Jayati Ghosh

The global economy is in the grip of an unprecedent crisis, once never experienced before in its history. The virus pandemic has yet to run its course in most countries; but meanwhile, the containment measures, which have involved major restrictions on mobility, gatherings and economic activity – in many cases as in India involving complete lockdowns for extended period – have already imposed a massive economic cost. The restrictions and closures have meant simultaneous attacks on demand and supply – a uniquely terrible combination that has created a situation in which conventional policies simply will not suffice. World economic output will most definitely fall this year possibly much more than the 3 percent optimistically projected by the IMF. Employment levels have collapsed and open unemployment has increased massively, while those in self-employment have seen their remuneration dwindle to almost nothing.

The worst declines are being experienced in the developing world, even before the pandemic has really hit them. Most developing countries (including those emerging markets apart from China that were earlier touted as the major beneficiaries of globalisation) are being hit by a perfect storm of declining export and tourism revenues, sharp outflows of capital, severe reductions in bond prices and increases in bond yields, major currency depreciations and increasing difficulties in servicing external debt. These external headwinds are adding to the domestic fiscal pressures created by collapsing state revenues.

In advanced economies, macroeconomic policy responses have been swift and large, with public spending increases anywhere between 5 and 20 per cent of GDP and monetary/financial policies that further enable economic activity to revive. But developing countries facing such severe balance of payment constraints simply cannot afford to undertake such measures, not only because of fears of capital flight but because they lack the ability even to finance necessary imports. This will obviously lead to human rights catastrophe in these countries, which account for the majority of the world’s population, but also this bodes ill for the world economy as a whole, as it would delay or prevent an eventual recovery.

Three measures are immediately required to prevent even more precipitate decline in economic activity in the developing world: a moratorium on debt payments for at least six months, possibly a year; imposition of capital controls to prevent further capital flight that is causing currency depreciation and collapsing asset prices; and a large issue of new liquidity by the IMF, in the form of Special Drawing Rights (SDRs).

Of these, the third is in some ways the easiest to do immediately. SDRs are supplementary reserve assets (determined as a weighted basket of five major currencies) issued by the IMF, which has the power just to create this additional international liquidity at no extra cost, and new allocations are NOT in the form of debt. Since a fresh issue of SDRs must be distributed according to each country’s quota in the IMF, it cannot be discretionary and (unlike other loans by the IMF) cannot subject to other kinds of conditionality or political pressure. At least 1 trillion SDRs could very easily be created and distributed, although many suggest that at least 2 trillion SDRs would be required. This would have a huge impact in ensuring that global international economic transactions simply do not seize up even after the lockdowns are lifted, and that developing countries in particular are able to engage in international trade. Advanced economies with international reserve currencies are much less likely to need to use them, but they can be a lifeline for emerging markets and developing economies, providing additional resources to fight both the pandemic and the economic disaster.

As it happens, this has been recognised by many global players, to the point that the IMF itself has called for new SDR issue. At the recent (virtual) G20 meeting and IMF Spring meeting, the proposal to create and distribute an additional 500 billion worth of SDRs was mooted. This is nowhere near the requirement, but it is a start and certainly would provide immediate liquidity to developing countries sorely in need of it. 102 countries have already approached the IMF for emergency funding just to meet their basic foreign exchange requirements – this would at least allow some of them to avoid having to borrow and adhere to conditionalities.

But even this limited proposal did not take off because it was vetoed by two countries: the US – and India!

The US position is reprehensible and even appalling, but sadly it comes as no surprise, given the Trump administration’s open embrace of “America first” policies that pay no heed to what happens to the rest of the world. As the holder of the world’s reserve currency, the US can undertake massive stimulus packages without concern for the external implications. And the US Federal Reserve can (and does) enter into swap arrangements with chosen countries, to prevent a global shortage of dollar liquidity. It suits the US government to provide this access only to certain countries, to maintain its own hegemonic position and to decide which countries it will favour or punish.

But should India (which would in fact be a beneficiary of SDR issue, providing access to debt-free foreign exchange reserves) oppose this move? It is possible that the Indian government may have been arm-twisted by the US, to respond in this manner in return for getting some of the US Fed’s currency swaps it has applied for, or that it is just expressing its petty political concerns vis-à-vis countries like Pakistan.

But whatever may be the specific national reasons for these two countries to oppose this eminently necessary move, it will have adverse implications not just for developing countries but for the entire world. It is a costly denial of a chance for the world economy to revive after this extraordinary shutdown.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University, New Delhi. Her research interests include globalisation, international trade and finance, employment patterns, macroeconomic policy, gender issues, poverty and inequality. She has authored and/or edited a dozen books and around 200 scholarly articles. She is the Executive Secretary of International Development Economics Associates (www.networkideas.org), an international network of heterodox development economists. She has consulted for several international organisations including ILO, UNDP, UNCTAD, UN-DESA, UNRISD and UN Women and is member of several international commissions. Twitter account: @Jayati1609