NEW YORK – The United States expects to “celebrate independence” from COVID-19 by Independence Day (July 4), when vaccines will have been made available to all adults. But for many developing countries and emerging markets, the end of the crisis is a long way off. As we show in a report for the Institute for New Economic Thinking’s (INET) Commission on Global Economic Transformation, achieving a rapid global recovery requires that all countries be able to declare independence from the virus.

Because the coronavirus mutates, it will put everyone at risk as long as it continues to flourish anywhere in the world. It is thus critical that vaccines, personal protective equipment, and therapeutics be distributed everywhere as quickly as possible. Insofar as today’s supply constraints are the result of a poorly designed international intellectual-property regime, they are essentially artificial.

While IP reform in general is long overdue, what is needed most urgently now is suspension or pooling of the IP rights attached to products needed to fight COVID-19. Many countries are pleading for this, but corporate lobbies in advanced economies have resisted, and their governments have succumbed to myopia. The rise of “pandemic nationalism” has exposed a number of deficiencies in the global trade, investment, and IP regimes (which the INET Commission will address in a later report).

Advanced economies, especially the US, have acted forcefully to reignite their economies and support vulnerable businesses and households. They have learned, even if only briefly, that austerity is deeply counterproductive in such crises. Most developing countries, however, are struggling to obtain the funds to maintain existing support programs, let alone absorb the additional costs imposed by the pandemic. While the US has spent some 25% of GDP to support its economy (thereby greatly containing the magnitude of the downturn), developing countries have been able to spend only a small fraction of that.

Our calculations, based on World Bank data, show that at nearly $17,000 per capita, US spending has been some 8,000 times higher than that of the least-developed countries.

Beyond unleashing their fiscal firepower, developed countries would help themselves and the global recovery by pursuing three policies. First, they should push for a large issuance of special drawing rights, the International Monetary Fund’s global reserve asset. As matters stand, the IMF could immediately issue about $650 billion in SDRs without seeking approval from member-state legislatures. And the expansionary effect could be boosted significantly if rich countries were to transfer their disproportionately larger allocations to countries in need of cash.

The second set of actions also involves the IMF, owing to its large role in shaping macroeconomic policies in the developing world, particularly in countries that have turned to it for help with balance-of-payments problems. In an encouraging sign, the IMF has actively supported the pursuit of massive, prolonged fiscal packages by the US and the European Union, and has even recognized the need for enhanced public spending in developing countries, despite the adverse external conditions.

But when it comes to setting the terms for loans to countries facing balance-of-payments stress, the IMF’s actions are not always consistent with its statements. An Oxfam International analysis of recent and ongoing standby agreements finds that between March and September 2020, 76 of the 91 IMF loans negotiated with 81 countries required public-expenditure cuts that could undermine health-care systems and pension schemes, freeze wages for public-sector workers (including doctors, nurses, and teachers), and reduce unemployment insurance, sick pay, and other social benefits. Austerity – especially cutbacks in these vital areas – won’t work any better for developing countries than it would for developed ones. And more assistance, including the SDR proposals discussed above, would give these countries additional fiscal space. 

Lastly, developed countries could orchestrate a comprehensive response to the overwhelming debt problems many countries are facing. Money spent servicing debt is money that is not helping countries fight the virus and restart their economies. In the early stages of the pandemic, it was hoped that a suspension of debt servicing for developing countries and emerging markets would suffice. But it has now been over a year, and some countries need comprehensive debt restructuring, rather than the usual Band-Aids that merely set the stage for another crisis in a few years.

There are a number of ways that creditor governments can facilitate such restructurings and induce more active participation from the private sector, which so far has been relatively recalcitrant. As the INET Commission’s report emphasizes, if there were ever a time to recognize the principles of force majeure and necessity, this is it. Countries should not be forced to pay back what they cannot afford, especially when doing so would cause so much suffering.

The policies described here would be of enormous benefit to the developing world and would come at little or no cost to developed countries. Indeed, it is in these countries’ enlightened self-interest to do what they can for people in developing countries and emerging markets, especially when what they can do is readily available and would bring enormous benefits to billions. Political leaders in the developed world must recognize that no one is safe until everyone is safe, and that a healthy global economy is not possible without a strong recovery everywhere.

This commentary is also signed by Rob Johnson, Rohinton Medhora, Dani Rodrik, and other members of the Commission on Global Economic Transformation at the Institute for New Economic Thinking.

