G-20 leaders urgently need to reconvene to agree on an enhanced and more strongly coordinated global response to the COVID-19 crisis. Although lockdowns are being eased in many places, the daily number of new COVID-19 cases worldwide recently reached its highest level yet, while the pandemic’s devastating economic toll continues to mount as new epicenters arise in the emerging and developing world.

We are at a critical moment, because the poorest countries in Africa, Asia, and Latin America are facing economic and public-health emergencies that demand immediate action. A diverse group of middle-income economies need help, too. Together, these countries represent nearly 70 percent of the world’s population and account for approximately one-third of global GDP.

Their needs will grow more acute in the months and years ahead. The International Labor Organization expects that global working hours in the second quarter of 2020 will be 10.5 percent below pre-crisis levels, equivalent to the loss of more than 300 million full-time jobs. And, for the first time this century, global poverty is rising.

Indeed, a global recession could reverse up to three decades of improvements in living standards and, according to one estimate, push 420 million to 580 million people worldwide into poverty. The World Food Program, moreover, has warned that COVID-19 will likely double the number of people suffering from acute hunger, to 265 million.

The pandemic has also given rise to the greatest education emergency of our lifetime, with 1.7 billion children—more than 90 percent of the global total—having been out of school because of lockdowns. In poor countries, many may never go back. Millions of children who no longer receive school meals are going hungry, and cash-strapped governments are reducing education aid.

This global economic and social emergency will not end until we overcome the global health emergency. And that will require overcoming it in all countries.

We welcome the pledges totaling $8 billion at a special May 4 virtual summit to develop COVID-19 vaccines, diagnostics, and treatments, and we urge governments and other donors to pay these contributions immediately. But much more needs to be done.

Global coordination is particularly important in the development, mass manufacture, and equitable distribution of any eventual vaccine. And, because such a vaccine must be universally and freely available, we urge every G-20 member to support the replenishment of funding for Gavi, the Vaccine Alliance, at an online pledging conference on June 4.

In a similar vein, COVID-19 testing capacity must be ramped up and deployed on a vastly greater scale. Moreover, closer cross-border collaboration is essential to increase the limited global supply of vital medical equipment. Developing countries also need support to build up their health systems and capacities, and to improve their social safety nets. And G-20 countries should support the United Nations’ appeal to protect refugees, displaced persons, and others who rely on humanitarian aid.

Reflecting the unprecedented economic and fiscal deterioration in many emerging and developing economies, more than 100 countries have approached the International Monetary Fund for help. More will likely do so. But although the IMF has said that these countries need $2.5 trillion to overcome the crisis, only a fraction of that amount has been allocated.

So, while we welcome the good intentions at the heart of the G-20’s COVID-19 action plan, world leaders must do more.

First, debt relief for the 76 International Development Association countries needs to be scaled up radically to include relief by bilateral and private creditors until the end of 2021. Moreover, multilateral creditors must demonstrate that they are providing net new lending; if not, they must provide debt relief. And because time is running out for private creditors to grant debt relief voluntarily, a new binding approach now needs to be considered.

Meanwhile, a dozen or more emerging-market economies may well run into debt-servicing problems in the coming months. The IMF should prepare now to bring the relevant parties together.

Second, the G-20 should agree that the $2.5 trillion of needed support will be provided. This will require the IMF, the World Bank, and regional development banks to raise their lending and grant ceilings, with the multilateral development banks increasing their outstanding loan portfolio over the next 18 months from $500 billion to $650 billion to 700 billion. These institutions must secure greater resources and allow more ambitious deployment of their capital if they are to act adequately.

All of this makes imperative a fresh emission of Special Drawing Rights (the IMF’s global reserve asset), and the transfer of existing unused and new allocations to countries desperate for support. A new SDR issue would release $600 billion immediately, and more than $1 trillion by 2022. The G-20 should marshal political support for this measure and undertake the necessary technical work, so that it can be implemented as soon as an agreement is reached.

In the first stage of the COVID-19 crisis, the emphasis was on liquidity provision, employment protection, and emergency investments in health. Now, as policymakers seek to return the world economy to pre-crisis growth levels, enhanced fiscal and monetary coordination is vital.

Governments should therefore consider establishing a global growth target alongside national inflation targets. Green investment must be part of the stimulus, with governments favoring infrastructure projects that advance sustainable development and thus help to combat climate change.

To raise vital revenues for national governments, world leaders should agree on a coordinated strategy to recover money lost to tax havens. Countries should automatically exchange tax information, lift the veil of secrecy surrounding beneficial owners and trusts, and sanction non-compliant countries that refuse to implement the agreed rules.

COVID-19 is a wake-up call for the world to build a new and more effective multilateralism that is equipped to address the challenges of the twenty-first century. The global health and financial architecture must be reinforced, and partly redesigned, to enhance our preparedness and capacity to fight future crises rapidly and at scale. Further G-20 action to prevent the pandemic-induced recession from deepening, and to mitigate its impact on the world’s poorest people, would advance this goal. We urge its leaders to embrace what needs to be done now.

       

The time is right for G-20 leaders to hold a second meeting to discuss measures to advance the implementation of the G-20 Action Plan, and agree to a more strongly coordinated global response to the health, economic, and social emergencies we face. The G-20 has demonstrated that it can bring people together around a common set of actions. What it decides next on the COVID-19 response will have a direct bearing on the future of the world economy.

Our world is at a critical moment. On May 30, the highest daily figure was recorded for new cases of COVID-19 worldwide. On every continent, countries are attempting to stop the transmission of the virus. Compared to pre-crisis levels, the International Labor Organization estimates a 10.5 percent decline in the number of hours worked, equivalent to the loss of more than 300 million full-time jobs. For the first time this century, global poverty is on the rise.

Therefore, as we did a month ago, to emphasize the urgency of delivering immediate relief to countries facing the effects of an unprecedented, global crisis. The problems faced by the poorest countries in Africa, Asia, and Latin America demand immediate action, as do those confronting diverse middle-income economies. Taken together, these countries represent nearly 70 percent of the world’s population and approximately one-third of global GDP.

The United Nations predicts that a worldwide recession would reverse three decades of improving living standards and plunge upwards of 420 million more people into extreme poverty. The World Food Program has estimated that 265 million of our fellow citizens are likely to suffer from crisis levels of hunger—an increase of 130 million over pre-pandemic levels. We are also hearing reports of the pressure on all health and other social services on which girls and women depend.

Moreover, COVID-19 has caused the greatest education emergency of our lifetime: 1.5 billion children—80 percent of all children—have been out of school. The majority are denied distance learning. Many may never return—many, we fear, may enter child labor. Millions who no longer receive school meals are going hungry, while at the same time education aid is being reduced.

Health

The global economic and social emergency cannot end until we can bring the global health emergency to an end. And we cannot bring the health emergency to an end in any of our countries until we end it in all countries.

