International Finance
Economy Magazine

Global economy’s uncertain future

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The West thought of hurting Russia's energy trade, the same resource on which Europe's entire economy keeps running

Economic affairs commentator Martin Wolf, in November, mentioned that if the ongoing Gaza war remained restricted between Israel and Hamas, the impact would be immeasurably small and would be very insignificant.

Wolf, however, said that there would be a sense of uncertainty about a possible escalation in various directions, while commenting “Uncertainty is bad for the world economy – it affects people’s willingness to take risks.”

We have already seen what the Russia-Ukraine war has done to the global economy. As the battle completed its one year on February 2023, daily necessities like food items and electricity became dearer in significant pockets of the world, as trade disruptions became a routine affair. Add the price rise into it, the problem gets murkier. Even though the developed economies around the world tried to be resilient in front of the crisis, they too felt the pinch of skyrocketing inflation.

Even though the situation is easing now, the central banks and experts are predicting a growth slowdown in the coming days.

Listing down the risks

“A world ordered for decades by globalisation and geoeconomics has quickly become a world grounded in geopolitical risk. Accumulating shocks such as the COVID-19 pandemic and the Russia-Ukraine conflict have persisted, significantly reorganising global structures and relationships in 2023,” commented a report from S&P Global, clearly implying the role of the geopolitical risks in deciding the economy’s course.

In fact, the above report, which came out in June 2023, listed the principal geopolitical risks for the global economy in the coming days. These were Russia-NATO tensions in Ukraine (resulting in greater risk exposures in capital flows, trade and commodity markets worldwide), cyber-attacks (Russia-linked threat actors wreaking havoc in United States and Europe), US-China strategic competition (Beijing’s increased military presence in the South China Sea, technological advancements and ongoing trade tensions with Washington in the domains like semiconductor), climate risks (growing incidents of hurricanes, droughts, floods and wildfires across the world) and energy security (Europe’s energy supply from Russia facing uncertainties as Ukraine conflict continues).

Add the impacts of the COVID pandemic too. Although the global supply chains are at the final stages of their recovery period, no one can predict that what we witnessed during the 2020-2021 period was the last such occurrence on our planet.

Understanding the pattern

“A potential decoupling of the global trading system into two blocs – a US-centric and a China-centric bloc – would reduce global welfare in 2040 compared to a baseline by about 5%. Losses would be largest (more than 10%) in low-income regions that benefit most from positive technology spillovers from trade,” comments a VOXEU article.

We are all part of the globalised world and such ‘Decoupling’ efforts will complicate matters further.

In fact, we are living in the era of ‘Open Markets’ (an unrestricted market with free access by and competition of buyers and sellers, governed by the principles of supply and demand, with limited interference/outside influence from large conglomerates/governmental agencies) and ‘Free Trade’ (international buying and selling of goods, without limits on the amount of goods that one country can sell to another, and without special taxes on the goods bought from a foreign country), an international order which emerged from the ruins of the Second World War.

“A large consensus on the benefits of lower trade costs and prioritising gains from trade led to a continuous deepening of the international trade regime. With the end of the Cold War, that consensus moved eastwards. The EU expanded to the east and many countries joined the WTO, including Russia and China,” commented economists Carlos Goes and Eddy Bekkers in their research titled “The impact of geopolitical conflicts on trade, growth, and innovation: An illustrative simulation study.”

“However, the last decade has witnessed the beginning of a backlash against global trade integration. Political scientists conjecture that the emergence of China as a new superpower against the incumbent US might lead to strategic competition between these countries, one in which geopolitical forces and the desire to limit interdependence take primacy over win-win international cooperation,” the experts commented further.

To prove their point, Goes and Bekkers took the Ukraine war as an example. As the battle broke out in February 2022, the United States-led Western Bloc imposed sanctions on anything and everything Russian.

The West thought of hurting Russia’s energy trade, the same resource on which Europe’s entire economy keeps running. Moscow countered it by diverting much of the commodity to allies like China and India. It resulted in the United Kingdom’s domestic population almost sliding into the ‘Energy Poverty’ in 2022.

The European country’s economy too got plagued due to inflation and the cost-of-living crisis. Although the energy scarcity situation is not so severe now, the uncertainties are there as the West is in no mood to give up on capping Russia’s trade revenues.

The Black Sea Grain Deal, signed in 2022 by Ukraine, Russia, Turkey and the United Nations has constantly come under the worry of breaking down. The deal, which till August 2022, saw some 32.9 million metric tonnes of food items to be exported from Ukraine, helped some of the developing and impoverished regions of the world to feed their populations under the World Food Programme (WFP). In July 2023, Russia pulled out of the deal, thereby putting the arrangement in jeopardy.