NEW DELHI – On March 10, the credit-rating agency Moody’s placed Ethiopia on review for a downgrade. The problem isn’t violence and repression in Ethiopia’s embattled Tigray region. Rather, Moody’s has concluded that the Ethiopian government’s commitment to engage with private creditors, as part of the G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative, raises the risk that those creditors will incur losses. For that, the country apparently must be punished.

Whereas the DSSI aims to provide immediate relief to low-income countries during the pandemic, the Common Framework was designed to help debt-distressed sovereigns reschedule or reduce their liabilities. For many countries, it offers the best chance of making their debt burdens sustainable. But now, the threat of ratings downgrades is casting a shadow over these countries’ prospects.

This points to a systemic problem in international finance: the extraordinary – and undeserved – power wielded by a few private credit-rating agencies. Just three – Moody’s, S&P Global Ratings, and Fitch Ratings – control more than 94% of outstanding credit ratings. And there is significant cross-shareholding among them.

These oligopolistic firms are market movers and makers, influencing financial portfolio allocations, the pricing of debt and other financial instruments, and the cost of capital. Bolstering their authority, the US Securities and Exchange Commission has recognized them as official statistical rating organizations. And many institutional investors, required by law to hold only “investment-grade” assets in their portfolios, must abide by the rating agencies’ verdicts.

Concerns about ratings agencies were first widely expressed during the Enron scandal in 2001. Enron, an energy-trading company, had been using accounting tricks and complex financial instruments to mislead investors, creditors, and regulators about its value. The ratings agencies were certainly fooled: The Big Three all issued Enron investment-grade ratings just days before the company collapsed.

Credit-rating agencies have also been accused of enabling the United States’ subprime-mortgage bubble, which triggered the global financial crisis when it burst in 2008, and of exacerbating the bust through rapid reversals and downgrades. And they have been known to adjust ratings in ways that seem to reflect ideological positions, such as a commitment to fiscal austerity.

And yet, as Yuefen Li, the United Nations Independent Expert on Foreign Debt and Human Rights, points out in a new report, ratings agencies face no accountability for their mistakes or damaging behavior. Their ratings are legally described as “opinions,” which are protected under free-speech laws, and they do not disclose their methodology. In short, ratings agencies do not bear appropriate responsibility for the enormous power they wield.

Moreover, as Li also notes, conflicts of interest abound. Ratings agencies are private businesses, funded largely by the institutions they rate. And they are players in the markets they purportedly assess, meaning that self-interest inevitably shapes their decision-making. Ratings agencies have, for example, been involved in the creation of financial products that they were then responsible for rating – including the mortgage-backed securities that, flush with AAA ratings, helped bring about the 2008 crisis.

And yet, even as regulators work to limit conflicts of interest among most financial-market players, they seem content to leave credit-rating agencies to police themselves. The lack of regulatory action partly reflects the lobbying power of the Big Three. And it is generating serious risks, which the coronavirus pandemic has intensified.

For example, procyclicality in rating – another issue Li highlights in her report – is making financial-market conditions inhospitable for developing countries whose economic prospects have been undermined by the COVID-19 crisis. Furthermore, the threat of a ratings downgrade is preventing many governments from pursuing sufficient fiscal expenditure. Now, with the latest move from Moody’s, developing-country governments must fear entering into debt-restructuring negotiations with private creditors, even as part of multilateral programs aimed at providing debt relief.

If the G20 countries are serious about improving developing countries’ debt positions during the COVID-19 crisis, they should begin by supporting the temporary suspension of credit ratings. In the medium term, regulators must take action to ensure that rating agencies are fulfilling their intended market-stabilizing role. Tackling conflicts of interest – such as by limiting agencies’ dependence on payments from those they rate – is essential.

But regulating private ratings agencies may not be enough. The UN Conference on Trade and Development has long argued that the world needs an independent public ratings agency to conduct objective evaluations of the creditworthiness of sovereigns and companies. Such an agency is also necessary to assess the instruments used to finance new public investment, which will be in high demand in the coming years.

A global agency makes sense, because credit ratings, especially for sovereign debt, are international in scope. Perhaps more important, it would provide a much-needed counterbalance to unaccountable private agencies. It might even force the Big Three to embrace reforms that they have long resisted.

NEW YORK – Over the past year, rich-country governments and central banks have provided unprecedented fiscal and monetary stimulus to help mitigate the economic impact of the COVID-19 pandemic. Getting back to economic normalcy – whatever modified form that takes in 2021 and 2022 – will require advanced economies to start weaning themselves off official support before too long, and thereby avoid dangerous new complications.

