It is nearly 30 years since Rudiger Dornbusch and Sebastian Edwards published a seminal book, The Macroeconomics of Populism. Their conclusion back then was that the economic policies of populist leaders were quintessentially irresponsible. These governments, blinded by an aim to address perceived social injustices, specialised in profligacy, unbothered by budget constraints or whether they might run out of foreign exchange.

Because of this disregard for basic economic logic, their policy experiments inevitably ended badly, with some combination of inflation, capital flight, recession and default. Salvador Allende’s Chile in the 1970s, or Alan García’s Peru in the 1980s, capture this story perfectly.

These days, the macroeconomics of populism looks different. Of course there are populist leaders out there whose policies follow, more or less, the playbook of the 1970s and 1980s. Donald Trump may prove to be one of those, with a late-cycle fiscal expansion that seemed to have no basis in economic reasoning; Recep Tayyip Erdogan, by some accounts, may be another.

But a much more interesting phenomenon is the apparent surge in populist leaders whose economic policies are remarkably disciplined.

Take Mexico’s president, Andrés Manuel López Obrador. When it comes to fiscal policy, it is odd indeed that this fiery critic of neoliberalism seems fully committed to austerity. His budget for 2019 targets a surplus before interest payments of 1 per cent of GDP, and on current plans he intends to increase that surplus next year to 1.3 per cent of GDP. He has upheld the autonomy of the central bank and, so far at least, his overall macroeconomic framework is anything but revolutionary.

Hungary’s prime minister Viktor Orban offers another example of conservative populism. Under his watch, budget deficits have been considerably lower than they had been previously, helping to push the stock of public debt down from 74 per cent of GDP in 2010, the year Orban took over, to 68 per cent last year.

This emphasis on the virtues of fiscal prudence is also visible in Poland, where Jaroslaw Kaczynski’s PiS has managed public finances with sufficient discipline in the past few years to push the debt/GDP ratio below 50 per cent last year, the first time this has happened since 2009.

The obvious question is: what has changed in the decades since Dornbusch and Edwards went into print?

One answer is that today’s populists tend to strive for national self-reliance, which encourages them to avoid building up any dependence on foreign capital. And since that goal is achieved by keeping a tight rein on macro policy, fiscal indiscipline is avoided in order to limit vulnerability to foreign influences.

Perhaps this is because the 'them', or the perceived enemy, for many of today’s populists tends to be outside the country rather than inside. Broadly speaking, it is the forces of globalisation — and global capital in particular — that are the problem for these leaders, and self-reliance is the only way to keep those forces at arm’s length. This helps to explain why, for example, Orban has been so keen to repay debt to Hungary’s external creditors. He has relied instead on selling bonds to Hungarian households to finance his deficits, even though the interest rates on those bonds are much higher than he would pay to foreign creditors. It also helps explain why the PiS in Poland has presided over a decline in foreign holdings of its domestic bonds. Foreign investors owned 40 per cent of Poland’s domestic government debt back in 2015, but only 26 per cent now.

In other words, among many of today’s populists there is a blurring of the distinction between populism and nationalism. And the nationalistic urge to keep the rest of the world off your back seems to dominate the populist urge to spend money. The perfect example of that instinct is Vladimir Putin: not necessarily a populist, but his administration has been emphatic about the need to keep public spending low and to build solid financial buffers. National self-reliance is an economic obsession for the Russian government, and provides a model for other countries who wish to insulate themselves from international finance.

One of the reasons why the macroeconomics of populism have changed in this way is the historical legacy of economic disaster. If you are a populist leader in a country where financial crisis is part of living memory — as it is in Mexico, Hungary and Russia, say — you might do well to err on the side of conservatism for fear of repeating the mistakes of your predecessors.

But another reason why populism looks different for countries like Poland, Hungary, Mexico and Russia has to do with mere luck. Hungary and Poland, in particular, enjoy the luck of geography: having been absorbed into the EU, they have received financial transfers from Brussels averaging some 3-4 per cent of GDP in the past few years, so that populism in these countries has been solidly underpinned by the terms of their EU membership. López Obrador is enjoying the inheritance of his predecessor’s sound macro policy, together with a buoyant US economy and low US interest rates. Russia has had the good fortune of oil exports to rely on.

The thing about luck is that it can run out. So maybe it’s not quite time yet to bury the old macroeconomics of populism. But for the time being, it seems true to say that many of today’s populists have an unexpectedly robust sense of economic discipline.

This article was originally published in the Financial Times.

The 2007-08 financial crisis wreaked havoc on the lives of millions of people across the globe, and upended the faith of many in the prevailing economic system, with many countries still recovering a decade on.

Drawing on extensive research in his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Professor Shiller will draw on a rich array of historical examples and data and outline a new way to think about economic change, and the narratives that shape it, to provide answers to questions such as whether lessons have been learned since the last financial crisis, are the same dislocations likely to occur again and what toolkits, if any, are there for anticipating the next financial crisis or recession?

Attendance at this event is by invitation only.

The renminbi seems to be back in business as a Chinese tool of retaliation against US tariffs. A 1.5 per cent fall in the currency early this month in response to proposed new US tariffs was only a start. Since the middle of August the renminbi has weakened further, and the exchange rate is now 4 per cent weaker than at the start of the month. We may well see more of a ‘weaponized’ renminbi, but there are four good reasons why Beijing might be wise to think before shooting.

The first has to do with how China seeks to promote its place in the world. China has been at pains to manage the collapse of its relations with the US in a way that allows it to present itself as an alternative pillar of global order, and as a source of stability in the international system, not to mention moral authority. This has deep roots.

Anyone investigating the history of Chinese statecraft will quickly come across an enduring distinction in Chinese thought: between wang dao, the kingly, or righteous way, and ba dao, the way of the hegemon. Since Chinese thinkers and officials routinely describe US behaviour since the Second World War as hegemonic, it behoves Chinese policymakers to do as much as possible to stay on moral high-ground in their behaviour towards Washington. Only in that way would President Xi be able properly to assert China’s claim to leadership.

Indeed, China has a notable track record of using exchange rate stability to enhance its reputation as a force for global stability. Both in the aftermath of the Asian crisis in 1997, and of the Global Financial Crisis in 2008, Chinese exchange rate stability was offered as a way of demonstrating China’s trustworthiness and its commitment to multilateral order.

Devaluing the renminbi in a meaningful way now might have a different rationale, but the cost to China’s claim to virtue, and its bid to offer itself as a guardian of global stability, might be considerable.

That’s particularly true because of the second problem China has in thinking about a weaker renminbi: it may not be all that effective in sustaining Chinese trade. One reason for this is the increasing co-movement with the renminbi of currencies in countries with whom China competes.

