Human-Centred International Economic Policy: Institutionalizing Inclusion, Sustainability and Resilience in International Economic Governance and Cooperation

Abstract

This chapter presents an agenda for deep reform of international economic governance and cooperation based on the human-centred logic of placing the bottom-line measure of national economic progress, broad progress in living standards, rather than GDP growth at the heart of international macroeconomic policy cooperation; the international financial architecture; and international trade and technology governance. This twenty-first century renovation of the international economic architecture is based on a “Roosevelt Consensus” model of growth and development that emphasizes the social contract's crucial role in advancing inclusion, sustainability and resilience. Major reforms are proposed to IMF and World Bank macroeconomic policy analysis and advice, including debt sustainability methodology; and international development and climate finance, through the tripling of ODA-related external flows to more than 80 of the poorest countries in each of the next seven years, including for the purpose of retiring and replacing most of the world’s coal-fired power-generating capacity over the next 15 years while doubling global annual investment in renewable energy research and development. Additional proposals are made to rebalance international trade policy by coordinating trade, labour, climate change and development cooperation to a far greater extent through new types of international economic alliances, including one that could create a workable solution to the thorny issue of climate leakage, and giving the WTO a new lease on life facilitating discussions among plurilateral trade agreements and their members about how the best normative and facilitative features of such agreements could ultimately be knit together into a reconstituted, high-road multilateral trading system. Together, these reforms would greatly accelerate progress toward UN goals.

This book has argued that the living standards of nations should no longer be treated in economic theory and policy as essentially a residual consideration, an inevitable, trickle-down by-product of the wealth of nations. To this end, Chap. 4 proposed a series of reforms of the standard liberal economic growth and development model. These concepts would explicitly integrate into the heart of the model an extensive ecosystem of policies and institutional features that have a more direct and tangible bearing on the lived experience of people than do the traditional preoccupation of top economists and economic policymakers—macroeconomic, trade and financial supervision policies.

In an important sense, this rebalanced model would return economics to its classical political economy roots by more explicitly contextualizing the pursuit of allocative efficiency and productive output as means to the more fundamental social purpose of broad-based progress in household living standards. This is the bottom-line way most people and their societies evaluate national economic performance. It also reflects the broader concept of economic progress that three of the field’s most important original theorists and codifiers—Adam Smith, John Stuart Mill and Alfred Marshall—had in mind, as discussed in Chap. 3.

In order to instrumentalize this conceptual reformulation, I have argued that both theory and policy need to adopt an explicit, co-equal focus on increasing allocative efficiency and productive output through markets and a stable macroeconomy, on the one hand, and diffusing gains in living standards through a spectrum of relevant institutions, on the other. I break down this spectrum into five policy domains, representing them as a system—an aggregate distribution function. I further posit that it is the combination and interaction of this function with the aggregate production function of an economy that determines its median standard of living or aggregate social welfare. Economic scholarship and policy practice should be centrally concerned with optimizing an economy’s aggregate social welfare function, that is to say, its aggregate production and distribution functions. This includes capturing positive synergies between the two, since the feedback loops between them can be either virtuous or vicious, depending upon policy and circumstance.

In other words, countries should devote at least as much policy attention and investment to the aggregate distribution as to the aggregate production function of their economy. This is the golden rule of a more human-centred approach to economic growth and development, the key to making them more socially inclusive, environmentally sustainable, and resilient. In practical terms, this means progressively increasing investment in the policy incentives and institutions, described in greater depth in Chap. 5, that reinforce household employment and entrepreneurial opportunity, disposable income, availability and affordability of material necessities, and economic and environmental security. Such an ongoing process of institutional upgrading to strengthen what is in effect an economy’s social contract, narrowing its welfare gap relative to the feasible frontier, needs to be a central pillar of every country’s development strategy and translated into both policy and budgeting. This is all the more important during disruptive transformations that produce more churn—winners and losers—in the world of work, which can widen inequality and insecurity, other things being equal.

The mid twenty-first century is shaping up to be such a period of accelerated socioeconomic stratification, driven by the digital, environmental, demographic, geopolitical and other transformations underway. In such circumstances, it behoves countries to take a more deliberate and systematic approach to protecting and promoting median living standards, as demonstrated by the growing political call for a “just transition” with respect to climate change. The aggregate distribution function and welfare gap notions presented in Chaps. 4 and 5 represent a way for countries to operationalize a just transition at a systemic, as opposed to merely project-by-project, level. As such, these tools should become an integral part of national strategies to intensify climate action.

Just as this reformulated approach to growth and development requires a reorganization of policy priorities and resource allocation at the national level, so it has profound implications for international economic governance and cooperation. Multilateral organizations and other important economic governance arrangements will need to substantially adjust their priorities and policy advice and increase their level of material assistance in support of this agenda of institutional deepening within countries—that is, this ongoing upgrading of national social contracts in the areas represented by the aggregate distribution function. In particular, international macroeconomic, financial, and trade and technology governance and cooperation will need to be restructured to reflect this rebalanced model of economic progress, which considers inclusion, sustainability and resilience to be endogenous to growth and development rather than a trickle-down residual.

This chapter presents such a human-centred reform agenda for international economic policy, placing the living standards of nations at the heart of three key dimensions of global economic governance and cooperation: international macroeconomic policy cooperation; the international financial architecture; and international trade and technology governance. The following sections outline some of the most important corresponding changes required in these three areas of international economic policy. Taken as a whole, this agenda would be transformational, enabling the major acceleration of social inclusion, climate action and other aspects of economic, societal and environmental ecosystem resilience that the world’s political leadership has promised to deliver by agreeing to the SDGs, Paris climate and Kunming-Montreal biodiversity agreements and ILO Centenary Declaration and Global call to action for a human-centred recovery from the COVID-19 crisis that is inclusive, sustainable and resilient. At the same time, these deep reforms are financially feasible, insofar as they are not dependent upon big increases in bilateral aid budgets. And they are politically feasible, in that they would simply activate much more fully the existing capital and capabilities, and in many cases stated intentions and current initiatives, of the principal international economic organizations.

International Macroeconomic Policy Analysis and Advice

The Bretton Woods institutions—the IMF and World Bank—are the most important institutional sources of macroeconomic policy analysis and advice in the world economy, particularly vis-à-vis developing countries. They are the primary custodians and agents of the prevailing growth and development model insofar as the external borrowing of developing countries is often linked to fiscal choices and policy reforms negotiated with their teams. The IMF has two additional important modes of influence in this regard: the global pronouncements of its managing director and chief economist; and its annual country consultations under Article IV of its charter.

The IMF’s recent leadership has been increasingly supportive of placing greater weight on inclusion, sustainability and resilience. However, this directional signalling has yet to be fully defined in operational terms, and country advisory and lending activities remain largely in line with the standard liberal development model—the so-called Washington Consensus. Yes, the Fund has been calling for the protection of social spending, including targeted and temporary fiscal support for the most vulnerable, and it has taken important initiatives to increase the financing available to member countries through an extraordinary distribution of Special Drawing Rights (SDRs) and related establishment of a facility, the Resilience and Sustainability Trust (RST), to channel some of these from developed to developing countries. However, the translation of these messages and initiatives into country policy advice and lending remains a work in progress, more procedural and incremental than structural and impactful, including in the case of this new Trust and the G20’s recent debt relief initiative, the Common Framework for Debt Treatments (Common Framework).

The UN Secretary-General challenged this incremental pace of change in letters to G20 finance ministers, central bank governors, and leaders in the autumn of 2022.¹ He called for markedly increased financial support for the poorest and most vulnerable of humanity in the face of a global cost-of-living crisis and lagging progress on the SDGs and climate change. However, such a transformation in international cooperation is unlikely to be realized absent a fundamental shift in thinking about the nature of economic development and the corresponding purpose of international economic governance and cooperation.

In the standard liberal growth and development model encapsulated by the Washington Consensus, social spending and sustainable development initiatives like the SDGs are socially desirable adjuncts of economic growth and the structural transformation of economies. They are implicitly viewed as worthy but subordinate objectives that are largely downstream from (made possible by) the success of a country’s growth and transformation strategy. In IMF language, they are not “macro-critical” factors. The Fund considers an issue macro-critical if “it affects, or has the potential, to affect domestic or external stability, or global stability. Exchange rate, monetary, fiscal, and financial sector policies are macro policies and always considered important for stability. Other domestic policies can also be macro-critical when they affect stability.”²

Thus, the IMF administers policy advice through the lens of macroeconomic stability, which is the institution’s formal mandate. But macroeconomic stability can be construed narrowly (e.g., sustainable fiscal balances and low inflation in the near to medium term) or more broadly (e.g., progress in median living standards and labour force participation and productivity sufficient to sustain social and political order in addition to sound public finances and monetary conditions, given the interdependence of these considerations). The Fund has been moving in the direction of the latter, particularly in the messaging of its prior and current managing directors on such issues as jobs, social protection and climate change. However, it has made slow progress in translating these signals into specific protocols to guide the policy advice it dispenses to countries. This leaves the impression that, for the time being, the organization has a more expansive definition of macro-criticality at the global than at the country level. It recognizes the potentially critical nature of these issues conceptually but appears not yet to have a practical model to guide implementation in programmes and consultations on the ground in a systematic fashion.

The key to resolving this seeming disconnect between global messaging and country operations at the IMF as well as the World Bank is for these organizations to acknowledge, first, that GDP growth and production-based measures of development are an incomplete, top-line measure of development, whereas broad progress in living standards is the bottom-line result that societies seek. Second, given that their de facto policy influence extends well beyond macroeconomic stability in the case of the Fund and development project financing in that of the Bank, they have both an implicit mandate and critical responsibility to adapt their operational frameworks so that they properly weight institutional factors that drive the diffusion of progress in living standards. This means recognizing the macro-development criticality (macro-criticality in a larger economic policy sense than macroeconomic stability alone) of the institutional features of a country’s social contract that support inclusion, sustainability and resilience, and hard-wiring them into their policy advice and programmatic support to developing countries.

This is the crux of the transformation required in these institutions for them to move beyond their Washington Consensus default operating mode on the ground—that is, beyond an unduly narrow conception of their role and responsibility with respect to global economic progress and stability in an era that is markedly different than the one in which their original mission and working methods were framed. Other conceptual replacements for the Washington Consensus have been proposed in recent years. Some cover a portion of this substantive terrain but remain more directional than practical. Others are far-reaching but essentially seek to compensate ex post for the skewed and unsustainable outcomes of markets through fiscal measures rather than re-engineer the growth model itself to improve these outcomes. Still others reject the very premise of economics as it has been practised for 250 years by prescribing low or no economic growth, but this is an unattractive, politically unrealistic option for the world’s many poor countries, as discussed in Chap. 2.

To use a modern metaphor, rather than patch or work around the flaws in the operating system of liberal economics with respect to inclusion, sustainability and resilience, the proposals made in this book seek to re-engineer its source code. Liberal economics requires a systems upgrade in order to bring its performance into alignment with the original specifications set by Adam Smith, John Stuart Mill and Alfred Marshal in the eighteenth and nineteenth centuries, as discussed in Chap. 3. Those original design principles (e.g., the economy serves a larger social purpose: improving general welfare and the human condition) remain valid; however, bugs have accumulated in the operating system’s software (see Chaps. 3 and 4) such that it is struggling to keep pace with changing circumstances and user requirements. As a result, the neoclassical synthesis—neoliberal operating system software—is not fully fit for purpose in this new era in which inclusion, sustainability and resilience matter as much as growth for many societies and their political leaders. Indeed, these qualities are a valuable source of growth at a time of diminishing returns from and prospects for macroeconomic stimulus and trade liberalization.

I have characterized this elsewhere as a “Roosevelt Consensus” model of growth and development.³ In response to the inequality, insecurity and financial instability of the late nineteenth and early twentieth century, the two Presidents Roosevelt spearheaded an extensive process of institutional deepening in the United States that effectively rebalanced the country’s growth and development model, rendering it more inclusive, sustainable and resilient. This period of institution-building and reform across corporate and financial governance, labour and anti-trust regulation, social and environmental protection, skills and infrastructure development, etc. lasted eight decades across both Democratic and Republican presidential administrations. The Square Deal, New Deal, New Frontier and Great Society programmes, among others, built out the aggregate distribution function of the US economy in a way that created a positive feedback loop with the economy’s production function, a virtuous circle between increased equity (rising median living standards and an expanded middle class) and robust growth that propelled US labour productivity and living standards to remarkable heights.

This growth and development model could just as well be called the “Bismarck”, “Beveridge” or “Nordic Consensus”. The German Chancellor pioneered elements of it in the late nineteenth century, and during the first half of the twentieth century multiple European societies enacted institutional reforms similar to those in the United States. The liberal economics establishment, including the IMF and World Bank, which are its institutional embodiment on the world stage, need to rebalance their working methods by renewing this appreciation of the macro-development criticality of an economy’s living standards diffusion mechanism—the institutional ecosystem that plays a crucial role in driving inclusion, sustainability and resilience as well as growth. This is a formula for structurally and thus durably correcting the overshooting of neoliberalism—its systemic underappreciation of and underinvestment in this institutional dimension of economic policy.

What would this Roosevelt Consensus and macro-development criticality approach look like in action—in the country advisory work of international economic organizations including the IMF and World Bank? Two major, interrelated changes are required: one concerns data and analysis and the other relates to the way that country consultations are organized and conducted.

First, a more structured and rigorous assessment of the relative strength of country policies and institutions in the five domains of the aggregate distribution function is needed. These data should be assembled, appropriately contextualized and then integrated into a combined macroeconomic and structural–institutional analysis of the country’s policy choices and pathways vis-à-vis both macro-criticality in the traditional macroeconomic stability sense and macro-development criticality in the larger aggregate social welfare function sense described in Chap. 4. As with the wearing of glasses, employing these two lenses at the same time will improve the depth perception and peripheral vision of the policy analysis and advice provided to governments.

These wider and more connected data and analyses are required to produce a sharper stereoscopic image of a country’s output and welfare gaps—and its policy options for narrowing these in a manner consistent with macroeconomic stability. Fiscal policy—the level of public investment in the aggregate distribution function’s key institutional domains—is the sensible place to start.

The IMF emphasized the importance of social spending in its 2019 “Strategy for Engagement on Social Spending”.⁴ The organization and particularly its managing director at the time, Christine Lagarde, deserve credit for seeking to clarify the extent to which social spending can be emphasized within the boundaries of the IMF’s macroeconomic stability-oriented, mandate. The Fund requires there to be a clear nexus with “the principles set forth in the Integrated Surveillance Decision, which establish that policies other than exchange rate, monetary, fiscal, and financial sector policies are also examined in the context of surveillance only to the extent that they significantly influence present or prospective balance of payments or domestic stability,”⁵ which is to say, fiscal stability, price stability, or growth.

