The world economy is experiencing a corrosion of globalization. The web of economic and commercial ties across the world is fraying, with more frequent and larger gaps in it—even as trade in goods, services, and technology shifts locations and in some places grows. For globalization is multidimensional, encompassing much more than international trade, though panic about trade gets most of the political and press attention. What matters for human welfare is the quality, not the quantity, of globalization. As global economic integration deteriorates, its benefits for everyone are eroding.
Worldwide, people want to be left in peace, make a decent living, educate their children, look after their families, and, if possible, save for the future. For decades that simple but profound state of economic safety and freedom became ever more widely attained, largely hand-in-hand with increased international openness. But we have been going mostly in the wrong direction on both counts since at least 2008, well before COVID-19. The economic and social impact of the pandemic has not just accelerated the corrosion of commerce and relationships across borders but also made undeniable the extreme vulnerability of the world’s population to disease, economic insecurity, and exclusion.
As a result, the risks of the most genuinely existential threats—climate change, technological slowdown, racial and gender-based oppression, digital disinformation and removal of privacy, aging populations, and the likely recurrence of epidemics—have risen. All of these threats are global, in that they are common to all humanity, and can be lastingly reduced only by global cooperative action. All of these threats are economic, in that beyond their direct human toll, their causes and lasting impact are meaningfully changed by our economic activities and policies. Both markets and international institutions have failed to deliver economic safety in the absence of global engagement by governments. Successful economic cooperation needs specific constructive policies with tangible deliverable results.
That is why we at the Peterson Institute for International Economics (PIIE) are providing work plans for Rebuilding the Global Economy. Heading into 2021 (and a new US presidential term), we are telling policymakers what needs to be repaired by defining critical and practical priorities and solutions. Our series, featuring memoranda to policymakers and virtual events with experts, have been published on a rolling basis since November 2020 and will culminate in a comprehensive PIIE Briefing in early 2021.
Rebuilding is a very deliberate and, we believe, apt verb for the task at hand. The global economy continues to exist, and it is necessary for the future well-being of all people, whether or not governments decide to withdraw from it. People and nations need a safe structure in which to conduct their economic lives, to join communities, and to be left in privacy. The building, however, has been allowed to sink into disrepair and, in some ways, has ceased to be fit for purpose. The architecture of the 1940s, updated on the fly in the early 1970s and again after 1989, does not meet today’s standards of inclusion and accessibility, does not have room enough for many growing (and some already grown) economies, and is inadequate shelter against the environmental threats we now face.
But the global economy is repairable. What is needed now are actionable plans setting out clear priorities for economic policymakers. These plans must reject the status quo and must be objective and specific in their assessment of what can be salvaged and repaired as opposed to what should be torn down and replaced. These plans must not, however, be grandiose architectural fantasies—we all have to continue living and working in the global economy even while substantial renovation is underway, and there are limits to how far people want to be disrupted. This is where the Peterson Institute can make a meaningful contribution.
The starting point for our Rebuilding the Global Economy program is a set of 40 memos targeted at specific senior policymakers in the US government, the European Union, and international organizations. In these memos we specify what the policymaker and their agency or department should prioritize to rebuild the global economy in their remit, what critical things they should stop doing or reverse immediately, and what institutional relationship they need to change or repair. These were released in tranches by agency or issue area and were accompanied by online public meetings. In early 2021, PIIE will release a comprehensive version of the key policy proposals and set out how they fit together globally across countries and issues.
We have limited our recommendations to policymakers in official positions because that is where actions must be prioritized and implemented. Nongovernmental organizations and interest groups—including labor unions, business organizations, environmental watchdogs, and representatives of excluded groups—must have a voice in this process, but the Institute does not presume to speak for any of them. We hope to engage them in discussion of our proposals over the coming months. Similarly, we have directed our memos to American, European, and especially international officials, where our fellows have experience, standing, and background. The officials of other regions of the world and some international organizations beyond our scope of research should be at the table just as much as the governments of the Group of Seven (G7) countries. We look forward to engaging with them as well. Starting now, PIIE will track the state of the global economy and the success of policy measures adopted to rebuild it in an accessible online format, to provide ongoing assessment of progress.
