April 16, 2024
Geoeconomic fragmentation and net-zero targets
The second half of the twentieth century experienced significant economic integration. International trade, cross-border migration, capital flows, and technological diffusion increased per capita incomes across countries and reduced global poverty. However, events such as the global financial crisis of 2007 to 2009, Brexit, and the COVID-19 pandemic—all against the backdrop of escalating great power rivalry and tensions between the United States and China—have demonstrated the rise of geoeconomic fragmentation (GEF). Since the 2022 Russian invasion of Ukraine, a growing numberof world leaders have addressed the impacts of GEF on global energy and agricultural markets. For one, higher and increasingly volatile food and energy prices have made it increasingly difficult for developing nations to prioritize environmental concerns and implement sustainable development initiatives.
The second half of the twentieth century experienced significant economic integration. International trade, cross-border migration, capital flows, and technological diffusion increased per capita incomes across countries and reduced global poverty.1 However, events such as the global financial crisis of 2007 to 2009, Brexit, and the COVID-19 pandemic—all against the backdrop of escalating great power rivalry and tensions between the United States and China—have demonstrated the rise of geoeconomic fragmentation (GEF). Since the 2022 Russian invasion of Ukraine, a growing numberof world leaders have addressed the impacts of GEF on global energy and agricultural markets. For one, higher and increasingly volatile food and energy prices have made it increasingly difficult for developing nations to prioritize environmental concerns and implement sustainable development initiatives.
The International Monetary Fund (IMF) describes GEF as a pattern of “policy-driven reversal of global economic integration” that threatens capital flows to low-income countries, hinders innovation in emerging markets, and discourages cooperation on international crises. Stemming from the prioritization of national security objectives, GEF takes the form of policies that reduce reliance on other countries by incentivizing domestic production and employment. In our increasingly fragmented world, nations have focused on reshoring essential goods and supply chains, including minerals crucial for green technologies, semiconductors, and military hardware due to concerns over national security and geopolitical motives. These transformations are in direct opposition to the founding principles of the Bretton Woods institutions (BWIs)—the International Monetary Fund, the World Bank, and the World Trade Organization (WTO)— which collectively seek to promote free trade, globalization, unified and competitive exchange rates, and the reorientation of public expenditures to achieve reductions in global poverty and increased economic prosperity for developing nations.
The costs of GEF are far-reaching and include higher import prices, segmented markets, diminished access to technology and labor, reduced productivity, and lower living standards. A June 2023 article in the IMF’s Finance & Development magazine points to diminished output in a scenario where countries must align with either a US-EU as 2.3 percent of global gross domestic product (GDP). Advanced economies and emerging markets could face permanent losses of between 2 percent and 3 percent, while low-income countries are at risk of losing more than 4 percent of their GDP. These losses could deepen risks of debt crises, exacerbate social instability, and increase food insecurity. The most vulnerable nations, heavily dependent on the imports and exports of key commodities, will find it particularly costly to adapt to new suppliers under fragmented trade conditions. Moreover, a 2023 IMF paper with a comprehensive analysis of GEF and its potential effects on the future of multilateralism found that increasing international trade restrictions could lead to a long-term decline of up to 7 percent in global economic output, or approximately US$7.4 trillion. Building on these findings, an October 2023 IMF blog, titled “Geoeconomic Fragmentation Threatens Food Security and Clean Energy Transition,” argued that disruptions in the global trade of goods induced the spike in inflation experienced globally in 2022, heightened food insecurity in lower-income nations, and contributed to a deceleration in global economic growth. In addition, GEF is posing a threat to food security and the clean energy transition, namely by impacting the trade of essential minerals and agricultural goods, according to the blog co-authors.
GEF also risks short-circuiting the multilateralism needed to coordinate climate change mitigation and sustainable development in the years to come. An IMF policy report, titled “Geo-Economic Fragmentation and the Future of Multilateralism,” noted signs of GEF including:
- Formation of regional economic blocs.
- Declivities in cross-border capital flows.
- Prioritization of resilient supply chains over and above efficiency.
- Growing income inequality.
- Rising geopolitical tensions.
- Increasing discontent associated with a free trade system.
Among the goals of the BWIs is to achieve global net-zero emissions by 2050; however, GEF has limited these organizations’ abilities to work with governments, businesses, civil society organizations, and other stakeholders to mobilize resources and accelerate the transition to a low-carbon economy. Policymakers and scholars have raised growing concerns, suggesting that increased GEF will have implications for sustainable development outcomes. However, there remains a paucity of research on the impact of GEF on net-zero targets specifically. This report builds on previous scholarly work to examine the impacts of GEF on the ability of nation states to attain their net-zero targets to combat climate change.
In conclusion, the paper calls for a democratized governance structure in the BWIs, emphasizing the need for reevaluating quota allocations and diversifying leadership roles. By addressing these foundational challenges, the BWIs can navigate the complexities of today’s global economic landscape more effectively, fostering trust, representation, and robust leadership. The authors also argue persuasively that BWI reform can not only reinforce the legitimacy of the IMF and World Bank but also indirectly help the soft and hard power of the states most hesitant to reform the international monetary system.
About the authors
Shirin Hakim is a Senior Fellow at the Center for Middle East and Global Order and a former Bretton Woods 2.0 Fellow with the GeoEconomics Center.
Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads GeoEconomics Center’s Bretton Woods 2.0 Project.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
Image: Silja Yraola, an employee of Icelandic startup Carbfix, enters the dome with injection well at its facility in Olfus, Iceland, November 21, 2023. REUTERS/Marko Djurica