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Rolph van der Hoeven and Rob Vos are the authors of a chapter* of the recently published book ‘COVID-19 and International Development’. In this blog, they elaborate on their chapter, which is about the international financial system. They urge governments worldwide to implement four reforms, necessary to create more fiscal space and access to adequate external finance for developing countries.
Deep inequalities in pandemic response capacity
The global economic crisis provoked by the COVID-19 pandemic has painfully revealed the fundamental flaws in the international financial and fiscal system (IFFS). While advanced countries could engage in massive fiscal and monetary support measures, low- and middle-income countries lacked such capacities and were hit disproportionally. During the first year of the pandemic (2020), advanced countries provided fiscal stimuli to the tune of 12.5 percent of Gross Domestic Product (GDP) on average. This was three times more in relative terms than the stimulus in emerging and other middle-income countries, and almost 10 times more than governments in low-income countries could provide (Figure 1). This divergence in government support mimicked the inequality in vaccine roll-out.
Figure 1. Fiscal and monetary support in response to COVID-19, as of January 2021
Four reforms to overcome financing flaws
As with past crises, a lack of adequate contingency financing forced poorer nations to take a big hit with lasting consequences. While high-income countries could engage in massive, and almost costless fiscal and monetary expansion, low-income countries saw their external debts increase to severe distress levels. In addition, they were forced to devalue their currencies, and curtail economic and social support programs. Consequently, an estimated 100 million to 150 million more people faced hunger during 2020, lifting the total number of people with not enough to eat to 810 million.[1]
The lack of fiscal space and access to adequate external finance for developing countries has its origins in the weaknesses of the International Financial and Fiscal System (IFFS). These structural weaknesses demand four urgent reforms, outlined below:
Such mechanisms would include, among other things, an internationally agreed, uniform corporate tax rate of approximately 25% to stop tax base erosion. This tax rate would hinder multinational companies shifting their profits to tax havens. Improved tax coordination should further include mandated publication of data on offshore wealth holdings. This would enable all jurisdictions to adopt effective progressive wealth taxes and facilitate the monitoring of income taxes effectively paid by the super wealthy. After years of deliberations, the G20 indeed agreed to a proposal for uniform corporate tax treatment in 2021. Unfortunately, at 15%, the rate is still significantly lower than we proposed, thereby falling short of making a more significant impact on boosting tax revenues and on limiting profit-shifting behaviour.[2]
Although existing mechanisms to renegotiate sovereign debts with private creditors have improved over the years, they are still far from adequate. This is due to the multiplicity of debt contracts, some of which are not subject to collective action clauses. These collective action clauses are perceived as preventing more drastic action in cases of crises; without them bonds could potentially lose a great amount of their value. A global institutional mechanism to renegotiate sovereign debts should, therefore, be put in place as soon as possible. To this day, sovereign debt solvency problems continue to be solved in an ad-hoc fashion, at little favourable terms to debt-distressed countries. Moreover, they are accompanied by policy conditionality. This leads to unnecessary hardship in affected countries.[3]
While the IMF has recognized the need for enhanced public spending by developing country governments, including those facing debt distress, in practice, however, it continues providing pro-cyclical policy advice. This means that the IMF asks for fiscal restraint, rather than deficit spending when economies are in recession.
As an important step in this direction, the IMF approved the issuance of US $650 billion in new SDRs in June 2021. However, no agreement has yet been reached regarding how these additional SDRs should be allocated to developing countries, and how they can leverage additional investment to foster sustainable development. Had such reforms been in place already, the pandemic response would have provided a fairer level playing field for emerging and developing countries. This would have mitigated the pandemic’s worst economic consequences.
Conclusion
None of these reforms should be seen as acts of charity. They are necessary to facilitate a global economic recovery that is both sustainable and equitable. As in past crises, government leaders have acted with a ‘me first’ attitude, as has been blatantly clear in the roll-out of vaccination programs. Some countries perceived this as a return to protectionism. This form of protectionism was evident in the unprecedented fiscal responses of high-income countries to protect the livelihoods of their own citizens, but which woefully disregarded the fate of people in low-income countries. The governments of those countries did not have the means to protect the livelihoods of their citizens to the same extent. Beggar-thy-neighbour policy responses, however, will affect global prosperity in the long term, and will make the Sustainable Development Goals elusive.
