Last week’s joint meetings of the World Bank Group and International Monetary Fund, with a gathering of G20 finance ministers and central bank governors wedged in between, were a clarion call for global co-operation. Top of the list for urgent co-operative action were vaccinations, a diverging global recovery and the climate change threat.
U.S. leadership has always been the driving force behind these multilateral institutions, which came out of the 1944 Bretton Woods Conference, and it was clearly in evidence this year. On the eve of the World Bank/IMF meetings, Janet Yellen, the new U.S. Treasury Secretary, took aim at Donald Trump.
“Over the last four years, we have seen firsthand what happens when America steps back from the global stage. America first must never mean America alone. For in today’s world, no country alone can suitably provide a strong and sustainable economy for its people.” Underscoring this point, a number of policy leaders pointed out “the pandemic is not under control anywhere until it is under control everywhere.”
The good news is the IMF revised upward its global growth estimates for this year and next. But two messages were loud and clear in the IMF forecast: a high degree of pandemic-related uncertainty still lies ahead, and we face increasingly divergent recoveries – both among and within countries.
As Ms. Yellen observed about the outlook: “The pandemic is really going to call the shots in terms of how economies do.” Surprisingly, the stronger global growth is being driven largely by the U.S. and China despite the debacle of the Trump administration in containing the spread of the pathogen and China being ground zero for it.
This recovery is different in other aspects as well.
Unlike the 2008 Great Recession, where advanced economies such as the United States and Europe were decidedly more affected than emerging economies, the COVID-19 recession is striking many emerging market economies, excluding China, harder and likely longer. Advanced economies learned some lessons from 2008: They protected their financial systems from impairment and they went bigger in their stimulus and liquidity support. Many emerging market economies have lacked the fiscal capacity to cushion the blow; they lack the resources to rapidly vaccinate their populations; and they have experienced large increases in debt leverage that puts the stability of their financial systems at risk.
Another unique aspect of this recovery, according to the IMF, is the scale of pandemic-related “scarring.” Service sector jobs and firms, particularly in travel, hospitality, entertainment and bricks-and-mortar retail, have been disrupted the most, rather than the manufacturing and industrial sectors, and are unlikely to recover until the pandemic is brought under control.
The employment and income shock of the pandemic has been highly unequal among workers, with women, visible minorities, youth and the relatively low-skilled affected disproportionally. Educational interruptions are hurting students worldwide, with developing countries hit harder as they lack online learning capacity. And inequality is also rising across countries. The World Bank estimates that 95 million people slipped back into extreme poverty because of the pandemic.
Besides the news of a stronger, albeit unequally distributed, global recovery, the other key message from the G20/Bank/IMF Washington meetings was that global co-operation is back on the agenda, with the active support of the Biden administration. There was general agreement on global co-operation in four areas: vaccines, pandemic relief for low-income countries, climate change and the U.S. proposal for greater corporate tax co-ordination.
On vaccines, where in our hyperconnected world variants and new strains know no national boundaries, there was recognition that no country has truly controlled the pandemic until all countries have done so. The international COVAX vaccine-sharing initiative was front and centre in shaping the way forward for developing countries. The U.S. committed to leading a further global funding round for this collective initiative. Among G7 donors, Canada unfortunately stands out for indicating it will take 1.9 million doses from this COVAX facility.
On pandemic relief, the cornerstone was agreement on a new US$650-billion allocation of Special Drawing Rights, the IMF’s reserve asset, to help poor countries mitigate the shock of the pandemic, as well as begin the adjustment to the low carbon future.
On tackling climate change, which was a no-go zone for the U.S. under Mr. Trump, U.S. Special Presidential Envoy for Climate, John Kerry, set a new and urgent American tone, declaring: “The world is way behind. If you believe it’s an existential challenge, and I believe for many people it is, we are not behaving that way as a world. We’ve got to pull our act together.”
Mr. Kerry stressed the need for interim 2030 milestones if we are to really get to a carbon neutral world by 2050, adding that coal-fired power plants have to be gone and calling out China for an unwillingness to reduce their emissions before 2030, putting the global 2050 target at risk. The G20 finance ministers and central bank governors echoed Mr. Kerry’s words in their communiqué.
On corporate tax co-operation, the U.S. proposal for a global minimum corporate tax was presented as a way to avoid a race to the bottom as multinationals aggressively shift profits around the world to minimize their taxes.
There is also a strong element of national self-interest in the proposal as the Biden administration attempts to raise U.S. corporate taxes. What seems clear is that backing by the European Union and Britain for such an approach would entail agreement by the U.S. on digital taxation of tech giants’ global profits. It would also be contingent on a minimum corporate tax rate that is below both the average level among major industrialized countries and the proposed U.S. rate. It will be interesting within the G20 to judge the Chinese reaction to such international rule setting.
The “macroeconomic tone” has also changed at these meetings. There is no longer talk of unlimited fiscal firepower with near-zero interest rates, but rather a growing concern about excessive leverage in both the both public and private sectors. Inflation risks were played down, but interest rates will begin to rise in the U.S. as growth picks up and unemployment falls, affecting everyone everywhere. Macro-prudential policies to rein in some of the moral hazard risks of excessively low interest rates, especially in housing markets, were put on the policy table by the IMF. And there was a view that continuing policy support has to be much more targeted to those sectors and groups that have been most scarred by the pandemic.
Historian and philosopher Yuval Noah Harari has said crises such as the pandemic “fast-forward historical processes.” We are at a critical moment, where promise and danger may collide. The good news is global co-operation is back on the agenda, supported by experienced American leadership. The challenge is we all have to up our game to meet the danger and seize the promise. It is a challenge a middle power like Canada, committed to multilateral co-operation, should embrace by forging strong ties with like-minded countries.
Kevin Lynch was clerk of the Privy Council and served as executive director for the Canadian, Irish and Caribbean constituency at the International Monetary Fund.
Paul Deegan is CEO of Deegan Public Strategies and was deputy executive director of the National Economic Council in the Clinton White House.
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