As the renminbi changes against the dollar, so do the Taiwan dollar, the Korean won, the Singapore dollar and the Indian rupee. In addition, the short-run impact of a weaker renminbi is more likely to curb imports than to expand exports, and so its effects might be contractionary. 

An ineffective devaluation of the renminbi would be particularly useless because of the third risk China needs to consider, namely the risk of retaliation by the US administration. Of this there is already plenty of evidence, of course.

The US Treasury’s declaration of China as a ‘currency manipulator’ on 5 August bears little relationship to the actual formal criteria that the Treasury uses to define that term, but equally the US had warned the Chinese back in May that these criteria don’t bind its hand. By abandoning a rules-based approach to the definition of currency manipulation, the US has opened wide the door to further antagonism, and Beijing should have no doubt that Washington will walk through that door if it wants to.

The fourth, and possibly most self-destructive, risk that China has to consider is that a weaker renminbi might destabilize China’s capital account, fuelling capital outflows that would leave China’s policymakers feeling very uncomfortable.

Indeed, there is already evidence that Chinese residents feel less confident that the renminbi is a reliable store of value, now that there is no longer a sense that the currency is destined to appreciate against the dollar. The best illustration of this comes from the ‘errors and omissions’, or unaccounted-for outflows, in China’s balance of payments.

The past few years have seen these outflows rise a lot, averaging some $200 billion per year during the past four calendar years, or almost 2 per cent GDP; and around $90 billion in the first three months of 2019 alone. These are scarily large numbers.

The risk here is that Chinese expectations about the renminbi are ‘adaptive’: the more the exchange rate weakens, the more Chinese residents expect it to weaken, and so the demand for dollars goes up. In principle, the only way to deal with this risk would be for the People's Bank of China (PBOC) to implement a large, one-off devaluation of the renminbi to a level at which dollars are expensive enough that no one wants to buy them anymore.

This would be very dangerous, though: it presupposes that the PBOC could know in advance the ‘equilibrium’ value of the renminbi. It would take an unusually brave central banker to claim such foresight, especially since that equilibrium value could itself be altered by the mere fact of such a dramatic change in policy.

No one really knows precisely by what mechanism capital outflows from China have accelerated in recent years, but a very good candidate is tourism. The expenditure of outbound Chinese tourists abroad has risen a lot in recent years, and that increase very closely mirrors the rise in ‘errors and omissions’. So the suspicion must be that the increasing flow of Chinese tourists – nearly one half of whom last year simply travelled to capital-controls-free Hong Kong and Macao – is just creating opportunities for unrecorded capital flight.

This raises a disturbing possibility: that the most effective way for China to devalue the renminbi without the backfire of capital outflows would be simultaneously to stem the outflow of Chinese tourists. China has form in this regard, albeit for differing reasons: this month it suspended a programme that allowed individual tourists from 47 Chinese cities to travel to Taiwan.

A more global restriction on Chinese tourism might make a devaluation of the renminbi ‘safer’, and it would have the collateral benefit of helping to increase China’s current account surplus, the evaporation of which in recent years owes a lot to rising tourism expenditure and which is almost certainly a source of unhappiness in Beijing, where mercantilism remains popular.

But a world where China could impose such draconian measures would be one where nationalism has reached heights we haven’t yet seen. Let’s hope we don’t go there.

This article was originally published in the Financial Times.

In the five months since the last extension of the Brexit deadline, the questions about the UK’s trading relationship with the EU remain as open as before, as do those about what sort of relationship it should seek with other partners.

The world has not stood still, however, and so the UKTPO is convening another panel to consider constructive ways of moving forward. The panel will discuss potential trajectories for UK trade policy, followed by a question and answer session.

The UK Trade Policy Observatory (UKTPO) is a partnership between Chatham House and the University of Sussex which provides independent expert comment on, and analysis of, trade policy proposals for the UK as well as training for British policymakers through tailored training packages.

At this event, which forms the second annual UK Trade Policy Observatory conference, there will be six presentations over the course of the day before concluding with a panel discussion and Q&A. This year’s conference will focus on the following legal areas of trade policy:

• Blockchain: Creating and Eliminating Trade in Services
• China's Role in the International Trading System
• Official Export Support: Compliance and Competition Concerns
• Strategic Litigation and Health Regulation: Implications for International Economic Law
• Development, Labour Standards and Sustainability in Trade Agreements
• Retaining Versus Reforming EU Food Safety Legislation: Selected Issues for a US-UK Trade Negotiation

To register for this event, please click here. 

As the chair of the Royal Institute of International Affairs, I recently hosted an offsite event with some of the organization’s strongest supporters, research staff, and other leaders. I left with a clearer view of three of the biggest issues of our time: slowing productivity growth, anti-establishment politics, and the rise of China.

Summary

• Multilateralism may, in theory, put countries on an equal economic footing. But in practice the concept has often relied on an anchor government to create and preserve global norms. Under the presidency of Donald Trump, the US has accelerated its move away from leadership in global economic governance. This shift threatens the monetary and trading systems that have long underpinned globalization. Does the global economy need – and can it find – another leader to take America’s place?
• In the monetary sphere, the US role in providing an internationalized currency has endured relatively well, even though the US’s formal anchoring of the global exchange rate system collapsed nearly half a century ago. Governance of the US dollar and of the dollar-based financial system has largely been left to competent technocrats.
• Recent US political uncertainty has encouraged other governments, particularly in the eurozone and China, in their long-standing quest to supplant the dollar. But these economies’ internal weaknesses have prevented their respective currencies from playing a wider role. Arguments for a multipolar system exist, yet network effects plus the dollar’s superior institutions mean it has retained its dominance.
• In trade, the US role as anchor of the global legal order was already looking unreliable before Trump’s election. Washington has faced growing resistance at home to its global responsibilities. This, together with the idiosyncratic rise of countries such as China, has made the US an increasingly unreliable and narrowly transactional leader.
• More recently, hard-to-regulate issues such as foreign direct investment, technology transfer and data flows, often with national security implications, are increasingly undermining the ideal of multilateral global governance. Institutions such as the World Trade Organization, focused on cross-border trade in goods and services, are becoming less relevant.
• Recent US actions against the Chinese technology firm Huawei show the Trump administration’s willingness to decouple the US market from China and try to drag other economies with it. As far as possible, other governments should resist taking sides. A complete separation of the global economy into rival spheres is probably unfeasible, and certainly highly undesirable.
• Although future US administrations may be less wantonly destructive, it is not realistic to expect them to resume America’s former role. Nor can the US simply be replaced with another power. Instead, coalitions of governments with interests in international rules-based orders will need to form. These coalitions will need to show due deference to issues like investment and national security, especially where attempts to bind governments by multilateral rules are likely to provoke a severe backlash from domestic constituencies.

Currently 73% of all UK agricultural imports come from the EU. That heavy dependence sparked a report by the British parliament expressing concern about the UK’s food security in the immediate aftermath of Brexit.

