Rebuilding international economic cooperation

Dr Robin Niblett CMG

Welcome, ladies and gentlemen, to this launch event for our ongoing project at Chatham House on Rebuilding International Economic Co-operation, led by our team in our Global Economy and Finance Programme at Chatham House, and by Creon Butler. Fantastic that you can join us today for this conversation. We’ve got a packed and fairly complex programme ahead of us here. I’m going to be turning over shortly in my remarks to my colleague, Creon, to get him to introduce the papers that we’ve produced in time for this launch event. My job will be, at the beginning, just to welcome you all, as you’re coming into this meeting and then, to moderate and Chair the second half of this meeting.

All I want to say is, obviously, I’m delighted that, as an institute, we’ve been producing a series of papers, as well as a number of events we’ve been running, to mark this really transformational moment, potentially, for global economic co-operation in the wake of, or through, the COVID-19 pandemic. We can see this, obviously, being a central topic of conversation in the World Bank/IMF Spring Meetings, taking place this week, in co-ordination with this event that we have today, or I say coinciding with this event that’s taking place today. And I think a lot of the topics that have been developed by a great and stellar group of paper writers, who you will be meeting shortly, and Creon will be getting to share their top ideas with you, you’ll see that there are a number of dimensions that we’re going to really have to focus in, on over the coming months and years, in order to make sure that we do, indeed, Build Back Better or emerge stronger and more resilient from this crisis, rather than use it as a gateway to greater insecurity or even, at worst, economic confrontation.

I do want to say a huge thank you to the paper writers, who you’ll be meeting shortly, for their contributions, some directly involved with Chatham House, some colleagues of ours from the private and public sectors. Thank you very much for sharing your ideas through the papers that we’ll be discussing. A big thank you to our three distinguished panellists who’ll be joining us in the second half of this meeting at the top of the hour, 4:00pm GMT, Lord Hammond, Philip Hammond, Dame DeAnne Julius and Professor Raghuram Rajan. They’ll have an opportunity to give their reactions to the papers and then, also, engage a bit in some of our conversation with all of you, who are joining us today, as our guests and as our members, as part of this conversation.

Reminder, this is on the record. It’s being livestreamed, as well, so please have a good programme. I’m going to hand over to my colleague, Creon, and not use up any more of our precious time, and there’s a lot to get through. Creon, over to you.

Creon Butler

Oh, and thank you very much, Robin, and while we’re showing the slide with the presenters of the various papers, I’ll just say a few brief words by way of introduction. First, let me add my thanks and those of my co-Editor, Stephen Pickford, for all the work that’s gone into producing the briefing papers. The project was actually conceived towards the end of the Trump administration, when the prospects for international economic co-operation looked pretty bleak, but the need for it was clearly growing and growing fast. And the idea was to ask a group of independent experts to come up with specific practical ideas, not just in response to the issues where there was a need for immediate action, but also on issues where successful co-operation could help rebuild the system as a whole. Now, fast forward to today, and fortunately, prospects are much better now, but the challenges are still considerable.

Seven of the briefing papers have already been published and are available on the Chatham House website, under the Global Economy and Finance Programme page. One more will be published after this event, but we also hope to continue with this format beyond these eight papers that we have already in train. With all the published papers, you will also find the bios of the Authors who are speaking today. The papers group quite neatly into four that address macro financial issues and three that address structural economic issues, and then one which looks at the kind of, overall challenges of how to do international economic co-operation.

The plan is, therefore, to have three segments. The first will have presentations from Neil, Isabelle, David and Rebecca, followed by a quick Q&A, and then we’ll have presentations from Chris, Lauge and Simon, again followed by a Q&A, and in the last segment, Stephen will present the emerging ideas from the paper he and I are working on.

In view of this, I would really invite the audience to start posting questions through the ‘Q&A’ function as soon as you are inclined to do so. We’ll aim to pick them up either in the Author segment, or subsequently. We’re obviously going to be very tight for time, so each of the Authors has very kindly agreed to keep their presentation to five minutes or less. Right, let’s move to the first paper, which is presented by Neil Shearing, Group Chief Economist at Capital Economics and Chatham House Associate Fellow. Neil, over to you.

Neil Shearing

Thanks very much, Creon, and hello, everyone. I’ll keep my remarks quite short, given how much we’ve got to get through. But I think the paper that I put together makes three essential points, really, and it’s focused on fiscal policy and the role of the state, in regards to fiscal policy in the post-pandemic world.

The first point the paper makes is that policymakers, government, should stay the course, in terms of the support that they’re providing to economies. The danger of withdrawing fiscal support too soon far outweighs the costs of leaving it in place for too long. Now, actually, there’s almost universal agreement on this. As you say, Creon, when we conceived this project several months ago, this was one of the, kind of, dividing lines, how much support should you put in place and how long should it stay there for? I think there’s now almost universal agreement on this and in fact, the parameters of the debate around this point have shifted substantially by the sheer scale of the Biden stimulus plan and perhaps inflation’s now a much greater risk in the US, and at the very least, I think we can probably agree that the Biden plan is perhaps badly targeted, and it’s use, but perhaps badly targeted, and get onto some of those issues in the Q&A, perhaps. But I still think the essential point remains, the dangers of withdrawing support too soon outweigh the costs of leaving it in place for too long, and I think it’s also true that most governments in Europe are perhaps still doing too little on the fiscal side of things. So, that’s the first point.

The second point, and this, I think, is a – relates to, kind of, what happens as economies start to recover from the pandemic, is that the debate needs to shift towards the role of the states, and by extension, fiscal policy and the role it should play in the post-pandemic world. And I think there are two points here. The first is that support should gradually be moved away from blanket support for the whole economy, towards targeted support for the sectors that are most affected and the individuals and the companies that are most affected by the pandemic, and I think that’s a failing of the Biden plan.

And the second point is that there’s going to be significant structural adjustment, as a result of this pandemic. I don’t buy the idea that we’re going to have permanently weaker economic growth at the global level as a result of the pandemic. I think this crisis is different. But there will be significant structural adjustment. Some sectors will shrink, others will grow. And there’s a question about how much – what role government should play in facilitating and guiding that adjustment, and the conclusion the paper reaches is that as much as possible should be left to the market. Government’s role should be really reduced to providing a platform for that transition, both through skills, but also through public investments, and of course, real interest rates at the moment, are negative pretty much as far as you can see, across the curve. It’s a once in a century opportunity to build out public investment, but that’s the – that’s where the government’s role should be focused on the – in terms of the transition to the post-pandemic economy, as much as possible, leave the rest to the market.

And the third point the paper makes is that there’s a need for international co-ordination amongst these plans. Now, that’s partly because if you can optimise fiscal policy, it’s a nat – at a national level, in as many countries as possible, by definition, you’re going to optimise the global recovery. But I think there’s also an important subsequent point, which is that as much as possible, if there’s co-ordination amongst fiscal plans, you stand a better chance of avoiding imbalances in the global recovery. China’s surplus was the biggest as a share of global GDP last year than it has been since the build-up to the Global Financial Crisis. The US deficit has blown out the counterpart to that Chinese surplus. All of that is being framed by ongoing US-China decoupling and I think that – those strains and tensions between Washington and Beijing have been accelerated by the pandemic and haven’t been changed as a result of Joe Biden’s election. So, it’s playing out against this backdrop of decoupling and without co-operation and co-ordination in fiscal plans and economic policies, I think there’s a risk that it exacerbates those existing strains.

So, there you go, three main points: keep support in place, and shift that support to the most affected sectors as economies start to recover, leave as much of the transition as possible to the market and with governments providing a platform, in terms of skills and investments, and co-ordinate as much as possible between different economies, particularly to avoid imbalances emerging and potentially, strategic rivalries emerging, too.

Creon Butler

Neil, thanks very much and thanks for such a succinct presentation. I think on your last point, it’s really quite interesting, when you look at the G20 communique this week, there’s quite a lot of good stuff in there, but the one area they don’t seem to be getting into very far is this whole question of fiscal policy co-ordination and that, I think, just illustrates how difficult that area is likely to be, although really important. Excellent.

Now I’d like to move to our next presenter and that’s Isabelle Mateos y Lago, Managing Director and Global Head of Official Institutions Group at BlackRock. Isabelle, over to you.

Isabelle Mateos y Lago

Thank you, Creon, hello, everybody. So, the paper that Stephen and Creon invited me to write focuses on global liquidity and my starting point there was, actually, what’s the problem? You know, and contrary to the Global Financial Crisis, we didn’t see a lasting dash for a dollar. We didn’t see – well, we did see massive capital outflows in March out of emerging markets, but they were reversed very quickly and soon, most central banks in emerging markets started reaccumulating reserves, and we only saw a handful of sovereign defaults, which largely reflected pre-existing conditions. And that was thanks to policy innovations, both by advanced country central banks, in particular very massive, and not just government bond purchases, but also corporate bond purchases, which you know, help push capital back into emerging markets. Then we had over a dozen emerging market central banks getting into the QE business themselves, which you know, hadn’t been possible, typically, in previous crises. And then, for low-income countries, we had the debt sys – Debt Service Suspension Initiative, DSSI, agreed by the G20 at the behest of the Heads of the IMF and the World Bank, very early on, which provided a lot of help.

Having said that, one – when one looks a bit forward, not all is well and there are, actually, some significant difficulties that really are going to require more co-ordination than we’ve seen. There were three such difficulties at the time I wrote the paper. There’s now a fourth one, so let me go through them. The first one is, we need to transition from what were clearly liquidity problems to what, in a growing number of cases, are turning out to be debt sustainability problems. More than half of the low-income countries are not estimated to be near a state of debt distress or in outright debt distress by the IMF and the World Bank. And then, there’s countries that are not facing debt sustainability issues right now, but very well might in the future if, and that’s the second problem, if they suffer from long COVID, or to put it differently, a protracted period of below potential growth, a little bit like we saw happen in Europe after the Global Financial Crisis, you know, as a result of not being able to deploy enough policy support to the recovery. And so, leading to a lot of scarring and leading to an inability to grow fast enough to pay back the increase in debt. And just as a reminder, in the advanced world, everybody is, you know, focused on low interest rates, but if you’re, you know, a large emerging market, you’re borrowing at 9/10% on your local currency, that – so, you need to grow very fast to pay it back.

Third issue that needs to be dealt with is policy normalisation. Policy normalisation, both the direct – the, sorry, the indirect impact of policy normalisation in the advanced countries, onto EM, but also policy normalisation in their own countries. I mentioned a lot of central banks in emerging markets are engaged in quantitative easing. That does bring about a risk of fiscal dominance. So far, they’ve been able to do it without being punished, without fears of inflation getting out of control, but obviously, the longer it lasts, the longer – the more complicated it’s going to be to get out of it, so how do we do that?

