A chapter in the October 2020 edition of the International Monetary Fund’s (IMF) biannual publication, Fiscal Monitor, argues that as a response to the COVID-19 pandemic, and to support the recovery as COVID-19 induced lockdowns are relaxed and the world moves to a post-pandemic phase, enhancing public expenditure is crucial. So, governments, the IMF argues, must bother less about increasing their levels of indebtedness and choose to spend instead.
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Amid the ongoing phase of partial lockdowns of varying severity, spending must focus on saving lives and livelihoods. As these shutdowns are relaxed and the world finally moves to a post-pandemic era, spending should be sustained to strengthen infrastructure with planning for long-term infrastructural investment that is green, digital and inclusive, according to the IMF.
To anyone engaged with economic policymaking in some form, that recommendation would sound like familiar sage advice received from a grandmother when young. Given the need to ramp up expenditures to address the health emergency, to support those whose livelihoods and businesses are threatened or lost, and address the pandemic’s fallout in the form of compressed demand and increased unutilised capacity in industry, this recommendation is nothing more than just obvious.
Yet, the IMF’s view seems to be material enough to make the news and even headlines. The reason is not the substance of what the IMF is saying but the fact that it is the IMF that is saying it. For long the fountainhead of conservative fiscal policy, which recommended a stance that falls within the narrow range stretching from “fiscal discipline” to austerity, a plea for enhanced public expenditure from the IMF is seen as a telling shift.
Not that governments needed the IMF’s advice to do what it recommends. Ever since the severe impact of the pandemic on economic activity was recognised, governments all over the world have resorted to stimulus packages that relied heavily on borrowing. The magnitude of the immediate fiscal impulse has been estimated by European think tank Bruegel at close to 10 per cent of the gross domestic product (GDP) in the United States, the United Kingdom and Germany and 5 per cent in France and Denmark, for example.
Policy recommendations
Given the exceptional nature of the COVID-induced crisis and the range of expenditures required to address the multiple challenges it poses, this was the route any half-sensitive government would follow. The IMF, to the extent it has modified its recommended stance, is only striving to remain relevant in a changing context. But even when doing so, the IMF has by no means given up on its traditional conservatism. It identifies three phases and details the phase-specific fiscal policy responses.
In the first phase, with lockdowns of varying intensity, the focus of fiscal policy should, according to the IMF, be on providing lifelines to people and firms, with some minimal spend on ongoing public sector projects and on maintenance. Meanwhile, planning must begin for larger spends in subsequent phases.
In the second phase, when lockdowns are relaxed to restart activity wherever safely possible, the lifelines, while continuing, must be gradually phased out, and support must be targeted and workers must be persuaded to take up new jobs. In that phase too, public investment must be focussed on maintenance and ready toimplement projects that are labour-intensive and have large multiplier effects.
Finally, in the third, post-pandemic phase, innovative projects informed by the lessons of the pandemic and aimed at advancing a green, digital and inclusive agenda, which had been planned for in the preceding phases, need to be emphasised, the IMF said.
In some senses even these recommendations are a departure from tradition for the IMF. The organisation is advocating increased public spending in the medium and long terms. It backs financing that spending with borrowing, even if at the expense of increasing public debt to GDP ratios.
And, as opposed to the position it often adopted in the past that such spending “crowds out” private investment by absorbing credit and raising interest rates, it holds that public investment, in fact, “crowds in” private investment, which is low and stuck in a trough.
Public expenditure
The justification for this case for public spending is interesting, however. The conventional Keynesian case for increased spending in the midst of a recession is the presence of substantial unutilised capacity that depresses private investment and aggravates the recession.
Public expenditure in that context not only revives demand and incentivises private investment, it increases tax revenues because of the resulting increase in output and employment, and therefore in part finances itself. The case here is for increased public expenditure of any kind, with any preference for current or capital expenditures in the total being justified on other grounds.
As compared with this, the IMF’s case is primarily for an increase in debt-financed public investment in infrastructure. The justification is also specific to circumstances and the type of expenditure. Thus, debt-financed spending is considered acceptable because of the low levels of interest rates currently prevailing and that prevailed prior to the onset of the pandemic. That is, a proactive fiscal policy stance is seen as warranted because of the cheap and easy money environment created by the monetary policy stance that Central banks, especially in the developed countries, adopted prior to and after the 2008 global financial crisis. It is not the unutilised capacity resulting from the crisis, but the liquidity overhang and low interest rate regime created by monetary policy, that in the IMF’s view justify debt-financed spending.
