For five decades following the end of the gold standard-backed Bretton Woods system in the 1970s, global economic integration drove an unprecedented rise in prosperity around the world, in rich and developing countries alike.
Underpinning this growth has been a unified global financial system aimed at lowering barriers to trade and facilitating cross-border transactions and capital flows. But today, policies enacted in response to geopolitical tensions and crises are fragmenting the system, adding friction to the free flow of investment and capital.
- Global economic integration since the 1970s has driven an unprecedented rise in prosperity around the world, in rich and developing countries alike.
- But now, policies enacted in response to geopolitical tensions and crises are fragmenting the system, impacting the free flow of investment and capital.
- Navigating Global Financial System Fragmentation, an initiative of the World Economic Forum in collaboration with Oliver Wyman, seeks to understand and articulate the costs of financial system fragmentation.
The disintegration of the interconnected financial landscape into competing regional blocs could undermine the forces that have propelled global economic growth for half a century, making it more expensive for individuals around the world to take out loans, buy insurance, make investments and obtain well-paid employment in vibrant and dynamic national economies.
Factors behind the fragmentation of the global financial system
In recent years, the trend towards ever-closer integration has slowed and even reversed, threatening to undermine the global financial system, the interconnected network of financial institutions which cooperate to allocate resources, manage risks and provide liquidity.
That system emerged in fits and starts over several decades, and its existence benefited most individuals and companies on balance by increasing the rate of economic growth (via more efficient capital allocation) and keeping the rate of inflation lower than it would otherwise have been.
In a worst-case scenario, fragmentation in the system could reduce global GDP by $5.7 trillion and increase global inflation by more than 5%, according to the World Economic Forum’s Navigating Global Financial System Fragmentation report, produced in collaboration with Oliver Wyman.
As countries increasingly prioritize national interests and security concerns (e.g., through efforts to bolster supply chain resilience), the seamless flow of capital, investment, commerce and financial services has been disrupted, resulting in a more disjointed and less conducive environment for growth. These disturbances have increased inflation and reduced economic expansion by introducing friction in economic interactions.
In aggregate, each of these impacts harms individuals in all economies – from advanced countries to emerging markets and developing economies (EMDEs) – making goods, homes and services more expensive and shrinking the average person’s purchasing power.
The first factor contributing to this breakdown in the system has been a series of shocks to the global economy. These disruptions began with the global financial crisis. Over a decade later, the world was shaken again by the COVID-19 pandemic, which severely disrupted global supply chains. That set off a surge in the rate of inflation in 2022 and 2023, which further unsettled electorates worldwide not accustomed to either pandemics or sudden spikes in prices.
A second source of pressure has been the escalation in geopolitical tensions in recent years. Examples include trade conflicts between great powers, Russia’s 2022 invasion of Ukraine and subsequent sanctions, and the North Korean and Iranian nuclear programmes.
The third force splintering the global financial system has been growing regulatory divergence and the emergence of regional financial systems operating independently of one another.