Globalisation 2.0

If you think inflation is bad now, just wait till you see what the next phase of globalisation has in store.

Over the past few years, the world has experienced an escalating series of trade disruptions — the US-China trade war, the COVID-19 pandemic, supply chain disruptions, Russia’s war with Ukraine, duelling sanctions and export controls.

The cumulative effects of these crises are driving a deep rupture between free-market democracies and Chinese/Russian-style system that’s dividing the global economy along geopolitical fault lines.

“Fragmentation is going to stay,” says Bob Koopman, chief economist of the World Trade Organisation (WTO), the Geneva-based institution formed 27 years ago to ensure nations abide by the rules of international commerce. “What we’re going to see is reorganised globalisation.”

How will our world change if the trade ties that bind the global economy unravel?

Bloomberg Economics ran a simulation of what an accelerated reversal of globalisation might look like in the longer run.

The answer: A world of lower economic growth and higher prices.

If nations collectively slapped the equivalent of a 25% tariff on the roughly $6 trillion worth of goods that are currently traded between democratic and autocratic nations, the result would be a 20% plunge in global trade.

Such a black swan event would essentially reverse the past two decades of globalisation and bring trade back to levels last seen before China joined the WTO, in 2001.

Such a scenario would be “extreme,” Koopman said. “But I wouldn’t rule it out.”

For governments and businesses, this would tilt the trajectory of global growth toward a more volatile and multi-polar world that’s significantly poorer and less productive.

To be sure, Globalisation 2.0 will have winners.

Factories and jobs will shift toward regional integration with economies deemed to be worthy of “friend-shoring” — the term US Treasury Secretary Janet Yellen uses to call the new world order.

But such a transition will take time and undoubtedly cause more supply shocks that will, in turn, increase costs.

Ultimately, the additional costs from all this uncertainty will result in less choice for consumers and persistently higher inflation.


Grab a copy of the inaugural PPC-GIBS Building Africa Report 2022 was launched on Africa Day, 25 May.

Aligned with the opening third of our motto, #BuildConnectDo, we have worked with the 130-year-old African cement maker PPC to think about the future of infrastructure, construction methods, business strategies and trading across borders for the continent.

With thanks to our partners PPC Africa and my colleagues at the Centre for African Management and Markets at GIBS (Gordon Institute of Business Science), as well as our fantastic array of international researchers and contributors.

You can read the full report by clicking here.

Or download it here:

Food Crises

Three months into the war in Ukraine that’s crippled shipments from a country known as the breadbasket of Europe, Russia pledged to open sea corridors from terminals key for exporting grain.

European leaders have slammed President Vladimir Putin for using food as a weapon and a United Nations official warned that the blockade of Ukrainian ports threatens to trigger mass migration and a global food crisis.

Putin said he’s willing to facilitate grain and fertilizer exports if sanctions are lifted, but didn’t specify if he was referring to Russian or Ukrainian supplies. The US rejected the proposal.

Resuming exports could help bring grain prices down from near a record, but it won’t be easy. Kyiv warned that mines placed in the area would continue to block transit. Lithuania’s president said another option is to reroute Ukrainian grain through other ports in the region by rail, but that also poses challenges.

More Restrictions

Meanwhile, food protectionism keeps growing. India, which already restricted wheat exports, this week said it will also limit sugar shipments as a precautionary measure to safeguard its own supplies. Analysts said India’s next target may be rice, which could have a devastating impact on global food security.

Elsewhere in Asia, Malaysia is banning chicken exports — which means costlier chicken rice dishes in neighboring Singapore. But more broadly, measures by governments in the developing world to protect citizens from record food costs threaten to spill over into richer countries.

Food for Thought

China has taken the rare step of buying Brazilian corn as it looks to ward against supply disruptions from the US and Ukraine. Those purchases were made before an agreement finally guaranteeing Brazil access to the Chinese market.


Real-Time Economic Indicators Help Better Track Activity in Africa | Botswana Case Study

Economists are increasingly turning to new technologies that help track indicators such as growth and inflation in real time to sharpen forecasts and offer better input for policymakers.

Nowcasting, or forecasting of the present, is especially promising for developing economies where statistical authorities may not release indicators frequently.

The IMF developed an approach that pairs high-frequency data with machine learning, a kind of artificial intelligence, to provide economic-growth nowcasts and help policymakers make better decisions.

Some developing economies release key indicators such as gross domestic product with lengthy delays.

That adds to challenges for setting policy in times of rapid change, such as the onset of the pandemic or outbreak of war in Ukraine, because decisions must be made without crucial data.

At times like these, nowcasting can offer projections that approximate economic activity a lot more quickly than official GDP data.

As the chart below illustrates, the nowcasting framework offered invaluable information for Botswana when pandemic closures hit in Q2 2020.

At the time, it was projected that output would contract by about 20% from a year earlier.

In September, when the government published GDP figures, they showed an even sharper 24% contraction.

This wasn’t far off from the framework projections, which moved in step with the actual data and accurately predicted the turning point.

In a new paper, the IMF seeks to narrow the gap between data availability and policymaking in sub-Saharan Africa by developing a framework to track real-time economic activity.

