How Do Geopolitical Alliances Affect Economic Growth?

Alliances and alignment between geopolitical powers can boost global economic growth, according to Goldman Sachs Research. By contrast geopolitical fragmentation, which shows signs of increasing, can be a drag on economic activity over the long term.

Some measures of broad geopolitical and economic fragmentation are signaling the lowest level of global alignment since the 1980s, according to a report by Johan Allen, an economist in Goldman Sachs Research, and Joseph Briggs, head of the global economics team. “The long-run impacts from shifting geopolitical alliances are not small,” they write. 

The team cites two indexes that use artificial intelligence (AI) to measure geopolitical risk events and geopolitical alignment. Geopolitical risk events include military confrontations, political crises, and diplomatic incidents. Geopolitical alignment refers to the relationships between nations. These indexes show that risk events have jumped in the past half-decade and that geopolitical alignment has deteriorated significantly, beginning about 10 years ago.

How much is geopolitical fragmentation affecting global GDP?
 

Goldman Sachs Research estimates that rising geopolitical fragmentation in the past decade has cut about 1% cumulatively from global GDP. There has been a larger impact in emerging markets (a 1.9% hit to GDP) compared with developed markets (a hit of 0.8%).

Looking forward, an improvement in the geopolitical alignment index—a hypothetical return to mid-2010s levels—would imply a 0.8% increase in global GDP by the end of this decade, Allen and Briggs write. Meanwhile, further political and economic fragmentation, similar in scope to what already happened in the late 2010s, could lower global GDP by 1% over the long run, Goldman Sachs Research estimates.

The indexes the team cite in the report come from recent academic research that takes advantage of AI using large language models (LLMs) to analyze geopolitical risk events and geopolitical alignment.

The geopolitical risk event index uses AI to analyze newspaper articles to identify and quantify the intensity of geopolitical events such as military conflicts or political crises. It was developed by Matteo Iacoviello, a researcher at the Federal Reserve, and Jonathan Tong of the University of Wisconsin. The geopolitical alignment index builds on research by Tianyu Fan at Princeton University that deploys AI tools to identify historical events between countries and quantify the relative alignment or misalignment.

Geopolitical risk events declined in the mid-1970s. Around the same time, geopolitical alignment increased as US relations with the Soviet Union entered a period of detente. More relevant to today, the event-risk index has risen sharply in recent years, and geopolitical fragmentation has increased over the past decade, leaving both near all-time highs. But even so, “while geopolitical risk and alignment are correlated, it is worth emphasizing that geopolitical risk is a distinct phenomenon from geopolitical alignment,” Allen and Briggs write.

At the level of an individual country, they note the two indexes do not always move at the same time. Brexit marked a deterioration in the UK's geopolitical alignment with other countries but not a rise in risk events, for example. Vietnam saw a huge drop in geopolitical risk at the end of the war with the US, but alignment did not improve for two more decades.

How long do the effects of geopolitical risk events and fragmentation last?
 

The economic impact of geopolitical events is often transitory, while geopolitical alignment changes according to longer-term trends, according to Goldman Sachs Research. The team finds that a shock that is captured in the risk index has some persistence but falls sharply within two years and subsides in five years. A geopolitical alignment shock, by contrast, endures longer, recovering after about 14 years.

“Wars, acts of terror, and threats of interstate violence are deeply disruptive—but are fortunately usually measured in days, months, or at most years,” Allen and Briggs write. The strengthening or deterioration of relations among nations, on the other hand, “is a gradual process that unfolds over decades.”

Goldman Sachs Research finds that improvements in political and economic relations have impacts that build for almost a decade. Such a shift in geopolitical alignment may increase trade, leading to long-run efficiency gains, and boost foreign direct investment.

The team’s analysis found that a one standard-deviation improvement in geopolitical alignment for a specific country raises the level of GDP by about 3% over seven years for the average country in Goldman Sachs Research’s panel. A shift of that size toward improved relations with the rest of the world would be similar to the magnitude of the shift that occurred for China after President Richard Nixon visited in 1972.

Three key channels are likely responsible for the increase in GDP, according to Goldman Sachs Research: Fixed investment rises as improved relations widen access to global capital markets. Exports increase as greater alignment lowers trade barriers and deepens bilateral commerce (this effect is more pronounced for smaller economies). Household and government consumption rise, though by less than overall GDP, likely as a second-order effect of stronger investment and trade.

How much do geopolitical conflicts impact the global economy?
 

By contrast, the direct effects of geopolitical risk events, separate from commodity impacts, create a more modest, and shorter-term, drag on global economic growth. This drag is likely due to increased caution from consumers and businesses.

For example, a sustained increase in geopolitical risk indexes as large as the spike due to the war in Iran would only subtract 0.3 percentage points from global GDP growth in the first half of 2026.

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