But even as it cites this restrictive interpretation of macro-criticality the strategy seems to open the door to going beyond it by referring to spending adequacy as one of the three channels by which social spending can be macro-critical and posing the question: “is social spending adequate for inclusive growth and protecting the vulnerable?” It also refers to “distributional objectives” in several places, endorses the setting of quantitative “social spending floors” and cites a survey of views of its mission chiefs in which

social spending was [considered] macro-critical in nearly 80 percent of countries, with 70 percent reporting that policy advice was provided in this area … The reasons given for macro-criticality of social spending were diverse, going beyond traditional fiscal sustainability considerations, and varied by countries’ income level: for advanced economies, expected social spending pressures (especially from population ageing) and achieving authorities’ distributional objectives; for emerging market economies, achieving the authorities’ distributional objectives, risks to social or political stability posed by insufficient spending levels, and large social protection gaps; and for low-income developing countries, large coverage gaps in education and health as well as risks to social or political stability.⁶

Thus, there is a certain tension, or cognitive dissonance, in the IMF’s guidance to itself on this important subject. The organization appears to be caught between a laudable desire to recognize the critical importance for growth and development of inclusion, sustainability and resilience (the social contract), on the one hand, and its long-standing institutional raison d’être as the international system’s guardian of balance-of-payments stability and emergency lender in the event of crisis, on the other. In short, it is struggling within the constraints of its official mandate to remain fully fit for purpose in today’s circumstances—to reconcile its long-standing official concept of macroeconomic criticality with the increasingly important and even more complex demands of macro-development criticality.

The IMF has come a long way in its thinking during the past decade and deserves credit for trying to find a way out of this organizational box. But a box it is, which brings us to the second fundamental shift required to adapt the macroeconomic dimension of international economic governance to human-centred economics and the pre-eminent importance of living standards: governance architecture. Instead of continuing to try to shoehorn a macro-development approach to criticality into the Fund’s macroeconomic stability mandate, the time has come to solve this problem through organizational innovation.

In strategic reorganizations, form is supposed to follow function. The world needs the IMF to fulfil its unique and vital function as the leading provider of policy advice and lending with respect to fiscal and monetary stability, as well as the ultimate guardian of the international monetary system and global financial stability. It was never intended to be a development institution; other multilateral organizations, both general and specialized, were created for this purpose. Despite its good intentions, the Fund’s efforts to justify social spending on macroeconomic stability grounds and its recent foray into development lending through the establishment of the RST are unsatisfactory halfway measures, for the reason that they do not play to the Fund’s core competencies or mandate, forcing it to engage in certain intellectual and operational contortions. These initiatives have arisen essentially because of inadequacies in the development cooperation architecture, including a certain narrowness of the country policy analysis and advice of multilateral development banks (MDBs) and a lack of coherence between these and the analysis and advice of the Fund.

MDBs underinvest in analysis and lending with respect to many of the key institutional drivers of broad progress in household living standards, such as labour ministry capacity to enforce worker rights, support training and facilitate workforce transitions; social protection system benefit coverage and adequacy (versus narrower safety net programmes); competition and anti-corruption rules and enforcement capacity; corporate and financial system regulation; subsidization to ensure the affordability of material necessities, etc. Such economic institution-building tends to take a back seat in these organizations to basic health, education and infrastructure systems and trade and industrial policy, particularly as it relates to export production. This may have a certain logic in very poor countries where it is of paramount importance to increase productive output. But most of the world’s poor people live in middle-income countries where marginalization and exclusion are the primary problem, rather than basic human needs and overall national income. In these countries, strengthening the institutional ecosystem underpinning the economy’s aggregate distribution function is a paramount development imperative.

In principle it is the MDBs and, in the case of labour markets and social protection, the ILO that should be assembling the data and analysis in these domains and participating with the IMF in a collective analysis of a country’s welfare gap and the policy options available to overcome it. These institutions as well as the OECD, which has unparalleled data and analysis of its member countries in many of the aggregate distribution function’s structural policy domains, are best positioned to identify the policy and spending targets that are macro-development critical. As development institutions, this is their function, not the IMF’s.

Their analysis and advice need to be better connected with the IMF’s macroeconomic stability analysis and advice. Human-centred economics views national economic performance stereoscopically, through the twin prisms of the aggregate production and distribution functions. These cover distinct policy terrains and require different competencies, but the analysis of them needs to be joined up rather than conducted in silos. Countries don’t consider macroeconomic and development policy in isolation from each other. They have a right to expect the responsible multilateral agencies to improve the substantive coherence and reduce the operational transaction costs (the number of meetings) of their analysis and advice in these respects. Moreover, an understanding of the interdependencies and synergies between the two functions—between opportunities to reduce country output and welfare gaps—is absolutely crucial; indeed, it is where these external advisers with their global experience can add particular value.

Thus, a structural interface is required between the IMF and multilateral development institutions in their policy advisory functions, in contrast to current ad hoc arrangements. While the data-gathering and technical assistance of the IMF, World Bank, ILO and OECD (for its more limited number of member countries) should remain specialized and distinct, their data and analysis need to be connected and placed into an integrated picture of macroeconomic and development criticality, with a corresponding set of policy recommendations for realizing both the growth and living standards potential of the country in question.

From an organizational behaviour standpoint, this is a tall order. Established bureaucracies don’t easily cooperate like this. They usually require a forcing mechanism of some sort. Outright integration, a merger of the policy surveillance and consultation functions of the organizations, is the most drastic option. But that would go too far; the world needs these institutions to maintain, indeed strengthen, their specialized competencies and analytical tools. More appropriate would be a joint country surveillance and consultation service—joint task forces that would prepare integrated analysis and policy recommendations for the benefit of these organizations’ mutual client countries. This should be a standing function, a Joint Office of Multilateral Country Analysis and Consultation, for example, which would coordinate the cross-organizational task forces that would conduct the country-specific analyses and consultations. Their work would coincide in timing with the IMF’s Article IV preparations and in-country consultations in order to ensure substantive coherence and minimize country transaction costs.

The Joint Office should also be assigned one global responsibility. It should prepare a joint report of the four organizations plus the World Trade Organization (WTO) and United Nations Conference on Trade and Development (UNCTAD) every other year on the progress of global development and their combined contribution thereto. This Global Economic Progress Report by the principal multilateral economic organizations should be jointly signed by their heads and delivered to G20 leaders and the UN secretary-general as well as made public. It, too, would serve as a useful forcing mechanism for policy coherence and operational synergy.

Let us return to the question of how to build out the data required for a more granular and actionable picture of the strength of economies’ aggregate distribution functions. First, with respect to social spending, a set of recommended reference ranges should be estimated for relevant dimensions of such spending for different typologies of countries (e.g., low-income; lower-middle-income; upper-middle-income and high-income). At a minimum, these ranges should be constructed for: health and non-health social protection systems; labour market institutions and programmes; infrastructure in areas corresponding to material necessities; and education. They should be accompanied by reference ranges for fiscal revenues, including with respect to total revenues and the shares generated from taxation of labour, capital, consumption, imports, etc. These fiscal spending and resource mobilization reference ranges should be broad enough (overlapping the categories of countries) to account for the significant diversity of country contexts and choices but narrow enough to provide a meaningful sense of what constitutes good policy practice and minimum thresholds (social spending floors). They could be expressed as a share of GDP or the national budget or both (or indeed by other metrics).

Considerable work would need to go into the development and refinement of these indicative fiscal reference ranges by the Joint Office. In some cases, existing country data may be insufficient to derive a confident picture of good or minimum acceptable practice, particularly for low-income countries. At the other end of the spectrum, the analysis is likely to be more granular and disaggregated for high-income countries, covering many more aspects of spending in light of the OECD’s vast collection of relevant data, as highlighted in Chap. 5. Indeed, one of the priorities of this effort should be to improve the availability of such data in developing countries, supported by increased development cooperation funding for their national statistical agencies.

Table 6.1 presents an indicative set of fiscal expenditure and revenue reference ranges derived from existing, publicly available data for four income groups of countries: high income; upper-middle income; lower-middle income; and low income. The table is intended to be more illustrative and suggestive than definitive and prescriptive, particularly in view of the limited availability of data in developing countries for certain indicators; however, reference ranges such as these would provide the basis for clearer and more coherent policy guidance and accountability on the part of the multilateral economic organizations and the governments they serve. The table characterizes “good practice” as the level of spending between the 50th and 80th percentiles of the distribution of existing country practice, and “leading practice” from the 80th percentile threshold and above. By enabling countries to benchmark themselves against their peers, such an approach would give them a specific yet objective sense of the realm of the possible, that is, the extent of available policy space for countries at their level of GDP per capita.

Table 6.1 Fiscal expenditure and revenue reference ranges

Table 6.2 presents similar reference ranges for a number of other salient aspects of the aggregate distribution function’s underlying policy and institutional ecosystem, particularly those relating to the ILO’s Decent Work Agenda. The data are drawn from the ILO’s statistical database and cover a range of output or performance indicators. Some of these correspond to areas of social expenditure included in Table 6.1 and can inform a judgement as to whether such spending is adequate. For example, when spending is near the top of the performance range of a peer group of countries but performance on the corresponding decent work indicators lags, then the efficiency of administrative or fiscal effort may be the primary problem. Conversely, when both indicators lag on a given issue, greater investment—i.e., increased fiscal effort—is presumptively warranted and should be supported and at a minimum protected during a crisis by the IMF, the World Bank and other international organizations and bilateral donors.

Table 6.2 Decent work indicator reference ranges

In sum, multilaterally promulgated reference ranges like these for peer groups of countries could improve governments’ priority-setting and resource allocation with respect to the promotion of broad living standards. They could also improve the accountability of national governments to their citizens and of international organizations to their member governments. Benchmarking can be a powerful tool if it is applied constructively and with due regard for differing country circumstances, and if it is combined with strategic engagement and relevant financial and technical support from international institutions. These tables demonstrate the huge range of country performance and investment that exists among countries at a similar level of economic development on nearly every fiscal and decent work indicator. The difference between the median and 80th-percentile performance is typically on the order of 50% to 300%, and the median is often three to six times higher than the lowest value. In other words, most countries have large amounts of unutilized policy space to strengthen their social contracts, even allowing for inevitable differences in national social, historical and political circumstances. Objective, comparable data such as these can help countries to move more forthrightly to instrumentalize the golden rule of human-centred economics—the rebalancing of emphasis on growth and median living standards, and the more serious search for synergies between the two called for in these pages.

Basic agreement by the IMF, World Bank, ILO and OECD on empirical reference ranges like these for the key institutional domains of the aggregate distribution function would enable the operationalization of the reformed notion of macro-criticality presented above. This in turn could transform not only the macroeconomic policy advice but also the lending and debt relief conditionality for developing countries, helping to ensure that national policymakers and international financial institutions (IFIs) do not throw the baby out with the bathwater when devising debt-restructuring and emergency lending packages and related policy reforms during balance-of-payments crises.

International Financial Architecture: Development and Climate Finance

This section is drawn from and builds upon Richard Samans, “Financing Human-Centred COVID-19 Recovery and Decisive Climate Action Worldwide: International Cooperation’s Twenty-First Century Moment of Truth”, ILO Working Paper 40, 7 October 2021, https://www.ilo.org/global/publications/working-papers/WCMS_821931/lang%2D%2Den/index.htm

Over the past several years, the international community has adopted a consensus of goals for rendering global development more inclusive, sustainable and resilient. In 2015, the governments of the world agreed to the 2030 Agenda, including the 17 SDGs, as well as the Paris climate agreement. In 2019, governments and business and labour organizations of the ILO’s 187 member states agreed to its Centenary Declaration for the Future of Work, followed in 2021 by a roadmap for the Centenary Declaration’s accelerated implementation in a Global call to action. In 2020, WHO and other stakeholders created the Access to COVID-19 Tools Accelerator (ACT-A) initiative, followed in 2022 by the G20’s creation of the Pandemic Prevention Financial Intermediary Fund to help countries strengthen their resilience to health crises. And, in 2022, a Global Biodiversity Framework was agreed in Montreal setting a number of long-term targets in this area of environmental protection, as outlined in Chap. 5.

Together, these international instruments outline a far-reaching vision for the reform of the world economy to meet the pressing demands expressed by societies everywhere: greater economic well-being and equality as well as health and environmental security. But this agenda remains essentially a statement of shared aspiration. Implementation is lagging badly across the board, frustrating citizens and undermining the credibility of both national leaders and multilateral institutions—that is to say, those who made these very public promises and the system that produced them.

The primary obstacle to implementation is a lack of financial resources, especially in developing countries where most of humanity resides. If one takes this agenda at face value—as a genuine expression of humanity’s will articulated by its duly designated leaders—then it is hard to escape the conclusion that the world economy is suffering from a systemic misallocation of private capital and underinvestment of public capital. The top priority for international governance and cooperation in the decade to come, beyond addressing wars and other military threats to peace and security, must be to raise and redirect the finance necessary to satisfy these priorities.

To be certain, donor governments are unlikely to provide a large and sustained increase in bilateral foreign assistance after having run extremely high fiscal deficits to support their domestic economies during the pandemic. In any event, the trillions required for this agenda, in particular the investments required to implement the SDGs and the nationally determined contributions (NDCs) under the Paris climate agreement, far exceed the current level of global official development assistance of about US$170 billion per year.⁷

However, these are extraordinary times. When the pandemic struck, many governments suspended existing rules and assumptions and used monetary and fiscal policy in creative ways to leverage the balance sheets of their central banks and treasuries to meet pressing domestic needs.⁸ They re-evaluated the limits and cost–benefit trade-offs of public borrowing and found a way to mobilize unprecedented levels of financial resources.

How might the same necessity-is-the-mother-of-invention combination of imagination and determination be applied to the international finance institutions in order to drive the implementation of these multilateral commitments at speed and scale? This is the most consequential question facing the international financial architecture in general and development cooperation in particular.

Three types of additional financing are required. Each is feasible using the existing capital and capabilities of IFIs in a more catalytic and networked manner. They are:

• One-off or relatively time-limited acute needs in developing countries which can be financed only through public grants or highly concessional loans (for example, sovereign debt restructuring; COVID-19 vaccines, tests and treatment; catalytic investments to establish or extend social protection systems; and accelerated replacement and avoidance of coal-fired power generation plants).

• Large, multi-year requirements that generate cash flows and can therefore be financed through a blend of public and private investment; they are so big that they can only be adequately financed by engaging private investment (for example, investment in SDG-related sustainable infrastructure and industry).

• Smaller, multi-year technical assistance and institutional capacity-building requirements typically financed with grants and concessional assistance (for example, the design and administration of labour, social protection, anti-corruption, tax, environmental, competition and financial system policies and frameworks).

The IMF and MDBs have unexploited potential to mobilize a step change in the resources available to developing countries in each of these three respects. Leaders face growing pressure to respond decisively to the large and urgent financing needs of developing countries with respect to the SDGs, digital and climate transitions, and pandemic recovery and the related cost-of-living crisis. The most feasible way they could do so would be to harness the existing international financial architecture more effectively, leveraging the public capital their countries have already invested in the IMF and MDBs more efficiently and expansively in three corresponding respects: (1) better deploying IMF’s unique capacity to issue and channel SDRs; (2) improving the utilization of capital and updating the business model of MDBs to catalyse public–private financing of sustainable infrastructure and industry at much higher volumes; and (3) strengthening bilateral and multilateral support of the institutional deepening of their client countries’ aggregate distribution functions.

If government representatives of developed and developing country governments on the boards of these institutions were to rally around the three corresponding sets of initiatives outlined below, the combined effect would be to generate between 2024 and 2030 in excess of US$2 trillion of additional resources for these critical financing needs in poor countries. This sum is nearly twice the projected level of global official development assistance over this period. It would represent an average increase in external flows each year for the next seven years of about 4% of GDP for the 82 economies classified by the World Bank as low income or lower-middle income, or more than 3% of annual GDP for an expanded group of 110 economies having a GDP per capita below US$7500. This US$2 trillion estimate does not include the substantial additional domestic resources that developing countries would have an incentive to mobilize in response, which could yield a further US$1 trillion or more.

