Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate . As Joni Mitchell sang, “you don’t know what you’ve got ‘til it’s gone.” Classroom education was often deemed boring by students and obsolete by tech visionaries. Then the coronavirus made it difficult or impossible to meet in person. The result: We yearn for the irreplaceable in-class experience. Perhaps the same is true of international economic cooperation. It was never especially popular. The theory, first formulated in a 1969 paper by Richard Cooper, said that countries could agree to coordinated bargains that achieved better outcomes,
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Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate .
As Joni Mitchell sang, “you don’t know what you’ve got ‘til it’s gone.” Classroom education was often deemed boring by students and obsolete by tech visionaries. Then the coronavirus made it difficult or impossible to meet in person. The result: We yearn for the irreplaceable in-class experience.
Perhaps the same is true of international economic cooperation. It was never especially popular. The theory, first formulated in a 1969 paper by Richard Cooper, said that countries could agree to coordinated bargains that achieved better outcomes, relative to the “Nash non-cooperative equilibrium.” But economists thought of plenty of reasons to be skeptical. The multilateral institutions of cooperation such as the World Trade Organization, the International Monetary Fund and the United Nations agencies, were downright unpopular among the public. Many Americans regarded them as invading US sovereignty, while other countries viewed them as an invasion of their sovereignty by the US.
Then Donald Trump came along and made international cooperation difficult or impossible. It showed. During the November 21-22 G-20 summit of world leaders, when the others were discussing pandemic preparedness, Mr. Trump was evidently tweeting more of his fantasy accusations of election fraud and then went off to play golf.
When he is dragged out of the White House in January 2021, kicking and screaming, there will be an urgent list of international issues crying out for attention, requiring US re-engagement and a cranking up of the machinery that the 195 sovereign states of the world use to work together. Top items on the list include global public health — most urgently, the coronavirus pandemic; global environmental issues — most importantly, climate change; and the global recession — requiring joint stimulus among advanced countries and joint arrangements for addressing the unsustainable debts with which the pandemic is saddling many Emerging Market and Developing Economies.
Although President-elect Joe Biden did not campaign on international cooperation per se – presidential candidates never do – he has pledged that, immediately upon taking office, he will reverse two of Trump’s monumentally short-sighted decisions: US withdrawal from the World Health Organization (WHO) and US withdrawal from the Paris agreement on global climate change.
Contagious disease is the classic example of an externality, a problem that individual citizens can’t adequately address on their own. Assume for simplicity that individuals hear and trust the advice of the relevant scientific experts. But assume also that they are motivated largely by self-interest and at best only partly by altruism. In that case, they have an incentive to protect themselves, but little incentive to protect others, e.g., by mask-wearing and social distancing. The benefit to society of fighting the affliction – whether through vaccination, treatment, or isolation – exceeds the benefit to the individual. Public health is a public good. Hence the need for government agencies like the CDC and measures like shutting down bars or banning large indoor gatherings.
Internationally contagious diseases, such as the present pandemic, are a classic example of an international externality, which individual governments can’t adequately address on their own. The contagion crosses national boundaries. Responses that are far more effectively carried out via international cooperation (as opposed to “every country for itself”) include investigation of local outbreaks and warning of global dangers; coordinated research, development, production, and distribution of vaccines or treatments; and agreed procedures for restricting or quarantining cross-border travelers.
The WHO is not perfect. But it would have been nuts for the US to withdraw, especially at a time when the UN agency is most obviously needed.
Analogously, environmental degradation is a classic externality, a case of market failure, in that those who pollute don’t pay a market price for the harm done to others. It thus calls for government action.
Global climate change is the classic global externality. A ton of carbon emitted into the air has the same greenhouse effect everywhere regardless where in the world it is emitted. Regulation at the national level cannot by itself correct the misalignment of incentives, because of the free-rider problem across governments. Hence the need for an international agreement like the Paris Agreement on Climate Change.
