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The global financial crisis of 2008–10 brought the Group of Twenty (G20) into being. Nearly 12 years later, what we have misleadingly called the postcrisis period has proven to be a mere pause between savage global shocks—this one the result of a global pandemic—demonstrating that international cooperation is a recurrent need. The G20 must rise urgently to the challenge as it did in the last global crisis, but even more forcefully with more lasting commitment.
A newly released PIIE Briefing sets out ten policy areas where practical near-zero cost collective actions can meaningfully speed the return of global health, physical as well as economic. Fruitful areas of cooperation range from disease control, to international trade, to financial policy. Importantly, many of our recommendations are simply for mutually binding and beneficial changes in government behavior, whether forswearing self-defeating aggression in trade or agreeing to lean together against dollar shortages and excessive capital flows; no additional expenditure is needed, just getting past mutual distrust. Most of our other recommended policies require only small investments, like in health innovation, or self-liquidating ones, like in central bank liquidity provision. This is the proverbial low-hanging fruit. Leaders just need the vision and will to act collectively to grab it. Collective action, and the small allocation of additional resources, primarily to the world’s poor, will be rapidly repaid.
When the world faces a common economic threat, cooperation between the governments of the most important economies is both attainable and genuinely worthwhile. G20 meetings can be more than just a formal photo-op with a barely changing communiqué on substantive policy measures. We saw this in the first two leaders’ meetings of the G20 in 2008 and 2009, where the agreements reached helped put a floor under the global economic freefall (see the resultant April 2009 communiqué). The key is commonality of the threat—not that every economy is suffering in the same way and amount as the others, but that all economies need to move in the same direction at roughly the same time. That is unquestionably the case today with the COVID-19 pandemic shutting down economic activity and people’s livelihoods around the world, while increasing demand for medical expenditure and public health cooperation.
In a global economic crisis, the G20, and international economic cooperation in general, can be useful in four ways:
- Increasing domestic compliance with best practice through transparent peer pressure.
- Stopping financial panic.
- Preventing mutual economic aggression from worsening the crisis.
- Helping the world’s poor survive the crisis fallout.
All of these would be important contributions to global recovery. So far, the G20, and particularly the working group of central bankers within it, has been remarkably quick to take on the second task, stopping financial panic. Within advanced economies’ financial markets, at least, their stabilization measures have been effective. The G20 has also taken some steps toward using transparent standards to improve members’ public health management and investment, though these have been insufficient. The latter two areas of potential gains—preventing escalation of economic aggression and helping the world’s poor—have seen more lip service than meaningful action so far, despite efforts to encourage more cooperation through the International Monetary Fund (IMF), World Trade Organization (WTO), World Bank, and World Health Organization (WHO). Economic nationalism harms everyone, particularly the world’s poorer countries but also the vulnerable within the G20 members’ own borders. Preventing it would, therefore, significantly improve human welfare in comparison with the alternative outcome now emerging in the absence of more positive G20 action.
Practical policies and payoffs despite distrust
Here is where the commonality of the threat from COVID-19 comes in: Making progress on collective action would be win-win in each of the four areas where international cooperation can yield benefits. A useful G20 agreement today does not involve horse-trading about which country gets a better deal, let alone having some countries put in resources now to get benefits promised in some uncertain future. All G20 economies will benefit today from cooperative action. Too commonly, economic policymaking is depicted solely as the management of tradeoffs, given limited resources. While that is often the case for domestic policymaking, in the international sphere the opposite holds as frequently: Cooperative action raises new opportunities and prevents harms for all participants simultaneously. Difficulty arises when the distrust born of a zero-sum mindset, which may be accurate for some other aspects of international relations or domestic interest group bargaining, prevents collective action on economic crisis response.
Of course, international distrust is the name of the game today, particularly between the Trump administration and counterparts in Beijing and Western European capitals. Some of that distrust originates in the understandable frustrations of domestic publics in the United States, European Union, and elsewhere over longstanding frictions and disappointments in the sphere of international trade. Some is the result of the Trump administration’s aggressive bilateral approach toward allies and non-allied governments alike, as well as its visceral disdain for international organizations. Some distrust has been spawned by China’s insufficiently responsible treatment of others despite its rapid rise in the global economy—an image fed, fairly and unfairly, by the Chinese leadership’s nontransparent handling of the initial COVID-19 outbreak there. Yet another source of distrust is both illustrated and fed by the European Union’s internal divisions, which reflect an uneasy coexistence of ambitions for integration and national or local bases for legitimacy. And some distrust is the seemingly inevitable result of countries’ fears that the virus will leave some of their own citizens with the short end of the stick when there are limits, actual or perceived, on access to medical equipment or other resources.