We welcome the $8 billion pledged on May 4 for vaccines, diagnostics, and therapeutic development as recommended by the Global Preparedness Monitoring Board, and urge that these contributions be paid immediately and be fully monitored and reported. But much more needs to be done:

• We need global coordination of the development, mass manufacture, and equitable distribution of a vaccine or vaccines to ensure that they are universally and freely available as quickly as possible.
• We urge every G-20 member to support in full the $7.4 billion replenishment on June 4 of Gavi, the Vaccine Alliance, which between 2021-25 will immunize 300 million children, saving up to eight million lives. While we fight COVID-19 we must not allow the resurgence of other infectious diseases.
• Closer cross-border collaboration is essential to increase now and for the future the limited global supply of vital medical equipment, and to make testing accessible in every country.
• Developing countries need immediate support from the World Health Organization and others to build up their health systems and capacities, as well as to improve their social safety nets.
• G-20 countries should support the U.N.’s appeal for support for refugees, displaced persons, and others who rely on humanitarian aid.

The Economy

We note not only the multiple obstacles faced by developed countries in returning to growth, but also the deteriorating economic and fiscal conditions faced by many emerging, middle- income, and developing economies. More than 100 countries have now approached the International Monetary Fund for help, and more are expected to do so.

The IMF has said emerging markets and developing countries need $2.5 trillion to overcome the crisis, but only a fraction of that $2.5 trillion has so far been allocated.

While we welcome the good intentions at the heart of the G-20 Action Plan, concrete measures must urgently be agreed and be implemented in full:

• Debt relief for the 76 International Development Association countries needs to be scaled up radically to include relief by bilateral, multilateral, and private creditors until the end of 2021, and operationalized with urgency. Multilateral creditors must demonstrate that they are providing net new lending in response to the COVID-19 crisis. Time is running out for the voluntary process for private creditors coordinated by the Institute of International Finance, and a new binding approach now needs to be considered.
• A dozen or more emerging-market countries may well run into debt-servicing problems in the coming year. The IMF should be mandated to convene relevant players and, through its debt-sustainability and policy analysis, to set broad parameters for resolution.
• The G-20 should agree that the $2.5 trillion in support will now be provided. This requires the IMF, the World Bank, and regional development banks to raise their lending and grant ceilings. The multilateral development banks (MDBs) will likely increase their outstanding loan portfolio from the current $500 billion to $650 billion to $700 billion over the next 18 months. Without further increasing the resources available to the international financial institutions and allowing them to be more ambitious in deploying their capital, their ability to respond to the crisis will be severely constrained.

The consequences of not acting now would be felt for the rest of the decade. This is a time when countries should be willing to go beyond their normal fiscal deficit ceilings. The poorest, whose fiscal capacity is limited, need additional financial support from rich countries and multilateral organizations.

Social safety nets, regular health services, education, and climate-change initiatives—and for the 2030 timetable for the Sustainable Development Goals—must not suffer because of the fight to mitigate COVID-19 transmission. Thus:

• We need to ensure that the MDBs have sufficient resources for at least the next five years, which will require an additional $1 trillion in their combined portfolios. The individual institutions should be asked to provide plans for how they are to achieve these objectives. It will require them both to use existing capital more efficiently and to secure new sources of finance from borrowing, further capital increases, and the creation of new guarantee-based facilities like the International Finance Facility for Education (IFFEd).
• We reassert our commitment to the issuing of Special Drawing Rights (the IMF’s reserve asset), and to the transfer of existing, unused SDR allocations and new ones to countries most in need of support. Without requiring a reference to national parliaments, a decision on SDRs would release nearly $600 billion immediately, and more than $1 trillion by 2022. We call on the G-20 to build political support for an SDR allocation while engaging simultaneously in the necessary technical work, so that the measure can be implemented as soon as agreement is achieved.

A coordinated response

In the first stage of the crisis, the emphasis was on the provision of liquidity, employment protection, and emergency investments in health. Now, as we seek to return the world economy to pre-crisis levels of growth, enhanced fiscal, monetary, and central-bank coordination is vital.

• “Green” investment must be at the heart of the stimulus, with spending focused on infrastructure and other projects beneficial to sustainable development and employment. This will make recovery from this crisis truly transformative, accelerating progress in delivering on climate-change agreements.
• Consideration should be given to a global growth target, which can sit side by side with national inflation targets, and to rebuilding global trade.
• To raise vitally needed revenues for national governments, a coordinated strategy to recover money lost to tax havens should be agreed. Countries should automatically exchange tax information and remove secrecy surrounding beneficial owners and trusts, as well as agreeing to sanction noncompliant countries that refuse to implement the agreed rules.

Without action from the G-20, the recession caused by the pandemic will only deepen, hurting all economies—and the world’s most marginalized and poorest peoples and nations the most. Representing 85 percent of the world’s nominal GDP, the G-20 has the capacity to lead the mobilization of resources on the scale required. We urge leaders to do so immediately.

COVID-19 is a wake-up call to the global community. The global health and financial architecture must be strengthened, and in parts redesigned, to enhance our preparedness and capacity to act with speed and at scale to fight future crises. We should send a message of hope for the future: that the U.N., G-20 governments, and all interested partners can turn this crisis into an opportunity to build a new and more effective multilateralism, which more appropriately reflects current economic and political realities and is better equipped to address the challenges of the twenty-first century.

