WEF: Economic Costs Of Fragmentation Could Eclipse Those Of '08 Financial Crisis, COVID

(MENAFN- Kuwait News Agency (KUNA)) DAVOS, Jan 23 (KUNA) -- The World Economic Forum (WEF) warned on Thursday from the significant economic risks from increasing geoeconomic fragmentation resulting from statecraft policies could cost the global Economy USD 0.6 trillion to USD 5.7 trillion, with a possible economic impact surpassing the disruptions caused by the 2008 financial crisis or the COVID-19 pandemic.
The report, developed in collaboration with Oliver Wyman company, and named (Navigating Global Financial System Fragmentation), has estimated that fragmentation could cost up to five percent of global GDP due to reduced trade and cross-border capital flows, as well as lost economic efficiencies that could also increase global inflation by more than five percent in a very high fragmentation scenario.
The report said that countries has increasingly used the financial system to advance their geopolitical objectives, evidenced by a 370-percent rise in sanctions since 2017 along with subsidies industrial policies and discussions about the creation of parallel financial architectures.
It called on policy-makers to adopt economic statecraft that fosters cooperation, sustainable development and resilience in the global economy.
The WEF's Head of Centre for Financial and Monetary Systems Matthew Blake said "Leaders face a critical opportunity to safeguard the global financial system through principled approaches."
According to the report, the impact of fragmentation on inflation rates and GDP growth depends heavily on the policies adopted by global leaders, adding that 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 mentioned three scenarios; the first is modelling trade relationships showed that GDP growth could decrease nearly 10 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 confirmed 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 presented the Principles to Safeguard the Global Financial System from Fragmentation, developed by over 25 financial sector CEOs, academics and other leaders, saying 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.
The report also outlined approaches for implementing economic statecraft that protect national security and sovereignty without reducing global prosperity, including 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. (end)
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