Subscribe and Listen on: Apple Podcasts | Spotify | Stitcher | Google Podcasts | YouTube
VIDEO
Transcript
Rob Johnson:
This is Rob Johnson, President of the Institute for New Economic Thinking. It’s great to be back here for the second of the three INET panels that are focused on our group called The Commission on Global Economic Transformation. Group’s been organized around which you might call the disruptors, the things that are creating a challenge in the transformation of economies throughout the world, both north and south.
Climate, technology, finance, globalization and its challenge to national governance, migration and all of these things, I would say, have turned into an awareness that we have not been on course, and that we need to rethink many aspects, particularly as the theme of this conference emphasizes, innovations in the importance of governance. Not to be too silly, but it is very clear that the pandemic, while we all wore masks unmasked the inadequacies of this system.
And today I have with me members from this commission who’ve together, the three of them were the central creators of our interim report. Nobel laureate Joseph Stiglitz, Jayati Ghosh who was from Nehru University, but is now at the University of Massachusetts. We like having her closer to us. Don’t have to do all those nighttime and morning calls, and Rohinton Medhora, who’s the head of CG, INET’s core partner from the very beginning, the Center for International Governance Innovation in Waterloo, Canada.
Thank you all for joining me and why don’t we begin with Joe, you describing what your subcommittee of globalization has created in that interim report and the issues as, how do I say, they’ve evolved, including a very important announcement related to taxation that was released this morning?
Joseph Stiglitz:
Well, thank you, Rob. As Rob pointed out, the Commission on Global Economic Transformation focuses a great deal on some of the key, might call disruptors and how we have to change the global economic architecture response. There probably has been no disruptor greater than COVID-19, and in that case, there was urgency. Urgency in responding in the health and the economic impacts of COVID-19.
So we wrote this interim report to address three key topics associated with COVID-19, the health issue, access to medicines, in particular vaccines, the economic recovery, the ability of developing and emerging markets to provide the funds that are necessary for the economic recovery and the debt crisis that is looming. Each of these represents, typifies some of the deeper longstanding problems. And so as we addressed the urgency of COVID-19, we were very aware that those problems helped illustrate the deeper and longer term reforms that needed to be done. For instance, to the global system of intellectual property, to the system of resolution of sovereign debt.
I want to make just three general comments or remarks that underlie, you might say the philosophy behind our report. The first is now well-recognized that no one in the world is going to be safe, no country is going to be safe from COVID-19 until the entire world is safe. Next, especially true because COVID-19 has shown an ability to mutate. Mutations can be more infectious, more dangerous and even vaccine-resistant. So as long as the disease is festering in some parts of the world, mutations may arise that can come back and you might say, bite us.
The second thing is that there won’t be a strong economic recovery until the pandemic is controlled. It’s very clear that where the pandemic is being put under control, the economies are doing better. And as long as the fear of the disease remains, people will be hesitant to travel, to go to restaurants, economic activity will be undermined. So this illustrates the interaction between the global economic downturn and the pandemic itself. So controlling the pandemic everywhere is important for economic recovery.
And the third proposition is related, there won’t be a strong, robust, sustainable global economic recovery until there’s an economic recovery everywhere. It should be very clear that we live in a very interdependent world, and if significant parts of the world like India or Africa or Latin America have not succeeded in controlling the pandemic, have not succeeded in resuscitating the economy, it’s going to be hard to have a strong and sustainable global economic recovery.
So the issues these three perspectives informed the approach that we took to the three topics I mentioned before, health, vaccines, medicines, the economic recovery and debt. Let me turn it over to the others to fill in more of the details in each of those agenda.
Rob Johnson:
Thank you, Joe. Jayati?
Jayati Ghosh:
Thank you so much, Rob. And as Joe has already mentioned, I think the idea was to identify what are the things that need to be done immediately in order to ensure that the medium term meet transformations that are so necessary in our economy and in the way we manage global relations can actually happen. And so recognizing that there are even greater existential challenges, which are going to require even more global cooperation, I think the report really puts forward relatively simple things that can be done relatively quickly.
And the first relates in fact, to the most obvious thing of the vaccine production and distribution. There are several issues here, there is the fact that COVAX, the global facility for the combined purchase and distribution of vaccines has been massively underfunded and could very easily be funded through even a tiny, tiny, less than 1% of the kinds of fiscal expansion that we have seen in the U.S. and EU. So there is that in terms of the distribution.
There is the fact that a number of advanced economies are actually sitting on stockpiles of vaccines, which they’re not going to use, and those shouldn’t be as soon as possible before they expire. Already many African countries, well, some at least have got vaccines that they’re unable to use because they were already expiring. And the most obvious and immediate issue is that of increase i the production of vaccine, because we clearly need to have a much more dramatic increase in supply.
