How Biden can lead a collective battle against Covid and its consequences
by Mark Sobel
On 1 April 2009, the G20 leaders came together in London for their second summit amid the darkest hours of the financial crisis. It was the first trip abroad for US President Barack Obama. The leaders committed themselves to a bold action plan to restart the world economy. That plan helped launch the recovery.
Twelve years later, the world faces a pandemic and its catastrophic consequences. The G20, largely missing in action in recent years, should revive the spirit of London, this time led by a new US president, Joe Biden. G20 leaders should gather together in Rome early in 2021, under the auspices of the Italian G20 presidency.
A Biden presidency will be far more committed than Donald Trump to multilateralism and rebuilding ties with America’s traditional allies. While that will engender much enthusiasm and relief around the world, it will not suffice to help reinvigorate the global economic and financial system.
For that to happen, a concrete G20 agenda will be needed, building on a renewal of American multilateralism. Such an agenda is well within grasp. A G20 leaders’ gathering should largely focus on economics and finance, including their relationship to health and climate issues. It should not get bogged down in a morass of detail.
Managing the pandemic: Macroeconomic and health policy
The first challenge is to strengthen the near- and medium-term outlook, which is intertwined with managing and overcoming the pandemic.
Our economies were put into lockdowns to flatten curves and mitigate the health crisis, thus allowing a safe reopening of activity and as close to a V-shaped recovery as possible. Macroeconomic support was to bridge the gap.
With a few exceptions, the G20 response is incomplete. Macroeconomic support – unprecedented fiscal expansion and monetary accommodation – was heroically put in place. It paved the way for the rebound, but its momentum is fading.
Monetary policy support in the major economies is largely exhausted, even if ammunition still remains. The pandemic is worsening societal inequality and leaving the poor behind. That puts a burden on fiscal policy.
At the London summit, G20 leaders rallied behind a $5tn global fiscal stimulus. At the Pittsburgh summit that September, the G20 looked to the future and the need for a more durable global growth model based on ‘strong, sustainable and balanced growth’.
To be sure, massive stimulus has been provided since the outbreak of Covid-19. But the fiscal support, while highly welcome, has lacked a common framing as was the case at the time of the London summit, nor is there a vision for the future as was put forward in Pittsburgh.
Vision is now needed to bolster the international response to the pandemic and its consequences. That approach must marry the near- and medium-term.
In the near term, withdrawing fiscal support prematurely would have catastrophic consequences. The US in particular must move forward with more help for the unemployed, state and local workers, and personal protective equipment.
But there should be no sense of complacency or belief that near-term assistance so far will suffice in the US or elsewhere in the G20. The pandemic is only at the end of the beginning. It is moving from a liquidity to a solvency phase. The global second Covid wave demonstrates the recovery is nowhere near as robust as hoped, largely because the health crisis has made a return to ‘normal’ impossible. There will be no sustainable recovery until the health crisis is durably addressed. Long-lasting scarring is widely available.
The outlook for global growth in the coming decade was already dreary to begin with – Japan’s potential growth is close to zero, Europe’s is trending towards 1%, the US’ has gone below 2%, and China’s may well slow to 3-4%. The pandemic will only further depress potential growth if not met with an active policy response.
The focus on medium-term growth should be strengthened as a necessary concomitant to the near-term effort. A smart fiscal policy will be necessary to overcome flagging potential growth, secular stagnation, and stall speed.
Climate change is the greatest existential threat to the planet and must be tackled. Future activity will depend far more heavily on technology, digitalisation and work from home, and less on commercial real estate and travel. Medium-term fiscal policy should support these societal transformations, including workers facing them, rather than propping up obsolescent firms. Support that generates high returns will represent a wise investment.
To this end, investments in infrastructure, climate and research and development offer a path forward. The International Monetary Fund should immediately formulate a global fiscal agenda for the G20’s near- and longer-term future, drawing inspiration from the work of the London and Pittsburgh summits. That plan should look at the extent of fiscal support that is needed to quicken the return to the pre-pandemic growth path. It should break down support by country, taking into account existing fiscal space, and offer concrete thoughts on measures to mitigate widening inequality. It should set forth the fiscal policies that would best help countries adjust to the ‘new normal’. It should clearly communicate where debt burdens, especially for the poorest countries, require treatment that may go beyond rescheduling, working with relevant official sector participants.