Constructive economic solutions to the existential threats we face are possible, but they must be targeted at practical rebuilding, and they must be global. Please join us in this effort.
—Adam S. Posen
President, Peterson Institute for International Economics
Read the memoranda to policymakers
THE WHITE HOUSE
Jason Furman to the Director of the National Economic Council [pdf] [Read online]
Karen Dynan to the Chair of the Council of Economic Advisers [pdf] [Read online]
Nicholas R. Lardy to the Chair of the US Delegation for Bilateral Economic Talks with China [pdf] [Read online]
Douglas A. Irwin to the Director of the National Trade Council/Office of Trade and Manufacturing Policy [pdf] [Read online]
OFFICE OF THE US TRADE REPRESENTATIVE
US DEPARTMENT OF THE TREASURY
Lawrence H. Summers to the US Secretary of the Treasury [pdf] [Read online]
Maurice Obstfeld to the Under Secretary of the Treasury for International Affairs [pdf] [Read online]
Joseph E. Gagnon to the Incoming Treasury Assistant Secretary for International Finance [pdf] [Read online]
US FEDERAL RESERVE
US DEPARTMENT OF COMMERCE
Evan G. Greenberg to the US Secretary of Commerce [pdf] [Read online]
Mary E. Lovely to the Under Secretary of Commerce for International Trade [pdf] [Read online]
Martin Chorzempa to the Under Secretary of Commerce for Industry and Security [pdf] [Read online]
US DEPARTMENT OF STATE
Marcus Noland to the Under Secretary of State for Economic Growth, Energy, and the Environment [pdf] [Read online]
Jeffrey J. Schott to the Assistant Secretary of State for Economic and Business Affairs [pdf] [Read online]
Cullen Hendrix to the Assistant Secretaries for the Bureaus of Energy Resources and Oceans and International Environmental and Scientific Affairs [pdf] [Read online]
US CONGRESSIONAL COMMITTEES
Gary Clyde Hufbauer to the Chairs and Ranking Members of House and Senate Subcommittees on Trade [pdf] [Read online]
C. Fred Bergsten to the Chairs and Ranking Members of the Senate Foreign Relations Committee and House Foreign Affairs Committee [pdf] [Read online]
Edwin M. Truman to the Chairs and Ranking Members of the Senate Foreign Relations Committee, House Financial Services Committee, and House Foreign Affairs Committee [pdf] [Read online]
Olivier Blanchard to the President of the European Central Bank [pdf] [Read online]
Simeon Djankov to the President of the European Bank for Reconstruction and Development [pdf] [Read online]
Jacob Funk Kirkegaard to the European Commission Executive Vice-President for a Europe fit for the Digital Age and Commissioner for Competition [pdf] [Read online]
Robert Z. Lawrence to the European Commissioner for Trade [pdf] [Read online]
Jean Pisani-Ferry to the President of the European Commission [pdf] [Read online]
Ángel Ubide to the European Commissioner for Economic and Financial Affairs [pdf] [Read online]
Nicolas Véron to the European Commissioner for Financial Services Policy [pdf] [Read online]
Reinhilde Veugelers to the European Commissioner for Innovation [pdf] [Read online]
Caroline Atkinson to the Secretary-General of the Organization for Economic Cooperation
and Development [pdf] [Read online]
Mark Carney to the Chair of the Financial Stability Board [pdf] [Read online]
Monica de Bolle to the President of the Inter-American Development Bank [pdf] [Read online]
Pinelopi (Penny) Koujianou Goldberg to the President of the World Bank [pdf] [Read online]
Anabel González to the Director-General of the World Trade Organization [pdf] [Read online]
José De Gregorio to the Managing Director of the International Monetary Fund [pdf] [Read online]
Patrick Honohan to the Chair of the Financial Stability Board [pdf] [Read online]
Olivier Jeanne to the General Manager of the Bank for International Settlements [pdf] [Read online]
Charles D. Lake II to the Leaders of the Parties to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) [pdf] [Read online]
Adnan Mazarei to the Executive Secretary of the United Nations Economic Commission for Africa [pdf] [Read online]
Peter Orszag to the International Monetary and Financial Committee [pdf] [Read online]
The global economy moves fast. We help you navigate it.
