Fragmentation of the global economy into rival trading blocs runs the risk of prompting a new cold war, the head of the International Monetary Fund has said.
Kristalina Georgieva, the IMF’s managing director, said a combination of the Covid pandemic, the war in Ukraine and shortcomings with globalisation had led to a potentially dangerous splintering.
“What we have learned from Covid-19 and the war is that security of supply and the reliable functioning of global supply chains are taking a higher priority in economic discussions and decision making,” she said.
Georgieva was speaking after fears of fragmentation were heightened by the G7 group of leading industrial countries, which wants to reduce dependency on China by building alternative supply chains.
The group, composed of the US, UK, Japan, Germany, France, Italy and Canada, said in a communique released after a meeting of finance ministers in Washington that it was exploring the possibility of developing “a mutually beneficial partnership with low- and middle-income countries”.
Georgieva said: “Regrettably we have to recognise that we can’t take peace for granted. Russia’s invasion is not just a tragedy for the people of Ukraine but a tragedy for the global community. Defence expenditure has gone up, the peace dividend is gone. Then we had globalisation that didn’t benefit everyone and didn’t focus enough on those that were left out or left behind.”
Georgieva, who was born in Bulgaria, said that having lived behind the iron curtain during the cold war, she had no desire to see a repeat of such circumstances. “I am among those who know what the consequences are of a cold war.”
Georgieva said: “Can we enhance security of supply without pushing the world into a new cold war? I think that’s possible.”
The UK chancellor, Jeremy Hunt, said he shared Georgieva’s concerns about fragmentation but said the desire for greater supply chain security was understandable.
He said: “The lesson of the war in Ukraine is that energy dependency on Russia was a bad thing and probably a mistake.”
He added that countries were also concerned about technological dependency and critical minerals dependency.
“We are going to solve that”, he said. “It would be irresponsible not to recognise the need to address this. But how we address it is completely up for grabs. We could do it in a protectionist way which would send the global economy back to the dark ages by saying we are all going to try to make sure we do everything ourselves – or we can cooperate with our friends and allies to make sure we continue to benefit from free trade.”
