The message from last week’s annual meeting of the International Monetary Fund was clear. War, pandemic and rampant inflation have put the global economy under severe strain. The mood was edgy, often fractious.
The Americans had a go at Saudi Arabia for orchestrating production curbs designed to push up the cost of oil. The Indians were unhappy with the aggressive increases in US interest rates, which they saw as exporting America’s problems to the rest of the world.
Britain was in the doghouse for a botched mini-budget that has sent tremors through global financial markets. Russia again made it clear it would veto any attempts by the G20 to condemn it for the invasion of Ukraine. Set up as a body that would encourage the world’s biggest developed and emerging market countries to find solutions to common problems, the G20 could not even agree on a bland communique to sum up its meaningless deliberations.
The moribund state of the G20 matters. It shows a global economy that is fragmenting, with countries responding to the series of recent shocks by looking out for themselves.
There have been examples of solidarity – such as the support for Ukraine – but they are exceptions to the trend. Joe Biden’s decision to restrict the export of US computer chips to China – symbolic of the frosty relations between the world’s two biggest economies – is more typical.
Kristalina Georgieva, the managing director of the IMF, knows there is a problem. The IMF was set up at the Bretton Woods conference in 1944 to end the beggar-my-neighbour policies of the 1930s and to prevent countries exporting deflation. Now she sees signs of deglobalisation. “Fragmentation in the world economy means we might see shifts in supply chains that impact on the cost structures on a more permanent basis.”
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 bigger question, namely: “Are we experiencing a fundamental economic shift in the world economy – from a world of relative predictability and stability, to greater uncertainty and volatility?”
The answer to that question would appear to be yes. It has taken the pandemic and its aftermath to expose a fragmentation happening slowly for the past 15 years. Globalisation’s heyday – the period between the demise of the Soviet Union in the early 1990s and the near-death of the global banking system in 2008 – is long past.
Richard Kozul-Wright, director of globalisation and development strategies at the UN Conference on Trade and Development, says: “There is a lot of focus on the failures of the past year but not enough on the fracturing that has been happening since the global financial crisis.
“There has been massive under-investment – which has manifested itself in supply chain bottlenecks – even though all the ingredients should have been in place for an investment boom.”
Kozul-Wright says inequality is the other big factor behind global fracturing, with the benefits of international trade skewed towards company profits, not workers’ wages.
In retrospect, 2016 marked an important staging post on the road to fragmentation. The Brexit vote in the UK revealed an unhappiness among millions of voters with the economic status quo, as did Donald Trump’s victory over Hillary Clinton in the US presidential election. Trump’s arrival in the White House led to marked cooling of relations between Washington and Beijing, and there has been a further deterioration under Biden.
Neil Shearing, group chief economist at the consultancy Capital Economics, says: “The world economy is fracturing into two China and US-aligned blocs. This will result in shifts in supply chains and reduced technology and investment flows between the two over the coming decade. Geopolitical considerations will play a greater role in economic policy than they have for a generation.”
Signs of the schism are already apparent. In the west, the pandemic, higher energy prices and growing mistrust of China have meant a renewed interest in self-sufficiency and shorter, less exposed supply chains. Beijing has set up an alternative to the World Bank – the Asian investment and infrastructure bank – and has invested in more than 150 countries through its Belt and Road initiative. Many of the world’s most heavily indebted countries now find that China is one of their creditors.
Kozul-Wright says there are similarities with the 1970s, with the US remaining the dominant power and China replacing the Soviet Union as the competing power. China, though, is a much more formidable economic challenger.
Georgieva appealed last week for policymakers to act urgently and collectively to tackle a lengthening list of problems: inflation, hunger, debt and climate change among them. But the multilateral system is creaking and there were few signs last week that the appeal would be heeded.