We’re not going to get there, we’re not going to get anywhere near a resolution of this if we cannot ensure much greater universal vaccination by at least within eight or 10 months. And that requires massive increases in supply, which can be done because the current shortage of supply is artificial and there are really three constraints. The first is a legal constraint that the monopoly rights over the knowledge, the patents over these vaccines are controlled by a very few number of companies globally. The approved vaccines are all controlled effectively by the companies rather than by the states that funded the technology for those vaccines.
The second is the fact that that knowledge, it’s not just the patent right, the legal restriction, but it is also the transfer of the technology, of the knowledge so that other companies, other producers can actually find out how to make these vaccines and go ahead and make them. And the third is the shortage of raw materials, which has also emerged quite significantly most recently because a number of countries that have the access and control over these raw materials, the U.S. is one have limited their export, have actually put export bans that reduce the ability of other producers who have the legal rights and the technology to produce more of these.
So let’s just consider each of these in turn. The legal issue is really one of whether governments can actually issue compulsory licenses to other producers in a situation where the monopoly rights is acting as an impediment for social welfare. This is something that is recognized in the TRIPS Agreement, you are allowed to issue compulsory licensing, especially in periods of emergency. And the TRIPS Agreement especially recognizes that intellectual property rights are not necessarily to be insisted upon in exceptional circumstances, which surely the pandemic is one.
So what is being proposed in the WTO is simply a waiver that would allow countries to go ahead and issue compulsory licenses without fear of legal battles. That is to say, you are suspending the possibility of a legal battle over compulsory licenses that are issued. Why is this necessary? Why do we need a generalized waiver? Why can’t countries simply go ahead and do that on their own? Because they are, number one, worried about these cases in the WTO and there’s a long precedent for that. There have been many cases of countries facing these cases.
But also because each of these vaccines involves many different intellectual property rights. The mRNA vaccines have about 60 to 62 different patents associated with their production. The idea of getting company by company, country by country, it’s going to be endless, this process and therefore it will take far too long. It’s much easier to have an overall suspension of this. The suspension does not mean that the companies that hold these licenses today are not going to get any reward. It simply means that they will get a reasonable return.
In other words, the licenses will be granted to other companies with a reasonable royalty, not a monopoly super profit, but a reasonable royalty. This has been done in the past, it’s been done over and over again. The U.S. did it in the second World War with penicillin, with HIV-AIDS drugs, that was the… So in other words, this is not something new, but it is essential right now to get over the legal impediment.
The knowledge transfer is another impediment because the companies, even if they have to hand over the licenses, maybe unwilling to share the knowledge. Now, this is a situation where most of this knowledge was publicly funded. Heavily reliant on prior public research, but also because governments gave big subsidies. The U.S. government alone gave 12 billion to just six companies. European Union countries also gave lots of subsidies to the approved vaccine makers. So they are in a position to nudge these companies to say, “Share your technology.”
The U.S. already did it with Johnson & Johnson to say, “Share your technology with Merck.” They can do this and say, “Share your technology with other producers,” known producers in the developing world and elsewhere who will enlarge the supply. That enlargement of supply is absolutely essential if we have to bring this pandemic under control. Both of these are really tweaking the system, they are not transforming the system. They are not transformative in that sense.
We definitely need more transformative forms. Further down the line, I think Rohinton will talk about those, but these are absolutely essential right now if we are to increase supply. This is just one of the elements, I know that Rohinton will take up the issue of fiscal strategy and how an enlargement of SDRs can be leveraged to expand their fiscal access. But essentially, what I want to highlight is that these are really simple things, they’re not big demands.
They are really minor demands that are just pushing the boundaries a little bit to cope with what is actually an extraordinary global emergency. Thanks.
Rob Johnson:
Thank you, Jayati. Rohinton?
Rohinton Medhora:
Rob, thank you. Nothing beats being in Trento and having this discussion in-person, but here we are. And I thought I’d pick up on what my colleagues have said about our work on the commission in three dimensions and give it that overlay of the pandemic, and give you a sense, I think without claiming to speak for the commission of some of what our thinking might look like. I’d like to begin with something that, of course precedes the pandemic as do all of these issues, because they’re all long-term structural issues, which is digital governance.
This is something we were dealing with the world over, developing and developed countries alike in several dimensions and the pandemic has just driven them home. The fourth point there would be exactly where I began this presentation, the digital divide. Working from home, participating in global value chains, reorienting them, all of that stuff makes sense if you have the hard and soft IT backbone and have the wherewithal to be able to participate in it.
