22, 2020 / 02:07 PM / by Tao Zhang / Header Image
Credit: Eurasia Review
Thank you for the opportunity to speak to this distinguished audience.
As you are only too aware, we are in the midst of a crisis like no other. The pandemic has sent shockwaves through the global economy. People are worried about their lives and livelihoods. Many businesses are either closed or waiting for customers to return. Governments are stretching their spending capacity. And the stability of financial systems is threatened. Policymakers all over the world are looking for ways to contain the spread of the virus while limiting the economic fallout.
And this is a truly global crisis. The COVID-19 virus does not stop at borders. For this reason, coordinated, international strategies to fight the virus and its economic impact are more effective than going it alone.
It is time now for global cooperation and multilateral coordination. Yet this has been slow to happen. It took two global, devastating wars for the international community to see the value of the multilateral system. But support for multilateralism has been weakening for several years now. And some feel that this trend has accelerated during the crisis.
I want to highlight two areas in particular where we desperately need multilateral solutions, and then I'll move on to some broad ideas on how to strengthen the dynamism of multilateralism.
Two areas in need of multilateral solutions
I want to draw your attention first to the challenges faced by developing economies.
These countries have been hit hard by the pandemic-first, from severe domestic economic contractions triggered by the virus and the lockdown measures imposed to contain it; and second, from a "perfect storm" of external shocks, including falling exports, sharp capital outflows, lower receipts from remittances, and lower tourism earnings.
At the same time, governments in developing countries have very limited resources to respond to the crisis. Advanced economies boosted fiscal spending by almost 9 percentage points of GDP. And emerging economies boosted their spending by 4 percent. By contrast, developing countries were, on average, able to make only 2 percentage points of GDP available.
This is simply not enough to cover their immediate needs.
In the absence of an adequate policy response, lasting damage to developing countries is likely. This would make achieving the 2030 Sustainable Development Goals even more difficult-and even before the crisis, achieving the SDGs would have required a major scaling up of international assistance.
National governments certainly have their part to play, in terms of raising taxes efficiently and equitably, and also allocating spending appropriately. Bilateral donors also will need to step up their assistance. Other actors, including civil society and the private sector, will need to get involved more actively. But multilateral institutions have a key role as well-in project financing and in helping countries to meet their international liquidity needs. Some countries, when they emerge from the crisis, may also need to restructure their debt, and this in the past has involved assistance from multilateral bodies like the Paris Club.
Now, the second area where more multilateral cooperation is greatly needed at this time is in addressing climate change. Countries have a great deal of work to do in terms of adaptation-that is, making the kinds of investments and changes to economic processes that will be needed to adapt to a changing climate. And there is certainly an element of multilateral cooperation needed here, as many poorer countries will need advice and financial assistance from the rest of the world. But another important multilateral dimension appears when we talk about mitigation-that is, how to alter our behavior collectively in order to slow or stop climate change.
There is already a multilateral process to deal with climate change- the annual United Nations Climate Change Conferences, also called the "COP" meetings. And the world is now gearing up for the pivotal COP-26 meeting next year, where parties will be revising their climate strategies.
Clearly, more need to be done. For example, current mitigation pledges fall well short of what is needed to meet the Paris Agreement's objective of limiting global warming to 1.5 to 2 degrees centigrade. Global carbon prices average $2 per ton, and they likely need to get up to $75 per ton, according to some recent analyses. Acting unilaterally, countries do not have enough incentives to scale up their mitigation.
One possible solution is the concept of an "international carbon price floor." If, for example, major stakeholders would simultaneously implement a minimum carbon price within their jurisdictions, this would cover about 70 percent of global emissions reduction opportunities while providing reassurance about potential losses in competitiveness from carbon pricing. Such an arrangement could be designed equitably, with stricter requirements for advanced countries, and flexibly to accommodate different policy approaches at the national level. And, as discussed in our Fiscal Monitor report in 2019, even fairly modest levels of carbon pricing could be highly effective in scaling up global mitigation.
But again, such a solution will require international cooperation.
So how can we restore the dynamism of multilateralism that is so desperately needed in these two areas, among others? I don't have a magic recipe, I'm afraid, but a few points come to mind.
First, we, the multilateral organizations, need to "up our game." We have to be nimble, responding quickly to a fast-changing landscape. And we have to be innovative.
I'm proud that the IMF has been a strong partner for countries, including in the initial phase of the COVID-19 crisis. We have provided more financing and to a greater number of our members than at any other time in the history of the IMF. We've led the call for debt relief for the poorest countries, which was adopted by the G20. We've continued to provide policy advice and technical assistance. And we've done all this while working from home.
We've also been bold, I think, in devoting substantial resources to issues of climate change, inequality, gender, governance, social spending, and fintech, among others. We've realized over the past few years that we can't adequately fulfill our core mandate of ensuring global macroeconomic stability if we ignore these critical issues that countries are grappling with.
Without a doubt there is much more that we can do. And the same is true for other international organizations, which also have stepped up but need to go further. If we can't show the world that its multilateral organizations are highly effective, our calls for enhanced multilateralism will surely ring hollow.
Second, we need to acknowledge that multilateralism is bigger than the international organizations charged with its stewardship. In particular, we need to forge new partnerships to bring in other players, including private investors and civil society. Consider, for example, the concept behind the Compact with Africa-a G20-led initiative aimed at closing infrastructure gaps and boosting private investment. If successful, it can serve as a template for bringing in and leveraging the creativity and productivity of the private sector. We should expand such initiatives and also leverage corporate efforts to promote good governance, as well as corporate social responsibility.
Third, we need to do a better job in our advocacy, to make clear just how much the world has to lose if we allow multilateralism to wither. Globalization has been a major driver of income growth, and indeed human development, over the past few decades, lifting countless millions of people out of poverty. But some of its downsides, including rising inequality, had already become apparent before the pandemic, and the crisis has revealed additional downsides of our interconnectedness.
Severing connections between people and businesses, however, may lead us to the wrong outcomes. A better solution, we think, is to recommit ourselves to openness and international cooperation, but to acknowledge the downsides and redouble our efforts to address them. Among other things, we need to protect labor and environmental standards, we must ensure that international tax regimes help to prevent base erosion and profit shifting, and we need to address complicated issues related to trade in digital services and the flow of data.
All of these can happen only if countries cooperate with each other to work on the building blocks for our future prosperity.
Let me wrap up by saying that we can reinvigorate multilateralism. We will need to innovate. We will need to reach out to new partners. We will need to re-engage and build trust across the board. If we can pull together and generate renewed momentum in the areas such as development and climate, we can reignite enthusiasm for multilateralism and all it has to offer. I look forward to your help, your support, and your ideas.
Thank you very much.
About the Author
Tao Zhang is a Deputy Managing Director at IMF