1. Multilateral solutions to a better recovery

Long Covid, lost decade

A year after the WHO declared a world-wide pandemic, the global economy is in recovery mode. However, both the economic damage caused by the pandemic and the pace of recovery have varied considerably with developing economies once again bearing the brunt of the shock. Moreover, just as health experts are worrying about lasting adverse effects from Covid-19, there are grounds to worry that the adverse economic effects will also persist unless there is a change of policy direction and political ambition.

Two fundamental lessons can be taken from the current crisis. First, effective state capacity and intervention matter for a healthy economy and stable society. Countries, at all levels of development require sufficient fiscal and policy space to manage the vagaries of the business cycle, mitigating unexpected shocks of various kinds, and building resilient economies particularly, as in the case of most developing countries, where cycles and shocks derive from the actions taken elsewhere in the global economy. Second, given the asymmetric power relations that continue to structure economic opportunities in the global economy, to the disadvantage of developing countries, effective international cooperation is essential to achieving greater resilience and fairer outcomes from a more interdependent world.

Multilateralism in the three decades after World War Two built on these same lessons. It was only a partial success. Managed capitalism coexisted with a persistent and widening technological divide between North and South, wasteful military spending under a tense East-West divide with proxy wars crippled economic prospects in many developing regions, colonialism and lingering racial prejudice, unequal trade relations that inhibited productive diversification in many countries, and carbon-heavy growth that was heedless of the environmental cost.

Despite its faults, the core principles of Bretton Woods did, however, provide a rough template for a more balanced form of economic development in an interdependent world and provided a platform for a new generation of leaders from the South to break the bondages of colonialism and strive for a more inclusive international economic order.

Those efforts ended with the economic dislocations and debt crises of the late 1970s and early 1980s. Over the subsequent four decades interdependence has given way to hyper globalisation as the guiding narrative of international economic relations, in which the territorial power of strong states has become intertwined with the extra-territorial power of footloose capital. From the perspective of the less powerful, this state of affairs is more a mercantilist jungle than the open plains on which friendship, respect, justice and cooperation can flourish. Despite a growing number of economic crises – in Asia, Latin America and Russia in the late 1990s, around internet companies in 2000 and with international banks in 2008-09 – and a looming environmental breakdown, multilateralism has struggled to respond and reforms, while regularly promised, have been resisted by the strongest players. A good deal of the financial firefighting has instead been left to an alliance of Central Bank led by the United States Federal Reserve and an increasing swathe of global management has remained under the governance of large, and largely unaccountable, international corporations.

Covid-19 may prove a turning point in both crisis management and global governance. Adopting lockdowns to manage the pandemic certainly signalled a willingness to put people`s health before corporate profitability and advanced economies have been quick to marshal a larger raft of monetary and fiscal measures to ease the burden those lockdowns have imposed on their own populations, abandoning in the process some of their long-held neo-liberal dogmas. The latest stimulus package of the new administration in the United States would certainly seem to suggest that the era of big government is back. However, there are grounds for caution. Austerity, inflation targeting, trade and investment liberalization, innovative finance and labour market flexibility, amongst a litany of hackneyed economic ideas, retain a loyal following in policy circles and provide a default narrative for charting a well-trodden path for the global economy. This path led to a world of growing economic inequalities, arrested development, financial fragility, and unsustainable use of natural resources before the pandemic hit.

Moreover, despite the hopes of many developing countries now hanging in the balance, the inability of the international community to put forward comprehensive proposals to alleviate debt distress, inject emergency liquidity into the global economy or agree on an equitable distribution of any future vaccine are signs not only that policy-as-usual still prevails but that things could get worse.

If advanced country governments again opt for premature fiscal tightening in an attempt to bring down public debt and businesses adopt an aggressive cost-cutting strategy in an attempt to boost exports, recovery will fizzle out, with a double-dip recession likely in many countries in 2022, followed by a lost decade of slow growth, high unemployment and stagnant wages.

UNCTAD has estimated that, if adopted, a return to policies-as-usual will translate into average global growth rates of 2 per cent annually to 2030, significantly below the average rate of growth of 3.1 per cent experienced after the GFC, and even further below the average rate of 3.8 per cent between the ‘dot-com’ crisis and the GFC. In this scenario, by end of 2021 global unemployment will climb from a pre-pandemic rate of 5 per cent to above 8 per cent (an increase of about 150 million workers seeking for jobs), and will remain above 6 per cent until at least 2030. What is more, despite fiscal austerity, public debt ratios will continue to rise because of the slow growth of GDP and government revenues. UNCTAD estimates that in this scenario, despite an average annual growth of government spending as low as 1.2 per cent (compared with 2.9 per cent in the post-GFC period), the ratio of gross public debt to GDP for the world as whole will actually increase from 89 per cent in 2021 to 92 per cent in 2030.

In sum, without a change of direction in policy, the next ten years will be a lost decade for growth, development, employment, the environment and economic and social justice.