By Richard Kozul-Wright, Director of the Globalisation and Development Strategies Division, UNCTAD
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.
The coronavirus has ruptured our world and, as with past global pandemics, raised fundamental questions about the way we organise society and the values that structure our lives. But it has also encouraged us to imagine a better world. However, if we are to act on that imagination, we will need to acknowledge the mistakes of the last decade, above all in the world’s richest economies.
Recovering better demands that we treat the COVID-19 pandemic as an opportunity to identify and address underlying structural barriers, at both the national and global levels, in the way of a more prosperous, equitable and resilient future. This did not happen after the global financial crisis when returning to business as usual was the winning policy mindset. But higher share prices or fuller treasuries, or more sophisticated supply chains will not be the basis on which future generations judge our response to the current crisis.
A better recovery will require governments, particularly in the advanced countries, to stick to deficits for several years ahead, commit to full employment and target insecure working conditions, particularly in developing countries. That means maintaining an expansionary macroeconomic policy stance, appropriately balanced between its monetary and fiscal components, for as long as it takes the private sector to regain its confidence to spend. A big public investment push will be needed with a variety of supportive policies used to complement expansionary measures including job guarantees and public works programmes. Tying these measures to a low-carbon future should be a given.
There is, however, more to recovering better than getting macroeconomic policy right. Governments have broken important policy taboos to keep things going during the lockdown and that same attitude will need to persist into the recovery and rebuilding stages. Raising productivity growth is a challenge for countries at all levels of development and will require various industrial and innovation policies, including more collaborative projects. Again, the need to make fighting climate change an intrinsic design feature of these measures needs little justification.
Intrusive trade rules, promoted under the banner of “deep integration”, are a threat to inclusive recovery. A more balanced trading system will have to be a more managed system. A place to begin is a temporary “Peace Clause” in trade agreements relating to pandemic-related government actions that better enable countries to use emergency measures to overcome intellectual property, data, and informational barriers. A permanent standstill in all relevant fora on claims against government measures implemented in the context of COVID-19 would, in addition, help create the necessary policy space to support recovery efforts.
Strengthening the tax base is a necessary condition for expanding fiscal space at all levels of development. Measures that successfully raise wages will automatically boost tax revenues but even a small change in higher income and corporate tax brackets can generate significant gains, not only in advanced economies. In light of the further increase in inequality resulting from this crisis the case for a wealth tax seems irrefutable. Still, the timing of changes in tax codes will be important and should reflect local circumstances. Other taxes and subsidies need also to be re-visited, including the trillions of dollars devoted to subsidising fossil fuels and industrial farming.
For developing countries, in particular, expanding fiscal space will require concerted international support. In the short-run alleviating balance of payment pressures through a large allocation of Special Drawing Rights (SDRs) is the most feasible and least burdensome option; UNCTAD has proposed anywhere from 1 to 3 trillion depending on whether or not revisions in the allocation are also made to facilitate political agreement. In addition, debt moratoria and short-term debt relief are essential to avoid liquidity crises turning into serial solvency crises.
These measures aim largely at relief and kick-starting recovery from the COVID-19 shock. However deeper reforms to the multilateral architecture will be needed to sustain the recovery and build future resilience.
Reining in corporate power is a prerequisite for recovering better. Anti-trust measures are now very much on the agenda at the national and regional levels. But existing multilateral agreements such as the UN`s Equitable Principles and Rules for the Control of Restrictive Business Practices adopted by the General Assembly in 1980, should be strengthened and operationalised with appropriate institutional support such as a global competition authority. Clamping down on corporate tax evasion and other forms of illicit financial flows can help both to secure sufficient fiscal space and address the inequality challenge. Recent estimates suggest that revenue losses, caused by tax-motivated illicit financial flows (IFFs) alone, are in the range of $49-$193 billion, accounting for 2.3 per cent of combined GDPs, respectively, in Latin America and the Caribbean and in Africa.
Long-term financing for the required investment push towards a more sustainable future will require scaling up public financing options. At the international level, that means boosting the lending capacity of multilateral development banks. This new lending could come from existing shareholders redirecting environmentally damaging subsidies, for example for fossil fuels and industrial agriculture, to the capital base of these institutions, or from more innovative sources, such as a financial transaction tax, and augmented by borrowing on international capital markets, with a measured relaxing of their fidelity to financial sobriety. In return, these institutions should reassess their policy conditionalities in line with a more sustainable and inclusive development agenda.
Moving in this direction suggests a bigger shake up of the international financial architecture with more representative governance arrangements. A Marshall Plan for global health recovery is one idea for providing a more dedicated and democratic framework for building future resilience. But it should take its namesake seriously. In the first place that means being generous. If the donor community met the 0.7% Official Development Assistance (ODA) target for the next two years that would generate something in the order of $380bn above current commitments. An additional $220bn mobilised by the network of multilateral and regional financing institutions could complete a $600bn support package over the next 18 to 20 months. The money should be dispersed largely as grants but with some room for zero interest loans, as the precise mixture determined as the global recovery takes shape.
Finally, a global sovereign debt authority, independent of either (institutional or private) creditor or debtor interests, should be established to facilitate comprehensive debt standstills, undertake reprofiling in a systematic fashion, correct the manifold flaws in the current handling of sovereign debt restructuring and, when necessary, administer debt cancellations. These have come under a glaring spotlight during the current crisis, including the crippling fragmentation and complexity of existing procedures, the potentially extraordinary powers of hold-out creditors to sabotage restructurings, and the resultant inefficacy of crisis resolutions.
Access UNCTAD’s Trade and Development Report 2020 here.