Meanwhile, Latin America’s agricultural powerhouses Brazil and Argentina only accounted for a total of 1.6% of the UK’s agricultural market across eight sectors in 2018. A growing relationship would seem to be an obvious fit post-Brexit – but a number of structural issues stand in the way.

There is certainly scope for increasing Latin American agricultural exports to the UK given current trade patterns. Two of the main agricultural imports that the UK buys from the EU are meat products, representing 82% of UK imports in that category, and dairy products and eggs; 98% of UK’s dairy- and egg-related external supply came from the EU. In both these areas, Brazil and Argentina could have comparative advantages, including lower prices.

But any improvement in agricultural trade links will depend on two factors: 1) how the UK leaves the EU: whether it crashes out, negotiates an easy exit or leaves at all; and 2) whether Latin American agricultural producers can improve their environmental practices and can meet the production standards established by the EU and likely maintained by a post-Brexit Britain.

Some of the key issues that will affect this are:

Tariff structures

On the UK side, there is pressure by domestic agricultural producers to raise UK tariffs to allow them to expand their local market share. Yet, despite the pressures from local farmers, the UK has laid out two scenarios.

In one case, the UK government has stated that in the event of a no-deal Brexit, tariffs will be lowered to 0%, but there is no firm commitment and this would likely be temporary. It is also unlikely that those would apply to all agricultural products. In the case of beef imports (of which Argentina and Brazil are major exporters), the UK has proposed that ‘no deal’ would bring a reduction on tariffs on a range of beef products of roughly half.

Meanwhile, tariffs on EU imports could go up. Even if the UK establishes 0% tariffs on EU products, it’s possible that the EU will not reciprocate, instead choosing to revert to the World Trade Organization’s most-favoured-nation tariffs. To take one example of what that would mean, under existing most-favoured-nation tariffs on beef, the tariffs range from €6.80 per 100 kilograms of full bovine carcasses or half carcasses all the way up to €161.10 for 160 kilograms of prepared or preserved meat, including sausages.

Free trade agreements between the EU and Latin American countries

The EU has free trade agreements with the Central American bloc of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama; Mexico; Chile; and the Andean countries of Colombia, Ecuador, and Peru. In all those cases, the UK has expressed its desire to maintain its liberal trade framework with those countries.

Even if the UK leaves without a deal and tariffs do increase on EU agricultural exports, though, these Western Hemisphere economies are unlikely to see a large boost in their food exports to the UK. Chile and other large fruit producers are already locked into the Chinese market. And the real agricultural powerhouses, Argentina and Brazil, are now part of the EU trade agreement with Mercosur.

Since that agreement is not yet in force, the UK and Mercosur would need to negotiate a separate agreement. Such an agreement may be easier to ratify than the EU agreement since there is only one partner (the UK) for such a deal, but the likely change in government in Argentina after the 27 October elections may make it difficult to secure a deal on the Mercosur side.

Some EU trade agreements also include arrangements for tariff rate quotas. An EU quota with Argentina, for example, allows more than 280,000 tonnes of lamb to be imported to the EU duty free from Argentina, among other countries. It is unclear whether these quotas will be maintained or even expanded by the UK post-Brexit.  

Phytosanitary standards and rules governing the treatment of animals

Non-tariff barriers concerning production practices could play a key role. The large UK consumer organization Which? raised the concern before parliament that in the scramble to replace EU food imports, the UK could diverge from EU standards on animal cloning, the use of growth hormones and hygiene in poultry production. Pressure to maintain those standards would likely exclude many products from South America.

Beyond the regulatory barriers, there is also the possibility that UK consumers may reject agricultural products produced in less sustainable and humane conditions, or in countries (such as Brazil) that are seen by the public as abusing the environment.

In short, an increase in Latin American agricultural exports to the UK market may not happen as easily or as quickly as some hope after Brexit. In fact, it may not happen at all. But if Latin American countries – Argentina and Brazil in particular – want to capture this potential new market, the first step both should be to improve their environmental profile and standards at both the government and producer level.

Economic containment has garnered repeated attention in the discourse about the United States' response to China. Yet, the attributes of economic containment as a distinct strategy of Great Power competition remain unclear. Moreover, the conditions under which a leading power can employ economic containment against a challenging power remain theoretically unelaborated. This article first suggests that economic containment refers to the use of economic policies to weaken the targeted state's material capacity to start military aggression, rather than to influence the competitor's behaviour over a specific issue. Then, this article suggests that economic containment becomes a viable option when the leading power has the ability to inflict more losses on the challenging power through economic restrictions, and this ability is largely determined by the availability of alternative economic partners. When the leading power cannot effectively inflict more losses on the challenging power due to the presence of alternative economic partners, it is better off avoiding economic containment. The author substantiates these arguments through case-studies of the United States' responses to the Soviet Union during the Cold War. The article concludes by examining the nature of the United States' recent economic restrictions against China.

The upcoming UK general election is arguably a 'Brexit election', and as such, whoever wins the election will have little time to get their strategy for Brexit up and running to meet the new Brexit deadline of 31 January 2020. But what are the political parties’ policies for the UK's future trade? This event will present and discuss what the five main parties’ manifestos imply for future UK trade. Each manifesto will be presented and analysed by a fellow of the UK Trade Policy Observatory (UKTPO) and will be followed by a Q&A session. 

Using the UK as a case study, this book provides the first systematic exploration of how accountability is understood inside the secret world. It is based on new interviews with current and former UK intelligence practitioners, as well as extensive research into the performance and scrutiny of the UK intelligence machinery.

The result is the first detailed analysis of how intelligence professionals view their role, what they feel keeps them honest, and how far external overseers impact on their work.

The UK gathers material that helps inform global decisions on such issues as nuclear proliferation, terrorism, transnational crime, and breaches of international humanitarian law. On the flip side, the UK was a major contributor to the intelligence failures leading to the Iraq war in 2003, and its agencies were complicit in the widely discredited U.S. practices of torture and 'rendition' of terrorism suspects. UK agencies have come under greater scrutiny since those actions, but it is clear that problems remain.

Secrets and Spies is the result of a British Academy funded project (SG151249) on intelligence accountability.

Open society is increasingly defended by secret means. For this reason, oversight has never been more important. This book offers a new exploration of the widening world of accountability for UK intelligence, encompassing informal as well as informal mechanisms. It substantiates its claims well, drawing on an impressive range of interviews with senior figures. This excellent book offers both new information and fresh interpretations. It will have a major impact.

Richard Aldrich, Professor of International Security, University of Warwick, UK

Gaskarth’s novel approach, interpreting interviews with senior figures from the intelligence world, brings fresh insight on a significant yet contested topic. He offers an impressively holistic account of intelligence accountability—both formal and informal—and, most interestingly of all, of how those involved understand it. This is essential reading for those wanting to know what accountability means and how it is enacted.