[1] Laborde, D., Martin, W. and Vos, R. (2021) Impacts of COVID-19 on Global Poverty, Food Security and Diets, Agricultural Economics 52(3) https://doi.org/10.1111/agec.12624, and FAO, IFAD, UNICEF, WFP and WHO. 2021. The State of Food Security and Nutrition in the World 2021. Transforming food systems for food security, improved nutrition and affordable healthy diets for all. Rome: FAO. https://doi.org/10.4060/cb4474en
[2] A. Cobham, 2021 Is today a turning point against corporate tax abuse? Tax Justice Network, 4 June 2022
[3] INET. (2021). The pandemic and the economic crisis: A global agenda for urgent action (Interim report of the commission for global economic transformation). Institute for New Economic Thinking. https://www.ineteconomics.org/research/research-papers/the-pandemic-and-the-economic-crisis-a-global-agenda-for-urgent-action
Note
*This blog is based on: Rolph van der Hoeven and Rob Vos (2022), ‘Reforming the International Financial and Fiscal System for better COVID-19 and Post-Pandemic Crisis Responsiveness’, Chapter 2 in Papyrakis, E.(ed.). COVID19 and International Development, Springer
Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.
About the authors:
Rolph van der Hoeven is Professor of Employment and Development Economics at the Institute of Social Studies (ISS)
Rob Vos is Director of Markets, Trade and Institutions Division at the International Food Policy Research Institute.
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The spread of coronavirus COVID-19 across the world has been accompanied by an explosion of activity on social media as people have tried to make sense of the implications of the virus and the speed of change. But the story that is emerging amid the chaos has failed to draw attention to the effect of the virus on low-income groups, making visible a radio silence on the plight of those in the Global South in particular. We need to break the silence to ensure the implementation of inclusive responses and a widening of the narrative beyond that of the privileged, write Lize Swartz and Josephine Valeske.
Following the progression of the coronavirus on news and social media from within the Netherlands, we have witnessed a worrying parallel development: a focus on the immediate economic effects of the crisis, including financial losses; reports of panic buying that have fueled further panic and anxiety; and the effects of quarantining on personal life. In the higher income households of Europe, social distancing and isolation are no more than an inconvenience for many, and one of the biggest concerns among young adults seems to be the boredom that will hit when being forced to stay at home for two weeks. For others it will be the lack of freedom of movement, the inability to travel for leisure and business or do things for pleasure.
Thus, two sides of the virus have become highlighted: either inconvenience through social distancing leading to eventual recovery, or death of the vulnerable as an impact of the virus itself. The ‘middle’—the physical suffering the virus will bring, rooted in pervasive structural socio-economic inequalities, has not sufficiently been discussed. The pandemic uncovers the effects of decades of neoliberalism undermining the welfare and healthcare systems all across the world. But in the Global South as well as in intentionally forgotten places in the Global North like the refugee camp Moria on Lesbos, the suffering will assume another dimension altogether.
There is still hope that low-income countries can avoid the pandemic, with Africa having put travel bans on Europe, China, and the US in a powerful twist of the discriminatory global visa regime. But if the coronavirus hits impoverished countries with high levels of social inequality and inadequate public health systems that still suffer the effects of (neo-)colonialism, that inequality will increase. For the vulnerable, the coronavirus will not be just an inconvenience, leading to loneliness or a temporary loss of income—it will likely cause untold suffering. The virus may result in the death of the physically vulnerable, including undernourished children and adults, or those with tuberculosis or Aids.
While it is true that the elderly across all income groups are experiencing the highest mortality rates, it is likely that young people in low-income groups will experience higher mortality than those that are wealthy, as is the case with influenza. A study by the University of Edinburgh found that the level of access to healthcare is associated with <65 year-olds’ influenza mortality rates. Deaths are not just numbers, but real experiences resulting in trauma and emotional distress.
Furthermore, often it is the suffering before possible death that strikes us hardest. Wealthier residents in the Global South, as many people in the Global North, will be able to self-isolate by withdrawing into their own lives, surrounded by high walls—properties where they can live in relative comfort for a few weeks, waiting for the storm to pass. Their place of safety is others’ place of danger. In informal settlements, isolation is not possible, where toilets and taps, where and if they are available, are shared. It is here where several people are crowded into a single room, sharing beds, utensils, space. It is here where diseases including tuberculosis spread more quickly. The suffering of those who cannot distance themselves socially, whose houses are not necessarily homes, or who do not have a house with a door and four walls, needs to be emphasized. The suffering of those who usually wander the streets during the day and now have to be confined into what might become a death trap.
