Today’s economic outlook is strangely contradictory. While global markets driven by technology and energy are buoyed by strong short-term profits, the mood at last month’s spring meetings of the World Bank and International Monetary Fund was decidedly somber. Two normally prosaic global institutions have issued strong warnings about the growing risk of economic fragmentation.
The idea that an interdependent global economy functions within a geopolitical system based on the national sovereignty of some 200 states has always reflected a degree of idealism. Or maybe it was something close to arrogance. Eventually, this strange marriage fell apart in her 1930s, and the split lasted until the end of World War II.
But idealism did not die, and the world system has since been restructured on the basis of agreed rules, common international institutions, a degree of mutual tolerance, and crisis management. From the beginning, security has been considered as separate from the economy as possible, but this became particularly important in the 1990s, when countries with radically different regimes began to integrate into the global economy.
Today, however, the foundations of this system are rapidly being undermined, and global economic integration is seemingly in reverse. As IMF First Deputy Managing Director Gita Gopinath recently explained, economic fragmentation can have far-reaching effects on trade, including reduced efficiency gains, and increase the risk of macro-financial instability. There is. Fragmentation could also reduce capital flows to the Global South and undermine the provision of global public goods, including climate protection.
Five key factors are driving this trend toward fragmentation. First, rising geopolitical risks are fueling distrust and reducing the willingness of systemically important countries to cooperate. Although policymakers rarely admit it, the Taiwan crisis, a flashpoint in the U.S.-China conflict, could well bring the global economic system to its knees.
Second, major countries are increasingly being allowed to consider security in shaping their economic policies, and some are taking far-reaching actions to ensure access to inputs, infrastructure, and technology. This is understandable, but states must exercise restraint. Globalization happened gradually, but a deglobalization process driven by security-motivated measures (which would almost certainly provoke escalation by rivals and partners) will likely be rapid, unwieldy, and pose serious systemic risks.
A third factor underlying economic division is the deepening rift between the Global North and the Global South. Public and private support for developing economies has collapsed as many grapple with the legacy of the COVID-19 pandemic and combat climate change. Decades of trends toward integration with developed economies appear to have been interrupted, and resentment is growing in the Global South. Net financial flows to developing countries turn negative in 2023, and the trend worsens in 2024. This partly explains the reluctance or refusal of many Global South countries to support the West on important geopolitical issues such as sanctions against Russia. war of aggression in Ukraine.
Fragmentation also reflects the rapid escalation of climate risks and disasters. With a surge in once-in-a-lifetime floods, large-scale fires and droughts, many countries are at risk of destabilization in the coming years, and no global safety net is in place. Meanwhile, as Harvard University’s Dani Rodrik has pointed out, countries are competing for green technology advantages rather than working together to accelerate progress.
Finally, the rapid growth of artificial intelligence (AI) is fostering competition between nations rather than the needed global cooperation. As MIT’s Daron Acemoglu and Simon Johnson point out, regulations, policies, and institutions will be essential to ensure that AI creates jobs, not just destroys them. Countries in the Global South need a voice in AI regulatory efforts.
To be sure, there are still many sources of resilience in the global economic system. As the recent G20 presidencies of Indonesia, India and Brazil demonstrate, most of the Global South remains committed to both interdependence and global governance. Moreover, the private sector remains characterized by interdependence. We still have professional international organizations, a global education network, and a global civil society.
However, 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 retaliatory policies aimed at securing an advantage over their rivals, the integrated global economy could collapse. The speed of the process could overwhelm policymakers, and the path from economic pain to social upheaval and abandonment of universal rules could prove short.
As it stands, our leaders are preoccupied with wars, power struggles, social tensions, and political polarization, much less strengthening our ability to deal with the existential crisis we face. , there appears to be little reluctance to invest to save an integrated global economy. But history, economic theory, and current empirical trends show this to be wrong.
Even a partial collapse of the interdependent global economic and financial system would be devastating, especially as it would undermine investments in global public goods. For politicians concerned about the impact of migration on their countries, it is worth noting that without major investments in combating climate change, reversing desertification and reducing poverty, millions of people may attempt to cross the Mediterranean by 2050.
National security must be a top priority for policymakers. But steps to make the economy “safe” need to be combined with efforts to improve communication with rivals and invest in global public goods. To this end, world leaders are using the G20 and other multilateral institutions to help manage AI risks, address climate change, and prevent the collapse of the global economic system on which we depend. We should focus on avoidance and strengthen working groups and institutions that support collective governance.
Bertrand Badret is CEO and Founder of Blue like an Orange Sustainable Capital and former Managing Director of the World Bank. Yves Tiberghien is a professor of political science, director emeritus of the Institute of Asian Studies at the University of British Columbia, and a visiting fellow at the Taipei Institute of Economics and Political Science.
Copyright: Project Syndicate
