Can world leaders stop global fragmentation?

The World Economic Forum’s Chief Economists Outlook report warned on Monday of dire human consequences from the fragmentation of the global economy. Releasing their outlook at the WEF Annual Meeting 2022 in Davos, Switzerland, the World Economic Forum’s Community of Chief Economists said it expected lower economic activity, higher inflation, lower real wages and greater food insecurity globally in 2022, pointing to the devastating human consequences of the global economy’s fragmentation.

“We are at the cusp of a vicious cycle that could impact societies for years. The pandemic and war in Ukraine have fragmented the global economy and created far-reaching consequences that risk wiping out the gains of the last 30 years,” said Saadia Zahidi, Managing Director at the World Economic Forum.

The report said the world is facing the worst food insecurity in recent history, especially in the Middle East and North Africa, Sub-Saharan Africa and South Asia. With wheat prices expected to increase by over 40 percent this year and prices for vegetable oils, cereals and meat at all-time highs, the war in Ukraine is exacerbating global hunger and a cost-of-living crisis. The WEF said: “Over the next three years, chief economists expect food insecurity to be most severe in sub-Saharan Africa and in the Middle East and North Africa. At the current trajectory, the world is on track for the worst food crisis in recent history, compounded by the additional pressure of high energy prices.”

The WEF said global leaders face difficult choices and trade-offs domestically when it comes to debt, inflation and investment. Yet business and government leaders must also recognize the necessity of global cooperation to prevent economic misery and hunger for millions around the world. The World Economic Forum’s Annual Meeting this week will provide a starting point for such collaboration.

“The costs of further disintegration would be enormous across countries. And people at every income level would be hurt—from highly paid professionals and middle-income factory workers who export, to low-paid workers who depend on food imports to survive. More people will embark on perilous journeys to seek opportunity elsewhere,” Zahidi said.

An International Monetary Fund blog—Why We Must Resist Geoeconomic Fragmentation—And How—said the flows of capital, goods, services, and people have transformed our world, helped by the spread of new technologies and ideas in the past three decades. These forces of integration have boosted productivity and living standards, tripling the size of the global economy and lifting 1.3 billion people out of extreme poverty, the IMF added.

“But the successes of integration have also brought complacency. Inequalities of income, wealth, and opportunity have continued to worsen within too many countries for a long time—and across countries in recent years. People have been left behind as industries have changed amid global competition. And governments have struggled to help them.”

The IMF observed that tensions over trade, technology standards, and security have been growing for many years, undermining growth—and trust in the current global economic system. Uncertainty around trade policies alone reduced global gross domestic product in 2019 by nearly 1 percent, according to IMF research. And since the war in Ukraine started, “our monitoring indicates that around 30 countries have restricted trade in food, energy, and other key commodities.”

“Think of the impacts of reconfigured supply chains and higher barriers to investment. They could make it more difficult for developing nations to sell to the rich world, gain know-how, and build wealth,” the IMF said, adding that advanced economies would also have to pay more for the same products, stoking inflation. And productivity would suffer as they lost partners who currently co-innovate with them. IMF research estimates technological fragmentation alone can lead to losses of 5 percent of GDP for many countries.

“The hard fact is that we have all been too slow to act as our economic fabric started to fray. But if countries can find ways now to come together around urgent issues that transcend national borders and impact us all, we can begin to mitigate fragmentation and bolster cooperation,” the IMF said.

The lender said there is no silver bullet to address the most destructive forms of fragmentation. But by working with all stakeholders on urgent common concerns, we can begin to weave a stronger, more inclusive global economy.

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