And then a fourth problem, which didn’t exist at the time I wrote the paper, late last year, but is now a real one, is US exceptionalism. Now, there’s lots of good things to the extraordinary, kind of, magnitude of the US policy response to COVID, frankly, both in terms of vaccine and the amount of stimulus that’s been already agreed and the additional one coming down the pipe, but what that’s doing is making the US a very attractive investment destination and by contrast, emerging markets much less so. And in fact, the latest IMF forecast indicates that if you include China, emerging markets are going to grow less than the US this year, which is extraordinary, and of course, we have the impact of the US rates being higher, which is also a problem for emerging markets.

So, what are the solutions? I suggested, in my paper thinking along four lines. The first one was liquidity provision via an allocation of special drawing rights. That’s a box that we can tick now, because it’s been endorsed by the G20 and the IMFC, it should happen pretty quickly. The remaining homework to do there and – is in finding a way to recycle the vast majority of these $650 million – billion [inaudible – 18:35] that will not be going to countries that need them. So, how do we organise the recycling? There’s some work to do there, but there seems to be support for that, so that’s good, but it’s not going to be straightforward to make it work.

The second I mention is debt restructuring. As I mentioned, we need to get beyond the DSSI. The G20 has, and I agreed, a so-called comprehensive framework, but that, again, is seen very much just as a successor to the DSSI. It doesn’t cover emerging markets, for example, and we have yet to see how it’s going to work. Very importantly, the role of the IMF and the World Bank in coming up with credible debt sustainability analysis, again, that’s going to be essential to make that work, but pretty well in train, I would say.

Third dimension is to really have a framework to help emerging markets deal with policy normalisation and here I would flag that it’s extraordinary that the IMF has disbursed so little money out of its you know, one trillion award chest. It’s disbursed just above 100 billion, of which practically none to emerging market countries. There is a problem here, emerging markets don’t want to borrow for the – from the IMF. They’re going to need help and the IMF really has a role to play there in devising new tools, new policy frameworks, that help emerging markets avoid long COVID and avoid fiscal dominance and avoid getting into really serious problems. So, lots of work to do there, which unfortunately, doesn’t seem to be, frankly, on the menu, judging from the various communiques issued this week.

And then, last area, emerging market capital development. Ultimately, these countries are going to need private finance. There is a one in – once in a lifetime opportunities, I’m tempted to say, given all the focus among global investors on green and sustainable. There’s a lot to do in that space, in emerging markets, and so, some co-ordination, both at G20 level and using the MDBs, the multilateral development banks, to really give a big acceleration to the issuance of green and sustainable debt by emerging countries, could be a way to make them more attractive, to really facilitate their financing over the coming decades, given all the spending needs that have been well diagnosed.

So, let me stop here. I think we’re in a much better place than just three months ago, but there’s still a lot of work to do and none of it is easy.

Creon Butler

Isabelle, thank you very much and I think – I mean, you laid out the agenda and the sort of, possible directions, but I think your points link very neatly to our next paper, by David Lubin, Managing Director and Head of Emerging Market Economics at Citi and also an Associate Fellow at Chatham House. And he looks at some of the longer-term issues for emerging market debt. So, David, over to you.

David Lubin

Thanks very much, Creon. Thanks, everyone, for joining today’s conference. So, I’ve written a paper about issues to do with emerging markets’ debt. I think it’s very important to split the idea of emerging markets’ debt into two buckets. One is a very familiar bucket, which is external debt, or foreign exchange denominated debt, and the other is a much less familiar bucket, which has to do with problems associated with domestic public debt in emerging markets, and I think that what I’m trying to do is to, kind of, make a couple of suggestions about each of those buckets.

If I talk, first, a bit about the ex – the problems to do with external debt. I think there’s a tendency, among many market participants and many policymakers, to panic about the idea that there is an imminent emerging markets external debt crisis. I don’t really buy that. I don’t buy it, partly because when I look at the ratio of external debt stocks to stocks of external assets, reserves, for example, they don’t look that stretched, by historical standards. In addition to that, commodity prices are currently very high, emerging markets, current account balances, are currently very strong, and although US real interest rates have risen recently, they are still, by historical standards, extremely low. And so, for all of these reasons, the idea of a, kind of, imminent systemic external debt crisis across emerging markets seems to me to be just incorrect.

In a way, it’s precisely because real US interest rates remain so low that I think what we need to do is concentrate more on avoiding an excessive build-up of external debt, because historically speaking, it’s when US interest rates, in real terms, are very low, that capital gets pushed towards emerging economies. And if you look at the issuance of dollar denominated Eurobonds in 2020, the amount of issuance last year was in excess of $800 billion. It was up 10/15% compared to 2019. So, the challenge, I think, is to limit the build-up of excessively large stocks of external debt, and the recommendation I make in my paper is just to use a very simple, but incredibly valuable framework that exists within the IMF, which is the Assessing Reserves Adequacy framework as a way of guiding countries in limiting the build-up of external debt. And I think that both the IMF, policymakers themselves and international bodies, like the Financial Stability Board, should be drawing more attention to the Assessing Reserves Adequacy framework, to ensure that everybody understands that, at the end of the day, risks associated with external debt are minimised by encouraging countries not to borrow too much in the first place. And the Reserves Adequacy Framework, I think, is an incredibly useful tool to help guide policymakers and market participants towards thinking in that way.

The problems to do with domestic debt are much more subtle and subtle because we just don’t have historical experience of dealing with problems to do with ex – with – to do with domestic debt. You know, all of our experience, over the last 40 years is that, you know, developing countries have debt crises that are to do with shortages of dollars. Brazil, South Africa, for example, cannot be said at the moment to have problems to do with shortages of dollars, but I think they can be said to have very serious problems to do with the build-up of their public domestic debt.

I think there are two vicious circles at work. One is a vicious circle that links declining potential growth with rising domestic public debt. You know, weak growth pushes – puts upward pressure on public debt, but rising public debt puts downward pressure on potential growth, so you have a kind of, vicious circle there. There’s another vicious circle, too, which has to do with the relationship between the steepness of the yield curve, which in these two countries’ cases, is exceptionally steep, and the effective exit by foreign Portfolio Managers who have just lost willingness to buy these countries’ domestic bonds. These two vicious circles combine in really nasty ways, to create the situation where countries like Brazil – I mean, I – you know, maybe in a way, I’m only talking about these two countries, but these are two such important countries that if they have problems, they are systemic problems, or potentially systemic problems. That we need to find a way to get rid of the problem that is created by the fact that both of these countries have long-term real interest rates which are way higher than their potential growth rate, and I think that one possible way out of that trap is to make GDP-linked bonds more of a thing, not just for developing countries, for developed countries as well, but particularly for developing countries. Because I think it’s only by introducing GDP-linked bonds that we can, kind of, break that vicious circle down.

And actually, the – you know, the fact that GDP-linked bonds are not yet a feature of public sector debt management in the developed world, I think is a huge constraint, because as we’ve seen in the past, for example, in the introduction of collective action clauses in two emerging economies’ debt contracts 20 years ago, it take support from the developed world to make a change in the developing world acceptable to market participants So, I would very much encourage developed country governments to start – consider issuing GDP-linked bonds as a way of making them more acceptable throughout international capital markets, which, in my view, would be a way of breaking down the vicious circles that I think are of tremendous – you know, that creates tremendous threats to financial stability in countries like Brazil and South Africa.

Creon Butler

David, thank you very much and be interesting to hear Philip Hammond’s views on GDP-linked bonds, and that’s – whether that’s one of the things he might’ve considered, or might consider today. Thank you very much.

And now, if we could move to the fourth in our macro-financial area and that’s a presentation by Rebecca Emerson, who’s a Partner at Oliver Wyman in London and her paper is joint with Til Schuermann, who’s a partner of Oliver Wyman in New York. So, Rebecca, over to you.

Rebecca Emerson

Great, thank you, Creon, and lovely to be here this afternoon. The paper Til and I wrote looks at the COVID-19 experience last March in the financial markets as an opportunity to view it as a stress test and look at how the banking reforms have stood up and opportunities for them to be better.

So, just taking a step back, when I was looking back over what had happened in 2008, I recalled looking forward to a relaxing Sunday lunch with old friends, enjoying the late summer sunshine on a weekend in September, but that lunch never happened. Instead, I had to make my excuses and I spent the day reviewing the financial prospects of a bank, which ended up being taken into government backed recovery before sunrise on Monday.

In the autumn of 2008, weekends were a time that banks moved into the netherworld of state rescuer or forced merger, but roll forward to spring 2020, a Monday catchup with a banking client told a very different experience. Yes, they had had some long nights and we came in working during the last two weeks of March, beginning of April. However, the most recent weekend had been a massive win. The bank had successfully processed more than 50,000 requests for loans backed by the government’s coronavirus guarantee scheme. So, 12 years later and a completely different crisis, a lot of hardship from banks as the source of the economic crisis during the Global Financial Crisis, to having an important role to play in transmitting government support for stricken businesses in the COVID crisis.

So, what has changed in the intervening 12 years? Significant reforms to the bank regulatory framework have been undertaken. These forms were discussed, proposed and ratified by the Basel Committee on Banking Supervision, but implemented by local regulatory authorities. These reforms significantly increased the amount of capital and liquidity which banks were required to hold against their lending activities. The reforms strengthened the global banking system, but they also had a number of unintended consequences. Among other things, they allowed a degree of organisation of bank capital and liquidity rules and the creation of a patchwork of local level regulation that has led to uncertainty and inefficiencies.

The COVID-19 shock in March 2020 was the first real stress test of these reforms. If the objective of the banking reforms was to avoid a repeat of the bank failures of 2008, then the Basel Committee regulatory framework can be considered to have worked well, at least so far. The reforms have clearly made the banks more resilient, not only through additional financial reserves, but also through improved risk management and public disclosure. However, there are, nonetheless, already lessons to be learned from the COVID-19 stress test that could further strengthen banks ahead of the next crisis. The Financial Stability Board, only a few weeks ago, announced it would carry out a review, in conjunction with the standard sitting bodies, of the regulatory system’s performance during the pandemic. The review would examine, among other things, the use of capital and liquidity buffers by financial institutions and how well crisis management and operational resilience arrangements have functioned. We welcome this review, as achieving as much consensus as possible will help improve preparedness ahead of the next crisis, or indeed another wave of COVID.

In addition, consensus at the G20 level on the lessons to be learnt will be crucial in maintaining the maximum possible degree of regulatory coherence. In our paper, we review the performance of the regulatory framework in the period up to the pandemic and look at some of these unintended consequences. We pose four questions to be addressed by the FSV review to be effective. Number one: burden sharing, where should the private sector self-insurance end, in other words, from the private banks, and the public sector insurance begin, so the central banks? Number two: size, how big should these financial buffers be? What level of stress should be covered and for how long should the protection last? Number three: disclosure, what should be publicly disclosed about the buffers, when and how? And number four: use, when should the buffers be used? Who determines when they’re used and who agrees to do so, and how quickly do these buffers need to be rebuilt after being drawn down?