The Peterson Institute for International Economics (PIIE) is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions.
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The following clips and policy priorities were taken from the Rebuilding the Global Economy virtual event series. They represent some of the recommendations put forward by leading economists, organized by the government body or international organization responsible for policy adoption. Visit the event page for details and full event videos.
THE UNITED STATES
THE WHITE HOUSE
Jason Furman (PIIE) says the Director of the National Economic Council should work with Congress on an expanded fiscal stimulus program and coordinate stimulus efforts with other G20 nations to speed global economic recovery. Cooperation with international partners and bodies on other issues like taxation of multinational corporations and digital competition would raise revenue and give firms the predictability they need to operate around the world. At home, regulation of the digital economy should promote competition and maximize consumer welfare.
Periodic economic slowdowns in the United States have prompted temporary fiscal stimulus, leading to too small, short-lived, politically motivated fiscal policy, argues Karen Dynan (PIIE) to the Chair of the Council of Economic Advisers. “Automatic fiscal stabilizers,” linked to economic conditions, would more effectively strengthen economic recovery and guard against future downturns. The pandemic has underscored the need for stronger social safety nets, including expanded health insurance, protections for American workers, portable benefits, and programs to help children.
Nicholas R. Lardy (PIIE) argues that the United States can do little to slow China’s economic rise. Incoherent tariffs on imports from China have failed to achieve better trade balances. Weaponization of trade policy will incur costs that exceed anticipated benefits. To further US interests, the Chair of the US Delegation for Bilateral Talks with China must instead coordinate with allies and partners to deliver a consistent and more focused message concentrating on attainable goals.
Douglas A. Irwin (PIIE) says that the focus of the Office of Trade and Manufacturing Policy is currently too narrow, and it functions ineffectively. He recommends to the Director of the National Trade Council/Office of Trade and Manufacturing Policy that the office be folded into the National Economic Council or made a joint task force between the Departments of Commerce, Homeland Security, and Defense, allowing it to function as a coordinator of administration policy. Alternatively, it could simply be abolished. Whatever the future of the office, US industrial policy requires a rethink. The new administration should undertake an interagency study to identify industries essential to maintaining technological prowess and protecting national security and public health and provide additional support to strengthen those industries.
OFFICE OF THE US TRADE REPRESENTATIVE AND US DEPARTMENT OF COMMERCE
Rebuilding relationships with allies is a necessary first step for the US Trade Representative to achieve results, argues Chad P. Bown (PIIE). The United States must begin by lifting all bilateral tariffs on economic allies and negotiating with other countries to improve the core functions of the World Trade Organization (WTO). Reestablishing a working dispute settlement system to replace the Appellate Body would reduce uncertainty over the enforcement of trade rules. Negotiating with groups of countries is the best way to resolve disputes over subsidies in the industrial, agriculture, and fishery sectors and over digital commerce and services. The United States should also drop the purchase targets in the “phase one” deal with China, which do not encourage trade liberalization or market reforms.
Evan G. Greenberg (Chubb Limited/Chubb Group) asserts that containing the spread of COVID-19 is essential for economic activity to fully resume. The US Secretary of Commerce should adopt a national approach to testing, digital tracing, masks, and social distancing, while establishing a global surveillance program with Europe and China to help restart international travel. Joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would advance US interests in Asia and promote open trade. To improve US competitiveness, the Department of Commerce should seek to strengthen North American presence in global supply chains, focus on the US community college system, invest in digital and physical infrastructure, and provide federal support for technology research and development.
