The world must use this opportunity to fund global public goods and rebuild global systems to fight the right battles.
By Ajay Chhibber
Covid-19’s stealth, speed of transmission and high fatality rate make it one of the biggest threats the world has faced in a long time—not just a global “bad”, but one that is downright “ugly”. The case for global coordination and financing mechanisms are critical. But in a more divided world, global collective action is proving more difficult. Even the ad-hoc and temporary global coordination the world witnessed in response to the Great Recession of 2008-09 is completely absent this time. At that time, the Group of Twenty (G20) came together to provide a coordinated set of monetary and fiscal stimuli, reaching trillions of dollars to get the world out of a deep recession. At the International Monetary Fund (IMF), a modest SDR 189 billion issue was agreed upon to try and help developing countries, and it helped. World leaders understood that they had to “hang together or will surely hang separately”.
With this pandemic, despite its worldwide spread, global cooperation is strikingly absent. China and the United States continue to compete for global leadership. The trade war between them is on hold for now—but they are busy trading charges on the pandemic. The UK is exiting from the EU, maybe even without a trade deal. Solidarity within the EU is being tested, threatening its very existence. Russia and Saudi Arabia unleashed an oil price war—just as the pandemic was peaking—and a shaky deal prodded by the US hangs by a thread.
Global forums such as the G20, which should be at the forefront of a coordinated global response to the pandemic, seem unable to take strong decisive actions. A virtual G20 meeting announced a $5 trillion response—later revised to $8 trillion—but this figure was just the cumulative total of what each government is planning to do internally. Two weeks later, the G20 announced a moratorium on debt payments by low-income countries until the end of the year. This is too little. Most of them will need debt write-offs, not just payment delays. And, private creditors will also need to take a “hair-cut” on their debt to the developing world. China, which is owed large sums under dubious Belt and Road Initiative projects, must also write off debts.
The IMF-World Bank spring meetings, which just ended, were an opportunity to do more for the developing world—but were a missed. The IMF and World Bank have promised large sums of money—$1 trillion and $160 billion respectively—but these will have to be borrowed. The IMF has had to use its Catastrophe Containment and Relief Trust (CCRT) to pay debts owed to it by developing countries. The World Bank is unwilling to defer debt repayments as it has no such fund with which to repay itself. The World Bank’s Catastrophe Bonds of around $130 million have just been triggered, but with embarrassing delays despite such a huge pandemic. The UN’s World Health Organization (WHO), which some have found wanting in even recognising the dangers, has its funding put on hold by the largest contributor, the US.
The developed world has huge fiscal fire-power to deal with the economic catastrophe. But, the developing world may, like the Spanish flu of 1918, experience greater loss of life and livelihood, as they do not have the fiscal resources or the health systems to deal with the pandemic. Many people live on daily wages, and countries cannot lockdown for too long without facing massive social unrest.
Capital outflows—exceeding $150 billion in the last month alone—are adding to problems for many developing countries by weakening their currencies and restricting their domestic macro-economic options. Even countries with strong reserve holdings and windfalls from declining oil prices have seen currency declines against the US dollar of 5-10%, and some as high as 15-20 %. Swap arrangements have helped some countries but these are bilateral.
Two global collective actions could help—one to deal with health systems and social safety nets, and another to deal with economic fallout.
The first is a global carbon tax. Global prices of oil and natural gas have crashed. This will be an opportune time to have a small tax on global oil and gas consumption to be set aside in a global fund to help fight the pandemic in the developing world. It would mean ending the oil price war permanently—and as prices rose, these could be used to finance the carbon tax fund. The funds could be used to provide medical equipment, testing systems and provide income support and help to small and medium business enterprises. With global oil consumption at around 35,000m barrels per year, a tax of $5 per barrel would add up to $150 billion. A similar small tax on coal as well as on natural gas where prices have crashed to below $2 per MMBtu could raise another $50 billion, reaching $200 billion. The exact amounts for each fuel source could be calibrated based on carbon content, and collected at the point of sale.
Such a fund could be administered by an international organisation like the World Bank, which has the infrastructure to manage such a special Covid-19 fund, and where the rich countries hold controlling votes. As the president of the G20 and a major oil producer, Saudi Arabia could take the lead on this. It would be its lasting and memorable leadership in this unusual emergency. It would help show OPEC as a force for good—not just a price cartel. It would also be to OPEC’s long term benefit. It would bolster global recovery, and help oil prices climb back up to $50 per barrel by 2021-22. Such a global carbon tax would also ensure a greener global recovery.
The second option is to allow the IMF to make a special SDR issue—of about SDR 475 billion (around $650 b)—which normally would be allocated to countries based on their quotas. This is equal to the size of the existing quotas at the IMF. Given trade and capital flows each amounting to around $20 trillion, this is a small increase in global liquidity. The IMF’s existing quota, estimated at $1 trillion, mostly has to be borrowed under IMF arrangements, whereas the SDR issuance would be available to countries without IMF conditionality. And the richer countries and China will help, if they transfer their shares to the developing countries to help write off their debt.
Many middle-income countries are afraid to go the IMF, given its past record, for stand-by arrangements. It erred badly in the Asian financial crisis—when it focused on fiscal contraction—in a crisis largely caused by excessive capital flows to countries that had prematurely liberalised their capital accounts. The IMF must show greater flexibility this time and listen to a wider range of opinions in designing its Covid-19 responses. This crisis is in any case different from a typical financial crisis. The advisory body set up by the IMF’s Managing Director is a good start—but only if its advice affects what gets put together in the trenches.
The IMF’s World Economic Outlook compared the projected decline in world GDP to the Great Depression. The former Fed Chair Ben Bernanke, an expert on the Great Depression, does not think that is an apt comparison. But, even if the recovery in GDP and stock markets is quick—as we saw after the Great Recession of 2008-09—the recovery in lives and livelihoods for large sections of the population could be quite slow. And, if the world goes back to festering trade wars, increased military spending, and conflict, the global recovery could be protracted.
The world must use this opportunity to fund global public goods and rebuild global systems to fight the right battles—not to fight each other. At this moment—in the midst of this crisis—a $200 billion COVID Response Fund managed by the World Bank and a 475 billion SDR ($650billion) special issue at the IMF—and, especially if the richer countries would voluntarily give up some of their issue to be shared among the low-income countries—would go a long way to help developing countries deal with this ugly pandemic.
(Distinguished Visiting Scholar, Institute of International Economic Policy, George Washington University and Non-Resident Senior Fellow at the Atlantic Council, USA. Views are personal.)