A thorough review of the calibration of bank capital and liquidity buffers, fully taking into account the experience up to the pandemic and the exceptional circumstances of the pandemic itself would improve confidence in the banking system and would be crucial to the future international coherence. Continued confidence in the international banking system would also benefit the industry by lowering society’s overall costs.

Creon Butler

Rebecca, thank you very much, and I think that illustrates another issue, where, in a way, we’ve got through the crisis and it, kind of, worked, but unless we agree on why it worked, we’re going to have a big problem later on, essentially, in terms of how the regulatory framework evolves from now.

Now, given where we are on time, what I want to do, actually, is to keep going with the Author presentations, ‘cause I know that some of them are on really tight schedules, and then maybe before we come to Stephen’s presentation, we can – I can put in the questions, and we’re getting some good questions coming through. So, if I may, I’d like to move onto our next paper and this is in the sort of, the three structural economic issues and this is a paper presented by my colleague, Chris Sabatini, our Senior Fellow for Latin America at Chatham House. So, Chris, if I may pass to you.

Dr Christopher Sabatini

Thank you, Creon, thanks for the opportunity to contribute. My paper is on the informal sector. Now, what we mean by the informal sector is, obviously, workers that work off books, that either work in, say, small businesses, self-owned businesses, as well as a growing number, up to 35% of the informal working-class work in actual formal firms, but do it off books. The reason why I’ve focused on this is if you follow it – obviously, the informal sector has borne a large brunt of the effects of COVID, both in terms of the decline in income, for a number of reasons, given the sector of the economy they work, given the fact that many are simply on the threshold of poverty, living day-to-day wages on day-to-day wages. And second, because they simply don’t have access to formal insurance coverage, unemployment, oftentimes if they’re in a publicly funded health programme, they have – only have access to the spotty public healthcare and without access to formal pensions.

As a result of this, the ILO has estimated that overall, about – there’ll be about a 60% decline in income of those employed in the informal sector globally, as well as in lower income and middle-income countries, about an 80% decline in their incomes and standard of living, as a result of COVID and the associated lockdowns.

Now, question here is, of course, is what is being done? ‘Cause it is a significant percentage of the population, according to the ILO, and there are about 60% of the global workforce, about two billion people globally work in the informal sector, not just in the developing world, although that’s obviously the bulk of it, but also the developed world, the so-called gig economy workers. We’re seeing this playout very much in the UK recently with the argument that drivers for Uber should be considered workers and be entitled to holiday and sick pay, as well as the issue now of Deliveroo on delivery people and whether they’re classified as self-employed or whether they’re a worker. So, this is very important. The problem is that, simply, the previous prescriptions haven’t really been taken. It’s very similar, I was on a panel recently with former Finance Ministers from Latin America and all of us were wringing our hands about the informal sector. It’s a bit like what Mark Twain said about the weather, “We all talk about it, but no-one does anything about it.”

So, the question is what is to be done beyond the standard prescriptions of formalising these workers? My paper argues that what should be done is that the international financial institutions and the G20 should look to create a new social contract between states and societies that cover this growing and very fragile and vulnerable working class that has persisted as a structural condition of these economies for now over several decades. I’d like to take Isabelle’s comment, this is a historic opportunity, moment of a lifetime, if you will, to be able to recreate this attention on this.

What am I proposing? Well, as a short-term, or medium-term, rather, proposal, the paper lays out what could be an option for expanding the possibility of individualised flexible private insurance for informal workers. This includes sort of, pensions, as well as health insurance. There’s similar models that are being undertaken in the Netherlands, for gig economy workers and self-employed. Similar models actually in China and Kenya and much of West Africa and Costa Rica. The argument that I’m laying out is to – basically, for the state to increase subsidies to create these programmes, to subsidise these insurance programmes, and for them to be, sort of, embedded in a regulated private sector accounts that would be overseen by the private sector. But the twist to all this would come from the offer of debt relief, notwithstanding David’s, I think, very good analysis of the fact that we’re not looking at a sovereign debt crisis that many are worried about. There is, obviously, the question of fiscal space and the capacity of these governments to take on new social obligations.

So, the question here is, can the G20 and the IFIs begin to offer some form of debt relief, either on the principle or on the service payments, in exchange for the recreation, or the creation, or expansion of existing individualised social income, social insurance programmes, that would be voluntary, would have set minimum and maximum contributions, but could be portable for individual workers to be able to carry from place to place and provide that essential social safety net. The benefits of this would be, not just economic, with, you know, 15-80% of the working class in many countries in the informal sector, with what are estimated to be a real – very high cost of low productivity. This would bring benefits, in terms of economic productivity, economic growth. But the second benefit is obviously political and social. These are workers that are on the fringes of the society, on the fringes of the working class, and have led to the large growth, not just in terms of domestic inequality, but global inequality too, when you have rates of informal sector labour participation as high as 85% in Africa, 53% in Latin America.

So, that’s, primarily, the proposal and as I say, also, this could begin to address one of the structural problems that has really bedevilled many of us who work on economics and development economics, in particular, of growing global inequality. So, I’ll leave it there. Happy to answer any questions and thank you very much for your time.

Creon Butler

Chris, thank you very much and I think it’s a – one of several examples we have here of you – we really mean something by Build Back Better, and this is a really good area in which to start and one that’s been neglected for a long period of time. So, thank you very much.

And next, I’d like to move for – to our – for our next paper, to Lauge Poulsen, who’s Associate Professor and Director of Graduate Studies at the School of Public Policy at UCL and his paper is a joint one with Geoffrey Gertz, who’s a Fellow in the Economic and Development Program in the Brookings Institution. So, Lauge, over to you.

Lauge N. Skovgaard Poulsen

Thank you, Creon. So, our paper is on Investor State Dispute Settlement, or ISDS, which is a mechanism that is enshrined in about 3,000 investment treaties around the world, that allows multinationals to pursue international claims against sovereign governments, and it has, over the last ten/15 years, right or wrong, become one of the most controversial corners of international economic law.

There was a question I noted in the Q&A from Barbara Ripast on Biden’s proposal to deal with what is largely seen as the overly generous regime on taxation for multinationals. Well, this is, sort of, your equivalent when it comes to what, at least some, see as an overly generous copyright regime for multinationals. The OECD has, in recent years, been increasingly critical of the regime, have highlighted how in important ways investment treaty arbitration or ISDS grants legal protections to foreign investors, that go beyond those that are available to equivalent domestic investors, in the UK, in Germany, France, Scandinavia and so forth. The IMF’s legal – the Lawyers in the IMF has also been critical of the regime, for various reasons. We’ve seen criticisms emerging, but not just from international institutions, but also governments around the world.

So, for instance, a couple of years ago, Pakistan, in one of these claims – to those of you who are not familiar with the intricacies of ISDS, Pakistan was asked to pay $6 billion in compensation to a foreign investor for a mine that was never built. The investor had, itself, spent about 250 million on that project, but received six billion in compensation, which was equal to the entire IMF bailout given the same year to the Pakistani Government.

Now, as I said, reasonable people disagree about the value, about the fairness of this regime, but it has become, undoubtedly, a major policy poison bill, in part, because it is seen as a stumbling block for other areas of international economic co-operation. So, for instance, we’ve seen a considerable number of claims against climate change measures, particularly in Europe, over the last couple of years, which is why the European Union wants to revisit the mechanism and the context of the Energy Charter Treaty, which allows for ISDS in the energy sector. We know from law firms that a range of claims are being considered against measures brought to respond to the pandemic over the last year, and we have increasing political mobilisation across the world, not just in developing countries, but also developed countries, to try and do something about this mechanism.

President Biden has said he does not want this mechanism in future agreements. The EU is trying to do away with the mechanism, at least in its current form, in future agreements, as well. We’ve seen criticism, also, from business groups. The German Association of Small/Medium-sized Enterprises were highly critical of the mechanism in the context of TTIP. German Association of Judges came out very critically against the mechanism, as well. So, we have mobilisation from some business groups, surprisingly, perhaps, but also from governments around the world.

So, what to do? Right, so, we have a lot of reform efforts going on around the world, but what we note in the paper is that almost all of the discussions amongst policymakers is about future treaties, how to deal with this mechanism in future agreements, to negotiate better ISDS permissions and more carefully crafted investment treaties in the future, and that is a laudable objective. But the problem is that, even with a better drafted treaty next year for a certain jurisdiction, you’ll still have about 3,000 investment treaties in place that have been negotiated over the last couple of decades. So, what do you do about them?

Now, one option is for states to terminate, to leave their agreements, and we’ve seen some states have begun to do that: India, Indonesia, South Africa. Perhaps not too surprisingly, two weeks ago, Pakistan also said it wanted to terminate its investment treaties after the $6 billion award that came out 2019. But the problem with leaving your treaties, or unilaterally terminating the agreements, is that that triggers, of course, survival clauses, which means that the protections in the agreements remain in place, sometimes for up to 20 years, allowing existing investors that are covered by the agreement to pursue similar claims decades into the future.

Another model, then, instead of determination, is then to renegotiate and we’ve seen some renegotiations in recent years. So, then, after renegotiation, significantly limited ISDS have been moved entirely, going forward, in the Canada-US investment relationship. But – and that’s, again, that’s helpful, but there’s about 3,000 of these agreements in place and it’s not feasible to renegotiate all of them. So, the challenge for policymakers in this regime is that we’re a bit stuck. There’s general consensus that something has to give, but it’s not entirely clear how to do it.

Now, our proposal is a modest one, but we think, nevertheless, a productive one. We suggest in our paper that rather than renegotiating or terminating 3,000 treaties, states can come together and generate a plurilateral instrument, for instance, in the context of the OECD, telling arbitrators how to interpret those agreements. That is a legally available option, under international law, that you can provide binding directions to tribunals on how to interpret often vague provisions in these agreements. It would be much more cost effective than parallel and serial renegotiations and it will build on an emerging technical consensus amongst investment policymakers.

We’ve worked, Geoff and I, and spoken with them for the last many years, and this is very possible. It is a practical way forward, it is feasible, but what is needed in order to make it work is for a couple of major economies to take the lead. And as for the relevant forum, what we suggest in the paper is that again, if the United States is, anyhow, going to spend some time in the Paris over the coming years, talking about fixing preferential taxation for multinationals, well, perhaps they could also send their investment officials to the OECD to combine these efforts, to also address multinationals’ preferential legal rights, as well. And if you want to see how that might work, then you can read the paper.

Creon Butler

Lauge, thank you very much and I think that’s, you know, it’s a good example of something that is clearly, kind of, doable, and you know, we won by co-operating on this and having success in this. You know, it’s something that may potentially contribute to the broader spirit of international economic co-operation. So, I’m now very pleased to move to the sort of, third structural economic proposal and that’s from Simon Evenett, Professor of International Trade and Economic Development at the University of St Gallen, and Simon, over to you.

