GPEnewsdocs – Richard Kozul-Wright: Post-COVID World Economy: Out of the Frying Pan… Into the Fire?

For sustainable recovery from the COVID-19 global economic shock, it is imperative to break from policy choices that produce concentration of economic power and wealth in a limited section of the economy but old habits die hard, warns UNCTAD’s Richard Kozul-Wright.

Richard Kozul-Wright is Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development / UNCTAD. He is the author of Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development.


LYNN FRIES: Hello and welcome. I’m Lynn Fries producer of Global Political Economy or GPEnewsdocs. Today I am joined by Richard Kozul-Wright. He is going to be giving us some big picture context on COVID-19’s pre-existing conditions. And what that means for building back better from the economic consequences of the COVID-19 pandemic.

Richard Kozul-Wright is chief economist at the United Nations Conference on Trade and Development or UNCTAD. Where he is Director of the Division on Globalization and Development Strategies. This division, known as GDS, is UNCTAD’s macro-economic unit. Tasked with providing economic policy advice and technical support to UNCTAD Member States.

The Trade and Development Report, UNCTAD’s flagship annual report, is produced by the GDS division headed by Richard Kozul-Wright. Welcome, Richard.

RICHARD KOZUL-WRIGHT: Thanks for the invitation, Lynn.

FRIES: Your report released in March is titled Out of the frying pan… Into the fire? ( as a question) and is an update of UNCTAD’s 2020 Trade and Development Report. And as the question suggests, the update warns that economic policy makers are falling well short of what’s needed to build back better from COVID-19. And the UNCTAD press release for the report warns: Global economy gets shot in the arm from US stimulus, but pre-existing conditions have worsened.

To help us get to the bottom of what worries you and what that warning means, start with a comment on those pre-existing conditions.

KOZUL-WRIGHT: Yeah. These are problems that we’ve been talking about now for a number of years after the global financial crisis; a lot of talk back in 2009-2010 that we were going to recover better from that crisis. If you remember the 2009 G 20 meeting in London, there was a lot of big promises about a new Bretton Woods and tackling the inequality that had contributed to the fragilities in 2008-2009. There would be regulation of the banking system et cetera. Most of that didn’t come to fruition.

As we looked at the evolution of the global economy after the global financial crisis, we saw these persistent trends that simply were not being tackled by policy makers: the declining share of labor income in global income which was a very prominent feature across developed and developing countries, the growing concentration of markets, the increased power of corporations and a certain brand of predatory rent-seeking behavior that became prevalent over the last decade, the persistent influence of financial markets, financialization short term kind of speculative mindsets that were not only present in asset markets but also across large parts of the global economy. And of course the ongoing climate crisis and the failure to tackle the environmental breakdown that was becoming ever more present.

FRIES: Trade and Development Reports have consistently emphasized that these persistent trends, you’ve been warning about are the product of policy choices. So inequality is a product of policy choices. Explain that.

KOZUL-WRIGHT: The phrase of choice for thinking about inequality over the last decade is somehow people have been left behind. You know, the world economy was in good shape, steaming ahead, technological progress et cetera. But somehow we forgotten about certain communities that were not doing so well. It was amnesia that was the cause of inequality, essentially.

Whereas we pointed out it was not that at all. It was, as you said, it was policy choices. It was the way in which the global economy and its constituent parts have actually been structured that leads to inequality.

Inequality is a necessary part of this functioning hyper-globalized world economy that we’ve seen evolve over the last decades and continue after the global financial crisis. So, it’s not an accident. It’s not a mistake. It’s a real product of efforts to change the rules of the game that have favored very large corporations and high wealth individuals at the expense of the vast majority of working people and smaller firms, smaller countries in general.

The way in which trade liberalization, investment liberalization, the rules of the international economy have favored very large corporations quite clearly is a feature of the global economy over the last few decades. I think you can…that can be justified fine if rising profit shares are translated into growing investment. Right?