Rory Cormac, Professor of International Relations, University of Nottingham

About the author

Jamie Gaskarth is senior lecturer at the University of Birmingham, where he teaches strategy and decision-making. His research looks at the ethical dilemmas of leadership and accountability in intelligence, foreign policy, and defence. He is author/editor or co-editor of six books and served on the Academic Advisory panel for the 2015 UK National Security Strategy and Strategic Defence and Security Review.

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The transition of power in Oman from the deceased Sultan Qaboos to his cousin and the country’s new ruler, Sultan Haitham bin Tariq, has been smooth and quick, but the new sultan will soon find that he has a task in shoring up the country’s economic position.

Above all, the fiscal and debt profile of the country requires careful management. Fiscal discipline was rare for Oman even during the oil price spike of the 2000s. Although oil prices only collapsed in 2014, Oman has been registering a fiscal deficit since 2010, reaching a 20.6 per cent high in 2016. As long as fiscal deficits remain elevated, so will Oman’s need to finance those deficits, predominately by borrowing in the local and international market.

Oman’s Debt-to-GDP ratio has been rising at a worrying pace, from 4.9 per cent in 2014 to an IMF-estimated 59.8 per cent in 2019. By 2024, the IMF is forecasting the ratio to reach nearly 77 per cent. A study by the World Bank found that if the debt-to-GDP ratio in emerging markets exceeds 64 per cent for an extended period, it slows economic growth by as much as 2 per cent each year.

Investors are willing to lend to Oman, but the sultanate is paying for it in terms of higher spreads due to the underlying risk markets are placing on the rising debt profile of the country. For instance, Oman has a higher sovereign debt rating than Bahrain yet markets perceive it to be of higher risk, making it costlier to borrow. Failure to address the fiscal and debt situation also risks creating pressure on the country’s pegged currency.

If oil revenues remain low, Sultan Haitham will have to craft a daring strategy of diversification and private sector growth. He is well placed for this: Sultan Haitham headed Oman’s Vision 2040, which set out the country’s future development plans and aspirations, the first Gulf country to embark on such an assessment. However, like all vision documents in the Gulf, Oman’s challenge will be implementation.

In the age of climate change, renewable energy is a serious economic opportunity, which Oman has to keep pursuing. If cheap electricity is generated it could also be exported to other Gulf states and to south Asia. In Oman, the share of renewables in total electricity capacity was around 0.5 per cent in 2018; the ambition is to reach 10 per cent by 2025.

However, in order to reach this target, Oman would have to take additional measures such as enhancing its regulatory framework, introducing a transparent and gradual energy market pricing policy and integrating all stakeholders, including the private sector, into a wider national strategy.

Mining could provide another economic opportunity for Oman’s diversification efforts, with help from a more robust mining law passed last year. The country has large deposits of metals and industrial minerals and its mountains could have gold, palladium, zinc, rare earths and manganese.

Oman’s strategic location connecting the Gulf and Indian Ocean with east Africa and the Red Sea could also boost the country’s economy. The Duqm special economic zone, which is among the largest in the world, could become the commercial thread between Oman, south Asia and China’s ‘Belt and Road Initiative.’

Oman has taken important steps to make its economy more competitive and conducive to foreign direct investment. Incentives include a five-year renewable tax holiday, subsidized plant facilities and utilities, and custom duties relief on equipment and raw materials for the first 10 years of a firm’s operation in Oman.

A private sector economic model that embraces small- and medium-sized enterprises as well as greater competition and entrepreneurship would help increase opportunities in Oman. Like all other Gulf economies, future employment in Oman will have to be driven be the private sector, as there is little space left to grow the public sector.

Privatization needs to continue. Last year’s successful sale of 49 per cent of the electricity transmission company to China’s State Grid is a very positive step. The electricity distribution company as well as Oman Oil are next in line for some form of partial privatization.

The next decade will require Oman to be even more adept in its competitiveness as the region itself tries to find its new bearings. Take tourism for instance; Oman hopes to double its contribution to GDP from around 3 per cent today to 6 per cent by 2040 and the industry is expected to generate half a million jobs by then. Over the next 20 years, Oman will most likely be facing stiff competition in this area not only by the UAE but by Saudi Arabia as well.

The new sultan has an opportunity to embark on deeper economic reforms that could bring higher growth, employment opportunities and a sustainable future. But he has a big task.

There are two well-established ideas in trade. Individually, they are correct. Combined, they can lead to a conclusion that is unfortunately wrong.

The first idea is that, across a range of economic sectors, the EU and the US have been engaged in a battle to have their model of regulation accepted as the global one, and that the EU is generally winning.

The second is that governments can use their regulatory power to extend strategic and foreign policy influence.

The conclusion would seem to be that the EU, which has for decades tried to develop a foreign policy, should be able to use its superpower status in regulation and trade to project its interests and its values abroad.

That’s the theory. It’s a proposition much welcomed by EU policymakers, who know they are highly unlikely any time soon to acquire any of the tools usually required to run an effective foreign policy.

The EU doesn’t have an army it can send into a shooting war, enough military or political aid to prop up or dispense of governments abroad, or a centralized intelligence service. Commission President Ursula von der Leyen has declared her outfit to be a ‘geopolitical commission’, and is casting about for any means of making that real.

Through the ‘Brussels effect’ whereby European rules and standards are exported via both companies and governments, the EU has indeed won many regulatory battles with the US.

Its cars, chemicals and product safety regulations are more widely adopted round the world than their American counterparts. In the absence of any coherent US offering, bar some varied state-level systems, the General Data Protection Regulation (GDPR) is the closest thing the world has to a single model for data privacy, and variants of it are being adopted by dozens of countries.

The problem is this. Those parts of global economic governance where the US is dominant – particularly the dollar payments system – are highly conducive to projecting US power abroad. The extraterritorial reach of secondary sanctions, plus the widespread reliance of banks and companies worldwide on dollar funding – and hence the American financial system – means that the US can precisely target its influence.

The EU can enforce trade sanctions, but not in such a powerful and discriminatory way, and it will always be outgunned by the US. Donald Trump could in effect force European companies to join in his sanctions on Iran when he pulled out of the nuclear deal, despite EU legislation designed to prevent their businesses being bullied. He can go after the chief financial officer of Huawei for allegedly breaching those sanctions.

By contrast, the widespread adoption of GDPR or data protection regimes inspired by it may give the EU a warm glow of satisfaction, but it cannot be turned into a geopolitical tool in the same way.

Nor, necessarily, does it particularly benefit the EU economy. Europe’s undersized tech sector seems unlikely to unduly benefit from the fact that data protection rules were written in the EU. Indeed, one common criticism of the regulations is that they entrench the power of incumbent tech giants like Google.

