world community to make effective decisions that can alleviate the consequences of the crisis and counteract it. At the same time, they call for the decision-making process to be carried out in accordance with the principle of "policies are for people", and recommend shifting the priority from the globalization of profits to the localization of the benefits of a connected world.

Source: International Monetary Fund

Our partners