If large corporations are investing, creating jobs, increasing productivity growth, there is a story that can be told there about how rising profits in this context can be justified as part of a more dynamic system with some kind of, I guess in a crude way, some sort of trickle down in terms of jobs and incomes across the economy. But I mean we simply have not seen that. Particularly over the course of the last decade, investment has remained very weak and productivity growth has been declining.

So the elements which are required for an inclusive, robust social contract have been seriously eroded not by accident but by the policy choices that are necessary to produce that kind of growth dynamic that benefits those that are at the top of the economic food chain.

One of the features of this kind of growth model in which the advantages that accrue to those already at the top, whether those are large corporations or high wealth individuals, this kind of growth model doesn’t have the kinds of linkages and spillover effects that were part of the successful growth dynamic in the post-war era. They’re hermetically sealed in terms of the benefits that are simply confined within certain sectors of the economy, within certain regional communities, et cetera. So, you don’t see these spillover effects.

What you see is a kind of dualistic pattern in which those in certain favorite sectors, certain favored corporations, see the benefits of this kind of highly financialized growth model. Whereas for large parts of the rest of the population jobs are precarious, public services are being eroded as the tax base is weakened. Again, as part of the policy choice of this model in which access to education becomes either too expensive or too substandard; in which there is few resources for retraining, for relocation.

And you get this perpetuation of these two very different parts of the economy. One that’s thriving, dynamic and expanding and the other that is a highly precarious and largely stagnant.

And I think that kind of dualistic structure, which we used to associate in the old days with developing countries. The idea of this kind of dualistic model of development was very much associated with poorer developing countries. It is now a feature of the advanced world.

And I think with the advent of digital technologies, right, which have reinforced this pattern which predates digital; this is not a product of the digital world. But clearly these same tendencies that lead to the concentration of economic power and wealth in a limited section of the economy have been reinforced by the advent and rise of the digital economy.

So then you get this pattern in which finance and digital become the driving forces for those at the top. Whereas large parts of the rest of the economy are dependent either on government support in many cases or on low paid and highly precarious service sector jobs.

FRIES: So, it’s not so hard to understand then why UNCTAD is calling for a profound shift in policy making. And a wholesale rewriting of the rules of the game. Because by design they have excluded almost everyone from the benefits of globalization while subjecting people and the planet to its costs. And so to reduce inequality, for example, UNCTAD recommends rewriting the rules of the economic game so that corporate rents not wages get squeezed. So raise wages, squeeze corporate rents.

Tell us something about your research on inequality so that we get a picture of how it informs your policy recommendations. The 2020 TDR says you examine inequality through the lens of functional income distribution. What does that mean?

KOZUL-WRIGHT: If you look at something like the Gini coefficient, which is a traditional measure of income inequality, it’s focused on household income. The flip side of that, of course, is that income that is allocated by household is matched by income that can be analyzed through a more functional lens, as you rightly said. Which is how income is distributed across profits, wages and rents and to some extent taxes.

So, the counterpart of income that is generated at the national level and distributed to households is that same income can be divided up according to profits, wages, and rents. They measure the same thing. They’re just a different way of thinking about the distribution of income that is generated in a national economy.

I think a lot of people tend to focus on the households as the basis for measuring income inequality. Which is important and gives a lot of things insights into the way in which societies are structured.

But it is important to keep in mind that underneath that is the way in which this income is allocated according to these functional classifications of factors of production. That gives you an insight, I think, beyond the household story in a much more visceral way in the way in which the rules of the economic game are structured.

And therefore brings in a much more direct way questions of economic power which from a political economy perspective is central to understanding the links between economic growth and how that growth is allocated across society. So we’ve tended to focus our work on the functional distribution of income because it brings out these power relations.

And of course, from a development perspective, that is particularly important, given that we live in this highly international and interdependent economy in which international firms have become very dominant players in the global context. And that allows us to look more carefully at the way in which the distribution question takes on an international dimension between developed and developing countries.

FRIES: When looking into asymmetries of power in how income gets allocated between different players in the global economy, what do you see as some key forces coming into play?