There is a similar pattern at work in the adoption of new technologies such as artificial intelligence and the Internet of Things. In that field, the EU and its member states are also facing determined competition from China, which has been pushing its technologies and standards through forums such as the International Telecommunication Union.

The EU has been attempting to write international rules for the use of AI which it hopes to be widely adopted. But again, these are a constraint on the use of new technologies largely developed by others, not the control of innovation.

By contrast, China has created a vast domestic market in technologies like facial recognition and unleashed its own companies on it. The resulting surveillance kit can then be marketed to emerging market governments as part of China’s enduring foreign policy campaign to build up supporters in the developing world.

If it genuinely wants to turn its economic power into geopolitical influence – and it’s not entirely clear what it would do with it if it did – the EU needs to recognize that not all forms of regulatory and trading dominance are the same.

Providing public goods to the world economy is all very well. But unless they are so particular in nature that they project uniquely European values and interests, that makes the EU a supplier of useful plumbing but not a global architect of power.

On the other hand, it could content itself with its position for the moment. It could recognize that not until enough hard power – guns, intelligence, money – is transferred from the member states to the centre, or until the member states start acting collectively, will the EU genuinely become a geopolitical force. Speaking loudly and carrying a stick of foam rubber is rarely a way to gain credibility in international relations.

This article is part of a series of publications and roundtable discussions in the Chatham House Global Trade Policy Forum.

This week the UK will start negotiating its future relationship with the European Union. The government is trying to convince the EU that it is serious about its red lines and is prepared to walk away from negotiations if the UK’s ‘regulatory freedom’ is not accepted – a no-deal scenario that would result in tariffs between the EU and the UK. Yet at the same time the story it is telling the world is that Britain is ‘re-emerging after decades of hibernation as a campaigner for global free trade’, as Boris Johnson put it in his speech in Greenwich a few weeks ago.

The EU is understandably confused. It’s a bit odd to claim to be campaigning for free trade at the exact moment you are creating new barriers to trade. If Britain were so committed to frictionless trade, it wouldn’t have left the EU in the first place – and having decided to leave, it would have sought to maintain a close economic relationship with the EU, like that of Norway, rather than seek a basic trade deal like Canada’s. 

As well as creating confusion, the narrative also absurdly idealizes free trade. Johnson invoked Richard Cobden and the idea that free trade is ‘God’s diplomacy – the only certain way of uniting people in the bonds of peace since the more freely goods cross borders the less likely it is that troops will ever cross borders’. But the idea that free trade prevents war was shattered by the outbreak of the First World War, which brought to an end the first era of globalization.

We also know that the domestic effects of free trade are more complex and problematic than Johnson suggested. Economic liberalization increases efficiency by removing friction but also creates disruption and has huge distributional consequences – that is, it creates winners and losers. In a democracy, these consequences need to be mitigated.

In any case, the world today is not the same as the one in which Cobden lived. Tariffs are at a historically low level – and many non-tariff barriers have also been removed. In other words, most of the possible gains from trade liberalization have already been realized. Johnson talked about the dangers of a new wave of protectionism. But as the economist Dani Rodrik has argued, the big problem in the global economy is no longer a lack of openness, it is a lack of democratic legitimacy.

The UK should therefore abandon this confusing and misleading narrative and own the way it is actually creating new barriers to trade – and do a better job of explaining the legitimate reasons for doing so. Instead of simplistically talking up free trade, we should be talking about the need to balance openness and economic efficiency with democracy and a sense of control, which is ultimately what Brexit was all about. Instead of claiming to be a ‘catalyst for free trade’, as Johnson put it, the UK should be talking about how it is trying to recalibrate globalization and, in doing so, make it sustainable.

In the three decades after the end of the Cold War, globalization got out of control as barriers to the movement of capital and goods were progressively removed – what Rodrik called ‘hyper-globalization’ to distinguish it from the earlier, more moderate phase of globalization. This kind of deep integration necessitated the development of a system of rules, which have constrained the ability of states to pursue the kind of economic policy, particularly industrial policy, they want, and therefore undermined democracy.

Hyper-globalization created a sense that ‘the nation state has fundamentally lost control of its destiny, surrendering to anonymous global forces’, as the economist Barry Eichengreen put it. Throughout the West, countries are all struggling with the same dilemma – how to reconcile openness and deep integration on the one hand, and democracy, sovereignty and a sense of control on the other.

Within the EU, however, economic integration and the abolition of barriers to the movement of capital and goods went further than in the rest of the world – and the evolution of the principle of freedom of movement after the Maastricht Treaty meant that barriers to the internal movement of people were also eliminated as the EU was enlarged. What happened within the EU might be thought of as ‘hyper-regionalization’ – an extreme example, in a regional context, of a global trend.

EU member states have lost control to an even greater extent than other nation states – albeit to anonymous regional rather than global forces – and this loss of control was felt intensely within the EU. It is therefore logical that this led to an increase in Euroscepticism. Whereas the left wants to restore some barriers to the movement of capital and goods, the right wants to restore barriers to the movement of people.

However, having left the EU, the UK is uniquely well placed to find a new equilibrium. The UK has an ideological commitment to free trade that goes back to the movement to abolish the Corn Laws in the 1840s – which Johnson’s speech expressed. It is difficult to imagine the UK becoming protectionist in any meaningful sense. But at the same time, it has a well-developed sense of national and popular sovereignty, and the sense that the two go together – which is why it was so sensitive to the erosion of them through the EU. This means that Britain is unlikely to go to one extreme or the other.

In other words, the UK may be the ideal country to find a new balance between openness and integration on the one hand, and a sense of control on the other. If it can find this balance – if it can make Brexit work – the UK could be a model for a wider recalibration of sustainable globalization. That, rather than fetishizing free trade, is the real contribution the UK can make.

A version of this article was originally published in the Observer.

Epidemics, of the size of Covid-19, have huge economic impacts – not just from the costs of managing the health of people, but stopping them, and keeping the economy working. The 10% fall in global stock markets since it became clear that Covid-19 would not be limited to China has boldly highlighted this.

Suppressing the epidemic, but allowing the economy to still function, requires key decisions, in which central banks and finance ministries play a part.

The role of fiscal and monetary authorities in managing an epidemic economy

The scope to use monetary policy to manage the economic impact of Covid-19 is limited. The fact that the underlying cause of the shock is an infectious disease outbreak (rather than a banking crisis, as in 2008-09) and nominal interest rates are currently close to zero in most major advanced economies reduces the effectiveness of monetary policy.

Since 2010, reductions in fiscal deficits mean there is more scope for supportive fiscal action. But even here, high public debt levels and the desire not to underwrite ‘zombie’ companies that may have been sustained by a decade of ultra-low interest rates remain constraints. 