This commentary is co-signed by Karen Koning AbuZayd, U.N. Under-Secretary-General and former commissioner-general for the UNRWA; Philippe Aghion, Professor of Economics at Collège de France and the London School of Economics; María Elena Agüero, Secretary-General of the WLA Club de Madrid; Masood Ahmed, President of the Center for Global Development and former director of the IMF Middle East and Central Asia Department; Esko Aho, former Prime Minister of Finland; Shamshad Akhtar, U.N. Under Secretary-General, Executive Secretary of ESCAP, former Assistant Secretary-General at UN DESA and Governor of the State Bank of Pakistan; HRH Prince Turki bin Faisal Al Saud, Chairman of the King Faisal Center for Research and Islamic Studies; Christine Allen, Director of the Catholic Agency for Oversees Development; Amat Alsoswa, U.N. Assistant-Secretary-General and former UNDP Assistant Administrator and Regional Director for the Arab States Bureau; Abdulaziz Altwaijri, former Director-General of the Islamic Educational, Scientific, and Cultural Organization; Mohamed Amersi, Founder and Chairman of the Amersi Foundation; K.Y. Amoako, President and Founder of the African Center for Economic Transformation (ACET); Valerie Amos, U.N. Under-Secretary-General for Humanitarian Affairs, former Emergency Relief Coordinator, and former Secretary of State for International Development of the UK; Inger Ashing, CEO of Save the Children International; Nava Ashraf, Professor of Economics and Research Director of the Marshall Institute at LSE; Shaukat Aziz, former Prime Minister of Pakistan; Bertrand Badré, former Managing Director and Chief Financial Officer of the World Bank; Gordon Bajnai, former Prime Minister of Hungary; Jan Peter Balkenende, former Prime Minister of the Netherlands; Ed Balls, former UK Secretary of State for Children, Schools, and Families; Oriana Bandiera, Director of STICERD and Professor of Economics at LSE; Kaushik Basu, President of the International Economic Association and former World Bank Chief Economist; Carol Bellamy, former Executive Director of UNICEF; Nicolas Berggruen, Chairman of the Berggruen Institute; Sali Berisha, former President and Prime Minister of Albania; Suman Bery, Director-General of the National Council of Applied Economic Research in New Delhi and former Chief Economist at Royal Dutch Shell; Tim Besley, Professor of Economics and Political Science at LSE and former President of the International Economic Association; Valdis Birkavs, former Prime Minister of Latvia; Tony Blair, former Prime Minister of the UK; Mario Blejer, former Governor of the Central Bank of Argentina and Director of the Bank of England’s Centre for Central Banking Studies; Irina Bokova, former Director-General of UNESCO; Patrick Bolton, Professor at Imperial College London and Columbia University; Kjell Magne Bondevik; former Prime Minister of Norway; Dumitru Braghiș, former Prime Minister of Moldova; Lakhdar Brahimi, former Minister of Foreign Affairs of Algeria; María Eugenia Brizuela de Ávila, former Minister of Foreign Affairs of El Salvador; Gro Harlem Brundtland, former Prime Minister of Norway and Director-General of the World Health Organization; John Bruton, former Taoiseach of the Republic of Ireland; Robin Burgess, Professor of Economics at LSE; Micheline Calmy Rey, former President of Switzerland; Kim Campbell, former Prime Minister of Canada; Fernando Henrique Cardoso, former President of Brazil; Wendy Carlin, Professor of Economics at University College London; Hikmet Çetin, former Minister of Foreign Affairs of Turkey; Lynda Chalker, former UK Minister of Overseas Development; Joaquim Chissano, former President of Mozambique; Bai Chong-En, Dean of the Tsinghua School of Economics and Management; Joe Clark, former Prime Minister of Canada; Emil Constantinescu, former President of Romania; Radhika Coomaraswamy, U.N. Under-Secretary-General, former Special Representative for Children and Armed Conflict, and former U.N. Special Rapporteur on Violence Against Women; Ertharin Cousin, former Executive Director of the World Food Programme; Diane Coyle, Co-Director of the Bennett Institute for Public Policy at the University of Cambridge; Chester Crocker, former U.S. Assistant Secretary of State for African Affairs; Mirko Cvetković, former Prime Minister of Serbia; Marzuki Darusman, former Attorney General of Indonesia; Gavyn Davies, Co-Founder & Chairman of Fulcrum Asset Management, former Chief Economist & Chairman of the Global Investment Department at Goldman Sachs, and former BBC Chairman; Frederik Willem de Klerk, former State President of South Africa; Álvaro de Soto, former U.N. Under-Secretary-General; Kemal Derviş, Senior Fellow at the Brookings Institute, former Minister of Economic Affairs of Turkey, and former UNDP Administrator; Mathias Dewatripont, Professor at Université libre de Bruxelles; Božidar Djelić, former Deputy Prime Minister of Serbia; Beatrice Weder di Mauro, President of the Centre for Economic Policy Research; Mark Dybul, former Executive Director of the The Global Fund to Fight AIDS, Tuberculosis, and Malaria, Co-Director of the Center for Global Health Practice and Impact and Professor of Medicine at Georgetown University Medical Center; Šefik Džaferović, Chairman of the Presidency of Bosnia and Herzegovina; Victor J. Dzau, President of the National Academy of Medicine; Hans Eichel, former Minister of Finance of Germany and a G20 co-founder; Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley; Mohamed ElBaradei, former Director-General of the International Atomic Energy Agency; María Fernanda Espinosa, former President of the U.N. General Assembly and Minister of Foreign Affairs and Minister of Defense of Ecuador; Gareth Evans, former Foreign Minister of Australia; Jeremy Farrar, Director of the Wellcome Trust; Christiana Figueres, former Executive Secretary of the U.N. Framework Convention on Climate Change; Jan Fischer, former Prime Minister of the Czech Republic; Joschka Fischer, former Minister of Foreign Affairs and Vice Chancellor of Germany; Franco Frattini, former Minister of Foreign Affairs of Italy and European Commissioner; Louise Fréchette, former U.N. Deputy Secretary-General; Ahmed Galal, former Finance Minister of Egypt; Nathalie de Gaulle, former Chair and Co-founder of NB-INOV; Maitreesh Ghatak, Professor of Economics at LSE; Ian Goldin, former World Bank Vice President; Felipe González, former Prime Minister of Spain; Lawrence Gonzi, former Prime Minister of Malta; Rebeca Grynspan, Ibero-American Secretary-General, former Second Vice President of Costa Rica, and former U.N. Under-Secretary-General and Associate Administrator of UNDP; Ameenah Gurib-Fakim, former President of Mauritius; Sergei Guriev, former Chief Economist of the EBRD; Alfred Gusenbauer, former Chancellor of Austria; Tarja Halonen, former President of Finland; Han Seung-soo, former Prime Minister of South Korea; Ameerah Haq, former U.N. Under-Secretary-General and Special Representative of the Secretary-General in Timor Leste; Noeleen Heyzer, Member of the High-Level Advisory Board on Mediation of the U.N. Secretary-General and former UN Under-Secretary-General; Arianna Huffington, Founder and CEO of Thrive Global, Co-Founder of The Huffington Post; Mo Ibrahim, Founder of Celtel and Chairman of the Mo Ibrahim Foundation; Enrique Iglesias, former Foreign Minister of Uruguay and President of the Inter-American Development Bank; Ekmeleddin İhsanoğlu, former Secretary-General of the Organization of Islamic Cooperation; Roza Isakovna Otunbayeva, former President of Kyrgyzstan; Dalia Itzik, former Interim President of Israel and President of the Knesset; Gjorge Ivanov, former President of North Macedonia; Harold James, Professor at Princeton University; Hina Jilani, Advocate of the Supreme Court of Pakistan ; Ellen Johnson Sirleaf, former President of Liberia; Mehdi Jomaa, former Prime Minister of Tunisia; T. Anthony Jones, Vice-President and Executive Director of the Gorbachev Foundation of North America; Lee Jong-Wha, former Chief Economist and Head of the Office of Regional Economic Integration at the Asian Development Bank; Ivo Josipović, former President of Croatia; Agnes Kalibata, President of the Alliance for a Green Revolution in Africa; Angela Kane, former U.N. Under-Secretary-General for Management and U.N. High Representative for Disarmament Affairs; Mats Karlsson, former Vice President of External Affairs at the World Bank; Caroline Kende-Robb, former Executive Director of the Africa Progress Panel and Secretary-General of CARE International; Kerry Kennedy, President of Robert F. Kennedy