Economic Fragmentation
Context:
Geo-economic fragmentation could deliver a severe blow to the global economy, with potential GDP losses of up to $5.7 trillion—greater than the impact of the 2008 financial crisis or the COVID-19 pandemic.
More on News
- This alarming projection was highlighted in the “Navigating Global Financial System Fragmentation” report released recently by World Economic Forum(WEF).
Economic Costs of Fragmentation
- The report warns that emerging economies like India may bear the brunt of this fragmentation under extreme scenarios.
- The analysis estimates that statecraft policies driving fragmentation could cost the global economy between $0.6 trillion and $5.7 trillion, amounting to a 5% reduction in global GDP.
- These losses stem from reduced trade, diminished cross-border capital flows, and lost economic efficiencies.
- In addition to the economic slowdown, extreme fragmentation could fuel inflationary pressures, pushing global inflation up by more than 5% in the most severe scenarios.
|
This situation is further complicated by bi-globalisation, where two major powers, primarily the U.S. and China, are reshaping their economic spheres of influence. This geopolitical competition leads to the formation of distinct economic blocs, which can exacerbate fragmentation and hinder global cooperation. |
Financial Systems as Geopolitical Tools
- The report highlights the growing trend of nations using financial systems to pursue geopolitical objectives.
- This is evident from a 370% increase in sanctions since 2017, alongside the implementation of subsidies, industrial policies, and discussions around creating alternative financial architectures.
- These strategies reflect a shift in global dynamics, where economic tools are increasingly weaponized for political gains.
Nearshoring, Friendshoring, and Onshoring
In response to these challenges, companies are adopting strategies such as nearshoring, friendshoring, and onshoring to mitigate risks associated with fragmented supply chains:
- Nearshoring involves relocating production closer to home markets to reduce dependency on distant suppliers.
- Friendshoring refers to sourcing goods and services from countries with which a nation has friendly relations, thereby minimising risks associated with geopolitical tensions.
- Onshoring entails bringing production back within national borders to enhance control over supply chains.
Implications and the Path Forward
- The potential fallout from geo-economic fragmentation underscores the need for greater global cooperation to prevent long-term economic damage.
- Strengthening multilateral frameworks and fostering dialogue among nations could mitigate the risks posed by economic isolationism and ensure a more resilient global economy.
As the world navigates this growing challenge, it is crucial to prioritise policies that encourage integration and collaboration, preserving the benefits of globalisation while addressing the risks of excessive fragmentation.
