Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
Rome will host the 2021 Summit of the G20 Heads of Government in October. Officials of member countries, including The finance ministers and central bank governors, are preparing for it.
The G20 meeting will come at a time of great uncertainty as concerns the health and economic effects of the pandemic in Year 2. Although the mechanisms of international cooperation have been badly bruised by events of recent years, they are more important than ever, in light of the interconnectedness across nations that the pandemic so vividly demonstrates.
Of what, specifically, should international cooperation in such bodies as the G20 consist? To begin with, by “cooperation,” I am not in this case referring to coordinated setting of national monetary or fiscal policies. For the most part, countries can, on their own, move those levers in the directions that are right for them.
Areas on which the G20 should focus include three: financial stability, trade, and vaccination. This is in addition to other important areas, especially the existential issue of global climate change, which should and will receive a lot of attention.
- International financial stability
Many countries in 2020 responded to the health crisis and economic recession with government spending. Of course, Emerging Market and Developing Economies (EMDEs) are not able to finance deficits as easily as the United States (with the “exorbitant privilege” enjoyed by its dollar) or even Europe. But the need was acute, and it is fortunate that many EMDEs were able to increase spending at all, without having to pay sky-high interest rates. The Fed and other major central banks made it possible, by aggressive monetary stimulus. Indeed, initial declines in EMDE currencies, securities prices, and commodity prices in March 2020 were only reversed after the Fed easing.
But now, in 2021, everyone has higher ratios of public debt to GDP. Also, though major EMs have continued to bring down the share of government debt that is denominated in foreign currency, too much EM corporate debt is dollar-denominated, resulting in precarious currency mismatch. At some point in the future, the Fed will signal an end to monetary ease and a coming rise in interest rates. At that point, investors will lose enthusiasm and pull out of risky assets in general. EMDE debtors will be vulnerable to financial crises akin to those that struck in the 1980s and 90s, or akin, on a lesser scale, to the taper tantrum of 2013.
The financial situation must be judged particularly fragile if one thinks there is a bubble component to today’s high prices for risky assets. Some say that soaring markets are based on economic fundamentals, for example, that price/earnings ratios in the US stock market are so high because of the prospects from digitalization and other productivity-enhancing technological innovation. Personally, I see a lot of frivolous financial innovation that does not enhance productivity. Four examples: 6,000 crypto-currencies, meme stocks, SPACs, and Non-Fungible Tokens.
The G20 can help lead the way to reduce the likelihood and severity of any coming EM debt crisis. The Debt Service Suspension Initiative was a good first step. But it was only a postponement of payments to one class of international creditors, governments. It is widely recognized that provisions for possible debt restructuring need to be extended to the cases of international creditors who are private financial institutions (and also to Chinese public lenders that claim to be private). Separately, the new allocation of SDRs (Special Drawing Rights), agreed by the members of the IMF in August, is a positive measure.
- Convergence and Trade
At the beginning of the pandemic, it appeared that the impact was more severe in most advanced countries than in most EMDEs, with the exception of South America. But advanced economies have begun an unusually strong economic recovery, spurred by macroeconomic stimulus plus the vaccines. Meanwhile, the “other half” is falling behind. Indeed, the IMF in its most recent update to the World Economic Outlook, while marking up the forecasts to the US and other advanced economies, marked down the growth rates for EMDEs by an equal amount. Millions of people in developing countries have been thrown back into extreme poverty. (The World Bank estimates 150 million in 2020.)
This economic divergence is all the more striking because it was preceded by a period of economic convergence: the EMDEs had been growing substantially faster than the advanced economies, at least from the turn of the century up until 2014 (when China started to slow and dollar prices for commodities fell). Among many other explanations for the catch-up period is that global trade increased roughly twice as fast as GDP during the decades preceding the Global Financial Crisis. Since 2009, however, the ratio of trade to GDP has lost its upward trend, even before Trump’s tariffs and the pandemic.
Unfashionable as it is to say it, the situation calls for some good old-fashioned trade liberalization. For example, the US and China should roll back trade barriers, which they have raised over the last four years. A particular sector ripe for liberalization is trade in environmentally beneficial products, such as equipment used to produce wind and solar power. G20 members should work with the WTO to agree on international rules guiding Carbon Border Adjustment Taxes, to be sure they can be used, but not abused.
The G20 should also work with the OECD to see to completion the exciting recent progress toward a global framework for corporate taxation.
Most importantly, the US and other rich countries should allocate a bit more of their multi-trillion spending to making vaccines more extensively available to low and middle-income countries. It is ridiculous for us to chase after the remaining vaccine skeptics at home, trying to coax them into accepting the benefits of this scientific miracle, without at the same time doing more to bring the benefits to those countries where very few have yet had the opportunity to get vaccinated. Ruchir Agarwal and Gita Gopinath of the IMF have proposed a plan of action to get more vaccines produced and distributed.
Even someone allergic to altruism should favor programs for vaccination in other parts of the world. So long as this coronavirus runs wild anywhere, it is a danger to everyone everywhere. Such is the nature of international interdependence.
This post written by Jeffrey Frankel.