It is still the case in many parts of the world and especially the marginalized parts of the world by definition, they don’t have this. I think the pandemic has shown us the socioeconomic and technological cleavages within countries, developed and developing alike, but also between them. Second we have all been dealing with, but imagine, especially if you’re a small open and developing economy, that we’re dealing with digital platforms that are inherently multinational and probably natural monopolies.
I think the announcement from this morning or yesterday about leveling the playing field with some kind of global minimum corporate tax is a step in the right direction. But I think when it comes to state sovereignty and some of the issues driving this year’s festival, the return of the state, I think we’re far from having getting a handle on how do states collectively and especially individually deal with large national monopolies, the point I’ll come back to when we get to vaccines as well.
I think content regulation and the scope for disinformation and misinformation to alter democratic or other civil society processes is also something that we should be thinking about and the pandemic has brought home through questions of resistance to vaccine and so on. Some of that is pure misinformation and we don’t have a way yet of changing the business model of digital platforms, which is essentially premised on the fact that they cannot police or in any way filter in any meaningful way content simply because that’s their business model is about putting stuff out there quickly and for all to see.
And the final point I’d make, which especially connects with the pandemic is that the nexus of issues around privacy, human rights and the public good has changed with the pandemic. And many of us readily took on the use of apps that gave us warning about if we’d been near people with COVID. Some countries, especially China that got a handle on COVID early did so with quite intrusive means that blended state control with technology, cameras following people, visiting them.
Using apps and tracking mechanisms, which I don’t think as countries we’ve had adult conversations about. And so I think there’s a bundle of issues around digital governance that remains to be sorted out and we’re starting that conversation, we’re not along it, and pandemic has shown that up.
Second point I’d make, and Jayati and Joe both mentioned this, on access to vaccines and innovation more broadly. There is no question that when it comes to developing vaccines, which is truly a success story, incentives matter. But let’s be clear on what the incentives were. This was not about the private sector taking risks in a way that it should reap all the benefits. There was about 12 or $15 billion in our estimate of different kinds of subsidies, not counting advanced market commitments, not counting speeding up the approval process and the trials, all of which added up to taxpayer subsidies of the development of the vaccines.
And yet when it came to contracting, it was all done in the standard framework of private sector versus so to speak the public sector. What has that meant? Two quick anecdotes. The prime minister of Israel mentioned that he personally talked to the head of Pfizer 17 times so that Israel could secure its quote of vaccines. This is not the market economy at work, and by the way, he wasn’t complaining. It was meant as a genuine public policy claim.
In Canada, my country, we had an instance when the Pfizer plant, I think in Belgium slowed down to retool for a while and our supplies were threatened. There was a self national outcry about the supply of vaccines to the country, in which quickly the tone became, had our prime minister picked up the phone and talked to the head of Pfizer, not our very capable and accomplished minister acquiring the vaccine and procurement, but had our prime minister.
And so we have to situation in which heads of companies are accorded the same treatment as it were as heads of state minus the checks and balances that you would expect in a proper political economic process. When you go beyond that and all the points that Jayati has just raised about the TRIPS waiver, you ask yourself, “Are we ready for the next time this happens? Would production be ramped up any more quickly? Would innovation be any more decentralized? Will we still be having the confused debate about whether this is about wealth redistribution or incentivizing genuinely innovation?”
And I think the points that Jayati and Joe made about the fact that the TRIPS waiver is not about appropriating falsely IP, but simply exercising what sovereign countries have already agreed to minus the transactions costs is something worth bearing in mind. And so my final set of comments has to do with economic responses in which again, if you think of state sovereignty and the return of the state, I think in many parts of the world, they might well be saying, “What return of what state?”
In our report, we mentioned how, when economies slowed down to a crawl in the early stages of the pandemic and right after, fiscal responses varied greatly and they broke exactly along developing lines. Developed countries spent about 22% of their GDP through various social stability and economic stability programs because they could. Emerging economies could spend about 9%, the least developed countries spent about 2.4% of GDP, simply because they were under strictures from the IMF, from lenders on how much they could bust budgets by, and they simply could not avoid them.
And so when we talk about state sovereignty, let’s understand that even before the pandemic, it was quite limited on account of the way that we do global financial governance and that the pandemic has simply shown that up. Now one way round… Well, there’s two ways around that. I guess one would be what I’d call genuine debt relief and genuine attempts to resuscitate a rules-based FDR system.