However, outside broad based fiscal and monetary policies there are six ways in which finance ministries and central banks will play a critical role in responding to the crisis.

A first crucial role for finance ministries and central banks is in helping provide the best possible economic evaluation of strict containment measures (trying to isolate each potential case) versus managing the epidemic (delaying the spread of the virus, protecting the most vulnerable and treating the sick, while enabling the majority of people to get on with daily life). Given the economic consequences, they must play a full part, alongside health experts, in advising political leaders on this key decision.

Second, if large numbers of staff are required to work from home to manage the epidemic, they have the lead role in doing whatever is necessary to ensure that financial markets – and thus the wider economy – will continue to function smoothly.

Third, they need to ensure adequate funding for the public health response. Steps that can make an enormous difference to the success of containment strategies, such as strengthening surveillance, and guaranteeing the availability of testing kits and protective equipment for front line health workers, must not fail because of a lack of funding. 

Fourth, they have a lead role in designing targeted economic interventions for the wider economy. Some of these are needed immediately to re-enforce and incentivize strict containment strategies, such as ensuring that employees without full or adequate sick leave cover have the financial support to enable them to report and self-isolate when they get sick. 

Other interventions may help improve the resilience of the economy in accommodating moderate ‘social distancing’ measures; for example, by providing assistance to small firms to help them gear up for home working.

Yet others are needed, as a contingency, to safeguard the most vulnerable sectors (such as tourism, retail and transport) in circumstances where there is a prolonged downturn. The latter may include schemes to allow deferral of tax payments by SMEs, or steps to encourage loan extensions and other forms of liquidity support from the banking system, or by moves to underwrite continued provision of business insurance.

Fifth, national economic authorities will need to play their part in combatting ‘fake news’ through providing transparent and high-quality analysis. This includes providing forecasts on the likely economic impact of the virus under different scenarios, but also detailed information on the support and contingency measures they are considering, so they can be improved and refined through feedback. 

Sixth, they will need to ensure that there is generous international support for poor countries, by ensuring the available multilateral support facilities from the international financial institutions and multilateral development banks are adequately funded and fit for purpose. The World Bank has already announced an initial $12 billion financing package, but much more is likely to be needed.

They also need to support coordinated bilateral aid where this is more effective, as well as special measures to support particularly vulnerable groups, for example, in refugee camps and prisons. Given the importance of distributing sophisticated medical equipment and expertise quickly, it is also important that every effort is made to avoid delays due to customs and migration checks.

Managing the future

The response to the immediate crisis will rightly take priority now, but economic authorities must also play their part in ensuring the world finally takes decisive steps to prevent a repeat of Covid-19 in future.

The experience with SARS, H1N1 and Ebola shows that, while some progress is made after each outbreak, this is often not sustained. This epidemic shows that managing diseases is absolutely critical to the long-term health of global economy, and doubly so in circumstances where traditional central bank and finance ministry tools for dealing with major global economic shocks are limited.

Finance ministries and central banks therefore need to push hard within government to ensure sustained long-term funding of research on prevention and strengthening of public health systems. They also need to ensure that the right lessons are drawn by the private sector on making international supply chains more robust.

Critical to the overall success of the economic effort will be effective international coordination. The G20 was established as the premier economic forum for international economic cooperation in 2010, and global health issues have been a substantive part of the G20 agenda since the 2017 Hamburg Summit. At the same time, G7 finance ministers and deputies remain one of the most effective bodies for managing economic crises on a day-to-day basis and should continue this within the framework provided by the G20.

However, to be effective, the US, as current president of the G7, will need to put aside its reservations on multilateral economic cooperation and working with China to provide strong leadership.

Ample evidence exists that China was caught off guard by the Trump administration's onslaught of punishing acts—the trade war being a prime, but far from the only, example. This article, in addition to contextualizing their earlier optimism about the relations with the United States under President Trump, examines why Chinese leaders and analysts were surprised by the turn of events. It argues that three main factors contributed to the lapse of judgment. First, Chinese officials and analysts grossly misunderstood Donald Trump the individual. By overemphasizing his pragmatism while downplaying his unpredictability, they ended up underprepared for the policies he unleashed. Second, some ingrained Chinese beliefs, manifested in the analogies of the pendulum swing and the ‘bickering couple’, as well as the narrative of the ‘ballast’, lulled officials and scholars into undue optimism about the stability of the broader relationship. Third, analytical and methodological problems as well as political considerations prevented them from fully grasping the strategic shift against China in the US.

The measures taken to limit the spread of the coronavirus - in particular social distancing -  come with significant economic costs, as the drop both in demand for goods and services and in supply due to workers being at home sick will create a short-term economic shock not seen in modern times.

Sectors that are usually less affected by regular economic swings such as transport and tourism are being confronted with an almost total collapse in demand. In the airline sector, companies are warning they might only be able to hold out for a few months more.

Building on the calls to provide income support to all citizens and shore up businesses, European leaders should now be giving explicit permission to the European Central Bank (ECB) to provide whatever financial support is needed.

Although political leaders have responded to the economic threat, the measures announced across the continent have mainly been to support businesses. The crisis is broader and deeper than the current response.

Support for weaker governments

The ECB already reacted to COVID-19 by announcing measures to support the banking system, which is important to guarantee the continuity of the European financial system and to ensure financially weaker European governments do not have to confront a failing banking system as well.

Although government-subsidised reduced working hours and sick pay are a solution for many businesses and workers, crucially they are not for those working on temporary contracts or the self-employed. They need direct income support.

This might come down to instituting something that looks like a universal basic income (UBI), and ensuring money keeps flowing through the economy as much as possible to help avoid a cascade of defaults and significant long-term damage.

But while this is likely to be the most effective remedy to limit the medium-term impact on the economy, it is particularly costly. Just as an indication, total compensation of employees was on average around €470bn per month in the eurozone last year.

Attempting to target payments using existing welfare payment channels would reduce costs, but is difficult to implement and runs the risk of many households and businesses in need missing out.

The increase in spending and lost revenue associated with these support measures dwarf the fiscal response to the 2008-09 financial crisis. The eurozone economy could contract by close to 10% this year and budget deficits are likely be in double digits throughout the bloc.

The European Commission has already stated member states are free to spend whatever is necessary to combat the crisis, which is not surprising given the Stability and Growth Pact - which includes the fiscal rules - allows for such eventualities.

Several eurozone countries do probably have the fiscal space to deal with this. Countries such as Germany and the Netherlands have run several years of balanced budgets recently and significantly decreased their debt levels. For countries such as Italy, and even France, it is a different story and the combination of much higher spending and a collapse in tax revenue is more likely to lead to questions in the market over the sustainability of their debt levels. In order to avoid this, the Covid-19 response must be financed collectively.