On the monetary-policy front, central banks around the world did whatever was necessary to calm financial markets when the pandemic struck in the spring of 2020. They have since maintained a highly supportive stance, with historically low and in some cases negative real policy rates. Monetary policymakers reused and enlarged existing tools, and fashioned new ones as needed.

These crucial efforts have greatly inflated major central banks’ balance sheets. In December 2020, the combined assets of the US Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China stood at a staggering $28.6 trillion. The ECB accounted for $8.5 trillion of this total, and the Fed $7.3 trillion, while the BOJ and the PBOC had total assets of $6.8 trillion and $5.9 trillion, respectively.

Likewise, advanced-economy governments have pursued historically aggressive fiscal policies, casting aside spending restraints to provide broad and largely indiscriminate support to many who needed and deserved it. The Group of Thirty estimates that direct fiscal support for firms, employees, and the unemployed during the COVID-19 crisis now exceeds $12 trillion globally. That assistance, supported by a broad political consensus, has prevented a great depression and widespread hardship.

Many of these emergency measures were necessary and unavoidable. But as policymakers eye a possible recovery in 2021-22, they must be vigilant about the side effects of prolonged monetary and fiscal stimulus. The United States and other rich countries face several risks as they try to rehabilitate and refashion their economies.

For starters, the current equity high could quickly turn into a nasty headache as policy stimulus fades. Equities have been on a tear, fueled by huge liquidity flows and easy money, with yield-hungry investors piling into risk assets.

Moreover, markets implicitly understand that central banks currently stand behind most asset classes, elevating risk tolerance. This helps to explain the recent run-up, wobbly retreat, and subsequent rebound for Bitcoin, and the social media-driven surge that squeezed hedge funds that had been short-selling the retailer GameStop. And the craze for special-purpose acquisition companies (SPACs), which raise capital through an initial public offering and then look for private firms to buy, continues unabated.

But it is doubtful that the current equity boom and search for yield can be sustained if policymakers withdraw monetary and fiscal stimulus. The resulting market correction may be sharp and painful, and many investors will pay a heavy price.

A second risk relates to corporate pain. The extent of state support until now has kept business-closure and bankruptcy rates lower than normal in most advanced economies. But as governments and central banks dial back support, as they must, the process of creative destruction will resume among small- and medium-size companies, and even some bigger firms.

Many struggling firms currently being kept afloat by government largesse will not be solvent and sustainable in the post-pandemic economy. Policymakers need to allow them to go bankrupt, be taken over, or close. Recognizing this and allowing normal market processes to play out will hurt many companies and employees, and saddle banks with non-performing loans. But economies will have to stand the pain, because there is no alternative.

A third danger is that other sources of infection – which central bankers and supervisors may be ill-prepared to tackle – trigger a new economic contagion. For example, risks may come from the massive and growing shadow banking sector, which the Financial Stability Board estimates had financial assets in 2018 of $50.9 trillion, equivalent to 13.6% of the global total.

Other threats to economic stability abound, from cyberattacks and artificial-intelligence failures to bond-market stresses and sovereign-debt defaults. As economies recover from the pandemic, central bankers and regulators cannot afford to discount emerging new risks in unsupervised financial markets and technologies, or relax their vigilance in supervised sectors.

Lastly, there is the danger of relapse. If we fail to inoculate fully populations outside the core advanced economies against the coronavirus, we risk allowing unvaccinated groups to incubate new strains, leading to new COVID-19 surges. Vaccinating the world to avert this scenario would cost an estimated $38 billion – a negligible price to pay for fostering a robust global economic recovery. Rich countries must make the necessary funds available and stop hoarding vaccines.

Faced with these risks, policymakers in the advanced economies must be mindful of the side effects of their aggressive monetary and fiscal measures. Their task will be even harder if G20 governments – led by the US – fail to commit the modest resources needed to inoculate the world against COVID-19. We simply cannot afford repeated relapses, pandemic surges, and economic standstills.

LAGUNA BEACH – President Joe Biden’s announcement that the US will have enough COVID-19 vaccines for every American by the end of May has contributed to a rising tide of optimism about the country’s economic prospects this year. This, and other good reasons to be hopeful about the economy, opens a valuable window for the administration to address the complex policy challenges it is facing in 2021 and beyond.