“The Russian invasion of Ukraine led to sanctions imposed by a group of Western economies and has reinforced the debate on decoupling between blocs of regions. Although the sanctions are so far focused on Russia and Belarus, there is a risk that the conflict could widen and reinforce support for a policy driven by geopolitical considerations. This raises the question of how much real income might be lost if win-win international trade cooperation were given up and the global economy were to decouple, disintegrating into an Eastern bloc and a Western bloc,” Goes and Bekkers summarised the situation perfectly.

In fact, what we are now witnessing is not only a geopolitical crisis dominating the global economy, it literally challenging the concepts of ‘Open Markets’ and ‘Free Trade’, as one can’t dismiss the notion of Russia, armed by the Chinese support, may end up severely challenging the concept of a ‘Globalised World Order’, thereby leading to the restoration of the Cold War-era ‘Eastern Bloc’ and ‘Western Bloc.’

Fragmentation of the global order

The worry raised by Goes and Bekkers gets further backing from the Atlantic Council which stated that the geopolitical tension between China and the United States has fragmented the world on political, economic, trade, and financial fronts. This is challenging the existing globalised monetary and financial system, so much so that the International Monetary Fund (IMF) whose core mission is to ensure that the market remains in a liberal, deregulated and reformed manner, to facilitate easy capital flows, may face operational difficulties as well. A rigid global economy divided into two camps, will spell doom for the emerging markets as well.

In 2017, the then United States President Donald Trump criticised China’s ‘unfair trade practices’ behind substantial and persistent US trade deficits and “hollowing out its manufacturing base”. Since then, the world’s largest economy has kept on punishing China economically, be it unilaterally imposing tariffs on imports from Beijing, restricting the latter’s access to cutting-edge technologies like semiconductors, and acting against Chinese telecom companies. The Inflation Reduction Act is incentivising high-tech investment and manufacturing in the United States through the use of subsidies, tax incentives, and other favourable regulatory treatments.

Europe too has followed the lead by launching the ‘Critical Raw Materials Act’ to reduce its dependencies on countries that are not union members. Targeting China, some nations in this part of the world have restricted the use of Huawei equipment in their telecom infrastructures. The reality is instead of liberalising the global economy, developed nations are taking the lead to make the system a rigid one by adopting protectionist policies.

China, under the leadership of Xi Jinping, has termed these moves as unfair ones, born out of ‘suspicion’, and countering them by promoting a ‘multipolar world’, something which has increased manifold after Moscow came close to Beijing after being globally isolated post Ukraine war.

Be it projecting its BRICS alliance as an alternative to the West-led groupings or promoting the idea of ‘de-dollarisation’, China has been playing an aggressive game since 2022. In addition to participating and hosting a series of government-to-government groups like BRICS and the Shanghai Cooperation Organisation (SCO), China is also conducting meetings with the Association of Southeast Asian Nations (ASEAN) and Central Asia, Africa, Middle East, and Latin America groupings.

China is also creating international development banks like the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB).

“The aim is to build up alternative international institutions to facilitate cooperation between China and other countries on China’s terms and not under the tutelage of the United States and Europe—which has contributed to the fragmentation and weakening of the current global order and its institutions,” commented Atlanta Council.

If China wants a global order sensitive towards its geopolitical aspirations, global bodies like the IMF, World Bank and World Trade Organization are coming under a severe threat. While China is now taking a key role in giving out loans to some of the world’s small and emerging economies, IMF, World Trade Organisation and World Bank have been and will be at the forefront, when it comes to bailing out world economies from any sticky situation, while protecting the low-income and vulnerable nations from the crisis’ fallouts.

IMF’s ability to continue functioning seamlessly looks secure as of now, as voting power is weighted by members’ capital contributions. while the United States commands 16.5% of the total votes, the G7 has 41.25% of the voting shares. West is in the driver’s seat here. However, the Atlanta Council feels that the rising level of mistrust and hostility between the United States and China will make it very difficult for the IMF to develop an international consensus to reform its governance structure and give more voice and representation to emerging markets and developing countries (EMDCs).

Is globalisation under threat due to the existing geopolitical crisis? Yes. Will we see the restoration of ‘Eastern Bloc’ and ‘Western Bloc’ kind of economic order? Maybe, that’s a subject of debate. However, the unanimous verdict here says that geopolitics is certainly dictating the 21st century world economy and it doesn’t augur well.

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