Human Rights; Igor Khalevinsky, former Ambassador-at-Large at the Ministry of Foreign Affairs of Russia; Jakaya Kikwete, former President of Tanzania; Ban Ki-moon, former U.N. Secretary-General; Jadranka Kosor, former Prime Minister of Croatia; Anne Krueger, former First Deputy Managing Director of the IMF; John Kufuor, former President of Ghana; Chandrika Kumaratunga, former President of Sri Lanka; Aleksander Kwaśniewski, former President of Poland; Rachel Kyte, former World Bank Group Vice President and Special Envoy; Luis Alberto Lacalle Herrera, former President of Uruguay; Hervé Ladsous, former U.N. Under-Secretary-General for Peacekeeping Operations; Ricardo Lagos, former President of Chile; Zlatko Lagumdzija, former Prime Minister of Bosnia and Herzegovina; Mark Leonard, Co-Founder and Director of the European Council on Foreign Relations; Yves Leterme, former Prime Minister of Belgium; Justin Yifu Lin, former World Bank Chief Economist and Senior Vice-President; Elisabeth Lindenmayer, former U.N. Assistant-Secretary-General; Budimir Lončar, former Minister of Foreign Affairs of SFR Yugoslavia; Petru Lucinschi, former President of Moldova; Ricardo Luna, former Minister of Foreign Affairs of Peru; Nora Lustig, President Emeritus of the Latin American and Caribbean Economic Association; Jessie Rose Mabutas, Executive Board Member of the African Capacity Building Foundation; Graça Machel, former Education & Culture Minister of Mozambique; John Major, former UK Prime Minister; Susana Malcorra, former U.N. Under-Secretary-General for Field Support, Chef de Cabinet to UN Secretary-General, and Minister of Foreign Affairs of Argentina; Purnima Mane, former U.N. Assistant-Secretary-General and Deputy Executive Director of UNFPA; Giorgi Margvelashvili, former President of Georgia; Dalia Marin, Professor Emeritus at the University of Munich; Paul Martin, former Prime Minister of Canada; Colin Mayer, Professor of Management Studies at the University of Oxford; Carolyn McAskie, former U.N. Assistant Secretary-General for Peacebuilding Support; Donald F. McHenry, Ambassador and U.S. Permanent Representative to the U.N.; Péter Medgyessy, former Prime Minister of Hungary; Rexhep Meidani, former President of Albania; Girish Menon, CEO of ActionAid UK; Carlos Mesa, former President of Bolivia; Stjepan Mesić, former President of Croatia; Branko Milanović, Visiting Professor at The Graduate Center, CUNY; Aïchatou Mindaoudou, former U.N. Special Representative of the Secretary-General in Côte D’Ivoire; Benjamin Mkapa, former President of Tanzania; Amre Moussa, former Secretary-General of the Arab League and Minister of Foreign Affairs of Egypt; Amanda Mukwashi, CEO of Christian Aid;  Rovshan Muradov, Secretary-General of Nizami Ganjavi International Center; Joseph Muscat, former Prime Minister of Malta; Mustapha Kamel Nabli, former Governor of the Central Bank of Tunisia; Piroska Nagy-Mohácsi, Program Director of LSE’s Institute of Global Affairs and former EBRD Director of Policy; Dawn Nakagawa, Executive Vice President at the Berggruen Institute; Bujar Nishani, former President of Albania; Chief Olusegun Obasanjo, former President of Nigeria; Punsalmaa Ochirbat, former President of Mongolia; Jim O’Neill, Chair of Chatham House; Djoomart Otorbayev, former Prime Minister of Kyrgyzstan; Leif Pagrotsky, former Swedish Minister of Industry and Trade and Minister of Culture and Education; Ana Palacio, former Spanish Minister of Foreign Affairs; David Pan, Executive Dean of Schwarzman College at Tsinghua University; Elsa Papademetriou, former Vice President of the Hellenic Parliament; Andrés Pastrana, former President of Colombia; P. J. Patterson, former Prime Minister of Jamaica; Thomas R. Pickering, former U.S. Under Secretary of State for Political Affairs and Ambassador to the U.N.; Navi Pillay, former U.N. High Commissioner for Human Rights; Christopher Pissarides, Nobel laureate in economics and Professor of Economics and Political Science at LSE; Rosen Plevneliev, former President of Bulgaria; Richard Portes, Founder and Honorary President of the Centre for Economic Policy Research; Jorge Quiroga, former President of Bolivia; Zeid Raad al Hussein, former U.N. High Commissioner for Human Rights ; Iveta Radičová, former Prime Minister of Slovakia; Fidel V. Ramos, former President of the Philippines; Jose Ramos Horta, former President of East Timor; Geeta Rao Gupta, former Deputy Executive Director of UNICEF; Òscar Ribas Reig, former Prime Minister of Andorra; Hélène Rey, Professor of Economics at the London Business School; Mary Robinson, former President of Ireland; José Luis Rodríguez Zapatero, former Prime Minister of Spain; Dani Rodrik, President-Elect of the International Economic Association; Gérard Roland, Professor of Economics and Political Science at the University of California, Berkeley; Petre Roman, former Prime Minister of Romania; Emma Rothschild, Professor of History and Director of the Center for History and Economics at Harvard University; Kevin Rudd, President of the Asia Society Policy Institute and former Prime Minister of Australia; Isabel Saint Malo, former Vice President of Panama; Juan Manuel Santos, Nobel Peace Prize laureate and former President of Colombia; Kailash Satyarthi, Nobel Peace Prize laureate and Founder of Bachpan Bachao Andolan, Global March Against Child Labour, and Global Campaign for Education; Wolfgang Schüssel, former Chancellor of Austria; Amartya Sen, Nobel laureate in economics and Professor of Economics and Philosophy at Harvard University; Ismail Serageldin, former World Bank Vice President of the World Bank; Fatiha Serour, former Deputy Special Representative of the U.N. Secretary-General in Somalia; Rosalía Arteaga Serrano, former President of Ecuador; John Sexton, President Emeritus of New York University and former dean of NYU School of Law; Jenny Shipley, former Prime Minister of New Zealand; Javier Solana, former Secretary-General of NATO and Secretary-General of the Council of the EU; Gillian Sorensen, former U.N. Assistant Secretary-General for External Relations; George Soros, Founder and Chair of the Open Society Foundations; Michael Spence, Nobel laureate in economics and Professor of Economics and Business at NYU; Devi Sridhar, Professor of Global Public Health at the University of Edinburgh; Danny Sriskandarajah, CEO of Oxfam; Eduardo Stein, former Vice President of Guatemala; Nicholas Stern, former Chief Economist and Senior Vice-President of the World Bank and Chief Economist of the EBRD; Joseph Stiglitz, Nobel laureate in economics, former Chief Economist of the World Bank, and Professor at Columbia University; Petar Stoyanov, former President of Bulgaria; Laimdota Straujuma, former Prime Minister of Latvia; Larry Summers, former Chief Economist of the World Bank, U.S. Deputy Secretary of the Treasury, Secretary of the Treasury, and Director of the National Economic Council;  Boris Tadić, former President of Serbia; Jigme Y. Thinley, former Prime Minister of Bhutan; Eka Tkeshelashvili, former Deputy Prime Minister of Georgia; Danilo Türk, President of WLA-Club de Madrid and former President of Slovenia; Cassam Uteem, Vice-President of WLA-Club de Madrid and former President of Mauritius; Juan Gabriel Valdés, former Minister for Foreign Affairs of Chile and Ambassador to the U.N.; Justin van Fleet, President of Theirworld; Marianna Vardinoyannis, UNESCO Goodwill Ambassador; Andrés Velasco, former Finance Minister of Chile; Ann M. Veneman, former Executive Director of UNICEF and Secretary of the U.S. Department of Agriculture; Melanne Verveer, Executive Director of the Georgetown Institute for Women, Peace, and Security; Vaira Vike-Freiberga, former President of Latvia; Ernst-Ludwig von Thadden, former President of Mannheim University; Filip Vujanović, former President of Montenegro; Tim Wainwright, CEO at WaterAid UK;  Leonard Wantchekon, Founder and President of the African School of Economics; Kevin Watkins, CEO of Save the Children UK; Shang-Jin Wei, former Chief Economist of the Asian Development Bank; Rowan Williams, former Archbishop of Canterbury; Elaine Wolfensohn, Co-Founder of the Wolfensohn Center for Development at the Brookings Institution; James Wolfensohn, former President of the World Bank; George Yeo, former Minister for Foreign Affairs of Singapore; Yu Yongding, Director of the Institute of World Economics and Politics at the China Academy of Social Sciences; Kateryna Yushchenko, former First Lady of Ukraine; Viktor Yushchenko, former President of Ukraine; Valdis Zatlers, former President of Latvia; and Ernesto Zedillo, former President of Mexico.

