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The International Monetary Fund (IMF) and the World Bank are two sister institutions created in 1944 by the Bretton Woods Agreements. The Fund was established to support the international financial system, granting conditional credits to countries experiencing temporary difficulties with their balance of payments. The World Bank, meanwhile, by financing investment projects vital to the development of poor countries on very advantageous terms, is at the forefront of global efforts to end extreme poverty, promote shared prosperity, and foster sustainable development. The two institutions meet periodically to raise awareness and increase engagement with these issues, as well as to guide their respective agendas accordingly. Their Annual and Spring Meetings are the most significant.

On March 2, 2020, shortly after the outbreak of the pandemic, the IMF’s chief operating officer, Kristalina Georgieva, and the World Bank’s president, David Malpass, issued a joint statement. It indicated that the two institutions are ready to help member countries address the human tragedy and economic challenge of Covid-19, that they are actively collaborating with international institutions and authorities in each country, and that they are paying particular attention to poor countries where health systems are weakest, populations are most vulnerable, and fewer resources are available to address these challenges.[1]

The 2021 Spring Meetings were conducted virtually from Monday, April 5 through Sunday, April 11, 2021. In addition to the meetings of the executive committees, which took stock of the progress of their projects, individual forums were devoted to international development, debt, economic recovery, vaccines and climate. The Spring Meetings are usually attended by approximately 2,800 delegates from member states, 350 representatives of organizations as observers, 800 members of the press and 550 accredited members of civil society.

The letter of Pope Francis

Pope Francis sent a letter last April 8 addressed to all of them.[2] He was clear and decisive regarding some fundamental themes, namely, the macro-problems of our world, now scourged by the cruel pandemic. These have given rise to a global crisis that, as he says, has many implications, because it is at the same time a health crisis and a socioeconomic and ecological one.

In the letter the pontiff sets out his main expectations. He hopes that this harsh contingency will give rise to an opportunity for change to a more inclusive, sustainable economy oriented toward the universal common good; that poor countries will have a real voice in international bodies and access to international markets; that they will be helped through debt forgiveness; and that they will be supported in their transition to a greener economy.

These four desires or aspirations are based on as many diagnoses: no one is saved alone, i.e., prosperity is not achieved if we do not share and recognize what is owed to others; there is a real “ecological debt” to be paid off; that all of this requires a global plan to be conceived in view of a common goal, i.e., the universal common good; we must act as a community and ensure that solidarity inspires our actions and that we finance a vaccine solidarity.

At the same time, the pope recalls the need to regulate the markets. Recent history serves as a teacher here, when the financial and real crisis of 2008 taught us – in the words of Paul Anthony Samuelson, winner of the Nobel Prize for Economics in 1970 – that “market systems without rules are destined to implode sooner or later.”[3]

In this article we will try to present data and reflections for an adequate evaluation of the papal intervention.

Third World: a bleak and worsening situation

The virus that threatens us was born in a world divided into rich and poor. It originated in a country, China, that has been moving away from poverty and developing at a very rapid pace. We are far from having defeated Covid-19 and the situation remains very serious. However, a light has emerged on this bleak horizon. Several effective vaccines have been made available in record time, much earlier than most experts had anticipated. In addition, there has been a massive monetary and fiscal response, which has alleviated the state of affairs, especially in the First World.

One key fact remains: economic recovery and vaccine distribution will not happen in unison. The IMF predicts that the United States and Japan will not return to pre-pandemic production levels until the second half of this year. The eurozone and the UK, again in decline, will not reach the same goal until well into 2022. China’s economy plays a game of its own, and by the end of 2021 it is expected to have grown 10 percent from late 2019 levels. But at the other end of the spectrum, many developing economies and emerging markets could take years to return to their previous levels of growth, and  there will be greater levels of inequality.[4] The World Bank estimates that by the end of 2021, the Covid-19 pandemic will have pushed another 150 million people into extreme poverty.[5] The number of people experiencing so-called “food insecurity,” or chronic hunger, has increased by 130 million since last year, surpassing 800 million overall.[6]

Behind these disparities are three facts.[7] First, there is the timing of vaccine distribution. Vaccines are expected to be widely available in advanced economies by the middle of this year; on the other hand, it is likely that those living in poorer countries will have to wait until 2022, if not beyond.