The protectionist response to the COVID-19 pandemic underscored the need for trade to promote American resilience, says Mary E. Lovely (PIIE). Resilience does not come from producing products domestically, but through diverse international partnerships. The Under Secretary of Commerce for International Trade should work with foreign partners to create an international market information system for medical supplies and medicines to track global stocks and prices and negotiate plurilateral agreements that preserve open borders in times of crisis. Trade can also foster inclusive growth. By promoting rural broadband access, the Under Secretary can create new opportunities in the services sector for American workers outside cities and coasts.
Globalized supply chains are moving firms’ research, development, and production overseas, says Martin Chorzempa (PIIE). Instead of trying to reverse this shift through sweeping export controls, which are burdensome for US exporters, the US Under Secretary of Commerce for Industry and Security should launch a “small-yard, high-fence” initiative with fewer export controls on commoditized products and stronger enforcement and monitoring of controls on high-priority technologies and products.
US DEPARTMENT OF THE TREASURY
No Treasury Secretary since World War II has faced so diverse and consequential a set of international challenges, observes Lawrence H. Summers (Harvard University). Restoring a healthy global economy will require mutual commitments from national governments to fund COVID-19 control measures, support aggregate demand, and protect emerging markets’ access to funding. The United States should lead efforts to build a global consensus on the most pressing macroeconomic challenges. The current period of slow growth, subtarget inflation, and low interest rates has not spurred a change in orthodox thinking. The Treasury Department should adopt a new view of economic stabilization that considers the risks of sustained underemployment and emphasizes fiscal policy to stimulate demand.
The current crisis will lead to an unprecedented federal debt level and place a premium on tax revenue, observes Maurice Obstfeld (PIIE). Without assurances that multinational corporations are paying their fair share of taxes, public support for globalization could deteriorate further. The Treasury should support the completion of inclusive frameworks on cross-border taxation and minimum tax levels. International cooperation should extend beyond financial issues. Corruption and cyber threats undermine global economic stability. The United States should push international governments and regulators to put these risks at the top of the agenda.
Addressing infrastructure shortages in emerging-market economies can help alleviate the savings glut, raise global asset returns, and ease immigration pressures in the United States, argues Peter Blair Henry (Leonard N. Stern School of Business). Reallocating savings from slower-growing, developed nations to emerging-market economies would deliver returns for the ageing populations of the rich world, ease secular stagnation, and stimulate global growth.
US FEDERAL RESERVE SYSTEM
The Federal Reserve bought securities and supported loans to small and medium-sized businesses to stabilize the economy during the COVID-19 pandemic. The scale of the response raised concerns that lending programs may keep unprofitable businesses afloat, draining resources from healthy parts of the economy and slowing the economic recovery. Stanley Fischer (Former Vice Chairman and Member of the Board of Governors, Federal Reserve System) argues that if there are prospects of businesses surviving, the government and the Fed should strive to keep them open. The unemployment generated by letting temporarily unprofitable businesses close would create much more economic suffering than temporarily supporting such firms.
The pandemic was a stress test for the US financial system. The resilience of the banking sector validated the reforms undertaken after the 2008-10 global financial crisis, but many of the capital and liquidity requirements have since been relaxed. Anna Gelpern (PIIE) argues that regulatory relief efforts must now be paused and reassessed. Regulatory relief refocuses oversight activity from rules-driven regulation to informal supervision, which often takes place behind closed doors. Reducing the transparency of financial oversight when questions remain over US capacity to abide by international norms could cast doubt on the legitimacy of the Fed and other regulators. The Fed should strengthen the transparency of its supervision activities to meet this imminent challenge.