Such a large increase in international financing for development represents the difference between continued incremental and truly transformational progress on the poverty and inequality challenges as well as environmental and health risks that humanity faces. It matches the additional external financing requirements for emerging and developing economies other than China that were estimated in four related areas by an international team under the guidance of Lord Nicholas Stern. This work was based on the global estimates he prepared for the G7 under the UK presidency during 2021.⁹ Specifically, the London School of Economics/Brookings Institution team determined that an increase in annual investment of between 5% and 6% of GDP would ultimately be needed in these countries to address key SDG objectives, with half coming from external (international) public and private financing.¹⁰ This is the same amount—an additional 3% of GDP per year from 2023 until the end of the decade—that would be generated by the three reforms outlined below of the existing international financial architecture.

IMF Special Drawing Rights

IMF SDRs are the closest thing the world economy has to the quantitative easing measures many governments applied domestically during the 2008–09 financial and 2020–21 COVID-19 crises (and Japan has applied for decades). They are an international form of liquidity injection by fiat, in this case by a decision of the IMF’s board.

For only the fourth time in its history, in August 2021, the organization’s Executive Directors approved a general allocation of SDRs, equivalent to US$650 billion, as well as plans for the voluntary channelling of some of them from developed countries to developing countries.¹¹ This extraordinary issuance of SDRs would never have happened had it not been for the dire financial position in which the pandemic had placed many poor countries; however, they received less than a third of the allocation, according to the IMF’s quota system. While these funds have been very useful to these countries, their financing requirements are larger still, with rising inflation and interest rates increasing their external debt service obligations and shifting their terms of trade unfavourably as food and fuel import bills mount.

Developed countries and China have little need for their US$441 billion majority share of these new SDRs.¹² And while several have pledged a total of more than US$80 billion of them to the Fund’s new mechanism for rechannelling such resources from rich to poor countries, the RST, this facility took a year to launch, and uptake of its assistance remains slow. The prospects for developing country participation is uncertain given the policy conditions and market stigma attached to borrowing from the IMF.

It is increasingly apparent that this well-intended and much-anticipated initiative is not configured to make more than a modest contribution to the large financing needs of these countries, even though it was these requirements that motivated the issuance in the first place. This is principally because of the reserve asset character of SDRs framed by the Fund’s Articles of Agreement, which reflects the organization’s original purpose as a provider of temporary emergency liquidity to countries facing a balance-of-payments crisis. The onlending or swapping of foreign exchange reserves between countries is a common device to insure against a liquidity crisis—a cascading contraction of credit driven by a loss of confidence in a country’s currency or public finances. Once a country devalues and/or restores market confidence by restructuring its public finances, its current account typically returns to surplus, allowing it to reaccumulate foreign exchange reserves and reverse the swap.

By contrast, the stated purpose of the RST is to finance fiscal expenditures—essentially development projects—in the areas of pandemic prevention, climate mitigation and adaptation, and other unspecified “resilience and sustainability” expenditure priorities of countries. Unlike foreign exchange swap lines, these have no self-equilibrating or self-financing mechanism. They are outright exercises in support of fiscal, not monetary, policy. And yet the guidance of the IMF and the expectation and often the domestic legal requirements of lending countries is that they maintain an on-demand, in-full claim on the SDRs they transfer to other countries as if they were engaging in a monetary swap rather than a long-term concessional development loan. This is the practical significance of the “reserve asset character” of SDRs upon which the Fund and donor countries are insisting.

This internal contradiction is preventing the initiative from fully achieving its stated purpose. In addition, the IMF is neither mandated nor staffed to make development project loans—this being the role of the MDBs—and developing countries tend to be wary of subjecting themselves to Fund macroeconomic (e.g., budget policy) conditionality. As a result, the RST has not been set up for success and therefore is bound to disappoint.

When advanced economy governments opened the financial spigots at home during the Great Financial Crisis and COVID-19 pandemic, many of them dispensed with any such self-limiting or self-liquidating constraint. Some have maintained their quantitative easing—extraordinary liquidity provision—for years and have done so while massively expanding their fiscal deficit, effectively monetizing the latter with the former. If the international community is serious about tackling climate change at the scale and pace agreed in the Paris climate agreement, as well as preventing and responding adequately to pandemics, then it will need to do something analogous with the international financial architecture. It must find a way to inject liquidity into the world economy for these extraordinary, emergency purposes in a similarly straightforward and scaled—not contorted and incremental—manner. This can be achieved either by relaxing the “reserve asset character” constraint of SDR rechannelling in this particular instance (for example, through a special, time-limited amendment to this aspect of the Articles of Agreement) or by working creatively around it, for example by steering rechannelled SDR allocations to MDBs in the form of hybrid capital contributions that they then use to increase their financing to developing countries for the RST’s intended purposes.¹³

The requirement that SDRs retain their reserve asset character is fundamentally a political, not technical, constraint. Governments on the IMF’s board could simply decide to issue a different kind of extraordinary liquidity governed by different rules than in the past. And in this case they would be entirely justified in doing so. Climate action and pandemic prevention and response are not just global public goods; they are global public imperatives. Delayed or otherwise insufficient action on them anywhere ultimately threatens the security of people everywhere, regardless of geographic location, social status or personal wealth. The sheer scale and time sensitivity of the climate action required to keep global warming within the Paris climate agreement’s well-below-2 °C outer limit, and the political necessity for this economic transformation to be accompanied by an orderly and just transition in the world of work, provide sufficient justification for such a temporary departure from the Fund’s rules in order to place the international financial architecture in a position to better serve humanity in its hour of need. Indeed, given the absence of viable financing alternatives for the rapid acceleration of emissions reductions urgently recommended by the scientific community, it would be imprudent of governments not to do so. There is little to no chance of this order of magnitude of additional liquidity having any material effect on inflation in a world economy whose estimated broad money supply and outstanding stock of debt exceed US$80 trillion and US$300 trillion, respectively.

The prospect of catastrophic climate change later this century in the absence of decisive action during the next decade is too important a matter to be left to technocrats struggling to fit a square peg into a round hole. Freeing the international system from the binding constraints of a financial architecture designed three-quarters of a century ago in a very different economic and political context is the essential challenge facing international monetary and development cooperation today. How the boards of these institutions and their political masters in capitals answer this challenge will determine whether the international community fulfils the promises made to humanity with respect to inclusion, sustainability and resilience in the 2030 Agenda, Paris climate agreement, ILO Centenary Declaration and recent WHO pandemic initiatives.

To be specific, a framework that enabled the outright donation by developed countries and China of 60% of their share of the recent SDR issuance, or a similarly sized new issuance, would generate about US$265 billion in supplemental funding for low- and lower-middle-income countries. This large amount would make a transformational difference in the ambition and pace of debt restructuring that many of them will require as a result of the triple whammy of pandemic, inflation and interest rate increases. It would also make possible a scaling of multilateral financing for four critical dimensions of climate and pandemic action if coupled with certain structural changes in the RST. The three climate action elements are areas in which early, massive financing—well above business as usual in development cooperation and climate finance—is essential if humanity is to retain a realistic prospect of not breaching the agreed 1.5 °C and well-below-2 °C limits (as opposed to continuing on the world’s current 2.7 °C trajectory). They are areas in which a strategic, top-down intervention is particularly required to compensate for the inadequate pace of the prevailing bottom-up architecture of Paris climate agreement NDCs and related development and climate finance cooperation.

To this end, two classes of SDRs should be established, whether through a modification of the terms of the August 2021 issuance or through a new, similarly sized, issuance. One class, perhaps called “Series A”, would function according to existing rules, essentially financing the purposes for which SDRs were originally intended: domestic uses, repayments of debt owed to the IMF, or supplemental hard currency reserves held for a rainy day. This is essentially the bilateral tranche in the sense that its use is determined and executed by the governments of individual recipient countries. Low-income and most middle-income countries would receive 100% of their standard quota-based allocation in the form of these Series A SDRs.

By contrast, high-income countries and China would receive 60% of their quota-based allocation in the form of a second class of SDRs. These “Series B” SDRs would be available to them exclusively for deposit (rechannelling) into a restructured RST or the Poverty Reduction and Growth Trust (PRGT), up to a sublimit of one-sixth of their allocation in the case of contributions to the PRGT to support developing country debt relief. Series B SDRs can be thought of as the multilateral tranche of SDRs in the sense that their use would be mediated exclusively through multilaterally administered funding windows, particularly the four RST ones detailed below dedicated to the global public good imperatives of accelerated climate action and pandemic resilience. Moreover, they would differ from Series A SDRs (and all previous issuances of SDRs) in that they would be exempted from the IMF’s reserve asset accounting and interest accrual treatment and activated only upon a request by the country in question to deposit them in the RST or PRGT. If an individual high-income country or China decided not to activate its Series B allocation and deposit it in these facilities, then this part of its SDR allocation would be credited to an IMF suspense account (not the country’s own account) for the duration of the RST’s existence, or until the country did decide to activate it and deposit it in the RST or PRGT.

In addition, the RST’s terms of reference would be revised. Rather than making loans itself to countries, the RST would be restructured into these four wholesale funding windows, each of which would enter into operating agreements with accredited facilities (principally MDBs) that would do the actual lending on the basis of the highly concessional terms prescribed by the IMF’s board (e.g., 20-year maturity and a 10½-year grace period, with borrowers paying an interest rate with a modest margin over the three-month SDR rate).¹⁴ The four windows would target four acute, non-recurring financing gaps faced by developing countries which threaten the security of every citizen on the planet by preventing humanity from asserting control over global climate change and pandemics, and would do so in part by addressing the highly unequal and potentially destabilizing secondary economic and social effects of these challenges.

Specifically, the RST windows would be dedicated to financing: (a) accelerated retirement and replacement of coal-fired power plants and abatement of industrial methane emissions within the time frame advised by the UNFCCC (Global Energy Transition Mechanism); (b) creation and expansion of social protection floors, which are the most effective and comprehensive way that societies insure their people against deprivation and dislocation and are thus crucial for a just climate transition (Global Accelerator on Jobs and Social Protection for Just Transitions); (c) acceleration of basic research into renewable energy and low-carbon land use technologies on a collaborative, open-access basis (Green Revolution 2.0); and (d) two WHO-coordinated pandemic response and prevention initiatives (ACT-A/COVAX and Pandemic Prevention Financial Intermediary Facility). Series B SDR-based loans by accredited facilities would not be subject to IMF macroeconomic policy conditionality; they would be subject only to the project-based terms and conditions of the administering MDBs. To the extent practicable, accredited facilities would be encouraged to standardize such terms and conditions, coordinate their technical advisory and project development activities and collaborate in diversifying the risk of their loan portfolios relating to the four RST windows.

RST Window 1: Coal Power Plant Retirement and Replacement and Industrial Methane Abatement (Global Energy Transition Mechanism)

As important as comprehensive action is on all of the key drivers of greenhouse gas emissions, nothing is more vital in the race to stabilize atmospheric concentrations of these gases by the mid-twenty-first century than halting the burning of coal and preventing the installation of new coal-fired power generation capacity. Even if no new coal plants were built, the existing global fleet would consume most of the world’s remaining carbon budget of roughly 440 gigatons of carbon dioxide under a moderate-probability scenario of 1.5 °C in global warming, including a third of the budget in just the next ten years.¹⁵ For this reason, unabated coal-fired power generation must decline rapidly—much faster than use of oil and natural gas—if the world is to have a realistic chance of achieving either of the Paris climate agreement’s 1.5 °C or well-below-2 °C goals: an 80% reduction by 2030 to achieve the 1.5 °C goal or the same reduction by 2038 to remain under the 2 °C limit, as well as virtual elimination (a 97% decline) within the following 10 years in both cases (Fig. 6.1).¹⁶

Fig. 6.1

Paris 1.5°C goal requires 80% drop in coal-fired power by 2030

Although plans for many new plants have been cancelled in recent years, some 1000 coal boilers are still under construction or are being planned and permitted around the world, equating to around a quarter of existing capacity.¹⁷ Coal is thus a central factor driving the current trajectory of nearly 3 °C in global warming,¹⁸ which the bottom-up NDC process of the Paris climate agreement has yet to substantially alter on the ground. A strategic, top-down initiative is required to intervene directly in power markets around the world with the financial inducements necessary to replace and avoid coal at the pace required over the next decade to avoid a lock-in of atmospheric greenhouse gases at concentrations incompatible with the mid-century targets set out in the Paris climate agreement.

Over the next several years, developed and upper-middle-income countries would donate US$80 billion of their Series B SDRs into this RST window, which would have a mandate to enter into operating agreements with MDBs that would structure arrangements, similar to the Asian Development Bank’s Energy Transition Mechanism (ETM),¹⁹ to: (a) buy out existing coal-fired power plants in low- and middle-income countries for the purpose of accelerating their retirement from service within a maximum of 15 years and work with their owners to redeploy the proceeds into new clean power construction projects; (b) offer financial inducements to sponsors of planned coal-fired plants which are sufficient to convince them to switch to the construction of clean power alternatives; and (c) finance a just transition for affected workers and their communities.

This RST financing would enable the international financial architecture to scale the Asian Development Bank’s ETM approach around the globe. They could syndicate tranches of mature projects among themselves and other investors to diversify risk and multiply the impact of the SDRs they receive from this window. MDBs could leverage this US$80 billion in SDR donations three to four times over using additional donor and private sector funding in order to generate the estimated US$300 billion to US$350 billion needed to replace and avoid the majority of coal power generation in low- and middle-income countries by 2035.²⁰ Such an initiative would likely also have the effect of raising the ambition level of wealthier coal-burning countries that have the resources—but not yet the political will—to phase out coal-fired generation within this timeframe, such as China (which accounts for half of all such capacity), the United States, European nations and the Russian Federation. Indeed, these countries could be encouraged to make use of their SDRs for this purpose. Between the share of resources allocated for this purpose from the first SDR issuance, the matching funds borrowed on the market, and a comparable, or perhaps even larger, share of resources allocated from a possible second SDR issuance in 2027 or 2028—as well as the incentive effects that this bold effort would have on other countries—the world would have a viable strategy for confronting what is arguably the single biggest obstacle to the fulfilment of the Paris climate agreement.

RST Window 2: Social Protection Floors (Global Accelerator on Jobs and Social Protection for Just Transitions)

Less than half of the global population is eligible for basic social protection, a baseline level of support for the poorest and most vulnerable members of society. Most countries that lack full social protection floors, as defined by the ILO Social Protection Floors Recommendation, 2012 (No. 202),²¹ have the potential to provide such services through better public financial management and realistic increases in tax revenues over time.²²

However, in low-income countries, the required amount of domestic resources amounts to an estimated 15.9% of GDP, the equivalent of 45% of current tax revenues. Any aspiration to narrow substantially the social protection floor financing gap in such countries—estimated to be US$77.9 billion per year²³—through domestic resource mobilization alone is not realistic. The IMF estimates that they have the capacity to finance up to a third of their combined US$500 billion in SDG implementation needs, including in the area of social protection, through an increase of 5% of GDP in tax revenues (up from very low levels) over a decade.²⁴ A catalytic matching international financial contribution for social protection would cost in the neighbourhood of an average of US$15 billion per year over the next seven years, an amount that could be covered in large part by wealthier countries in the form of SDR donations as part of a global effort to facilitate a just transition to climate change, including the replacement of coal power plants and reduction of energy poverty, while accelerating progress towards SDG 1 regarding the elimination of extreme poverty (Table 6.3).

