Geoeconomic Fragmentation Threatens Food Security and Clean Energy Transition
IMF Blog, October 3, 2023
Source details
- Canonical URL
- Geoeconomic Fragmentation Threatens Food Security and Clean Energy Transition
Other formats
Bibliographic details
- Authors: Jorge-Alvarez, Mehdi Benatiya Andaloussi, Martin Stuermer
- Published: October 3, 2023
Summary of context and shock
- Russia’s invasion of Ukraine in 2022 fragmented major commodity markets.
- Countries have since restricted trade in commodities, with a more than twofold increase in new policy measures relative to 2021.
- The analysis is based on Chapter 3 of the October 2023 World Economic Outlook, “Fragmentation and Commodity Markets: Vulnerabilities and Risks.”
Key findings on economic impacts and distributional effects
- Further fragmentation could lead to turmoil in commodity markets, causing large price swings and wide price differentials across geopolitical blocs.
- Long-term global economic losses are estimated at about 0.3 percent.
- Low-income and other vulnerable countries would bear the brunt:
- In illustrative simulations, low-income and other vulnerable countries could face long-term gross domestic product losses of 1.2. percent on average, largely stemming from disruptions in agricultural imports.
- For some countries, losses could exceed 2 percent.
- Fragmented markets would be more volatile and offer fewer buffers to absorb future commodity shocks, such as poor harvests or extreme weather.
- Even a single commodity producer switching geopolitical allegiance could trigger significant price fluctuations.
Vulnerabilities in commodity supply and demand
- Commodity production is highly concentrated: the three largest suppliers of minerals account for about 70 percent of global mined production on average.
- Scaling up mining and processing capacity can take years, resulting in slow responses to price signals.
- Some commodities (food and energy) are pivotal for household consumption; many minerals are key inputs for vital technologies and manufacturing.
- High concentration of supply plus widespread demand leads many countries to rely heavily on imports from a handful of suppliers, increasing vulnerability to trade restrictions.
Energy transition risks
- Commodities fragmentation could hinder the global energy transition by constraining access to minerals critical for net-zero-carbon emission targets.
- In a hypothetical scenario where trade of critical minerals between blocs is disrupted:
- Investment in renewable energy and electric vehicles could be lower by as much as 30 percent by 2030, compared to an unfragmented world.
- Slower deployment could lead to slower mitigation of climate change.
Policy implications and recommended actions
- The findings strengthen the case for multilateral cooperation on trade policies to avoid or mitigate fragmentation.
- If full cooperation is elusive, pragmatic, targeted solutions should focus on:
- Ensuring unhindered flow of food staples to minimize the threat of food insecurity in low-income countries.
- Establishing a “green corridor,” a minimal multilateral agreement to maintain the flow of critical minerals.
- National resilience measures policymakers can adopt:
- Diversifying sources of commodities supply.
- Greater investment in mining, exploration, and critical mineral recycling.
- More robust macroeconomic, structural, and fiscal policy frameworks.
- Ample fiscal and financial buffers.
- Strengthened safety nets.
- Preparation for sudden disruptions of commodity supplies.
- An international initiative to improve data-sharing and standardization in minerals markets could reduce market uncertainty.
Overall message
- Commodity market fragmentation could create a more unstable global environment, threatening food security, economic growth, and the cost of climate change mitigation efforts; multilateral cooperation and targeted pragmatic measures are needed to avert these risks.
This blog is based on Chapter 3 of the October 2023 World Economic Outlook, “Fragmentation and Commodity Markets: Vulnerabilities and Risks.” The authors of the chapter are Jorge Alvarez, Mehdi Benatiya Andaloussi, Christopher Evans, Chiara Maggi, Marika Santoro, Alexandre Sollaci and Martin Stuermer, with contributions by Marijn Bolhuis, Jiaqian Chen, Benjamin Kett, Seung Mo Choi, Peter Nagle and Alessandra Sozzi, and under the guidance of Petia Topalova.
Content in this bundle
- Staff Discussion Note
- Working Paper