When the time for isolation comes, not only will it be impossible in densely populated areas, it will become devastating. Many workers survive from their daily wage, living hand to mouth. Those without a choice will have to go to work, and the virus will spread. The dependence on public transport, particularly buses and trains, in developing countries should not be negated. Wearing a mask won’t help if you’re crowded into a small space. And as horrible as working with a fever and breathing troubles sounds, it might still be better than what will happen if the governments declare shutdown and sentence the extremely poor to go hungry for days or even weeks.
In addition, school feeding programmes for many children provide the only nutritious meal that they get each day—or the only meal they may get. Staying away from school can be devastating for families who cannot afford to feed their children, both in the Global South as also in places like New York City, which hosts 114,000 homeless children. And impoverished people who cannot afford private healthcare will have to wait in queues in clinics and at hospitals for free medicine—to the extent that they are accessible or proximate—increasing their risk of exposure to sickness.
Perhaps the worst of it all, however, is that for many low-income groups in the Global South, the physical effects of the pandemic and the sudden confrontation with death by illness are not at all as novel as they are for us in the rich countries. Death and suffering from communicable diseases is much more common in the Global South than in the North (see figure below). The daily death count of “poor people’s diseases” such as tuberculosis and malaria are at present much higher than those of the coronavirus, but these illnesses, often easier to fight than the novel virus, are usually forgotten―as are their victims.
The coronavirus is threatening to sharpen divides both intra- and internationally, not only revealing differences in adaptive capacity based primarily on socio-economic circumstances that affect individual responses to the virus, but also highlighting ignorance regarding the constant high level of exposure of vulnerable groups to communicable diseases. The very silence about these inequalities perpetuates them. Strong responses are sorely needed, including ongoing pressure to ensure that interventions are inclusive and target vulnerable groups first instead of focusing on the business sector.
Moreover, individuals need to break the silence by directing their gaze outward, away from their own societies, to reshape the narrative of the crisis by driving the focus away from the privileged who continue to dominate sense-making processes and who are dampening or silencing the voices of others in the process. And finally, it should not be forgotten that what wealthy societies are facing now has been the daily reality for many around the world, and that our imperial gaze often prevents us from recognizing this.
This article is part of a series about the coronavirus crisis. Find more articles of this series here.
About the authors:
Lize Swartz is a PhD researcher at the ISS focusing on water user interactions with sustainability-climate crises in the water sector, in particular the role of water scarcity politics on crisis responses and adaptation processes. She is also the editor of the ISS Blog Bliss.
Josephine Valeske holds a MA degree in development studies from the ISS. She is currently an intern at the Transnational Institute in Amsterdam and the blog manager of the ISS Blog Bliss. Her reseach interests lie in the areas of aid, corporate accountability, and social and economic justice.
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A remarkable ‘big switch’ has emerged from the turn of the millennium in terms of attitudes towards and discourses over globalisation. But while the world is currently witnessing a new backlash against economic globalisation, considerable support for globalisation within some parts of the Global South should not be overlooked.
While the world is currently witnessing a new backlash against economic globalisation, considerable support for globalisation within some parts of the Global South should not be overlooked. Supporters of the UK’s exit from the European Union seek to “take back control” from Brussels, while Donald Trump’s economic ethno-nationalism has promised to put “America first”. In contrast, the picture that emerges in the Global South is quite different, as part of a remarkable ‘big switch’ that has been taking place from the turn of the millennium in terms of attitudes towards and discourses over globalisation.
Support for globalisation in the global South
The polling company YouGov, in a 2016 survey of people across 19 countries, found that France, the US and the UK were the places where the fewest people believe that “globalisation has been a force for good”. In contrast, the survey found the most enthusiasm for globalisation in East and Southeast Asia, where over 70% of respondents in all countries believed it has been a force for good. The highest approval rate, 91%, was in Vietnam.
From a poor starting point, many in the Global South have experienced some improvement in basic development indicators in the 20th and 21st Centuries. People living in Asia accounted for the vast majority of those who experienced relative income gains from 1988 to 2008. In comparison with the 1990s, the Global South now earns a much larger share of world GDP, has more middle-income countries, more middle-class people, less dependency on foreign aid, considerably greater life expectancy, and lower child and maternal mortality rates.
