Rebooting global cooperation

There have been very few moments in history when the world faced a confluence of global shocks and crises: from the lingering COVID-19 pandemic, threat of widespread food and energy insecurity, a surge in inflation, looming crises of development financing and sovereign debt, high risk of a global recession, climate crisis, to the geopolitical crisis. While seemingly unrelated, these challenges reflect shortfalls in multilateral cooperation and coordination in a world that is increasingly interdependent. As such, successfully navigating the multitude of shocks will entail considerably stronger global cooperation and radically reforming the multilateral system.

As world leaders gather at the 77th Session of the United Nations General Assembly and at International Monetary Fund (IMF)/World Bank Annual Meetings in October, strengthening global cooperation should be a top priority.

Long before the COVID-19 pandemic, the deficit in multilateral cooperation was palpable. Growing discontent with globalization has been associated with the failure of the multilateral system to stem the tide of rising inequality, social fragmentation, job insecurity associated with technological change, and offshoring in advanced countries, among others. The rising disillusionment with the multilateral approach has prompted bilateral deals or groupings of like-minded or geographically proximate countries. ust as countries were turning inward, the COVID-19 pandemic highlighted the necessity of a global effort to eradicate the virus. That necessity was largely ignored as countries implemented anti-COVID measures unilaterally, including border closures and other restrictive policies. The lack of cooperation is also reflected in the differentiated policy stimulus to manage the pandemic. While advanced economies (AEs) deployed on average 20 per cent of their GDP in stimulus, that number was 5 per cent for emerging market (EMEs), and a meager 2 per cent for low-income countries (LICs).

The Special Drawing Rights (SDRs), which represent perhaps the single most important instrument in the global financial system’s toolkit to respond to global shocks, were not approved until 18 months into the pandemic. With the distribution of the SDRs linked to country quotas, the countries most in need of support received only $21 billion or 3 per cent of the $650 billion in SDRs, and the IMF is relying on the goodwill of AEs to either donate or loan their SDRs. The lack of adequate resources along with inequitable access to vaccines resulted in an asynchronized global economic recovery. Indeed, even before Russia’s invasion of Ukraine, the economic recovery around the world was highly uneven. To date, while the vaccination rate exceeds 75 per cent in AEs, it is only 30 per cent in LICs, well below the threshold to achieve herd immunity

Global value chains turbocharged globalization, and economies have become highly dependent on them. An estimated 70 per cent of international trade involves global value chains, as services, raw material, and parts and components cross borders—often numerous times. For all the benefits, global value chains make the global economy vulnerable to disruptions or delays in production in any country participating in the value chains or in transport and shipping logistics. The uncoordinated response to the pandemic, along with the repurposing of some factories to produce essential goods for domestic consumption, disrupted global value chains. The release of pent-up demand, particularly for goods, from the nascent recovery in the advanced economies against the backdrop of shortfalls in supply due to labor shortages, continue to clog and disrupt value chains, such as obstructions to shipment and transport logistics, which generated significant price pressures and caused a broad-based increase in inflation. These price pressures emerged before the Russian invasion of Ukraine and were exacerbated with further disruptions to food and energy markets. The increase in inflation rates to levels not seen in decades in most countries, notably in AEs where the economic recovery from COVID-19 was more consolidated, prompted major central banks to begin raising interest rates even as the recovery remains fragile elsewhere. The higher interest rates triggered large capital outflows from emerging market and developing economies (EMDEs). With one-third of low-income countries’ sovereign debt contracted on variable interest rate, the increase in global interest rates is raising the debt service costs, adding to fiscal pressures and, more generally, constraining options for development financing.

To be sure, the sovereign debt buildup in low-income countries precedes the pandemic. It began in the aftermath of the Global Financial Crisis of 2008/09 as fiscal balances deteriorated and countries took advantage of the ultra-low interest rate environment to issue government debt. The reach-for-yield behavior by global asset managers facilitated access to private capital markets for sovereign debt for LICs, in many cases, for the first time. However, the devastating impact on the economies exacerbated the debt buildup and, by some estimates, about 60 per cent of all LICs are now either in or at risk of debt distress.

Global cooperation to establish a Debt Service Suspension Initiative (DSSI) has been helpful in alleviating the fiscal pressures on LICs but it expired in late 2021, and the newly established Common Framework for debt restructuring has run into operational challenges. Although some countries—Chad, Ethiopia, and Zambia—have submitted requests for debt treatment, the process has run into protracted negotiations with creditors—notably China and the private sector. The expiration of the DSSI will add an estimated $10.9 billion in debt service cost for LICs this year. Calls for global solidarity to extend this initiative have so far been unsuccessful.

The Russian invasion of Ukraine in late February 2022 could not have come at a worse time for the global economy. It was a culmination of unresolved issues in global cooperation since the fall of the Berlin Wall and the dislocation of the Soviet Union. While it is unclear whether a “better” or more reasonable form of global cooperation could have deterred Russia from invading Ukraine, stronger cooperation, particularly on security matters, may have reduced the odds of the Russia-Ukraine crisis.

brookings.edu