Jakarta, CNBC Indonesia – The International Monetary Fund (IMF) has again issued a warning regarding the risk of fragmentation in the global economy.
In her latest note released Monday (16/1/2023), IMF Managing Director Kristalina Georgieva said the disintegration of trade and technological change had hurt some communities. Public support for economic openness has declined in several countries and since the global financial crisis, the cross-border flow of goods and capital has flattened.
This was exacerbated by trade tensions between the world’s two largest economies, China and the United States (US), which increased the risk of new trade restrictions.
“Meanwhile, Russia’s invasion of Ukraine caused not only human suffering, but also major disruptions to the flow of finance, food and energy around the world,” he wrote.
According to him, it is natural for countries to adopt a policy of restricting trade in goods, services and assets for consideration of their economic and national security. However, supply chain disruptions during the Covid-19 pandemic have made it even more stringent.
“The risk is that policy interventions adopted in the name of economic or national security could have unintended consequences, or could be used intentionally for economic gain at the expense of others,” he said.
According to him, this would be something dangerous and increase uncontrolled geoeconomic fragmentation.
Estimates of the impact of this fragmentation vary widely. However, continued Georgieva, the long-term costs of trade fragmentation alone could range from 0.2% of global GDP in a limited fragmentation scenario to nearly 7% in a severe scenario or roughly equivalent to the combined annual GDP of Germany and Japan.
“If technological separation is added to the equation, some countries could lose up to 12% of GDP,” he said.
However, according to a new IMF analysis, the full impact is likely to be even greater, depending on how many fragmentation channels are accounted for.
He said in addition to trade restrictions and barriers to technology deployment, fragmentation can be felt through cross-sectoral restrictions triggering reduced capital flows and a sharp decline in international cooperation.
“Low-income consumers in developed economies will lose access to cheaper imports. Small open market economies will be especially hard hit. Much of Asia will suffer because it is so dependent on open trade,” he said.
Meanwhile, it is feared that developing countries will no longer benefit from the abundance of technology that has boosted productivity growth and living standards. Instead of catching up with advanced economic income levels, developing countries will be increasingly left behind.
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