Simon J. Evenett

Thank you, Creon. My task is to identify the ways in which we can limit shortages of medical goods and to ensure the continuity of trade. I will just make four points. The first is that the right way to think about this problem is to think about how to limit the size and the duration of any shortages that might arise, and the shortages arise, on one part, because there are demand surges, and those demand surges are influenced by public health policy choices of governments. We can work on trying to fix the supply chain, the supply side of this, but no number of fixes, in this respect, will make up for first order mistakes that governments make on public health policy, which create the very demand shortages – demand shocks and shortages in the first place. And I think that’s a very important point of context and our paper deliberately talks about measures the governments can take on the public health policy side, as well as on the supply side.

The second point is, we discuss at length the issue of diversification and whether or not more diversification should be encouraged. In looking carefully at the product level data, this is an issue which has probably been overexaggerated. There – where there are problems, they’re often in a specific number of products and here, we need to have a very, sort of, focused and targeted approach to encourage diversification across different geographical locations. So, it’s not a matter of diversifying across suppliers, but also across locations.

The third comment I would make is that the paper discusses national trade facilitation plans, in times of pandemics and potentially going forward. We can see that, of course, during pandemics, the demand for medical goods surges and we want to encourage, therefore, the smooth importation of those goods. It may surprise many people to know that at the start of the pandemic, 141 nations were taxing the importation of soap and 79 of them had import taxes at a rate of 15% or more. You cannot think of worse public policy that existed at that time and governments, bearing in mind, many governments sensibly got rid of those import tariffs, but what we need to have, I think, going forward, is a much more forensic examination of all the barriers, which stop importation of medical goods, both technical barriers, as well as non-tariff barriers, as well.

And the fourth, final point I want to make is that in the paper, we argue that nations shouldn’t just be doing this alone. They should be co-operating and forming, or assigning a memorandum of understanding amongst likeminded nations, perhaps starting with the G7 and then working out from there. The goal should be to keep the trade routes open. It should be to lock in, as much as possible, these national trade facilitation reforms I mentioned and, also, to discourage the use of export controls. We saw last year export controls played havoc with the supply chains of medical goods and many countries quickly realised they were more counterproductive.

Now that we’ve learned that we should really be going forward and making sure that these are never used again. We also need to think internationally about whether certain medical products and items can be stockpiled, whether can be sheer swaps of those stockpiles when necessary. Another area of international co-operation is in the area of surveillance, in terms of identifying where supply chains are coming under pressure, where there are shortages and the like, and of course, all of this won’t happen, unless there is a dedicated unit, probably in an international organisation, which is devoted to monitoring these critical supply chains in essential goods. And the paper draws that altogether at the end, with the framework and ten principles for action. Thank you.

Creon Butler

Simon, that’s brilliant and thank you for being so succinct. I mean, I think the – yours, as with the others, but yours is a particularly good example of when you combine national measures with co-operation, you get a really good outcome, but if you have neither one nor the other, then you know, we can be in real trouble. But anyway, it’s a good example of that and I think one finds the same aspect with the other papers, as well.

Now, looking at the time, what I’ve agreed with Robin is that we’ve got some really good questions coming in on the Q&A, but what he’s going to do is pick those up in the panel session in the second hour. So, what it gives me the chance to do, before Stephen does his, sort of, final segment, is to ask a – probably one, or possibly two, questions for all the Authors. And the first question, really, is around the fact that all the papers, in a way, look at some of the most immediate issues that we’re facing now and to some extent, also, longer-term issues. One really important longer-term issue that’s coming down the tracks is climate change and the response to climate change, and so, policymakers have to face the challenge of integrating the response to, if you like, those immediate issues, with the need to tackle climate change. And this is, I think now, particularly acute for the sort of, financial and economic co-operation sphere.

So, I just wonder if anybody would like to, sort of, suggest, you know, how policymakers should go about this challenge and whether, you know, it may be in some areas there’s a, kind of, win-win, but it’s not true in every area? So, what, sort of, like, mind map should we have for both tackling these immediate issues, but also taking onboard the challenge of climate change which is now coming at us very rapidly? So, I don’t know if anybody would like to put their hand up and respond to that. I can see, Neil, you’re being very brave.

Neil Shearing

I’ll say two words. I’ll say two words very, very – two – make two points very, very quickly, in the interests of time, Creon. And the first is I spoke at the start about how I thought that government’s role should be reduced and contained to providing the platform for this transition to a post-pandemic economy. That was about investment in human capital and skills and also physical infrastructure. Clearly, green investment plays a huge part in that and there’s a debate that we could stretch into days, that we could have around the priorities and where that should focus. But it’s clear that, kind of, green investment plays a huge part in that, in whatever form of public investment comes as – in that programme.

The second point, and this links to the need for international co-ordination, is that I think tackling climate change is the ultimate collective action problem. You know, it is one thing saying there’s going to be another three trillion of investment in infrastructure in the US and it’s going to be green focused, etc., etc. If China doesn’t do the same and if India doesn’t do the same, and there’s not a similar plan in Europe, then what’s the point? So, we’re talking about the need for international co-ordination and we’re talking about the need for the IMF and the World Bank and other IFIs to find a role for themselves in the kind of, post-pandemic economy. I think this is a prime area, actually, both co-ordinating policies, but also given that menu of options to governments, so this is where you get the most bang for your buck.

So, I think, yeah, two points. There needs to be a big green element to the fiscal plan, but also, there’s a huge – an obvious need for co-ordination and a clear role for IFIs to play in that.

Creon Butler

Thanks very much, Neil. Yeah, I think this is very true and I just wonder, you know, if any of the – in the other areas, if there’s any comments that Authors would like to make on the sort of, challenge of integrating their policy issue with the challenge of climate change? I mean, the question I have is, do people feel this is actually generally win-win and it’s an opportunity, or not? Isabelle, yeah?

Isabelle Mateos y Lago

Yeah, I would say – I would go beyond saying it’s a win-win. It’s climate change, it costs a lot to invest now to deal with it. It costs a lot more if you don’t make that investment now and so, it would be a very short-sighted approach to, kind of, say, “Well, I can’t afford to make that investment now.” Having said that, there is a problem. I mean, the US is about to throw to $2 trillion at it. The EU has put together the Next Generation EU fund. Again, I mean, a lot less money than the US, but still a lot.

The emerging markets, as David has ex – have explained, there is a problem of where to find the money and so, to me, this would really call on the IFIs to come up with new ways of helping these countries finance the investment into the green transition, which has a social dimension to it, as well, by the way, at much lower interest rates than they can obtain on the markets.

Creon Butler

Yes, and thank you very much. That – I agree, and I think, in a way, here’s an opportun – it’s a bit like here’s another Building Back Better opportunity, if we, you know, have the political leadership to take it. Very good. I mean, I have one other question, which I’ll just very briefly put, which is a similar kind of question. So, across the whole range of issues, there’s a growing anxiety about the level of inequality within the global economy, both within countries and between countries, and many of the papers that have been presented, in a way, are practical solutions that should help tackle the problem of inequality, one way or another. And I think they go to the point that, really, there’s no one single solution to inequality. It’s actually a culmination of many things, when co-ordinated right, will help us tackle this. But I wondered if any of the panellists would like to comment, just briefly, on how their issue relates to that broader question of inequality. I mean, particularly, maybe David, I could just ask you, or Chris, in relation to the papers that you’ve put forward. Chris, do you want to go, perhaps?

Dr Christopher Sabatini

Sure. You had mentioned David first, whilst the…

Creon Butler

Okay, sorry.

Dr Christopher Sabatini

No, that’s okay, I’m happy to answer first. The – I mean, that’s, fundamentally, what this is and again, I want to quote Isabelle, who said, “This is,” you know, “once in a lifetime opportunity.” It sounds like we’re trying to sell something. We’re not, but it is an opportunity to rethink the nature of new labour markets and how they’ve evolved over the last 20/30/40 years and what can be done? It is – these are not – and this is not something to, sort of, lay the blame at structural adjustment packages of the past, or the Washington consensus, the poorly labelled Economic Reform Plan of the IMF. It also has to do with the fact that labour unions, for a long time, simply didn’t engage in the sort of advocacy around these sorts of workers, ‘cause they just couldn’t – they didn’t quite fit into their own model. And so – and this is a larger organisational transformation that needs to take place, that addresses the needs of an emerging and large working class who simply hasn’t had that level of economic security.

And so, you’re looking at this not just in terms of inequality, but you’re looking at the political effects of this in places where, you know, just statistically, I know in Latin America, for example, those who are most likely to vote for more populist options, whether for President or the like, tend to be those who work in the informal class. So – it also has a political implication, so I think it’s very much goes to the heart of inequality and I think it’s – we need to understand the nature of that inequality more than just increasing living standards above a certain threshold, which is the way it was measured before.

Creon Butler

Right, thanks very much. David, any very quick…?

David Lubin

Just one quick point. The long end of the South African yield curve embeds a real interest rate, which is in excess of 6%. South Africa’s potential growth rate is probably no more than 1½%. If GDP-linked bonds offer a way of allowing interest rates to come down because the buyers of the bonds have the equity upside that’s related to more rapid – you know, related to more rapid growth, should more rapid growth occur, then I can see that that is – that fits very, very neatly into issues to do with income inequality, and also fits very neatly into the kind of political requirements of what it takes to make a debt sustainable. Because, you know, there is a reasonable growing political risk associated with the idea that a bunch of rentiers are receiving interest rates that are four times the potential growth rate of the economy.

Dr Christopher Sabatini

Creon, you need to unmute.

Creon Butler

Yes, I’ve got it. Thank you very much, David. Sorry, not doing very well with the technology. Great. Well, thank you very much to all the Authors for their presentations and their succinctness. Now, I’d like to pass to my co-Author, Stephen, who will, sort of, set out some of the ideas that he and I have been thinking about in relation to modalities and priorities for co-operation. So, Stephen, over to you.

Stephen Pickford

Okay, thanks very much, indeed, Creon, and thanks to all the Authors who have put their efforts just together to come up with ideas for ways in which international co-operation can make – can help us to recover better from this crisis.

I want to talk briefly about the how, how you might achieve some of these changes, and I’ve put together a small – a short slide screen, because you haven’t been able to look at our paper yet. But first of all, very quickly, why bother with international co-operation? There are the standard arguments about ending spill-over effects. There are some problems that can only be addressed by international co-operation and the way in which poorer countries can be brought up also requires full international co-operation. So, you can envisage a situation where international co-operation allows all countries to manage their way out of the pandemic better. But we think that it’s also important to recognise that you need to have a way of rebuilding international trust and the institutions that you will need, going forward, to tackle the longer-term global challenges that we’ve started to touch on.

I mean, there has been a lot going on in the crisis. I think it’s important to recognise that. A lot of them have been national responses. There’s been unprecedented fiscal support, unprecedented monetary mechanisms to support banking systems and so on, job support mechanisms. Part of the downside, though, is – of these national responses, is some of the measures which have had consequences, international consequences, usually bad consequences. So, you’ve had travel restrictions which have prevented some industries, travel, labour movements. You’ve had a degree of vaccine nationalism, which have been unhelpful.

