An aborted economic recovery, or worse, another lost decade, is not preordained. It is a matter of policy choice. This time around advanced countries must choose and maintain an expansionary macroeconomic policy stance for as long as it takes the private sector to regain its confidence to spend. And while monetary policy is crucial, the battle of the moment is for governments to provide sufficient fiscal stimulus. Avoiding a lost decade will require governments to stick to deficit spending for several years ahead.
There is, however, more to recovering better than public spending. Raising productivity growth will require industrial and innovation policies and reversing wage repression. Stronger labour market institutions will be needed to align wages with productivity, support structural change and reduce inequality. Broader central bank mandates and tighter financial regulation will have to be put in place to tame speculative investment and channel credit to productive and necessary activities, from manufacturing medical equipment to production of renewable energy. Free trade agreements, the embodiment of neo-liberal thinking, deny these policy choices and must be avoided with roll back of existing agreements wherever appropriate and possible.
But even more than was the case 75 years ago, international cooperation and coordination are essential to fighting the pandemic and recovering better. So far, the timid and fragmented response of the international community has left many developing countries feeling helpless (and frustrated). While advanced countries are seeing the highest absolute falls in output for now (in some countries in double-digit figures in 2020), the greatest economic and social damage will be in developing countries, where, as noted above, levels of informality are high, health and social protection systems often weaker and commodities and tourism remain major sources of much needed foreign exchange. It is expected that between 90 and 120 million people will be pushed into extreme poverty in the developing world, with close to 300 million facing food insecurity.
This situation is even more critical given that the fiscal spaces of many developing countries have been squeezed by rising debt pressures which were already apparent prior to the pandemic. This is in part a consequence of the lop-sided global recovery from the Global Financial Crisis but also of decades of premature capital account liberalization and financial deregulation that have turned developing country debt from a developmental policy tool into a speculative financial asset, with external borrowing relying more strongly on private, rather than bilateral and multilateral creditors. In this context, volatile investor sentiment, shortened maturities and greater rollover risks, in combination with high commodity price fluctuations have substantively increased debt and financial vulnerabilities.
The tools are available to provide fiscal space to developing countries; special drawing rights, dedicated financing windows and debt relief can all be quickly scaled up to mitigate the financial squeeze. But if this crisis is to offer a truly Rooseveltian moment of recovery and reconstruction then what is also required is a new set of principles for the global economy that can deliver prosperity for all and revive the health of a planet under increasing environmental stress.
The ‘Geneva Principles for a Global Green New Deal’ advances an urgent research and policy agenda for a New Multilateralism to calibrate the global economy toward a twenty-first century vision of stability, shared prosperity, and environmental sustainability (Gallagher and Kozul-Wright 2019). Those Principles include 1. Global rules should be calibrated toward the overarching goals of social and economic stability, shared prosperity, and environmental sustainability and be protected against capture by the most powerful players 2. States share common but differentiated responsibilities in a multilateral system built to advance global public goods and protect the global commons 3. The right of states to policy space to pursue national development strategies should be enshrined in global rules 4. Global regulations should be designed both to strengthen a dynamic international division of labour and to prevent destructive unilateral economic actions that prevent other nations from realizing common goals 5. Global public institutions must be accountable to their full membership, open to a diversity of viewpoints, cognizant of new voices, and have balanced dispute resolution systems.
These principles should be understood as a guide to policy initiatives that will be implemented by local and nationally accountable institutions, with the active participation of citizens and tailored to their particular circumstances, and as a working basis for collaboration at the international level in support of those initiatives. They suggest several areas of reform to the multilateral architecture that will be key to recovering better from COVID-19 and advancing a global green new deal.
Reining in corporate power is a prerequisite for recovering better. Anti-trust measures are now very much on the agenda at the national and regional levels. But existing multilateral agreements such as the UN`s Equitable Principles and Rules for the Control of Restrictive Business Practices adopted by the General Assembly in 1980, should be strengthened and operationalized with appropriate institutional support such as a global competition authority. Additional actions, made more urgent by the current crisis, regarding the price gauging, patent abuse and other anti-competitive practices of pharmaceutical giants and digital platforms, are warranted to ensure the recovery is both fair and resilient.
Clamping down on corporate tax avoidance and evasion and other forms of illicit financial flows can help both to expand fiscal space and address the inequality challenge. Recent estimates suggest that revenue losses, caused by tax-motivated illicit financial flows (IFFs) alone, are in the range of $49-$193 billion, accounting for 2.3% of combined GDPs, respectively, in Latin America and the Caribbean and in Africa. Multilateral efforts towards reforming international corporate taxation require new energy, beginning with a much more concerted effort to clamp down on tax havens in the North, establishing a global asset registry to enable wealth taxes on the super-rich and moving to a unitary taxation system that recognizes that the profits of international corporations are generated collectively at the group level.
Sustainable financing will require vibrant public financing options. At the international level, that means boosting the lending capacity of multilateral development banks. This new lending could come from existing shareholders redirecting environmentally damaging subsidies, for example for fossil fuels and industrial agriculture, to the capital base of these institutions, or from more innovative sources, such as a financial transaction tax, and augmented by borrowing on international capital markets, with a measured relaxing of their fidelity to financial sobriety. In return, these institutions should reassess their policy conditionalities in line with a more sustainable and inclusive development agenda.
At the national and regional level, public and development banks also need more support, with governments wholehearted in their mandates and allowing their banks to lend beyond the extremely narrow parameters of triple-A ratings by the world’s big rating agencies. The dual-sized role of credit rating agencies’ as both player and umpire in the markets needs also to be revisited, given their impact on banks’ abilities to raise capital for further lending.
A Marshall Plan for global health recovery could provide a more dedicated framework for building future resilience. But it should take its namesake seriously. In the first place that means being generous. If the donor community met the 0.7% Official Development Assistance (ODA) target for the next 2 years that would generate something in the order of $380bn above current commitments. An additional $220bn mobilized by the network of multilateral and regional financing institutions could complete a $600bn support package over the next 18 to 20 months. The money should be dispersed largely as grants but with some room for zero interest loans, the precise mixture determined as the emergency response evolves. Finally, given the multifaceted nature of the recovery effort, a dedicated agency, drawing, like the Marshall Plan, on the personnel of existing agencies as well as from the private sector, with local expertise and coordination involved from the outset. Much like the original, a central financing and oversight agency linked to national public agencies through a regional coordination mechanism remains a model to follow.
Finally, a global sovereign debt authority, independent of either (institutional or private) creditor or debtor interests, should be established to address the manifold flaws in the current handling of sovereign debt restructurings. The COVID-19 crisis, and the stumbling efforts by the international community to agree emergency debt suspension and relief measures, have, yet again, put a glaring spotlight on the crippling fragmentation and complexity of existing procedures, the potentially extraordinary powers of hold-out creditors to sabotage restructurings, and the resultant inefficacy of crisis resolutions. At a minimum, such an authority should provide coherent frameworks and guidelines to facilitate automatic and comprehensive temporary standstills in recognized disaster situations, ensure that long-term developmental needs, including meeting the 2030 Agenda, are systematically taken into account in debt sustainability assessments, and provide an independent forum for expert advice to governments requesting this. In the longer run, it should provide a blueprint for a comprehensive reform of current sovereign debt workout mechanisms to balance creditor and debtor interests fairly, close loopholes for hold-out creditors, and prioritize the long-term collective interests of the many over the short-term financial rewards of the few.