IMF Warns of "Runaway Fragmentation" in Global Economy

For several decades, trade deepening helped catalyze catch-up in per capita incomes across countries, leading to a significant reduction in global poverty and benefiting consumers in advanced economies through lower prices. However, the world now faces the dangers of potential economic ramifications of policy-driven reversal of global economic integration, also called geoeconomic fragmentation. 

“The unraveling trade links would most adversely impact low-income countries and less well-off consumers in advanced economies. Restrictions on cross-border migration would deprive host economies of valuable skills while reducing remittances in migrant-sending economies. Reduced capital flows would hinder financial deepening in destination countries, especially through foreign direct investment, which can be an important source of technological diffusion. And a decline in international cooperation would put at risk the provision of vital global public goods,” reads the Geoeconomic Fragmentation and the Future of Multilateralism report by the International Monetary Fund (IMF). 

Since the start of the COVID-19 pandemic, the terms “internal production relocation” and “near offshoring” in company earnings presentations have increased almost tenfold, reads the report. Available studies suggest that the more profound the fragmentation, the deeper the costs. The rules-based multilateral system, including international trade and monetary systems, must adapt to the changing world to avert runaway fragmentation. 

Although the world needs to expand international cooperation on several fronts, it is facing the specter of a new cold war that could fragment the world into rival economic blocs. “This would be a collective policy mistake that would leave us all even more impoverished and unprotected,” says the IMF. Given current geopolitical realities, progress through multilateral consensus may not always be possible and trust may have to be rebuilt gradually. 

According to the IMF, it is necessary to first strengthen the international trade system. Forecasts indicate that trade growth will decline by 2023, making it urgent to dismantle the trade-distorting subsidies and restrictions adopted in recent years. Fragmentation could make it even more challenging to aid vulnerable emerging and developing economies hit by various shocks. About 15% of low-income countries are already in a critical debt distress situation and another 45% are at high risk of debt distress, according to the IMF. About 25% of emerging markets are facing high risk, with debt spreads pointing to credit default. 

IMF also urged countries to scale up climate action, which is essential to address the climate crisis. Last year, climate catastrophes occurred on five continents, with damages amounting to US$165 billion in the US alone.