KOZUL-WRIGHT: For sure, there is little doubt that the ability of capital to move in a very unregulated space, which is what has happened under neo-liberalism over three decades, has shifted the bargaining power in favor of capital and against labor. And that’s true both in advanced economies and in developing countries. And we’ve seen that play out.

But on top of that, I think the role of intellectual property as a mechanism for grabbing the income that is generated has become a very, very important part, particularly of the ability of large, very large corporations to amass significant profits by using intellectual property as a strategy to generate rents from their control of certain parts of the value chains where intellectual property is critical: electronics and pharmaceuticals, agriculture, and other parts of the global economy.

That’s a prominent feature of the way in which economies have been structured over the last few decades. It clearly favors those people who take things over those people who make things. That’s what intellectual property allows companies to do; to grab a larger share of what has already been produced in the economy.

FRIES: And having structured the economy in this way, what then has been the impact on the economy in terms of its resilience?

KOZUL-WRIGHT: I think it’s fair to say that resilience has become much less of an important goal. And that’s, I mean, that’s not just true in the way in which the social contract has been weakened. It’s also true within value chains. And we saw this in the pandemic, right?

I mean, there’s very little slack in this system and it’s true for value chains. We saw the way in which they collapsed as a consequence of the spread of the pandemic. .And since then there’s been a lot of talk in the corporate sector about the need to rebuild resilience at the level of production given what they’d experienced in the face of the pandemic.

But I think the far more detrimental side of that story is the way in which public services have been, you know; they are a cost for business. Public services are a cost for business. And therefore they’re not something to be valued. They are something to be reduced.

FRIES: So as you say the consequences of thinking of public service as a cost to be reduced has been made all to clear with the pandemic. And the role of public spending in saving lives and livelihoods has returned to the center stage with the COVID-19 shock.

UNCTAD argues bold targeted fiscal expansion led by the advanced economies is the only way to build a fair and resilient recovery to a post COVID-19 economy. In other words, what is needed is a coherent, coordinated advanced country policy response. So give us the progress report.

I should note for viewers, that as we speak the $1.9 trillion Biden package is the only US stimulus we have seen to date. So that is the US stimulus referred to in the report and that you will be commenting on today. So what’s your take on the state of play?

KOZUL-WRIGHT: The Biden Package is a significant package. And it marks; I think it does to some extent mark a break in American policymaking. Right. And we expect that to be reflected in the U S growth performance this year. I mean, we’re talking about a stimulus package in the order of 10% of GDP.

It’s clearly, I mean, unlike the Trump package, Trump had a package at the end of 2017 people forget but he had a stimulus package at the end of 2017. It was mainly tax cuts and some military spending, but it was large. It was in the order of at least one and a half trillion dollars. But the benefits of that kind of package were in the old model. They benefited large corporations and high wealth individuals. And their impact on growth in the U S was ephemeral. It was already weakening in 2019.

I think it’s fair to say that the Biden package at least in its composition is more egalitarian. You know, the benefits are going to go more to working households and to local States. I mean, there’s a significant portion that goes to the local level too. That is an important break with previous US policymaking, you know, post Jimmy Carter. So, that’s to be welcomed.

Other advanced economies have not followed suit so far. And that’s an interesting feature of the current global economy. The U S is taking the lead in terms of a more aggressive stimulus package. But we don’t see the European Union, we don’t see Japan, the UK to some extent but nowhere near as significantly, following suit. It’s a choice that the Europeans are making, or the Japanese are making not to emulate the kind of stimulus package that Biden has adopted.

There are two concerns I think with the Biden, with the U S stimulus package. One, this is not an investment package. Now the Biden administration is saying that they will have an infrastructure package later in the year. If the US is to have a resilient future, it needs to be investing more than it has been doing in recent years. So it will be very important, if they are to recover better, that there is an investment package later in the year. And there’s no guarantees there.

