Rising Geo-Economic Fragmentation Threatens Global Growth

Recent analyses indicate that rising geo-economic fragmentation could impact global economies. A report by the World Economic Forum (WEF) estimates that such fragmentation may reduce global GDP by up to USD 5.7 trillion. This potential loss is projected to exceed the economic disruptions caused by the 2008 financial crisis and the COVID-19 pandemic. Emerging markets, particularly India, are expected to face the most severe consequences.

About Geo-Economic Fragmentation

Geo-economic fragmentation refers to the increasing use of economic measures for geopolitical objectives. This includes sanctions, industrial policies, and the establishment of alternative financial systems. Since 2017, sanctions have surged by 370%. These actions create barriers to trade and capital flows, undermining economic efficiencies globally.

Projected Economic Impact

The WEF report suggests that fragmentation could lead to a GDP loss ranging from USD 0.6 trillion to USD 5.7 trillion. This represents nearly 5% of global GDP. Additionally, inflation rates could rise by more than 5% in extreme scenarios. The economic fallout will be felt most acutely in countries dependent on integrated financial systems.

Effects on Emerging Markets

Emerging economies, including India, Brazil, and nations in Africa and South-East Asia, are likely to experience GDP declines. In a worst-case scenario, GDP growth in these countries could drop by more than 10%. This is nearly double the global average impact, denoting their vulnerability in a fragmented economic landscape.

Policy Recommendations

The report encourages policymakers to adopt economic strategies that promote cooperation and resilience. Emphasising sustainable development is crucial. By encouraging collaboration, countries can mitigate the adverse effects of fragmentation on inflation and economic growth.

Future Scenarios

A full economic decoupling between Eastern and Western blocs could lead to severe consequences. Unaligned nations may find themselves forced to trade exclusively with their largest economic partners. This shift would further exacerbate the economic challenges faced by emerging markets.

Conclusion on Global Economic Cooperation

The WEF stresses the importance of principled economic statecraft. By prioritising cooperation, policymakers can create a more resilient global economy. This approach can help alleviate the unintended consequences of fragmentation on living costs and overall economic growth.

Questions for UPSC:

1. Examine the implications of geo-economic fragmentation on global trade dynamics.
2. Discuss in the light of recent economic trends, how sanctions influence international relations.
3. With suitable examples, discuss the role of emerging economies in a globalised financial system.
4. Critically discuss the potential consequences of economic decoupling on global inflation rates and economic growth.

Answer Hints:

1. Examine the implications of geo-economic fragmentation on global trade dynamics.

1. Geo-economic fragmentation leads to reduced trade flows due to increased sanctions and barriers.
2. Emerging markets face greater challenges, resulting in potential trade isolation.
3. Alternative financial systems may emerge, disrupting traditional trade relationships.
4. Global supply chains could be restructured, increasing costs and inefficiencies.
5. The overall reduction in economic cooperation could diminish global economic growth prospects.

2. Discuss in the light of recent economic trends, how sanctions influence international relations.

1. Sanctions have surged by 370% since 2017, reflecting a shift towards economic statecraft.
2. They often strain diplomatic relations, creating divisions between sanctioning and targeted nations.
3. Sanctions can lead to retaliatory measures, escalating tensions and conflict.
4. They influence global alliances, as countries may align based on economic interests.
5. Long-term use of sanctions can reshape global trade patterns and economic dependencies.

3. With suitable examples, discuss the role of emerging economies in a globalised financial system.

1. Emerging economies like India and Brazil are integral to global supply chains and trade networks.
2. They contribute to economic growth, providing markets for developed nations’ exports.
3. Increased investment from developed economies marks their rising importance in finance.
4. Examples include India’s IT services and Brazil’s agricultural exports, showcasing their global impact.
5. However, they are vulnerable to fragmentation, risking economic stability and growth.

4. Critically discuss the potential consequences of economic decoupling on global inflation rates and economic growth.

1. Economic decoupling could lead to increased costs for goods due to disrupted supply chains.
2. Inflation rates may rise as countries face trade barriers and reduced competition.
3. Emerging markets may experience GDP declines exceeding 10%, worsening economic conditions.
4. Global economic growth could slow, impacting investments and consumer spending worldwide.
5. Long-term decoupling risks creating economic silos, limiting innovation and efficiency.