Despite all these sources of distrust among G20 governments, significant self-harm will result if mutual suspicion dominates countries’ actions. Put simply, in the COVID-19 pandemic, lack of international cooperation will mean that more people will die, not just in the developing world, and many more otherwise viable businesses and jobs will not survive. Many of the actions G20 countries are taking in their own interest—such as fiscal support and disease mitigation—are necessary to avoid economic collapse and to save lives, but they are not sufficient to achieve those objectives effectively on a global scale. However, escalating fear-based nationalist policies—like export controls on medical supplies and attempts to control vaccine or testing technologies for one’s own primary use—are not only damaging for the world but also are already backfiring in their own terms on the countries that impose them, as shown in the chapters by Chad P. Bown and Maurice Obstfeld in the Briefing. Such reflexive or seemingly defensive exercises of distrust make it harder for those who have the misfortune of being born in the wrong place, or the wrong part of the income distribution in the rich world, to get medical assistance.
Those with fiscal space should use it to meet the health crisis
The correct principles to guide fiscal policy are clear, and high-income (and some middle-income) economies have converged on similar programs accordingly. First, spend whatever it takes to expand health care capacity where there are viable delivery systems, to speed creation and production of testing materials for COVID-19 infection and antibodies, and to accelerate research on antiviral treatments and a vaccine. Second, give essentially the entire economy a bridge loan to preserve businesses that were viable before the crisis so they can resume operations quickly when the health crisis abates—and tie those rollovers, loans, and grants to maintaining the jobs that those businesses would normally provide. Third, support the basic needs of those who lose their livelihoods in the pandemic and its aftermath. And fourth, prepare forms of stimulus that may be needed to bring the economy out of stasis and back from high unemployment when the pandemic lifts. To whatever extent stimulus proves necessary then it will have to be fiscal—interest rates already being zero or negative—although monetary policy can expand the fiscal budget constraint by keeping interest rates low (American Economic Association 2020).
Ironically, the somewhat troubling macroeconomic situation we were in as the crisis began—low and declining interest rates and inflation, persistently low productivity growth, disappearing wage pressures, excess saving and its counterpart, lack of demand for risk assets and private investment—is one that facilitates the effectiveness of G20 fiscal action. As Olivier Blanchard explains in chapter 3 in the Briefing, the high-income and some middle-income countries have fiscal space because interest rates are so low and because the returns on public investment are so high relative to those interest rates. Meanwhile, the multiplier on income transfers and spending on human needs should be extremely high, well above one, in response to this temporary though historically severe shock, and given the lack of crowding out at current interest rates. The coincidence of fiscal expansions, driven by each economy’s own domestic challenges, means that there is little or no free-riding in the G20 on this score, and any “leakage” of one’s own stimulus abroad is offset by others’ spillovers. In this case, fiscal coordination is largely automatic. An important caveat, however, is that many emerging-market and developing economies have neither the fiscal space nor the price stability track record to undertake large fiscal responses without external financial support. As discussed below, several chapters in the Briefing propose ways to provide that support.
The global nature of the health challenge leads naturally to an agenda for international collaboration on public health and research expenditures proposed by one of us (Obstfeld) in chapter 2 in the Briefing. The underlying points are two simple ones: Whatever amount is spent directly on necessary health care and R&D in response to COVID-19 will be small, if not second order, compared with the costs of not defeating the disease. There are huge economies of scale in production and even greater benefits to sharing knowledge and information in research in real time. So G20 members should encourage each other to go big on health care, to pool production to quickly resolve shortages of vital medical supplies and above all to jointly create incentives for an open environment conducive to rapid medical research. The more the infection comes under control around the world, including in poorer countries that are likely to be hit hard, the lower the chances of second or third waves of pandemic outbreaks. And the more widely testing and new health technologies are disseminated, the faster they will improve health outcomes to the benefit of all. The existing infrastructure of international health cooperation should be better funded and expanded.