I think the other feature that worries many people is the depth of the redistribution that is in the current package is not significant enough. And we saw with what happened to the minimum wage, that the kind of redistributive package that we would associate it with the New Deal, for example, is not very prominent in this kind of package.

So the inequality question that we talked about earlier, this need to address this bifurcated economy is not being addressed systematically in this package.

And what happens, I think, to the U S economy will depend critically on whether the current administration does more aggressively follow redistributory measures such as the $15 minimum wage, and whether it comes up with a series infrastructure package linked ideally to climate change later in the year.

The thing is that none of the other countries have anything like this on offer. The European Union doesn’t have anything remotely like this on offer. As far as I can tell Japan, doesn’t have this on offer. And if the world economy is to really build back better, become resilient, address the problems of climate change, address the huge inequalities that  we’ve talked about, then it needs all of the advanced economies to be emulating this kind of model. And they’re not following suit.

I mean the European Union and Japan still, I think, believe that it can export its way out of this COVID-19  crisis. And they can’t without damaging the global economy and particularly the developing countries that are part of that global economy.

The victims of this kind of incoherent, uncoordinated response to the crisis in the advanced economies are, of course, the developing countries that are suffering not only from the behavior with respect to vaccines but also from this highly unbalanced economic response to the crisis.

So that lack of coordination, that lack of determination even to follow the kind of Biden stimulus that we’ve already seen, let alone, the other parts that need to be included is something that we worry about when we look at the next five to ten years.

Because what it means is that the kind of underlying conditions that we’ve been complaining about over the last decade: the problems of too much debt, the problems of too much inequality, the problems of finance dominating investment decisions and creating a kind of short-termist mindset. These will not be addressed in that world. And that’s a real concern for us and particularly for developing countries.

Many developing countries do not have the kind of fiscal space that we’ve seen employed by advanced economies and some big emerging economies. And the only way in which we can expand that fiscal space is through help from the international financial system. And it hasn’t happened on the scale that is needed.

I think that’s a serious lesson that people need to take from the last 12 months about what needs to be done to the international financial system to make it fit for purpose in both responding to these kinds of short term shocks. But beyond that, responding to the persistent underlying conditions that essentially prohibit developing countries from meeting the sustainable development goals by the end of this decade.

FRIES: So then the way you see it, whatever the shortcomings may be of the US stimulus at least the Biden package is a break from past policy making and more egalitarian than anything coming out of the US since the Carter administration. So some of your concerns are that it still remains to be seen what will follow from the US as this stimulus clearly is not enough.

And hopes at least for a timely coherent, coordinated policy response from the advanced countries hasn’t been forthcoming. First of all, other developed countries have not yet emulated Biden’s stimulus. And if the European Union and Japan still believe exporting their way out of crisis is the way to go that would be damaging to the global economy. Explain why you say that.

For the world as a whole, what’s so damaging about the export led growth model?

KOZUL-WRIGHT: There is this obvious fallacy of composition, right? Not everybody can be a successful exporting country. Right. So, countries are endlessly told to become successful exporters. And the only way that they are told that they can become successful exporting countries is to reduce costs. Right?

So to cut down labor costs to make labor markets more flexible, to reduce the influence of labor unions in terms of the organization of labor markets. And so that’s the route that is encouraged. The consequence of that, of course, is that the people on the receiving end of that advice have found that the only way that they can keep going is by borrowing.

The neoliberal advice to prioritize exporting has contributed to this highly indebted, highly fragile global economy of which there are a few winners and many losers or people in a very precarious situation.

As this kind of system evolves, you have two ways of keeping the system going. One is through increased levels of debt. Right. And we know as wages have become much weaker; more and more households have been forced into borrowing to keep the lifestyle going. Many firms have resorted to borrowing particularly smaller firms to keep the businesses going.

And of course, borrowing has become an endemic part of this highly financialized world where private credit creation has become a major source of asset accumulation and asset price rises from which the upper echelons have benefited tremendously.

