Here’s how Janet Yellen should ‘go big’ on Covid-19 relief
This Friday, at a virtual meeting of G20 finance ministers, US Treasury Secretary Janet Yellen has the opportunity to galvanize the world’s largest economies to potentially unlock hundreds of billions of dollars in new support for Covid-19 relief and recovery efforts. To do this, the seasoned economist will need to show leadership where the previous administration did not, and to support an urgent proposal before the International Monetary Fund (IMF).
It’s no secret that Covid-19 triggered the deepest economic recession in nearly a century, wiping out decades of progress and risking long-term scarring of economies. The projected deficit – in addition to the existing one – is now estimated at $ 1.7 trillion in private and public funding. No stranger to economic crises, Secretary Yellen will need to work with her G20 counterparts to mobilize the resources needed to end Covid-19, save lives and revive global recovery.
One tool Secretary Yellen and her Treasury team are currently considering is a new issue of Special Drawing Rights, also known as SDRs. SDRs are reserves or expendable assets available to countries by decision of the IMF Board of Governors and, according to the US Congressional Budget Office, is budget neutral and incurs virtually no cost to taxpayers. Secretary Yellen is well aware of the role SDRs can play as they were used to respond to the 2009 financial crisis. She knows full well that they can be approved fairly quickly and easily.
A new SDR allocation requires the support of IMF shareholders – largely the wealthiest countries – but the previous US administration blocked this idea with its veto power. This was in large part due to unfounded concerns that they would benefit countries opposed to American interests. Unfounded because, on the one hand, Iran already has existing SDRs that it does not use and on the other hand, Venezuela is unlikely to use its SDRs due to the sanctions imposed on the current government.
Now a new proposal is being submitted to the Biden administration to support the issuance of $ 500 billion to $ 650 billion in new SDRs, with Secretary Yellen playing a key role in the decision-making. One of the immediate benefits of choosing to support a new issue is that these resources are flexible and could be used by both richer and poorer countries to meet a range of development needs related to the economic crisis induced by Covid, including rising hunger and unemployment.
Such additional support could not come at a more critical time given fears that the number of people living in extreme poverty is set to rise to more than 160 million people by the end of this year due to of the pandemic.
While SDRs are allocated to countries in proportion to their IMF quota – meaning rich countries like the United States would receive the lion’s share – there are steps that can be taken to reallocate them to larger countries. poor. Interested rich countries can galvanize a commitment from other shareholders that at least 10% – $ 50 billion – could be reallocated to the poorest countries through the IMF’s Poverty Reduction and Growth Trust. World leaders such as President Macron and Chancellor Merkel have long championed such a proposal, and even Chinese President Xi would be in favor given the vast reserves they already have. But without the leadership of the United States, these proposals have so far failed to gain traction.
Developing countries, in particular, would benefit greatly from a new issuance and reallocation of SDRs as the global economic downturn has hampered their ability to mobilize their own resources to respond to the crisis. During At the start of Covid-19, the countries of sub-Saharan Africa were only able to mobilize 3% of their GDP (much smaller) to counter the crisis and keep their economy afloat, compared to 20% of the GDP invested by the countries of the G20.
Even without any reallocation of SDRs from rich countries, African countries could collectively earn another $ 25 billion in new issue, more than five times the $ 5 billion allocated for debt relief since May.
As another point of comparison, a Deficit of $ 22.9 billion – accounting for less than 1% of the $ 13 trillion the G20 spent to boost their economies – still faces ACT-Accelerator and COVAX, threatening to undermine their ability to deliver vaccines, tests and treatments to the world’s poorest countries poorer. In a recent SDR briefing, Columbia University economist and professor Jeffrey Sachs said SDRs could play a critical role in ensuring that COVAX has “the funding to scale up vaccine distribution. , but also to provide other resources to fight Covid-19, Oxygen, etc.) This cannot be done without money; and therefore justifies the allocation of SDRs ”. As they reflect on whether to back the IMF proposal that finance ministers will consider tomorrow, fear of a new vaccine resistant strain emerging somewhere in the world also provides sufficient reason for Secretary Yellen and the United States to help unlock new resources.
A final point to consider should be the fact that a new allocation of SDRs is in the interest of the United States. While the economic crisis has hit the poor countries much harder than the richest, world growth will not recover without them: according to the ECA, 40% of the world economy today depends on developing countries. Ultimately, the additional liquidity provided by SDRs will strengthen major trading partners and prevent even greater losses to the global economy (up to $ 9.2 trillion) and strengthen the soft power and leadership of the United States in the world.
Tomorrow’s G20 Finance Ministers Meeting, marking Secretary Yellen’s debut in this area, represents a privileged moment to secure an agreement, including from the United States, on a new issue and a new allocation of SDRs and thus give the poorest countries the help they desperately need right now. Yellen has previously said now is the time for world leaders to “push the envelope” on tax support. Tomorrow is also their chance “go big” for everyone, including the world’s poor.