David Vines is Emeritus Professor of Economics and Emeritus Fellow of Balliol College, Oxford University.
By David Vines
The last time the world faced challenges as serious as those facing us now was in the period immediately following World War II. At that time there was an extraordinary burst of international institutional creativity, led by the United States.
The late 1940s saw the creation of the IMF, the World Bank, the Marshall Plan, the United Nations, which the WHO joined in 1948, and the GATT, now the WTO.
Seventy years on, these post-war institutions still provide a framework within which international cooperation can take place. But, in the wake of the COVID-19 pandemic, they need strengthening and reinvigorating. The world now faces an important choice. We could revisit the direction taken in the late 1940s, when multilateral cooperation helped support a golden age of global growth. Or we could return to the path of the 1930s, when weak cooperation and ineffective institutions led, eventually, to war. The election of Joe Biden has given us all hope that, once again, the United States might help take us in the former direction.
During the COVID-19 pandemic, the international health response has fallen short because cooperation has been lacking. Many of the tasks involved in controlling infectious disease are global in nature, with solutions best reached through global cooperation [1], including the rolling out of diagnostic tests, the provision of PPE, and the discovery and distribution of effective vaccines [2]. These activities are at present globally under-provided and under-funded. In particular, the WHO is under-resourced. This must change.
Economically, there’s a need for huge fiscal support to pay for virus-fighting action and preserve incomes through economic recovery. The fiscal responses of the world’s major economies have been enormous, with spending measures larger than ever. In the United States and Australia, spending and revenue measures have increased by more than 10 per cent of GDP, and in Japan, Canada and South Africa by more than 5 per cent. Loans, equities and guarantees have increased by 15 per cent of GDP in France and the United Kingdom and by over 30 per cent in Germany and Italy. Across the G20, spending and revenue measures have amounted over 4 per cent of GDP while loans, equities and guarantees account for more than 5 per cent.
G20 Summit in Riyadh
But emerging market economies have been denied [3] this course of action, due to high levels of public debt and external financial constraints. Global cooperation is urgently needed to support them. At the G20 Summit in Riyadh, on 20–21 November, leaders need to agree that these countries can run larger budget deficits, by an additional 5 per cent of GDP or even more.
The benefits worldwide would be very large [4]. In countries where extra fiscal support is provided, GDP could increase by more than 2 per cent and employment by up to 5 per cent. Global output would be pulled up by as much as 1 per cent of global GDP.
Such fiscal stimulus would create an additional US$3 trillion in government debt worldwide over five years. However, the countries carrying out this stimulus will need global support. Without it they face an attack on foreign exchange markets and risk to their domestic fiscal finances, including the possibility of bankruptcy. Some combination of IMF lending, central bank swaps and debt relief will be necessary, coupled with sufficient confidence in the future of these countries for the private sector to lend. This support must be agreed, as a matter of urgency, at the Riyadh Summit.
There are also major problems concerning trade. Many of the world’s poorest countries have seen their terms of trade collapse during the COVID-19 pandemic. Protectionism is also rife [5], with countries under pressure to bring domestic production [6] back home to ensure security of supply. Historical experience, particularly in Asia, shows that countries develop most rapidly when open to trade, by allowing foreign firms to supply home markets, and especially by encouraging domestic firms to grow by exporting.
It’s particularly challenging to pursue trade openness in the services sector, where policy needs are much more complicated than simply a reduction in tariffs. There are issues concerning regulatory standards that are difficult to negotiate internationally. And high-tech sectors are monopolistic, and often receive government-funded research support, which can make international competition seem unfair – and it sometimes is. The prospect of a non-cooperative battle over the development of technology is looming in the US–China struggle.
The further freeing up of trade remains vital — as all will stand to benefit. So the Indonesian proposals for WTO reform are a significant item on the G20 agenda, particularly the proposals to resurrect the dispute-settlement procedure. And implementation of Asia’s new flagship trade agreement, the Regional Comprehensive Economic Partnership (RCEP), will be vital. It will run parallel to whatever the G20 agrees to do about trade.
Climate change issues present a huge global opportunity. Massive plans in the United States, and elsewhere, are already in place to spearhead global recovery from the COVID-19 crisis [7] by investment in green technology, and in renewable power generation. We know that the Biden administration will ensure the United States re-joins the Paris Climate Agreement, and the COP-26 conference in Glasgow in November 2021 provides an opportunity to take that Agreement forward.
Now is the time for governments to show leadership in reforming the global system, a system that is weakened when governments show a preference short-term bilateral band-aids over long-term multilateral solutions [8] . If countries in Asia want a multilateral system to survive, they need to promote, use and improve it. The G20 Summit in Riyadh will provide an opportunity to push forward this agenda. And, at last, with US cooperation, this seems possible.
An extended version of this article appears in the forthcoming edition of East Asia Forum Quarterly [9], ‘How has China changed’, Vol. 12, No. 4.
Article printed from East Asia Forum: https://www.eastasiaforum.org under a creative commons licence.
URL to article: https://www.eastasiaforum.org/2020/11/15/asias-stake-in-global-cooperati...
URLs in this post:
[1] through global cooperation: https://academic.oup.com/oxrep/article/36/Supplement_1/S64/5863407
[2] vaccines: https://www.eastasiaforum.org/2020/10/28/dangers-of-jumping-the-gun-on-a...
[3] emerging market economies have been denied : https://www.eastasiaforum.org/2020/10/18/asia-wont-beat-covid-19-without...
[4] would be very large: https://academic.oup.com/oxrep/article/36/Supplement_1/S297/5899018
[5] also rife: https://www.eastasiaforum.org/2020/10/11/resilient-supply-chains-can-ino...
[6] domestic production: https://www.eastasiaforum.org/2020/08/16/industrial-policy-makes-a-comeb...
[7] from the COVID-19 crisis: https://academic.oup.com/oxrep/article/36/Supplement_1/S359/5832003
[8] show a preference short-term bilateral band-aids over long-term multilateral solutions: https://www.eastasiaforum.org/2020/09/21/the-multilateral-system-use-it-...
[9] East Asia Forum Quarterly: https://www.eastasiaforum.org/quarterly/
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