This could cost global economy up to 7% of GDP

Durrant Pate/Contributor

The International Monetary Fund (IMF) is warning that fragmentation could cost the global economy up to seven percent of economic activity noting that Russia’s war in Ukraine and the COVID-19 pandemic have prompted countries to become more disconnected.

In a newly released report, the IMF cautions that, if unresolved, this trend will lead the developing world to “fall further behind”.

The report highlights that the longer-term cost of trade fragmentation varies from 0.2 per cent of global output to almost seven per cent, which is roughly the combined annual output of Germany and Japan.

This, the report acknowledges, represents a “Gordian knot of challenges” that policymakers face today. Interestingly, the authors of the report did not state how long the fragmentation could take to impact growth of this magnitude.

CNBC is reporting that, depending on the definition of “fragmentation”, some forecasts by the IMF are even bleaker. Estimates that include technological disconnect between regions suggest that countries could lose up to 12 per cent of GDP.

Factors contributing to fragmentation

The IMF lists a number of factors contributing to increasing global fragmentation, including Russia’s invasion of Ukraine and the COVID-19 pandemic. Both situations, the report concludes, have caused international disruption to financial, food and energy supplies with additional trading restrictions adding to the discord between regions.

The international multinational funding agency also lists restrictions on cross-border migration, reduced capital flows and a decline in international cooperation as different types of fragmentation. According to the report, “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”.

The IMF does not expect all countries to feel the impact of fragmentation equally but admits that lower-income consumers in advanced economies would no longer have access to cheaper imported goods. This would leave small, open-market economies particularly vulnerable. 

Emerging and developing economies most affected

The report identified that most of Asia would suffer due to its heavy reliance on open trade, explaining that emerging and developing economies would also cease to benefit from “technology spillovers” from more advanced economies, which in the past have helped to boost growth and living standards. 

“Instead of catching up to advanced economy income levels, the developing world would fall further behind,” the report states.

The IMF is recommending three approaches to tackling fragmentation: strengthening the international trade system, helping vulnerable countries to deal with debt and stepping up climate action.

These topics, the IMF states, are likely to feature heavily in discussions at the World Economic Forum in Davos, Switzerland, which got under way on Monday (January 16), which this year named ‘Cooperation in a Fragmented World’ as its theme.