The G20 should call on the Italian presidency to bring together a high-level expert task force to put forward a concrete infrastructure and climate plan to transition to a non-carbon future. The US and Germany in particular face massive infrastructure needs – they should spearhead that effort. Europe should hasten implementation of and build upon its Next Generation Fund to address imbalances among member states and boost potential growth.
G20 leadership and co-operation will be essential to answering the climate challenge. The US should help galvanise the G20’s climate push by its readiness to re-join the Paris climate agreement. As the IMF’s work has underscored, carbon taxation can play an important role in reducing emissions. The G20 should fulfil its longstanding promise to eliminate fossil fuel subsidies.
Economic support must complement health measures. The G20 leaders must send a clear message to the world about wearing masks and sustaining social distancing. That would represent a remarkable turnaround for such countries as the US and Brazil. If and when a vaccine is found, widespread and rapid distribution across the globe will hasten the resumption of activity. The G20 leaders must ensure that adequate financing is available to produce and distribute a vaccine as quickly as possible for every corner of the world. To underpin global support for this effort on health, the US will announce that it is remaining in the World Health Organisation.
Emerging markets, low income countries, international financial institutions
At the London summit, the G20 mobilised more than $1tn in additional resources for emerging markets and low-income countries. This helped arrest a massive financial run on these nations.
The Federal Reserve’s heroic actions in March ended the sudden stop caused by the immediate financial fall-out from the pandemic. But challenges still abound for emerging markets and low-income countries. These nations face years of lost tourism revenues, commodity proceeds and remittances. Their social safety spending needs have risen sharply, while revenues are plunging. Additionally, they have less policy space than advanced economies to combat the downturn.
The G20 needs to step up.
Its key initiative to date has been the debt service suspension initiative, a proposal to defer debt service for low-income countries. Now extended until spring 2021, it aims to free up resources for social spending. One cannot yet be pleased by or take comfort from its results, but it provides a foundation from which to build. The G20 should expand upon DSSI and fill in the sizeable gaps in order to place the global economy on a more sustainable footing.
The private sector is simply not participating. Eligible countries have been slow to take up the DSSI, fearing that it would result in credit downgrades and wondering if a few months of debt service relief were worth it.
The participation of official creditors is spotty and confusing. Since the multilateral debt relief initiative of the mid-2000s helped wipe the slate clean, official debts have risen sharply to new ‘non-traditional’ creditors, especially China. Non-traditional creditors now dominate official lending. When low-income countries were faced with unsustainable debt in the past, the Paris Club of official creditors slashed or eliminated them. China and other non-traditional creditors are not Paris Club members.
The Chinese Development Bank, Chinese Export-Import Bank and state-owned commercial banks and firms have provided significant Chinese credits. Though unclear, it appears CDB lending is regarded as private by the Chinese authorities and is thus excluded from the DSSI. Whether CHEXIM co-financing is regarded as official or private is also unclear.
Beyond immediate debt service relief, it is clear that much official lending to low-income countries will need to be written down or off. While the G20 is developing a common framework of principles for this purpose, it will only represent a step forward, rather than a definitive solution to the problem.
Multilateral support from international institutions should not be used to repay the private sector, which should take responsibility for the risks inherent in its own lending. To that end, the official sector should develop approaches to make private sector participation in the DSSI mandatory, including that the private sector should not be able to hide behind credit rating agencies threatening low-income country downgrades. This would help countries avoid the perceived stigma of accessing the DSSI.
Strengthened debt transparency is essential, especially from non-traditional creditors and the private sector. The IMF and World Bank, as well as recipient countries and the private sector, have far more work to do on this front. The G20 should insist upon it.
China needs to be fully transparent about its official lending to low-income countries. Beijing should take a far more expansive interpretation of what constitutes official lending and apply Paris Club principles to its activities.
The London summit agreed to a $250bn IMF special drawing right allocation. A key debate has been whether a roughly $600bn allocation at this time is needed to provide additional resources to emerging markets and low-income countries. The governor of the People’s Bank of China has made an eloquent case for doing so, and a strong global majority supports that position. The US, and more quietly some northern European countries, have heretofore opposed an allocation, observing quite practically that 70% would end up on the balance sheets of countries with little need for SDR. Only some $25bn would go to, say, Sub-Saharan Africa.
An SDR allocation could face other challenges. Would it simply provide unconditional support to emerging markets and low-income countries to make debt payments, for example to cover unsustainable private sector and Chinese lending, and not boost social spending? Would countries even make widespread use of the SDR? After the London summit, use was sparse, and countries have not made much use of it in the pandemic.