So this hyper-globalized world, this highly fragile world is based upon this growing mountain of debt. For some parts of the global economy, they’ve been able to benefit from that through successfully exporting to countries that have been willing to run very large trade deficits and have been able to borrow on international capital markets to keep those trade deficits at a significant level.

The successful exporters of this world have been able to carve out a niche for themselves in this world that has become highly addicted to mounting levels of debt. In a sense, there are two sides of this coin of a hyper-globalized world.

FRIES: Let’s put all this in its broader context ofgrowth patterns you see evolving across the world, region by region. Patterns that lead you to conclude as laid out in the report that old habits die hard. So let’s start with East Asia.

KOZUL-WRIGHT: East Asia is a region that has grown successfully on the back of a strong connection between investment and exports. It’s wrong to call it I think an export led growth model; lots of people do. Because it’s the linkage between exports and a very strong investment drive that has made for successful growth experiences in that region.

China is the latest success story in a pattern that goes back to Japan in the the immediate post-war period. And was successfully replicated particularly in the first tier NICs [Newly Industrialized Countries]  South Korea, Taiwan, et cetera, in the ‘70s and the 1980s.

China has followed that and it’s a tremendously successful experience in terms of its diversification and alleviation of poverty, et cetera. But it does put pressure on other countries, of course, because you are depending on demand in other countries to drive your own growth process.

And for a long time now people, including the Chinese policymakers themselves to their credit, have recognized that they need to rely much more on their own domestic markets as engines of the next stage of their growth story. And they’ve been trying to do this for the last decade and have not really been successful. They still depended very heavily on this export investment nexus to keep their growth growing.

So they haven’t broken with that pattern. There are interesting new developments of which the Belt and Road is one way in which the large surpluses that these export investment models generate have to some extent been recycled to other parts of the global economy. But not on the scale that is required for their more balanced integration into the global economy. So that the old model in East Asia remains in place.

And to some extent that’s true of the European Union. I mean the big drivers of growth in the European Union, Germany have as a percentage of their economy larger surpluses than China has. Their growth model depends upon sucking out demand from other parts of the global economy. Japan has done that for years. This leads to imbalances in the global economy

And in the case of the United States, which at one point and to some extent remains the kind of consumer of last resort for these successful export oriented economies because it can produce the currency which everybody is willing to accept in exchange for the goods that they produce. But it’s a very heavily consumption driven model in the United States.

And as I said before, you know, that’s producing problems in terms of the weakness of their own investment regime and that’s public investment as well as private investment. I mean, we know that the infrastructure in the United States is in desperate need of new investment, for example. And they haven’t been able to generate that over the course of the last two decades.

So you have these imbalances in the heartland of the global economy which are part of the fragility that existed before COVID 19. And in parts of the periphery in Sub-Saharan Africa, Latin America, these are regions that have been dependent on commodity exports and capital imports.

And we don’t see a break from these patterns over the course of the recovery that has been taking hold from the summer of last year. They seem to be going back to reproducing these kinds of models; to reproducing the imbalances that they cause and reproducing the fragilities that we warned about in the reports that we did prior to the COVID-19 disrupting the economy in this very damaging way that we have seen.

So that’s a real worry. That despite all the talk that we need to be more resilient. We need to build back in a different way than we did after the global financial crisis. Many of the same elements that we’ve seen over the last decade seem to be coming back into play. So that’s big worry.

The other old habits that we think can persist and which make us nervous about future prospects is the persistence of neoliberal economic ideas. I mean, there has been a genuine break in the last …you know, people have been talking about policy options in response to COVID 19 that they wouldn’t have dreamed of talking about two years ago.

And that’s true of whether you have a more Keynesian type macroeconomic policy, or whether you’re willing to canvas ideas around basic income, or whether you’re willing to talk about industrial policy to build resilience into supply chains. These are all ideas that have been floating around in response to COVID-19 that weren’t there before.

But it would be very naive, I think, to believe that the old neoliberal tropes of “expansionary austerity”, of the dangers of inflation, of the need for more flexible labor markets, of the wonders that free trade agreements can generate in terms of growth; all those ideas have not gone away, Lynn.

