Bailey warns of global fragmentation risks to open economies
Bank of England Governor Andrew Bailey highlighted the increasing challenges to global economic openness and the international rules-based system. Speaking at the Bellagio Group meeting, he emphasized the need for domestic support and institutional flexibility.
The shifting poles of power
Bailey began by outlining the well-known benefits of trade and open economies, which require an international rules-based system supported by multilateral institutions.
He noted that the effectiveness of this system depends on domestic national support and robustness to changing global conditions.
The tension between economic globalisation and domestic objectives is natural, particularly concerning persistent and excessive global imbalances.
Bailey highlighted that the focus of international attention has shifted from monetary relations to trade, which is more susceptible to domestic pressures and directly impacts national political economy and well-being.
He stressed that shifts in global polarity, as observed today, invariably strain the system's operation.
Four headwinds to growth
Bailey identified several conditions shaping the international system, noting that it operates more easily during periods of strong, inclusive growth.
Today, slower growth is complicated by four significant headwinds: a lull in productivity cycles (between "discrete rushes" of technological development like AI/robotics), ageing populations, increasing defence expenditures, and climate-related economic shocks.
He also discussed the return of industrial policy, which, while potentially a response to these headwinds, can drive persistent global imbalances if applied at scale alongside closed capital accounts.
Bank of England staff work, planned for publication in spring, suggests macro factors remain dominant drivers but industrial policy can have material short-to-medium-term effects.
Reasserting robust openness
Bailey concluded by asserting four critical imperatives for navigating the fragmented global landscape.
He stressed the need to continually emphasize the benefits of robust economic openness for growth and well-being, rejecting protectionism.
Furthermore, he called for investment in multilateral institutions, acknowledging past imperfections but affirming their essential role for global stability.
Finally, Bailey urged enabling the next wave of productivity growth, likely from AI and robotics, while proactively managing its societal consequences and investing in skills development.