Wednesday 12 Aug 2020 | 05:52 | SYDNEY
What's happening on

About the project

Trade wars, populism, and geopolitics. The world is quickly becoming more fraught as complex forces threaten to disrupt and reshape the global economy in profound ways. In this context, the Lowy Institute launched the Global Economic Futures project aimed at better understanding this rapidly changing global economic landscape, where it might take us, and the key choices to be made.

The project examines the future shape of the global economy especially given rising tensions between the world’s two largest economies – the United States and China – and the possible implications for, and changing roles of, major regional economies, including Australia, India, Indonesia and others.

Latest publications

What the G20 needs to deliver

The Covid-19 outbreak has rapidly gone from a crisis for China to a crisis for the world. The pandemic is desperately crying out for international leadership.

So far that has been sorely missing. An extraordinary (virtual) meeting of G20 leaders, to be held on Thursday, will hopefully begin rectifying this.

Many are looking to the G20 to provide the same kind of leadership it did during the 2008–09 global financial crisis. In fact, the need for strong global action goes vastly further this time around.

The G20 should commit now to quickly developing, funding, and rolling out a global health effort to help emerging and developing economies manage what could be an explosion in devastating health disasters.

The global financial crisis was really a North Atlantic crisis, with the core problems lying within the tightly interwoven financial systems of the United States and Europe. Those two getting their own houses in order – or at least re-establishing stability – was the single greatest service to the rest of the world they could provide.

The G20 complemented this by delivering a coordinated stimulus, guarding against a descent into beggar-thy-neighbour protectionism, and supporting the rest of the world via increased funding for the International Monetary Fund and multilateral development banks. That helped restore global confidence, limit the damage, and enable the recovery.

Covid-19, by contrast, is a truly global crisis. As the pandemic intensifies, countries around the world are simultaneously not only facing a dramatic external shock but a massive internal one as well – in the form of national health crises and related public shutdowns coming at high economic cost.

Most worrying, the obvious next stage of the Covid-19 crisis risks being a health and economic disaster in the emerging and developing world. Weak health systems, low state capacity, poverty, slums, inadequate safety nets, and little ability to fund their own policy responses mean the human and economic costs threaten to be far more devastating than what we have seen to date. There is some speculation that the virus doesn’t spread as easily in tropical climates. But that remains unproven.

Acknowledging this harsh reality is fundamental to thinking about the global ambition required.

A 3D print of a SARS-CoV-2 – also known as 2019-nCoV, the virus that causes COVID-19 – virus particle (National Institute of Allergy and Infectious Diseases/Flickr)

The key for the G20 is to begin taking concrete steps while sending a strong signal they are willing to do “whatever it takes” depending on how things evolve – echoing the famous words of former European Central Bank president Mario Draghi at the height of the Eurozone debt crisis.

Today, a truly global crisis requires a global “whatever it takes”. The need is in two broad areas.

The first is delivering a large-scale global health response. The G20 should commit now to quickly developing, funding, and rolling out a global health effort to help emerging and developing economies manage what could be an explosion in devastating health disasters. The World Health Organization could lead in coordinating the response and mobilising funds.

This needs to be coupled with more immediate actions, in particular urgently removing the array of export restrictions on critical medical supplies recently imposed by many countries, including G20 members. These are particularly insidious beggar-thy-neighbour policies, and will hit smaller and poorer countries with little domestic industrial capacity the hardest.

The second priority is on the economic front. The need is not just about coordinating expansionary fiscal and monetary policies as in 2009 but also about ensuring that as many countries as possible are actually able to undertake such measures in the first place.

Most emerging and developing countries, including G20 members such as India, Indonesia, and Mexico, simply cannot finance the kind of massive fiscal expansions – on the order of 10% of GDP and possibly higher – that many advanced countries are currently pursuing to save their own economies.

Many currencies are already plunging, and an emerging markets crisis is now a distinct possibility – with the risk that events in one country could easily spark wider financial contagion and collapse.

Underwriting financial stability and enabling the fiscal expansion needed in these countries will require a large and multi-faceted effort – deploying and dramatically expanding tools including central bank currency swaps, IMF liquidity and balance of payments support, and large-scale budget financing loans from multilateral development banks. For the poorest countries, international aid will be critical.

All of this may need to go far beyond the scope and scale of that delivered during the 2008–09 crisis. Positively, the IMF has begun raising important new proposals that could help. The G20 should heed this advice but also be prepared to go much further.