The G20 can replace words with deeds on trade and it will really matter
The traditional macroeconomic and financial focus of the G20, however, is not enough, even with greater focus on public health spending. International trade, migration, and cross-border investment are first-order concerns in facing the pandemic, particularly for the developing world. While larger economies lose efficiency and purchasing power over time when turning inward, they can survive a long while despite the costs. For developing countries, being cut off from hard-currency income in the form of lost exports and remittances is a matter of life and death. When larger wealthier economies start blocking exports of food, medical supplies, or other critical resources, they may hurt themselves by inviting other countries to retaliate, but their actions directly imperil lives in poorer countries. Emerging-market economies that emulate the short-sighted “homeland first” approach to such critical resources, as India is now doing, may feel the negative consequences even more sharply.
Over the longer term, looking even just a few years past the pandemic, escalating deglobalization could lead to greater corruption and lower productivity growth in the rich West, with slow but pernicious effects. For the global South, cutting off access to global opportunities, inputs, engagement, and technology will have devastating effects rapidly, and impede any recovery from the crisis (Goldberg 2020; Posen 2018). The impressive convergence that has narrowed the per capita income gap between rich and poorer countries over the last 20 years could cease, even as the richer countries stagnate. Even the huge progress poorer countries have made on health outcomes could reverse, just as Cullen Hendrix in chapter 5 points to the plateauing of progress on basic nutrition provision in recent years. Of course, malnutrition and susceptibility to disease reinforce each other, increasing the damage of pandemics like COVID-19 and defeating their containment.
The G20, therefore, needs to add real substance to its ritualized pledges on trade and not leave the prospects for trade cooperation, especially on key inputs to health and food security, at the feet of the deadlocked and undeservedly beset WTO. As Chad P. Bown, Anabel Gonzalez, and Cullen Hendrix compellingly argue in chapters 4 to 6 of the Briefing, the major economies can provide useful leadership that actually matters in the trade arena.
- All G20 countries should lift export restrictions on critical medicines, medical supplies, and basic foodstuffs. Rich nations and exporters of these goods should stockpile an adequate amount instead and make their production available to the market beyond that level.
- These stockpile efforts—transparently disclosed to the world along with tracking of shortages—can be used to pop bubbles in prices and address localized shortages or supply interruptions.
- G20 governments, starting with the United States, must recognize the reality that all wealthy economies import components and supplies for production of medical goods and that all poorer economies are completely dependent upon imports for such health-related goods.
- As a result, elected officials’ hostility to supply chains is self-defeating, leading to shortages and retaliation in the very short run. Harassment of companies to restrict their sourcing is similarly counterproductive.
- G20 member countries, but particularly the G7 and China, should coordinate at the technical and administrative levels to facilitate trade in health-related products, especially for those, like a COVID-19 vaccine when ready, that require special handling for successful distribution.
- Intellectual property protections must not be allowed to interfere with the prompt administration of pandemic-relevant medicines and associated technical knowledge.
Returning to where we began: G20 cooperation can now succeed, even in the contentious trade arena. The preceding policy steps would simultaneously enhance market size and demand for all G20 members and increase all their citizens’ purchasing power. They deliver a win-win. The primary beneficiaries of cooperation in trade areas now under stress would of course be the world’s poor, but all would benefit from increased availability of critical goods needed to fight and overcome the pandemic.
Ending the financial panic and supporting the developing world
As previously noted, the stabilization of advanced-economy financial markets, especially the critical government bond and interbank lending markets, has been largely successful. So the G20 agenda for preventing financial panic should focus instead on three crucial areas of international spillovers. One is straightforward, at least in principle: monitoring the risks to financial stability that may accumulate among those lenders and institutions that bear the burden of rolling over temporarily the global economy’s debts. This is where peer pressure for transparency and agreement on the nature of the indicators to watch plays a useful role—we are all too familiar from the run-up to 2008 how hidden international financial linkages can transmit instability across continents. The Financial Stability Board (FSB) is the well-functioning organizational instrument of the G20 that should undertake this monitoring. Especially because credit standards will necessarily be relaxed in response to the crisis, the buildup of positions must be tracked and communicated to regulators.
