COVID-19 and Accelerating Deglobalization (w/ Pedro da Costa and Adam Posen)
PEDRO DA COSTA: The thing I love about this format of is we get to take a step back and really just delving deep into questions. The Peterson Institute is the Peterson Institute for International Economics, I really would love to take a tour around the world with you and look at this issue from a global perspective because it really is when-- I tell my friends and colleagues there was ever a time where we were like, for better or worse united, this is it. ADAM POSEN: It could be for better, it could be for better. PEDRO DA COSTA: It could be for better. Exactly. That's exactly my question to you. Peterson Institute is at the forefront of promoting global integration, free trade, openness, international cooperation, that trend had been under threat before. It's still under threat perhaps more severely now. Of course, this crisis in general, some need for cooperation but there's also some tension. Can you talk about how you see those two things playing out? ADAM POSEN: I think we have to start by explaining just briefly why people at Peterson and elsewhere are committed to making globalization work and not reversing it. You see that right now. As my colleague, Chad Born has published a series of pieces, they're getting a lot of play deservedly. You can't disentangle yourself from global supply chains in order to get everything you need, whether it's food or medical supplies. People say, oh, we went too far, we shouldn't be getting this stuff from China or wherever, but the fact is, we're getting stuff from Canada, we're getting stuff from Mexico, we're getting stuff from the Netherlands, from England. Every time that President Trump or someone, either party who decides they want to cut us off from the world, they are making us more vulnerable. Those unemployed people, poor people in the US are the first to suffer because you're reducing supplies, you're raising prices. What happens is, that means it just goes even more to the rich, these medical supplies and services. Same is true food. Same is true of all these basic things. You cannot, it's not just a question of modernization or cost cutting or excessive globalization, for centuries, going back to the Roman Empire, you need lower income people to come pick your crops because higher income people won't do that work and then the food rots in the fields. Those people need to be able to cross borders in order to make their living. You cannot get away from this. This is even more true in the pandemic as you're talking about, Pedro, because you can't get away from the disease. We'd like to say, okay, cut off travel. If we'd cut off travel by this date from Europe or this date from China, we would then be safe. Go back to the Great Flu of 1918-1920, there were tiny islands in the Pacific that after a few months, got infected with the flu. There is literally no place on earth that didn't have the flu. That was in the aftermath of World War I with no commercial air travel, no internet, no globalization of the sort we know now. The reality, the hardheaded reality is-- PEDRO DA COSTA: [?] have infected my great grandfather in Rio De Janeiro in 1918, turns out he died of the Spanish Flu. ADAM POSEN: It's not like there was huge international tourism and travel back and forth from Rio or San Paolo in 1918. The rational realist thing is to think about how to make these international integration work, but you're absolutely right. Things are going backwards. PEDRO DA COSTA: Chad and your colleagues have pointed out in that context how actually some of the trade war disruptions that were happening ahead of this crisis have made it more difficult for everyone but also for the United States to get the goods and product, medical equipment even that we need. ADAM POSEN: No, absolutely. This is happening in Europe as well. It's not just the US, it's other countries. Europe put on this export ban on their medical supplies that they were producing, and it backfired on them. Even rich countries, even large, rich economies like the US or EU take it as a whole, can't fully self-supply. It's just not possible. Moreover, there's a lot to talk about the globalization issue but the biggest thing where globalization has not delivered is not for the people of the rich world, it's not for the people of China, it's for the people of Africa, Latin America, South Asia. Even there, we've delivered but we haven't delivered them all the way. In other words, the bottom line is there's going to be horrible debts and disruption in developing countries, it's already started. There's been a huge outflow of capital from those countries, the IMF, World Bank, and others are trying to get some money back in so that those people are not deprived of everything they need then they don't incur horrible debts they shouldn't have to. That is the real divide in the world right now. Everybody's got the disease, but it's how much you suffer, how resilient your society is. PEDRO DA COSTA: How worried are you about the emerging world as it's called, in terms of the crisis hitting health infrastructures that are even less, we're seeing just how strained rich countries are in the face of this virus. How do you see this playing out in the emerging world? Can you talk a little bit about things that you and others have argued that G20 can do to help? ADAM POSEN: Thank you for that. The picture is very grim. The one bit of good news is we're seeing increasing evidence that the disease, statistically speaking, is much less deadly, much more contagious, and much less deadly than we first thought. Like the news that just came out about this study, a small random sample of pregnant women being admitted for delivery in New York and it turns out, some vast share of them are infected, and very few of them are symptomatic. There's various other data points coming in like that. That's the one bit of good news. That's not about economics, that's about the fundamental biology, so that potentially, the death rate is going to be much lower once you count all the people who got sick, still going to be formal. Other than that, the public health's picture in developing worlds-- when I say developing world where the emerging is about PC, it's because there are certain developing countries like your friends in Brazil, a few others that are big enough and on the right side of the divide, that they can get away with running fiscal policy. They already have something of a welfare state. Our mutual friend, my colleague, Monica de Bolle, of course, has been pushing for universal basic income in this emergency in Brazil and Brazil can afford to do something like that. Then you've got a host of countries in Central America and South Asia, in Africa that can't do that. You get caught in not only is the healthcare system overtaxed, but you have people living mostly in very tight conditions, bad living conditions, not great sanitation, huge population density in and around urban areas. We have lockdowns as we've seen very visibly in India, which may or may not be the right thing to do in this context. That's a very real question but which clearly don't protect the urban poor and people sounds end to that. Unemployment is much more meaningful for the informal sector people in these countries. Once you saw the millions of people in Mumbai and Bombay, just to pick an example, who had to go back to their home villages, because they had no way of making a living, it was hand to mouth cash work to make a living day to day and when you have a lockdown, maybe the middle income enough people locked down, but then they stopped interacting with all those poor people, you have to go-- PEDRO DA COSTA: The notion of stocking up for two