Recovering global leadership is crucial

This year, the world experienced a global crisis unlike anything seen in generations. The covid-19 pandemic is indiscriminate and unprecedented in scale, and has exposed pervasive weaknesses in health systems, emergency preparedness, and multilateral coordination. Though the coronavirus is primarily a health issue, it remains a multidimensional crisis.

Owing to the sheer complexity of the pandemic’s fallout, policymakers at all levels have been confronted with unprecedented challenges. Governments have had to strike a balance between protecting lives and livelihoods, and maintaining fiscal space and avoiding higher debt burdens. During these extraordinary times, the trade-offs between speed, accuracy, and effectiveness in policymaking have become widely apparent. Though most national governments have responded to the crisis in a similar overall fashion, the effectiveness of policies has varied widely across countries, reflecting differences in political leadership, institutional capacity, decision-making processes, and other factors. Robust and inclusive health-care systems, emergency preparedness, and social safety nets have all played a critical role. In the future, these systems, along with sound macroeconomic policy and available fiscal space, will allow countries to respond faster and more effectively to similar shocks.

And such shocks can be sharp and, worse, synchronous. From January to April this year, the global economy plunged from general optimism to the worst downturn since the Great Depression. The World Bank estimates that as many as 100 million people will be pushed into extreme poverty, reversing decades of progress.

Across developing countries, the burden of covid-19, and the ensuing lockdown measures, has fallen the hardest on workers and households that lack access to adequate social safety nets. Without an expansion of assistance, the near-poor and other vulnerable groups could easily fall into deeper penury. But the efficacy and pace of a government’s response depends heavily on the availability and reliability of data. Countries that already have detailed, easily accessible information about potential beneficiaries can adjust their programmes very quickly to target at-risk populations. For those without unified databases, however, expanding the data in the midst of a pandemic poses significant challenges.

For its part, Indonesia, like most countries, has responded to the pandemic by reinforcing its public-health infrastructure, expanding social protections, and extending support to small businesses. With a unified household database for the bottom 40% of the population already available, we have been able to expand eligibility for benefits quickly, with the goal of covering the bottom 60% of households. Whereas small businesses and the informal sector were relatively well-cushioned from previous economic crises, these constituencies have now been among the most vulnerable to pandemic lockdown measures. Like many other countries, Indonesia has therefore emphasized policies to support small businesses, including through subsidized interest rates, debt restructuring, and working-capital loans combined with credit guarantees.

Looking toward 2021, it is already clear that the shape and pace of a global recovery will depend on several related factors. But the most important is global leadership. The international community needs to agree on a common platform for driving a recovery that is consistent with the 2030 Sustainable Development Goals (SDGs). Yet, whereas G20 leaders came together in the aftermath of the 2008 financial crisis to save the world economy from a deeper collapse, we are now facing an unprecedented lack of global leadership. The US and China are locked in a conflict over trade, 5G technology, and other geopolitical issues, and multilateral systems and processes have been sidelined in the name of national sovereignty. In the absence of global leadership, each country is left to focus on what it can do domestically to avoid the worst-case scenario of a protracted pandemic while maintaining progress toward the SDGs. For example, Indonesia’s social protection programmes and policies in support of small businesses include special carve-outs for women beneficiaries. This approach not only improves financial inclusion for women, but also advances other development goals, because women tend to allocate more resource to children.

Policymakers must also reckon with the pandemic’s impact on how people work and interact, and with sharply higher reliance on digital technologies and internet infrastructure. The covid disruption thus represents an opportunity to transform the economy through more efficient, effective, and flexible working arrangements and a reduced carbon footprint. Investments in digital technology and infrastructure are both valuable in themselves and powerful catalysts for economic recovery. Moreover, with narrowing fiscal capacity everywhere, reforms to improve the quality of public spending have become increasingly important. Transparent policy design, accurate data, and effective institutions are all crucial to ensure that all public resources are spent on what really matters for development.

But even as governments focus on domestic challenges in the near term, global cooperation ultimately will be critical to secure a sustainable and inclusive recovery. Concerted international collaboration is needed to manage the upcoming debt tsunami that the pandemic has set in motion. Many countries were already struggling with unsustainable debt burdens before the crisis, and it will take global cooperation to avoid sweeping credit downgrades and a wave of sovereign debt crises in the months ahead.

Moreover, because the pandemic will not be defeated until the virus has been eradicated in all countries, global cooperation will be needed to ensure universal access to vaccines. Without universal vaccination, covid-19 will further widen the gap between rich and poor, exacerbating social and political instability within and across countries.

So far, the world has managed to avoid the worst-case scenario, having heeded many of the lessons of the 2008 crisis. But we have yet to pass the pandemic test. The 2020 crisis has shown us that we need even more global cooperation in order to face this century’s toughest challenges.

The global recovery is now on the line. We must reform and revive the multilateral system and resist those who would throw the baby out with the bathwater. The global economy is one boat carrying the fate of eight billion people. Its recovery is in the interest of every business, every national government, and every multilateral forum. ©2020/Project Syndicate (www.project-syndicate.org)

Sri Mulyani Indrawati is finance minister of Indonesia