On the positive side, Biden’s vaccine announcement came on the heels of economic data that beat the consensus expectations of economists and market analysts. The latest figures show that personal income grew by 10% between December and January, that manufacturing expanded by nearly ten percentage points year on year, and that 379,000 jobs were created in February (well above the consensus expectation of some 200,000). In keeping with with these trends, the Federal Reserve Bank of Atlanta’s much-watched (and notably volatile) GDPNow model now estimates annualized first-quarter GDP growth to have reached around 10%.

This notable economic pickup is being driven by the release of pent-up demand – both in the US and internationally – and by the fiscal stimulus package that Congress approved at the end of last year. Moreover, these public- and private-sector effects are both likely to intensify as vaccines continue to be administered more quickly, and as the Biden administration progresses with its two-stage rescue and recovery effort.

But three main challenges will need to be addressed quickly. First, progress toward increased vaccine availability is necessary but insufficient. To end the public-health crisis, stepped-up vaccine production will need to be accompanied by a high rate of vaccine acceptance, vigilant efforts to prevent a resurgence of infections, and ongoing resilience in the face of new variants of the virus.

Second, with competing signals from different labor-market data, the pickup in economic activity has yet to be accompanied by a sustained, strong rebound in employment. Moreover, the labor-force participation rate needs to recover more strongly.

The third challenge is highlighted by the debate among economists about whether the Biden administration’s proposed $1.9 trillion American Rescue Plan will lead to economic overheating. The fear is that the additional stimulus will trigger a spike in inflation and market interest rates, which could derail a sustained recovery and heighten the risk of financial-market accidents. Indeed, in recent weeks, there have already been two near-accidents that, fortunately, were countered by endogenous market flows.

In thinking about these challenges, one also must look beyond 2021. To develop into the type of recovery the US (and global) economy needs and is able to deliver, the current economic bounce will need to prove durable, inclusive, and sustainable. Policymakers will not only have to avoid some significant pitfalls this year; they will also have to do more to counter the pandemic’s lingering aftereffects, particularly those that could undermine households’ balance sheets and hamper productivity and growth both at home and globally.

Judging by the current course of the recovery, major headwinds could emanate from several sources. These include the likely widening of the economic, financial, and health divergence between advanced and developing economies; the deepening disconnect between Main Street (economic and social conditions) and Wall Street (financial asset prices); sovereign- and corporate-debt challenges (particularly in the developing world); and the social, political, institutional, and economic fallout from the recent spikes in inequality of income, wealth, and opportunity.

Good policy design and implementation can do a lot to minimize these risks. But sustaining the recovery will require an ongoing policy push. After the $1.9 trillion bill passes, the US will need to move expeditiously to enact the Biden administration’s second proposed fiscal package, which is aimed squarely at boosting longer-term productivity and inclusive growth.

Moreover, US policymakers need to look closely at the functioning of the labor market, both directly and in cooperation with the private sector. And they will have to embrace the delicate task of rebalancing the macroeconomic mix so that there is less reliance on unconventional monetary policies (particularly open-ended large-scale asset purchases and highly repressed policy rates), and more emphasis on structural reforms and macro-prudential measures.

After the annus horribilis of 2020, there is justifiable optimism about the US economy. A compelling vision of a much brighter future is coming into sharper focus. It can and should help policymakers to press ahead with preemptive action to mitigate the considerable risks on the horizon.

It would be a tragedy if world leaders were to repeat the mistakes of the post-2008 period, when it won the war against a depression but then failed to secure the peace through high, durable, inclusive, and sustainable growth. The US plays a critical role in this regard. By seizing the moment, policymakers can spare the US – and therefore the rest of the global economy – that unnecessary risk.

LONDON – The term “industrial strategy” has a turbulent history. After being embraced in the United Kingdom by the Labour governments of the 1960s and 1970s, it was rejected by Margaret Thatcher and subsequent prime ministers on the (dubious) grounds that government is inherently wasteful and inefficient.

Although industrial strategy was partly rehabilitated by the Labour Party in 2009, and then again during David Cameron’s Conservative/Liberal Democrat coalition government, it took Theresa May’s Conservative cabinet to bring it back fully. In 2016, May established the UK Department for Business, Energy, and Industrial Strategy, which then published the UK’s first Industrial Strategy in decades.

