On 13 April 2023, the International Monetary Fund (IMF) published the World Economic Outlook, wherein it discusses geoeconomic fragmentation and foreign direct investment. Geoeconomic fragmentation, for those who are not familiar with this phenomenon, was coined by Aiyar et al as a “policy driven reversal of global economic integration often guided by strategic considerations”. The considerations could range between national or economic security and include additional concerns such as countries’ decreasing reliance on others and thereby increasing autonomy (and protectionism). The phenomenon of geoeconomic fragmentation ordinarily results from countries’ economic policy objectives but may also stem from geopolitical rivalry. The definition does not, however, extend to the reversal of global economic integration which results from self-directed shifts in technology or preferences, or the reversal of global economic integration resulting from decreased cross-border transactions based on prudential policies adopted to enhance a country’s financial stability.
Naturally, many benefits arising from international trade, which include a global reduction in poverty and more affordability for consumers, may well slowly disappear with the resurfacing of geoeconomic fragmentation. In four studies that made certain assumptions regarding fragmentation (namely, that of Bolhuis et al, Cerdeiro et al, Goes and Bekkers), Aiyar et al found various similarities in the results. Inter alia, the costs incurred by countries increased with deeper fragmentation, emerging markets and low-income countries were found to be at higher risk in respect of trade and technological fragmentation, and the short-term costs associated with the fragmentation of trade were much higher than the long-term losses resulting from the fragmentation of trade.
With the above as background, we now turn to geoeconomic fragmentation with reference to the current global and South African economic trends. The IMF’s January 2023 Staff Discussion Notes on “Geoeconomic Fragmentation and the Future of Multilateralism” notes that following several decades of global economic integration, the culmination of the global financial crisis, trade tensions, Brexit and military conflicts may have caused the reversal of the stable increase in integration that has been observed in recent years. This much is evident for many countries that have reverted to implementing more trade restrictions and consequently have engaged in less global trade.
So, what’s the fuss for developing countries? As the title suggests, Chapter 4 of the IMF’s April 2023 World Economic Outlook, titled “Geoeconomic Fragmentation and Foreign Direct Investment” highlights the impact that geoeconomic fragmentation has on foreign direct investment (FDI), as well as the consequences of FDI policy shifts on the international economy. In short, the Chapter underlines that many developing economies are extremely vulnerable to relocations in FDI due to their heavy reliance on the FDI of foreign countries. The long-term implication of FDI fragmentation for emerging markets is likely to be a substantial loss of output.
One of the primary manners in which geoeconomic fragmentation affects South Africa is through its impact on the amount of international trade. As a small, open economy, South Africa relies heavily on exports to drive economic growth and job creation. The increasing fragmentation of the global economy has, however, made it more difficult for South African exporters to access key markets, particularly in Europe and North America. This is because many countries are becoming more protectionist by imposing tariffs and other barriers to trade in an attempt to protect domestic industries and jobs.
In addition, FDI into South Africa is also taking a knock due to geoeconomic fragmentation. While South Africa had long been a popular destination for foreign investors, the policy driven and strategically backed fragmentation of economies has caused investors to invest with increased caution, particularly in relation to emerging markets. Unfortunately, South Africa has not quite yet diversified its economy enough to avoid being exposed to substantial vulnerabilities as a result of trade fluctuations. Due to its key sectors being manufacturing and mining, it is particularly susceptible to external shocks such as variations in commodity prices.
Given the fact that many of the protectionist policy decisions have commenced the fragmentation of global economies, developing economies such as South Africa are already suffering the consequences and urgently require solutions. The most impactful means to avoid undoing the global economic integration that has occurred over the recent decades is multilateral integration preservation initiatives, which would entail South Africa working closely with other strategic countries to promote an open and stable economic system. Moreover, from a domestic perspective, South Africa needs to adopt a more proactive approach to trade and investment, by engaging in regional economic integration, diversifying its exports, and strengthening its domestic industries.