IMF‘s Georgieva: Don’t let supply chain security lead to new Cold War

By Andrea Shalal and David Lawder

WASHINGTON (Reuters) – International Monetary Fund Managing Director Kristalina Georgieva on Thursday warned policymakers against the danger of a new Cold War as they ramp up efforts to secure their industrial supply chains amid geopolitical tensions between major powers.

“The question is, can we be more determined to enhance security of supplies but not push the world that far that we are into a second Cold War？” Georgieva told a news conference at the IMF and World Bank spring meetings in Washington. “I believe it is possible.”

Georgieva, who grew up in Bulgaria during the Soviet era, said she experienced the Cold War and its impact in cutting off talented people from the world economy, and didnt want to see that repeated.

On Wednesday, Group of Seven (G7) finance leaders pledged to give low- and middle-income countries a bigger role in diversifying supply chains to make them more resilient and sustainable.

Their communique did not mention China by name, but the supply chain language fit in with “friend-shoring” efforts championed by U.S. Treasury Secretary Janet Yellen and other Western leaders to trade more with allies and become less reliant on the Asian manufacturing powerhouse for battery minerals, semiconductors and other strategic goods.

The IMF warned earlier this month that rising geopolitical tensions and the resulting fragmentation of the global economy could increase financial stability risks, potentially reducing global economic output by between 0.2% and 7%.

Georgieva said policymakers might have to accept that development of new, more separated supply chains would involve some cost, but could keep those costs low by continuing to work together through institutions like the IMF.

“Security of supplies and the reliable functioning of global supply chains is taking a new, higher priority seat in economic discussions,” she said, citing the impact of both the COVID pandemic and the war in Ukraine. But she warned against going overboard and harming global trade flows.

“If we fail to be more rational, then people everywhere would be worse off. The middle class in each country would pay a price,” Georgieva said. “So a bit more cool-headedness would take us a long way.”

China rebound

The IMF has long warned of increased costs, economic friction and GDP output losses associated with the global economy fragmenting into geopolitical blocs, with U.S.-led democracies on one side and China and other autocratic states on another. This can lead to competing technology systems and reduced trade.

A new IMF working paper showed such rising tensions could also drive outflows of cross-border capital, including direct investment, from countries, with particularly high risks for developing and emerging market economies.

The IMF is forecasting a strong rebound in China in 2023 given its post-COVID opening, and it will account for about one-third of global growth this year, Georgieva said.

World Bank President David Malpass said the strong growth forecasts for China also reflected the Asian nations “explicit efforts” to rebuild supply chains and have a faster opening process.

This was also part of a broader readjustment in supply chains after vulnerabilities exposed during the COVID years as a result of too-strong dependence on China, he said.

(Reporting by David Lawder; Editing by Paul Simao)