Table 6.3 Financing gap for achieving universal social protection coverage in 2020 in billions US$ and as a percentage of GDP (low- and middle-income countries only)

In fact, most low-income and lower-middle-income countries have relatively young populations, meaning that they have the potential, from an actuarial perspective, to establish or expand basic social protection through the right combination of contributory and general financing arrangements supported by a catalytic round of financing from international cooperation. The UN Secretary-General has launched an initiative, the Global Accelerator on Jobs and Social Protection for Just Transitions, with this purpose.²⁵ A collaborative effort of relevant UN agencies and MDBs, it plans in its initial four years to support 30 developing countries in the design of labour market adjustment and social protection system expansion programmes and domestic resource mobilization strategies, combined with an increase in complementary international financing. Its ultimate goal is to help countries create 400 million decent jobs, including in the green, digital and care economies, and to extend social protection coverage to the four billion people currently excluded.

In the spirit of earlier proposals for a global social protection fund,²⁶ this SDR window’s concessional financing would help the ILO, which coordinates the initiative’s Technical Support Facility, and accredited SDR implementing partners such as MDBs to organize matching commitments to countries that have sound plans to expand the coverage and/or benefit levels of their social protection systems (or to make permanent the temporary benefits provided during the pandemic) on the basis of solid domestic resource mobilization strategies. In addition to addressing the most acute crisis-related social welfare needs of those countries, such an international social protection financing initiative, perhaps on the order of the SDR equivalent of US$80 billion over the next seven years, would give practical effect to the commitment of the international community to achieve universal social protection, including social protection floors, as reflected in SDG Target 1.3.

RST Window 3: Basic Research on Renewable Energy and Low-Carbon Land Use Technologies, Including Their Development and Diffusion in Developing Countries (Green Revolution 2.0)

Given the slow pace of actual greenhouse gas emissions reduction,²⁷ and incremental progress in policy implementation (as opposed to long-term goal-setting),²⁸ the world is clearly going to require a series of technological breakthroughs if it is to have any realistic prospect of meeting the Paris climate agreement goals and averting catastrophic atmospheric warming later in this century. Public and private investment and scientific engagement in this challenge have increased significantly in recent years, but both remain well short of what is required. In its Net Zero by 2050 report, the International Energy Agency (IEA) estimated that unlocking the next generation of low-carbon technologies would require huge increases in global public RD&D (research, development and demonstration) investment, including as much as US$90 billion in demonstrations alone by 2030.²⁹ A strategic “top-down” injection of substantial additional financing over the next decade is needed to multiply the impact of the growing bottom-up engagement of individual investors and scientists. An RST SDR window to blend international “global public good” financing with that of government and academic research programmes would be a smart investment—indeed a prudent insurance policy—for humanity given the enormity of the challenge and slowness of progress to date.

Global public sector “clean” energy research expenditures totalled about US$12 billion in 2018, having risen considerably in the years leading up to the 2008–09 global financial crisis and plateaued thereafter.³⁰ Renewable energy research comprises about US$5 billion of this amount, along with about US$2 billion in power and storage technologies, US$600 million in hydrogen and fuel cells and US$4 billion in other cross-cutting technologies. According to the IEA, government spending on energy R&D worldwide, including with respect to demonstration projects, has fallen as a share of GDP from a peak of almost 0.1% in 1980 to just 0.03% in 2019. It has concluded that,

without a major acceleration in clean energy innovation, reaching net-zero emissions by 2050 will not be achievable. Technologies that are available on the market today [can] provide nearly all of the emissions reductions required to 2030 … to put the world on track for net-zero emissions by 2050. However, reaching net-zero emissions will require the widespread use after 2030 of technologies that are still under development today. In 2050, almost 50% of CO2 emissions reduction [will have to] come from technologies currently at demonstration or prototype stage. This share is even higher in sectors such as heavy industry and long-distance transport. Major innovation efforts are vital in this decade so that the technologies necessary for net-zero emissions reach markets as soon as possible.³¹

Mission Innovation is a global clean energy research cooperation of 22 governments, including the European Commission representing the European Union’s 27 member states. In 2021, it launched “a decade of action and investment in research, development and demonstration to make clean energy affordable, attractive and accessible for all”.³² Its members reportedly have boosted their clean energy investments by a total of US$18 billion since the initiative’s launch during the Paris climate agreement negotiations in 2015, including over US$5 billion in 2020. Mission Innovation would be a suitable recipient of matching or otherwise complementary investment from the RST window and could be accredited by it subject to appropriate rules regarding the licensing and broad diffusion of the breakthrough technologies the cooperation co-finances. An SDR allocation of the equivalent of US$50 billion over seven years would effectively double the world’s public investment in renewable and related energy RD&D during the coming pivotal decade.

Ten per cent of this window’s allocation (the SDR equivalent of US$5 billion) should be allocated to governmental and academic RD&D in climate-resilient agricultural technologies and techniques, particularly for application in developing economies. A doubling of such research is possible with these funds over the next seven years and could be delivered through accreditation of existing multilateral and philanthropic partners such as the Consultative Group for International Agricultural Research³³ and the Rockefeller Foundation, which catalysed the first Green Revolution in the mid twentieth century.

RST Window 4: Pandemic Response and Prevention (ACT-A/COVAX Initiative and Pandemic Prevention, Preparedness and Response Fund)

The COVID-19 pandemic appears as of this writing to be transitioning from an immediate and acute public health crisis to an ongoing but lower-intensity challenge to national health care systems. As the WHO has observed:

The pandemic may soon be over, but COVID-19 is here to stay. As the world adapts and learns to live with this virus, countries (and the partners that support them), have started the transition to long-term COVID-19 control. A key part of this transition will see the mainstreaming of current COVID-19 emergency work into routine public health and disease control programmes, some of which may need to be adapted to take on these additional functions. Given that the SARS-CoV-2 virus continues to circulate and evolve, countries will need to maintain capacity to surge in response to future COVID-19 waves while this transition is underway.³⁴

From April 2020 to September 2022, donors pledged a total of US$23.7 billion to the COVID-19 ACT-Accelerator initiative coordinated by the WHO, including US$16.1 billion for vaccines, US$1.7 billion for therapeutics, US$1.4 billion for diagnostics, US$2.3 billion for the Health Systems Response Connector and US$ 2.2 billion allocated across the Accelerator’s pillars. The initiative currently expects funding requirements to fall off significantly as the disease becomes more of a mainstream challenge for national health systems; however, it has observed that “if a new, significant and more deadly variant emerges, which evades current countermeasures, tens of billions of dollars could be rapidly required to mount an effective emergency response on a global scale”.³⁵

A new Pandemic Prevention Financial Intermediary Fund was established and launched on the margins of the 2022 G20 Leaders’ Summit under Indonesia’s presidency.³⁶ Its mission is to “provide a dedicated stream of additional, long-term financing to strengthen pandemic prevention, preparedness and response (PPR) capabilities in low- and middle-income countries and address critical gaps through investments and technical support at the national, regional, and global levels”.³⁷ Approximately US$1.6 billion had been pledged to the Fund as of early 2023, a level that pales in comparison with these gaps, particularly since the Fund also has a mandate in such important related areas of health system capacity-building as anti-microbial drug resistance and the intersection of human health, animal health and the environment.

The history of such initiatives is that funding tends to fall behind need with respect to both level and timing. Establishment of this RST SDR window at a base level of US$10 billion, with the possibility to expand its resources in the event of a new pandemic or lethal COVID-19 variant, would reverse this legacy and significantly enhance the resilience of societies and economies around the globe.

SDRs and Developing Country Debt Relief and Reduction

Finally, high-income countries and China would have the option of transferring up to one-sixth of their Series B SDR allocation to the IMF’s PRGT to support accelerated developing country debt restructuring. Even before the pandemic struck, 25 countries were already spending more on debt service than on social spending for education, health and social protection combined, according to UNICEF.³⁸ Since then, elevated food and fuel import costs, rising US dollar interest rates, depreciating exchange rates as well as ongoing pandemic-related domestic expenditure have made it more difficult for many developing countries to service their external debts.

The World Bank reports that nearly 60% of low-income countries are experiencing or at high risk of debt distress and that 69 low- and middle-income countries saw their public debt service payments rise by an estimated 35% in 2022.³⁹ The deteriorating financial position of many low- and middle-income countries led the Bank’s president to warn,

The debt crisis facing developing countries has intensified. A comprehensive approach is needed to reduce debt, increase transparency, and facilitate swifter restructuring—so countries can focus on spending that supports growth and reduces poverty. Without it, many countries and their governments face a fiscal crisis and political instability, with millions of people falling into poverty.⁴⁰

The United Nations reported that, in 2022, 25 developing countries paid more than 20% of total government revenue in external debt service—a number of countries not seen since the year 2000 at the beginning of the Heavily-Indebted Poor Country (HIPC) Initiative. Moreover, as of early 2023, measured on the basis of a combination of credit-ratings, debt sustainability ratings, and bond spreads, more than 50 developing countries, including many middle-income countries, were suffering from severe debt problems; 26 of 91 developing countries with credit ratings were currently rated at “substantial risk, extremely speculative or default”, up from 10 countries at the beginning of 2020.⁴¹ The UNDP estimates that 54 countries are experiencing severe debt problems:

[F]irst [are those] with a credit rating of either “substantial risk, extremely speculative or default” (26 countries). Added to these are [those] that do not have a credit rating but have a Debt Sustainability Assessment (DSA) risk rating of either “in distress” or at “high risk of distress” based on the latest country DSAs (23 countries). Finally, added are countries that do not meet the two ratings criteria above, but where sovereign bond spreads are more than 10 pp over US Treasury bonds (5 countries). In total this comes to (at least) 54 … with severe debt problems, which is 40 percent of all low- and middle-income countries … Not providing the debt relief needed will come at great human cost, as these 54 countries account for close to 18 percent of the global population and more than 50 percent of all people living in extreme poverty.⁴²

Thus far, the international community’s response to this debt overhang has been to move in the right direction by organizing a temporary suspension of debt service payments for many countries during 2020 and 2021 and proposing a framework for the permanent restructuring of the stock or terms of such debt thereafter. However, this G20 Common Framework on Debt Treatments is proceeding very slowly and likely to be overtaken by both the economics and politics of the problem.

Twice in the past forty years, the international financial architecture faced a similarly widespread deterioration in the external debt position of developing countries. In both cases, it responded hesitantly and incrementally for several years before belatedly recognizing reality and implementing a comprehensive process of debt restructuring as the economic pain and social unrest mounted.

The international community should abbreviate this familiar cycle by rapidly building upon the Common Framework to increase its ambition while applying lessons learned from these earlier episodes. The Baker Plan in response to the Latin American debt crisis of the 1980s, as well as the HIPC Initiative of the late 1990s, were forced to change course after a number of years of remaining well behind the curve of country and market conditions. Three years after its inception, the HIPC Initiative was relaunched as the Enhanced HIPC Initiative at the G8 Cologne Summit in 1999 and supplemented by the Multilateral Debt Relief Initiative in 2005. It ultimately yielded about US$125 billion of debt reduction and restructuring for 36 countries.⁴³ Bilateral (governmental) and multilateral (mainly MDBs and the IMF) creditors accounted for 37% and 48%, respectively, of this relief, which was delivered in stages. In general terms, countries would receive up to 67% relief of their bilateral debts on a net present value basis while they implemented an economic strategy agreed with the IMF and World Bank. After a few years of progress in implementation, they received a wider and deeper package of relief from bilateral, private and multilateral creditors, often reaching 100% in the case of their official creditors.

The Common Framework is a useful debt workout architecture to build upon in that it includes both traditional “Paris Club” and important newer bilateral creditors, such as China, the United Arab Emirates (UAE) and Turkey, and aims to achieve debt relief from private creditors on comparable terms. However, unlike the Common Framework, the Enhanced HIPC Initiative signalled its intention to include the credit of multilateral institutions, creating the prospect of truly comprehensive debt relief. Moreover, as developing countries went into their negotiations with bilateral creditors they were given a sense of the level of ambition of the exercise—the potential magnitude of relief they could obtain, if necessary, once they reached their “completion point”, when they would become eligible for full debt relief (which was originally set as 80%, then reset as 90% in 1999 and as 100% in the mid-2000s). By contrast, the Common Framework is ambiguous in this regard, some of its documentation suggesting that debt write-offs would be restricted to “the most difficult cases”.⁴⁴ Through knowing that the Enhanced HIPC process aimed to be comprehensive and truly substantial, developing countries were more motivated to participate than they currently are in the Common Framework, where this larger context and level of ambition are lacking.

That said, the Enhanced HIPC Initiative had several weak points. First, the process was long and slow. By 2009, only 15 countries had reached the completion point. Second, its coverage was somewhat arbitrarily limited, excluding countries that were not eligible for the World Bank’s International Development Association (IDA) programme. Third, the crucial debt sustainability analysis methodology on which the depth of debt reduction was based focused mainly on financial ratios (e.g., debt stock/GDP and debt service/exports) and too little on economic development criteria, that is to say, the level of external debt service consistent with measures of economic and social sustainability rather than fiscal sustainability alone. Finally, private creditor participation was suboptimal, and multilateral debt reduction was constrained by the reliance of these institutions in part on individual member governments to fund their participation in debt reduction packages.

Similarly to the way the HIPC Initiative evolved, the G20 should reformulate and relaunch its Common Framework, assimilating certain lessons of the Latin American Brady Plan and Enhanced HIPC debt relief experiences. First, it should state a clear policy goal of offering a full set of low- and middle-income countries in debt distress—such as the 51 on the UNDP list referenced above (excluding the special and large cases of Ukraine, Venezuela and Argentina)—a framework for the negotiation of comprehensive debt reduction sufficient to restore a level of debt sustainability that is consistent with progress on sustainable development in general and the protection and progress of the most vulnerable and marginalized citizens in particular. To this end, it should signal its readiness to work on a country-by-country basis to achieve debt relief of as much as 67% to 80%, on a net present value basis, if that is what is required to achieve such debt sustainability. It should further commit to developing this new sustainability methodology by applying the more human-centred, two-lens economic growth and development model described in these pages, including by explicitly incorporating quantitative reference ranges for key policy drivers of broad living standards, such as those outlined in the preceding section of this chapter which pertain to social spending and decent work.

Second, with respect to the comprehensiveness of debt relief, the Common Framework should state an ambition to include private and non-Paris-Club official debt on a similar basis as Paris Club debt and to require full transparency in this regard. It should indicate that multilateral debt will be included as well, albeit possibly in a staged manner following bilateral and private sector agreements and perhaps at a lower rate reflecting these institutions’ preferred creditor status. The PRGT-related SDR allocation should be applied for this purpose, helping to fund the participation of multilateral institutions without them having to resort to bilateral contributions, on the one hand, and, on the other, financing the buyback of private debt that has been deeply discounted in the market (or the collateralization of debt restructured via negotiation) as with the Brady Plan in the 1990s.

The multilateral debt reduction delivered under the Enhanced HIPC Initiative cost about US$42 billion,⁴⁵ roughly the same amount in nominal terms that would be mobilized if all advanced economies and China allocated 10% of their SDR allocation to the PRGT as suggested above. Thus far, there has been disagreement about the role of multilateral debt reduction in the Common Framework, potentially because of its resource implications for these institutions and their government shareholders. The application of this tranche of SDRs to this purpose could help to resolve these differences and enable the Common Framework to fulfil its stated mission of providing significant financial relief to developing countries whose financial position has been substantially and adversely affected by today’s multiple crises.