The pandemic of 2020 led to the deepest global recession since the 1930s. The IMF projects a 4.4 % drop in global income for the year. Beyond measures to address the pandemic itself, what is most needed in advanced countries is joint fiscal stimulus. Precedents include the Bonn Summit of G-7 Leaders in 1978, during the recovery from the recession of 1974-1975, and the 2009 G-20 meetings under the leadership of British PM Gordon Brown, during the Great Recession. The argument for coordinated fiscal expansion consists of more than the obvious observation that the effect on global economic activity will be bigger if many countries enact stimulus than if just a few do. The argument is (i) a recognition that countries worry about their trade balances, not just their levels of output and employment, (ii) the logic that when each country acts on its own (that “Nash non-cooperative equilibrium”), it will hold back in its fiscal expansion out of fear that it would lead to a large trade deficit; and (iii) the insight that if all countries agree to simultaneous fiscal stimulus, it need not adversely affect anyone’s trade balance, while yet achieving a faster global recovery of GDP and employment. Thus, cooperation beats non-cooperation.
We need something like that now. Recent estimates at the IMF show large potential gains when G20 countries invest at the same time: “If those with the largest fiscal space were to simultaneously increase infrastructure spending by ½ percent of GDP in 2021 and 1 percent of GDP in the following years—and if economies with more constrained fiscal space invested one third of that—they could lift global GDP by close to 2 percent by 2025. This compares with just below 1.2 percent for an unsynchronized approach.”
While President Trump doesn’t understand the connection between his country’s fiscal deficit and its trade deficit, others do understand. A coordinated fiscal expansion (with the funds hopefully spent on such good causes as the fight against Covid-19, directly, and green infra-structure investment, as Biden wants to do) would minimize the danger of a W-shaped recession.
Coping with EMDE indebtedness
With their interest rates near zero, the US and other advanced countries do not feel constrained in their ability to borrow, even as debt-to-GDP ratios rise. Emerging Market and Developing Economies [EMDEs] do feel very much constrained, however. This is especially true of those that already had unsustainable debt-to-GDP ratios even in January, but not just them. Many will need their debts restructured. The response of the international community mostly consisted of the G20’s Debt Service Suspension Initiative (DSSI), which has been very limited in scope. In particular, it failed to include private debt.
Leadership and coordination on this subject among the largest economies is sorely needed. The November 21-22 G20 Leaders’ Summit tried to go further, adopting a common framework for the 73 poorest countries, encouraging restructuring not just of known bilateral official debt but also of private debt. China, the biggest holder of EMDE claims, agreed to participate. But the G20;s framework still consists primarily of kicking the can down the road by postponing debt-service obligations, rather than reducing them.
Many in Africa worry that well-intentioned efforts at coordinated restructuring will hurt their ability to continue participating internationally in private financial markets. Also needed in the case of the poorest countries is new concessional lending and grants. Proposals are back on the table to issue a new round of SDRs and to direct the liquidity to EMDEs.
Many in his own party will call for President-elect Biden to continue to pursue some of the same trade objectives as Trump, but to work with US allies rather than against them. One example is the objective of reducing the need for foreign corporations to share proprietary technology with domestic Chinese partners as the price for access to China’s market.
An intelligent strategy might have been to stay in the Trans-Pacific Partnership – in which the US mostly got to write the rules – and then hold out to China the prospect of someday joining if it followed the rules. The other trans-Pacific countries have gone ahead without the US. America could still catch up by re-joining. But it is probably too late for that. After all, in the meantime, while the US has been asleep, China has organized its own trade bloc in Asia and the Pacific, called the Regional Comprehensive Economic Partnership, which was signed on November 15. Personally, at this point I would see more promise in good old straightforward reciprocal tariff cuts, than in messy hard-to-enforce “deep integration.”
Even we who are committed devotees of the open rule-based trading system — which played such an important role in achieving global economic prosperity in the second half of the 20th century — must recalibrate our ambitions.
This past week’s high-level appointments to the incoming Biden Administration are internationalists. Presumably the US will allow the WTO to function again. Biden will return America to the practice of keeping its word in its international dealings.
But international trade agreements are not likely to be high on Biden’s list of priorities. Furthermore, even if America were fully ready to lead again, the world has lost some of its enthusiasm for allowing the United States to be the conductor of the international orchestra. But its friends and allies will, at a minimum, be very happy to see the US back as an important and constructive player.
This post written by Jeffrey Frankel.