A regionalized world
With G7 countries adding more sanctions and the NATO committing to support Ukraine for as long as necessary, it appears as if the world stands united against Russia. This picture, however, is not as clear-cut as it seems. Furthermore, we state that the Fed’s monetary tightening is affecting the entire world, but may especially lead to financial distress in emerging markets.
Emerging markets face tough financial challenges
To fight inflation in the US, the Federal Reserve is performing one of the most aggressive tightening cycles in recent history. Because of the role the US and the dollar play in the global financial system, this monetary tightening is affecting the entire world, but may especially lead to financial distress in emerging markets. Since the Fed’s tightening raises global interest rates, emerging markets that often borrow in US dollars see their financing costs rising, while COVID-19 has already increased public debt levels to record highs. The result is inflation and currency depreciation, which diminish consumer spending. Meanwhile, economic growth in low- and middle-income economies is slowing due to stagnation of global trade and shifting global supply chains. More specifically, the opportunity of “export-oriented industrialization”, created in the 20th century by the forces of free trade and largescale outsourcing of manufacturing, is disappearing. Instead, emerging markets must seek “endogenous” growth: development through creativity from within. The future will tell which developing countries will be better able to develop in such a ‘bottom-up’ manner.
Broaden Your Horizons
- Quartz explains why friendshoring – the strategy of running supply chains through countries that are close political partners – might be damaging to the world economy.
- Our new blog on the VanEck Smart Home website explains how smart energy solutions not only help cutting energy bills and emissions, they lay the basis for further smart home adoption.
- This article by Digital Trends discusses how Amazon found a way to get Alexa to speak in the voice of anyone – including the dead.
The world won’t unite against Russia
With G7 countries adding more sanctions and the NATO committing to support Ukraine for as long as necessary, it appears as if the world stands united against Russia. This picture, however, is not as clear-cut as it seems. At previous UN council meetings, several countries have used abstentions to signal their position on the Ukraine conflict. Similar to what happened during the Cold War, these countries – most of them from Asia and Africa – are unwilling to be part of either the Western or the Russian bloc, deciding instead that their best (economic) interests might lie in the ability to deal with both sides. During the cold war these blocs were clear, but today alliances are more ambiguous, as the voting abstentions in the UN show. Even a traditional US ally like Saudi Arabia has abstained from some votes on Ukraine. Since a short-term resolution of the conflict is becoming more unlikely with each new sanction, the world is not uniting; instead it is moving faster to a regionalized global economy.
Horizons is a bi-monthly Dasym Research initiative to show you how the Dasym themes have been in the news. We publish the Horizons on our website and as an email newsletter. If you wish to receive the email, sign up here.
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