David Wilcox (PIIE) calls on the Fed to clarify its statement regarding future purchases of long-term assets. The Fed could bolster public confidence by announcing thresholds for inflation and unemployment rates that have to be met before it stops increasing the size of its portfolio. The Fed should also consider increasing its inflation target from its current 2 percent level. A modestly higher target would help the Fed recoup some of its lost ability to fight recessions. Finally, the Fed should work with Congress to expand its recession-fighting toolkit. Monetary policy will be stretched to the limit in the coming years and other policy tools will be necessary to protect financial stability.
US DEPARTMENT OF STATE
Withdrawal from the Paris Agreement damaged the United States’ image and set back any reductions in global greenhouse gas emissions, argues Marcus Noland (PIIE). Rejoining the agreement was a necessary first step, but further domestic reforms—many of which are outside the State Department’s purview—are needed. The State Department will have to diplomatically manage the inevitable imposition of border taxes as countries try to maintain a level playing field for domestic and foreign producers facing new carbon taxes in different jurisdictions.
The United States can lead the global effort to address climate change by pressing for decarbonization targets in trade negotiations and carbon border tax adjustments that consider the energy used in the production of imported goods and services, argues Cullen Hendrix (PIIE). Progressive carbon taxes based on the trading partner’s income level will have the perverse effect of incentivizing the offshoring of carbon-intensive production to developing countries. But imposing a tax on the carbon footprint of the finished product will encourage trading partners to decarbonize their energy systems.
Rebuilding frayed economic relations with allies will be a primary responsibility of the State Department, explains Jeffrey J. Schott (PIIE). Protectionist trade measures and sanctions have damaged traditional allies’ economies and shaken US credibility as a reliable economic partner. Rebuilding trust in these relations will be necessary to build a common front to address shared threats like Iran’s nuclear ambitions.
Catherine A. Novelli (Listening for America) argues that the State Department must expand its domestic communication efforts. Without effective communication, misinformation prospers, eroding public support for the department’s initiatives and limiting their success.
US CONGRESSIONAL COMMITTEES
The US Constitution grants Congress the power to regulate commerce with foreign nations. But in the last half century, Congress has enacted more than a dozen statutes that delegate its power to the president. Gary Clyde Hufbauer (PIIE) urges Congress to reclaim its oversight of trade policy through an umbrella oversight law that requires congressional ratification of presidential trade actions. Congress should renew Trade Promotion Authority (TPA), which could be used to allow the United Kingdom to join the US-Mexico-Canada Agreement (USMCA) and set congressional priorities for countries to target for trade agreements.
International financial institutions are magnifiers of US policies on global issues. Their underfunding, including of other foreign affairs programs, has contributed to the erosion of US soft power in recent years. Edwin M. Truman (PIIE) argues that the 117th Congress should authorize the US Treasury to lend up to $75 billion to the International Monetary Fund (IMF) over the next two years and $4 billion to the World Bank to facilitate lending to members during the pandemic. The United States should also consider joining the Asian Infrastructure Investment Bank (AIIB) to limit China’s use of the bank to further its political objectives.
Multilateral organizations originally created and nurtured by the United States have been ignored or abandoned. C. Fred Bergsten (PIIE) calls for an urgent review of the entire legislative framework for US international economic policy, beginning with congressional hearings on effective US leadership of the global economy and on economic and security challenges in the US-China relationship.
Leila A. Afas (Toyota Motor North America) observes that the true costs of US tariffs go beyond price increases on imported goods. Tariffs, or even the threat of tariffs, force businesses to invest valuable time and resources into planning for anticipated disruption. These “uncertainty costs” affect investment and hiring decisions and stifle economic activity. The next Congress should further analyze these uncertainty costs and their indirect effect on the economy.
EUROPEAN CENTRAL BANK (ECB) AND EUROPEAN COMMISSION
Working Together on EU Macroeconomic Policy
In an environment of low interest rates and low inflation, monetary policy alone cannot stabilize the economy. Fiscal policy is also necessary. The European Central Bank currently deals with 19 fiscal authorities. Having one formal fiscal partner would help achieve the right mix of EU fiscal and monetary policies, argues Olivier Blanchard (PIIE).