The flipside of that is that there have been some really positive international responses so far. The Central Bank started out by putting in place swap lines to ease international liquidity. You’ve had, as people have referred to already, the debt sustain – the debt service mechanism put in place by the G20. The SDR allocation looks, hopefully, to be on it where – which will help to ease international liquidity, but also, potentially, support poor countries, and the likes of COVAX has enabled vaccine access to – more broadly in the global community.

As I said, the Authors have come up with some very good ideas about priorities for using international co-ordination to address. I think it’s helpful to think in terms of groupings of urgent, high payback, quick wins and longer-term challenges. Some of the urgent priorities, I think, are to make sure that we have some agreement on how countries are going to exit from their support measures and Neil has addressed that. I think the way in which you can free up trade in medical supplies, as Simon has outlined, is also an urgent issue. Then you’ve got some issues which have you – give you a very high payback, if you can manage to address them, and there are two examples, which have been discussed so far. One is how you head off any incipient debt crises. So, David and Isabelle have addressed those. How you avoid a future financial crisis and Rebecca and Til have looked at that.

Quick wins are obviously usually very attractive to things like the spring meetings and G20 meetings, which is why it’s encouraging to see that the SDR allocation looks to be on track for being introduced fairly quickly. Also, the US approach to corporate taxation looks to be something where a lot of the spade work, a lot of the groundwork, has been done. Putting these in place quickly should not be beyond the wit of governments, but I think Lauge and Geoff have a very interesting take on it, as well, where addressing the shortcomings of investment treaties could be a really useful way forward. That is – but that leaves the longer-term challenges still to be addressed, the issues of planning for a future pandemic, climate change, inequality, which we’ve just been discussing, and I think those are more difficult, but it doesn’t mean to say they should not be addressed, start to be addressed immediately.

There are clear limits to the way in which international co-operation and, kind of, co-ordination can work. There are clearly a whole range of domestic constraints. Politics gets in the way of many of these efforts, but there are also geopolitical constraints. There’s the sorts of geopolitical tensions that we’re seeing between the West, for example, and China, is not going to make life any easier to get international co-operation going. The sort of vaccine nationalism, which we’ve seen in Europe, also stems from some of those geopolitical constraints.

But it’s not all bad news, because I think, as Creon said at the start, when this was first mooted, we were – this was after four years of an American administration, which was pushing America First, that is on the wane, thank – so, the climate there is a little bit more conducive to launching international co-operation measures. There are clearly, also, technical constraints. You need to have the IFIs involved, but you need the nations that are the members of the IFIs to come in and support them and you need to address some of the shortcomings, which the IFIs themselves face. We’re not going to go into that in detail, because that is a long subject which, for example, the Tarman report looked at a couple of years ago. It concluded, as you can see from this quote, that “The whole system lacked coherence and capacity.” But nevertheless, it’s an issue that would – it would help if we could address that.

Creon Butler

Steve, I’m…

Stephen Pickford

So, finally…

Creon Butler

…sorry to come in, but I think maybe what we could do is just quickly…

Stephen Pickford

Fine.

Creon Butler

…do the last slide and then we’ll move to the next session. It’s really my fault, I’m afraid, but…

Stephen Pickford

Go for it. Okay, thank you.

Creon Butler

Sorry. Thank you very much, everyone. As I say, it was my fault for running over there, but I think we had a really good range of presentations, with an enormous amount of material. And what I’d like to do now is to hand over to Robin for the next part of the panel. We were planning to have a short break, but I think what we’ll do is move to the next part of the panel straightaway and people will be able to take the break during the discussion, if they need to. Thank you. Robin, over to you.

Dr Robin Niblett CMG

Well, thanks, Creon, and I’m sorry we didn’t get to see Stephen’s last slide, but I’m sure I’ll give him the chance of final refusal at the end, if he needs to come in again. I would just like to invite our final set of panellists to open up their videos, with Philip Hammond, DeAnne Julius and Raghu Rajan. Delighted that they can join us. They’ve had the benefit of having seen some of these papers in advance of their being released, as we’ve gone through the process. And DeAnne Julius was Chair of Chatham, actually was Director of the International Economics Programme, as it was called a little while ago, so knows Chatham House’s work very well as a Senior Advisor and a distinguished Fellow in the Global Economy and Finance Programme now and I think known to all of you from her role on a number of boards and Chief Economist at Shell and BA in its day and on the Monetary Policy Committee of the Bank of England, etc.

Philip Hammond, and one of those people I’m able to say needs no introduction, but that won’t stop me from saying a couple of words of introduction. Delighted that Philip is also now on the Panel of Senior Advisors of Chatham House, but obviously, Chancellor of the Exchequer in that period after 2016, where he had to deal with a lot of these topics, so probably, I’m sure, very grateful that he still isn’t Chancellor during COVID-19. But having served prior to that as Foreign Secretary, the First Secretary in a number of other Cabinet and other roles between 2010 and 19.

And delighted to have Professor Raghu Rajan with us here today. Raghu, thank you very much for joining us from University of Chicago Booth School, where he is a Distinguished Service Professor of Finance at the Booth School there. Obviously known to everyone here for his writing, and most recent book, “The Third Pillar,” which I think is particularly appropriate, actually, for all we’re discussing today, the disconnects between market state and the community, the third pillar. And Raghu, I definitely want to get your angle as to how that book you wrote sits inside this crisis of COVID-19, when we come to you, but having served, also, as Governor of the Reserve Bank of India from 2013 to 16, perhaps Raghu also will be able to give us some real picture and – on some of the dynamics that we’ve discussed here, inequalities and informal economies and how some of the emerging markets are coping with this terrible crisis, also having served as Vice Chairman at the Bank of International Settlements and Chief Economist at the IMF, amongst his other roles.

So, a great group to be able to look at our issues. Philip, I’m going to run, kind of, in the order on the agenda. I’m going to start with you. But maybe just a nice, soft opening question, if I could put it that way. Is there something that really stood out to you on this list? And I thought, actually, the way Stephen pulled it out as the urgent, you know, the long-term, the quick wins, etc., is there something that stood out to you where you thought this is a great idea, if I’d been Chancellor of the Exchequer, that’s what I’d be championing right now in the G20 or the IMF or wherever? And something, maybe, that’s missing, an issue that you really want to put on the agenda from your perspective? Let me turn to you first.

The Rt Hon Lord Hammond of Runnymede

Robin, I think there’s a whole raft of good ideas in these papers. It’s a feast and, you know, the risk is of indigestion. I think, actually, just listening to the presentation there, the overwhelming impression I had was of being a Politician, or at least a former Politician, in a roomful of Economists. And there are many, many proposals here which I perfectly well understand, and they make perfect sense, looking at the world, from an Economist’s perspective, but I’m immediately seeing significant political pitfalls around many of them. For example, the expression: “Build Back Better”, which of course, our own Prime Minister here in the UK uses, and the real sense that I got from so many of the contributors that they see this as a real opportunity, a real, sort of, sense of positivity about the whole thing, I am not convinced that our electorate is necessarily viewing the next couple of years in that way. I think if you took a poll, you’d find that what most people want to do is get back as near as possible to how things were in February 2020. So, there’s going to be a real challenge between, sort of, visionary global viewpoint of people thinking like the panel here and an electorate that is just weary of this intervention.

But if you asked me for what stood out for me, the thing that has troubled me since the very beginning of this crisis has been around global supply chains. The shock of realising just how fragile our 21st Century world is, particularly in a developed economy, where you take so much for granted. Realising just how crude the world is and, you know, little things that stick in my mind, like seeing civilised, developed countries, seizing and impounding shipments of goods that they happen to think they rather like, in the way that you would probably not have associated with advanced economies, and I think it’s that sense of the fragility of globalisation. And for me, the bit that we perhaps need to look at a bit more and reinforce here is the risk that in any crisis, there’s always a default to the nation state. That will disappoint many people. It certainly disappoints the leadership of the EU that, you know, when COVID struck, people across Europe weren’t saying, “What is Brussels going to do about this?” They were saying, “What is Rome, what is Paris, what is Berlin going to do about this?”

And this fragile globalised world, that was already under tremendous pressure, not least by the disengagement between China and the US, COVID has given a kind of quasi respectability to some of these trends away from globalisation. I think, if we’re not very careful, we’re going to allow globalisa – we run the risk that COVID will become the veneer of respectability for what is little more than outright protectionism. I already smell a bit of it around talking about, you know, in my own part of the forest, in Europe, you know, developing European champions in this, that and the other. Whenever I hear the word ‘champion’, I always become extremely nervous, extremely quickly.

Dr Robin Niblett CMG

Thank you very much, Philip. Just yeah, I was noting that in Stephen’s presentation, he talked about all of the good bits of news is that we’ve moved away from a President who talks about America First, but I do hear a lot of talk about “Made in America.” And, of course, it’s not necessarily America First, but there is a Made in America dimension, which I think is an echoes of the political imperatives so many other face.

Just so I take advantage, we had so many good questions in the ‘Chat’ and I’m worried we won’t get to them all in the Q&A. But to pick up on your theme about this split between the sort of, Build Back Better and sort of many people just wanting to get back to where they were before, where do you sit on this issue James Blinder raised in his question about “the costs of going green and debt levels. A lot of the talk is that going – you know, going green is actually part of an answer to maybe create jobs, to see it as an opportunity. Do you see the climate agenda getting squeezed by this,” with your Politician’s hat on, “or can that be one of the areas where you really do leverage the opportunity for the future?”

The Rt Hon Lord Hammond of Runnymede

So, let me preface my comment by saying that I, personally, am committed to the Green Agenda. I think it’s something we have to do. We don’t have an alternative. But I do worry that in, certainly in the UK, but I think across the developed world, Politicians are being disingenuous in the way they present this challenge to electorates. Yes, of course, a green economy will create jobs. There’s no issue about that. But we are making a choice here. We’re making a choice, over the next couple of decades, three decades, to invest hugely in one area of our economy, trans – the energy transition and what we’re doing, effectively, is deciding that instead of increasing the quantity of people’s consumption, we will increase the quality of it by decarbonising it, and we’re inviting people to see that although their pot may not be getting bigger, it is getting significantly better.

I think we’ve got quite a long way to go to persuade people, particularly those living further down the prosperity curve, of that argument and I’m looking forward to seeing how Politicians, in developed countries, sell this argument. For Politicians in developing countries, frankly, I find it challenging to see how they are even going to persuade themselves to want to do that. If I’m an Indian Politician, and I take India at random, you know, availability of energy, of electricity, is a far more electorally alluring prospect than the composition of the generation mix, I would guess. Now, Raghu will perhaps be able to comment with more authority than me, but I find it difficult to see that Indian Politicians will, any time soon, sacrifice growth in energy supply for improvement in the green credentials of energy supply.

