Webinar: Geo-economic fragmentation and development financing

Three questions will guide the discussion:

• To what extent does fragmentation pose an additional threat to development financing, particularly for 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?

The escalation of geopolitical tensions following Russia's invasion of Ukraine, the 7 October 2023 attack 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 globalisation and the fragmentation of the geo-economic space into several blocs. This fragmentation is "a policy-driven reversal of global economic integration". It stems from increases in customs duties, measures to restrict 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 usually measured by differences in voting patterns at the United Nations General Assembly. Although this indicator does not fully capture the sometimes-rapid reconfiguration of major geopolitical blocs in real time, it remains relevant for measuring the more inert developments of geo-economic blocs. On this basis, numerous studies, particularly by international institutions (IMF, WTO, etc.), have examined both the already visible consequences of this fragmentation on trade and its potential long-term effects on growth and welfare. 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)[1] estimate that in a scenario of geo-economic fragmentation, global output would fall by around 2.3% of world 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.

Political distance can also increasingly be measured through trade policies. Recent decisions by the United States seem to reflect this development in part. Indeed, the executive order signed by the Trump administration on 31 July 2025, which came into force on 7 August, introduces 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 be more in line with foreign policy, security or other objectives, which are part of a "bilateralist" strategy. In this context, low-income countries (LICs) and least developed countries (LDCs) once again appear to be the most vulnerable. Indeed, many African LDCs have been taxed at 15%, including Lesotho, Madagascar, Chad and the Democratic Republic of Congo. These rates, equivalent to those applied to the European Union, are likely to have a much greater impact on the economies of LDCs and their strategic sectors than on those of developed countries.

Investment patterns and global value chains also reflect this conflictual geo-economy. An IMF report[2] shows that emerging and developing countries are more exposed to the risks of foreign direct investment (FDI) reallocation in the event of geopolitical tensions. This is true even " if there is large variation in the distribution of the index and some overlap between advanced and emerging market economies (for instance, 14 percent of emerging market and developing economies have a vulnerability index[3] lower than the median for advanced economies)". 

Development aid and international financial assistance flows are likewise likely to be affected by fragmentation, just as private capital flows are, against a backdrop of significant reductionsin the aid budgets of several major donors (Germany, the United States, France, the United Kingdom, etc.), compounded by a redistribution in favour 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[4]. The geopolitical context is one of the explanatory factors. Cabrillac et al. (2025)[5] illustrate how the decline and reconfiguration of US aid following the dissolution 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 donor, 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 development aid (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.

[1] Marijn A. Bolhuis, Jiaqian Chen, Benjamin R Kett. 2023. "Fragmentation In Global Trade: Accounting For Commodities." IMF. 24 March 2023. https://www.imf.org/en/Publications/WP/Issues/2023/03/24/Fragmentation-in-Global-Trade-Accounting-for-Commodities-531327
[2] World Economic Outlook: A Bumpy Recovery, April 2023. 2023. IMF. 11 April 2023. https://www.imf.org/fr/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023?cid=bl-com-spring2023flagships-WEOEA2023001
[3] Aggregate index created by the IMF comprising a market power, geopolitical and strategic index (Chapter 4, page 99 of WEO 2023)
[4]OECD (2025), Reductions in Official Development Assistance: OECD projections for 2025 and the short term, 4 July 2025, https://www.oecd.org/fr/publications/reductions-de-l-aide-publique-au-developpement_811056e3-fr/full-report.html 
[5] Cabrillac et al 2025. "How the Closure of USAID Will Affect the Allocation of Global Official Development Assistance." 26 June 2025. https://hal.science/hal-05131729/.