We now do have some movement on issuing greater amounts of SDRs, but it still has not been systematized and made technocratic, and it still depends on key countries such as the U.S. agreeing to do this rather than seeing it as standard technocratic, counter cyclical monetary policy. And also we should revisit, and this too is a long-standing global governance issue. The way in which the IFIs write their contracts as it were and what kind of outs do countries have when they face once in a lifetime emergencies?
And what we found is that in the midst of the greatest emergency in most of our lifetimes, the strictures of the IMF and the lenders were still dominant. And so I think questions of state sovereignty and of civil society organization stay with us. These are not just questions about equity and distribution, important as that is, these are also actually questions to improve efficiency and allocation of resources.
And so that’s the point I want to end on is when Joe said things are interconnected and we won’t be safe till everyone is safe, I think we can make the same point about efficiency and equity, is that these two go hand in hand and a report has a few thoughts on that. So I’ll stop there, Rob for now.
Rob Johnson:
Good. Thanks, Rohinton. Well, Joe, coming back to you, we’ve seen a big announcement today related to G7 multi-country tax proposal that may influence things throughout the world. I’ve been very concerned. I know you and Mike Spence are the chairs of this global commission, but I’ve been very concerned in the realm that you had, which is the subcommittee on globalization, that we’re in a place now where the Treaty of Westphalia kind of image of a nation state with all the instruments and tools appears to be in tatters.
But seeing the G7 rise to the occasion with this tax proposal suggests we may be, I would say, awakening to the challenge and moving in a healthier direction. How do you see that?
Joseph Stiglitz:
I think this agreement is obviously a move in the right direction. The fragility of globalization is illustrated by what’s happened as we went from the Trump presidency in the United States to the Biden presidency. The Trump presidency was about destroying multilateralism. It was about a world of every country for themselves. And as we share one planet and we face so many common problems from global health to climate change, to the issue I’m going to talk about in a second, it’s clear, we can’t solve it in the way that president Trump had tried.
And so it’s so great that the United States has returned to multilateralism. It’s also, I can tell you from talking to leaders all over the world, it’s so great that there’s a level of rationality that’s been restored to discussions. It’s very hard to have discussions where the other side lives on a different planet as it were in terms of what are the facts, what are the theories describing. So that too is really welcome.
Now, as we come to this issue of taxation of multinational companies, the reality that we’ve been aware of for many years is this is one of the dark sides of globalization. Companies and rich individuals have been able to use globalization to avoid paying their fair share of taxes. They pretend that production occurs in some jurisdictions with low taxes just to avoid taxes. In some cases, they move production, but in many other cases, as in the case of Ireland, they don’t even move production.
They just claim that that’s where the profits originated and it’s… What Ireland was engaged in can really be viewed as theft of the tax revenue that ought to go to other European countries. They get a little and companies like Apple were the big beneficiaries. So this is an attempt to stop that kind of avoidance over the basic responsibilities of contributing to the public wellbeing core to the issues of return to the state. If the state doesn’t have resources, it can’t do anything.
And the irony of course, is that the state provides the intellectual property, it provides the education, the highly educated people that these companies depend on, it provides the rules law. These companies depend on the state and they are among the greatest beneficiaries of a well-functioning state. But let’s be honest, the era of neo-liberalism is marked by utter selfishness and they’re selfish. They want the benefits of a well-functioning state, but they want other people to pay for it.
We’ve had a discussion in the United States about how we need more infrastructure. Who benefits from the better infrastructure? Obviously companies that produce our goods and they move goods back and forth. But they say they don’t want to contribute by paying their fair share of taxes. Who’s going to pay? The people who’ve done well over the last 40 years or those at the bottom who’ve actually seen their incomes decline? Well, it’s obvious it has to be… the only place we can get the revenues is from those who were the winners of the era of globalization.
But these companies and the Republican Party don’t want to contribute. They just want more benefits for themselves and not to pay their fair share. Now that comes to the proposal. The Biden administration proposed a global minimum tax of 21%. I’m on another commission focusing specifically on the issue of multinational corporation, and our consensus was, the global minimum should be 25%.
What was being discussed at the OECD before the Biden proposal was a global minimum tax of 12 and a half percent. Let’s be clear about the irony of this. This entire discussion began in an attempt to raise more revenue from the multinational corporations and especially more revenue for emerging markets in developing countries, but also for advanced countries. At 12 and a half percent, a initiative that was intended to raise more revenue would probably wind up raising less revenue, and that’s even probably true at 15%.
We have to recognize that this global minimum tax is likely to be the global standard, and therefore the global maximum tax as well. That is the real danger. That is the real danger. The good news about the compromise that was really was they’ve said, “It will be at least 15%.” And that opens up the future, no matter what specific rate they raise right now. It means that we will go back and re-examine this issue, have the multinationals develop other new ways of avoiding taxes.