They remain to be rejuvenated as the global economy gets back to some kind of normal. And if that happens, then I think the chances of building back better are very, very limited.

This is where I think the US experience becomes very important. Will it resort back… and we’ve heard it. someone like Larry Summers already warning about inflationary pressures that are emerging from the stimulus. These are the ideas that can derail a move towards a more progressive agenda that tackles inequality, that tackles the infrastructure deficit in a more serious way.

And I think we’ll hear the same kinds of noises also in, even though their own stimulus packages are much weaker, we’ll hear the same kinds of noises in Western Europe too. I think quite soon.

So, you know, we worry both about the growth patterns that we see evolving. And the old kind of neoliberal tropes that have gone into remission of some kind as a consequence of COVID 19. But are certainly waiting their turn  to come back to try and get back to business as usual over the next two or three years.

FRIES: So in the remaining time left, give us a brief wrap on the three main lessons UNCTAD draws from what has happened to date with respect to persistent vulnerabilities across the global economy. Start with the lesson that austerity undermines resilience and fiscal space.

KOZUL-WRIGHT: All the evidence suggests that if you go back to the model, the broad policy model that was in place after 2009: tight fiscal policy, easy monetary policy, trade liberalization, free trade agreements, then you will reproduce the kinds of fragilities that left the world economy in a precarious state at the end of the last decade. And investment will be weak. Productivity growth will be weak. Inequality will have increased.

So, I think austerity, this is a kind of lynchpin in the system. If you go back to that then I think there’s very little chance of creating a more resilient global economy over the next decade.

And the only way to build an alternative is through a strong and equal growth regime. That’s the alternative to adjusting through austerity: toput growth, jobs, income redistribution at the center of the policy regime.

We believe that is the only way to build back better; the only way to build back better. And if we don’t follow that route, then we’re not very optimistic about prospects in either the advanced but particularly in the developing world.

FRIES: So, that’s lesson one. Lesson two points out that in an inter-dependent global economy, international cooperation is key to both recovery and resilience. As an example of how international cooperation has fallen well short of what is required for tackling global challenges, comment briefly on growing problems of food security.

KOZUL-WRIGHT: We raise it briefly in the current report. And that’s partly in response to the sharp rise in food prices in the period since COVID 19 hit. That then shines a light on some of the issues that have come up in the WTO with the right of countries to hold food stocks. And other ways of dealing with problems of food insecurity. That developing countries feel they need the space to be able to manage these kinds of crises. And advanced economies and large agricultural companies dominate the global food chain.

Much like pharmaceuticals, the degree of market concentration in global food chains has been rising significantly over the last two decades or more. And it’s a reflection of this world that has become highly unbalanced between large favored rent-seeking corporations with strong political backing from their governments and the vast majority of people who are essentially told to suck it up in one way or another.

FRIES: As well as problems in food security since COVID-19 hit, problems in the vaccine rollout are also shining a light on issues that have come up at the World Trade Organization. And like food security, the vaccine rollout issue is a reflection of this highly unbalanced world that as you say favors large rent seeking corporations with strong political backing from their governments.

The rent-seeking corporations in this example being Big Pharma with political support from advanced countries that have long backed their favored sectors and its lead corporations. So winner take all corporations in sectors rich in intellectual property rights like for example Big Pharma, Big Tech, Big Agriculture.

But to bring all this into the conversation on how international cooperation has fallen well short of what’s needed, comment now on the refusal by advanced country Member States at the WTO to support the WTO TRIPS waiver. For viewers I will just note, this is the call by developing countries to expand vaccine production by relaxing intellectual property rules on COVID-19 vaccines.

It is called the TRIPS waiver because TRIPS is an acronym for the WTO trade agreement that effectively turned the world’s rules based trading system into an international law enforcement mechanism for intellectual property rights. And under the TRIPS Agreements, WTO Member States that do not comply with WTO rules on intellectual property face retaliation.

