The message from the International Monetary Fund’s annual meeting last week was clear. War, pandemic and rampant inflation have weighed heavily on the global economy. The mood was nervous, often brittle.
The Americans tried Saudi Arabia to orchestrate production cuts aimed at driving up oil prices. Indians were unhappy with aggressive US interest rate hikes, which they saw as exporting America’s problems to the rest of the world.
Britain has been in the doghouse over a botched mini-budget that has rocked global financial markets. Russia reiterated that it would veto any attempt by the G20 to condemn it for invading Ukraine. Founded as a body to encourage the world’s largest developed and emerging economies to find solutions to common problems, the G20 failed even to agree on a bland communiqué to summarize its meaningless deliberations.
The dying state of the G20 matters. It shows a fragmented global economy, with countries responding to the series of recent shocks by taking care of themselves.
There have been examples of solidarity – like support for Ukraine – but they are exceptions to this trend. More typical is Joe Biden’s decision to restrict exports of US computer chips to China – symbolic of the frosty relations between the world’s two largest economies.
Kristalina Georgieva, the executive director of the IMF, knows there is a problem. The IMF was created at the 1944 Bretton Woods Conference to end the beggar-my-neighbor policy of the 1930s and prevent countries from exporting deflation. Now she sees signs of deglobalization. “The fragmentation of the global economy means we may see shifts in supply chains that will have a more lasting impact on cost structures.”
Georgieva says the repeated shocks and growth setbacks in the three years since the IMF last held a full, in-person annual meeting raise a larger question, namely: “Are we witnessing a fundamental economic shift in the global economy — from a relative world of predictability and Stability towards greater uncertainty and volatility?”
The answer to this question appears to be yes. It has taken the pandemic and its aftermath to uncover a fragmentation that has been slowly happening over the past 15 years. The heyday of globalization – the period between the fall of the Soviet Union in the early 1990s and the near death of the global banking system in 2008 – is long gone.
Richard Kozul-Wright, director for globalization and development strategies at the UN Conference on Trade and Development, says: “Much emphasis is placed on the failures of the past year, but not enough on the ruptures that have occurred since the global financial crisis Crisis.
“There has been massive underinvestment – manifested in supply chain bottlenecks – when all the ingredients for an investment boom should have been in place.”
Kozul-Wright says inequality is the other big factor behind global fracturing, with the benefits of international trade being focused on corporate profits, not workers’ wages.
Looking back, 2016 was an important stage on the road to fragmentation. The Brexit vote in the UK has revealed the dissatisfaction of millions of voters with the economic status quo, as has Donald Trump’s victory over Hillary Clinton in the US presidential election. Trump’s entry into the White House led to a significant cooling off in relations between Washington and Beijing, and Biden has worsened further.
Neil Shearing, group chief economist at consultancy Capital Economics, says: “The global economy is splitting into two blocs allied with China and the US. This will lead to shifts in supply chains and reduced technology and investment flows between the two over the next decade. Geopolitical considerations will play a bigger role in economic policy than they have in a generation.”
Signs of the schism are already visible. In the west, the pandemic, higher energy prices and growing distrust of China have prompted a renewed interest in self-sufficiency and shorter, less exposed supply chains. Beijing has created an alternative to the World Bank – the Asia Investment and Infrastructure Bank – and has invested in more than 150 countries as part of its “Belt and Road” initiative. Many of the world’s most indebted countries are now finding that China is one of their creditors.
Kozul-Wright says there are similarities to the 1970s, when the US remained the dominant power and China replaced the Soviet Union as a competing power. However, China is a much stronger economic challenger.
Georgieva last week called on policymakers to act urgently and collectively to address a growing list of problems including inflation, hunger, debt and climate change. But the multilateral system is creaking and there was little sign last week that the appeal would be heeded.
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