As policymakers and business leaders head for Davos, the global economy is likely to face its biggest test since World War II. Russia‘s invasion of Ukraine has included the Covid-19 epidemic – disaster upon disaster – destructive lives, slowing down growth, and inflating inflation. High food and energy prices are burdening households around the world. The tightening of financial institutions puts more pressure on countries, companies, and families with large debts. And countries and companies are re-evaluating global supply chains amid endless disruption.
Adding to this is the huge volatility of financial markets and the ongoing threat of climate change, and we are facing potential risks. However, our ability to respond is hampered by another consequence of the Ukrainian war the ever-increasing risk of geoeconomic fragmentation.
How did we get here?
Over the past three decades, the flow of funds, goods, services, and people has transformed our world, aided by the spread of technology and new ideas. These integration forces have raised productivity and quality of life, tripled the size of the global economy and lifted 1.3 billion people out of extreme poverty.
But the success of the merger has also come to the fore. Income inequality, wealth, and opportunity have continued to worsen in many lands for a long time — and in all lands in recent years. People are left behind as industries have changed as the world becomes more competitive. And governments have struggled to help them.
Uncertainty over trade policies
Trade disputes, technological levels, and security have been growing for years, undermining growth — and the reliability of the current global economic system. Uncertainty over trade policies alone reduced the value of gross domestic product by 2019 by about one percent, according to an IMF study. And since the war began in Ukraine, our surveillance indicates that about 30 countries have limited trade in food, energy, and other essential commodities.
Implications of re-chains and high barriers to investment
The cost of continuing to disperse will be huge in all countries. And people at all levels of income will be harmed — from highly paid professionals and middle-income factory workers who export, to low-wage workers who rely on imported food for their livelihood. Many people will embark on a dangerous journey that will take them to other places. Consider the implications of re-chains and high barriers to investment. They can make it very difficult for developing nations to sell to rich countries, gain knowledge, and build wealth. Developed economies will also need to pay more for similar products, holding inflation.
Production will be hurt as they lose colleagues who are currently innovating with them. An IMF study estimates that the technological divide alone could lead to a 5 percent loss of GDP in many countries Or consider new operating costs for individuals and businesses if countries make similar payment systems, cut off to reduce the risk of potential economic sanctions. Therefore, we can choose: A commitment to geoeconomic diversity that will make our world poorer and more dangerous. Or revisit the way we work together — to improve in tackling joint challenges.
Restoring Trust in a Global System — Four Keys
To restore confidence that a global legal system can work well in all countries, we must weave our economic fabric in new and better ways. If we can start by focusing on emergencies where development will clearly benefit everyone, we can build the trust needed to co-operate in other areas where there is disagreement. Here are four key pointers in moving forward.
•First, strengthen trade to increase resilience:
We can start now by lowering trade barriers to reduce shortages and lower food and other commodity prices. Not only countries but also companies need to exchange imports — to protect the supply chain and to maintain significant gains in the global integration business. Although geostrategic considerations will drive certain information acquisition decisions, this should not necessarily lead to dissolution. Business leaders have an important role to play in this regard.
A new IMF study shows that diversification can reduce potential GDP losses from a half-supply disruption. Automotive manufacturers and others have found that designing products that can use infectious or wider components can reduce losses by up to 80 percent.Extermination can also boost economic stability. Auxiliary policies include: upgrading infrastructure to help businesses reduce supply chains, increasing broadband access, and improving the business environment. The WTO can also assist with its full support of predictable and transparent trade policies.
•Second, intensify your efforts to deal with debt:
With about 60 percent of low-income countries at high risk of debt, some will need to restructure debt. Without a strong partnership to make it easier for them to carry their burdens, they and their creditors will be worse off. But debt recovery will attract new investments and encourage inclusive growth.
That is why the Group of Twenty Common Framework for Debt Treatment should be developed without delay. This means setting clear procedures and timelines for creditors and debtors — as well as making the framework available to other high-risk debt countries.
•Third, develop cross-border payments:
Ineffective payment systems are another barrier to inclusive growth. Take shipments: the average cost of transfers is 6.3 percent. This means that $ 45 billion a year is transferred to mediators — and far from millions of low-income households.
A possible solution? Countries can work together to build a global digital platform — a new payment infrastructure with clear rules — so that everyone can send money at a lower cost as well as greater speed and security. It can also connect different types of currencies, including digital banking central banking.
•Fourth, tackling climate change: the challenge that exists above all else:
During the COP26 climate conference, 130 countries, representing more than 80 percent of global emissions, committed to achieving net-zero carbon by the middle of the century.But we need to quickly close the gap between wishes and policy. To accelerate green reforms, the IMF has opposed a comprehensive approach that combines carbon prices and investment in renewable energy, as well as compensation for those most affected.
Human Progress:$ 650 billion allocation
The hard truth is that we have all been slow to act as the economic situation begins to deteriorate. But if countries can now find ways to come together about these urgent issues that cross national borders and affect all of us, we can begin to reduce divisions and strengthen cooperation. There are some signs that give hope.
When the epidemic strikes, governments take integrated financial and financial measures to prevent further Great Depression. International cooperation was important in making vaccines on record time. In terms of international corporate tax, 137 countries agree on reforms to ensure that international businesses pay their fair share wherever they operate.
Last year, IMF membership backed a historic $ 650 billion allocation of Special Drawing Fund rights to strengthen international funding. Recently, our members agreed to create a Resilience and Sustainability Trust — which provides long-term affordable funding to help our high-risk members deal with climate change and future epidemics.
In pursuit of further progress, we must all adhere to a simple guiding principle: goals are human. Instead of making a global profit, we should do something to make the most of the connected world. Start with the communities of all countries that have lost “the old global trade,” and were driven back by the epidemic: Invest in their lives and education. Help relocated workers learn the necessary skills and shift jobs in emerging industries. For example, export firms pay higher wages — as do raw materials.
International institutions can play a key role in reorganizing international cooperation and resilience, including continuing to strengthen their governance to ensure they reflect global economic transformation — the next IMF review of capital and voting shares will provide such an opportunity. They can also use their power of integration, and maximize the use of their various tools. The IMF can help, for example, with its list of financial instruments, bilateral and global surveillance, and equal management in all our membership. There is no silver bullet to deal with the most damaging methods of separation. But by working with all stakeholders in the same urgent problems, we can begin to integrate a vibrant, inclusive global economy.
For more read: https://blogs.imf.org/2022/05/22/why-we-must-resist-geoeconomic-fragmentation-and-how/
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