Importantly, the rationale for a global “whatever it takes” is not too different to that justifying the massive increases in spending currently underway in advanced economies – namely, incredibly low borrowing costs and high returns to acting now to stave off the far worse alternative.

Conversely, the costs to not doing whatever it takes could be catastrophic. And not just in terms of the human and economic toll. It could also deliver a fatal blow to any remaining idea of a stable global order – especially one underpinned by liberal values and led by the United States and its allies.

The RBA's job is to back banks, not bail out gamblers

It’s quite a while since I was at the Reserve Bank, but one of my tasks there was to draft replies to letters received. So let me try my hand at responding to Christopher Joye’s "Virus gets upper hand in battle against central banks" (AFR, March 13). Originally published in the Australian Financial Review.

Limiting the global economic fallout from Covid-19

Panic has now set in over the Covid-19 global pandemic. The coronavirus is spreading rapidly, especially in Europe and the US, and severe public-health measures are being put in place and are set to intensify. At the same time, economic policymakers are deploying their own emergency policy responses, and financial markets are either plunging, freezing up, or whipsawing all over the place.

With the worst yet to come, we are perhaps at the point of greatest fear and uncertainty. The first priority is to get the public-health response right – the only way to limit both the human and economic cost.

People come first. But the economic threat posed by the virus is also extremely serious, and the response needs to be correct. The last thing the world needs is for a devastating pandemic to be accompanied by a deep economic crisis, prolonged stagnation, and the attendant social damage and political dysfunction that would likely result.

The focus now needs to be on funding whatever is necessary for public-health systems to respond most effectively while providing financial relief to hard-hit households and businesses to cope through the peak of the crisis.

A global recession already looks inevitable, at least by the standard of the International Monetary Fund, which classifies global growth at 2.5% as signifying a world recession. With what has already happened, particularly in China and with global growth last year at only 2.9%, we are already looking at something well below that. As the crisis goes global, an outright contraction in 2020 is very possible. The question is how deep and how long it will be.

What are the immediate priorities for economic policy? This is a particularly unusual and uncertain crisis. Much will depend on how deep and how long the health crisis itself proves. But a few things seem clear.

The starting point is recognising that the social distancing required to slow the virus – both voluntary and mandated by governments – means the economic hit is going to be large, and there’s probably not much that traditional demand-stimulus policies can do to materially counter it. In part, that’s because people won’t go out to spend the money, but it’s also because the virus is an intensifying supply-side shock as well – with big disruptions to normal business activity and many workers pulled out of work, either for health reasons or as workplaces and schools are temporarily shut down.

The first-order economic damage of the virus will therefore be difficult or impossible to counter in any significant way. The focus instead needs to be on countering the second-order economic effects of the virus that could either deepen the short-term damage or lead to longer-term economic costs.

Stimulus is not the main game. That comes later when countries can more realistically start thinking about recovery.

Instead, the focus now needs to be on funding whatever is necessary for public-health systems to respond most effectively while providing financial relief to hard-hit households and businesses to cope through the peak of the crisis. The goal of financial relief is to prevent otherwise sound businesses from going bankrupt, to keep workers from being unnecessarily dislocated, and to stop massive loan losses from hitting banking systems and precipitating a financial crisis.

Supporting households is also critical from the broader perspective of protecting the vulnerable while also perhaps reducing any pressure some might feel to go out and work when they should be self-isolating.

The market cannot handle this problem. Socialising the costs via government budgets will be necessary. Fortunately, long-term government borrowing costs are incredibly low these days – below zero after adjusting for inflation – so there is plenty of scope to do so.

A staff member in protective medical clothing at Brisbane International Airport on 16 March. Strict new border measures came into effect Monday in Australia, requiring all overseas arrivals to self-isolate for 14 days (Lisa Maree Williams/Getty Images)

Central banks around the world, led by the US Federal Reserve, are also stepping up with emergency interest-rate cuts, liquidity injections, and asset purchases (quantitative easing), while regulatory controls on banks are being temporarily loosened. The focus is less on stimulating demand for the reasons given above and more about easing funding constraints, preventing financial markets from seizing up, and keeping credit flowing to households and businesses that would otherwise face their own funding squeeze.

Beyond these elements, there is a dire need for international cooperation. Independent central banks have already been coordinating in earnest. But international coordination among governments has so far been extremely lacking.