Less of a backlash in the Global South necessarily means support for neoliberal globalisation—and the optimism in countries such as Vietnam may paradoxically be a result of an earlier rejection thereof. China, in particular, has not followed the same approach to economic globalisation as that which was encouraged by the US and organisations such as the IMF and World Bank in the late 20th Century.
Meanwhile, many of the world’s poorest in the Global South have seen very little improvement in quality of life in recent years, yet they are much more marginal and less well-positioned to express their frustrations than the ‘losers’ in countries such as the US and UK. They must not be forgotten.
China and India warn against deglobalisation
Most notably, the last two World Economic Forum gatherings at Davos have seen explicit statements from the respective leads of China and India warning against deglobalisation. In January 2017, China’s president Xi Jinping said that his country would assume the leadership of 21st Century globalisation. Defending the current economic order, Xi said that China was committed to making globalisation work for everyone—its responsibility as “leaders of our times”.
At Davos in 2018, Narendra Modi, prime minister of India, warned against deglobalisation:
It feels like the opposite of globalisation is happening. The negative impact of this kind of mindset and wrong priorities cannot be considered less dangerous than climate change or terrorism.
The ‘big switch’ on globalisation
It is remarkable that the backlash most associated with the Brexit referendum in the UK and the election of Donald Trump in the US has emerged from the right of the political spectrum, in countries long recognised as the chief architects and beneficiaries of economic globalisation.
At the turn of the millennium, the primary opposition to globalisation was concerned with its impacts in the Global South. Joseph Stiglitz, former chief economist at the World Bank, in his 2006 book Making Globalization Work wrote that “the rules of the game have been largely set by the advanced industrial countries”, who unsurprisingly “shaped globalization to further their own interests.” Their political influence was represented through dominant roles in organisations such as the World Bank, the International Monetary Fund and the WTO, and the corporate dominance of their multinationals.
In the 1990s the anti-globalisation movement opposed neoliberal economic integration from a range of perspectives, with a particular emphasis on the Global South. The movement was populated by activists, non-governmental organisations and groups with a variety of concerns: peace, climate change, conservation, indigenous rights, fair trade, debt relief, organised labour, sweatshops, and the AIDS pandemic.
Yet, in the aftermath of the Brexit vote, UK prime minister Theresa May offered a sceptical assessment at the 2017 World Economic Forum at Davos, arguing that “talk of greater globalisation can make people fearful. For many, it means their jobs being outsourced and wages undercut. It means having to sit back as they watch their communities change around them.” The US, under Trump, subsequently began renegotiating NAFTA and withdrew from the Trans-Pacific Partnership.
Significant proportions of the population in the US and other countries in the Global North have experienced limited, if any, income gains in the most recent era of globalisation. Leading global inequality expert Branko Milanovic has explored changes in real incomes between 1988 and 2008 to show who particularly lost out on relative gains in income. He found two groups lost most: the global upper middle class—those between the 75th and 90th percentiles on the global income distribution scale, of whom 86% were from advanced economies—and the poorest 5% of the world population.
Emerging evidence indicates that increased global trade has played a role in economic stagnation or decline for people in the North, especially in the US. MIT economist David Autor and his colleagues suggest that the ‘China shock’ has had major redistributive effects in the US, leading to declines in manufacturing employment.
Economists had previously argued that the “losers” from trade could be compensated by transfers of wealth. Autor and his colleagues found that while there have been increases in welfare payments to regions of the US hardest hit by the trade shock, they fall far short of compensating for the income loss.
Not just globalisation
Not all of the stagnation and decline experienced in the Global North can be attributed to economic globalisation. Technological change is a big factor and national policy choices around taxation and social welfare have also played key roles in shaping inequality patterns within countries. In such a context, ‘globalisation’ has been deployed as a scapegoat by some governments, invoking external blame for economic problems made at home.
The current backlash is not just about economic globalisation. It has involved ethno-nationalist and anti-immigrant components, for example among supporters of Trump and Brexit.
A key lesson from the late 20th Century is to be wary of wholesale attacks on, and sweeping defences of, 21st Century economic globalisation. In light of the difficulties of establishing solidarity between ‘losers’ in different parts of the world, the challenge of our times is for an alter-globalisation movement which addresses all of them.
Moreover, if the stellar growth rates of the last 15-20 years slow down, the relatively positive view of globalisation in much of the global South may not continue, with the possibility of a backlash (re)emerging beyond the Global North.
Also see: Deglobalisation 2.0: Trump and Brexit are but symptoms by Peter A.G. van Bergeijk