We are also grateful for the support from: Šefik Džaferović, Chairman of the Presidency of Bosnia and Herzegovina; Ken Ofori-Atta, Finance Minister of Ghana and Chair of the World Bank Development Committee.

       

Europe needs a robust and agile development bank that can cooperate with, but also challenge, the Chinese institutions involved in the Belt and Road Initiative and the United States’ newly reinforced development agencies. With this goal in mind, the European Union recently appointed a “wise persons group” (WPG) to review the European Union’s development-finance architecture. The group, of which I was a member, has devised three stylized options. But there might be a fourth alternative that combines the best features of existing institutions.

The EU needs a development bank so that it can strengthen its capacity to respond to big global and regional challenges—above all, to risks and opportunities in Africa. From a geopolitical standpoint, Europe urgently needs to bolster its economic sovereignty, without abandoning its ambition to forge multilateral coalitions. Development finance is a critical building block in that regard, and, although Europe currently provides close to two-thirds of all global development finance, it would have a much greater impact if EU efforts were better coordinated.

The two existing European development-finance institutions—the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB)—each have their strengths. The EBRD is a proper development bank with a broad range of activities, close policy dialogue with national governments, and a heavy presence on the ground. The EIB, meanwhile, is mainly EU-focused: It is a policy-taker, and most of its staff are based in Luxembourg. But both banks are weak where development needs are greatest: in fragile states and particularly in Sub-Saharan Africa.

In short, the European development-finance system needs an overhaul. Maintaining the status quo, even one enhanced by the short-term measures suggested by the WPG, will not help Europe build its credibility and capacity as a global player over the long term.

One option proposed by the WPG would be to establish a new bank from scratch with the EBRD, EIB, and the European Commission as shareholders. But this would require huge investments of financial capital as well as specialized staff, and it would take time – which is particularly precious if we are to achieve the United Nations Sustainable Development Goals by 2030. For those reasons, EU finance ministers have already rejected this scenario.

The two remaining possibilities are to build the new bank from either the EBRD or the EIB, with the WPG clearly preferring the former option. Unfortunately, after Brexit, the EU will control only a little over 50 percent of the votes in the EBRD, whereas many important decisions require larger majorities. And if Europe were to provide more capital, there are no guarantees that non-EU shareholders would agree to reduce their voting shares.

The EIB option would involve spinning off the bank’s non-EU assets (about 10% of the total) to a new subsidiary entirely controlled by European entities. These could include the Commission and national development institutions such as Germany’s KfW or the Agence Française de Développement. The big, and possibly overwhelming, challenge is to turn the EIB or its subsidiary into a development institution, despite the absence of basic features such as an inclusive shareholder base or a deep local presence.

Fortunately, there is a fourth option that would weld together the different parts of the system in an interesting and perhaps more politically palatable way – including by involving national development institutions more. Many of these national entities cover important areas, such as health and education, and operate in parts of the world where the EBRD and EIB have little or no presence. They could be integrated into an open European development-finance system within which national, regional, and global institutions compete to implement EU assistance projects under a coherent European development policy.

This option also would involve separating the activities of the EBRD and EIB. The two banks already run up against each other in many countries and sectors, and their current expansion plans would increase the overlap. The EIB could focus solely on EU countries, with its assets elsewhere transferred to the EBRD. Conversely, the EBRD could hand over its assets in the EU, and focus on the European neighborhood and Sub-Saharan Africa. Such an exchange would not be easy, but it was actually prepared once, in 2013.

The third and central component of this proposal would be to recast the EBRD as the European Sustainable Development Bank, working alongside institutions such as the World Bank and the African Development Bank.In order to increase its lending capacity, the EBRD would need additional capital. Because only EU shareholders are likely to contribute, their voting shares in the bank should increase. But non-EU shareholders, including the US, the UK, and, importantly, recipient countries, would still be represented, thus preserving a multilateral approach. The EIB, meanwhile, would focus on becoming the European climate bank, and would serve as a backstop to help strengthen national development-finance institutions.

Now is a good time to overhaul European development finance, in part because the EU currently is preparing its next seven-year budget. Equally important, the EBRD, an institution with a proven track record and additional lending capacity, faces important strategic choices over the coming months.

As Brexit looms, the EBRD’s non-EU shareholders will soon face a stark choice between reducing their respective stakes or witnessing the establishment of a new European institution in which neither they nor EBRD recipient countries hold shares. And without access to EU grants, the EBRD will not be viable in many of the sectors and countries in which it currently operates, and might eventually have to close down.

