Our world is becoming economically fragmented

A fragmentated global economy

In recent months, there has been a cacophony of warnings that the global economy is heading towards fragmentation. The basic premise underlying this alarm is that "globalisation is good" and any restructuring that challenges this tenet of the present world order is considered harmful.

There is no doubt that, in recent years, we have seen a few adjustments in trade patterns and international economic relationships, as well as some realignment of political power. But does this amount to fragmentation or a reversal of globalisation?

Fragmentation can be viewed as countries stepping back from the path of increased global integration and moving towards localisation in terms of production, trade, or fintech.

At the World Economic Forum's (WEF) annual meeting recently in Davos, IMF chief economist Gita Gopinath came out swinging and alerted the business leaders and government functionaries of the dangers of fragmentation or deglobalisation. IMF Managing Director Kristalina Georgieva went further. On February 5, on CBS' "60 Minutes," she said that world GDP would go down by USD 1.5 trillion or 1.4 percent, and this damage will be three percent in Asia if world trade goes down. However, her estimates are way off, as we explain later.

Undoubtedly, some changes are taking place in how the global economic community copes with the forces unleashed by the US-China tariff war, Covid-induced economic disruptions, and supply-chain ruptures, and recently, the massive anti-trade measures initiated by the US and its allies to punish the eastern bloc. The US and its Nato allies tried to isolate Russia for its invasion of Ukraine. But even during the Trump era, the US and China had engaged in a damaging trade war. These actions have led to visible changes in economic and political relationships.

The Biden administration has, through its Inflation Reduction Act, Chips Act, and other legislations, enacted policies to subsidise domestic chip makers and green industries. The impact of these measures, which provide protection from foreign competition, will be felt in the years to come. Asia and the Pacific could lose over three percent in GDP if trade is cut off in sectors hit by recent US chip sanctions on China and if non-tariff barriers in other areas are raised to Cold War-era levels, the IMF said in a recent report. European countries have already announced that they will retaliate – and this will strengthen the call for protectionism in other countries.

So, the current situation has been many years in the making.

In times of crisis, more affluent countries offered very little to the developing world. During the pandemic, the G7 countries poured money into their own healthcare systems to protect their citizens, leaving only scraps for the poorer countries. Consequently, emerging countries, including India, South Africa, and Brazil, have been striving to change the status quo where only a few benefit from the much-heralded "new economic order." In her interview, Georgieva conceded that the benefits of globalisation have been unequally distributed or, as she put it, there have been "some gains and some losses."

So, we can conclude that the current debate and the reshuffling of the global supply chain network are inevitable – and all for the better. Even before the pandemic began, The Economist ran a story titled "Globalisation is dead and we need to invent a new world order." Nonetheless, a careful analysis of economic data shows that it is too early to conclude that "globalisation is dead." Of course, there is a push towards streamlining the supply chain, so it might be more accurate to say that globalisation is evolving, not receding – a view shared by James Mittelman, a globalisation and development expert at American University in Washington, DC. "Clear evidence shows that the combined impact of the coronavirus pandemic, Brexit, supply chain disruptions and the Ukraine war have created barriers to cross-border flows and inefficiencies, but no significant retreat from globalisation," Mittelman told Al Jazeera.

The South is aware that financial fragmentation may lead to short-term costs from a rapid unwinding of financial positions and long-term costs from lower diversification and slower productivity growth because of reduced foreign direct investment.

But we can build a better supply chain for the future. The lessons we learned are that, first, complex, long-distance trade routes aren't meant to handle severe disruptions, thus setting the preconditions for what the world economy is experiencing today. Many companies are willing to hold more inventory because the loss of a sale is of greater risk than the extra cost of holding the inventory.

Second, the side effects of globalisation are apparent. Wealth inequality, the dominance of multinationals, and the dispersion of global supply chains have all become hot political issues. Developing countries need to focus on regional trading blocs and building resilience.

Third, in the existing setup, real wages are falling and are unable to keep pace with surging prices, and food and energy insecurity could easily lead to social unrest.

Even though globalisation may have peaked, it is far from being wholly reversed, and Western countries need to stop weaponising trade and economic policy. Nations should also lower their trade barriers.

Fortunately, big companies, in their effort to diversify their manufacturing out of China, are turning to Mexico, Vietnam, and India rather than "nearshoring" (that is, shifting the bulk of their manufacturing back to the US). Some businesses are "re-shoring" their outsourced staffing (engineering, accounting, legal, IT, etc), manufacturing, and supply chains.

Thus, the real outcome is nuanced. Globalisation is still (slowly) increasing but in different ways and areas. One could wax poetic and say that the waves of globalisation will continue to tide back and wash forward.

Dr Abdullah Shibli is an economist and works for Change Healthcare, Inc, an information technology company. He also serves as senior research fellow at the US-based International Sustainable Development Institute (ISDI).


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