Way forward for the global economy  

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Secretary of the Treasury, Janet L. Yellen

By Janet L. Yellen

The course of the global economy over the past two years has been shaped by COVID-19 and our efforts to fight the pandemic. It’s now evident though that the war between Russia and Ukraine has redrawn the contours of the world economic outlook.

Vladimir Putin’s unprovoked attack on Ukraine and its people is taking a devastating human toll – with lives tragically lost, families internally displaced or becoming refugees, and communities and cities destroyed. The atrocities in Bucha are the latest grim reminder of the brutality of Putin’s war of choice. Its impacts are reverberating to neighbouring countries and beyond. The Biden administration stands firmly with the people of Ukraine as they defend their lives, their homes, and their country. We are resolute in our commitment to hold Russia accountable.

Russia’s horrific conduct has violated international law, including core tenets of the UN Charter – challenging countries to demonstrate where they stand with respect to the international order that has been built since World War II. Therefore, when I speak about a changed global outlook, I’m not just talking about growth forecasts. I’m also referring to our conception of international cooperation going forward.

I will focus my remarks today on the significance of international cooperation in this current environment and for our future. The power of working together with our partners has been essential in confronting Russia; we need to take that lesson on board as we tackle the most pressing global issues we face today.

We have seen that swift and sweeping sanctions can have enormous force. The United States, along with over 30 countries, representing well over half the world’s economy, has imposed an unprecedented suite of financial sanctions and export controls on Russia.

The multilateral approach that President Biden has taken has enabled us to impose significant costs on Russia, degrading its ability to prosecute this war and to project power in the years ahead. We were able to do this, for example, because the G7 plus the European Union account for about half of Russia’s international trade, and our financial institutions have facilitated most of Russia’s trade and investment finance. We, the sanctioning countries, are saying to Russia that, having flaunted the rules, norms, and values that underpin the international economy, we will no longer extend to you the privilege of trading or investing with us.

By joining together, we demonstrate that these sanctions are not motivated by any one country’s foreign policy objectives.  Rather, we are acting in support of our principles – our opposition to aggression, to widespread violence against civilians, and in alignment with our commitment to a rules-based global order that protects peace and prosperity.

Moreover, we are carving new paths in our technical work to target, monitor, and enforce sanctions. The work of our team of experts at Treasury is now reinforced by other experts around the world. With Attorney General Garland, I convened a novel taskforce of law enforcement and finance ministry leaders from G7 and partner countries to advance our efforts. Together, we are learning how to be more effective. We are creating new habits of cooperation, trust, and goodwill that create positive spillovers across the entirety of our relationship.

Rest assured, until Putin ends his heinous war of choice, the Biden Administration will work with our partners to push Russia further towards economic, financial, and strategic isolation. The Kremlin will be forced to choose between propping up its economy and funding the continuation of Putin’s brutal war.

At the same time, we are marshalling the power of international cooperation to mitigate the economic impacts of Russia’s war. Russia’s invasion will have direct impacts on the global economy due to the contraction of Ukrainian and Russian exports – particularly energy, food, fertilizer, and other commodities. When Russia made the decision to invade Ukraine, it predestined an exit from the global financial system. Russian leaders knew that we would impose severe sanctions, even if they underestimated the breadth, depth, and coordination of the actions that the United States and its allies would take. We are now seeing higher commodity prices that have added to global inflationary pressures and are posing threats to energy and food security, trade flows, and external balances across many countries.

Much of our work next week during the IMF and World Bank Spring Meetings will be centered on how we can better support developing countries as they weather these shocks, particularly as they are still recovering from COVID-19. With over 275 million people facing acute food insecurity, I am deeply concerned about the impact of Russia’s war on food prices and supply, particularly on poor populations who spend a larger share of their income on food. The multilateral development banks are already providing financing to strengthen domestic food production, bolster social safety nets, and unlock trade finance. They must also couple their near-term responses with longer-term investments to address the underlying vulnerabilities in food systems. I will be convening leaders in this field next week to discuss further potential solutions.

The ultimate outcome for the global economy of course depends on the path of the war. Russia could end this unnecessary war and the near-term impact could be contained.

While many countries have taken a unified stand against Russia’s actions and many companies have quickly and voluntarily severed business relationships with Russia, some countries and companies have not. Let me now say a few words to those countries who are currently sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and backfilling the void left by others. Such motivations are short-sighted. The future of our international order, both for peaceful security and economic prosperity, is at stake. This is an order that benefits us all. And let’s be clear, the unified coalition of sanctioning countries will not be indifferent to actions that undermine the sanctions we’ve put in place.

The war in Ukraine and sanctions against Russia highlight the pivotal role of China.  China has long claimed to hold sacrosanct key international principles – including those enshrined in the UN Charter with respect to sovereignty and territorial integrity. Whatever China’s geopolitical aims and strategies, we see no benign interpretation of Russia’s invasion, nor of its consequences for the international order. China cannot expect the global community to respect its appeals to the principles of sovereignty and territorial integrity in the future if does not respect these principles now when it counts.

China has recently affirmed a special relationship with Russia.  I fervently hope that China will make something positive of this relationship and help to end this war. Going forward, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security. The world’s attitude towards China and its willingness to embrace further economic integration may well be affected by China’s reaction to our call for resolute action on Russia.

The Russian invasion of Ukraine has dramatically demonstrated the need for us to stand together to defend our international order and protect the peace and prosperity that it has conferred on advanced and developing countries alike. As we do so, it is worth considering the breadth of unmet global challenges that would benefit from greater cooperation of the kind we have mustered in confronting Russia.

