The writer is a former UK prime minister
Most of us will be looking forward to 2021 as the year of mass vaccination, and will welcome the economic rebound it makes possible. But we should not confuse that with the sustained global recovery the world needs.
While China may be bouncing back, the G7 nations — even with successful mass vaccination — are unlikely to reach their 2019 levels of output in 2022. Unemployment across Europe is set to double without more state support and, globally, up to 150m more are joining the world’s poor.
The world economy is heading for a low-growth, high-unemployment decade. Expecting low interest rates to restore pre-crisis levels of private investment while unemployment crushes demand would be like pushing on a string. The liquidity crisis of 2020 could easily become the solvency crisis of the 2020s and the scars of long-term unemployment could last a generation.
What is missing in the management of the crisis is an internationally co-ordinated plan for growth that recognises the limits of monetary policy when interest rates are near zero. Only co-operation between the US, Europe and China can change that and that is why January’s US presidential inauguration should be followed by an emergency G20 summit in February.
The gains from action are substantial. If G20 countries, which have fiscal headroom, boosted infrastructure spending by between 0.5 per cent and 1 per cent of gross domestic product over the next few years, then the world economy would expand, the IMF believes, by an additional $1tn by 2025.
But if we achieved synchronised global growth, as we did in late 2009 in the wake of the financial crisis, the multiplier effect — or the spillover from increased trade and consumption — would be twice as effective in promoting growth. The world would then enjoy a co-operation dividend, boosting world output by an additional $2tn. An even bolder fiscal stimulus, raising spending by between 1 per cent and 3 per cent in 2021, could achieve two-thirds of these gains in just one year.
But an initiative by the G20, for the G20, can only take us so far: we cannot afford to exclude the world’s lower-income countries, which — according to the IMF — need around $2.5tn to speed their recovery.
Their limited fiscal firepower is in sharp contrast to the west’s. While most of these countries have been able to borrow in the marketplace, the aid, debt relief, and enhanced multilateral bank lending that might have compensated for the collapse in tax revenues have been slow to build, leaving their healthcare and anti-poverty programmes underfunded and their demand suppressed.
In one of his first acts as US president, Joe Biden should agree what Donald Trump rejected throughout 2020: the issue of new international money in the form of special drawing rights. Some $1.2tn could be paid out in two tranches in 2021 and 2023 without requiring Congress or national parliament agreement.
It would be a historic act of collective statesmanship if G20 countries agreed that the bulk of the new SDR allocations should fund Africa. And if the IMF and the multilateral development banks match the first SDR allocation with funds from their own considerable resources and make good their commitments on debt relief, we have the makings of a $2tn 21st-century Marshall Plan for the developing world.
The global growth plan must be even more ambitious. In 2009 environmental investment comprised one-sixth of the stimulus — far below the near-50 per cent share that we now should target as the starting point for progress at the COP26 in Glasgow.
Many advanced economies have exhausted their fiscal headroom in the rescue phase. But in a low interest rate environment, productivity-enhancing, job-creating investment will pay for itself by creating a circle of demand, growth, and tax revenues. If we achieve this, the SDR allocation secures for us all the benefits claimed for modern monetary theory, an interest-rate free injection of resources, without the risks. And, were we to push back against tax havens, we could repatriate much of the estimated $400bn lost to OECD members’ national exchequers each year.
Of course, deficits become unmanageable if inflation runs out of control and if private investment is crowded out. But with inflation and interest rates low and private investment subdued, today’s challenge is quite different. It is to create the global demand that will reactivate the investment and employment that are the key to growth and the eventual reduction of debt — to the benefit of all nations, rich and poor alike.