What is the right tax base? Are they figuring out ways to change the tax base so in the end, they aren’t really paying that even 15%? Can we define a really adequate, comprehensive definition of profits, which we can levy the taxes? The point I want to make is, it’s a step in the right direction, hopefully, but it won’t be a step in the right direction if it turns out that the minimum tax is the maximum tax and the corporations figure out a way of defining income in a way that allows them basically continue not to pay their fair share of taxes.
Rob Johnson:
Jayati, taking the thing that Joe’s brought forward of tax evasion, tax avoidance, I’ve also have often heard having grown up in Detroit, Michigan, the unions and so forth, claiming that foreign direct investment was facilitated to go to the places where, which you might call labor rights were minimal and environmental protections were minimal. But we’re now at a place in the realm of climate change, where if we tolerate, which you might call avoidance of environmental restriction, we’re harming everybody.
But tell me a little bit about what concerns you right now. What are the things you see on the horizon? What are the unanticipated things that have come forward that, how do I say, give you heartburn in the current time?
Jayati Ghosh:
I think the heartburn doesn’t come even from unanticipated things, they’re all too anticipated. You can almost see the writing on the wall, that is what is so terrifying. So even with the global tax reform, that Joe was just talking about, there is definitely in the detail because it’s supposed to be tax on profits above 10%, which is extraordinary. Suddenly there’s this whole notion of excess profits to be taxed, which is not the basis of corporate tax anywhere in the world.
No national system says, “We will tax profits only above 10%.” But suddenly you’ve got this introduced into the international tax system, which is, as Joe said, you could even end up with lower tax revenues than you have at the moment if this principle is actually applied. And I think what I’m really fearing is that what this pandemic shows us, I think globally, we’re at the kind of inflection point where we are facing a real crisis of legitimacy.
I think the Biden administration has recognized that in the U.S. and is trying to take steps to recover some legitimacy with those who really felt completely, not just excluded, but oppressed by globalization and all of those forces. But now in a sense, that whole thing has moved to the global arena and we’re going to face a massive crisis of legitimacy globally in large parts of the developing world.
To pick up on the point that Rohinton made about the lack of fiscal response, I don’t think people in the advanced economies realize the enormity of the difference. 88% of all the fiscal additional spending that has occurred since January 2020 to March 2021 occurred in just 11 countries. 10 advanced economies and China account for nearly 90% of all the additional fiscal spending. The U.S. alone accounts for 55%, and this is even before the new Biden proposals come in. We’re just talking about what has already been spent.
If you look at the per capita fiscal spending in the U.S., I think it’s in the region of 20 to $25,000 per capita. In the low income countries according to the world bank numbers, $2 per capita. $2 per capita, additional fiscal spending. That gives you some idea of the enormity of the difference and we’re talking about developing countries that do not have automatic stabilizers, where 70% of workers are informal, where in India, 90% of workers are informal and they have no legal protections, they have no social protections, and you have governments that are not spending anymore.
So the kind of material devastation that has occurred in these countries is massive already, and now we are looking at a triple whammy. We are looking at a continuation of the pandemic with recurring waves that bring ever more death and destruction, and of course, destroy livelihoods along with that. We are looking at a situation where the governments, as I mentioned, are unable to spend partly because of debt concerns, partly because of fear of capital flight and credit rating agencies who are bearing down on them already.
Because the tax revenues are collapsing, so automatically fiscal deficits go up and they’re already telling them, “My God, your fiscal deficits are too large,” and sending signals to capital markets to leave. And we’re looking at a situation where the recovery in the advanced economies is already generating rising prices and potential inflationary pressures for large parts of the developing world at a time when their economies are still on a real down slide. So there’s a triple whammy going on.
And in this world, I would argue that there is also, if you like this geopolitical shift, the elephant in the room that we haven’t even talked about so far is China, which has recovered the most, and let us recognize that every recent crisis has strengthened China, not just economically, but geopolitically. The global financial crisis, the pandemic crisis has strengthened China in terms of also its ability to provide some sucker to developing countries that have been, let’s face it, either ignored or even trampled upon in the vaccine nationalism that we have seen otherwise.
I believe it’s in the self-interest of the “leaders of the world,” G7, the big pharma companies, big everybody companies, it’s in the self-interest these companies and these interests to change course. Because otherwise, that crisis of legitimacy that was expressed itself so graphically in Brexit and Trump supporters and et cetera is going to be widespread across the developing world in ways that we cannot anticipate, cannot control, and which will definitely change economic and geopolitical trajectories.