Such a relaunch of the Common Framework to address the immediate developing country debt crisis should be coupled with a set of longer-term reforms intended to prevent the next one. The world economy has repeated many times the cycle of unsustainable lending followed by a crisis and workout. Several proposals for a standing sovereign debt restructuring framework have been made over the years, including by the IMF, but they have never gained political traction. In any event, they, too, are a form of ex post—that is, second-best—solution, since they are focused on making the restructuring of unsustainable debts more orderly and timely rather than on preventing them in the first place.

External shocks happen from time to time, and economic growth and development is not a linear, predictable process. What may look like a sustainable debt burden one year could turn into a serious headache for a country soon thereafter, depending on the evolution of domestic and external economic conditions sometimes beyond its control. Sovereign borrowers currently bear most of this risk; the terms of their debt service generally do not adjust unless there is a default or renegotiation. In recent years, however, countries and IFIs have begun experimenting with debt issues whose coupons vary with the economy’s performance, that is, the country’s underlying capacity to pay. Examples include the United States’ and United Kingdom’s inflation-linked bonds, the natural-disaster-linked debt issues of a few Caribbean countries and a number of initiatives to create sustainability-linked bond structures.⁴⁶

The development- and sustainability-linked bond markets are in their infancy; however, interest and deal flow in them is growing. Stakeholders recently agreed on a set of principles to guide the development and application of these instruments and the key performance indicators (KPIs) to which they are linked.⁴⁷ The IFIs ought to invest in the development of this market, including by building the necessary market infrastructure, underwriting and syndicating early large-scale deals, including in debt buyback as well as new loan arrangements that they sponsor, and distilling and promoting best practices.⁴⁸ This contribution, combined with a continued effort to establish the inclusion of collective action clauses in sovereign bond contracts as customary practice,⁴⁹ could substantially rebalance the relative burden of risk assumed by sovereign creditors and borrowers and in so doing structurally reduce the frequency and severity of developing debt crises.

MDB-Led Public–Private Financing of Sustainable Infrastructure and Industry

The single biggest obstacle to the attainment of the SDGs is the large financing gap for low-carbon and job-rich sustainable energy, water, sanitation, digital, transport and other infrastructure. In developed countries, this gap exists primarily because of a lack of political imagination and will, rather than a lack of private savings or of public capacity to borrow and tax. However, in developing countries, where the largest gaps in sustainable infrastructure exist, it is a different story.

The IMF estimates that an increase in annual investment of 4% of GDP will be required by 2030 in middle-income developing countries in order for them to achieve the Paris climate agreement goals and the SDGs.⁵⁰ Sustainable infrastructure accounts for half to two-thirds of this gap, depending on the country. This incremental financing requirement is comparable to the scale of funding mobilized for Western European countries by the Marshall Plan. The financing gap in 49 lower-income countries is much higher relative to the size of their economies, at 15% of GDP. However, given the small size of these economies, this amounts to around only 0.5% of world GDP, or US$500 billion.

These estimates imply an annual incremental investment gap for sustainable infrastructure in developing countries of around US$1 trillion between now and 2030. This is around five times the level of annual official development assistance and private philanthropy delivered to developing countries. However, it is not beyond the reach of two other, more scalable, sources of development finance: domestic resource mobilization (tax base broadening and more efficient tax administration) and private portfolio and direct investment from both domestic (developing country) and international investors. Thus, the second major proposed reform of the international financial architecture aims to accelerate the implementation of SDG-related sustainable infrastructure and industry in developing countries by expanding these two sources of investment. It uses major increases in the latter to incentivize the reforms necessary to mobilize more of the former, not unlike the way in which the Marshall Plan leveraged aid from the United States to secure commitments of locally matched financing and supportive policies in European countries after the Second World War.

MDBs should play a critical catalytic role in this process. Private investment firms around the world manage assets in excess of US$120 trillion, of which only 5% are allocated to infrastructure and just 1% to developing country infrastructure. Approximately 10%, or US$12 trillion, of these assets were actually earning a negative yield until recently, and an additional large share were earning less than 1%. By contrast, infrastructure funds have historically generated a return of 10% to 15%.⁵¹ This skewing of global capital away from investment in sustainable infrastructure that is employment intensive and that reduces greenhouse gas emissions is not even justified by the level of risk; average default rates on infrastructure assets are below those on non-financial corporates, and African infrastructure credits have lower default rates than European and US infrastructure assets.⁵²

A two- to three-percentage-point shift in portfolio allocation by institutional investors to developing country sustainable infrastructure would cover this biggest of SDG and climate financing gaps and, in so doing, open an enormous opportunity for decent work creation in developing countries by virtue of the relative employment intensity of infrastructure projects. This shift could be catalysed through a concerted effort of MDBs to share and diversify the risks perceived by international institutional investors, blending in their own capital and partial guarantees, attracting local currency financing provided by developing country governments and investors, and aggregating infrastructure projects into syndicated packages large enough to be of interest to major institutional investors. The MDBs could offer such financial structuring and risk mitigation support to countries that meet certain minimum levels of domestic resource mobilization (such as tax collection as a share of GDP) and local currency project co-financing. MDB participation would be conditioned on safeguards to ensure financial additionality and integrity and proper public governance and oversight, including those reflected in the Blended Finance Guidance⁵³ produced by the OECD and in the Equator Principles,⁵⁴ as well as adherence to international labour, human rights and environmental standards, including those enshrined in ILO core labour standards and other conventions.

Most MDBs have considerable underutilized capital headroom⁵⁵—an estimated US$750 billion of additional space in their collective capital structures without putting into jeopardy their AAA credit ratings—to expand such co-financing and risk-sharing as well as more traditional direct lending and grant provision.⁵⁶ They could comfortably utilize two-thirds of this available room on their balance sheets over the next several years, applying 40% of this amount to additional lending and grants and leveraging the other 60% three to four times over in private flows by scaling their co-financing, partial guarantee and portfolio-recycling activities. This would generate over US$1 trillion in additional external financing for SDG-related sustainable infrastructure and industry, which could be structured in such a way as to stimulate significant additional domestic resource mobilization and local currency financing.

The public–private, domestic–international and cross-multilateral institution cooperation necessary to solve this global market failure will not occur on its own, even if it would yield a two-for-one payoff of the highest political importance: big increases in employment and reductions in greenhouse gas emissions. Although the MDBs and some of their bilateral development agency partners have the necessary balance sheet room and risk mitigation and asset packaging and syndication tools, they lack the political mandate from their boards and the alignment of their senior staff to move rapidly in this direction on an individual basis, let alone a coordinated one. Breaking this logjam will require the kind of cross-cutting political leadership that world leaders under the auspices of the G20 or the UN financing-for-development initiative could provide, building on the strong network of developed and developing country governments already engaged in these processes.

Multilateral and Bilateral Financing of Domestic Economic Institution Building

The two financing initiatives described above would have the added benefit of freeing MDBs to shift more of their traditional activities and resources towards helping countries strengthen the distribution functions of their economies. Development cooperation has chronically underinvested in the design and proper staffing and implementation of the public administrative functions that are crucial to the level of inclusion, sustainability and resilience—and thus dynamism and resilience—of an economy. It has traditionally placed relatively little emphasis on helping countries build effective public institutions in such areas as:

• labour ministries and social protection system agencies that oversee critical social standards and benefits, including vis-à-vis the informal economy and other insecure forms of work that are so prevalent in developing countries;

• environmental ministries that set and enforce compliance with key standards;

• tax agencies that enable adequate and equitable domestic resource mobilization;

• independent anti-corruption, competition and financial regulatory authorities that ensure fair treatment of working families and small businesses;

• institutions of social dialogue—such as worker and employer organizations—that facilitate social participation in the setting of government and enterprise strategies and practices, giving these a solid foundation of citizen confidence and support.

Most of the world’s poor people now live in middle-income countries where the primary challenge is not fulfilling basic human needs but, rather, including more of their population in the development process. The robustness of the kinds of economic institutions listed above is what chiefly determines whether countries succeed in doing so at scale over time. Technical and budget support for the design and administrative capacity of these critical public institutions and their rulebooks should be made a top priority for MDBs (and bilateral donor agencies), especially—but not exclusively—in middle-income countries. Properly resourced programmes of this sort—including Decent Work Country Programmes,⁵⁷ which help countries translate ILO labour and social protection standards into rights and protections of workers and their families on the ground—should routinely accompany trade liberalization agreements and country lending programmes in such countries.

As MDBs shift a larger proportion of their financial activities to efforts to catalyse far larger amounts of private investment through a more efficient use of their capital in co-financing and risk mitigation activities, they should be able to devote more of their energy and expertise to providing a service the private sector cannot supply: helping to build the public institutional infrastructure on which competitive and socially just markets rest. This change, on top of the greatly increased direct lending and co-financing enabled by a more expansive use of their capital, as well as the crash effort to incentivize a rapid decline in coal-related greenhouse gas emissions around the world, represents the refinement in the “business model” of MDBs necessary to apply them more fully to the priorities of the multilateral system in the twenty-first century.

A Financing Strategy to Match the Ambition and Urgency of Multilaterally Agreed Agendas

These three financing initiatives would provide the international community with the bold resource mobilization strategy it needs to have a much better chance of achieving its agreed objectives with respect to inclusion, sustainability and resilience. By generating an additional US$2 trillion in international financing for sustainable development over the next several years, these initiatives would enable the establishment of a new doctrine of development cooperation corresponding to the deeper level of interdependence that humanity is experiencing in this century and reflecting the universal threats posed especially by climate change and pandemics. To be specific, any low-income or lower-middle-income country that formulated a well-considered national strategy for the use of additional financing for these critical aspects of sustainable development would be assured access to a large boost in external flows to leverage the resources they mobilized domestically for these purposes.

This is the nature of the stronger partnership between developed and developing countries, the public and private sectors, and the Bretton Woods institutions and UN system that is necessary to make the decade of action for sustainable development a reality and to manage the risk of climate change and pandemics. In the absence of such an initiative, it is difficult to imagine how the large financing needs of developing countries with respect to the SDGs, decent work, climate change and pandemic PPR can be met.

As illustrated in Fig. 6.2, the US$2 trillion estimate assumes that: (a) developing countries not including China have received around 32% of the 2021 SDR allocation (US$209 billion); (b) developed countries and China (which has the largest foreign exchange reserve holdings in the world) would donate 60% of their share to the RST and PRGT for these four common purposes (US$265 billion); (c) MDBs would utilize roughly two-thirds of their US$750 billion in additional capital headroom, of which 40% would be devoted to increased lending and concessional assistance (US$200 billion); and (d) MDBs would deploy the remaining 60%, or US$300 billion, to catalyse private investment in SDG-related sustainable infrastructure and industry through co-financing, partial guarantees and portfolio recycling, leveraging US$4 of private capital for every US$1 in MDB capital (US$1.2 trillion).

Fig. 6.2

Tripling annual official development assistance (ODA) related external flows to low- and lower-middle-income countries from 2024 to 2030

Per the discussion above, financing mobilized through the SDR donation part of this proposal would be allocated through the four IMF RST windows as well as a restructured G20 Common Framework supported by its PRGT facility as outlined above (see Table 6.4).

Table 6.4 Resilience and Sustainability Trust (RST) allocation of rechannelled SDRs

These amounts do not include the additional domestic resources that developing countries would likely mobilize in order to attract such complementary international financing, including in the form of local-currency-denominated investments in sustainable infrastructure and increased tax revenues to support the expansion of social protection systems. This could add a further US$750 billion to US$1 trillion to the total resources mobilized by this package. Finally, a second SDR issuance could be considered for the latter part of the 2020s, in particular to maintain the momentum on climate action and the implementation of the broader 2030 Agenda.

The tangible human impact of this more effective use of the public capital already invested in the international financial architecture would be profound, including for each of the dimensions of household living standards represented in the aggregate distribution function of countries. For example:

• Jobs: The employment effects of this additional US$2 trillion in external financing of SDG investment needs in developing countries would be transformational—especially from the major share that would go to finance employment-intensive sustainable infrastructure and industry projects in the energy, water, transport, sanitation, housing, digital, land use, health and education sectors. This additional external financing would enable the creation of tens of millions of jobs, helping to fill a gap that still exists from the pandemic in much of the developing world. The gross employment creation potential of investing adequately in the SDGs has been estimated at over 300 million jobs by 2030, representing more than 10% of the workforce.⁵⁸ Global unemployment stands at around 220 million individuals, with young people accounting for approximately a third of this number and experiencing an unemployment rate of around 13% and a labour underutilization rate three times higher than that of adults in the prime of their working life. The energy system aspect of this investment agenda is, by itself, projected to generate 18 million net additional jobs globally by 2030.⁵⁹ Coal power replacement and avoidance are projected to generate three to four times as many jobs as will be displaced—an estimated four million more in construction alone over the next decade.⁶⁰ Moreover, shifting to a net-zero-carbon economy through healthier and more sustainable diets, which reduce meat and dairy consumption while increasing plant-based foods, could create even more jobs. For example, the Inter-American Development Bank and the ILO estimate that 15 million net new jobs could be created in Latin and America and the Caribbean by 2030 as a result of the transition to net-zero emissions in agriculture and plant-based food production, renewable energy, forestry, construction and manufacturing. In sum, this bold financing agenda would go a long way towards filling the large hole in the labour market that existed before—and was widened much further by—the COVID-19 pandemic.

• Entrepreneurial opportunity: This international resource mobilization agenda would also create enormous opportunity for sustainable enterprise, including small businesses. The Business and Sustainable Development Commission estimates that achieving the SDGs would create up to US$12 trillion in market opportunities across four economic systems representing 60% of the real economy: food and agriculture, cities, energy and materials, and health and well-being.⁶¹ Progress towards the SDGs is well behind schedule, and these increased financial flows would go a long way towards fully funding national sustainable development plans in poor countries and placing the 2030 Agenda on track more generally. Such additional investment in the real economy is sorely needed to compensate for the effects of the COVID-19 pandemic.

• Disposable income, economic security and poverty reduction: This large and sustained increase in investment in employment-intensive infrastructure, industry and health systems would boost household income, expand the availability of material necessities and reduce poverty substantially. Better water, energy, sanitation, transport, housing and digital systems would also boost economic growth, as would the increased domestic funding of health and education which would likely result from the additional fiscal space opened by comprehensive packages of permanent debt relief. In addition, the large sums this financing initiative would make available for social protection floor expansion would place the multilaterally agreed goal of universal social protection within reach, with all that this implies for eliminating the worst forms of poverty that disproportionately afflict the most vulnerable groups in society. Similarly, adequate funding of pandemic PPR would enhance the resilience of entire societies and indeed the world economy.

• Environmental security: This ambitious mobilization of the international financial architecture would also open a viable path towards the stabilization of global warming by the middle of the twenty-first century. First, it would make possible the steep reduction in coal-fired emissions over the next ten years that is a sine qua non for achieving the 1.5 °C and well-below-2 °C scenarios by ensuring that such action also takes place in developing countries with sizable emissions, thereby removing any “free-rider” pretext for richer coal-burning nations to delay their own decisive action. Second, it would massively boost investment in climate-related sustainable infrastructure and industry in other sectors, further accelerating the low-carbon economic transition of economies and delivering on the unfulfilled US$100 billion per year promise of climate financing that developed countries made to developing countries as part of the Paris climate agreement. The stakes for humanity in rapidly getting on to the 1.5 °C or well-below-2 °C curve, and making much faster progress on other key aspects of environmental security such as water stress, biodiversity loss and soil degradation, are extremely high. The current trajectory of nearly 3 °C in global warming is projected to render large parts of the tropics essentially uninhabitable and to turn severe droughts and related fires that are currently once-in-a-century events into relatively common experiences that will occur every two to five years in most of Africa, Australia, Southern Europe, southern and central United States, Central America, the Caribbean and parts of South America.⁶² Below 2 °C of warming, global average sea levels will likely rise by 30 to 60 centimetres by 2100. However, warming of over 2 °C will likely cause sea levels to rise by 61 to 110 centimetres in the same period. Under these circumstances, high-tide flooding that is currently expected only once a century would inundate many large cities and communities as often as every year, and some small island nations would likely become uninhabitable.⁶³

In sum, mobilizing this additional US$2 trillion would make a huge difference to median living standards and human welfare more generally. These positive potential impacts demonstrate what taking multilaterally agreed economic, social and environmental goals more seriously would mean for people on the ground—for the human condition in the twenty-first century. They also demonstrate the enormous opportunity cost for humanity of the current incremental pace of change in development and climate finance.