The Eurogroup could decide to use the European Stability Mechanism (ESM) to provide states with the funds, while suitably ditching the political conditionality that came with previous bailout. But the ESM currently has €410bn in remaining lending capacity, which is unlikely to be enough and difficult to rapidly increase.

So this leaves the ECB to pick up the tab of national governments’ increase in spending, as the only institution with effectively unlimited monetary firepower. But a collective EU response is complicated by the common currency, and particularly by the role of the ECB.

The ECB can’t just do whatever it likes and is limited more than other major central banks in its room for manoeuvre. It does have a programme to buy government bonds but this relies on countries agreeing to a rescue programme within the context of the ESM, with all the resulting political difficulties.

There are two main ways that the ECB could finance the response to the crisis. First, it could buy up more or all bonds issued by the member states. A first step in this direction would be to scrap the limits on the bonds it can buy. Through self-imposed rules, the ECB can only buy up to a third of every country’s outstanding public debt. There are good reasons for this in normal times, but these are not normal times. With the political blessing of the European Council, the Eurosystem of central banks could then start buying bonds issued by governments to finance whatever expenditure they deem necessary to combat the crisis.

Secondly, essentially give governments an overdraft with the ECB or the national central banks. Although a central bank lending directly to governments is outlawed by the European treaties, the COVID-19 crisis means these rules should be temporarily suspended by the European Council.

Back in 2012, the then president of the ECB, Mario Draghi, proclaimed the ECB would do whatever it takes, within its mandate, to save the euro, which was widely seen as a crucial step towards solving the eurozone crisis. The time is now right for eurozone political leaders to explicitly tell the ECB that together they can do whatever it takes to save the eurozone economy through direct support for businesses and households.

Illicit finance not only threatens financial stability and inclusion but also provides support for terrorism and is a primary incentive for human trafficking, the illegal wildlife trade and narcotics smuggling. Frequently, actors capitalize on loopholes and inefficiencies resulting from the lack of a coordinated response to financial crime and an underpowered global system for tracking illicit financial flows. Enhanced public-private partnerships, in addition to investment in tackling financial crime from governments, international bodies and private industries, are necessary to develop regulatory frameworks, effective responses and valuable coordination between law enforcement, policymakers, regulators and financial institutions. But how should businesses structure their efforts so that their business interests are protected and the work they do is of use to others fighting financial crime?

This webinar will explore solutions to enable public-private partnerships to work together to combat financial crime. What do successful partnerships need from each side to ensure that the work being done is efficient and effective? How can the industry’s internal effectiveness impact the ‘real-world’ victims? And what barriers impede public-private partnerships operating as a force for good? 

This event is part of a fortnightly series of 'Business in Focus' webinars reflecting on the impact of COVID-19 on areas of particular professional interest for our corporate members and giving circles.

Not a corporate member? Find out more.

The outbreak of COVID-19 has demonstrated the wide-ranging and immediate impact a systemic shock can have on the global economy including the financial loss caused by the emergency shutdown of many retail operations, the loss of income for individuals who are forced to stay indoors and the major disruption to supply chains. The longer term impacts are still being realized and depend heavily on the ability of industry and the government to respond effectively to the direct economic shock caused by the pandemic.

Systemic shocks like the COVID-19 pandemic demand immediate responses, but should also encourage governments and industries to re-examine their recovery processes, their resilience and their forward planning. In this webinar, the panellists will discuss the short and long-term impacts of the current crisis and explore how industry can help ensure that the global economy is able to recover from, and build resilience to, future systemic shocks. How do business leaders move from making decisions to reimagining a ‘new normal’ and reforming their practices? What are the critical decisions that businesses should consider when planning for this 'new normal'? And how far can these decisions be based on expected changes to governmental or intergovernmental regulation of different sectors?   

This event is part of a fortnightly series of 'Business in Focus' webinars reflecting on the impact of COVID-19 on areas of particular professional interest for our corporate members and giving circles.

Not a corporate member? Find out more.

With the IMF forecasting a 6.1% fall in advanced economy GDP in 2020 and world trade expected to contract by 11%, there is intense focus on the question of how and when to re-open economies currently in lockdown.

But no ‘opening up’ plan has a chance of succeeding unless it commands the confidence of all the main actors in the economy – employees, consumers, firms, investors and local authorities.

Without public confidence, these groups may follow official guidance only sporadically; consumers will preserve cash rather than spend it on goods and services; employees will delay returning to work wherever possible; businesses will face worsening bottlenecks as some parts of the economy open up while key suppliers remain closed; and firms will continue to delay many discretionary investment and hiring decisions.

Achieving public confidence

Taken together, these behaviours would substantially reduce the chances of a strong economic bounce-back even in the absence of a widespread second wave of infections. Five key steps are needed to achieve a high degree of public confidence in any reopening plan.

First, enough progress must be made in suppressing the virus and in building public health capacity so the public can be confident any new outbreak will be contained without reverting to another full-scale lockdown. Moreover, the general public needs to feel that the treatment capacity of the health system is at a level where the risk to life if someone does fall ill with the virus is at an acceptably low level.

Achieving this requires the government to demonstrate the necessary capabilities - testing, contact tracing, quarantine facilities, supplies of face masks and other forms of PPE (personal protective equipment) - are actually in place and can be sustained, rather than relying on future commitments. It also needs to be clear on the role to be played going forward by handwashing and other personal hygiene measures.

Second, the authorities need to set out clear priorities on which parts of the economy are to open first and why. This needs to take account of both supply side and demand side factors, such as the importance of a particular sector to delivering essential supplies, a sector’s ability to put in place effective protocols to protect its employees and customers, and its importance to the functioning of other parts of the economy. There is little point in opening a car assembly plant unless its SME suppliers are able to deliver the required parts.

Detailed planning of the phasing of specific relaxation measures is essential, as is close cooperation between business and the authorities. The government also needs to establish a centralised coordination function capable of dealing quickly with any unexpected supply chain glitches. And it must pay close attention to feedback from health experts on how the process of re-opening the economy sector-by-sector is affecting the rate of infection.  

Third, the government needs to state how the current financial and economic support measures for the economy will evolve as the re-opening process continues. It is critical to avoid removing support measures too soon, and some key measures may have to continue to operate even as firms restart their operations. It is important to show how - over time - the measures will evolve from a ‘life support’ system for businesses and individuals into a more conventional economic stimulus.

This transition strategy could initially be signalled through broad principles, but the government needs to follow through quickly by detailing specific measures. The transition strategy must target sectors where most damage has been done, including the SME sector in general and specific areas such as transport, leisure and retail. It needs to factor in the hard truth that some businesses will be no longer be viable after the crisis and set out how the government is going to support employees and entrepreneurs who suffer as a result.

The government must also explain how it intends to learn the lessons and capture the upsides from the crisis by building a more resilient economy over the longer term. Most importantly, it has to demonstrate continued commitment to tackling climate change – which is at least as big a threat to mankind’s future as pandemics.