The EU’s priority since the establishment of the euro has been to make sure that the currency serves the needs of the euro area. Jean Pisani-Ferry (PIIE) argues that the EU should now promote the international role of the euro. It should issue a euro-denominated safe asset on a large scale. The NextGenerationEU program provides an opportunity to do that. The EU should also support the extension of ECB swap lines to partner central banks during liquidity crises to expand the euro’s international use.
Prudent fiscal policy is no longer equivalent to deficit reduction. Deficits must be an instrument, not an objective, of fiscal policy, argues Ángel Ubide (Citadel). Lower interest rates have made the debt and deficit targets in the European Union’s Stability and Growth Pact (SGP) obsolete. The pact should be revised to focus on improving the quality of member states’ fiscal policy, instead of deficit reduction.
The European Union should have a stabilization tool at the federal level, says Lucrezia Reichlin (London Business School). It is difficult for monetary policy to meet the inflation target with interest rates close to the zero lower bound. The European Union needs other instruments. The NextGenerationEU recovery facility is a temporary measure and is not a substitute for a permanent tool at the federal level to support monetary policy.
Role in EU Trade, Regulation, and Innovation
For many decades, the EU has been preoccupied with internal issues. Shifting geopolitical realities and the emergence of the US-China rivalry are forcing the EU to redefine itself. The process should start with adopting a China strategy, argues Jean Pisani-Ferry (PIIE). Europe lacks a unified strategy over security concerns posed by Huawei and Chinese investments generally. To engage effectively with both the US and China, Europe must be clearer about its own aims.
The US-EU trade relationship needs reinvigorating, says Robert Z. Lawrence (PIIE). Steps toward resolving trade frictions over the Boeing-Airbus subsidy case and steel and aluminum tariffs will help restore cooperation, while more ambitious goals are placed on the backburner. Cooperation in setting standards in the transportation, health, and renewable energy sectors and international taxation could also yield gains.
The global financial system has become more multipolar, rendering the current infrastructure—based on informal coordination between critical firms—inadequate. Nicolas Véron (PIIE) argues for the creation of an international regulatory architecture to oversee financial information providers, including audit networks, ratings agencies, and trade repositories, to ensure a common basis for trust in cross-border financial activity and protect the integrity of the global financial infrastructure.
Following recent technological advancements and growing prominence of state-linked actors, the EU should focus on its core mission to combat market distortions in the digital sector, argues Jacob Funk Kirkegaard (PIIE). Digital “gatekeeper” platforms should be prevented from exploiting their position to the detriment of other suppliers; there should be strict limits on how long digital platforms can hold exclusive rights to big datasets; and state-linked entities that receive subsidies should be blocked from acquisitions and tenders.
COMPREHENSIVE AND PROGRESSIVE AGREEMENT FOR TRANS-PACIFIC PARTNERSHIP (CPTPP) MEMBER COUNTRIES
CPTPP member countries should strengthen the pact to mitigate the long-term economic damage of COVID-19, argues Charles D. Lake II (Aflac Life Insurance Japan Ltd.). Recent economic and technological developments have increased the need for cooperation on digital governance, supply chain resilience, and investment screening standards. Expanding the agreement’s scope to address these issues would ensure the CPTPP remains at the forefront of global trade issues. Additionally, membership should be expanded to market-oriented countries ready to commit to the agreement’s disciplines, creating new opportunities for trade expansion.
Malcolm Turnbull (Former Prime Minister of Australia) agrees that the CPTPP should be expanded. Increasing access to new markets, including the United States and the United Kingdom, would benefit both new and existing members by allowing for more diverse trade relationships.
China, however, is unlikely to join the agreement. Mary E. Lovely (PIIE) argues that China believes it has more to lose than gain from the CPTPP. The Regional Comprehensive Economic Partnership (RCEP) will, in the view from Beijing, solidify East Asian supply chains at a time when China already has free trade agreements with several CPTPP members. China would also be unwilling to make the necessary changes to its rules on foreign direct investment, industrial policy, and data flows to align them with standards in the CPTPP framework.
