Dangers of economic fragmentation

Mahmoud Mohieldin
Tuesday 9 Jan 2024

A series of virulent disruptions have wrought havoc on the world economy, accompanying a growing realisation that the world is fragmenting both politically and economically, writes Mahmoud Mohieldin



 have just come back from the world’s largest annual meeting of economists, held this year in San Antonio, Texas, in the US.

The 2024 Allied Social Science Association (ASSA) Conference brought together the latest ideas and studies on economic developments and policies around the world at the global, regional, country, and sectoral levels. Among the most important subjects discussed was the signs of US economic recovery, how it compared to other major economies, and the Federal Reserve’s attempts to engineer a “soft landing,” namely to control inflation in the short term while averting recession.

A positive prognosis is supported by upticks in US labour market figures and employment rates, but predictions for the future still look bleak.

Meanwhile, dark clouds are looming elsewhere and threaten to prevent the continued rise of average growth rates to the levels the world had seen before the train of crises that struck at the beginning of this decade, from the Covid-19 pandemic to the war in Ukraine and now the brutal and inhumane war in Gaza with its mounting risks of expansion across the region.

Although inflation in the US has indeed declined, it is still higher than the Fed’s target, which is for the annual rate not to exceed two per cent. This means that the Fed might decide to raise interest rates again or, at least, not bring them down, contrary to investors’ hopes that a series of reductions in financing costs starting in March would bring rates down to 1.5 per cent during the year.

If labour market and growth conditions prove favourable to interest rate cuts, the rate may fall to 0.75 per cent this year, if the hopes are correct.

Several of the ASSA Conference sessions were devoted to prospects for recovery, growth, and financial and monetary stability in the global economy under the current conditions of fragmentation and the effects of changes in the post-World War II international order.

The pattern of economic globalisation has transformed in tandem with the increasingly rapid transition from the bipolar world order of the Cold War era to the unipolar world order after the collapse of the Soviet Union and then to the current multipolar world, with the global economic centre of gravity has shifted towards the fastest-growing and most-populous Asian side of the world.

This shift has precipitated mounting geopolitical tensions, while threats and complications have also emerged from other directions. These sometimes take the form of advances in digital technology, artificial intelligence (AI), and smart applications and their impacts on labour markets and disparities in wealth and income distribution.

At other times, they come in the form of political and institutional turmoil stemming from the rise in populist currents and the influence of the extreme right in different countries worldwide. Not only are all these virulent disruptions occurring at once, but they are also accompanying a growing realisation that the world is out of joints politically.

An International Monetary Fund (IMF) staff discussion note entitled “Geoeconomic Fragmentation and the Future of Multilateralism” observes the growing international trends towards inward-looking national policies that are bringing a rise in protectionist measures and consequent restrictions and barriers to trade, capital flows, the cross-border movement of labour, and international technological cooperation.

The spate of conventional and newly contrived protectionist measures and recently introduced industrial policies in the US and Europe have raised the spectre of trade wars reminiscent of what I described in a previous article entitled “The Mercantilists are Back” and similar to the drive of the emergent European powers in the 16th and 17th centuries to accumulate wealth by restricting imports and expanding markets abroad often by war, territorial conquest and colonisation, human trafficking and securing control over the sources of raw materials.

The geoeconomic fragmentation discussed in the above-mentioned IMF note intensified following the onset of the Covid-19 pandemic and the consequent supply line disruptions and bottlenecks. It then worsened with the sharpening global polarisation that accompanied the war in Ukraine and the consequent geopolitical entrenchments, sanctions regimes, and restrictions on international payment systems.

While the protectionist measures behind this fragmentation were motivated by security concerns, a desire to break free from a dependence on certain trading partners, or other motives, they were also connected with larger inward-looking policy trends, as exemplified by some of the measures taken under the Inflation Reduction Act and the Chips and Science Act in the US and by the green economy and digital transformation measures recently adopted in the EU.

The fragmentation has been compounded by the dynamics of tit-for-tat trade restrictions and the growing tendency of parties to go their own way whenever they sense that economic transactions are not working in their interests in terms of trade, investment, or the migration of labour. According to one estimate, policy measures obstructive to trade have tripled from 2019 to 2022, costing the global economy a seven per cent decline in global GDP.

Among the greatest dangers posed by the growing fragmentation is the decline in international cooperation in fighting climate change, remedying debt crises before they spiral out of control, and facilitating AI governance. After all, if you obstruct cooperation in trade and investment, you cannot realistically expect constructive cooperation in other areas such as climate change and global public health.

The Summit of the Future, to be held during the UN General Assembly in September, will address the worsening geoeconomic fragmentation and its costly effects on the international order. As we look forward to that summit, it will be important to consider whether geopolitical conflict is the main enemy to the global economy, as Harvard economist Dani Rodrik argues, or whether it is the protectionist wave that ignited the geopolitical fire, which is the view of Yale economist Pinelopi Goldberg, who has served as chief economist at the World Bank.

Given the complexity and tightly interweaving nature of the causes of the current state of the world economically and politically, it will be a tall order to determine which of the two came first. Suffice it to say that their driving forces have combined to wreak immense harm on international affairs and, as always, it is the weaker parties in the system that end up paying the greatest price.

They should be the first to merit consideration and protection, not just for the sake of justice but also because of the grave consequences that ignoring the vulnerable can have on international peace and security.


This article appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 11 January, 2024 edition of Al-Ahram Weekly

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