Second, the G20 should be extending the financial “safety net” of hard-currency liquidity as widely as possible. In times of heightened global fear and genuine risk, there is flight of capital from riskier assets into advanced-economy government bonds, and especially from emerging-market and developing markets into US-based dollar-denominated assets. The recent scale of capital outflow from the developing world has already exceeded the total outflow of funds from those economies during the entire 2008–10 crisis. Yet, financial systems around the world, as well as sovereign and private borrowers, need liquidity, especially in US dollars, to finance their cash flow requirements, including rolling over debt that would be sustainable in the absence of capital flight. There are several components to providing bridge loans for at least some borrowers in emerging-market and developing economies, notably their governments, which will face huge costs due to the human health and economic toll of COVID-19. These policy measures are set out in several of the contributions to the Briefing and include:
- Extending the network of central bank swap lines and secured borrowing against official holdings of US Treasuries well-beyond G20 countries and currencies (chapter 9 by Christopher Collins, Simon Potter, and Edwin Truman).
- Agreeing on a standstill on developing-country sovereign debt payments to both official- and private-sector creditors (chapter 8 by Anna Gelpern, Sean Hagan, and Adnan Mazarei).
- Funding facilities at the International Monetary Fund and World Bank that will provide emergency loans and direct aid to governments to purchase necessary medical supplies and provide some basic human needs (chapter 7 by Simeon Djankov).
- Issuing more special drawing rights (SDR), the IMF’s international reserve asset, to ease financial conditions in low-income countries, which the IMF needs G20 members’ buy-in to do (chapter 10 by Christopher Collins and Edwin Truman).
Third, the G20 has to take into account the importance of the dollar to financial and real transactions throughout the world economy.[3] This means that excessive dollar appreciation has to be resisted and managed. Some appreciation of the dollar is inevitable due to flight to safety and to the still relatively better prospects for the US outlook than in other major economies (despite the terrible spread of COVID-19 in the United States at present). As analyzed by Christopher Collins and Joseph Gagnon in chapter 11 in the Briefing, this general appreciation is not the result of any active currency manipulation by G20 members or other sizable economies, especially given the common simultaneous shock and the generally similar monetary and fiscal stances undertaken.
In a bitter irony, most developing countries and even many higher-income economies wish that their currencies were not depreciating so much against the dollar right now, in contrast to the usual concern expressed at the G20 by successive US governments. And those countries are right to be concerned: Critical imports of medical gear and other human needs, debt payments denominated in dollars, and credit for the private sector more broadly become far more expensive when the currency depreciates against the dollar. Until the crisis abates, the G20 should not rule out coordinated intervention if there is sharp further dollar appreciation. Even if we are usually skeptical about the effectiveness of sterilized foreign exchange intervention, under the current monetary and political conditions a joint intervention has a good chance to be effective by signaling a consensus official view. Moreover, interventions to bid up emerging-market or developing-economy currencies against the dollar have a much better chance of working than interventions against the widely traded currencies of advanced economies.
All or nothing time for the G20
The way the G20 addresses the present global crisis will have ramifications that persist long after medical science produces the fundamental answers to preventing and treating COVID-19. In the past few years, the structure of international cooperation built up after World War II has frayed as never before, and across the world, economic nationalists are opportunistically driving governments further apart. Nationalistic responses to current shared challenges not only will be collectively damaging but also will leave a legacy of heightened distrust and even bitterness that will further damage the prospects for dealing with imminent global threats beyond the current crisis. Those threats include not just future pandemics but additionally the ongoing and massive tragedy of the planetary commons—the climate crisis. Productive G20 action now will deliver immediate worldwide gains in terms of lives saved and jobs recovered and also demonstrate the power of global cooperation and set policymakers on a better path. The price of failure is a less prosperous and more dangerous world.
Notes
1. This is in contrast to the types of deals attempted in the G7 and other international forums—occasionally successfully, but usually not—which have sometimes asked member economies to make differentiated contributions or to trade off some kind of donation now for getting their own payoff later. Part of the reason for the skepticism about G20 cooperation being achievable or useful today is the track record since the 1978 Bonn Summit of such deals failing due to either freeriding or exploitation of some participants by others. Arguably, the G20 is seen as having accomplished little since 2011 because it made unsuccessful attempts in this direction. That is also why the current situation of a truly global pandemic is different, and akin to the 2009–10 period when G20 cooperation delivered.
2. This may be why there has already been a great deal of convergence on design and scale of fiscal and monetary policies adopted by G20 members. (The wisdom of current policymakers who learned from the last crisis and the near unanimity of economists across the partisan span of the profession also deserve some credit.)
3. This is a long-standing systemic concern, though the current crisis exacerbates the costs of excessive dollar dependence in international trade and finance. See Carney (2019).