The IMF’s nowcasting framework extracts signals from high-frequency figures available before official GDP is out.

The tool generates nowcasts by incorporating a broad range of increasingly popular machine-learning techniques that use an array of high-frequency economic indicators historically related to change in GDP.

Tourist arrivals, for example, are more reliable predictors for tourism-dependent countries.
For oil-exporting countries, such as Nigeria, GDP tends to move with crude oil prices.

Other nontraditional data inputs can include satellite imagery of nighttime lights, which tend to glow with greater intensity as economic activity increases, and of shipping vessels, used to track trade volumes and disruptions.

Web searches can also help more accurately forecast tourist arrivals, as one IMF working paper showed in 2020.

The IMF research shows machine-learning algorithms are often more accurate than traditional econometric methods, especially for predicting turning points such as when an economy begins to bounce back to life after a recession or crisis.

The nowcasting predictors used for the work on Botswana included currency values, stock prices, inflation, imports, consumer lending, electricity generation, tax revenue, and Google search volume for the country’s name (an indicator of future tourist visits).

And because it’s one of the world’s largest diamond exporters, the framework also incorporates prices for the stones as well as economic growth for two of the largest destination countries for their shipments.

The Bank of Botswana is now producing its own nowcasts, after participating in an IMF workshop.

This article first appeared here.

Social Unrest is Rising, Adding to Risks for Global Economy

After a pause in popular protest during the first year of the pandemic, people are returning to the streets.

This year, large and long-running anti-government demonstrations have occurred in some advanced economies where unrest is relatively rare, such as Canada and New Zealand.

And in several emerging and developing economies, coups and constitutional crises have sparked widespread protests.

A recent body of IMF work aims to understand the economic drivers and costs of such unrest.

Measuring social unrest consistently is difficult. The IMF’s Reported Social Unrest Index attempts to do so by counting media mentions of words associated with unrest across 130 countries.

The fraction of countries experiencing large spikes in this index, which typically reflect major unrest events, rose to around 3% in February.

As the chart below illustrates, this is close to its highest levels since the onset of the pandemic.

Prior to the pandemic, unrest rose around the world.

Perhaps most prominent was a wave of protest which began in Chile and swept through parts of Latin America in October and November 2019.

Significant unrest also occurred at around the same time in the Middle East, notably in Algeria, Iran, Iraq, and Lebanon.

Unrest declined sharply at the start of the pandemic amid an increase in social distancing, both voluntary and mandatory.

IMF research shows that this is consistent with experience during past pandemics.

That is not to say that social unrest halted completely.

Some significant unrest events occurred in the second and third quarters of 2020, including in the United States, which saw large racial justice protests; Ethiopia, as inter-ethnic tensions became more pronounced; and large anti-government protests in Brazil, Lebanon and Belarus.

Social unrest continued through the later stages of the pandemic, with events in both advanced and emerging and developing economies.

In the former, protests erupted in places where major social unrest is usually rare, often with anti-government or anti-lockdown motives, including in Canada, New Zealand, Austria, and the Netherlands.

In emerging markets and developing economies, the apparent motives for recent unrest have been more diverse, with examples including anti-government protests in Kazakhstan and Chad; a coup in Burkina Faso; regional protests in Tajikistan; and a constitutional crisis in Sudan.

Causes and costs

In coming months, two important factors could lead to an increased risk of future unrest.

First, as governments relax restrictions and public concerns about catching COVID in crowds diminish, pandemic-related disincentives for protest might abate.

And second, public frustration with rising food and fuel prices may increase.

Although the economic causes of civil disorder are complex, and unrest is exceptionally hard to predict, steep price increases for food and fuel have been associated with more frequent protests in the past.

Any rise in social unrest could pose a risk to the global economy’s recovery, as it can have a lasting impact on economic performance.
In a paper last year, IMF staff showed that unrest can have a negative economic impact as consumers become spooked by uncertainty and output is lost in manufacturing and services.

As a result, 18 months after the most serious unrest events, gross domestic product is typically about 1% point lower than it would have been otherwise.

Although social unrest remains low relative to pre-pandemic levels for now, the lifting of pandemic-era restrictions and the continued cost-of-living squeeze mean that protests may yet increase.

This could impose significant economic costs.

This article first appeared here.

Federal Reserve in the US issues Interest Rate Hike with MORE to follow

In face of the highest inflation in 40 years, the US Federal Reserve announced another widely expected rate hike two weeks ago.

The Federal Open Market Committee (FOMC) unanimously decided to raise the target range for the federal funds rate to 1%, with further rate hikes “anticipated”.

The 50 basis point hike follows a more cautious 25 basis point increase in March and marks the largest upward step since May 2000.

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said in a press conference following the FOMC meeting.

Even if inflation was starting to come down, Powell later hinted, the Fed wouldn’t stop the rate hikes, but likely go back to 25 basis point increases.

As it stands, however, he expects “50 basis point increases on the table the next two meetings.”

That would be in line with projections made by FOMC members at their last meeting in March, which hinted at further rate hikes in 2022 and beyond.

Back then the median projection for the target range of the federal funds rate at the end of 2022 was 1.75% – 2.00%, with further increases towards 3% anticipated for 2023.

This article first appeared here.