This ties in with the IMF’s position that, other than for the unavoidable increase in current expenditures needed to address the health emergency, the policy focus must be on increasing capital expenditure in the form of public investment in infrastructure. Within infrastructural investment, the type of investment matters inasmuch as the focus has to be on “efficient” infrastructural investment involving projects that can be implemented quickly and which deliver the greatest impact in terms of generating jobs immediately and having large multiplier effects.
Thus, in phase two of the post-COVID recovery process, when the lockdown is withdrawn and economic activity revives, the IMF recommends spending on maintenance and renovation of pre-existing infrastructure and some investment in small-sized, job-intensive projects ready for implementation and with large short-term multiplier effects.
The case is not for just any autonomous spending (current or capital) that raises aggregate demand, improves capacity utilisation, and triggers new private investment. Rather, it is for a specific kind of capital spending. Paulo Mauro of the IMF, one of the authors of the study, made this clear in an interview to Financial Times, where he refers to John Maynard Keynes’ idea that in a recession, public spending can even be directed towards employing workers to dig holes in the ground only to fill them up, since that would achieve the aim of increasing employment, incomes and demand, with salutary multiplier effects that trigger further investment. “We are certainly not talking about digging holes,” Mauro reportedly said. “Investment provides an asset for the country and is not wasteful. Right now, we are not at the point of literally trying to stimulate aggregate demand.”
But even within public investment, the IMF emphasises infrastructural investment in particular. Its argument seems to be that investment in infrastructure in phase 2 of the recovery would deliver most in terms of jobs and growth. The authors of the study hold that their estimates indicate the following: “Increasing public investment by 1 per cent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 per cent, private investment by 10 per cent, and employment by 1.2 per cent if investments are of high quality.”
The implication seems to be that governments should, in the first instance, focus on quick-yielding projects and profitable projects that can be financed with cheap credit, and only in the longer term plan for projects that are “green, digital and inclusive”. For reasons unexplained, the IMF sees only infrastructural investment as possessing these characteristics. This also raises the question as to why the IMF’s favoured agents, private sector investors, cannot be called upon to take over this task. That cannot happen, the study argues, for two reasons.
Private sector
The first is the environment of uncertainty that has engulfed economies, resulting in a reticence on the part of private players to invest. The second is the burden of indebtedness carried by overleveraged firms, which will not be willing to borrow more to invest. That is, the public sector is needed because the private sector is unwilling or incapable of ramping up investment currently. The public sector must step in to revive private sentiment and crowd in private investment.
But there are conditions. Public spending cannot be of the Keynesian type but must focus only on investment spending. Second, investment must be in quick-yielding infrastructural projects which, while reviving private sentiment, also makes up for long years of ideologically inspired public underspending in areas that the private sector has not found attractive enough to step in to make up for public sector absence. Having come in, the public sector must contribute to sustaining investment that meets the longer-term goals of rendering growth green, digitally empowered and inclusive. All routine profit-making opportunities must be left to a revived private sector.
In sum, the IMF has stepped beyond its conservative fiscal policy framework only because there seems to be no option to address the post-COVID growth crisis. This is as much an agenda for private sector revival as it is for economic recovery. And it is predicated on the existence of an environment where private financial markets can be approached for cheap credit to finance the required public spending.
But there is a catch there. As the IMF economists themselves recognise, not all countries would be in a position to tap private markets for the cheap money needed to pursue this agenda. If that be the case, these countries should not be overambitious but opt for “a gradual scaling-up of public investment financed by borrowing”, ensuring that “rollover risks (risks associated with the refinancing of debt) and interest rates do not increase too much”. In some cases, this would imply little or no additional investment. This differential approach would mean that pre-existing international inequalities would only widen. But that is an unavoidable price to pay, the IMF would argue, for being fiscally “prudent” and focusing on the task of reviving the private sector rather than on pushing development with whatever means are available.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.