But I absolutely agree that there’s a role for the IFI. So, there has to be a role for the IFIs in the green transition, because as somebody said earlier on, unless we co-ordinate this, we’re, frankly – it’s not that we’re wasting our time, but that it’s going to be politically impossible to sell if it looks as though, you know, a national government is inflicting the – a high degree of challenge on its own population when others are not doing their share. But I absolutely agree with Tarman, who was quoted earlier, that if the IFIs are going to step up to that role, there’s quite a lot of structural change needs to take place around there.

Dr Robin Niblett CMG

Thanks, Philip, thanks very much for those comments. Hopefully, we’ll be able to come back to you, maybe with some questions or comments from the paper writers. Let me turn to DeAnne. DeAnne, maybe same opening question, did something in particular stand out to you from that set of presentations and what do you think was missing or something you’d like to put on the agenda, in addition? Start with that.

Dame DeAnne Julius

Hmmm.

Dr Robin Niblett CMG

Over to you.

Dame DeAnne Julius

Well, thanks, Robin. I mean, I think I’d really start by just congratulating all the Authors and Creon for pulling this altogether, because it is a group of really interesting papers, with some quite meaty suggestions. Yeah, it’s tricky to pick one. I suppose, for me, since I worked on foreign direct investment in my earlier lives and published a bit on it, I found the best idea, really, the paper on looking at the existing bilateral investment treaties and coming up with these interpretive statements to try to, actually, defuse some of the bombshells that are in existing treaties, that is probably of no interest at all to the political classes. I thought Philip’s point was very interesting that Economists might look at these things quite different than Politicians.

I suppose if I were to perhaps think about it in those terms, something that wasn’t really discussed very much was the issue of the Green Agenda and whether there are elements that could be part of a solution to some of these issues. And there, putting back my aspirational economic hat on, again, I think an area that would be quite helpful, coming out of COP26, if we ever get there, would be a notional global carbon tax. Notional, meaning it – that not too many countries would actually impose the tax, but for making public investment decisions, for making corporate investment decisions, to actually use a carbon tax which is consistent, a notional tax, a notional cost of generating carbon, that is consistent with reaching the zero-carbon goal in 2020. And at the moment, that, at least from some studies that I’ve seen, that looks like it would be about $100 per CO – per ton of CO2 by 2030, going up to something like $350 per ton in today’s dollars by 2050. That’s the kind of co-ordination for – that I think could make a big difference, I – because – simply because the carbon – the climate change issue is, you know, the pre-eminent area that needs global co-operation.

I suppose a smaller thing, just to throw it in, as well, would be Biden’s tax plan, his corporate tax plan. Now, of course, that’s only come out recently, but those of us who’ve been following the OECD work on that think that that’s an area where I suspect the average voter understands what’s going on and there might well be a convergence of both economic and political support for reform of corporate taxation.

Dr Robin Niblett CMG

And since you mentioned, that was going to be, actually, one of my follow-up questions to you, ‘cause Barbara Ripast put that in the Q&A list there, you know, “Where do you see the Biden proposals for minimum global corporate tax sat in there?” And I think your point being is there is at least some indication of an openness on the US side, and we’ll see if it can be pushed through the US political process for co-ordination on this front, and that would then provide perhaps a framework for your idea about really thinking about this idea of a notional carbon tax. So, I think unpacking that word ‘notional’ sounds like a very important part of the mix, which maybe is a challenge for us at Chatham House to take up, actually.

So, my – let me – I’ll pose a different follow-up question to you, which really, I suppose, pulls out from the papers that we saw there, in particular Rebecca’s paper. I mean, how do you think that the steps that were taken, especially through the framework of the Bank for International Settlements, in the wake of the Global Finance Crisis, how have those – do you think they’ve stood the test of time? Have they meant that we went into this crisis in a more resilient way, and the proposals that were put forward in that paper about we may need to, then, think about whether these now need to be adapted, going forward from there? So, how did you think about this business of the kind of, regulatory framework in which we’ve put the financial institutions and the banks, through this process, or through this crisis?

Dame DeAnne Julius

Well, one of the things that really struck me, reading that paper, but also some of the others, was actually, how well the lessons from the Global Financial Crisis served us going into this crisis. You know, it is interesting that it was possible to prevent the health crisis turning into a financial crisis in the very early stages, with the excess liquidity. The – I mean, Neil’s paper talks about the very large amount of fiscal support that governments came up with this time. It was this, what’s it called, “Go big, go fast.” We did learn lessons from that crisis, which served us well, and the regulatory changes that were made did mean that banks went into this crisis in a much more healthy position, from the point of view of their buffers and their reserves, than we had before.

So, I think, in a way, policymakers deserve a bit of a pat on the back in what they did with the previous crisis. That’s not to say that more doesn’t need to be done, but I think that the idea of having a proper review of how the banking regula – financial regulation and monetary policy contributed to this would be useful, both to learn its lessons, but also, one of the big challenges we face after all of this unwinding, some of this very, very large stimulus that is now still coursing through our economies. And although I agree with Neil that you have to be careful not to unwind it too soon, I think also, there are some major risks in leaving it in there too long. So, especially with QE, I think we have some lessons that we could learn about unwinding it.

Dr Robin Niblett CMG

Thanks, DeAnne. Well, that, actually, is a perfect transition to Raghu. Again, I’ll kick off that big opening question about what stood out and what do you think wasn’t addressed? I can’t resist précising that question with a reference to the article you had in the FT, I think it was about a week or so ago, “A riot of US spending spells trouble for future generations.” So, I mean, you know, you unpacked it. Maybe that wasn’t even your title. That might’ve been the newspaper’s title. But Raghu, why don’t you come in and maybe address those points and maybe give us a little hint as to whether you’re a little more worried to pick up where…

Dr Raghuram Rajan

Okay.

Dr Robin Niblett CMG

…DeAnne left off. Over to you.

Dr Raghuram Rajan

Let me get there. I, first, want to commend the papers. There’s a lot of thinking outside the box. Sometimes out of the box thoughts are entirely new, sometimes they have been around, but dismissed for various reasons, real or perceived, and sometimes they go against important vested interests, so it’s important to bring them up again to see if the environment has changed, whether they actually make more sense, given the realities of the moment.

So, one example of this, I mean, coming to one of the ideas I really like was GDP-linked bonds. But you know, they’ve been around, the idea’s been around for a long time, as David would agree, and yet, very few countries have tried them. Argentina tried a version, and he mentions that, but you know, they fudged the GDP numbers and so, it wasn’t particularly effective. But why don’t – I mean, there are versions of this, commodity-linked bonds. Why doesn’t an oil producing country link its debt to oil prices? That’s harder to fudge, but still, countries don’t do that. I think Agustín Carstens is the only Finance Minister who tried intervening in oil and actually made money for his country, got some praise for it, but he’s the only one.

And I think some of it has to do with the risk-return trade of Finance Ministers. If you actually make money, you know, very few people recognise that, but if you lose a lot of money, you’re the guy who went out into this crazy new instrument and invested in it and maybe there was a payoff and – which was under the table. So, I mean, it’s very hard; we tried. I was at the World Bank doing a project. We tried getting countries to be interested in this. They simply don’t buy it. So, I hope the time is ripe. I think David has the right idea, let’s first run it through more advanced countries and then see if it hits elsewhere. I think commodity-linked would be easier than GDP-linked, but let’s explore that. That makes sense.

Now, to your point, I mean, I do think we are in a really uncommon, in fact, unprecedented, environment, so it’s hard to draw lessons from the past. You know, clearly, the pandemic shock is different from the normal recession. It’s tragic, but it also has some elements, which could imply a faster recovery and also, some pent-up demand. And, also, we’ve had this unprecedented monitoring and fiscal support. I mean, “The US is spending,” as Larry Summers says, “like wartime,” 30% of GDP over the last year and this year for something which, in magnitude terms, is far smaller. Yeah, we – you know, we would see the pandemic’s effects everywhere except in the prospect of GDP numbers. I mean, 6½% growth is stunning and we’re – what happened to the pandemic? And I think we have to adjust for that in some of our review.

I mean, I think it’s okay to say the financial system is doing fine, but if the intent was the financial system should do fine without public support, then clearly, that’s not true. Right from the Fed intervention in March, to the massive income adjustments in the US, based on transfers from the fiscal system, I mean, there has been enormous support. And so, I don’t think it’s – we can, without detailed analysis, say that Basel worked. I mean, I would love for it to have worked, because I’ve worked on Basel, but I think we need to be careful, because we’ve had moratoria, we’ve had fiscal supports. You know, there is some risk, still, in the system, as these supports come to an end. We have to see what happens then, but I do think we have to adjust to that.

The third thing I’ll say, and end there, is that it is dangerous, and I want to get back to something Lord Hammond said in a second, it is dangerous to push prescriptions that are driven by industrial country priorities and leverage. I think we saw that in one of the papers with ISDS. That was a priority for some countries at some points and we are seeing the consequences. TRIPS was – trade – I forget the acronym, the protection of intellectual properties, pushed by American pharmaceutical companies and some countries are seeing that it overly restricts their ability to enter some areas. But I think the problem, more, is that these priorities shift. We’ve just talked about a tremendous shift in priorities between the Trump administration and the Biden administration. So, if – and it’s quite possible it shifts again.

If Congress shifts, if we get a new administration, which is not democratic, you know, our priorities could shift again. To have those priorities imposed on the rest of the world is very dangerous. I mean, for sure, it subverts democratic process, and this is why I want to hesitate a little bit when I see proposals like, “Let us propose debt relief for X.” I mean, debt relief is a form of leverage. I think, for certain, you want to make sure it’s used in a reasonable way. It doesn’t go straight to somebody’s Swiss bank account. But you do want to allow for the democratic process in the country to actually assert itself. For example, asking Belize to take action on climate change in return for debt relief, but that may not be their priority. They may have other priorities. Are you, in a sense, burdening the recovery process with demands that would not be undertaken in your own country? And furthermore, are you undermining any democratic prospect for, you know, support for climate change actions by insisting on them as an outside requirement? So, I think you may be sceptical about the governance in some areas, but it’s dangerous to substitute your own sense of what is appropriate governance and that often comes back to hurt us.

Let me end, and I’ll be very quick, on this – you know, Lord Hammond mentioned the default to nation state and as a way of strengthening the power of the nation state versus, say Europe. I would say the same thing, but in the other direction, strengthening the power – the position of national capital versus more decentralised entities in the country. We are defaulting again to that in the pandemic and sometimes it is the right thing to do, but it does create enormous power in that. Let [audio cuts out – 98:53].

Dr Robin Niblett CMG

You’ve just muted yourself, Raghu, by mistake. Oh, yeah, there we go, yeah, carry on. Yeah.

Dr Raghuram Rajan

Oh, sorry. I was…

Dr Robin Niblett CMG

You’re unmuted again, that’s good, yeah.