weeks of food is not feasible for millions and millions of human beings, including in this country. ADAM POSEN: Yeah, absolutely. That is part of the reason we keep hammering on this idea of making globalization work, because as much as people talk about inequality and problems of globalization, if you're closed and you're not taking advantage of the diversification, and the multiple sources of supply, and the checks on government and the flows of people and information for health purposes, all these things, it's the poor and vulnerable who gets it worst in the US as well as the poor world. You had said I don't want to be so negative, because there are things we can do that will make a material difference. You had said the work we've done on the G20, [?] and I edited a short piece, which I hope people will read. It's very quick, but about practical steps to make life better in the world. The key point is, going back to where you started, Pedro, this is about collective action. Usually, people are used to economists that think in terms of tradeoffs. Well, if we have more of this, we have less of that. For international relations, not as much as Donald Trump makes out to be. That's often thought to be zero sum if I'm gaining, China's losing and vice versa. There are situations in international economics where it's what we call collective action problem, where it's just there's no competition. If people join together and get past distrust, you could actually get things for everybody that you couldn't get other ones. It's not privileging one country versus another. It's not taking away from one to another. Those are the things we emphasize. Those are things like swap lines that give temporary liquidity in dollars to strained financial systems in emerging markets in developing countries. Emergency aid for the World Bank and the IMF is very cheap, but very important support for how to distribute vaccines, how to distribute antivirals when we have them whether it's refrigeration or safe distribution networks or administration instructions, restoring freer trade in medical supplies and food so that the people don't hoard in the rich world, and we have a better sense transparently as Chad and others argue about where the supplies are and where the bottlenecks are. Leaning against dollar appreciation, which sounds like a selfish US thing, but actually, in the current context, when all the world's money almost is flying into the US and a few other safe havens like Switzerland and Norway, the dollar goes up a lot and for poor countries who need to buy food, medicine, technology, pay debts in dollars, that makes it even worse. When you've got energy prices cratering, it's good for most people but of course, there are a bunch of countries who export energy and export copper and nobody's building with copper at all. There's room for us to all lean against excessive dollar appreciation, and that again, doesn't cost very much money at all, probably get most of it back and it helps everybody. These are the things we should be talking about at the international level. PEDRO DA COSTA: Beyond the health cooperation and actual medical know-how in supplies getting to the places where they need I imagine that there's a preventing a deeper financial crisis component to this as well. There's a lot of larger but less developed African economies and Asian economies that issued a lot of bonds in so-called good times. I would imagine that having financial crises in one or more of those countries would aggravate a pandemic, by definition. ADAM POSEN: You're absolutely right. We have to appreciate the scale but also the nature of what's happening right now. Even during 2008, 2009 global financial crisis, Asian financial crisis 20 plus years ago, you have huge flows of money out of these countries into, again, the safe havens and rich countries. That increases the amount of debt in real terms that these countries have to pay and decreases usually the amount of money they have. Also, because it's a recession, usually increases the amount whatever degree they have of welfare state and public spending increases the demands off. Now, take each of those factors and amp them up for the pandemic, more money's going out. We have more money leave the developing world in the last two months than left about more than the entire 2008, 2009 crisis, more of a recession, because you've talked about the horrible unemployment numbers here in the US, even if it's not sustained, God willing. It's an enormous contractionary shock. Then more demand for public spending and public services for global health pandemic even more than just trying to keep the poor going. This is an enormous burden on the developing world. Over 90 countries have applied for emergency loans or assistance of the IMF and World Bank simultaneously. In the worst crises, we've usually seen 20 at most. There's a huge challenge of how to do this. Now, there's one piece of goodness to that, which is the rich world knows that none of those countries fall. Wherever the disease started, it wasn't because some African government were in too much debt, or some South Asian government was too loose with their fiscal spending. That's not what's going on here. This is something that are totally not their fault, which suddenly changes their whole [?]. The big emphasis this week around the G20 and the IMF meetings, IMF-World Bank meetings, is to try to get some form of the same rollover debt, not building up new debt, not requiring current payments that we're trying to do for small businesses in the US. It's the same thing, try and do that for governments and some entities in the developing world. There's some real progress to be fair, there's some genuine progress the IMF and World Bank and the G20 have tried, but there are issues, as you've reported on and written about in the past about the so-called vulture funds and various holdout investors who this is the worst part of it. If you say the official sector says we're not going to ask you to make interest payments now to loans coming from us, but then maybe the private people still keep going. Think of it as the government says, okay, you can postpone your taxes till July 15th in the US for a household, but the local loan shark says you still got to pay me. PEDRO DA COSTA: Is there a risk? Who holds the bag on the northern side? Is there a risk to US, European financial systems from the lending that's been done in the emerging world? ADAM POSEN: I think it's a good question to ask. Certainly, in past crises going back to the crisis of the '80s, which you're all familiar with, there has been this issue of Western banks overextending getting themselves in trouble, which has had sometimes the beneficial side effect of encouraging the Americans and the Europeans to actually put more money into rescuing the poor countries [?]. Right now, I think that's actually much less of an issue than it's been in past crises. A lot of the money that went into the developing world was more liquid form on securities, investment funds, or investors who are not banks and hedge funds of various kinds. The banks themselves in the US and Europe are genuinely better provisioned and better capitalized than they were in say 2008. Now, I know your first two episodes were with two people I admire, Sheila Bair and [?] talking about the questions of how much has the supervision of banks really improved? How much has that been rolled back over the last couple years of changes at the Fed? That's a legitimate thing, but I think we have to recognize the reality as a forecaster that the US financial system, the European financial system, even if it's not ideal, are in much better shape to weather this than they would have been in the past.