Second, there is the glaring difference between rich and poor countries in macroeconomic support. In advanced economies, additional government spending and tax cuts during the Covid-19 crisis amounted to nearly 13 percent of GDP, with loans and guarantees involving another 12 percent. In contrast, in emerging economies, government spending and tax cuts involved about 4 percent of GDP, and loans and guarantees totaled another 3 percent. For low-income countries, these figures fall as low as 1.5 percent of GDP in direct fiscal support,  with almost no guarantees.

Third, there are emerging economies. They were already in debt when they entered this crisis, so they are vulnerable. They would be in even more serious trouble if it were not for near-zero interest rates in advanced economies. And this is despite the fact that we have seen a growing wave of sovereign defaults: for example, those of Argentina, Ecuador and Lebanon.

This time the US Central Bank (Fed) says it is not willing to raise interest rates until unemployment is at its lowest level. But if the USA manages to reach its vaccination targets by the summer, the scenario could change. Inflation has remained stubbornly low so far, but an explosion in demand could push it up, which would cause the Fed to raise rates a little earlier than it had anticipated; in fact, long-term interest rates have already nearly doubled in the first months of 2021. The domino effect of this move on the financial markets would separate the strong from the weak and would hit the already debt-laden emerging markets particularly hard. In fact, if the latter have to allocate resources to interest payments, they will not be able to cope with the economic consequences of the pandemic. This would lead to a situation similar to that already seen in the crisis of the 1990s, when in Mexico, Brazil and the economies of Southeast Asia the disastrous collapse was triggered precisely by the delayed effects of higher interest rates in the United States.

Financial cooperation becomes essential

The world of finance encompasses both difficulties and solutions. Therein lies the Gordian knot. The Annual and Spring Meetings of the IMF and World Bank, which bring together the leaders of this world, offer a historic opportunity for financial cooperation. If such cooperation is implemented with authority, boldness and creativity on a global scale, it will help to end the pandemic.[8] A global disaster of this magnitude requires strong cooperation, which will only be possible to the extent that it can count on the necessary financial support.

Our future depends on this urgent assumption of responsibility. If Covid-19 is not eradicated and survives in some areas of the world, the pandemic will continue to damage global manufacturing, trade and tourism. Also, viral mutations will evolve, jeopardizing the immunity already acquired. The virus could become endemic in many regions of the world, imposing high health and economic costs in the coming years. Not surprisingly, Janet Yellen, U.S. Treasury Secretary, has stated that it is in the common interest of all countries to end the pandemic everywhere in the world.

World governments have created COVAX, a global access program for vaccination against Covid-19. Global projects on vaccines, trials and health treatments have been developed, but there is an urgent need to strengthen them. The  process aimed at reaching the current goal of immunizing at least 27 percent of the population of all countries by the end of the year needs to be strengthened: all adults must be vaccinated by the end of 2022. This is necessary if we want to end the pandemic and reduce the possibility of new mutations.

The $11 billion governments have allocated so far is insufficient: an additional $22 billion needs to be made available this year. Moreover, the current shortage of vaccines induces countries to fight to move to the front of the queue, at the cost of paying very high prices. Thus there is all the more reason to highlight the urgency of ensuring that everyone, including the poorest nations, can achieve full vaccination coverage in a fair and timely manner.

The additional sums needed to ensure universal vaccination coverage by the end of 2022 (more or less $50 billion) are modest in comparison to the enormous global benefits of ending the pandemic. Between March 2020 and March 2021, the U.S. government alone spent approximately $5 billion in emergency funds.

A rational plan must be drawn up as soon as possible to finance the imbalances that Covid-19 has caused in the balance of payments of all countries until the end of 2022. The IMF was created precisely to manage such emergencies. Access to its funding will protect the welfare and macroeconomic stability of individual countries and the world at large. This is a critical opportunity that must be seized to get the United Nations, the IMF and key governments – such as those of the United States, China, Russia, the EU, Japan and the United Kingdom – to cooperate effectively for the good of humanity.

The current catastrophe as a global opportunity

Some members of humanity have a pressing need not only to be helped, but also to be treated with dignity. As Pope Francis pointed out in his letter, poor countries must have a voice in international bodies that decide on policies that affect them; moreover, they need to be relieved in the payment of their foreign debt and rewarded for their positive ecological enterprises.