A roughly $600bn allocation, though, could send a positive signal of international solidarity.
An SDR allocation could be linked to non-traditional creditors immediately agreeing to apply Paris Club principles to their official lending and provide full debt transparency, as well as making private sector participation in the DSSI mandatory. If an allocation takes place, the IMF must reach out to emerging markets and low-income countries and ensure that the allocation is actually used.
The IMF is seeking to raise funding to triple lending to low-income countries through its poverty reduction and growth trust and to boost resources for debt relief through its catastrophe containment relief trust. This endeavour merits support. However, it is far more important to raise grant funds to subsidise PRGT lending at the current 0% rate than to mobilise loans. The US should offer $1bn for PRGT subsidies and the CCRT.
The Fund could consider generating further low-income country resources through limited gold sales. IMF gold is an important backstop for creditor resources, and this backstop should be preserved. The Fund has almost 90m ounces of gold on hand. The yellow metal is now close to $1,900 per ounce, while the IMF holds gold on its books around $50 per ounce. A sale of 10m ounces could generate close to $18bn for low-income country support, while still leaving the Fund with 80m ounces. If the IMF pursues this approach, it should aim to sell as much of the gold as possible off-market in order to limit market impact.
The situation for emerging markets is more complex. Even if the economic losses associated with the pandemic are beyond their control and not of their making, they will be enduring. That means countries will need a mix of adjustment and financing to address the pandemic’s consequences. Asian emerging markets and many in Latin America are in strong positions, and have even been able to undertake limited quantitative easing on their own. Other emerging markets are already unsustainable or will be clearly pushed there by Covid. These countries will need to restructure debts along with IMF programmes. The restructurings should be sufficiently deep to address debt overhangs.
Some countries may face questionable sustainability. They will in many cases need IMF programmes. These programmes should provide more liquidity support than is the IMF’s traditional bent, and even possibly exceptional access, though not so much as to overload them with excessive debt. While this could be achieved under existing IMF procedures, the Fund could send a positive signal by creating a temporary special pandemic facility to provide such generous finance, and thus cordon off potential adverse precedents for lending in normal periods.
The IMF has substantial resources on hand, though the distribution of these is more heavily weighted toward backstop funding than to first line quota resources. This weighting should be rebalanced in the coming years. Quota negotiations are slated to conclude at end-2023. China accounts for more than 16% of the global economy, yet its weight in the IMF is 6%. Despite tensions between Washington and Beijing, China is a strong supporter of the Fund, and both countries share a common interest in a healthy and stable global economy and financial system. Were China to adopt measures on debt transparency and Paris Club principles, the US should stand ready to signal that it would be open to an increase in China’s voting power in the IMF and China becoming the Fund’s second largest member.
The World Bank and multilateral development banks offered support at the London summit through large-scale pledges of additional assistance for their membership. They should do so again. The World Bank in particular can be far more aggressive in its lending.
The first G20 leaders’ summit in Washington put forward a commitment not to raise new barriers to investment or trade in goods and services. This anti-protectionist refrain was repeatedly underscored at subsequent summits. By and large, in the immediate aftermath of the 2008 financial crisis, the ‘refrain’ significantly limited protectionist beggar-thy-neighbour behaviour.
Those constraints, especially in the last four years, have been pushed to the side. New protectionist measures, especially from the US, and the focus on bilateralism have substantially weakened the global trade framework.
The G20 should reaffirm its support for openness and trade. It should reinstate its ‘refrain’.
But one cannot be naïve. Multilateral trading arrangements advance trade and result in far less trade diversion, in contrast with bilateral and plurilateral deals. The latter, though, can still benefit open trade. Countries will favour plurilateral deals so long as multilateral progress proves infeasible – as was the case with the Doha round – and the World Trade Organisation’s reliance on ‘consensus’. Consensus should not mean that one nation alone blocks advances.
The WTO cannot reform itself from within. The G20 should launch an immediate ‘blue sky’ study of WTO reform, perhaps by an outside expert panel. The study should ask whether the Organisation’s consensus-based model works, and examine perhaps whether reliance on a lesser hurdle for ‘consensus’, supplemented by some form of weighted average voting, could advance trade. The reform effort should also explore changes to dispute resolution and appellate processes.
As a sign of good faith to launch these discussions, the US and China should re-engage and start talks with the aim of reducing tariff hikes over the past years and engaging on structural issues such as state-owned enterprise subsidies, industrial policy, forced technology transfers and the like. The US and Europe should also set up a dialogue specifically aimed at working out their differences on Boeing and Airbus.
