Global finance chiefs, gathering in Washington little more than a year after the shock Russian invasion of Ukraine, are drawing sharply different conclusions about the biggest risks to the outlook, in a split showcasing the rising role of geopolitical struggles in the world economy.
(Bloomberg) — Global finance chiefs, gathering in Washington little more than a year after the shock Russian invasion of Ukraine, are drawing sharply different conclusions about the biggest risks to the outlook, in a split showcasing the rising role of geopolitical struggles in the world economy.
The key takeaway among rich, democratic nations: the need for more “resilience” in supply chains, to ensure their economies are better insulated from risks ranging from war and pandemics to attempts at coercion by authoritarian regimes. But others, including the International Monetary Fund, are warning against a “fragmentation” of the global economy into competing blocs that hurts growth.
Group of Seven finance ministers and central bank governors invoked the terms “resilient” and “resilience” a total of 15 times in their joint statement after meeting on Wednesday.
“All countries are going to want to have more resilient supply chains in a much less stable world — the lesson of Ukraine was that energy dependence on Russia was probably a mistake,” UK Chancellor of the Exchequer Jeremy Hunt told reporters Thursday. “We want to make sure that it’s not just energy dependence, but technology dependence, critical-minerals dependence, all sorts of other dependences” that are addressed, he said.
Hunt’s G-7 colleague, German Finance Minister Christian Lindner, described the danger as “cluster risk” — where there’s over-reliance on trade and investment in one location. Trade relations with China, for example, “must not become a cluster risk — which is why diversification is necessary,” he told reporters Thursday.
But the danger of this new push by democratic economies to shift supply chains toward themselves — something US Treasury Secretary Janet Yellen calls “friendshoring” — is a separation of the global economy into blocs, leading to less efficiency and ultimately less development.
That was the warning sounded by Kristalina Georgieva, managing director of the IMF, which together with the World Bank is hosting spring meetings of world economic policymakers this week in the US capital.
The security of global supply chains “is taking a new higher priority” in economic discussions and decision making, Georgieva told reporters on Thursday. “The question is, can we be more determined to enhance security of supplies but not push the world that far that we are into a second cold war.”
While “resilience” is the new mantra of the US and its allies, “fragmentation” is the feared result among observers including Georgieva. “Getting on a path of less fragmentation in the world economy is good for everybody,” she said last week.
Former US Treasury Secretary Lawrence Summers cautioned that “there’s a growing acceptance of fragmentation,” speaking Friday on Bloomberg Television’s “Wall Street Week” with David Westin. “Maybe even more troubling, I think there’s a growing sense that ours may not be the best fragment to be associated with,” said Summers, a paid contributor to Bloomberg TV.
Read More: Summers Warns US Getting ‘Lonely’ as Other Powers Band Together
One key source of fragmentation risk is the ever-escalating tensions between the US and China, the world’s biggest and second-largest economies.
“That’s the key relationship in the world” and “that is fracturing,” Raghuram Rajan, a former IMF chief economist, said on Bloomberg Television Thursday on the sidelines of the meetings. “That is important for the rest of the world — because if you have to choose sides, countries will be in a very, very difficult position.”
That position wasn’t lost on Moroccan Finance Minister Nadia Fettah Alaoui.
“Countries like Morocco will suffer from fragmentation,” she said Thursday. “We have to push to avoid this.”
No More ‘Chinas’
Making things all the worse is a much weaker trend-growth rate for the global economy. Part of that is because major nations including China, Japan and some euro-zone members are seeing working-age populations shrink. Productivity growth rates have weakened compared with past decades. And the IMF also this week warned that high levels of debt leave the world more vulnerable.
While this year, China’s reopening will offer a burst of growth that may help support the world expansion, its medium-term trend pace of 5% or weaker is notably down from pre-pandemic rates.
“We don’t have any Chinas anymore that are growing at very high rates,” Gita Gopinath, who’s now Georgieva’s top lieutenant after previously serving as IMF chief economist, said on Bloomberg TV. “So for the global economy as a whole, we don’t have very large engines of growth.”
“The IMF is exactly right, longer-term growth looks a lot worse,” Rajan said.
So much worse that the IMF says the five-year outlook for the world is the worst in their projections, which date back to 1990. That year was effectively the book-end of the last Cold War: a year before the collapse of the Soviet Union, which helped to usher the rapid integration of once-Communist nations into a new, rapidly globalizing economy.
Today, intensifying geopolitical competition is seen also in the battle for investment dollars and disputes over debt.
The Washington meetings featured limited progress over resolving debt overhangs for Zambia and other frontier economies, with China — the world’s largest official creditor to the developing world — reluctant to accede to terms that G-7 members are insisting on.
China’s Moves
China instead is focused on strengthening its own supply chains and financial ties with the developing world — a push on display this week as it plays host to Brazil’s president, Luiz Inácio Lula da Silva.
Amid the impasse in debt talks in Washington, Shanghai witnessed the swearing in of one of Lula’s predecessors, Dilma Rousseff, as head of the New Development Bank. The NDB is one of a number of multinational institutions and forums China has built as it places less emphasis on legacy organizations set up in an era of US domination.
Read More: China Lays Out Three-Point Plan at Global Debt Relief Talks
Back in the US capital, the fracturing of the world order was also seen in the G-20 finance ministers failing to issue a communique — continuing the discord faced by the group since the Russian invasion of Ukraine.
Some developed-world policymakers are attendant to the risks even as they seek to shift supply chains. French Finance Minister Bruno Le Maire said, “We need a common strategy to avoid that fragmentation and to keep the door open for stronger cooperation.”
But others were direct about the threats they see. Canadian Finance Minister Chrystia Freeland in a Wednesday speech underscored, “These strategic vulnerabilities to authoritarian economies put our own security in jeopardy.”
–With assistance from Kamil Kowalcze, Viktoria Dendrinou, Jorge Valero, Philip Aldrick, Christopher Condon, Maria Tadeo, Brian Platt, Eric Martin, Tom Keene, Jonathan Ferro, Lisa Abramowicz and Toru Fujioka.
(Updates with comments by Summers in 10th paragraph.)
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