As Covid-19 spreads around the world, it brings economic crisis and unemployment, pushing most emerging and developing economies to the brink. The inadequacy of their health systems and the scarce resources of their social security programs are combined with a very limited ability to stimulate their economies. The reality is grim: emerging and developing countries are on the cusp of a humanitarian and financial crisis. It is unrealistic to expect them to be able to repay their debts. In fact, in recent weeks, capital has fled most of those economies  in haste, as a new wave of sovereign defaults seems inevitable.

In the letter, Pope Francis calls for a “significant reduction in the debt burden of the poorest nations.” Prominent economists, such as Carmen M. Reinhart and Kenneth Rogoff, argue for an urgent moratorium on the timing of repayment of debt incurred by emerging or developing sovereign states, except those with better credit ratings.[9] It is a fact that the experience of lockdown is very different depending on where you live. In the huge slums of Sao Paulo, Mumbai or Manila, lockdown can confine ten people to a small room, with little food and water, and little or no government handouts to make up for lost wages. The disruptions that the pandemic has caused in supply chains are already causing food shortages and price hikes. In other words, places like Africa and South America are on the verge of socially unsustainable situations at risk of exploding.

As long as the pandemic continues its deadly spread, there is nothing that is not exceptional. It would be naive and cruel on the part of creditors (institutional and private) to expect those countries to divert resources from the fight against Covid-19 in order to pay off debts. The authorities we cited above believe that the World Bank and the IMF, thanks to their extensive experience with countries with debt problems, have become increasingly aware in recent years that a partial default is often the only realistic option. Any decision to impose the usual way of paying debts, in extraordinary times like the ones we are experiencing, would only serve to deepen and prolong recessions for no reason. But in order for a debt moratorium to be approved, the decision must involve the United States, which has veto power over IMF decisions. And China must also agree.

However, can we exhaust the issue by adopting the goal of restoring the previous situation, the former “normal”? Aren’t we instead facing a crisis that provides opportunities to improve our world? Hasn’t the time come to consider forgiving the debts of poor countries? This option is gaining supporters: today it is even shared by Willem H. Buiter, former chief economist of Citigroup,[10] the world’s largest financial services company.

His arguments are very compelling. He starts from the observation that this crisis will burden many public and private parties with unsustainable debts. The only instrument capable of bridging the gap between potential and actual production has been fiscal stimulus that is financed through deficits and monetized wherever possible. But poor countries have not benefited from this choice. Buiter informs us that, according to the Brookings Institution, emerging markets and developing countries are already burdened with about 11 trillion dollars of foreign debt, and estimates the cost of servicing the debt amounts to 3.9 trillion dollars annually. In April 2020, the World Bank and the IMF offered minimal help to many of these debtor countries, and the G20 granted a temporary suspension of official debt payments, in a gesture that has been imitated by hundreds of private creditors.

But, in his view, these forms of aid are insufficient and late. Certainly most of those debts should never have been incurred. The proper way to transfer resources to low-income countries is through outright grants; this was the only mechanism provided by the Marshall Plan after World War II, and for those countries, in the Covid-19 crisis, it is more necessary than ever.

In 1996, an initiative of the IMF and the World Bank aimed at highly indebted poor countries resulted in 36 of them obtaining partial or total relief from their debts. On that basis, Buiter concludes that this idea must be reinstated by putting in place, to begin with, an integral application of debt relief for the poorest countries in the world. This selective “jubilee” must include debts owed to the IMF, the World Bank, other multilateral bodies, sovereign creditors, official entities (e.g., public companies) and private creditors. Given an unprecedented global crisis, something has to change. It is obvious that developing countries will need a more radical solution.

The ecological debt

The theme of debt does not end there. As Francis indicates in his letter, there is more, but this time with the roles of debtors and creditors reversed. It is the First World that owes the Third and Fourth Worlds, and not just a little. A few days before the Spring Meeting of the IMF and the World Bank, Sharon Ikeazor, Nigeria’s Minister of the Environment, wrote that in 2021, developed countries are called upon to work with low-income, developing and emerging economies to chart the path to a low-carbon future. That means, first and foremost, delivering the financing they have promised.

The minister says that Nigerians, caught between stifling heat waves and crop failures, are already feeling the effects of climate change, a challenge that no country can face alone. In particular, African countries should not be forced to do so. After all, Africa, one of the most vulnerable regions of the planet, where since 2012 recurring droughts in the Sub-Saharan area have already increased the undernourished population by 45.6 percent, has less responsibility in this regard. On the other hand, the effects of climate change negatively affect societies, destroy livelihoods, exacerbate conditions that generate conflict, with destabilizing results that are felt throughout the region.