For the United States, the CPTPP is more attractive. The Trans-Pacific Partnership (TPP) was unpopular in Congress, but the revived CPTPP has suspended many of the contentious provisions, observes Jeffrey J. Schott (PIIE). US involvement in the CPTPP could mitigate the reorientation of Asian supply chains toward China through RCEP and a possible free trade agreement between China, Japan, and South Korea. The United States is also exploring ways to deepen ties with Taiwan. Engaging with it through a regional trade agreement like the CPTPP would create less political friction with China than a bilateral agreement.
WORLD TRADE ORGANIZATION (WTO)
No priority is more pressing for the WTO than fighting the COVID-19 pandemic and promoting resilience to future health crises, observes Anabel González (PIIE). Global supply chains preserved countries’ access to medical supplies during the pandemic. The next Director-General of the WTO should promote efforts to reach an agreement to limit export restrictions on critical medical supplies, including commitments from members to roll back restrictions previously imposed. US refusal to fill vacancies on the WTO’s Appellate Body has also deprived the global trading system of an effective mechanism to settle disputes. The WTO should seize the opportunity to restore an improved WTO dispute settlement function under a Biden administration.
Ngozi Okonjo-Iweala (Gavi, The Vaccine Alliance; Former Minister of Finance, Nigeria; Former Managing Director of the World Bank) stresses the need to restore a sense of purpose to the WTO, which was set up to raise income, employment, and standards of living. These core objectives should drive the organization’s priorities. The next Director-General of the WTO should make global trade more inclusive. Promoting ecommerce and developing a regulatory framework for digital trade would be one way to achieve this end.
The US services sector is hampered by obstacles to cross-border trade, restrictions on foreign direct investment, and regulatory misalignment. J. Bradford Jensen (PIIE) argues the United States should negotiate to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and revive the Trade in Services Agreement (TiSA) to facilitate fair and open trade across service industries. Programs like “Buy American” risk retaliatory exclusions of US companies from government contracts abroad. Instead, the United States should push for greater participation in the WTO’s Agreement on Government Procurement (GPA) and work with like-minded countries on regulatory convergence to open new markets for competitive US firms.
High production costs will limit COVID-19 vaccine manufacturing to a handful of high-income countries, and cold storage requirements will complicate distribution efforts, explains Chad P. Bown (PIIE). Facilitating vaccine distribution will therefore be a top short-term priority of the WTO.
INTERNATIONAL MONETARY FUND (IMF)
Public finances are under stress and fiscal deficits are set to rise, particularly in emerging-market economies. José De Gregorio (PIIE) argues that the Fund must be prepared to increase lending to low-income countries. The IMF can strengthen global resilience to future crises by increasing the availability of its resources, providing more debt relief, and developing its Integrated Policy Framework.
Many governments are struggling with debt in the wake of the COVID-19 pandemic. To resolve debt restructurings effectively, Peter Orszag (Lazard) proposes the development of contingent clauses in debt contracts that trigger an automatic extension or freeze of payments when the IMF certifies an economic crisis. Incorporating China into the Paris Club of sovereign creditors would also strengthen the debt restructuring process.
Joseph E. Gagnon (PIIE) predicts that conflicts over exchange rates and trade imbalances will arise as countries use exchange rate policies to generate growth at their trading partners’ expense. The IMF should do more to referee the international monetary system to prevent exchange rate abuse. The IMF has set up the analytical framework, which identifies excessive trade imbalances, but could go further and insist that exchange rate policies of its members must always aim to narrow trade imbalances.