To its credit, the strategy called for more funding for science, skill formation, and other productivity-boosting investment, with an emphasis on sectors that are key to future competitiveness (including life sciences, creative industries, construction, and aerospace). For the first time, such a strategy also explicitly targeted wider societal “grand challenges,” which the UCL Commission for Mission-Oriented Innovation and Industrial Strategy (MOIIS) – co-chaired by one of us (Mazzucato) – advised the government on how to implement.

Rather than creating a list of sectors to support, we stressed that an industrial strategy should choose broader problems to tackle, whereupon all relevant sectors can engage in the solution organically. In this way, the state proactively shapes markets, rather than simply fixing them when they break.

Unfortunately, the UK’s return to industrial strategy was short-lived. This month, the Treasury replaced the May government’s strategy with a new blueprint, Build Back Better: Our Plan for Growth, arguing that “much has changed since 2017.” By this, the government is referring to the UK’s 2050 carbon-neutrality target and plans to “level up” the regions. And yet, neither of those goals is incompatible with the previous industrial strategy, which included “clean growth” among its four “grand challenges,” and paid special attention to “place.”

The 2017 strategy is as timely as ever, so one must assume that it was scrapped simply because the current government did not conceive it. The costs of such pettiness will soon become clear. The UK urgently needs a dynamic, entrepreneurial mission-setting state to confront the triple crisis of COVID-19, rising inequality, and climate change.

The UK’s success in developing a vaccine is itself an example of what can be achieved with an industrial strategy. The Oxford-AstraZeneca vaccine did not fall out of the sky. It was the result of patient investments made over many years (if not decades) in blue-sky research across a number of areas. When the moment of truth arrived, the state’s ongoing support for scientific and technical expertise became a launchpad for the rapid development of a vaccine. The pandemic presented a clear and urgent mission, which in turn spurred public-sector coordination and private-sector investment.

Prime Minister Boris Johnson’s government is clearly happy to have the state play a larger role in the economy. But that alone won’t produce better outcomes. Without a coherent, transparent, and publicly accountable framework to steer government policy, the UK risks descending further into cronyism or repeating past mistakes.

Successful industrial strategies also require sources of patient (long-term) finance, which the UK desperately lacks. Previous attempts to create public investment banks in the UK have met with only limited success. The Green Investment Bank was foolishly privatized in 2017, and the British Business Bank has never been given the mandate or financial firepower it needs. It remains to be seen if the government’s new UK Infrastructure Bank will be different; but early indications are not promising.

The Johnson government’s decision to scrap the Industrial Strategy Council – a move widely criticized even by business leaders – is an even more damaging act of self-sabotage. Led by the Bank of England’s chief economist, Andy Haldane, the ISC brought together key stakeholders to ensure that the 2017 industrial strategy was meeting its objectives. In its inaugural annual report last year, the Council emphasized that successful industrial strategies “typically take a lengthy period to have a significant and durable impact on the economy.” That is why we at MOIIS recommended that the ISC be put on a permanent statutory footing to ensure that it would outlast the government that created it.

Any economic strategy, regardless of whether it is called an “industrial strategy,” will need an institutional framework within government to oversee implementation across departments. And no government can achieve a goal as complex as carbon-neutrality without mechanisms for eliciting and coordinating the participation of business, academia, and civil society. A stop-start approach – where the strategy’s flagship sinks before its third birthday – fatally undermines the private sector’s confidence in the state.

The Johnson government’s new plan appears to be a restatement of the challenges outlined in May’s industrial strategy, but with a less thorough framework for policy responses. Gone are the “grand challenges” and sector deals; all we get are the same old graphs showing stagnant productivity and frozen real (inflation-adjusted) median incomes.

While the plan does offer some clarity about the government’s vision of “leveling up,” the question of how that will be achieved remains murky. The plan acknowledges that the UK has “weaker business investment [than other advanced economies],” yet proposes few solutions.

But the Plan for Growth does get one thing right: “Not all growth is created equal.” Growth is about the direction of the economy’s expansion, not just the rate. In the UK’s case, economic growth continues to be consumption-led, with private debt reaching new heights while public- and private-sector investment sinks to some of the lowest levels in the developed world. To show any promise at all, the government’s plan needs to steer the economy in a more inclusive and sustainable direction.

The key lesson from the COVID-19 pandemic is that government and industry need to work together to tackle the challenges of the twenty-first century. A state that leaves the market to its own devices will never create the political economy we need. Unless the Johnson government offers more than the Plan for Growth, the UK’s economic problems will remain unsolved.