So I think that recognition really somehow has to get home to G7, that it’s not just about your own country. And all of that can come back, and as Joe said, can come back to bite you, can come back to change the terrain in which you operate in ways that you are not yet thinking of.
Joseph Stiglitz:
Can I emphasize two points that Jayati made? The first is that the corporate profits tax is a tax on profits returns in excess of what you spend on labor and on capital. You get to deduct your interest, and in the United States, you deduct your depreciation and your investment. So the implication of that is that in fact, a tax on profits does not discourage investment. And the multinationals keep saying, “Oh, we discourage investment.” The answer is no, because you get to deduct your spending on investment.
That argument is simply a red herring. That’s why a global minimum tax is important because you can move investment from one place to another. You have to have a level playing field, but the overall rate does not discourage investment. The second point I want to emphasize is that how bad the global debt regime is. So many countries are facing the risk of a debt crisis. The international community decided to have a temporary say on the service of debt. Just like in the United States and in many other countries, there was a temporary stay on evictions from your house.
It was a good idea, but you needed to make it effective, participation of the private sector. And the problem was the private sector did not want to play and they knew that they had power. And so most of the private sector has not participated in the debt sustainability initiative, and that means that in this period of a pandemic, countries have had to continue to service their debt when they don’t even have enough money to provide for the healthcare of their citizens.
Making it even worse is some of the countries that have applied for a debt stay have been downgraded by the rating agencies, making them pay higher interest rates. So what began as an initiative to help them, once you get these rating agencies involved has turned out actually to lead them into a more difficult position.
Rob Johnson:
Rohinton, you’re the leader of our subcommittee on African development. Derrick Turner who leads our climate group in the commission said to me recently, “There is a tragedy in the making, which is in Norway, you have very dark periods throughout the year, but you can deploy all of these solar panels and things and you can fund it at an interest rate that something like 1% real net of inflation. But a whole lot of the year, it’s not a very effective generator of energy.”
You go to Africa, equatorial region, sunshine all year and to finance the implementation of solar panels, you pay something in the neighborhood of 8% risk premium, real above the inflation rate. We all have to breathe, we all benefit from reducing carbon. What kind of financial mechanism, which you might call socialize that risk premium and diminish that risk premium so that the funds flow into, you might say, guarantees for multilateral institution and we get those solar panels put up where they should be put up and not totally relate to the market signals that would deter us from proper deployment in Africa?
Rohinton Medhora:
There’s a couple of thoughts that come to mind on that question, Rob. The first is what Joe just said. Our current global financial allocation mechanism is the exact opposite of what we require given the example you gave. And so we’re still in this notion of leading the patient when in fact, what you want is to resuscitate the patient, not just to make the patient better off, but as you pointed out with the solar case, to actually make people around the patient better off. And so that’s one element, come back to it in a second.
The second is to factor in the pandemic, which is part of Jayati’s triple whammy is, on average in sub-Saharan Africa, the per capita health budget annually is about 80 U.S. dollars, 80 American dollars to deal with absolutely everything with health. Now, if you add to that, even subsidized double shot vaccines or a single shot vaccine and the six to $10-range, and then an annual booster, which we’re almost certainly going to need, you’ve taken a healthy 10, 20% chunk in perpetuity out of already frugal health budgets.
And so social spending, which was never generous in the first place is going to be squeezed and even more exactly when you want to be thinking beyond that. Now, when it comes to these kinds of what I’d argue might be merit goods, be the solar panels or be the vaccines, we have to think in terms of a rate of return that doesn’t penalize the countries that can’t afford to participate in that system.
And so the risk premium of six to eight percentage points comes from the fact that the ratings agencies are looking at the ability to pay or the cost of investment in the very narrow micro sense. Now, we always knew that. In fact, going into Bretton Woods, the conference, we knew that, and the whole point the IFIs was that they would borrow using their credit rating at low rates, and then on lend it in areas or countries where social rates of return higher.
In practice, while some of that has happened, the fact is the IFIs are creatures of the overall global system. They’re controlled by interests that exactly drive global finance. And at the end of the day, the IFIs behave perhaps slightly less pro-cyclically, but effectively are almost as pro-cyclical as private sector capitalists.
So there’s two or three ways forward. None of them may happen right away, but let’s begin with something, and Jayati alluded to it in her geopolitical analysis. You might want to think of the new institutions that China has created, the infrastructure bank and BRI as one way forward, that you find a sponsor who is not driven purely by the ratings agency financial ratel for return, but it’s driven by something else.