This strategy to make more effective use of the existing international financial architecture is certainly ambitious, but it is not pie in the sky. The IMF and MDBs have previously used each of the approaches suggested here, just not at scale or as a central organizing principle of their activities. To be certain, strong collective leadership on the boards of these institutions will be necessary to bring about these changes, building on the options and recommendations of two related independent expert groups organized as part of the Italian and Indian G20 presidencies in 2019 and 2023, respectively.⁶⁴ This could be a useful focus of the G20 and UN financing-for-development initiative: leveraging their high-level political character to build the coalition of developed and developing countries within these boards that is necessary to effect such changes. Many shareholder governments and top MDB executives are committed to galvanizing and modernizing these organizations to enable them to serve the international community much more effectively in its unprecedented hour of need. The strategy outlined in this chapter would help them to harness the balance sheets and expertise of these institutions to much greater effect for this purpose.

Such a global resource mobilization partnership would greatly accelerate implementation of the objectives set out in the Paris climate agreement, 2030 Agenda (SDGs), ILO Centenary Declaration for the Future of Work and Global call to action, WHO-coordinated ACT-A/COVAX and Pandemic Fund initiatives and the 2022 Kunming-Montreal Global Biodiversity Framework. Its efficient leveraging of the resources of developed and developing countries and the public and private sectors would have certain parallels to the great international resource mobilization effort of the twentieth century: the Marshall Plan, designed to help Europe recover from the devastation of the Second World War.

The Marshall Plan, or the “European Recovery Program” as it was formally known, provided around 3% of recipient country GDP in aid per year over four years (1948 to 1951), comparable in magnitude to the additional international flows that the proposals presented here would generate for the world’s lower-income and lower-middle-income countries over the next seven years. The aid provided through the Marshall Plan built on a similar level of assistance provided by the United States in 1946–47; however, it differed in several important respects. First, it was a multi-year programme, providing greater certainty and continuity. Second, it financed far more than basic needs; it was a multifaceted recovery programme that supported the reconstruction of infrastructure, the expansion and modernization of industry, and improvements in labour productivity through training and technical cooperation. Third, it required a matching commitment of local currency funds from recipient countries. These were deployed in support of policy reforms intended to sustain the economic momentum and social support of the recovery. Such reforms prioritized capital investment, technical and managerial capacity, and market competition, thereby strengthening European industry’s competitiveness and capacity to generate employment, as well as reducing public debt, which created fiscal space for the important expansion of social protection systems that took place during this period. About half of the war debts of Germany were eventually forgiven, and repayment of the rest was deferred and linked to the country’s capacity to pay (its levels of economic growth and exports). Fourth, the Marshall Plan had a distinctly public–private character. Multi-stakeholder councils were formed in recipient countries to advise on the best use of the grants and loans available through the programme, and the overall leader of the programme was a prominent business executive recruited from American industry.

As such, the Marshall Plan was far more than an aid—or crisis response—initiative; it was a crisis recovery-and-reform initiative that helped post-war Europe literally build back faster and better, avoiding major social unrest and political instability in the process. It not only supported a return of economic output to pre-war levels within a few years, but also corrected a number of structural and institutional weaknesses that had hampered the performance of European economies during the interwar period.⁶⁵ In other words, the Marshall Plan played a crucial catalytic role in the post-war rebalancing of Europe’s economic growth model and social contract, which in turn enabled decades of strong, socially inclusive economic progress.

An analogous effort is needed today on a global scale to help economies and societies build forward faster and better from recent crises. A Marshall-Plan-like recovery-and-reform strategy is required to supplement and, ultimately, supplant the individual, largely crisis response, measures of nations, as important as these have been. As was the case in Europe after the Second World War, the speed and sustainability of recovery depend on reinforcing the key building blocks of broad-based economic and social progress: widely available employment and training; stronger worker and social protection; the deepening of other public institutional frameworks that enable more inclusive and dynamic growth; increased investment in the real economy; and, in today’s context, accelerated and more equitable progress on the pandemic and climate change. Such increased social investment is also the key to achieving a just transition from our fossil-fuel-based energy system.

The architects of the Marshall Plan—as well as the UN system and the Bretton Woods institutions—deliberately sought to learn from the mistakes of the interwar period. There are analogous lessons to be learned today about the nature of the growth and development model of recent decades, in particular its socially and environmentally unbalanced nature and the deep-rooted perceptions of unfairness that this has engendered in parts of the world. These frustrations are reflected on the street and in government councils in a wide range of countries. They are manifest most visibly at international level in the long-standing stalemate at the WTO and the increasingly contentious debate within the UNFCCC about the unfulfilled commitment made by developed countries to provide US$100 billion per year in climate finance to poorer countries.

Industrialized countries, which hold the majority of votes in IFIs and have the world’s largest capital markets, bear certain historical responsibilities with respect to global inequality⁶⁶ and climate change.⁶⁷ The pandemic and global warming are further entrenching inequalities and perceptions of injustice around the world. This would be an appropriate moment for these countries, in the interests of the long-term cohesion of the international system as well as their own national security, to provide a fresh round of leadership to and support for these institutions, inspired by the admonition enshrined in the foundation stones of the ILO’s original headquarters which paraphrases its 1919 Constitution: “Si vis pacem, cole justitiam”—“If you desire peace, cultivate justice.”

There has been much discussion in recent years about placing greater emphasis on global public goods in the operations of the Bretton Woods institutions and regional MDBs. The foregoing analysis demonstrates that the resources exist within them to drive a Marshall-Plan-like effort to greatly increase investment in the people of low- and middle-income developing countries other than China (which has ample international reserves)—in their health, productivity and economic opportunity, as well as in their social and environmental security. This would enable the international community to emerge from the current set of crises faster, stronger and more politically cohesive, while laying the foundation for the more inclusive, sustainable and resilient growth and development model to which world leaders have been aspiring since the Great Financial Crisis.⁶⁸

This optimization of the international financial architecture’s existing capital and capabilities would enable countries containing nearly two-thirds of humanity, accounting for almost half of global GDP,⁶⁹ to benefit from a US$2 trillion step change in external investment in the employment, basic necessities and social protections of their people between 2023 and 2030. It would also bring the international financing of global climate change to multiples of the US$100 billion per year target that has never been met, while fully funding the new Pandemic Fund, increasing its current committed funding sixfold. The resulting sustained increase in median household income, labour productivity and consumer confidence would raise aggregate demand and economic growth within developing economies and far beyond them, creating a virtuous circle of more rapid and resilient global growth and development.

In other words, the multilateral system already has the means at its disposal to become a truly transformational force for the reversal of global disease, inequality and greenhouse gas emissions, strengthening social cohesion and political stability along the way. These are the most important IFI reforms that are necessary to unlock that potential. The United Nations has called for a “decade of action”⁷⁰ on the SDGs and the Secretary-General has presented a supporting “SDG Stimulus” proposal⁷¹; this agenda would go a long way towards bringing about the more networked and effective form of multilateralism required to make such action and financing a reality.⁷²

International Trade and Technology Governance

Trade and technology present special challenges for the practice of human-centred economics. Per the original insights of Adam Smith and David Ricardo, international trade and investment liberalization promotes resource allocation efficiency by facilitating specialization of production in areas of current or nascent comparative advantage. It also often embodies—introduces into the receiving economy—productivity-enhancing technologies and processes. In short, these two areas of international economic policy and cooperation are key drivers of GDP—the quantity of economic growth. The extent to which they also contribute to broad-based progress in living standards—the social quality of growth—depends importantly on the institutional context into which they are introduced, the robustness of the host country’s aggregate distribution function.

Much has been made in recent years about the tendency of trade liberalization and technology adoption to widen inequality. But increased inequality and insecurity are not preordained outcomes of international economic integration and technical progress. They are potential risks, but not inherent or immutable ones. Governments can mitigate them by in parallel increasing investment at home in worker protections, skills and transitions, social protection systems and the enabling environment for entrepreneurship and innovation—what the ILO calls the “institutions of decent work”. This is the international economic policy corollary of the golden rule of human-centred domestic economic policy described in Chap. 5—namely, that governments at all levels of economic development should place at least as much emphasis on strengthening the distribution functions as the production functions of their economies, especially during periods of economic transition and transformation.

International trade and investment agreements need to be routinely accompanied by increased domestic investment in the institutions of decent work if globalization (and regional economic integration) is to be become a more reliable force for broad progress in living standards. It is the combination of the two that helps to advance efficiency as well as inclusion as an economy integrates more deeply into the world economy. Unfortunately, this combined approach is largely missing from both economic practice and pedagogy, partly because these two policy portfolios are highly segmented—i.e., siloed—in both governments and international economic governance, and partly because of the subordinate treatment of institutions generally by the neoliberal growth and development paradigm of the past two generations.

It was not supposed to be this way. The first clause of the WTO’s 1994 charter, drawn directly from the precursor 1947 General Agreement on Tariffs and Trade (GATT), states,

Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development …⁷³

Similarly, the ILO’s 1944 Philadelphia Declaration, agreed only months before the Bretton Woods conference establishing the IMF and World Bank, stated,

Believing that experience has fully demonstrated the truth of the statement in the Constitution of the International Labour Organisation that lasting peace can be established only if it is based on social justice, the Conference affirms that:

• (a) all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity;

• (b) the attainment of the conditions in which this shall be possible must constitute the central aim of national and international policy;

• (c) all national and international policies and measures, in particular those of an economic and financial character, should be judged in this light and accepted only in so far as they may be held to promote and not to hinder the achievement of this fundamental objective;

• (d) it is a responsibility of the International Labour Organization to examine and consider all international economic and financial policies and measures in the light of this fundamental objective;

• (e) in discharging the tasks entrusted to it the International Labour Organization, having considered all relevant economic and financial factors, may include in its decisions and recommendations any provisions which it considers appropriate.

In short, modern international trade, labour and financial institutions were born with a certain logical hierarchy in their stated purpose. Trade and financial cooperation were explicitly conceived as means to improved living standards, material well-being and social justice rather than as objectives in their own right, with the expectation that they would be closely coordinated with labour and social security cooperation so as to “ensur[e] full employment and a large and steadily growing volume of real income and effective demand”. The parallel reference to their intended contribution to environmental objectives was added later, in the 1990s, as the international community became more conscious of their critical importance for living standards, material well-being and social justice.

This original human-centred framing of the international economic architecture implied a certain degree of coordination, even co-creation, among these institutions. But such structural coherence in trade, labour, environmental and technology policy never developed within multilateral system. It has begun to emerge plurilaterally, particularly in preferential trading arrangements (PTAs) such as free trade agreements. Over 100 regional trade agreements, covering 140 economies, contain labour provisions,⁷⁴ and nearly 300 different environmental provisions can be found in the texts of about 630 PTAs.⁷⁵ But most of these provisions are more general and aspirational than specific and binding. And most developing countries lack sufficient institutional capacity to adequately implement and enforce them, which leads all too often to regulatory arbitrage and a race-to-the-bottom dynamic among multinational companies under constant market pressure to reduce costs. This deficit in the policy coherence and operational connectivity of international trade, technology, labour, environmental and development institutions is a signal failing of the past two generations of international economic governance. It impedes the human-centred rebalancing of the world economy that citizens and their political leaders have been appealing for since the 1999 Seattle WTO ministerial meeting by perpetuating policymakers’ treatment of trade liberalization and technical progress as objectives in themselves rather than as instruments that need to be accompanied by proper investment in domestic institutions in order to produce a higher quality as well as quantity of economic growth. Following are some of the most important policy coherence and operational connectivity reforms required to bring these organizations more fully into alignment with the first principles enshrined in their charters in this regard—with a Roosevelt Consensus vision of growth and development emphasizing the co-equal importance of institutions and living standards, on the one hand, and market forces and growth, on the other.

Trade, Decent Work and Development Cooperation

The Decent Work Agenda of stronger domestic investment in people—their employment opportunities, capabilities and transitions as well as their labour and social protections—provides the most effective pathway for ensuring that the gains to living standards from international economic integration are shared as widely as possible. International trade, labour, and development cooperation institutions could do far more to work in concert to support member states in this regard, strengthening the multilateral trading system in the process.

The WTO and ILO could lead the way by jointly articulating and facilitating implementation in countries of the fundamental principle that integration in the world economy and domestic investment in the Decent Work Agenda go hand in hand. Trade liberalization and increased investment in labour and social protection institutions are necessary complements with important synergies for living standards, employment and sustainable development. For example, a WTO–ILO Trade and Decent Work programme of policy guidance and dialogue, technical and capacity-building assistance, and research and thought leadership would send the right signals to interested member states. This should be reinforced by development cooperation institutions providing additional resources to countries that choose to follow this guidance and increase their investment in these institutions as part of their engagement in regional free trade areas and other PTAs or their implementation of WTO obligations.

Such a stronger facilitative, as opposed to mainly legal, approach could go a long way towards strengthening the coherence of trade and labour policies on the ground while respecting the terms of the 1996 WTO Singapore Declaration, which excluded negotiations on labour norms in the WTO. At the same time, it would advance the objectives of the ILO’s 1998 Declaration on Fundamental Principles and Rights at Work and 2008 Declaration on Social Justice for a Fair Globalization, which stated, respectively, that “labour standards should not be used for protectionist trade purposes” and that “the violation of fundamental principles and rights at work cannot be invoked or otherwise used as a legitimate comparative advantage”.

More specifically:

• Policy dialogue: The WTO and ILO could jointly articulate this more human-centred model of trade and investment integration in a range of international fora, including their respective governing bodies. They might also co-sponsor policy dialogues involving trade and labour ministries for the purpose of encouraging the cross-fertilization of country experience and good practice. And they might offer to support national social dialogues that engage employer and worker organizations in discussion with governments about the identification of priorities and the formation of national Trade and Decent Work strategies.

• Technical and capacity-building assistance: The two organizations could also engage in a joint effort to mobilize additional development cooperation resources to support implementation of the Decent Work Agenda in developing country member states engaged in international trade and investment liberalization. Investment in the institutions of work, including the translation of international labour standards into national law and implementation mechanisms and the establishment or expansion of social protection systems, requires a sustained commitment of resources and technical expertise. As argued above, this aspect of institutional capacity-building has been underemphasized by development cooperation institutions, despite its central importance for the inclusiveness of trade in developing and developed countries. The ILO and WTO could work together to address this challenge by encouraging donors to strengthen support for developing country member states that seek assistance with decent work capacity-building strategies as part of their trade and investment liberalization efforts. Additional funding mobilized for this purpose could be administered through a new “Aid for Trade and Decent Work” facility or as a new track within the existing Aid for Trade initiative, which over the years has devoted only a small fraction of its resources to this crucial aspect of the enabling environment for inclusive trade and development.⁷⁶

  The two organizations could work to connect interested countries to specific sources of relevant expertise and financial assistance. For example, with respect to skills development the ILO’s Skills for Trade and Economic Diversification programme works with policymakers and industry to identify those sectors with growth potential and then identify the skills needed in those industries and build up the capacity of training providers to meet them. The programme develops a chain of economic analysis and partnerships that can turn the potential of trade into the reality of more diversified economies and the creation of more productive and decent jobs. Industry skill councils and other partnerships target training on genuine trade and employment growth opportunities and reduce the risks of skills mismatches. They also open opportunities for smaller businesses along the value chain. The ILO’s Better Work programme, which it operates in partnership with the International Finance Corporation of the World Bank to promote decent work and better business practices in the garment industry, could be a model for other industrial sectors facing particular widespread decent work deficits.

