By Paola Subacchi, Professor of International Economics at Queen Mary University of London’s Global Policy Institute, is the author, most recently of The Cost of Free Money (Yale University Press, 2020)
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
When a crisis strikes, it is a time to be bold and do whatever it takes to avoid the worst. The response to the COVID-19 pandemic so far has been surprisingly bold at the national level, but at the international level, it has been disappointing to say the least. The G20 – the “premier forum for international economic co-operation” – has played no significant role in this crisis, or at least not one comparable to the role it played during the global financial crisis. Unlike in 2008, when it led the multilateral policy response, the G20 has attempted neither to coordinate the fiscal response nor to ensure that robust and broad multilateral financial safety nets are in place. It is arguable whether the nature of the current crisis requires the same deployment of financial resources as when the banking and financial systems in many countries seized up. However, the IMF and the World Bank have beefed up their resources to an unprecedented $1 trillion of loans and non-conditional credit lines to help developing countries. The G20, in turn, has agreed on temporary debt relief for low-income countries, but limited the suspension to one year. So far just $5.3 billion in bilateral debt repayments have been suspended, against an expected $11.5 billion – clearly this initiative has fallen short in ambition and scope.
Compare the G20’s timid response with the reaction of the central banks and governments of the largest economies. Monetary policy has been stretched further beyond its conventional boundaries to inject liquidity and prop up the many activities affected by lockdowns. The Federal Reserve, for instance, has made $2.3 trillion in loans available to support households, employers, and state and local governments. It has adopted an open-ended programme of quantitative easing; between mid-March and mid-June, the Fed’s portfolio of securities expanded from $3.9 trillion to $6.1 trillion. It has slashed the federal funds rate by 1.5 percentage points to 0-0.25 percent. In a similar vein, the European Central Bank has announced a broad package of collateral easing intended to benefit the public and private sectors, SMEs, the self-employed, and households. It has agreed to purchase an extra €120 billion in assets under its existing Asset Purchase Programme (APP), and a further €1.35 trillion under the new Pandemic Emergency Purchase Programme (PEPP).
Fiscal policy has been even bolder – even when compared with the measures unveiled in the aftermath of the global financial crisis. The United States ushered in a fiscal stimulus package worth more than $1 trillion. In Europe, governments implemented generous emergency budgets to support individuals and businesses hit by the crisis while throughout the European Union, state aid rules and fiscal rules have been suspended. In Germany for example, the federal government unveiled two additional budgets: one of €156 billion (4.9 percent of GDP) in March, and €130 billion (4 percent of GDP) in June. Many local governments have arranged further measures, totalling €141 billion in direct support and €63 billion in state-level loan guarantees. In the UK, the government has deployed an additional £48.5 billion for public services and charities, £29 billion for businesses, and £8 billion to strengthen the social safety net.
All of this is good, but the pandemic is and remains a global problem that requires a global response. In an ideal world, the G20 would have coordinated policy action, ensuring a smooth transition in areas such as the movement of goods and people across countries, and avoiding bottlenecks in medical equipment supply. Even more so than during the global financial crisis, the G20 would have worked together to avoid ‘beggar thy neighbour’ measures. They would have invited the WHO to join as a permanent technical partner. Instead, the Trump administration has accused the WHO of being biased towards China and has threatened to withdraw US membership.
Above all, the G20 should have coordinated action to help developing countries weather the crisis. These countries have been hit the hardest by the pandemic. Brazil and Mexico, for instance, both members of the G20, have experienced soaring numbers of infections and record capital outflows – $11.8 billion left Brazil’s stock market between February and May and $18.7 billion left its bond market between February and April, while $7 billion flew out of Mexico in March alone. Debt levels were at a record high prior to the pandemic, and the situation has been exacerbated. However, it is the subsequent loss of employment, education, and social welfare that will be felt the most and in the long run.
It is worth remembering that the G20 is the ‘club’ of the world’s largest economies, that ensures a more inclusive, albeit not exhaustive, governance by giving large emerging market economies a seat at the multilateral table. Economic development has always been a key item on the G20 agenda. In addition, policy co-operation around transnational issues such as trade, capital flows, migration, global health and climate change is where the G20 can contribute to positive change with an impact that goes beyond its member states.
So why has the G20 stayed on the bench and given up on what it is best at i.e. coordinating international policy action in times of crisis? The group is struggling with the fact that the United States has become a reluctant leader of the global economic order that has been in place since the Bretton Woods conference of 1944. Since 2017, the difficulty of cajoling the United States to agree to a common agenda has resulted in quasi-inaction.
Where does the G20 standstill leave developing and low-income countries? Besides the existential question of why keep the G20 going, failing multilateralism – a self-fulfilling prophesy – risks spilling over into all sorts of areas. Take, for example, the issue of low-income countries’ public debt. Aggregate public debt is now at 45 percent of GDP with a number of low-income countries such as Bangladesh and Ethiopia grappling with their debt burdens. According to IMF figures, the percentage of low-income countries in debt distress or at high risk of debt distress has increased by almost half since 2012 and now sits at 43 percent. What would happen if multilateral institutions are no longer prepared to provide the necessary safety nets or if the largest economies are not willing to offer debt relief? Will they be pushed to accept financially and politically onerous bilateral ‘deals’? Developing and low-income countries have always struggled to have their voices heard in the international arena. Let’s make sure that the COVID-19 crisis doesn’t muffle their voices any further.