Amid international tensions and evolving geopolitical rivalries, the world is witnessing a transformation that has profound implications for economies across the globe. Recent developments point to a shift where corporations increasingly align their capital with nations that share their values and interests. This realignment can potentially reshape the global economic landscape while presenting a series of challenges for countries like Pakistan.

One noteworthy phenomenon is the reorganisation of the world into rival, albeit interconnected, blocs, reflecting UN votes on critical events like Russia’s invasion of Ukraine. According to a Bloomberg Economics analysis of UN foreign-direct investment data, approximately $180 billion of the $1.2 trillion Greenfield Foreign Direct Investment (FDI) in 2022 shifted between geopolitical blocs based on their stance towards Russia’s invasion. This monumental change indicates that we are entering an era of unprecedented upheaval.

Several factors have accelerated this shift. The global pandemic and recent global events have heightened the importance of national interests, prompting governments to urge companies to prioritise these interests and offer incentives for domestic production.

Chinese influence is poised to grow significantly, potentially reshaping Pak-US relations

Simultaneously, Russia’s invasion of Ukraine and the growing rivalry between the United States and China have expedited the end of the post-Cold War model, which witnessed a surge in trade and globalisation.

This reconfiguration of the global economy into competing blocs is driven by each bloc’s efforts to align the rest of the world with its strategic interests and shared values. While this transformation is driven by geopolitics, it also has significant economic implications.

Economists at the International Monetary Fund (IMF) have warned that in the most extreme scenarios, where the world divides into hard blocs, it could result in the loss of up to seven per cent of global economic output in the long term.

The World Trade Organisation (WTO) has noted that geopolitical tensions are already shaping trade flows, causing goods trade between geopolitical blocs to grow from 4pc to 6pc. The role of geopolitics in driving capital flows and trade is increasingly evident, even when accounting for factors like country risk and geographic distance.

For Pakistan, these geopolitical shifts carry significant risks. The country may find it increasingly challenging to secure foreign direct investments or aid from Western nations, which have traditionally been important sources of capital.

As Pakistan’s largest trade partners, the United States and the European Union could see reduced import demand due to the Russia-Ukraine conflict, affecting Pakistan’s exports and trade balance. The recent surge in world prices, along with inflation and costly imported inputs, jeopardises Pakistan’s manufacturing sector’s competitiveness and production capacity.

The confluence of the pandemic and recent geopolitical events suggests that the world may be entering a phase of de-globalisation. This could result in increased world import tariffs, further threatening Pakistan’s trade balance. Pakistan’s reliance on imports for its energy needs and persistently high LNG and crude oil prices present further challenges.

The combined significance of Russia and Ukraine in global food production is substantial, accounting for over one-tenth of the world’s caloric intake. Additionally, Russia is the largest exporter of fertilisers and one of Pakistan’s suppliers.

This interdependence, coupled with rising energy prices, poses a serious threat to Pakistan’s agriculture sector. Consequently, food prices may surge, and the spectre of food insecurity could persist.

Since its independence in 1947, Pakistan has repeatedly found itself in need of IMF bailouts. These financial rescues result from economic policies that generate unsustainable growth, leading to external sector crises where the country faces a shortage of foreign currency for debt repayment and imports.

This recurring cycle stems from the failure of successive governments, both civilian and military, to restructure the economy. Instead of promoting the welfare of ordinary citizens, these policies have primarily benefited a small elite.

These failures not only create an unsustainable macroeconomic environment, compelling governments to turn to the IMF for bailouts, but also lead to strategic concessions to key allies like the United States, China, and Saudi Arabia.

Geopolitical support and funding have become increasingly elusive for Pakistan. This has left the country’s political and military elite more reliant on China to stabilise the economy. In such a scenario, Chinese influence in Pakistan is poised to grow significantly, potentially reshaping Pak-US relations and may expose Pakistan to economic repercussions from the United States.

In addition, Pakistan’s economy faces a perfect storm characterised by stagflation, a growing external debt burden, the aftermath of devastating floods, and political tensions. This challenging environment necessitates innovative thinking and bold policy reforms. The road ahead is uncertain but also presents opportunities for a resilient and adaptable Pakistan.

The writer is an assistant professor and a researcher at the Centre of Economic Planning and Development, Minhaj University Lahore

Published in Dawn, The Business and Finance Weekly, November 13th, 2023newspaper business &