On some issues, like trade and competitiveness, this will involve bringing together partners that are committed to a set of core values and principles. We will also need to modernize our existing institutions – the IMF and the multilateral development banks, so that they are fit for the 21st century, where challenges and risks are increasingly global. And finally, we need to build trust and cooperation to improve our ability to provide the global public goods that are needed to address these challenges.

I will now present a set of propositions on how to turn some of our problems into opportunities to move forward.

First, we need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade. We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage. Let’s build on and deepen economic integration and the efficiencies it brings – on terms that work better for American workers. And let’s do it with the countries we know we can count on. Favoring the “friend-shoring” of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy, as well as to our trusted trade partners.

We should also consider building a network of plurilateral trade arrangements to incorporate elements of the modern economy that are growing in economic importance, especially digital services. We should harmonize our approaches to protecting the privacy of data. And a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.

Second, we should implement last year’s global tax deal. Some 137 countries representing nearly 95 percent of the world’s GDP -have agreed to rewrite the international tax rules to impose a global minimum tax on corporate foreign earnings and to partially reallocate taxing rights from countries where companies are headquartered to those where they sell goods and services. This tax deal is necessary to end the race to the bottom in corporate taxes and to reform profit reallocation rules that, by demanding a physical nexus to a taxing jurisdiction, no longer reflect modern economic realities. By ensuring that profitable corporations pay their fair share and operate on a level playing field, the deal will provide governments around the world the resources they need to invest in their people and economies.

Third, we must ensure the IMF has the tools to fulfill its role of financial firefighter in the face of modern, potentially more frequent, global crises. The IMF evolved to assist countries needing domestic policy adjustment to overcome balance of payments difficulties. It was not designed to deal with the novelty and breadth of the last two global crises. As a consequence, the economic and financial response to the global financial crisis in 2008-2009 was too timid and short-lived.  With inadequate global liquidity, the crisis caused lasting damage.

In response to the pandemic, the IMF acted creatively to support poorer countries. Still, those countries with the resources to do so responded forcefully, protecting incomes and profits, preventing debilitating bankruptcy, and rapidly reversing the decline in GDP. We were less successful in supporting poorer countries, which led to a divergence in global prospects.  We will also need to consider the governance of the institution, to ensure that it reflects both the current global economy and also members’ commitments to the IMF’s underlying principles and objectives.

Fourth, let’s revisit our strategies, policies, and institutions to better mobilize capital in support of people in developing countries. We have made great efforts to provide funding to support human development, the creation of needed infrastructure, and more recently the attainment of climate objectives. Multilateral development banks, bilateral official donors and creditors, and growing private sector involvement deserve credit for important achievements. That said, the response to date is not to the scale needed. Experts put the funding needs in the trillions, and we have so far been working in billions. The irony of the situation is that while the world has been awash in savings – so much so that real interest rates have been falling for several decades – we have not been able to find the capital needed for investments in education, healthcare, and infrastructure.

There is little doubt that there are huge potential returns, both human and eventually financial, in equipping billions of people in developing countries with what they will need to succeed. Going forward, we need to evolve the development finance system, including the World Bank and the regional development banks, to our changing world, in particular to better mobilize private capital and fund global public goods. However, the multilateral development banks alone will never meet the scale of financing needed – so we also need to revisit our strategies for making capital markets work for people in developing countries.

Fifth, we must expedite the global transition to a more secure and cleaner energy future, with more energy access for all. We know we have not yet done enough in terms of mitigation, adaptation, green technology innovation and adoption, and funding for those efforts. The recent IPCC reports confirm that our window of opportunity to leave our planet worthy of our children and grandchildren is even closer to being permanently shut. We must redouble our efforts to decarbonize our economies, recognizing that countries will use a range of tools – including carbon pricing, regulation, and subsidies to achieve needed emissions reductions. Because those approaches will have quite different consequences for the costs of production, we will see differing impacts on trade competitiveness. We will need to work together to avoid trade tensions and in time to coordinate and harmonize our approaches.

And finally, sixth, we need to complete work on strengthening the global health architecture to boost pandemic preparedness and response. History teaches us that pandemic risks rise with the interconnectedness of the world. And recent history shows us the incredibly high cost of inadequate preparation. G20 countries are now working through a Joint Health and Finance Task Force to leverage broad country and expert participation to address the current gaps in the international health architecture for pandemic prevention, detection, information sharing, and crisis response. We have also proposed a Financial Intermediary Fund as a vehicle to help fill in the gaps in health system investments at the country, regional, and global level so that we are collectively better able to prepare for and prevent future crises.

As we gather for the IMF and World Bank Spring Meetings next week, I look forward to working with my partners to address these big issues. At the top of everyone’s minds will be the direct impact and broader spillovers of Russia’s invasion of Ukraine. We will also advance efforts to mobilize vaccine donations and delivery support, further discussions on tackling the climate crisis, and continue to expand our efforts to support low-income countries.

Some may say that now is not the right time to think big.  Indeed, we are in the middle of Russia’s war in Ukraine, alongside the lingering fight against a global pandemic and a long list of other initiatives underway. Yet, I see this as the right time to work to address the gaps in our international financial system that we are witnessing in real-time.

Treasury officials began crafting proposals for the IMF, the World Bank, and the post-war international financial architecture in 1941, as World War II raged in Europe. Three years later, in the opening to the Bretton Woods Conference occurring as the Allied invasion of Normandy was still underway, president Roosevelt said: “It is fitting that even while the war for liberation is at its peak, [we] should gather to take counsel with one another respecting the shape of the future which we are to win.”

As then, we ought not wait for a new normal. We should begin to shape a better future today.

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