Opinion: The US abdicates and the world prevaricates — the perils of a rudderless recovery

We are just beginning to grapple with the economic carnage unleashed by the COVID-19 pandemic. The stakes are enormous; the cost of failing to mount a robust response looks set to be measured in human lives and widespread, abject suffering for at least a generation.

Not since World War II have leadership and decisive, coordinated global action been so imperative. Tragically, the U.S. administration’s gross mismanagement of the pandemic response and failure to play a constructive role on the global stage threaten to deepen and prolong the pain.

The US Treasury throws away its shot

During three decades at the U.S. Treasury Department, I saw the onset and recovery of several global financial crises — each one bigger and more complex than the last. Typically, the U.S. would work through the G-7 and G-20 — the groups of leading nations — to advocate for global policy alignment across multiple fronts.

But thanks to the “America First” agenda, the U.S. has rendered these bodies dangerously close to irrelevancy and the global community has been reduced to less than the sum of its parts. German Chancellor Angela Merkel’s Camp David snub is a case in point: Why be in “the room where it happens” if there is no rational adult to speak for the world’s largest economy?

With global cooperation as imperative as ever, the abdication of U.S. leadership could not be more ill-timed. A debt moratorium supported by the G-20 is offering a financial tourniquet, but a plan to permanently stem the bleeding is yet to manifest. Meanwhile the U.S. is reportedly impeding a G-20 proposal for a massive liquidity injection at the International Monetary Fund that could boost member countries’ coffers, despite relying on the IMF to lead the financial response.

A credible multilateral effort to forge a consensus on the global recovery that we want to engineer and debates on whether we have the right policy priorities, adequate tools, and enough firepower to bring it about are also sorely lacking. Treasury Secretary Steven Mnuchin himself seems satisfied with a “thoughts and prayers” approach, with readouts of multilateral meetings stressing the value of regular contact but offering no hint of concrete action.

Partially stepping into the void are the major global financial institutions, led by the IMF and World Bank, which in the absence of any consensus on a way forward are sending mixed messages.

In a notable departure from the past, IMF Managing Director Kristalina Georgieva is publicly advocating for inclusive growth, quality education, clean water and sanitation, publicly funded child care, and a green recovery. IMF economists have even argued for expanded social assistance, public work programs, and a “solidarity surcharge” to help offset the distributional effects of the pandemic.

The 1990s called; they want the Washington consensus back

In contrast, there is a confounding lack of emphasis on sustainability and inequality across the street at the World Bank.

The institution is led by David Malpass, a former Treasury undersecretary and administration official, whose public posture on the recovery hews uncomfortably closely to the Washington consensus — a rusty set of policy prescriptions rooted in the assumptions that strong macroeconomic fundamentals, free markets, and attractive investment regimes will cure most economic ills. His June remarks on the recovery — later echoed in conversation with The Economist — focused on how to improve investment climates, including through swifter dispute resolution and greater transparency of balance sheets.

There is some common ground with the IMF, with Malpass and Georgieva stressing measures to protect the poorest and shore up health systems. And both are calling for debt relief in conjunction with greater transparency of sources and terms.

But in contrast to Georgieva, Malpass’ public comments do not adequately acknowledge the climate crisis and the perils of environmental degradation, the fate that awaits millions of schoolchildren deprived of quality education, the specter of a hunger pandemic, and the setbacks to women and girls — as reflected in higher rates of gender-based violence, elevated risks of forced marriages, a larger burden of unpaid care, and heavier job losses.

Despite the literally fatal consequences of inequality across the world, as laid bare during the pandemic, I do not believe Malpass is sufficiently championing measures to ensure that growth is more inclusive and resilient.

This is nonsensical. It is not rational to pay the exorbitant price of voluntarily bringing the global economy to its knees, preventing millions of deaths from one source — the pandemic — only to revert to a system that enables millions of preventable deaths from other sources, like pollution and malnutrition, and ignores the looming effects of climate change.

‘Anyone can hold the helm when the sea is calm’

In a benign environment, the stakes would not be terribly high; the World Bank is more cruise ship than warship and, thanks to highly capable technocrats, does just fine on automatic pilot. But now the World Bank needs visionary leadership in step with today’s challenges and complexities.

And while I believe that evidence and the times favor Georgieva, the IMF lacks the mandate for sweeping institutional and structural change. As a result, we risk defaulting to a business-as-usual approach to the crisis — one that is overreliant on private sector-led growth and fails to tackle major vulnerabilities or factors in the disenchantment with a market-based system that has enabled the massive accumulation of wealth into the hands of a very few.

Finally, we have yet to grapple with the seismic pandemic-induced shifts in human behavior that could upend conventional economic wisdom. A post by former World Bank Chief Economist Kaushik Basu reminds us that markets rely on social norms to the point that they are no longer embedded in economists’ explicit assumptions. Rigorous evaluations of these new behavior patterns are essential if we want to harness these new forces effectively, rather than fall prey to them.

Every Treasury secretary I served under during a financial crisis led with steely resolve and embraced the need for coordinated global action. Even a Treasury Department at the top of its game could falter in the face of a crisis of this magnitude. But to deliberately and even defiantly retreat from the global stage when the stakes are this high is feckless and irresponsible. The price we pay will be the loss of lives and livelihoods that can never be recovered.

Update Aug 11. 2020: This op-ed was updated to clarify that the author's assessment of Malpass’ public statements is an opinion, not a statement of fact.