  Finally, at the request of member states participating in PTAs that include labour provisions, the ILO could offer its technical support in the implementation and monitoring of such provisions supported by social dialogue. Its recent role in facilitating the strengthening of Mexican labour institutions and supporting dispute resolution aspects of the US–Mexico–Canada Agreement (USMCA) is a potential model on which to build in this regard.⁷⁷

• Analytical tools: The WTO and ILO could also work more closely together to develop and disseminate analytical tools countries can use to proactively assess their priority challenges and opportunities with respect to trade and decent work. For example, in recent years the ILO has developed the following resources:

  • i. Trade and Decent Work: Indicator Guide.⁷⁸ This Guide offers a broad set of labour market indicators for trade policy assessment which can be used in studies examining the nexus between trade and the quantitative and qualitative aspects of employment. In addition to framing the indicators most suitable for analysing the impact of trade policy on the labour market, the Guide facilitates the use of these indicators in macro- and micro-assessments by providing an overview of measurement approaches, relevant data sources, links to trade theory, and empirical evidence.

  • ii. Trade and Decent Work: Handbook of Assessment Methodologies.⁷⁹ This Handbook presents and compares methodologies for assessing the impact of trade on various areas of decent work. It traces approaches ranging from the macro- (country), through the meso- (industry/sector), to the micro-level (firms and workers), examining their strengths and weaknesses. Particular attention is paid to the micro-level, since analysis at that level, especially using linked employer–employee data sets, allows one to understand better the distributional effects of trade.

  • iii. Labour Provisions in Trade Agreements Hub.⁸⁰ The ILO’s Labour Provisions in Trade Agreements database and web portal provides an extensive, structured compilation of labour provisions in trade agreements. Drawing upon the WTO’s Regional Trade Agreements Information System (RTA-IS) database, it provides access to the text of labour provisions in over 100 RTAs representing 140 economies. This represents just under a third of the total of 357 RTAs in force and notified to the WTO as of early 2023. The database could be extended to include labour provisions of major international investment agreements in a further stage of research.

  • iv. Sectoral and value chain analytics. The ILO has developed a survey and mapping methodology for measuring the decent work deficits in an industry/sector as part of its work on global supply chains. The aim is to introduce transparency and data (quantitative and qualitative) in industries that are most relevant to trade. This approach could be further developed to expand understanding of the impact, both positive and negative, of international trade and supply chains on decent work. It could look at employment and skills indicators as well as forced labour indicators. The methodology offers flexibility in the type of indicators measured and could help stakeholders develop policies and action to address these deficits, building eventually into a database of information that goes beyond and complements existing databases such as the World Input–Output Database.

• Multilateral framework development: The two organizations might eventually wish to consider collaborating on the development of a framework for integrating facilitative and normative aspects of the relationship between trade and decent work in the WTO’s Trade Policy Review Mechanism, potentially as part of a broader process aiming to include sustainable development considerations more fully in this important function of the WTO. Broader uptake of the analytical tools and policy dialogue opportunities outlined above could ultimately enable a joint WTO–ILO global analysis of PTA labour provisions and a corresponding discussion of the lessons learned from their implementation and facilitation. Such a comparative analysis could be a useful point of departure for an eventual discussion among PTAs co-convened by the WTO and ILO on opportunities to align their provisions with good or best practice in this area and facilitating increased development assistance to fill institutional capacity gaps. Such a structured process of normative alignment and increased investment would have the virtue of reducing complexity for companies and other stakeholders and creating synergies with the growing movement for labour-related due diligence of firms within their global supply chains, such as the requirements recently enacted by the German government⁸¹ and under development in the European Union.⁸² This might even make possible one day a multilateral accord on Trade and Decent Work, perhaps modelled on the WTO Trade Facilitation Agreement in which developing countries undertake different levels of obligations as a function of their capacity to implement them, supported by the dedication of additional resources for this purpose by development cooperation institutions.

  The USMCA replacing the North American Free Trade Agreement represents leading practice in this respect. Signed in 2018, its labour provisions are the culmination of 35 years of iterative development of US trade policy. They represent a major step beyond the treatment of labour issues in earlier trade and investment preference programmes and free trade agreements with respect to both facilitation and enforcement.⁸³ Novel features in the Agreement’s labour chapter include over US$200 million in institutional capacity-building assistance to support Mexican implementation; a presumption of a link between any alleged labour rights violations and trade flows unless proved otherwise by the respondant; and creation of a Rapid Response Mechanism with a cascading series of time-limited investigation, consultation and adjudication processes.

In sum, a rebalanced and more cooperative normative and facilitative approach to trade and labour issues, organized at the plurilateral level but enabled by a much deeper collaboration among the WTO, ILO and multilateral and bilateral development institutions, could provide a pragmatic basis for moving the international debate on trade and labour beyond where it has been stuck since the WTO Singapore Declaration a quarter of a century ago. With the right blend of policy innovation and trade–labour–development institutional coherence, substantial progress is possible on this crucial but politically sensitive aspect of a more inclusive model of globalization.

Trade, Digitally-Enabled Services and Decent Work

The availability of cloud infrastructure and computing services to store, process and communicate information has accelerated the pace of technological change.⁸⁴ The COVID-19 pandemic and the counter-measures implemented by firms and governments (e.g., remote work, digital passes, virtual meetings) have accelerated the digitalization of the economy and workplaces, including the automation of management practices and human resource (HR) policies. Algorithmic management, surveillance and tracking, and other feedback mechanisms are increasingly being used by firms in sectors such as logistics, transportation and storage services, manufacturing, and health care, among others, to organize, monitor and evaluate the performance of work.⁸⁵

Algorithmic management is not entirely new, and many of its key features have historical precedents in Max Weber’s idea of bureaucratic organization⁸⁶ and Frederick Winslow Taylor’s scientific management.⁸⁷ However, digital technologies are enabling the parcelling, distribution and monitoring of tasks in real time and at scale, including in ways that span regulatory jurisdictions and national boundaries. The adoption of algorithmic management techniques can provide assistance, direction, prediction and more to management and employees, which can lead to increased productivity. However, it can also create new challenges for workers’ rights and job quality. For instance, surveillance through algorithmic management, wearable devices and other sensors can have adverse effects on worker well-being and retention, and the use of algorithms in the recruitment and performance evaluation of workers can perpetuate or create new forms of discrimination, especially if the data used for predicting such algorithms are biased.⁸⁸

While adoption of these tools and practices may be at an early stage, it is already clear that they present significant risks as well as opportunities for decent work and median living standards.⁸⁹ One open and troubling question for public policy is the extent to which they are being applied in a manner that treats labour like a commodity—a twenty-first century version of Taylorism and Fordism. Another is whether on balance they promote the replacement or augmentation of labour, sometimes also referred to as “destructive” versus “transformative digitalization”.⁹⁰

While the jury may still be out on these questions at a macro-level, we already know that the use of algorithms and other digital devices is profoundly changing workplaces—that is, the conditions under which work is carried out and employment contracts and relationships are structured. This transformation raises new questions for labour regulation—for example, regarding algorithms making decisions about worker contracts; new psychosocial and physical OSH risks⁹¹; or regulations in various domains which are no longer fully fit for purpose. The ILO is undertaking a stock-taking of relevant national regulation and international norms with a view to identifying gaps as well as good practices that may merit broader and more consistent application given the cross-border nature of many of the firms that use such tools.

These digital tools and practices have further exposed the limits of labour regulation bounded by physical jurisdictions and conceived for the production of tangible products. Jobs that were once considered “non-tradable” and thus protected from global competition—such as that of an administrative assistant—have now become a tradable service, readily available through a digital platform at a competitive price. The limitations of state-based regulation were already apparent in a world economy increasingly characterized by cross-border supply chains, but platform work and other forms of cross-border digital employment relationships and human resource management practices are compounding these weaknesses.⁹²

Thus, digitally-enabled services present a new frontier for international trade policy and its relationship with decent work. Their importance in terms of value added is growing rapidly, as are the heterogeneity and complexity of their treatment by national regulation. Absent an agreed baseline level of international practice, a race-to-the-bottom competitive dynamic could take hold in the coming years. Thus far, PTAs have been the primary venue for policy coordination in this domain, but so far such agreements have focused mainly on market access issues, such as data localization, and placed limited emphasis on safeguards for workers and consumers.

Employee and consumer data protection and portability, on the one hand, and enterprise algorithmic management accountability are two of the most common challenges in this domain, relevant to both platform and more traditional forms of work. As such, they are good starting points for the development of common international principles and standards through a process of international dialogue involving trade, labour and other relevant policymakers. The result of such deliberations could be a model trade agreement chapter on Trade, Digitally-Enabled Services and Decent Work, which could be integrated into existing or new PTAs.

A 2022 ILO background paper prepared for a meeting of experts on decent work in the platform economy made the following observations, which are equally relevant to non-platform work in companies that utilize these services:

the advances made by platforms and their capacity to capture data have led to growing concern about the protection of workers’ personal data, and legal instruments on data protection are appearing or being reassessed in virtually every region of the planet.⁹³

Examples of these are the OECD Guidelines Governing the Protection of Privacy and Transborder Flows of Personal Data (revised in 2013), which have had a decisive influence on initiatives taken in many parts of the world, and the General Data Protection Regulation in Europe (2016). But it is the ILO code of practice on protection of workers’ personal data (1997) which could guide the actions of platforms in this regard, especially the application of the following basic rights: (i) to be informed about personal data being held and about its processing; (ii) having access to personal data regardless of whether it undergoes automated processing; (iii) the possibility to request the deletion or correction of inaccurate or incomplete personal data; (iv) a guarantee that decisions concerning a worker should not be based solely on the automated processing of that worker’s personal data; and (v) a guarantee that the processing of personal data should not lead to any discrimination.

Furthermore, in platform work it is especially important to have portability of data from one platform to another, so as to provide a curriculum vitae that can facilitate mobility between platforms and transfer a worker’s ranking from one platform to another. This portability is now one of the most commonly made recommendations on platform work⁹⁴ and is already recognized as a right of individuals by the General Data Protection Regulation (Article 20) and by the Standards for Personal Data Protection for Ibero-American States (Article 30).

But if one thing characterizes platform work, it is algorithmic management. It is an algorithm that offers and grants services or tasks to workers, defines their time slots, calculates the rankings on which their activities and income depend, and decides whether they will continue to provide services for the platform or remain deselected from it. However, little or nothing is known about the algorithm by the workers who are subject to its dictates because it is opaque and at times incomprehensible to them. Also, algorithmic decisions are not always neutral. The data that feed into algorithms can contain biases which ultimately introduce discrimination into the decisions taken by them.

This is not simply a possibility, there are already examples. In Italy, a judgment has declared that the algorithm used by a delivery platform causes discrimination among delivery drivers because it does not take into account the reasons why they might not perform services in a slot previously selected by them or cancel a slot 24 hours in advance, those reasons perhaps being that they are exercising their right to strike or are ill.⁹⁵ In the Netherlands, a judgment confirmed the right of a transport platform to use an algorithm for taking decisions, but also its obligation to make transparent the data and main evaluation criteria fed into the algorithm so that workers can understand them and test their lawfulness.⁹⁶

What many people regard as a key factor in relation to algorithmic decisions is the need to recognize their existence and their legitimacy in platforms’ decision-making, and to submit the algorithms to a process of transparency and evaluation. Some national policies point in this direction. In Spain, Law No. 12/2021 of 28 September … regulates the right of worker representatives to obtain information on “the parameters, rules and instructions at the basis of the algorithms … which influence decision-making that can affect working conditions [and] access to and retention of employment” (one single article). However, there is a regulatory vacuum within the ILO on this matter.⁹⁷

In 2019, the ILO’s independent Global Commission on the Future of Work went further and called for a multilateral governance system that would require platforms and their clients to respect certain minimum rights and protections.⁹⁸ The Commission drew its inspiration from the ILO Maritime Labour Convention, 2006 (No. 186), which sets a guiding precedent because it concerns seafarers who transcend geographical borders and involves multiple parties operating across different jurisdictions. The Commission suggested that an analogous approach could be considered for digital labour platforms, and it called for a “human-in-command” requirement in the regulation of data use and algorithmic accountability across the world of work. The tripartite ILO Centenary Declaration subsequently called in more general terms for “policies and measures that ensure appropriate privacy and personal data protection, and respond to challenges and opportunities in the world of work relating to the digital transformation of work, including platform work”.⁹⁹

A combination of hard-law and soft-law regulatory frameworks at the plurilateral and perhaps one day multilateral levels is needed to adequately address the challenges the digital economy poses to trade and decent work. The place to begin is an international regulatory dialogue and process of policy coordination to clarify and then narrow the regulatory gaps and discontinuities and to reinforce the application of universal labour standards.¹⁰⁰ This process could focus initially on developing a common baseline of safeguards regarding employee and consumer personal data protection and portability as well as enterprise algorithmic accountability. It could be extended over time to other decent work aspects of trade in digitally enabled services, including but not limited to digital labour platforms. These could include OSH protections and the use of algorithmic monitoring, work–life balance in remote work, transparency in platform ratings and rankings, and remote worker–management cross-border dispute resolution.

Trade and Climate Change

The most important current deficit of policy coherence between the international trade and environment regimes is in the area of climate change. This disconnect risks creating major political tension in the coming years, particularly in light of the European Union’s plans to implement unilaterally a Carbon Border Adjustment Mechanism (CBAM) in 2026.¹⁰¹ Under this initiative, additional import duties would be levied on certain industrial products according to their carbon intensity relative to that of competing European products. Such tariffs would very likely be challenged under and quite possibly violate the WTO’s rules,¹⁰² leading to potential retaliation against them.

For years, the multilateral trading system has sought to maintain a certain degree of openness to and interoperability with national and international environmental policy developments. Its jurisprudence has accorded a measure of deference to multilateral environmental agreements. And it has blessed plurilateral negotiations among 18 parties on an Environmental Goods Agreement aiming to eliminate tariffs on a number of environment-related products. However, the post-war trade architecture, including the WTO, has never faced an environmental challenge of the magnitude and urgency of climate change or the coming dispute over carbon border adjustments in particular.

With the scientific community warning that the window available to meet the Paris climate agreement’s goals is beginning to close, it is time for the trading system to get ahead of this curve and shift from a reactive and incremental posture into a more proactive and catalytic mode. It can and should become an influential driver of climate action rather than merely seek to avoid becoming an obstacle to it. This will require a new geometry of both trade and climate cooperation, including a different cast of diplomats from that which produced the Kyoto and Paris accords.¹⁰³ Foreign and environment ministries were the key players in the creation of the UNFCCC’s Kyoto Protocol in 1997 and the Paris climate agreement in 2015, with crucial input from the scientific community through assessments organized through the IPCC. This time around, economic ministries (finance, trade, energy, transport, infrastructure, development, technology) will need to be centrally engaged, with active input from the business, financial and civil society communities.

