Webinar: Geo-economic fragmentation and development financing

The escalation of geopolitical tensions following Russia's invasion of Ukraine, then the attack on October 7 and Israel's intervention in Gaza, the exacerbation of Sino-American competition over more than a decade and the rise of the BRICS countries, as well as aggressive US trade policy, have led to a decline in cooperative globalization and a fragmentation of the geo-economic space into several blocs. This fragmentation is “a reversal of global economic integration, often guided by strategic considerations”. It is caused by increases in customs duties, measures restricting trade and financial flows, and even sanctions, most often targeting “politically distant” countries. However, recent decisions by the Trump administration have complicated this landscape by introducing a vision of US economic interests based on bilateral trade imbalances.

Political distance is typically measured by differences in voting patterns at the United Nations General Assembly. While this indicator does not always measure the sometimes rapid reconfiguration of major geopolitical blocs in real time, it remains relevant for measuring the more inertial shifts in geoeconomic blocs. On this basis, numerous studies, particularly by international institutions (IMF, WTO, etc.), have explored the already noticeable consequences of this fragmentation on trade and financial flows and the potential long-term effects in terms of growth and well-being. The conclusions are consistent: trade and financial flows are partly driven by geopolitical affinities, leading to significant losses in growth and well-being for the world as a whole. Emerging and developing countries are generally the most affected, particularly low-income countries. Bolhuis et al. (2023) estimate that, in a scenario of geo-economic fragmentation, the loss of global production would be around 2.3% of global GDP, equivalent to the size of the French economy. These losses would be 2-3% for advanced and emerging countries, while low-income countries would lose more than 4% of their GDP.

However, political distance can also increasingly be measured through trade policies. Recent decisions by the United States seem to reflect this trend in part. Indeed, the executive order signed by the Trump administration on July 31, 2025, which came into effect on August 7, provides for differentiated tariffs ranging from 10 to 50%. While the new duties appear to be motivated by a desire to reduce bilateral trade imbalances, some duties seem to respond not only to trade objectives but also to foreign policy, security, or other motives, which are part of a “bilateralist” strategy. In this context, LDCs and LICs once again appear to be the most vulnerable. Indeed, many African LDCs have been taxed at 15%, including Lesotho, Madagascar, Chad, and the DRC. These rates, equivalent to those set by the EU, for example, will have a much greater impact on the economies of LDCs and their strategic sectors than on those of developed countries.

Investments and value chains illustrate this conflictual geo-economy. An IMF report shows that emerging and developing countries are more exposed to the risks of FDI reallocation in the event of geopolitical tensions. This is true even though “there is significant variation in the distribution of the index and some overlap between advanced and emerging countries (for example, 14% of emerging and developing countries have a vulnerability index below the median value of the index for advanced countries).” 

Development aid and international financial assistance flows are also likely to be affected by fragmentation, as are private capital flows, in a context of significant reductions in the aid budgets of several major donors (Germany, the United States, France, the United Kingdom, etc.), compounded by a redistribution in favor of Ukraine. The latest OECD forecasts indicate a significant overall decline in aid, particularly to LDCs, with a drop of between 13% and 25% in 2025, and a likely continuation of this trend in subsequent years. The geopolitical context is one of the explanatory factors. Cabrillac et al. (2025) illustrate how the decline and reconfiguration of US aid following the disappearance of USAID and the Millennium Challenge Account is likely to give even greater weight to US political and economic interests in the geographical allocation of US aid.  In the current circumstances, marked by increasing budgetary constraints on major donors, it is unlikely that the US withdrawal will prompt additional efforts to replace the United States. On the contrary, there is reason to fear that this US decision will lead to a reduction or reorientation of ODA flows from other countries, as evidenced by France's announcement that it wishes to reduce its ODA budget by €700 million for the year 2026. 

The aim of this seminar is to clarify this observation by comparing the views of international institutions, economists, and decision-makers from the most vulnerable countries, and to answer the questions it raises:

• To what extent does fragmentation pose an additional threat to development financing, particularly in the most vulnerable countries?
•  What measures can the international financial community take to limit the negative effects of fragmentation on the most vulnerable countries?
• How are the authorities in the most vulnerable countries responding to these findings?