Washington (EFE).- The main current geopolitical tensions, such as the rivalry between China and the United States or the one caused by the Russian invasion of Ukraine, are changing the flow of foreign direct investment and may end up causing losses equivalent to 2% of GDP world.
This was stated on Wednesday by the International Monetary Fund (IMF), which also warned that the financial fragmentation derived from polarization has important implications for global financial stability, since it affects cross-border investment, international payment systems and asset prices.
The IMF published this Wednesday a chapter of its Economic Outlook Report (WEO) and another of the Global Financial Stability Report (GFSR) in which an analysis is made of the consequences of the geopolitical fragmentation that has produced in recent years and warns about the growing protectionism of many countries.
Next week, in the framework of the spring meetings of the IMF and the World Bank, these reports will be published in full, in which the outlook for global growth will be updated.
Global economic and financial fragmentation
According to the IMF, concerns about global economic and financial fragmentation have intensified in recent years amid rising geopolitical tensions, between China and the United States, and also over Russia’s invasion of Ukraine.
One of the consequences of fragmentation is that as tensions rise, “companies and policy makers are increasingly seeking strategies to make supply chains more resilient by moving production home or to trusted countries.”
Examples of this are protectionist measures such as the US government’s decision to support local supply chains; the European Union’s Net Zero Industry Act “to counter the subsidies in the US Inflation Reduction Act,” while China has opted to replace imported technology with local alternatives.
global consequences
In the WEO, the IMF economists make an estimate of the global consequences and believe that the fragmentation would bring a permanent increase in the barriers to investments by the blocks of countries. This could cause losses equivalent to 2% of global GDP.
“Simulations of various what-if scenarios suggest that losses are likely to be unevenly distributed, with emerging market and developing economies with reduced access to advanced economies being particularly affected, both through lower job formation capital as lower productivity gains”, warns the Fund.
As for the financial implications, fragmentation weakens financial relations between countries and investors bet less on geopolitically distant economies for various reasons.
Among them that financial restrictions increase transaction costs or also because of “general mistrust and fear of expropriation.”
An increase in tensions between an investor and a host country reduces the overall bilateral cross-border allocation of portfolio investment and banking rights by about 15%, the IMF calculates.
The effect of geopolitical tensions on cross-border bank assets and portfolio allocation is considerable, particularly for investment funds, the Fund says.
Global integration needs strong defense
For all these, the IMF notes, “global integration needs a strong defense” as long-term production losses will be “large and widespread.”
Thus, he considers that governments must “carefully weigh” the strategic motivations behind relocation, the costs for their own economies and the secondary effects for others.
In addition, he believes that “the current rules-based multilateral system must adapt to the changing world economy and must be complemented by credible mechanisms to mitigate the spillover effects of unilateral policies.”
Regarding finance, the IMF points out, supervisors, regulators and financial institutions must be aware of the risks to financial stability derived from a possible increase in tensions and “commit to identify, quantify, manage and mitigate these threats ”.
“In response to growing geopolitical risks, economies that depend on external financing must guarantee an adequate level of international reserves, as well as capital reserves and liquidity in financial institutions,” it adds.
Likewise, the global financial safety net -a set of institutions and mechanisms that mitigate the impact of crises- must be strengthened through mutual assistance agreements between countries.
