Geneva: The World Economic Forum (WEF) warned on Thursday about significant economic risks resulting from increased geoeconomic fragmentation. This fragmentation, driven by statecraft policies, could cost the global economy between USD 0.6 trillion and USD 5.7 trillion, potentially surpassing the economic disruptions caused by the 2008 financial crisis or the COVID-19 pandemic.
According to Kuwait News Agency, the report, developed in collaboration with the Oliver Wyman company and titled "Navigating Global Financial System Fragmentation," estimates that fragmentation could reduce global GDP by up to five percent. This reduction is attributed to decreased trade and cross-border capital flows, as well as lost economic efficiencies, which could also lead to a global inflation increase of more than five percent in a high fragmentation scenario.
The report highlights that countries have increasingly utilized the financial system to advance geopolitical objectives, evidenced by a 370-percent rise in sanctions since 2017, along with industrial policies and discussions about creating parallel financial architectures. It urges policymakers to adopt economic statecraft fostering cooperation, sustainable development, and resilience in the global economy.
Matthew Blake, WEF's Head of Centre for Financial and Monetary Systems, stated, "Leaders face a critical opportunity to safeguard the global financial system through principled approaches." The report emphasizes that the impact of fragmentation on inflation rates and GDP growth heavily depends on the policies adopted by global leaders. With a principled approach, policymakers can advance appropriate policies for their economies and societies while mitigating unintended effects on areas like cost of living and GDP growth.
The report outlines three scenarios. The first scenario models trade relationships and suggests that GDP growth could decrease nearly ten times more in a scenario involving a full decoupling of Eastern (i.e., China and Russia) and Western (i.e., the US and its allies) blocs compared to a lower fragmentation scenario, where capital and trade flows are only restricted in sensitive areas related to national security and competitiveness. Similarly, inflation would be nearly nine times higher in this same comparison.
In the most extreme fragmentation scenario, the report confirms that a full economic decoupling between Eastern and Western blocs would force unaligned countries to trade exclusively with their most significant economic partner. These nations could see GDP growth drop by over 10 percent, nearly double the global average, with India, Brazil, Turkiye, and emerging economies in Latin America, Africa, and South-East Asia bearing the greatest burden.
The report also presents the Principles to Safeguard the Global Financial System from Fragmentation, developed by over 25 financial sector CEOs, academics, and other leaders. It states that these principles underpin the effective functioning of financial services globally and their protection stands to help reduce the impacts of fragmentation in the financial system.
Additionally, the report outlines approaches for implementing economic statecraft that protect national security and sovereignty without reducing global prosperity. It includes eight key considerations for policymakers, focusing on the design of more effective sanctions, promoting areas of mutual gain, reducing unintended costs, and modernizing the financial system to reflect 21st-century geopolitical and economic dynamics.