Instead of letting the EBRD flounder and fail, the EU and its international partners should put the bank at the heart of European development finance. At a time of increasing uncertainty, growing international threats, and fundamental challenges to multilateralism, we need solid institutions more than ever.

       

The Swedish climate truthsayer Greta Thunberg has set sail for the United States in a zero-emissions racing yacht to generate waves in a different part of the world—including at next month’s United Nations Climate Action Summit in New York. She will arrive in America at a time of growing transatlantic awareness of the threat posed by climate change. But whether shifts in public opinion will translate into concrete action remains to be seen.

Taking sustainability seriously means that we can no longer ignore our planetary boundaries. We need to start designing tools and policies to make all aspects of society more sustainable, before the costs of doing so become so large as to impoverish us. This has increasingly become a task not just for academics who specialize in the field, but for scholars and researchers generally. Sustainability should now be the lens through which we approach all policy-related empirical questions. We need challenge-driven, mission-oriented research, and that calls for a broad multidisciplinary effort.

To that end, Michael Grubb of the University of Cambridge, along with two co-authors, made a monumental contribution with his 2014 book “Planetary Economics: Energy, Climate Change, and the Three Domains of Sustainable Development.” Grubb marshals a broad range of tools from within the economics discipline to chart the way to a sustainable society. That framework will need to be broadened beyond economics, but it provides a useful starting point.

The “three domains” in the book’s subtitle concern human behavior, and how it can be influenced through regulation, traditional market-based pricing, and innovation. Transforming a system requires action in all three areas. For example, better regulation can change human behavior in a way that reduces prices and spurs innovation, in turn yielding even better regulation and lower costs.

Unfortunately, these three traditional domains within economics have each evolved separately, developing their own languages, evidence, policy recommendations, professional societies, and journals. The goal of a “planetary economics” is to integrate the domains within a single community, whose sole objective is to build a civilization that can exist within Earth’s boundaries.

This is already happening on the margins. Evolutionary and institutional economists are talking to organizational and behavioral economists about how individual social and economic choices make up complex systems over time. Complexity economists like W. Brian Arthur have been studying such questions for decades. And, in parallel, “Solow Residual” economists have drawn on all three domains to make sense of unexplained factors in economic growth.

But this multidisciplinary intermingling is not happening nearly fast enough. What we need is a new field of planetary social science to unite different perspectives, conceptual frameworks, and analytical tools—from political science, sociology, anthropology, and psychology. Just as we cannot ignore the climate science, nor can we ignore the geopolitical and security challenges that will confront a warming planet.

Beyond the participation of individual consumers, private corporations, and civil society, building a sustainable global economy will require active state intervention. Governments urgently must adjust regulatory frameworks, reset market incentives, and expand the hard and soft infrastructure needed for innovation to thrive. Moreover, policymakers should be prepared to take calculated risks, and to recalibrate policies based on feedback.

The sub-discipline that has perhaps come closest to integrating other disciplines, including medicine and environmental science, is public health. In “Survival: One Health, One Planet, One Future,” George R. Lueddeke, the chair of the One Health Education Task Force, shows how public health can be incorporated into a wide range of fields to address individual, population, and ecosystem health.

Another crucial area, of course, is education. In 2015, the international community adopted the UN’s 2030 Agenda and the 17 Sustainable Development Goals, one of which (SDG 4) regards high-quality universal education as a key to building “peaceful, just, and inclusive societies.” Yet progress toward this goal, particularly in developing countries, is being hampered by inequality, poverty, financial shortfalls, extremism, and armed conflict.

In advanced economies, education systems need to prepare students for a world that is undergoing fundamental social, economic, and technological change. Young people today will need the skills not just to cope with the ongoing transformation, but to lead it. That means education policy, too, must become challenge-driven. In practical terms, every university should consider creating a compulsory course on systems thinking and cross-disciplinary approaches.

Meanwhile, public- and private-sector organizations around the world are being asked to integrate the SDGs into their daily operations. In “Survival,” 17 organizations, ranging from the U.S. Centers for Disease Control and Prevention to the World Wildlife Fund, tell Lueddeke how they are adopting a more multidisciplinary approach. But, in general, it is clear that many—if not most—countries have yet to consider the costs of implementing the SDGs fully. Without their active participation, success is unlikely.

In fact, most national finance ministries have not fully bought into the 2030 Agenda. In advocating sustainability, we must not create new vulnerabilities in the form of over-indebtedness. Recent experience shows that financial crises can rapidly undermine economic and political achievements, sometimes reversing decades of development or jeopardizing future economic growth and stability.

As Greta Thunberg steps onto new shores, those in power should consider their responsibility to all generations. We urgently need to create the conditions for the emergence of a planetary social science that can inform our policy decisions. Ultimately, the planet will carry on. But whether humanity survives will depend on the leadership shown today, and on the systems of governance and scholarship that we build for the future. There is nothing like the prospect of extinction to focus the mind.

       

On October 8, the Brookings Africa Growth Initiative hosted a discussion on the global infrastructure financing gap, the rationale and challenges for institutional and other investors, and the potential benefits for the global economy from renewed investment in infrastructure. Panelists included: Erik Berglof, chief economist and special adviser to the president at the European Bank for Reconstruction and Development; Henry Rotich, cabinet secretary for the Kenyan National Treasury; Julia Prescot, partner and chief strategy officer at Meridiam Infrastructure; Michel Wormser, former vice president and chief operating officer of the Multilateral Investment Guarantee Agency at the World Bank, and Amadou Sy, senior fellow in the Brookings Africa Growth Initiative. Sandrine Rastello, Global Economics Correspondent at Bloomberg, moderated the discussion.

       

The leaders of Europe will meet this weekend to respond to the rapid deterioration of the economic situation in Emerging Europe. The situation varies a great deal; some countries have been more prudent in their policies than others. But all are joined, more or less strongly, through the deeply integrated European banking system.

Western banks and the Eastern economies

This relationship between the Western banks and the Eastern European economies, to date so mutually beneficial, is now being put to a test. It is not hard, as many commentators have done over the past week, to paint a negative scenario where one or more Western banks drastically cut their support to subsidiaries in the East and trigger nationalisations of these banks in the name of financial stability, setting off chain reactions across the region. The end result would be a massive contraction in credit available to Eastern Europe and enormous losses to Western banking systems.

But this is not what has been happening so far. Lending to the region has contracted, but the fact is that Western parent banks are standing by their subsidiaries. Most banks have to date been refinancing and recapitalising subsidiaries. In some cases the parent banks are actually looking at increases in credit this year. Even in Ukraine, arguably the country in most serious trouble, the foreign banks have committed to recapitalising their subsidiaries to the tune of 2bn euros this year.