Dr Raghuram Rajan

I was going to say, I have a comment on the global tax. I think it’s a great idea. I have a twist on it, but I’ll wait for discussion.

Dr Robin Niblett CMG

Thanks very much. Just one very quick follow-up, as I’ve got you here, and I’m glad you mentioned that business about we seem to be defaulting back to the capitals, versus, let’s call it, more decentralised governance, ‘cause it does strike me that when you look at the kind of proposal that’s coming out of Washington right now, it is about retesting the idea of the role of the state and the state often being the central state, in the context of growth generation. And a lot of people saying, “Hooray, you know, this is where we needed to be.” There’s many other people who are saying, “Well, hold on a minute,” some because they favour the market, but I think I heard you say because they favour something that’s neither the market, nor the central state. It’s more about the bottom-up drive as a growth. But maybe that’s a thing we could come to later on.

But I didn’t want to pass up the opportunity here, ‘cause Philip mentioned India and it’s example of such a huge economy. When I look at Chris Sabatini’s paper and the way that the COVID crisis has exposed the vulnerability and the centrality of informal workers in the functioning of particular economies, India is, well, you tell me, I think is a test case or – of that particular reality. The fact that those workers were, in essence, chucked out, as far as I can tell, a little bit onto the pavement, literally, at the beginning of the process. What did you think when you read that paper, or if you saw that paper, or at least to the comments Chris made, do you think there is something really systemic about the role of informal workers in many developing or emerging economies and markets, and how they have to be included or blended into sustainable growth, going forward?

Dr Raghuram Rajan

Absolutely. I think it’s an important point. But I would say that that doesn’t seem, to me, the obvious starting point. I mean, they are often – as we’ve seen with the migrant workers, you know, those horrible pictures of people on the road, transporting their kids on their shoulder, there is very little social protection. But there is very little social protection, even for formal workers, and so, I would start by, first, ensuring that there is – you know, in India we have a rural employment guarantee programme, which allows for rural unemployed workers to get some support. That’s been quite effective. We don’t have anything in urban areas, so you could be a formal urban worker with limited unemployment insurance, in fact none, and you could be fired, and you could be – I mean, they’re virtually informal, and what the government has been trying, to its credit, is to, first, try and build protections for those. It also has to build protections for the informal, but the assumption, and this is why you see the migration, is they will go back to their villages where there is this rural support, and they will be able to take advantage of that.

I don’t think that’s right, but I would say the starting point is improved protections with those who are easiest to reach and strengthen, then can focus on an urban guarantee programme. Jean Drèze has an idea, others have ideas. This will come, but – so, put differently, when you look at these workers in industrial countries, these are the least protected, but everybody else is protected, so this seems like the right place to start. There may be easier places to start, as well.

Dr Robin Niblett CMG

Thanks very much. Look, what I’m going to do – I’m keeping an eye on time, we’re getting lots on the table. What I’d like to do is maybe invite some of the paper writers, who put so much effort into their papers, to, almost, if I can say, ask a question back to our panel or bring one of their points back to the panel. And as we had to cut Stephen off before slide seven, which I’m sure had all of his key conclusions in it, but rather than sharing the conclusions, Stephen, which we’ll see in your final paper, did you want to, kind of, throw a question back to some combination of Philip, DeAnne and Raghu? Let me throw it to you and then, David, I thought I might bring you in on the issue of the bonds and – any case, I – kind of, catch my eye or put a note into the ‘Chat’ for me and I can draw on some of you, the Authors, first. Stephen, you’re first on my list.

Stephen Pickford

Lovely, thank you very much, Robin, and thanks very much, indeed, to Philip, Raghu and DeAnne. I – there’s a really big central question underlying what’s – what I heard from you and that is how you reconcile the domestic political with the need to get – to tackle either issues that can be better addressed internationally or cannot be addressed unless they are internationally agreed? So, I guess I’d – to specify the question, if you want to make progress on something that you really need to push forward through the G20, for example, or the IMF, and you need to build the political support in your own domestic constituency, for something that may seem very remote and not at all relevant to your domestic electorate, what is – are there particular things you can do? Is your – are there ways in which you can bring those issues back to a domestic level to emphasise why support for an internationally agreed programme is important?

Dr Robin Niblett CMG

Do you want to – Philip, do you want to – just as a first right of reply and you can pick up on any other points you’ve heard, as well, from DeAnne and Raghu? And then I’ll – I’m going to bring in maybe a couple of the other Report Authors, if they want to catch my eye.

The Rt Hon Lord Hammond of Runnymede

Yeah, I mean, I think the role – and I was going to say something about the G20, anyway, particularly the G20, because somebody said earlier on that the recent output from the G20 had been a little bit disappointing, in terms of co-ordination of fiscal policy. I do know, from experience, that as soon as the words ‘co-ordinating fiscal policy’ are uttered, quite a serious number of people around the table, you know, close down their participation. Many of our G20 colleagues see the G20 as a place where things that are properly done at international level should be agreed, but mostly, they would not agree that fiscal policy was something that should be decided at G20 level. For all sorts of reasons, including political, but also for economic reasons, they would wish to retain their freedom of manoeuvre in fiscal policy.

But I think the role of the Finance Minister, if you like, or the national leader, sitting in the G20 forum, is essentially that of a Broker, and this will be exactly the same whether it’s a developed economy or an emerging market. The gap between my understanding – let me – you know, the gap between my understanding, as a G20 Finance Minister, of a proposition and its value to the world, and the Indonesian Finance Minister’s understanding of that proposition, will probably be quite small, because we were educated in the same way, we think along the same lines. You know, to be – to put it bluntly, we are part of the global elite, but we will both have very different challenges in trying to sell that proposition to our domestic electorates. So, we go away from those meetings, having all congratulated each other on the good things we’re proposing to do, thinking in the plane on the way home, how the hell am I going to sell this to my political colleagues and, ultimately, to my electorate?

The international – the minimum taxation of digital companies’ agenda is an area where, superficially, as somebody said earlier, there is a convergence between what is economically sensible and what is politically sellable, because there’s pretty much universal demand for something to be done about this. But I have a persistent fear and I, you know, I’d be delighted to be proved wrong, but I’m afraid that I think that consumers and taxpayers, in developed economies, are going to be disappointed to the point of anger when they discover actually how much tax their Exchequers, their Treasuries, are going to benefit by.

I mean, I know from some polling that we did in the UK, where we introduced our digital tax, which we estimated would raise about £400 million a year, and that we had a whole lot of electorates out there who thought that if Amazon paid proper taxes, they wouldn’t need to pay any income tax at all. A completely distorted understanding of what the proposition was. And you know, I’m afraid, over the last 18 months/two years, in trying to move this agenda forward, some Politicians have not helped that problem by talking up – some of my European and former European political colleagues are digging themselves big holes by talking up the benefits that will come from getting this agenda delivered. It will now be delivered, I’m confident about that, but the consequences will be far, far smaller than many of our voters are expecting.

Dr Robin Niblett CMG

Very important points, thank you. Look, I’m just keeping an eye on time. I’m just going to try and see if we can unmute a couple of our people who’ve got good questions, maybe get two or three of them on the table. André Hoffmann’s got a very interesting question about a sovereign debt instrument. André, are you there and if you are, can Sam, you – yes, I can see Andre on my little screen. If you could unmute yourself, André, we should be able to get you to ask your question, or Sam can unmute you. Can somebody unmute André? Yes, great, go ahead, André.

André Hoffmann

Well, you take me by surprise. I wasn’t really expecting to have the limelight. This is very embarrassing.

Dr Robin Niblett CMG

You’ve got it.

André Hoffmann

Very nice to see you all. No, we were talking about foreign debt and we were talking about the way that we can link some of the benefits that developing countries can bring to the conversation about conservation and about nature resources and about biodiversity and how we could link this with the existing burden of the debt. If we provide the opportunity to countries to deforest in order to pay back the principles, we are not helping ourselves, so the idea is really to demonstrate a certain link between ecosystem preservation and perhaps even ecosystem restoration in a generation, in exchange of different attitudes towards the debt repayment. So, the G20 have just met, there’s – there’ve been some lightening of the load, but there’s nothing structural in place and I think there needs to be some sort of mechanism to create short-term liquidity to allow to address the equipment issue, the infrastructure issue that are on the table, and I would be quite interested to hear what the panel has to say about this. Well, I’m really trying to posit the short-term needs for cash with the long-term reimbursement of the debt, which frankly, could be paid not with money, but with nature. That’s the end, yeah.

Dr Robin Niblett CMG

Very interesting proposal. So, folks, if you can hold that thought and I’ll invite our panellists to come back on it, but also some of our paper Authors, if any of them have a particular idea. I’m going to try and get a couple of other questions onto the table, as well. Bill Campbell, I think, asked about six questions. So, Bill, you only get to put one, actually, to the panel, but I was thinking, you know – well, I’ll let you do your one. I think the one on technology struck me as maybe being the most relevant and an issue that’s not been tackled yet, I think, sufficiently in our conversation. So, Bill, do you mind doing your technology question?

Bill Campbell

Well, sure, and thank you for the opportunity to ask such a distinguished panel these questions. So, on technology, we’ve seen a pull forward of technology due to the pandemic. Obviously, as we reopen and you know, the economy is going to be a different economy, in many respects, so there’s going to be structural unemployment issues that we’re going to have to deal with. So, the question revolves around the use of policy and all of this debt financing. How should we think about policy in trying to build back productive GDP in this new environment, in dealing with the structural issues that are, you know, now in place and are probably only going to accelerate?

Dr Robin Niblett CMG

Thanks. I’m going to take one more question from the folks here, and Neil Carmichael. Neil, if we could call on you, ‘cause I think you had a, well, a number of interesting questions. The one that struck me was the one about the risks of the industrialisation and the rise of nationalism, the – some of the politics that Philip was talking about, very much at the beginning, and that Raghu addressed, as well. Over to you, Neil, if you could unmute, please. Ah, hold on, you’re muted and if we can’t unmute you – you need to unmute yourself, Neil, if you can, I think, otherwise, I’ll ask your question on your behalf. I don’t see you unmuting or being able to be unmuted, so there’s obviously some blank there. Don’t worry about it. I can see you’re a participant on the list. So, just for our panellists and others, Neil Carmichael’s question was specifically about whether technology might – which might accelerate through this process of the COVID recovery, could end up actually driving some quite deep disruption to social contracts, to employment opportunities and where do you see that fitting into the kind of, Build Back agenda? So, DeAnne, I’m sorry, as you’ve been with us longest, you’re going to go in the deep end on these very complicated and somewhat disconnected questions. I’m going to turn to DeAnne, then to Raghu and then, to see if some of our paper Authors want to come in, either to comment or ask another question on any of these points, as we’ve got you all here and you’ve done a lot of the hard work. DeAnne first.

