Risky business

As the world heads into 2024, over 50 elections are due to take place in countries with a combined population of over four billion people. CHRIS HATTINGH believes that the wrong policy choices stand to deepen the global economic slowdown, with especially dire consequences for developing economies…

Since 2019, global tensions have accelerated through the Covid-19 pandemic and into the mid-2020s. Supply and value chains across the globe were disrupted by government shutdowns; economies slowed and unemployment rates spiked. Additional cash sloshing around as a consequence of government stimulus programmes was used to chase fewer goods, which spiked inflation and kept it higher for longer than many had initially hoped.

Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade is a new working paper published by the International Monetary Fund (IMF). With so many elections coming up around the world and the potential for increased political turmoil, the paper aims to assess the extent to which 185 different countries are exposed to trade fragmentation along geopolitical lines.

The food and high-end manufacturing sectors stand out as most the most exposed sectors. The paper models “geoeconomic fragmentation” as an “increased sensitivity of trade costs to geopolitics and greater geopolitical polarisation”. Should this fragmentation increase, it will lead to generally lower trade and incomes.

Real per-capita income losses for the median emerging markets and developing economies in Africa are 120% larger than for the median advanced economy. For Asia, this figure is 80%. Where increased and easier trade has improved the global average quality of life, the process will be halted (and in some cases reversed) by higher levels of geoeconomic fragmentation. The consequences of this will fall more heavily on countries that need more – not less – trade and investment.

Conflicts are the clearest example of events that drive geoeconomic fragmentation. The continued Russian invasion of Ukraine and the conflict between Israel and Hamas in Gaza (the latest consequence of which is the Houthi rebel movement’s disruption of global shipping around the Suez Canal) are the two most immediate flashpoints, but trade wars also add to the shifting of supply chains.

In the US, the Biden administration has continued down the path of stronger industrial policy and protectionism set out by the administration of Donald Trump. In China and India, as well as the European Union, governments are exploring ways to incentivise local investment, with subsidies, tax cuts, and other tools at the forefront. Although they can shore up local manufacturing capacity (if applied well), such programmes risk distorting market forces, protecting non-performing businesses and industries, and ultimately resulting in materials and goods costs that are higher than they would have otherwise been.

The authors of the IMF paper also delve into countries’ respective “geopolitical alignments”, finding that “geopolitical alignment is generally associated with lower trade barriers”. The sectors most affected are “transport equipment”, “food and beverages”, and “other manufacturing”.

When geoeconomic fragmentation increases, notes the paper, trade flows become more sensitive to geopolitics and market participants become more aware of and take into consideration the risks of trading with geopolitically distant countries. Geopolitical alliances become yet more polarised, which in turn widens the geopolitical distance between countries.

As many countries’ foreign policies become somewhat more pragmatic, an element of shared values and principles will, to some extent, remain important. Countries diverging radically on issues like freedom of speech and the press, democracy, strong property rights, and economic freedom, could drift further apart from the rest, fuelling the ongoing increase in geopolitical distance.

With increased risk comes increased opportunity… if one has the information and analysis at hand to take advantage of the opportunities presented. Over the short term, economic growth could slow further, but investors and businesses are always looking for new avenues and locations in which to invest. South African businesses, working with municipalities and civil society organisations around the country, can make their cities and towns more attractive to new investment without waiting for national government in Pretoria to act, or give them permission to act.