The Washington, London and Pittsburgh summits launched a comprehensive plan to tackle the root causes of the financial crisis, and in particular strengthening the capital and liquidity of systemically important banks while reducing their leverage.
But in strengthening bank resilience, risks gravitated toward the far less regulated non-bank financial intermediation sector. In March, excess leverage, especially in the non-bank sector, created instability in the US Treasury market, repo, exchange-traded funds and corporate and muni bonds. The Fed and other central banks not only had to duplicate their crisis playbooks. They had to go far beyond them to pull the global financial system from the brink of calamity.
In addition to the gaps thus exposed, the extraordinary policy support implemented by financial authorities to quell the financial ructions caused by the pandemic are sowing the possible seeds for the next bout of financial excesses.
Another intensive round of financial sector reform is needed. The Financial Stability Board has already launched a holistic study of the developments in March. It must build on this study and propose concrete recommendations to achieve proper oversight of non-bank financial intermediation. It should do so next year. The recommendations will need to be adopted at the national level, and in the US, re-energising the Financial Stability Oversight Council should play a critical role.
Further, there is widespread consensus that in addition to micro-prudential regulation, G20 countries need to rely on macroprudential oversight and supervision to tackle financial stability risks. Yet macroprudential frameworks are still a work in progress, even over a decade after the financial crisis. Strong frameworks are essential on financial stability grounds and to allow monetary policy to concentrate on achieving central bank mandates. The G20 should instruct the FSB to bring authorities together for a renewed push on developing macroprudential frameworks and submit work by the autumn of 2021.
International tax issues
International tax issues are a longstanding irritant in the G20, mainly between the US and Europe. There are legitimate concerns across the globe about companies shifting profits to low tax jurisdictions to slash tax bills and avert paying taxes where revenues are generated. These issues have become all the more pressing with the advent of digitalisation. However, some European nations are moving unilaterally to impose digital services taxes, often targeting US digital firms such as Google, Amazon, Apple and Facebook, while ignoring more brick and mortar establishments.
The Organisation for Economic Co-operation and Development has spearheaded efforts to help the G20 find solutions, but these have not reached fruition. While progress is being made in reaching agreement on curbing tax avoidance through a global minimum tax, digital taxation remains mired in controversy and threatens to become an even more divisive irritant that could spark protectionism and upset trade.
The G20 leaders should send a strong message on the need to revive OECD efforts to find a comprehensive agreement in 2021.
A footnote: The US and China
The G20 leaders held their first meeting in 2008, convened by the US in recognition that the G7 alone no longer carried the clout to manage the world economy absent fast growing emerging markets, especially China. The US and China are now by far the two largest economies in the world. Despite rising tensions between the two, managing the global economy is impossible without a modicum of co-operation and engagement between Beijing and Washington. There are undoubtedly areas where relations between the two are going to remain extremely tense, such as the South China Sea and technology. However, both countries have an interest in a strong and stable global economy and financial system. Engagement between the US Treasury and Federal Reserve with the PBoC and Chinese finance ministry has been strong, technical, frank and professional. They have a common understanding of the challenges each other faces.
For any effort to revive the G20 and multilateralism to succeed, the US and China must find a way to better re-engage on the economic and financial front, and each must pledge and commit itself to fulfil its special responsibility for the management of the international monetary system.
The G20 has been moribund in recent years. Though the machinery has remained oiled, it has not stepped up well to address the pandemic and its consequences – a situation for which the G20 was designed. President Biden will have much work at home following his inauguration. But reviving the G20 on economic and financial issues will complement those domestic efforts and offer an opportunity to strengthen America’s standing overseas. The G20 has acted on a large range of issues. To start the process of reviving it, especially amid the pandemic, it will be important for leaders to act swiftly and boldly, focusing on principles and high priorities.
Mark Sobel is US Chairman of OMFIF, and a former US Treasury international monetary and financial official and US representative in the International Monetary Fund. He served as the US financial deputy for the London summit. The author thanks Matt Goodman and Stephanie Segal for helpful comments.
 Between end-2019 and September 2020, net use of SDR was roughly $4bn.
 The CCRT was establishment in response to a call from then US Treasury Secretary Jack Lew ahead of the 2014 Brisbane summit, aimed at providing debt relief for countries affected by Ebola.
 G20 finance ministers and central bank governors first met in 1999.
Picture: Gage Skidmore