The International Monetary Fund was eerily quiet this week. Normally, the IMF’s two buildings in Washington DC would have been full of finance ministers and central bank governors gathered together to discuss the state of the global economy. This year, the meeting was a virtual yet still an important one: the most significant since the financial crisis.
Piecing together the story of the spring meetings of the IMF is a bit like peeling the skin off an onion, with the health emergency caused by the Covid-19 pandemic the outer layer. Since it was created at the 1944 Bretton Woods conference, the IMF has seen many crises, but nothing like this one. Never before has it needed advice from epidemiologists to do the predictions for its flagship publication: the World Economic Outlook.
One layer down from the health emergency was an economic emergency. Dealing with Covid-19 has involved extreme measures that have meant businesses have been shut and workers left idle. The WEO forecast that the global economy will shrink by 3% this year – an assessment not based on the latest data and so likely to prove optimistic.
Country-specific data provides a better picture. Britain’s Office for Budget Responsibility says that if the lockdown goes on for the whole of the second quarter, gross domestic product will shrink by 35%. China reported its fastest rate of economic decline in more than half a century, while the unemployment numbers from the US were a horror show. In four weeks, the number of jobless claims has reached 22m – erasing all the employment gains in the 11 years since the global financial crisis.
The biggest falls in activity will be seen this year in the countries with the highest number of virus infections: the rich, developed part of the world in the main. But the impact has also been severe on emerging market and low-income countries, which are intrinsically more vulnerable. In the past few weeks, the IMF has received calls for help from 102 countries, more than half its membership.
So the third layer of the onion was the policy response: the IMF gave its approval to the decision by central banks to turn on the money taps and to the $8tn (£6.4tn) of stimulus provided by finance ministries. Kristalina Georgieva, the IMF’s managing director, said she had $1tn of financial firepower at her disposal and was prepared to use it. She also successfully rattled the tin for some emergency programmes, with the UK among those countries that responded. Creditor countries agreed to suspend debt payments from more than 70 of the world’s poorest countries for six months.
Even so, the multilateral response was less impressive than it might have been. Calls for the IMF to sell some of its gold reserves – which have soared in value in recent weeks – to pay for a more generous package went unheeded. Nor did Georgieva press the case she made last month for the go-ahead to issue a new tranche of special drawing rights (SDRs) – reserve assets that the IMF can create and distribute to its members.
This was not 2009, when the international community came together with a coordinated response to the financial crisis. In retrospect, the London G20 summit in April of that year was a high point for multilateralism: since then it has been downhill all the way. Donald Trump has neutered the World Trade Organisation and last week threatened to cut off US funding to the World Health Organization. The reason Georgieva went quiet about SDRs was because the idea ran into opposition from the US, which can veto any proposal coming out of the IMF that it doesn’t like. Removing another layer of skin exposes a much weaker form of internationalism. What last week’s meeting needed was a progressive narrative around which countries could rally and a willingness of the US to fulfil the leadership role it has had since 1945.
Neither was much in evidence, because America has a different agenda. Covid-19 has highlighted and accelerated a struggle for global hegemony between the US and China: the final layer of the onion.
For the first time since the collapse of the Soviet Union – and probably longer than that – the US faces a rival that Washington knows is a real threat. The Soviet Union never managed to provide its citizens with the living standards found in the west; China, courtesy of decades of rapid growth, has virtually eradicated extreme poverty and made consumer goods available to millions.
A new cold war is raging. Trump’s objection to the IMF’s SDR plan was that some of the reserves would find their way into the hands of regimes he didn’t like: those in Tehran and – more importantly – Beijing. The WHO’s mistake was to take at face value the lies told in the initial stages of Covid-19 by the Chinese government, when the spread of the pandemic outside China could have been prevented.
The Chinese seem to be up for the fight. Beijing says, wrongly, that the virus was imported from the US, and will exploit to the full the propaganda value of its economy starting its recovery before that of its geopolitical rival. China is developing a new digital currency in the hope that the hegemony of the US dollar as the world’s reserve currency will be challenged and views itself being at the cutting edge of artificial intelligence as a means of cementing authoritarian control.
The US is right to be worried. It is, though, too glib to say that the 21st century will be China’s just as the 20th was America’s. The US has been written off many times and always found a way to reinvent itself. The struggle will be long and hard.