There are now signs the G7 and G20 might finally be more actively mobilised. The need goes far beyond coordinating emergency economic policies.

Until now, haphazard and beggar-thy-neighbour health policies have been the order of the day – from disjointed travel bans causing chaos to far more worrying export restrictions on critical medical equipment, including face masks and respirators. Not only does that mean that the right medical equipment potentially won’t be available where it’s most needed, but in a world built on fragmented global supply chains, few countries (if any) are likely to be fully self-sufficient in this regard. In other words, it could lead to everyone being made far worse off.

Strong global coordination is desperately needed. Unfortunately, today’s world is beset by crude populism, partisan politics, and zero-sum geopolitics. The virus, of course, is not hampered by such problems. The world cannot afford to be, either.

Covid-19: Nearing a global pandemic?

The novel coronavirus, or Covid-19, has spread throughout the world in three short months. Outbreaks have been reported in more than 50 countries, there are 88,000 confirmed cases, and at least 3000 people have died. But while the numbers of new cases and deaths in China might be steadying (based on official figures, the accuracy of which is uncertain), the numbers outside China are increasing at a worrying pace.

While the vast majority of cases are still within China, there have been more new cases reported outside of China than within China since 25 February. And the number of confirmed cases outside of China has already outstripped SARS, the viral respiratory disease caused by a coronavirus in 2002–03. In just over a month, there have already been more than 6000 cases of Covid-19 outside of China. By contrast, there were approximately 3000 cases of SARS outside China in the first three months of the outbreak.

The World Health Organization (WHO) has been reluctant to label the novel virus a pandemic. WHO is walking a fine line between leading a global healthcare response, retaining access to China, and avoiding panic. Its constant praise for China’s efforts to combat the virus has attracted criticism, though others claim this was the best way to secure access for the WHO observer team to China.

The head of WHO, Tedros Adhanom Ghebreyesus, has said that “using the word ‘pandemic’ now does not fit the facts, but it may certainly cause fear. This is not the time to focus on what word we use.” The organisation last declared a pandemic when H1N1, or swine flu, infected approximately 61 million people in the US alone in 2009. It was accused of exaggerating the threat, and WHO officials fear that the word ‘pandemic’ would lead to panic.

This stands in contrast to the response of US and Australian authorities. The US Centers for Disease Control and Prevention (CDC) spokesperson Benjamin Haynes said on 26 February that the novel coronavirus has already met two of the three criteria for a pandemic, and the world was moving closer to meeting the third criteria. The CDC has said that a coronavirus outbreak in the United States is a matter of when, not if. In doing so, US health authorities have essentially contradicted the claims of US President Donald Trump that “because of all we’ve done, the risk to the American people remains very low”. The Australian government has activated its pandemic emergency plan, as new cases were reported over the weekend in countries as widespread as Azerbaijan, Ecuador, and Ireland.

It’s worth noting that a pandemic declaration did not happen during the SARS outbreak. A pandemic is often declared after efforts to contain an outbreak in specific regions or countries fail. The idea is that such a declaration will prompt governments to switch from containment measures (quarantining individual cases) to mitigation (shutting schools and other mass gatherings to slow the spread). A number of WHO officials have expressed concern at the binary nature of government responses: they would prefer governments be focused on containment and mitigation, rather than one or the other.

The rapid spread of the virus outside China also drastically raises the economic stakes. The shock to the global economy now looks like it is going to last much longer and be potentially far deeper than was thought just a few weeks ago. The hope that the economic hit might be painful but short-lived looks increasingly unrealistic. The case for governments and central banks to provide immediate policy support has gone up.

Much will ultimately depend on the effectiveness of the public health response of governments around the world.

WHO’s Tedros said “The steps that China has taken to contain the outbreak at its source appear to have bought the world time”.

That time appears to have run out.

China’s Economic Choices

China’s economic growth has fallen to its slowest rate since 1990, and this deceleration looks set to continue unless China implements the kinds of deep reforms behind the successful economic transitions of Japan and Korea 

The US is elbowing Australia and allies in a race for the China market

US President Donald Trump was quite right when he declared the 15 January US­–China “Stage One” agreement an “unbelievable deal” for the United States. Unbelievable it is, though not in a good way – and especially not for Australia.

The deal requires China to import $200 billion more from the US this year and next, compared to the baseline of China’s imports from the US in 2017. The arithmetic (see below) implies that China’s imports from the US this year must be 80% higher than its imports from the US last year.