Now, that something else may not leave us that much more comfortable, but the fact is that you need that kind of outside push from someone who’s not invested in the system. And you might say, “Well, why is only China doing that? Why couldn’t we have a group of like-minded democratic countries, be it the Nordics, be it Canada, be it others, be it the private philanthropist who band together and create that same kind of counter-cyclical, progressive financial mechanism?” So I think that’s one way forward, is to actually create new institutions that are driven by newer imperatives.
But I don’t think we should only focus on that. I think we’re putting the IFIs off the hook as it were by doing that. I think there’s a lot to be said for an agenda of longstanding on the governance of IFIs on changing their voting structure in a meaningful way so that the countries that actually possess solutions and countries like Sub-Saharan Africa, where these kinds of interesting solutions might lie are actually driving decision-making in some way. And so I think that’s a second way forward.
And then I guess the third point I’d make on all of that is that if you find that these kinds of rates of return are so tempting and why aren’t they happening, think back to the environmental negotiations, where we found small ways to compensate countries for what used to be called global environmental services, be the carbon sinks, be the forests. You might want to think for a similar mechanism, which compensates countries, where the sun shines and from which we all benefit.
And there might be ways in which we want to subsidize investment that has this kind of spillover effect for the rest of the world. So there’s creative ways of doing it, but we’re not there yet.
Rob Johnson:
Joe, how do you envision a sovereign debt restructuring that would, which you might call take care… I’ve always been very fond of this knockout punch poem by Muhammad Ali. He says, “Me, we.” How do we take care of we instead of just me for the good of mankind through sovereign debt restructuring?
Joseph Stiglitz:
Every country has a bankruptcy law. What does a bankruptcy law do? When a debtor has more debts than he can pay, it has a way of fairly treating each of the creditors. And a good bankruptcy law has good incentives so that the creditors think about the credit worthiness of the borrower before they give the borrower money. So a good bankruptcy law has implications for both efficiency and fairness. Now, restructuring international debt is even more complicated than restructuring domestic debt because the currencies can be different, the legal frameworks can be different.
For some mysterious reason, the international community, and when I say this, it’s mostly the lenders, argued that you didn’t need a bankruptcy court. You could write contracts with provisions that would substitute for a bankruptcy law. If you could do that, why do countries have bankruptcy laws? It was really a self-serving argument. What was at the core of the argument? Power. The predators thought they could use their power to intimidate small countries, to threaten them to say that if you don’t pay me back, you’ll never get a dime.
Whereas in the case of them Argentina, they actually tried to seize one of its Navy boats. They can do all kinds of things that make life extremely difficult, especially for a small developing country. So they want a framework that allows for power and they believe they have more power. These provisions, which are called collective action clauses were put into in fact, contracts that were written after 2015.
And interestingly, the first debt restructuring following that, these provisions didn’t work out as they had hoped and as anybody had hoped, and it didn’t really facilitate the restructuring. So what we need is an international bankruptcy court, and this is one of the important reforms in the global economic architecture. Interestingly, the UN General Assembly overwhelmingly adopted, not only the idea that there should be this international bankruptcy court, but actually laid out a set of principles that makes an enormous amount of sense.
Joseph Stiglitz:
So we actually have done a lot of the work in creating this alternative way. Unfortunately, a few, when I say few, very few of the creditor countries said, “Basically, we’re not going to play.” And without their cooperation, it’s very hard to get this new global economic framework to work. And so nothing has happened, and here we are, 2021, six years after the UN General Assembly adopted the resolution, nothing is there and we’re facing the risk of a number of countries suffering enormously from debt crisis.
Rob Johnson:
Jayati, your thoughts?
Jayati Ghosh:
No, this is absolutely true. I think the absence… Because this is something that has been in discussion now for 20 years really and particularly after the global financial crisis, it all hearted up, it seems to have subsided again. And what is extraordinary is that during a pandemic, when we know that there have been so many effective defaults already and where many more countries are on the verge of default, that doesn’t seem to be a sense of urgency.
I have to keep coming back to this, I’m not really clear what will generate urgency among global leaders. If the pandemic doesn’t do it and generates a sense of urgency about the minimum needs of global health, if the onset of climate change, which is already upon us and we’re already facing the impacts across the world, including in the rich countries. If that doesn’t force us to think about ways of climate mitigation like ensuring the kinds of investments that Rohinton was talking about, and the kinds of adaptation expenditures that are already necessary, somehow there’s no urgency about that either.
So it does leave you wondering, what is going to generate the sense of urgency? What will it take for global leaders to say, “We can’t just push a little bit on the borders of business as usual. We have to think transformatively?” Somehow I’m not able to understand the politics of this, and maybe that’s a limitation, but I do feel that we are heading into catastrophes that are going to be much, much bigger than even what people seem to realize at a national level that they have to make changes.