Capital demands

Yet, the requirements for the region as a whole are very large. Excluding Russia and Kazakhstan, which can draw on their own resources, the region will need some 150 billion dollars in refinancing and recapitalisation this year alone. This number most likely underestimates the deterioration of bank portfolios, but does not take into account the reduction in credit demand as the recession starts to bite – some reduction in capital flows is only natural as the appetite for new investments dampens in the economic downturn.

The bulk of capital needs will have to come from the Western parent banks and their home country governments. Most of these banks are now under state-led rescue programmes and with some important exceptions the capital requirements in Eastern Europe are modest compared to the size of the parent bank balance sheets and the state programmes. The refinancing and recapitalisation needs of local banks without foreign parents should be addressed by their shareholders or their governments. Shortfalls can be covered by the international financial institutions, primarily the European Investment Bank, European Bank for Reconstruction and Development and the World Bank Group.

Unilateral actions by nations or banks could trigger a banking crisis

The situation is manageable, but it needs to be managed. Unilateral actions by individual countries or banks easily spill over across borders and across institutions. A sudden decision by an international bank to discontinue its support to foreign subsidiaries or restrictions imposed by home countries on the use of state funds for support to these subsidiaries abroad could easily trigger banking crises in the countries where these subsidiaries operate. Similarly, measures by host countries, like nationalisations of subsidiaries or forced conversions of foreign exchange exposures into local currencies, could set off chain reactions either through the balance sheets of the parent banks or simply by inspiring bank runs in other countries.

To date none of these things have happened either, but the pressure is rapidly building up as the global financial crisis deepens. The relations between home and host countries, and between host country governments and their banks, local or foreign, also need to be coordinated. Here again the international financial institutions are playing an important role. Steps have already been taken. In a joint initiative that has been informally underway for some time and was officially announced on Friday, they have been working closely together to bring together the various actors home country by home country, and host country by host country. The have also pledged $25 billion in funding to support the Eastern European banking systems. The additional capital these institutions bring to the table provides valuable incentives for the individual banks to collaborate.

What EU leaders must do

But this coordination, crucial as it is, may not be enough. This is where EU’s leaders come in.

• They must provide a backstop to these efforts and put their weight behind the coordination.
• They must also clearly signal that government-imposed restrictions on parent support for subsidiaries are not acceptable.

In fact, countries that are home to cross-border banking groups must not only tolerate, but encourage flows to subsidiaries in the East.

• They should encourage the European institutions to play their part in this difficult exercise.

This applies to the European Commission, but also to the ECB which may help support a select group of central banks outside the Eurozone with liquidity and foreign currency credit lines.

• The leaders should also indicate that if there is a serious shortfall, additional resources will be available to support the economies of Central and Eastern Europe.

But in order to encourage early action and collaboration it should be made clear that any additional resources will be made available only on conditions that are likely to be much less favourable for all parties concerned. Such additional funds could be channelled under strict conditionality through the IMF or possibly through the other international financial institutions. Conditions might well include forced conversions of foreign exchange exposures into local currency or nationalisations of foreign subsidiaries – all to secure fair burden-sharing between home and host countries and between the banks and the governments.

Conclusion

There is much to suggest that it was the belief that EU’s leaders will stand by Eastern Europe that prevented a full-blown meltdown last week. A failure to show substantive progress this weekend or over the next few weeks could well trigger a new round of speculative attacks. Strong leadership, on the other hand, would likely calm markets and signal that Europe stands behind its model of growth based on openness and integration.

       

The current crisis reveals two major flaws in the world’s crisis-resolution mechanisms: (i) funds available to launch credible rescue operations are insufficient, and (ii) national crisis responses have negative spillovers. One solution is to emulate the EU’s enhanced cooperation solution at the global level, with the IMF ensuring that the rules are respected.

Big global crises always trigger calls for big global reforms. This time is no exception.

Before G20 leaders embrace big-reform calls, they should look carefully at what happened the last time around.

When the last global crisis hit a decade ago, we saw a round of calls for big global reforms, including new institutions, new funds and new financial instruments that were touted as stabilising capital flows and allowing countries to insure against sudden stops. Other recommendations focused on bigger and better crisis lending, and on better international bankruptcy mechanisms.

While many of these ideas were good, virtually none of them were implemented.

Instead, the victims of the crisis — emerging markets — reacted unilaterally; they sought to shield themselves from similar shocks in the future by building large foreign exchange reserves, reforming their financial sectors, etc.

Many of the G20 nations are currently making unilateral adjustments to shield themselves from future crises; this is a good and inevitable reaction. The G20 meeting, however, should focus on two systemic issues:

• The lack of IMF lending capacity, and;
• Negative spillovers among the unilateral responses, i.e. the fact that one nation’s solution can become another nation’s problem.

IMF lending capacity

For all but a handful of giant economies, the proper response to a global crisis requires outside help. As in the Asian crisis, IMF funds are insufficient to launch credible rescue operations. The current resources of the IMF would be sufficient to put together credible rescue packages for no more than a couple of emerging market countries if the crisis were to hit them with full force. Funds to increase the IMF’s war chest should at least in part be raised from the large emerging economies. After all, they would benefit the most from improved insurance. In exchange, they should also get greater say in the institution.

Negative spillovers from national responses

The second major shortcoming of existing crisis resolution mechanisms is the negative spillovers of national crisis responses.

This problem is not new either, but it has become more apparent as interdependencies have increased and the number of packages has multiplied. Western governments have stabilised their own banking systems, but often at the expense of emerging economies.

Generous guarantees attract deposits from, and trigger runs in countries without the resources to back up such guarantees. Bailouts often impose restrictions on the support banks can provide to their foreign subsidiaries. The result could be the undermining of banking systems in many emerging markets.

These discriminatory practices should, of course, be forbidden. The IMF already does so in countries that benefit from its programmes. But most countries now bailing out their banks and guaranteeing their depositors do not need the IMF. One solution would be to give the IMF, or the Basel Committee, broader jurisdiction, but for this to be credible emerging economies — the main victims of these practices — must be better represented in the design and enforcement of the rules.

Ultimately, even these seemingly small improvements in crisis resolution mechanisms may require bigger reforms.

The regional route

But one possibility would be to start to start at the regional level. The negative spillovers are largely a European problem due to the extraordinary penetration of West European banks into Eastern Europe. If not all of the EU can agree on non-discriminatory practices, let a subset of member states pursue deeper collaboration on crisis resolution under the option of enhanced cooperation introduced in the Maastricht Treaty 1992 and spelled out in the Nice Treaty 2003. Members would subject themselves to bailout rules and perhaps even need to have certain institutions, like bank resolution mechanisms, in place before joining. The European Commission guarantees that the club would be open to any state that subscribes to its basic objectives and rules.

The obvious global approach would be to redraft the articles of the IMF to bring them closer in line with the more constraining spirit of the text originally signed in

Bretton Woods. Unfortunately, such reforms are likely to be resisted by some.

