Navigating Global Financial System Fragmentation Report released by World Economic Forum (WEF)

Navigating Global Financial System Fragmentation: Report Released by the World Economic Forum (WEF)

The WEF report advocates for an integrated global financial system and proposes broad principles for policymakers to encourage greater financial integration.

What is Global Financial System (GFS) Fragmentation?

Meaning: GFS fragmentation refers to the differences that exist across jurisdictions, such as variations in the prices of economically identical or similar assets, or restrictions on the free movement of capital across borders.
It leads to increased tariffs, economic sanctions, and export controls, all of which hinder cross-border investments.

Recent Trends in GFS Fragmentation:

• Economic Statecraft: States use economic tools and policies, such as sanctions and quotas, to pursue their foreign-policy and domestic objectives.
• Rising Multipolarity: The global economy is becoming more multipolar, reflected in the declining share of the U.S. dollar in global reserves, from 71% in 1999 to 58% in 2024.
• Geopolitical Events: The COVID-19 pandemic and its aftermath, including supply chain disruptions, and industrial policies like China’s "Made in China 2025," have heightened fragmentation.
• Weakening Global Governance: Since 2019, the WTO Appellate Body has been unable to issue decisions, leading to the formation of regional trading blocs.

Issues Arising from a Fragmented GFS:

• Macroeconomic Impact: Fragmentation can significantly hurt global output, with an estimated loss of about 5% of global GDP in the short term.
• Impact on Emerging Markets and Developing Economies: These economies may struggle without access to capital and investment, potentially seeking financial support outside the established international rules-based system.
• Impact on Financial Institutions: Fragmentation reduces the ability of financial institutions to facilitate financial intermediation, while also exposing them to increased credit, currency, and insolvency risks.

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