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Financial Deglobalization Must Come Next

The ongoing fragmentation of the world economy marks the likely end of an era characterized by increasing integration through trade and finance. Faced with a debt crisis that is partly the result of unregulated and volatile portfolio flows, low- and middle-income countries must impose more effective capital controls.

NEW DELHI – After four decades of fostering integration through trade and finance, the global economy has begun a painful process of fragmentation. Initially driven by wealthy countries – namely, the United States under former President Donald Trump and the United Kingdom following the Brexit referendum – several geopolitical forces have combined to accelerate the shift toward deglobalization.

The fracturing of global trade could herald the fragmentation of international capital markets. COVID-19-related lockdowns and closures have disrupted global supply chains and shut down major production centers, most notably in China. Similarly, the war in Ukraine has altered trade routes and forced Western countries to find alternative suppliers of major commodities like oil, gas, wheat, and fertilizers. Western-led sanctions on Russia have further impeded trade and sharply increased food and energy prices.

But while global trade could become even more fragmented if major economies adopt protectionist policies such as border carbon taxes, financial markets remain strongly integrated. Cross-border capital flows are still largely unregulated and more volatile than ever. It’s a combination that is currently proving to be lethal for many low- and middle-income countries.