That won’t be easy, and may well be impossible.

If China succeeds in doing so it will almost certainly be partly at the expense of other exporters to China. Europe is well aware of this, and has already threatened a World Trade Organisation dispute against China. Australia, too, should be wary of how this deal will play out, although Trade Minister Simon Birmingham seems unfussed.

Birmingham ought to be a little more bothered than he appears because the additional goods purchases from the US in 2020 to which China is now committed total more than the entirety of  Australian goods exports to China in 2018, and not very much less than the entirety of Australian goods exports to China in 2019.

For Australia and other third countries with strong economic relationships with China, the only really good news in this agreement is that America is clearly not detaching from China.

Not only is the increase required equivalent to the total of Australian goods exports to China. It also covers many of the same products. Australia supplies 7% of China’s farm imports and 8% of its energy imports. The US is now the third biggest exporter of liquid natural gas after Australia and Qatar, and it has plenty of capacity. It is a big coal exporter. It exports liquid petroleum gas. It exports meat, dairy and wine. Iron ore is a big exception, but iron ore apart most the merchandise Australia otherwise sells to China competes with exports by the United States. Because iron ore exports account for well over a third of Australian goods exports to China, it follows that the total of Australia’s non-iron ore exports to China is much less than the addition to non-iron ore US goods exports to China required in 2020 under the new agreement.

Having admonished Australia (and Germany, Japan, and South Korea) for depending too much on the China market, the US is now elbowing Australia and other allies out of the way in a race for that same market.

The deal also includes China commitments on behind the border impediments to US farm exports, additional liberalisation of foreign investment in financial services, commitments on protection of intellectual property, and an undertaking to ban authorities seeking technology transfer to Chinese partners in joint ventures.

Many of these commitments were blessed at the National People’s Congress in March 2019, some already legislated, and some others are minor.

For Australia and other third countries with strong economic relationships with China, the only really good news in this agreement is that America is clearly not detaching from China.

The agreement goes in the opposite direction from decoupling. It increases the value of the Chinese export market to the US, and places no additional restriction on China’s exports to the US (compared for example to the 1981 US “voluntary restraint” auto agreement with Japan).

It also increases US direct investment access to the finance industry in China, and removes some impediments to deploying US intellectual property in China. It formalises dispute settling and consultation procedures.

All these understandings will tend to increase economic integration of the US and China. At his 15 January signing ceremony for the agreement, Trump promised that stage two of the negotiations would open up much more opportunities for US businesses to invest in China.

The stage one agreement itself reflects a change in the Trump administration’s declaratory posture towards the China US economic relationship. It includes a statement that:

The Parties believe that expanding trade is conducive to the improvement of their bilateral trade relationship, the optimal allocation of resources, economic restructuring, and sustainable economic development, given the high degree of complementarity in trade between them.

In respect of its two biggest national economies, together accounting for four tenths of global output, the trend towards global economic integration remains intact.

The agreement goes in the opposite direction from decoupling (Photo: White House/Flickr)

The arithmetic (all figures in US dollars)

  • In the Stage One agreement China agreed to buy from the US an additional $76.7 billion in goods and services this year, and $123.3 billion in 2021. The baseline year is 2017, the peak year for China’s imports from the US.
  • For goods (as opposed to services), the requirement is for an additional $64 billion in 2020, and $98 billion in 2021, for a total of $162 billion over the 2017 baseline.
  • In 2017 US goods exports to China totalled $130 billion, according to the US Census Bureau. China has therefore committed to a minimum level of goods imports from the US of $194 billion in 2020, and $228 billion in 2021, to reach the total increase of $162 billion in goods imports over the 2017 baseline over two years.
  • China’s goods imports from the US are likely to come in around $107 billion in 2019 (December 2019 data is not available until 5 February). If so, the increase required in 2020 over 2019 is $87 billion, or 81% over the 2019 level.
  • The increase required is equivalent to around 4.4% of China’s total goods imports in 2018. For comparison, the value of Australian goods exports to China in 2018 was around $82 billion. For 2019 Australian goods export to China are likely to be worth around $101 billion.
  • The goods increase required must be in farm products, energy and manufacturing and in the industry categories nominated in the agreement, though the categories are very wide. This appears to leave open the possibility that China could increase US imports in the nominated areas and decrease them in other areas. I assume that for obvious reasons that is not a practical possibility for China.