And as the UNCTAD report explains the refusal by advanced countries to allow a temporary COVID-19 specific waiver on those rules in the WTO TRIPS Agreement signals prioritizing profits over people. So comment on the issue of vaccine rollout that’s come up at the WTO.

KOZUL-WRIGHT: The most unconscionable part of that story, I mean given that we face a global public health problem, given the world will never be safe until everyone is relatively safe. We know that because of the potential for this virus to mutate and cause problems again. In response to that, all options should be on the table.

And that includes the option of allowing developing countries to produce the vaccine themselves. And indeed for those countries that have the capacity to be able to export the vaccines that they produce to other developing countries at an appropriate price. One of the obstacles to that are the TRIPS rules in the WTO.

This is an initiative led by India and South Africa, of course, but a very large number of developing countries have signed up to the waiver. And it’s the advanced economies that are blocking it. And they’re blocking it because they are pushing the interest of their own large pharmaceutical companies in this multilateral setting.

It’s very, very difficult to defend…I mean it’s incredible. I think it’s indefensible actually as a response by advanced economies given the kind of crisis that we are facing on the health front. Talk of it, you know, somehow derailing innovation has no evidence, no empirical evidence to support that.

Indeed pharmaceutical companies over the last 20 or 30 years have been appalling at creating vaccines because it hasn’t been a very profitable way of doing business. So they haven’t been in the vaccine business for a very long time.

It’s been governments and some small companies as in Germany that have been instrumental in creating the vaccine to deal with COVID 19. Government support has been the critical factor in this.

So the idea that you can then use intellectual property to make a lot of money from taxpayers money that has gone into it; I don’t think is defensible in any way, shape or form.

FRIES: International cooperation has also fallen well short of what’s needed in the area of debt and liquidity crisis management. The report says the scale of the debt threat, particularly for developing countries, cannot be reduced without debt forgiveness and the adoption of a functioning debt workout mechanism.

And in the case of countries facing a liquidity squeeze rather than a debt crisis, the report says what’s needed is an issuance of special drawing rights known as SDRs. Comment on all this. First, in a nutshell what’s an SDR?

KOZUL-WRIGHT: It’s a form of liquidity that is issued by the International Monetary Fund. So it allows countries to spend beyond their immediate means without facing the wrath of the international financial markets, essentially. And so it’s a very important; it’s an important tool in the arsenal of the international financial institutions that could alleviate some of the economic pressure on developing countries. And it’s not being used to full effect at the moment.

When you look at the question of debt, right, the kind of limited response of the G 20 countries to dealing with the debt problem also reflects their unwillingness to take on private creditors. I mean, you know, most of the credit in this world is generated by private financial actors.

And those [private financial actors] have to be forced into taking a haircut to deal with the problems that developing countries face in terms of their limited fiscal space. And that is not on the table; advanced economies have not been willing.

And this is an interesting difference, for example, when people draw the parallels between Biden and FDR. Back in the 1930s, FDR was very clear. Speculative, predatory American financial institutions were part of the problem not part of the solution. And they were not going to get support from the American State when it came to problems of debt default and restructuring in developing countries.

And we just do not see any kind of parallel in the way in which the advanced economies are behaving in response to the debt problems that developing countries now face as a consequence of COVID-19 thanks to the irresponsible and predatory lending practices by private creditors.

So the problem of market power infecting domestic policy making has also unfortunately translated to the international sphere and to the way in which multilateralism works. The current multilateral system is much closer to 18th century neo-mercantilism than it is to the ideals of the people at Bretton Woods who forged the post-war multilateral system.

That is governments have become much more entwined with their own narrow, private corporate interests, in the way that mercantilism worked back in the 18th century, than to the real multilateral ideals of that post-war generation.

In response to not only the health crisis, but in response to the climate crisis, in response to the inequality crisis, we need an international response to deal with this. It has to be done collectively and through cooperation and coordination. We can only deal with these problems multilaterally but the system has been co-opted under this hyper-globalized world in a way that makes it very difficult I think for the multilateral system to respond accordingly to the kinds of challenges that we now currently face.