While the climate diplomacy of the past two decades has taken place at the multilateral level in the United Nations, this new economic phase will require a more purpose-built and variable configuration. Since the speed and volume of greenhouse gas emissions reductions is what matters most, a universal, multilateral approach will be unnecessary and even counterproductive. Global emissions are concentrated in a limited number of locations and industrial sectors, so there is no need to seek unanimous agreement among the United Nations’ nearly 200 member states.

The best approach would be for a group of like-minded major economies to use their combined market power to speed the diffusion of low-carbon goods and services by aligning their policy incentives and standards in ways that create greater economies of scale and lower transaction costs for producers. A coalition of countries with big markets and ambitious environmental goals as well as supportive business communities could together accelerate a shift of production and consumption patterns, directly at first within their own sizable collective share of the world economy and then indirectly in other markets as these expanded economies of scale drive down production costs of low-carbon goods and services and make them more affordable globally.

Examples of climate-related economic cooperation have begun to emerge over the past several years. For example, the Major Economies Forum, WTO environmental goods negotiations, Carbon Pricing Leadership Coalition,¹⁰⁴ RE100,¹⁰⁵ the FSB Task Force on Climate-Related Financial Disclosures,¹⁰⁶ and other initiatives have all taken important steps forward. But, relative to the challenge the world faces, these are baby steps—fledgling and uncoordinated efforts that unfortunately are not yet making a major difference in production and consumption patterns where they would most affect global emissions.

A vanguard coalition of countries could, however, generate a significant change in the pace of low-carbon adoption in the world economy by working together in a new kind of international trade and investment alliance to shift the relative prices of the high- and low-carbon goods and services within their markets. Indeed, a growing chorus of citizens and business, civil society and international organization leaders have been calling for the introduction of “a price on carbon”. This drumbeat is growing louder, but it is an appeal that suffers from being too narrowly focused, potentially to the point of making the perfect the enemy of the good.

The most effective way to shift the relative prices of low- and high-carbon alternatives would indeed be to impose a broad carbon tax or implement a national cap-and-trade scheme. But these policies have been slow to spread, and when adopted—often at considerable political cost—they have yielded modest results relative to the scale and speed of transformation that are required. While the idea of putting a price on carbon may appear to be a magic bullet, in the real world it has so far been a disappointment.

The focus of climate change strategy therefore needs to expand beyond carbon pricing on an economy-wide basis to using a much larger set of policy tools to shift relative prices with respect to specific carbon-intensive products, as well as magnifying the combined market pull of these incentives by jointly applying them across as many of the world’s largest markets as possible.

There are multiple ways, beyond a broad tax or cap-and-trade scheme, to shift the relative prices of high- and low-carbon goods in an economy, whether via tariffs, procurement, financing, corporate governance, subsidies and performance-based technical standards, or targeted tax, investor disclosure, or emissions-trading rules and policies. Some of these instruments have the potential to influence prices directly, others more indirectly through a shift in purchasing behaviour that generates expanded economies of scale for low-carbon technology producers.

The actors relevant to this broad economic agenda are currently scattered across many different ministries, international organizations, and industries. Each has no shortage of challenges and priorities on its traditional turf, which is why the machinery of international economic cooperation has remained so quiet in the fight against climate change for so many years. Only presidents and prime ministers—whose authority spans finance, trade, development, infrastructure, energy and technology ministers—can galvanize the necessary domestic and intergovernmental action. And only they can compel the engagement of the key business leaders in their societies who are needed to co-design and support such a strategy.

Leaders of the European Union, Japan, South Korea, Canada, Brazil, China, the United Kingdom and the United States have all articulated support for accelerated climate action. A critical mass of them could translate these good intentions into much more decisive action by agreeing to create a new kind of international economic agreement to collectively scale market incentives for low-carbon adoption. By creating a low-carbon economic zone that aims to take full advantage of the growing price competitiveness of clean technology and industrial products, they would add fresh momentum to humanity’s race against time, propelling faster adoption of clean technology in a group of the world’s most important economies and driving down the relative prices of these products worldwide in the process.

This new type of “trade” agreement could take a flexible approach to the terms of membership, requiring each member country to commit to implementing at least half of the policies on its agreed action agenda within a certain number of years, while encouraging all to adopt as many as possible over time. Its policy menu could include: zero tariffs for a defined set of low-carbon goods and services¹⁰⁷; common energy efficiency standards for government procurement of energy-intensive goods and services; mutual recognition of technical standards for related goods and services; minimum, time-bound targets for the reduction of fossil fuel subsidies¹⁰⁸; a trade dispute peace clause and consistent rules on the use of clean energy subsidies; implementation of the forthcoming ISSB global baseline climate disclosure standards for corporations; coordination of efforts within the boards of multilateral development banks to have them make more effective use of their balance sheets to mobilize the private finance necessary for climate mitigation and adaptation in key developing countries¹⁰⁹; alignment of policies in carbon-intensive sectors such as maritime, aviation, cement, steel, and oil and gas; coordination of basic and applied clean energy research to avoid wasteful duplication and to speed the rate of technical progress¹¹⁰; linkage of emissions-trading systems; and mutual recognition of the rough equivalency of domestic carbon pricing and regulatory schemes to avoid the tit-for-tat imposition of border adjustment taxes on one another’s carbon-intensive products in the name of industrial competitiveness.

Such an open, expanding low-carbon zone within the world economy would help to scale up demand for low-carbon goods and services by embedding and aligning price advantages for them through linked trade, procurement, regulatory, tax and investment rules. A virtuous cycle of policy leadership, technological innovation and market forces would ensue. And the risk of border adjustment tax disputes relating to differences among national carbon emissions reduction approaches could recede as member countries use this green trade alliance as a mechanism to recognize the equivalency of effort of each other’s carbon pricing and regulatory policies and eventually to negotiate a common framework at either the national level or within key industrial sectors.

An international climate action leadership club of this nature need not be restricted to national governments. City and provincial governments could be invited to accede to those elements of the menu within their jurisdiction, particularly with respect to procurement rules and energy efficiency product regulations.

Supplementing the trade and climate cooperative architecture in this manner would accelerate the implementation of the Paris climate agreement by speeding up the underlying economic transformation that is needed before nation-states can fully realize the political commitments they have made.

The world urgently needs to build on the Paris climate agreement, not rest on its laurels by hoping for the best from voluntary national plans. The best way to do so is to think beyond the current, largely siloed, trade and climate regimes—beyond the WTO and regional free trade agreements, on the one hand, and the UNFCCC and Paris climate agreement, on the other. In particular, economic institutions and policies need to be at the centre of this new effort—and that will only happen if a group of the most like-minded heads of government of major economies compels it. Only they can cut the Gordian knot of fragmentation and inattention that has plagued international economic cooperation on climate change for so many years.

A number of useful building blocks for such an approach have recently been established. Principal among them is the “Climate Club” which was agreed during the German government’s presidency of the G7 in 2022. The Club will focus initially on facilitating the decarbonization of hard-to-abate industrial sectors, but it will also include a strategic dialogue on industrial “carbon leakage” and “platform for alignment, matchmaking on a voluntary basis and creating synergies between cooperation and funding instruments, thereby improving the enabling environment for industry decarbonisation in emerging economies and developing countries”. The Club will have a flexible architecture in terms of both substance and membership. It has indicated that members are not required to participate in every workstream; other economic aspects of climate cooperation may be added to its agenda over time; and other “climate-ambitious” non-G7 countries are welcome to join.¹¹¹

This is a promising example of the new enabling architecture the world will need this century to stimulate faster climate action where it is most needed in the world economy—and to avoid trade disputes in the process. If the most important industrial economies can agree on a framework to recognize the rough equivalency of each other’s disparate approaches to internalizing climate-related externalities in their industrial production—whether through direct regulation or market mechanisms or the infinite possible combinations of the two—then this will obviate the need for them to impose carbon border levies, avoiding a cascade of major trade disputes that the WTO is not adequately designed to adjudicate.

Another potentially complementary building block in this regard is the recent effort by the OECD to develop an agreed methodology for estimating the carbon mitigation effectiveness of various policy instruments. Its Inclusive Forum on Carbon Mitigation Approaches aims to “develop a rigorous assessment of cross-country and country-level mitigation policies by taking stock of price-based and non-price-based climate change mitigation policies and assessing the impact of different policy approaches on greenhouse-gas emissions”.¹¹² Such analysis could form the basis of the kind of mutual recognition regime that will be needed to avoid border adjustments and trade disputes among major industrial exporters. The Forum aims to include both OECD and non-OECD members.

Major economies should embrace and build on these initiatives to create the more comprehensive plurilateral trade and climate architecture I describe above, taking inspiration from not only the German G7 initiative but also another nascent green trade alliance of smaller and more ambitious countries, the Agreement on Climate Change, Trade and Sustainability.¹¹³ A sizable group of countries from both of these exercises might even seek to launch and complete later in the 2020s a results-oriented Climate Change Round of plurilateral trade negotiations that incorporates several of the approaches presented here. Such a high-profile initiative would contrast with the commercially oriented, single-undertaking multilateral rounds of negotiations of prior decades, including the most recent one that failed, the Doha Round. This is the essence of the deeper policy coherence and operational connectivity between the international trade and environmental regimes which are necessary to speed the industrial decarbonization of major economies while avoiding a debilitating trade war among them triggered by the unilateral imposition of carbon border levies.

Conclusion: Making the Sum of International Economic Cooperation Greater Than Its Parts

Since the Great Financial Crisis, there has been a great deal of discussion about updating the international economic architecture to address global challenges, particularly with respect to enhancing inclusion, sustainability and resilience. But there has been relatively little progress in the past 15 crisis-ridden years, with the exception of macroprudential policy and the creation of the FSB. Part of the reason for the relative stasis in international economic governance has been the lack of a core logic—a set of guiding principles or design specifications to guide the renovation project. The absence of a new compass setting, combined with the siloed way in which the principal international organizations are governed by different sets of ministers, the reticence of the G20 despite its mission as the “premier forum for international economic cooperation”, and a conspicuous lack of engagement and investment of political capital by leaders, has produced a decade of well-meaning but marginal progress.

This chapter has presented a blueprint for a major institutional renovation of international economic cooperation guided by the human-centred, living-standards-of-nations logic set out in Chap. 4. The blueprint would insert social contract institution-building into the heart of macroeconomic policy advice and analysis, including debt sustainability methodology, defining “macro-criticality” in a larger development sense more explicitly and quantitatively. It would transform international development and climate finance by tripling such investment flows for more than 80 of the poorest countries for the remainder of the 2020s, finally responding at scale to the increasingly urgent appeals of poor and vulnerable developing countries, such as those included in the Bridgetown Initiative.¹¹⁴ This reform agenda would also retire and replace most of the world’s coal-fired power-generating capacity over the next 15 years and double investment in renewable energy research and development—frontally attacking humanity’s biggest near-term obstacle and literally doubling down on its best long-term hope for the fulfilment of the Paris climate agreement, respectively. At the same time, it would institutionalize a rebalanced, high-road model of international trade integration by coordinating trade, labour, climate change and development cooperation to a far greater extent through new types of plurilateral trade agreements, including one that could help to prevent a global trade war by creating a more workable solution than unilateral action to the thorny issue of climate leakage. Finally, it would give the WTO a new lease on life as the convenor of discussions among plurilateral trade agreements and their members about how the best normative and facilitative features of such agreements could ultimately be knit together into a reconstituted, high-road multilateral trading system that captures the potential synergies of these policy domains and sidesteps related political sensitivities of developing countries.¹¹⁵

This far more ambitious and integrated deployment of the principal international economic organizations would instrumentalize a human-centred, Roosevelt Consensus model of economic growth and development and make the multilateral system a much more potent force for sustainable development and the interests of developing countries in particular. These are the practical building blocks of a strengthened “global social contract” that would help build trust among nations and bind them more closely to the multilateral system and liberal international order for a generation or more to come. Specifically, this tripling of external financing and structural enlargement of domestic policy space would enable participating developing countries to accelerate their reduction of poverty, inequality and marginalization—that is, to significantly raise the living standards of their people. This is the top domestic political priority of virtually every developing country government, irrespective of political philosophy. With such important tangible economic and political benefits on the table, they would be much more likely to engage with advanced economies in constructing a rebalanced, high-road model of trade and globalization with respect to labour and environmental considerations in the manner outlined above, all the more so because these issues would be dealt with first and foremost as development issues rather than solely as legal ones.

This fundamental reorientation of international economic governance and cooperation would represent a sharp break with the past approach of developed countries, which essentially control the agenda of the primary international economic organizations and have never brought financial resources of sufficient scale to the table in either multilateral trade or environmental discussions. Nor have they, until recently, as in the USMCA, connected in a substantial way the facilitative with the normative aspects of international trade policy in plurilateral arrangements, with the notable exception of the European Union in the course of its enlargement into Southern and Eastern Europe.

US President Dwight D. Eisenhower reportedly once said that sometimes the best way to solve a difficult problem is to enlarge it. The past 25 years have shown that trade ministers do not have the political wherewithal within the confines of their portfolio to modernize the trading system in a manner that brings along the overwhelming majority of nations. The problem needs to be expanded to include other aspects of international economic cooperation. A more networked and decisive deployment of the principal international institutions is required to rescue the system from its current slide into the law of the jungle.

There is a growing risk that the world economy will splinter into a negative-sum-game dynamic of competing trade blocs which would be self-defeating in the long run for all concerned. The diplomatic stakes are high. The stability and very character of the trading system as a net positive or negative force for international peace are increasingly being put into question as this slide continues.

Participants in the 1944 Bretton Woods conference and the 1947 Geneva negotiations leading to the GATT and UN Conference on Trade and Employment in Havana, were very focused on understanding and applying lessons from the descent into the law of the jungle they witnessed in the 1920s and 1930s. Their original vision was for an international economic architecture spanning monetary, development and trade institutions whose guiding stars would be stability and development.¹¹⁶ They viewed the architecture they were designing as creating a vital institutional underpinning for world peace through a positive-sum-game dynamic of mutually beneficial trade and financial cooperation between advanced and developing economies. Circumstances intervened in the ensuing years to prevent the realization of important parts of this holistic strategy; however, it is still a valid one and has become an imperative in the twenty-first century.

This is undeniably an ambitious agenda. But it is also a feasible one in the sense that it can be accomplished with the resources already invested in existing institutions and built on top of their most relevant existing initiatives. These priority reforms would bring the impact of the IMF, MDBs, ILO, WTO, UNFCCC, OECD and other international organizations into far greater alignment with humanity’s consensus vision of the world we want for our children and grandchildren as expressed in a string of multilateral declarations over the past decade. They would improve the effectiveness and thus political value of the multilateral system for all countries, thereby reinforcing respect for its underlying liberal principles of universal human rights, rule of law, self-determination, territorial integrity and the peaceful diplomatic resolution of disputes.

Although it may take a global political crisis to prompt governments to take such decisive action to strengthen the multilateral system and make it more responsive to people’s daily concerns, this is wholly unnecessary. There is no technical or financial barrier—just a shortfall in imagination and leadership. And yet, if history and human nature is any guide, governments may not engage sufficiently until such a grave threat to world order emerges.

As it happens, one may well be forming around the liberal tradition that gave rise to the multilateral system in the first place. This challenge, and the relevance of human-centred economics to it, is taken up in the concluding chapter.