In the meantime, developed economies, which are primarily responsible for climate change, pretend to ignore what is happening in Africa and refuse to take adequate measures. As we can see, the Covid-19 pandemic is by no means the only common challenge we face in our interconnected planet.

In 2015, the Paris Climate Agreement raised hopes that world leaders would finally be ready to put the well-being of the planet above short-term political interests, that they would take decisive steps in climate cooperation to achieve the necessary decarbonization, and prepare corresponding substantial subsidies. The Paris Agreement envisaged that by 2020 the world would have to provide 100 billion a year to meet the needs of developing countries. This has not been forthcoming . Developing countries will need to spend 600 billion a year to mitigate the effects of climate change, but so many of them lack financial liquidity and adequate capital flows. And many of today’s large-scale climate funds do not explicitly recognize climate justice or pay attention to the specific needs of poor and vulnerable communities.

In general terms, Africa is the region with the largest gap in climate financing. If there are no immediate changes in this regard, by 2030 clean energy will make up just 10 percent of the new energy generated on that continent. Many of the technologies needed to build sustainable economies already exist. Renewable energy technologies are developing rapidly. Many countries in the world are orienting heavy industry and agriculture toward ecologically based policies and introducing less contaminating transport systems. Africa, which already has to deal with unemployment, famine and growing unrest, has the right to receive the resources to do the same.

Conclusions

The current pandemic occurs in a world of rich and poor, full of cross-debt and in which the actions of developed countries have consequences, for better or worse, on developing ones. The governments of rich countries devote at least 25 percent – in the EU a little over 40 percent – of their national tax revenue to ensure the provision of public services, to undertake investments and to be able to transfer income to those most in need. In this way, they avoid the drift of their societies toward inequality, injustice and instability, as is happening today in the United States, Latin America and Africa. These three public functions are sorely needed today on a meta-national level. In this world, and in times such as these, it cannot be assumed that the local provision of public goods and services is sufficient.

The pope’s letter calls for international laws and regulations to ensure that financial markets operate for the common good. It becomes imperative that at least 2 percent of the world’s income be dedicated to international goods and services, to end extreme poverty, combat climate change, protect nature, save millions of poor people from premature death, ensure the schooling of all children and defend peace through the UN.

It is time to devise new global taxes on corporate income, on foreign accounts, on international financial transactions, on the net wealth of the super-rich and on enterprises causing pollution, in order to preserve a world that is as interconnected as it is under threat. With creativity, cooperation and vision, new revenues must be mobilized to transform our great global wealth into sustainable prosperity for all.[11] This financial reform is being called for more and more: we have all shared the public anger at the fact that, while government finances were under severe pressure during the pandemic, major corporations continued to pay taxes at relatively low rates. According to data from the Tax Justice Network, tax abuse perpetrated by large corporations and evasion by wealthy individuals cost countries around the world $427 billion annually in lost revenue.

A global tax framework needs to be put in place as soon as possible to accommodate the new horizon of the digital economy and prevent large multinationals from shifting taxable capital to more lax jurisdictions, located in tax havens, in order to reduce taxes owed. The energetic policy thrust of the new Biden administration opens up new horizons, especially to the hypothesis that a grand global tax pact can ensure a fairer contribution to public bodies by large corporations.

The promising U.S. proposal rests on two pillars. On the one hand, there is the objective set out by Treasury Secretary Yellen: to establish a global minimum threshold for corporate taxation, thus preventing downward tax competition between countries. On the other, Washington has been open to the idea of supporting a resolution that would require large multinationals to pay a fair share of taxes where they generate their profits.[12] In turn, the IMF has proposed the creation of a temporary solidarity tax as a contribution to the costs of the crisis, to be imposed on high income earners and companies that have benefited most during the pandemic. It would serve to rebalance the social inequalities exacerbated by the health crisis.

Both the World Bank and the IMF insist that the worldwide effort for vaccination be intensified. To achieve this, a colossal mobilization will be needed, a Herculean effort, but the real problem is not the lack of vaccines, but the lack, in poor countries, of the money needed to pay for them. Rich countries, which represent 20 percent of the world’s population, have been credited with most of the demand for vaccines. At the same time, in Africa, which has a population of 1,200 million people, only 70,000 have so far received full vaccination.