When countries have unsustainable debt and restructuring is postponed, they gamble for redemption and take shortcuts to alleviate short-term pressures, often at the expense of long-term stability. Kristin Forbes (Sloan School of Management, MIT) proposes incentivizing early restructuring by using flexible bonds, contingent debt clauses, and clauses that prevent a borrower from using valuable assets as collateral to other creditors. The IMF can help draft these contracts and act as an outside arbiter to sign off on key variables, thereby boosting creditor confidence.
INTERNATIONAL FINANCE AND CENTRAL BANKS
As countries around the world set ambitious emissions reduction targets, risks are materializing in the financial sector. Depending on the speed of the transition to net-zero carbon emissions, banks could face losses through exposure to businesses that are no longer viable in the net-zero economy. Mark Carney (Former Governor of the Bank of England) argues the Financial Stability Board (FSB) should mitigate the risks to the financial system by creating a consensus around climate-related reporting. Disclosure must go beyond firms’ carbon footprints today and include their plans to manage future emissions. These forward-looking disclosures will help investors determine the viability of firms in a net-zero economy and allow financial institutions to better manage risks.
Since its creation, the FSB has focused on risks to banks, but many of the modern risks to the financial sector lie in nonbanks. Patrick Honohan (PIIE) calls for a revaluation of nonbank regulation to better protect against systemic risks. Shifting geopolitical power structures will also require a new push for inclusiveness. The traditional G10+ nations still dominate the FSB’s governance agenda. To ensure that the FSB’s work reflects the growing importance of new financial centers, it should increase engagement with China and other emerging-market economies.
The Bank for International Settlements (BIS) can help the global financial system prepare itself for the looming solvency crisis as a result of massive debt buildup and significant loss of revenue during the COVID-19 pandemic. Olivier Jeanne (PIIE) proposes that the BIS run an international stress test to assess the linkages and spillovers of potential solvency shocks to the banking system This stress test should especially cover the dollar wholesale funding market to assess whether reliance on the market should be scaled back.
Caroline Atkinson (RockCreek) outlines five areas where the Organization for Economic Cooperation and Development (OECD) must work to build credibility and facilitate cooperation between its members and G20 members, many of whom are not members of the OECD: cross-border taxation; regulation of digital technology; climate analysis and regulation; health care reforms; and productivity.
INTERNATIONAL DEVELOPMENT AND THE MULTILATERAL DEVELOPMENT BANKS
Some of the World Bank’s biggest successes have been in East Asia, particularly China. But the World Bank must redefine its relationships to reflect new realities, says Pinelopi Koujianou Goldberg (PIIE). A push for reforms should now guide interactions with China, particularly in climate change, intellectual property rights, and the social safety net. Trade tensions between the US and China have forced Southeast Asian nations to revisit trade policies, and the World Bank can advise low- and middle-income countries on the benefits of regional economic integration and open trade.
The European Bank of Reconstruction and Development (EBRD) is also well-positioned to further economic integration, particularly in the postcommunist economies of Central and Eastern Europe. The EBRD has helped the transition of other post-Soviet economies and can apply its expertise to Ukraine, wresting control of companies from Russia-dependent oligarchs and reorienting trade routes toward the European Union, argues Simeon Djankov (PIIE). The EBRD can assist Balkan countries to join the European Union and reduce Russian influence in the region.
The COVID-19 pandemic has disproportionately hurt the poorest populations of Latin America. Monica de Bolle (PIIE) says that the Inter-American Development Bank can help these populations by advising governments on how to fund social protection programs and health systems without exceeding fiscal constraints and plan for a future labor market that may face high long-term unemployment.
In Africa, lower commodity prices and lost tourism revenues and remittances have created an economic crisis. While countries differ in their experience, Adnan Mazarei (PIIE) outlines some broad priorities for the United Nations Economic Commission for Africa (UNECA), such as encouraging private creditors to participate in debt standstills and maintain the flow of funds to African nations. UNECA can also help design and implement a value-added tax to raise revenues in low-income economies and continue to push for the implementation of the African Continental Free Trade Area (AfCFTA), agreed in 2018, to facilitate the economic recovery from COVID-19.