Fourth, the authorities should explain how they plan to manage controls on movement of people across borders to minimise the risk of new infection outbreaks, but also to help sustain the opening-up measures. This needs to take account of the fact that different countries are at different stages in the progress of the pandemic and may have different strategies and trade-offs on the risks they are willing to take as they open up.

As a minimum, an effective border plan requires close cooperation with near neighbours as these are likely to be the most important economic counterparts for many countries. But ideally each country’s plan should be part of a wider global opening-up strategy coordinated by the G20. In the absence of a reliable antibody test, border control measures will have to rely on a combination of imperfect testing, quarantine, and new, shared data requirements for incoming and departing passengers.  

Fifth, the authorities must communicate the steps effectively to the public, in a manner that shows not only that this is a well thought-through plan, but also does not hide the extent of the uncertainties, or the likelihood that rapid modifications may be needed as the plan is implemented. In designing the communications, the authorities should develop specific measures to enable the public to track progress.

Such measures are vital to sustaining business, consumer and employee confidence. While some smaller advanced economies appear close to completing these steps, for many others there is still a long way to go. Waiting until they are achieved means higher economic costs in the short-term. But, in the long-term, they will deliver real net benefits.

Authorities are more likely to sustain these measures because key economic actors will actually follow the guidance given. Also, by instilling confidence, the plan will bring forward the consumer and business decision-making crucial to a strong recovery. In contrast, moving ahead without proper preparation risks turning an already severe economic recession into something much worse.

In the last 100 years, global economic crises from the Great Depression of the 1930s to the 2008 financial crash have contributed to significant political changes in Europe, often leading to a rise in popularity for extremist parties and politics. As Europe contends with a perceived crisis of democracy - now compounded by the varied responses to the coronavirus outbreak - how should we understand the relationship between externally-driven economic crises, political upheaval and democracy?

The panellists will consider the parallels between the political responses to some of the greatest economic crises Europe has experienced in the last century. Given that economic crises often transcend borders, why does political disruption vary between democracies? What can history tell us about the potential political impact of the unfolding COVID-19-related economic crisis? And will the unprecedented financial interventions by governments across Europe fundamentally change the expectations citizens have of the role government should play in their lives?

This event is based on a recent article in The World Today by Hans Kundnani and Pepijn Bergsen who are both researchers in Chatham House's Europe Programme. 'Crawling from the Wreckage' is the first in a series of articles that look at key themes in European political discourse from the last century. You can read the article here. 

This event is open to Chatham House Members. Not a member? Find out more.

There were several notable achievements during last week’s Spring meetings. The Fund’s frank set of forecasts for world GDP growth are a grim but valuable reminder of the scale of the crisis we are facing, and the Fund’s richer members will finance a temporary suspension on payments to the IMF for 29 very poor countries.

Most importantly, a boost to the Fund’s main emergency facilities - the Rapid Credit Facility and the Rapid Financing Instrument - now makes $100bn of proper relief available to a wide range of countries. But the core problem is that the vast bulk of the Fund’s firepower is effectively inert.

This is because of the idea of 'conditionality', which underpins almost all of the IMF’s lending relationships with member states. Under normal circumstances, when the IMF is the last-resort lender to a country, it insists that the borrowing government tighten its belt and exercise restraint in public spending.

This helps to achieve three objectives. One is to stabilise the public debt burden, to ensure that the resources made available are not wasted. The second is to limit the whole economy’s need for foreign exchange, a shortage of which had prompted a country to seek IMF help in the first place. And the third is to ensure that the IMF can get repaid.

Role within the international monetary system

Since the IMF does not take any physical collateral from countries to whom it is lending, the belt-tightening helps to act as a kind of collateral for the IMF. It helps to maximise the probability that the IMF does not suffer losses on its own loan portfolio — losses that would have bad consequences for the Fund’s role within the international monetary system.

This is a perfectly respectable goal. Walter Bagehot, the legendary editor of The Economist, established modern conventional wisdom about managing panics. Relying on a medical metaphor that feels oddly relevant today, he said that a panic 'is a species of neuralgia, and according to the rules of science you must not starve it.' 

Managing a panic, therefore, requires lending to stricken borrowers 'whenever the security is good', as Bagehot put it. The IMF has had to invent its own form of collateral, and conditionality is the result. The problem, though, is that belt-tightening is a completely inappropriate approach to managing the current crisis.

Countries are stricken not because they have indulged in any irresponsible spending sprees that led to a shortage of foreign exchange, but because of a virus beyond their control. Indeed, it would seem almost grotesque for the Fund to ask countries to cut spending at a time when, if anything, more spending is needed to stop people dying or from falling into a permanent trap of unemployment.

The obvious solution to this problem would be to increase the amount of money that any country can access from the Fund’s emergency facilities well beyond the $100bn now available. But that kind of solution would quickly run up against the IMF’s collateral problem.

The more the IMF makes available as 'true' emergency financing with few or no strings attached, the more it begins to undermine the quality of its loan portfolio. And if the IMF’s senior creditor status is undermined, then an important building block of the international monetary system would be at risk.

One way out of this might have been an emergency allocation of Special Drawing Rights, a tool last used in 2009. This would credit member countries’ accounts with new, unconditional liquidity that could be exchanged for the five currencies that underpin the SDR: the dollar, the yen, the euro, sterling and the renminbi. That will not be happening, though, since the US is firmly opposed, for reasons bad and good.

So in the end the IMF and its shareholders face a huge problem. It either lends more money on easy terms without the 'collateral' of conditionality, at the expense of undermining its own balance sheet - or it remains, in systemic terms, on the sidelines of this crisis.

And since the legacy of this crisis will be some eye-watering increases in the public debt burdens of many emerging economies, the IMF’s struggle to find a way to administer its medicine will certainly outlive this round of the coronavirus outbreak.

This article is a version of a piece which was originally published in the Financial Times

Political leaders, policy-makers and academics routinely refer to development as an objective process of social change through the use of technical, value-free terms. Images of poverty and inequality are regularly presented as evidence of a world that exists ‘out there’ where development unfolds. This way of seeing reflects the value of scientific forms of knowledge but also sits in tension with the normative foundations of development that take European modernization and industrialization as the benchmark for comparison. The role images play in this process is often overlooked. This article argues that a dominant mode of visuality based on a Cartesian separation between subject and object, underpinning the ascendance of European hegemony and colonialism, aligns with the core premises of orthodox development discourse. An example of how visual representations of development matter is presented through images of Africa–China relations in western media sources. Using widely circulated images depicting China's impact on African development in western news media sources as an example of why visual politics matters for policy-making, the article examines how images play a role in legitimizing development planning by rendering associated forms of epistemological and structural violence ‘invisible to the viewer’.