FRIES: You’ve talked about lessons drawn from what’s happened to date with respect to persistent vulnerabilities across the global economy. First, austerity undermines resilience and fiscal space; second, international cooperation is key to both recovery and resilience.

So last but not least, talk about the lesson that the disconnect between financial markets and the real economy remains of systemic concern for future stability and resilience.

KOZUL-WRIGHT: In a way, this does go to the heart of the current structure of the global economy and the rules of the game that privilege the few and disadvantage the many. It’s not just a problem of finance but I think the dominant role of finance.

The way in which financial calculations and financial strategies have become dominant not only with respect to markets but with respect to a lot of corporate behavior which produces this very short-termist kind of thinking. This kind of predatory type behavior is a dominant feature of what we call the hyper-globalized world. With footloose capital, speculative types of finance becoming the dominant way in which economies are connected and parts within economies are connected. That feature of financialization has become so prevalent now.

To go back to 2008- 2009, I think lots of people understood that that was a cause of the global financial crisis. It wasn’t just certain types of financial instruments that came out of the housing market that caused the global financial breakdown in 2008. It was a systemic problem about the way in which financial markets dominate the real economy in some way, that was really exposed by the 2008-2009 crisis.

And the big promise that we would get back to a world that was more heavily regulated in which finance would get back to the job that it promises to do. Which is to provide the resources for productive investment that allows firms to create strong and healthy jobs and improve productivity. That then feeds into a virtuous cycle of rising wages and increased aggregate demand and healthy investment.

So, that’s always the promise of a healthy financial system and we don’t have that. And we didn’t get back to that despite the damage that the system caused back in 2008-2009. And so we need to get back to a system which is not only more regulated, I think, in which certain types of financial practices are not allowed but in which the public sector and that includes both central banks and public banks have a much more prominent role in allocating credit.

So again and this will be interesting to see, unlike 2008-2009 there has been almost no talk since COVID-19 about reforming the financial system. None. It’s not been part of the policy. Even as new ideas have been talked about, industrial policy and basic income, the old question of reforming finance is not part of the agenda.

And unless we have that discussion and unless we find ways of using the credit system to generate the kind of investment we need to tackle the climate problem, to tackle these awfully high levels of inequality, then again, we will reproduce this system that is vulnerable to boom and bust, to fragilities, to a lack of resilience that we know is not capable of producing the kinds of economies that can deliver inclusive and resilient outcomes for the vast majority of people.

So the question of finance, you know, it’s interesting in the way that it’s not figured prominently. Indeed, in some respects and quite shockingly from our point of view, if anything it’s actually strengthened its grip on the thinking of policy makers.

In the world of climate, for example, all the talk is how do we get BlackRock to solve our climate problem? And the answer is BlackRock can’t solve our climate problem because it’s part of the problem, not part of the solution.

But it’s quite unusual; it’s quite surprising, I think how little attention has been paid to the question of reregulating finance coming out of COVID 19 when it was such an important part of the discussions back in 2009-2010. And we failed to use that crisis in an opportune way to get finance moving in a more productive direction.

So yeah the disconnect, if you like call it the disconnect, I think disconnect is a slightly misleading term, but that disconnect between  finance and most people’s lives remains a singularly big threat to building back better and achieving the kind of resilience and sustainability that we’re all hoping to achieve by the end of the decade.

It’s imperative, I think that multilateralism breaks from these kinds of practices, if it is going to deliver on the very, very, very serious challenges that we all face, whether it’s in advanced or developing countries. We need, we need multilateralism to come back.

It’s not just America coming back into multilateralism. It’s multilateralism getting back to the business of what it was set up to do back in 1944 and 1945. Which is to forge genuinely cooperative solutions to problems which are not simply dictated to by the profitability of favored sections of the economy.I mean, that was what it was all about.

FRIES: Richard Kozul-Wright, thank you.

KOZUL-WRIGHT: Thank you, Lynn

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