Dame DeAnne Julius

Well, I think I should say thank you, but yeah, these are tough questions and important questions. I guess I would say to André Hoffmann’s point, I think there is some scope for using impact investment or maybe even carbon offsets as a vehicle to transfer resources from either countries or companies who do need to emit, airlines I’m thinking of, in particular, and maybe steel companies, to allow them develop a more robust and a more verifiable system than we have right now, but to allow that transfer to take place, which could, indeed, be directed towards, not just carbon issues, but biodiversity or other things. And I would hope – I know there are discussions taking place, whether they come up with anything, I’m not so sure.

On the questions on technology and structural change, you know, this has, kind of, happened. It’s the acceleration of digitisation, both by, you know, people like us and the way we talk to each other today, but also by companies, it’s happening. And indeed, I think – I mean, I’ve been surprised at how quickly it’s happened and how many companies have actually pivoted quite quickly, given the constraints over the past year. So, I’m not – I don’t think there’s a huge new role for government in helping this structural change take place. Obviously, education, re-education, training, apprenticeships, all these things that we’ve been trying to do for years, perhaps become even more important. But we’ll need the – we’ll – I have an open mind, at least, about how disruptive this is going to be. We should watch the unemployment figures, see what happens. I think some of these changes are taking place and many of them are positive changes that probably don’t require too much more additional support.

Dr Robin Niblett CMG

That’s great. Raghu, any comments on the questions that have come through so far?

Dr Raghuram Rajan

Yeah, sure. I mean, just amplifying a little bit on what DeAnne has already said. I mean, I do think, you know, we are seeing firms adapt significantly, increase the pace of automation, robots. The investment in robots are you know, increasing tremendously and, of course, we’ve seen how to work at a distance far more effectively. Silver lining, this should enhance productivity and the restructuring of work, should allow us to benefit from the improvements from the communications and technology revolution. The question is, how do you distribute this – these productivity gains to a wider base? And I would certainly agree that we need to make adjustments on the educational front. We’ve tried that for a long time, we need to do better. Maybe we can use technology to do it better.

But I also think there is scope for social adjustment and what I mean by that is, maybe we now see the possibility of distributed production even in advanced countries, through this working at a distance. The small town now has prof – a lot more professionals, because they work in London, but go in once a week, and so incomes can get more widely distributed. And then the question is, how to make those incomes work so that they employ a broader set of people, who maybe, you know, not producing stuff, but actually providing a variety of services. And we have the opportunity of addressing many of the ills that plague us, for example, the disease of loneliness, which I understand is huge in the UK, but can we think – and this is where there may be some scope for reinventing government in a certain sense, maybe local government, but thinking about what kinds of structures we have now that we are producing more, to effectively, use it to create a happier society.

So, I think there is a scope for reinventing some of the things we do, but I would agree with DeAnne, let’s see how this proceeds. I think we jump too quickly to yeah, we’re working at a distance, so all the offices are going to be empty. Well, maybe, but maybe people will rediscover after a year and a half of working at home with a two-year-old, that it makes sense to go back to the office. So, we need to figure out what real change happens, but I would think there’s an opportunity to build on it.

Dr Robin Niblett CMG

We’re coming into the last two or three minutes and it’s been a, you know, full two-hour session and we lost our break. So, I don’t want to keep people on. Hopefully, you’ve all been looking at the very good questions that are in the list, including lots of the ones we won’t be getting to. So, please use those as, sort of, good information and thank everyone for the questions that people have put in there. I thought there was one, sort of, appropriately, perhaps, anonymous question, or from an anonymous participant, that is a nice, kind of, wrapper upper. What I am going to do is pose that wrapper upper to Philip, to DeAnne, to Raghu, in this second half, you know, to close up the second half. But I can see a few our paper Authors on the – in my gallery view on the screen. Wave at me right now if any of you have a point you want to come in on, before I allow our three closing panellists to say some closing words. You’re not waving. I’m looking at you.

Okay, in that case, thank you very much for your contributions. What I am going to say is just turn, first, to Philip, then to DeAnne, then to Raghu. Here’s the question: do you have any deep worries about financial stability in the medium-term? I’ve been interested that the word inflation hasn’t cropped up much in our conversation. We’ve had technology and equality, climate. We’ve had all the good things that I expect to be in there, but that was on that list, that – the question I posed in the Q&A line, you know, house price bubbles. We’ve hardly said the word ‘China’ in this at all. Philip, if you were sitting in your old seat there, either near-term or medium-term ones, are there some things we’ve not worried about that we really need to keep an eye on?

The Rt Hon Lord Hammond of Runnymede

So, I’m glad you made that distinction, because of course, if I was sitting in my old seat, I’d probably have a resolutely clear two to three-year time horizon and I don’t think I have huge concerns on that time horizon, but going beyond that, yes, I do. I think one of the things we’ve touched on today is – first of all, just coming back to you for a minute, you know, did the Basel system work? And I think the conclusion we’ve reached is that we don’t know, because it hasn’t really been tested, because it’s been, you know, been obscured by a sea of liquidity, drowning everything.

But there’s another problem here. Is the Basel system going to be undermined by an implicit assumption that any challenge to financial stability will always be responded to with this same kind of, you know, off the scale fiscal and monetary largesse? And I think somebody said earlier, I can’t remember if it was DeAnne, but somebody said earlier that, you know, “The whole point of the Basel reforms was to create these sort of buffers within the system that wouldn’t require this massive external stimulus.” So, why do I worry about this? I wor – again, from a Politician’s standpoint, the thing that worries me, because we saw it in 2008 on what we thought then was a massive scale, but we’ve now – we now realise that, actually, that was just the hors d’oeuvres, and the main course has just happened, we’ve seen a huge injection of liquidity and we’ve seen, I think, most of that going towards asset price inflation, rather than strengthening wages. And we’re, certainly in the developed world, we’re already living in an environment where there are really significant tensions building up between those who own assets and those who don’t. That’s not just a rich and poor divide. It’s a young and old divide, as well. And the politics of this is pretty toxic, you know, at a time when millions of people are on furlough, their incomes are under pressure and they, you know, they open their newspaper, and they see that the stock market has risen 60% and over the period of the crisis. And where do we go from here? How do we manage the political fallout of increasing inequality through the feeding of asset price inflation?

Dr Robin Niblett CMG

Thank you. I think it’s a really important point to have raised and I’m glad you put it on the agenda. I noted, I think in the newspaper yesterday, that we’re in a situation where European banks are now as exposed, or more exposed, to their national sovereign debt than they were in the leadup to 2007/2008. So, to your point, Philip, you know, we maybe just got into – ourselves into a new dilemma.

DeAnne, over to you.

Dame DeAnne Julius

Yeah, I certainly agree with everything that Philip has said, and I think it also illustrates that we always have to worry about financial stability risks. We are living in a very interdependent financial world, where a problem in one place very quickly spills over to other places. We’re also living in a world with very high leverage and that’s true, not just in the banking system, but in the shadow banking world. We have a lot going on that doesn’t actually go through regulated intermediaries these days and so, we don’t really know how much to worry about them, but I think we have to.

And then there is this issue of asset prices, that at some point, they will become really overvalued and probably that point will have something to do with what happens to interest rates. And personally, I worry about whether central banks, particularly the Fed, but maybe this country as well, in Britain, whether those – whether they will have the courage and the political space to raise interest rates when the time comes. They are not going to stay at this level for the long-term and maybe not even the immediate term. So, yes, I worry about all those things.

Dr Robin Niblett CMG

Plenty to worry about, as always. Raghu, last word to you. Just need to unmute.

Dr Raghuram Rajan

I agree with everything Philip and DeAnne said. I mean, look at debt, just look at it from 1975. It’s been on an upward trajectory, if you look at public debt in industrial countries and we just added a huge amount to it. But it’s not just public debt, it’s corporate debt up 10%, according to the IMF, over the pandemic, household debt up 5%, not in every country, but on average. And this is on top of the 15-20% increase in public debt. So, we are spending, and the question is, when does the cost hit us? What were – you know, there is a school, which I think is extremely dangerous, which says, “Don’t worry, be happy. Interest rates are really low, spend all you need,” and, essentially, spend with the idea that no-one should suffer. And I think that is really bad public policy, because, you know, that means probably excessive spending and the costs, obviously, are not paid in the short-term, they are paid in the medium to long-term, when you limit fiscal space to do other things.

In fact, in the US, we are already seeing that. The CARES Act, plus the two subsequent bills, five trillion, now we’re really fighting about what actually is important investment, because this, now, we have to pay for and this is when, you know it starts hitting that, you know, this is not free money. And so, what we’re going to get is a shrunken investment package, which is, essentially important, even while we’ve, sort of – and there are various reasons why the spending has been so easy, I think many of them rooted in political economy, many of them in some of the things that Philip has mentioned. But I think we really have to be worried that, you know, even if we don’t have a financial – explicit financial crisis, that this level of build-up is unsustainable and somewhere it has to stop, and the question is, how does it stop?

Even while we’re having a really big strategic competition, you mentioned China, that we haven’t spoken about, increasing amount of strategic competition between the democracies of the world and a very successful regime, so, thus far, at least. Let me stop.

Dr Robin Niblett CMG

Well, sorry, yes, ah, sorry, I’m keeping on time. Thank you, Raghu, for those comments. I think all of your three very thoughtful comments today and, obviously, the great inputs we’ve had from our paper writers, is a reminder why we are putting so much focus and centrality on this area and will be. This is a launch event of current thinking, convened and produced by Chatham House around these big questions of the future of international economic co-operation and stability.

I would just underscore, as well, within this, that as a core part of this, I think we want to make sure that we always connect to it the sustainability of the solution, and it’s not just the economic sustainability, or even just the political sustainability in the short-term, but the environmental sustainability, the climate sustainability of the answers that we are putting together here, because these elements are all interwoven. Politicians, obviously, have to deal with what’s on their plate today, but the whole point of a think tank like Chatham House is to be able to look that little bit further into the future and try to keep Politicians and others’ eyes on the big changes that are ahead of us, and on that sense, the sustainability part of the answers is so critical, and not just climate, but the whole natural environment, as well. And that ties in, obviously, to inequality and all of the elements that you’ve addressed.

So, a big thank you to the participants, so many of you joined us, all of those who’ve stayed with us for the full two hours. Great sets of questions and comments, thank you. Thank you again to the paper writers, who are with us here today. I can see you on my screen. Thank you for all of your hard work putting together great ideas, and a huge thank you, Philip, DeAnne, Raghu, for sharing a big chunk of your time this afternoon and giving us some really thoughtful feedback and ideas for us to pick up as we go forward. And we look forward to keeping you very much involved in our work as we develop it further. Creon, thank you for putting this together and, obviously, Stephen’s been in it, as well. Great to have this coinciding with a big public debate right now around the spring of 2021 for the future. Thank you. Thanks Sam and the team behind all of this to make it happen. See you soon, but great ideas, and we’ll feast on them for a while. All the best, bye, bye. Bye, everyone.