WASHINGTON, Jan 15 (Portal) – Severe fragmentation of the global economy after decades of increasing economic integration could reduce global economic output by up to 7%, but losses could reach 8-12% in some countries if technology is also decoupled, said the International Monetary Fund in a new staff report.
The IMF said even limited fragmentation could reduce global GDP by 0.2% but said more work was needed to assess estimated costs for the international monetary system and the global financial safety net (GFSN).
The note, released late Sunday, noted that global flows of goods and capital had flattened following the global financial crisis of 2008-2009 and a rise in trade restrictions in subsequent years.
“The COVID-19 pandemic and Russia’s invasion of Ukraine have further tested international relations and increased skepticism about the benefits of globalization,” the staff report said.
For years, deepening trade ties have resulted in large reductions in global poverty while benefiting low-income consumers in advanced economies through lower prices.
Dissolving trade ties “would have the greatest adverse impact on low-income countries and less affluent consumers in advanced economies,” it said.
Restrictions on cross-border migration would deprive host countries of valuable skills while reducing remittances to migrants’ countries of origin. Reduced capital flows would reduce foreign direct investment, while a decline in international cooperation would pose risks to the provision of vital global public goods.
The IMF said existing studies suggest that the deeper the fragmentation, the deeper the costs, with technological decoupling significantly amplifying losses from trade restrictions.
It found that emerging and low-income countries are likely to be most at risk as the global economy shifts toward greater “financial regionalization” and a fragmented global payments system.
“Less international risk-sharing (global economic fragmentation) could lead to higher macroeconomic volatility, more severe crises and greater pressure on national buffers,” it said.
It could also weaken the global community’s ability to support troubled countries and make it more difficult to resolve future sovereign debt crises.
Reporting by Andrea Shaal; Edited by Daniel Wallis
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