The centre of gravity of the world economy has gradually shifted from the Atlantic to Asia. However, the war in Ukraine has cast doubts on many projections for the global economy. For example, the Asian take-over is not a foregone conclusion. The United States (US) and Europe may also find a second sail in the wind for transatlantic co-operation, especially at a time when some amount of drift was evident in this relationship.
Some analysts are also arguing that the war may lead to or even hasten the bifurcation of the current global order. For instance, in the April 2022 issue of Foreign Affairs, Shivshankar Menon contends that instead of consolidation, the war in Ukraine seems likely to lead to greater fragmentation of the global order.
In the March 2022 issue of Foreign Affairs, Adam S. Posen made the argument that due to the war, it now seems likely that the world economy will split into blocs—one oriented around China and one around the US. For its part, the European Union (EU) will be situated mostly but not exclusively in the US camp. Posen asserts that the economic consequences for the world will be immense, requiring policymakers to recognise and then offset them to the greatest extent possible.
It is conceivable that countries which are more oriented towards China may want to diversify their currency reserves away from the US Dollar and the Euro, particularly given the wide reach of American and Western economic sanctions. However, the Chinese Yuan is unlikely to emerge as a major reserve currency anytime soon, which may then force some countries to give more credence to cryptocurrencies.
Posen also argues that the war and sanctions against Russia will speed up the corrosion of globalization already underway. In this regard, there is likely to be less economic interconnectedness, lower trend growth and less innovation across the world.
Companies, especially large multinationals, may also determine that it is best to situate their supply chains in areas of the world which are safer for their investments, including those areas which are aligned with either of the US or China based on the orientation of those companies’ home states.
For small and vulnerable countries, the question to ask is whether they can find the right mix of policy instruments to navigate the world as it is shaping up to be. Of course, it is not outside the realm of possibility for such countries to survive and thrive.
For small states in the Caribbean and the Pacific for example, they may wish to take advantage of regional integration as a means of building strategic autonomy and resilience which would necessitate greater self-reliance with respect to trade, investment and economic co-operation.
As an example, Caribbean states may need to expend greater efforts to unify more of their economic policies. This can be done by putting up joint financial resources, such as Caribbean bonds, to finance their further development. In a world of low returns, it is important to create safer assets for investors and states alike, and this can be done through certain joint financial actions, rather than individual ones.
Finally, there is also a strategic opportunity for the Caribbean to take advantage of proximity to North and Latin America to promote efforts for their firms to re-shore production to the Caribbean, especially at a time when firms are spooked and looking for nearer-shore locations to produce in and source from. This would require more focus on business climate reform efforts, including bringing down the cost of energy through renewables, reforming tariff structures, particularly for inputs into production, and making it easier to invest across the board so as to make the region much more attractive.