As well as being a human tragedy, the COVID-19 pandemic has been an unprecedented economic shock for the world economy. Global output is estimated by the IMF to have fallen by 3.5 per cent in 2020, and all countries – big and small, rich and poor – have been hit.
There is now an increasingly clear route to bring the immediate crisis to an end by relying on a mass vaccination programme unprecedented in speed and scale. But implementation remains complex and risky, while the long-term consequences of the pandemic – impacts on health, acquisition of skills, and the accelerated spread of technology – remain highly uncertain.
International economic cooperation can play a crucial role in securing the smoothest possible immediate exit from the pandemic and in minimizing the risk that a similar crisis will happen again. It can also help minimise the long-term costs from the pandemic’s extraordinary legacy and maximise the benefits from national efforts to build back better.
Taking a cooperative approach supports and complements the actions of individual countries and governments in three main ways.
First, coordinating the nature and timing of national measures in response to a global economic crisis can enhance their combined impact by increasing positive ‘spillover’ effects and reducing negative ones. It builds confidence in financial markets and among investors, while acting jointly with others can also be an effective way for national governments to overcome domestic political opposition.
Second, sharing information and pooling resources enables the international community to find common solutions to global problems which are more effective, more efficient, and easier to deliver than simply relying on national measures. This may sometimes require the creation of new global institutions.
Third, international cooperation is the best way to ensure poorer countries with fewer capabilities and resources of their own are not left behind. Although this is a moral imperative, it is in the best interests of developed countries too – and is especially true in the current crisis.
Cooperation has been in decline
International economic cooperation typically intensifies during or after a major economic crisis, most notably after the Second World War via the Marshall Plan and the creation of the Bretton Woods Institutions, but also during the 2008-09 global financial crisis which saw the creation of the leader-level G20 and major initiatives announced at the London summit of 2009.
In our current global crisis, we have seen some important examples of international cooperation, such as the global scientific effort to develop vaccines, the G20 initiative to suspend debt service payments by the poorest economies (known as the Debt Service Suspension Initiative, or DSSI), and the establishment of ‘US dollar swap lines’ by the Federal Reserve to underpin global liquidity.
But so far, the overall cooperative economic response has been much more limited than it was during the global financial crisis, with measures to protect citizens and mitigate the damage typically being taken nationally and in a largely uncoordinated manner.
To some extent this reflects the nature of the current crisis – with different countries being hit in different ways. But it is also true that substantial opportunities to improve outcomes through international cooperation have been missed.
A key factor undermining a cooperative approach has been the political climate of the past four years as international disputes have intensified and trust between countries has fallen. In substantial part this has reflected the Trump administration’s ‘America First’ ethos in the US, but there has also been a sharpening divergence between the West and some other major economies (most notably China) over core values.
The election of Joe Biden to the US presidency is a critical opportunity to try cooperation again. But it does not remove all the factors which have undermined such efforts over the past few years and the mechanisms of the past will not simply snap back into place.
The challenges to which cooperation can or must be applied in the present crisis are enormous and have a momentum of their own. The extent of common ground needs to be established, trust needs to be rebuilt, and technical solutions to problems found. National policymakers – whether working in the G7 or G20, or through the major international economic institutions – need to get into the habit of cooperating once more.
Some of the current global issues that would benefit from a cooperative approach may prove relatively straight forward. Others are much more difficult, but still need to be addressed urgently. There is no time to lose in taking the first steps.
This article introduces a new project by Chatham House’s Global Economy and Finance Programme which convenes a group of economic policy experts from the private sector, academia and think-tanks to deliver proposals for focused, effective, and practical solutions to the economic challenges the world faces.
These proposals are being published as a series of briefing papers, each addressing a specific problem where international cooperation can make a significant difference.