I think advanced economies, some of them are realizing at a national level, yes, we’ve got to make changes. Especially the U.S., it’s very clear that the administration recognizes that it has to change from what was going on before. That same understanding does not seem evident at a global level. I think those consequences are going to be massive. Rohinton touched on the digital inequalities and what that means. We know about the disease inequalities, we know about the fiscal inequalities.
And we know about the complete mess in global finance that is going to happen once you get that domino effect of defaults, which are almost inevitable on current considerations without a change. So I suppose I would put the question back to the rest of you who are much more experienced in these matters, what does it take to make this global leadership change?
Rob Johnson:
Rohinton, you work very closely with Jim Balsillie. We’ve talked about all the different disruptors and tomorrow I’ll continue the conversation with Michael Spence. But just quickly in a couple of minutes, what do you see right now vis-a-vis technology? And I’m going to juxtapose this against something, which is the smoke signals all over the world of authoritarian politics.
These disruptors are frightening people and people in fear submit to autocratic authority perhaps more than they should. But how do you see technology’s role in this dynamic?
Rohinton Medhora:
Look, I just know that my answer will be much more informed after I’ve listened in on your chat with Michael Spence tomorrow, and I look forward to it. But I do think there’s something going on here and I just come back very quickly because I know we’re at the end to the example of how did China do so well in containing the pandemic, especially in the first three or six months?
And it was the imposition of a tracking app coupled with CCTV cameras that kind of took over once people had been identified, coupled with a very intrusive police system where you actually visited people at homes, locked down buildings, and you had a system in which you could actually contain people’s travel and movement. That’s both the opportunity and the challenge that digital technologies give you. They don’t operate in a vacuum, they’re not manna from heaven.
They’re actually creatures of the larger social and political construct in which they operate. And so you can have that system work to your benefit during a pandemic, so to speak, but the reason it did was there was all of these other things that most countries are probably not willing to tolerate as it were. The other point I’d make is on the regression from the pandemic. India during the MDGs era, so it took something like 270 million people out of poverty, 230 million people and that’s over 15 years.
In the last year alone, something like, and Jayati would know the precise figures, something like 230 million people have fallen back into poverty. And so you have this kind of regression in a country that we see as a source of messy, but nevertheless, democratic stability going through this kind of cataclysmic transformation. It is not self-panic thinking to think of that leading to huge amounts of social disruption, which then spill over into the rest of the world.
And so the attraction of more authoritarian ways of managing things coupled with the beguiling nature of digital technology really has a risk of taking us there. And the question we all have to ask ourselves is, do we really want to go there? What are the costs and benefits of that? And that’s one of those big transformative questions that technology has thrown on us, but I want to leave us with the point that this is not about technology. This is about society, people and politics.
Technology is a kind of bit player, but happens to be an important bit player in this, but it is not the tail that should be wagging the dog on this one.
Rob Johnson:
Well, as you know, and Rohinton said at the outset that we wish we were all in Trento. And we’re very grateful to Tito Boeri and his team for holding this wonderful conference every year. But I want to dedicate this session to a man who helped me tremendously at the outset of INET in 2010. Tommaso Padoa-Schioppa, former economy and finance minister gave the last speech at our first conference in Cambridge, England. He later transcribed that speech and presented it as The Per Jacobsson Lecture.
And this pressing the Italian man said, “The combat between the Emperor and Croesus is marked by alternating phases of supremacy of one or the other. A peaceful and neutrally seen the highest social costs…” Excuse me, “A peaceful and mutually respected constitution is still to be found. In the past century, we’ve seen the high social costs when politics subjugates the market, not only through the totally repressive experiment of communism but also through the excessive interference of the pre-Reagan-Thatcher years.
But the beginning of this century, the crisis started in 2007 shows what disasters can occur when the market subjugates the government. A successful exit from the present troubles can be found only by fundamentally rethinking the relationship between markets and government in a global world.” This is the task that all of you who work with me on the Commission Globally Economic Transformation undertake. And in honor of Tommaso, I want to read the last stanza of a poem that was written by a man named Isaac Watts and it was called False Greatness.
“Thus mingled still with wealth and state, Croesus himself can never know. His true dimensions and his weight are far inferior to their show or grasp the ocean with my span, I must be measured by my soul. The mind’s the standard of the man.” Well, apologies, Jayati, man or woman. I am very fortunate to have known him and I’m very fortunate to work with these three upstanding minds at INET. Thank you all. We’ll see you again soon.