An alternative would be to emulate the EU enhanced cooperation solution at the global level. In such a global club for crisis resolution the IMF could play a role similar to the one played by the European Commission in ensuring that the rules are respected. With a set of transparent requirements for joining, like the Maastricht criteria, this proposal could also help address remaining weaknesses in the institutions for crisis prevention in emerging — and mature — markets.

       

Finance ministers of the Group of Eight leading economies have commissioned a study on the role of financial market speculation in recent oil price rises. In India, the regulator recently suspended trade in futures markets for several commodities, blaming speculators for price rises. The global credit crisis has made the financial sector vulnerable to populist attacks. The greatest casualty may be financial development.

In developed countries there is a sober search under way for appropriate regulatory and supervisory responses to the lessons learnt from the crisis. But in poorer countries politicians are unwilling to leave regulation to the regulators. The problems in the financial sector in the US allow populists in emerging markets not just to retread their critiques of financial markets but also to hold free enterprise and trade guilty by association.

These critics have a point, although it is misdirected. The world is still struggling to understand how to regulate sophisticated financial systems, but it has learnt more about how to manage less sophisticated ones. As a result, the achievements of emerging market financial systems over the past decade have been impressive. Since the Asian and Russian crises, financial regulation and supervision, as well as corporate governance and transparency, have all improved. Governments have made tremendous advances in managing their finances, while central banks have charted more independent policy. These advances help explain why we have not so far seen more collateral damage in emerging markets.

Indeed, the correct response in emerging markets to the global crisis should be to accelerate reforms that strengthen the financial and regulatory infrastructure, while taking care to avoid, as far as possible, the misaligned incentives that lie at the root of the crisis. Instead, important reforms are being reversed. In India, politically motivated mass loan waivers, which ruined credit culture in the past, are reappearing. A recent European Bank for Reconstruction and Development/World Bank survey showed deep distrust of many market institutions, including banks, and widespread nostalgia for the debilitating instruments of central planning in many countries of the former Soviet Union.

Many of the actions against the financial sector are proposed in the name of the poor, even though the true beneficiaries are the politicians themselves. Ironically, in much of the world the financial sector is at last reaching out to the poor, as improvements in technology and the growth in legal infrastructure promise new solutions to age-old problems. In Africa, banks and cell phone companies are drawing ever larger parts of the population into the payment system. Financial innovations such as crop insurance and micro-finance are promoting the diffusion of new seeds and fertilisers, and futures markets are facilitating hedging and price discovery. In India, a new law promises to aid the growth of grain warehouses and electronic warehouse receipts that will allow a farmer to store his harvest, and obtain finance against it, until he is ready to sell. It will probably do more for agricultural credit than years of state intervention.

In the industrialised economies of central and eastern Europe, which started their transformation into market economies essentially without financial systems, it took almost a decade for fragile banks truly to extend credit beyond the government, large companies and rich individuals. But now well-capitalised institutions, often backed by foreign parents, actively support restructuring of privatised enterprises, extend loans to risky small entrepreneurs and finance the mortgages of people wanting to buy their own homes. As a result of better financial access, in the Baltic states people trust their banks even more than their political and legal institutions.

All this progress may be at risk, especially if the global financial squeeze is longer and deeper than expected. Financial access will contract and with it the support for institutions and markets. Emerging markets will re-enact battles for their economic soul that we thought had been decided. It is important that industrial countries’ governments do not fan the flames of antimarket sentiment by choosing the present time to reconsider their position on trade and capital flows. For the experience of previous crises suggests that the veneer of market institutions is thinner than we think.

       

For decades westerners have lectured central and eastern European policymakers on how to regulate and supervise, balance their budgets and stem credit expansion. Now they must deal with the consequences of a global crisis triggered because the west broke all the rules it preached. Worse, it is a crisis they cannot do much to resolve. They cannot even benefit from the bargains of distressed assets. Unlike some resource-rich neighbours in the east, they are not sitting on huge reserves that could bail out western institutions.

Much is at stake for these economies. Elsewhere countries have lost decades of development in a single crisis. Most eastern Europeans still have the Asian and Russian crises of 1997-98 fresh in their minds. They have been told they are vulnerable – in fact, according to the International Monetary Fund last year, the world’s most vulnerable.

Some countries in the region are already feeling the pinch with higher interest rates and pressures on their exchange rates. Thanks to strong fundamentals and much-improved institutions, they have so far weathered the storm. But they are bracing themselves for a second wave of impact through lower growth in export markets.

The stakes are also high for western Europe – much higher than in 1997-98. These emerging economies are no longer just growing fast; they are also beginning to matter economically. Central and eastern Europe, including Russia, have surpassed the UK and the US jointly as the largest export market for the eurozone.

A new Europe is emerging with deeper economic and financial integration. Massive foreign investments have given rise to production patterns that have brought western and eastern Europe much closer together. Look at Volkswagen, which has invested heavily in the Czech carmaker, Skoda. Initially many critical components came from Germany, but local Czech suppliers upgraded and western subcontractors migrated to the Czech Republic. Today car components are an important Czech export.

Or take SEB. The Swedish bank acquired several Baltic banks. These highly profitable subsidiaries were first run as independent banks, but gradually activities have been integrated under the motto “One SEB”. Today SEB, with two other Swedish banks, is in effect the monetary authority of the Baltic states, with main regulators and supervisors based in Stockholm.

This new Europe is highly competitive. While Chinese exports have gained ground in western European markets, so have those from central and eastern Europe; the only big product category in which Chinese producers have advanced at their expense is garments. Competitive labour costs, productivity improvements driven by foreign investments, and proximity to export markets explain the success.

We are seeing the dividends from the end of the cold war and more than a decade of painstaking European Union accession. The countries of central and eastern Europe have perhaps not always followed the straight and narrow path, but they have in the end, more or less, done everything they were asked to do. Unprecedented institutional progress has laid the groundwork for even more integration in the future.

But this integration is also what makes the new Europe more vulnerable. While the region’s banks are in good shape, questions are emerging about the ability of the parent banks in western Europe to support their offspring. Deplorably, some parent banks are finding increasingly innovative ways to undermine local regulators and the rules the west has preached about, for example, capital adequacy and foreign exchange exposure.

All this leaves local policymakers with a sense of powerlessness. They have perhaps not always been model students, but they have opened up their economies, exposing them to international competition. Their state sectors still need reforming, but most budgets are holding up reasonably well, given the pressures for compensation after years of hardship. Still they know that they have yet to be tested in a sustained global downturn.

So far the economies of central and eastern Europe are doing remarkably well, but our crisis could become their crisis. For our common good we must quickly mend the global financial system. Meanwhile, to sustain growth in the new Europe we must repeat the old prescription of stronger regulation, vigilant supervision, fiscal discipline and careful credit expansion – and make sure we take the medicine ourselves.

       

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View the presentation

View the report, Transition report 2007: People in transition