The coronavirus crisis highlights just how much the world needs a well-coordinated and well-resourced system of international public financing. Global Public Investment offers an ambitious approach towards pooling resources and knowledge.
The coronavirus pandemic is in full force, with much of the world in lockdown – or near lockdown – conditions, an unprecedented situation. In addition to the terrible human cost in lives lost, many are also rightly focused on the catastrophic economic consequences of a worldwide shutdown, and the urgent need for states and public finance to play a key role in supporting workers and businesses, and rebooting economies worldwide.
The UN’s Conference on Trade and Development has warned that the world economy could be on course for a US$2 trillion hit. The UN’s Financing for Development (FfD) agenda, already severely off-track, is now likely even more derailed, just as we enter the ‘decade of action’ on the UN’s Sustainable Development Goals (SDGs).
While the prognosis is bleak for the richest countries (some are predicting a slump worse than the Great Depression a hundred years ago), concerns are also being raised about the threat posed to the poorest and most vulnerable countries. Impacts will be felt not only through under-resourced healthcare systems but also in trade and financial channels. Steep declines in key commodity prices, weakening public revenues and turmoil and panic in international financial markets is leading to large-scale capital flight from emerging markets and a surge in sovereign borrowing costs. These threaten to further exacerbate already very elevated debt levels across developing countries. Before this pandemic, 40% of low-income countries already faced debt crisis or a high risk of debt distress.
Governments around the world have already pledged trillions to avert financial meltdown. In the UK, a GBP 330 billion rescue package for small- and medium-sized businesses has been announced, with billions more in tax breaks and support for workers, while the European Central Bank has launched an emergency bond-buying programme worth EURO 750 billion for eurozone economies. Most developing countries, however, do not have the same room for manoeuvre, with potentially devastating consequences for SDG progress over the next few years. Even before this crisis, the UN estimated a US$2.5 trillion annual SDG financing gap.
International public finance will also need to play a key role in economic recovery, including by providing more aid financing and billions to help countries cope with inevitable balance of payment needs over the coming months. International public finance plays a vital countercyclical role in periods of crisis, maintaining stable (and often increased) flows while private sector investments retreat. Yet aid has flatlined prior to this crisis, and we are now likely to see pressure on future aid resources, in line with increased fiscal pressures in major donor countries, as a consequence of the pandemic. The institutional architecture for global macroeconomic recovery remains woefully inadequate, with the IMF and other regional financing arrangements lacking the resources (and in the case of the IMF, the legitimacy) to deal with a crisis of this scale. It remains to be seen whether recent calls (by the Center for Economic Policy Research (CEPR) and Overseas Development Institute (ODI), among others) for the IMF to issue trillions in Special Drawing Rights (SDRs) to help the Global South will be heeded.
The coronavirus crisis highlights just how much the world needs a well-coordinated and well-resourced system of international public financing. Global challenges – from public health to bio- and cybersecurity, economic stability, climate change, humanitarian crises, the preservation of world heritage, international terrorism and crime control, and more – need global public responses, financed by ongoing and reliable public resources of a magnitude much higher than we see today. This is especially critical for developing countries.
Instead, over recent years, our willingness to cooperate – and finance – shared challenges has become inversely related to our need to do so, as some advanced economies have retreated behind nationalist rhetoric and conveyed the sentiment that, with rising wealth, many developing countries are now in a position to fund themselves. Many international institutions have become increasingly under-resourced, the UN especially.
The coronavirus crisis has laid bare the limitations of private finance, on which enormous expectations have been placed regarding SDG financing. Our call for a new approach – Global Public Investment (GPI) – reflects a need to move away from ad hoc, undemocratic and underfunded approaches to financing common challenges, and towards pooling resources and knowledge in a much more ambitious way. This will allow international public finance to realise its true potential. As Gordon Brown recently pointed out, an internationally coordinated medical project, pooling and mobilising all available resources, could enable us to discover a COVID-19 vaccine and cure much more quickly.
Financing for Global Public Goods (GPGs) needs to be a permanent fixture on the international financing landscape, reflecting the reality that shared challenges require coordinated, sustained and increasing resources over time – which simply can’t come from aid budgets or smaller ad hoc cooperation agreements. Over the coming months, I recommend an independent expert commission be established to explore options for improving the international architecture for financing GPGs (and, crucially, to outline the benefits of doing so). It should bring together the world’s best minds and a wide range of expertise.
This terrible crisis must provide the impetus the world needs for ushering in a new era of international cooperation and financing to solve global problems.