A new multipolar world could spell “disaster for the global economy”, the International Monetary Fund (IMF) said earlier this week.
In its most recent Global Financial Stability Report, the IMF identified a growing danger ensuing from increasing geopolitical tensions.
According to the fund, strains in the geopolitical landscape are leading to speculation that a new multipolar world may arise – where Europe and the US are in one system and China and Russia are siloed off.
The fund’s chief economist Pierre-Olivier Gourinchas called that model a potential tragedy.
“So eventually we know that we’re going to be in a world in which it’s not just the United States dollar, it’s not just the dominance of the dollar,” Mr Gourinchas said.
“The question is what kind of transition we put in place to get there,” he noted.
The IMF believes deglobalisation and fragmentation of capital markets is set to occur in the “coming years”. What’s yet to be determined, however, is the path to a less connected world.
“One scenario is one where we have divided blocs that are not trading much with each other and are on different standards. And that would be a disaster for the global economy,” Mr Gourinchas said.
The other is a “managed transition” which maintains and protects the gains from globalisation “that have lifted hundreds of millions out of poverty”.
“And so the difficulty here is going to be to engage on this managed transition path that leads us to this more multipolar world,” he explained.
The IMF also flagged the risk of fragmentation in payment systems and the creation of central bank digital currency blocs as a direct result of the war in Ukraine.
More widespread use of crypto-assets in emerging markets to bypass capital restrictions and sanctions is also predicted to occur.
The IMF has revised its forecast for global economic growth downwards to 3.6 percent in both 2022 and 2023.
“This reflects the direct impact of the war on Ukraine and sanctions on Russia, with both countries projected to experience steep contractions,” Mr Gourinchas said.