To prevent poor countries from suffering vaccine apartheid, the group of rich nations represented in the G7 will have to commit to a contribution of 30 billion annually.[13] To date, none of its members seems willing to take on such a commitment in full. Gordon Brown, former British Prime Minister, has proposed that the G7 pay 60 percent of this amount and that the remaining percentage be borne by the oil states and China. The present crisis exacerbates the problems we already had. In addition, the pandemic has exposed the difficulty of our world in responding to challenges of global proportions. Once we get past Covid-19, we still have to tackle climate change.

We believe we have justified the relevance and validity of the content of Pope Francis’ letter to the IMF and the World Bank. The pope indicates which path to take. Never more than now are politicians needed who are able to embody at the same time competence, the will to act and social sensitivity,  capacities such as those that William Shakespeare attributed to Henry V: “Turn him to any cause of policy, the Gordian knot of it he will unloose, familiar as his garter.”[14] Also needed  is resolute will, like that shown by Don Quixote, who, although repeatedly beaten by a stubbornly cruel reality, when Sancho asks him: “Sir, what about us?”, he answers: “It is clear. Support and help the neediest and the weakest.”[15]

[1].    See International Monetary Fund, Joint Statement from Managing Director, IMF and President, World Bank Group, March 2, 2020 (www.imf.org/es/News/Articles/2020/03/02/pr2076-joint-statement-from-imf-managing-director-and-wb-president).

[2].    Cf. Francis, Letter to Participants in the Spring 2021 Meeting of the World Bank and International Monetary Fund (April 5-11, 2021), April 8, 2021 (https://www.vatican.va/content/francesco/en/letters/2021/documents/papa-francesco_20210404_lettera-banca-mondiale.html).

[3].    P. Samuelson, “I sette errori dei liberisti senza regole”, in Corriere della Sera (www.corriere.it/economia/08_ottobre_20/samuelson_errori_liberisti_86105a88-9e6d-11dd-b7ca-00144f02aabc.shtml), October 20, 2008.

[4].    See International Monetary Fund, World Economic Outlook Update, January 2021 (www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlook-update).

[5].    See The World Bank, “COVID-19 to Add as Many as 150 Million Extreme Poor by 2021”, October 7, 2020
(www.worldbank.org/en/news/press-release/2020/10/07/covid-19-to-add-as-many-as-150-million-extreme-poor-by-2021#:).

[6].    See M. Lowcock – A. Van Trotsenburg, “Prevent the Next Food Crisis Now”, in Project Syndicate (www.project-syndicate.org/commentary/early-international-action-can-prevent-next-food-crisis-by-mark-lowcock-and-axel-van-trotsenburg-2021-01), January 29, 2021.

[7].    See K. Rogoff, “Uneven recovery from Covid recession could hit poorer countries hard”, in The Guardian (www.theguardian.com/business/2021/feb/05/recovery-covid-recession-poorer-countries-us-fed), February 5, 2021.

[8].    See J. D. Sachs, “Global financing to end the pandemic”, in Project Syndicate (https://www.project-syndicate.org/commentary/global-pandemic-financing-imf-sdr-allocation-by-jeffrey-d-sachs-2021-04), April 6, 2021.

[9].    See C. M. Reinhart – K. Rogoff, “Suspended Emerging and Developing Economies’ Debt Payments”, in Project Syndicate (www.project-syndicate.org/commentary/suspend-emerging-and-developing-economies-debt-payments-by-carmen-reinhart-and-kenneth-rogoff-2020-04/), April 13, 2020.

[10].   See W. H. Buiter, “Time for a Selective Debt Jubilee”, in Project Syndicate (www.project-syndicate.org/commentary/covid19-case-for-2020-debt-jubilee-by-willem-h-buiter-2020-05), May 21, 2020.

[11].   See J. D. Sachs, “Financing International Cooperation”, in Project Syndicate (www.project-syndicate.org/commentary/financing-global-and-regional-public-goods-by-jeffrey-d-sachs-2018-11), November 27, 2018.

[12].   See “Por una fiscalidad global más justa”, in El País (https://elpais.com/opinion/2021-04-11/por-una-fiscalidad-global-mas-justa.html), April 11, 2021.

[13].   See G. Brown, “The G7 must push for global vaccination. Here’s how it could do it”, in The Guardian (www.theguardian.com/commentisfree/2021/apr/12/g7-global-vaccination-covid), April 12, 2021.

[14].   W. Shakespeare, Henry V, Act 1, Scene 1, 45-47

[15].   M. de Cervantes, Don Quixote.