International Public Finance and COVID-19: A New Architecture is Urgently Needed
COVID-19 and Sustainable Development
To say that the COVID-19 pandemic is resetting the international development agenda would be an understatement. As the coronavirus outbreak tears across countries, leaving a trail of social and economic devastation in its wake, the pandemic is also tearing up the global blueprint for collective action for sustainable development agreed in 2015. Already faced with an existing financing gap of US$2.5 trillion a year, the Sustainable Development Goals (SDGs) are destined to go severely off-track in the aftermath of the pandemic, with projections of a contraction in the global economy to rival the Great Depression. Aside from the massive and tragic loss of human lives, the pandemic is expected to result in significant declines in world trade and foreign direct investment (FDI) flows that will have substantial effects on economic activity and livelihoods.
There is an urgent need to massively scale up resources needed to tackle both the immediate health, social and economic impacts of the pandemic and the longer-term recovery measures once the crisis abates. This is much more acute for developing countries that have entered the pandemic in much more fragile and perilous economic conditions. Many developing countries were heavily indebted to official and private creditors before the crisis, including 40 low-income countries in or at high risk of facing debt distress. Meanwhile, emerging markets have already seen unprecedented capital outflows, with overseas investors pulling out US$100 billion since the beginning of the crisis. The slowdown in global economic output is already hitting commodity-exporting sub-Saharan African countries the hardest, as prices for oil and industrial metals fall sharply since the start of the pandemic.
The response of the international community has been swift, with many multilateral and bilateral institutions and private philanthropists pledging vast sums of money to support mitigation and recovery efforts of the pandemic. The International Monetary Fund (IMF) has enhanced its emergency financing funds to US$100 billion while the World Bank has pledged up to US$160 billion over the next 15 months to support developing countries to cope with the effects of the pandemic. Major sovereign creditors, including G20 countries, have agreed on a moratorium on developing country debt payments. Regional and bilateral donors, such as the African Development Bank (AfDB), the European Union, Global Affairs Canada, Fraance’s Agence Française de Développement (AFD) and UK’s Department for International Development (DFID), have all committed to supporting health-specific and other social and economic responses to the COVID-19 pandemic. Private foundations and public-private partnerships, such as the Gates Foundation and the Global Fund, have made similar pledges to support both medical research and health interventions to stem and overcome the crisis. No doubt, there will be further commitments made in the coming weeks as the scale of the pandemic’s impact become clearer.
New Wine in Old Bottles
In the midst of this flurry of financial pledges, it is crucial that these financial packages are scrutinised in terms of the current framework of international public finance, especially in the context of what is called in technical circles: ‘financing for development’. The reason behind this is that the speed and scale of financial packages committed to developing countries obscure the political environment and institutional architecture through which they are being mobilised and disbursed. Given the historical legacies and contemporary realities of international development financing, it is imperative that the mechanisms and institutions funding global, national and local responses to COVID-19 are subjected to robust public scrutiny to ensure accountability in the use of resources and, more importantly, that the terms of such financing do not exacerbate the social, economic and ecological challenges already faced by developing countries.
It is important to note that the framework of multilateral and bilateral financing that is being utilised to channel resources to developing countries remains deeply rooted within the postcolonial rationalities that shaped the emergence of these institutions in the immediate postwar era. The circulation of financial resources from the global north to the global south — and the law, institutions and policies that govern the flow of these resources — have been also central to the management of developing countries. The two institutions that have once again emerged as pivotal financiers in the current crisis — the IMF and the World Bank — have traditionally served as powerful intermediaries between developing states and the global economy, using both their financial and epistemic leverage to exact domestic regulatory and policy change to accommodate states’ insertion into the global economy. The other major pandemic financiers include the European Commission, regional development banks (RDBs) and bilateral donors from OECD states, including France, Germany, Japan, UK and the USA (the countries which also control decision-making at the IMF, World Bank and many RDBs).
Importantly, despite ostensible commitments to global coordinated action, including G20 coordination on debt relief and funding promises to more representative multilateral organisations such as the United Nations (UN) and the World Health Organisation (WHO), the bulk of the financing will primarily be channelled via bilateral and multilateral organisations controlled by powerful states. This means that the amount of financial resources extended to developing countries, and the terms that accompany such financing packages, will be largely determined by northern policymakers and technocrats, with little input from countries and communities in receipt of such financing. Moreover, it is expected that a significant amount of financing will also be channelled through private financing mechanisms, including commercial financial instruments, private philanthropic foundations and public-private partnerships, that will be subjected to much less scrutiny than official financing platforms.
Need for Course Correction
The governance and regulatory shortcomings of the framework for international public finance are not inconsequential when we consider the projected amount of financial resources ( conservative estimate of between US$1 trillion to US$2.5 trillion) that will flow to developing countries as a result of the pandemic. Without clear and consistent oversight, these shortcomings can impact on short-term state responses to the pandemic and have the potential to endanger longer-term sustainable development in three critical ways.
First, regardless of their significant volume, the amount of financing available to developing countries is likely to fall far short of their actual needs, and this simply because they remain dependent on the political will of donors and the interests of creditors.
The fundraising capacity of the IMF, for example, is limited by its archaic decision-making structure which confers effective veto power to the US. Efforts to boost the Fund’s firepower last year through increases in quota subscriptions — the financial contributions countries make to the IMF as a condition of membership and its main source of funding — were thwarted by the US, denying with this other countries, notably China, to expand their contributions and, as a result, their decision making power within it. Instead, the Fund has resorted to doubling New Arrangements to Borrow (NAB) and renewed its bilateral borrowing arrangements (BBAs) to maintain its US$ 1 trillion lending capacity. These are funding options that are much more susceptible to creditor interests and much less egalitarian than increasing quota subscriptions or issuing additional special drawing rights (SDRs).
The use of supplemental financing as means of topping up the IMF’s liquidity is characteristic of the current landscape of international public finance. Significant amount of financing continues to be mobilised and disbursed through non-core platforms or concessional financing windows that require periodic replenishment. These are processes which often require laborious negotiations and, often, horse-trading over the terms and amount of resourcing. Financial resources pledged by the IMF and the World Bank to low-income and some lower middle-countries in response to the pandemic will be drawn, as a result of this, from the IMF’s Poverty Reduction and Growth Trust (PGRT) and the World Bank’s International Development Association (IDA), which rely primarily on donor contributions to subsidise the cost of lending and/or to provide capital for loans, grants and technical assistance. Debt relief for countries indebted to the IMF or the IDA are also funded through donor contributions rather than outright cancellations by the institutions themselves. In this context any relief on debt owed to multilateral institutions will depend on the resources available in ad-hoc trust funds, such the Catastrophe Containment and Relief Trust (CCRT) or Heavily Indebted Poor Countries Initiative Trust. As the European Network on Debt and Development (Eurodad) has calculated, the IMF’s decision to extend limited short-term debt service relief to 25 countries will quickly exhaust most of the US$500 million available in the CCRT, including the US$285 million recently pledged by the UK and Japan.
In the arena of global health, the proliferation of earmarked funds have led to chronic underfunding of core operational activities of international organisations, notably the WHO and other UN development agencies, reducing their financial autonomy and flexibility to respond to pandemics. At the WHO, the share of non-core funding increased from less than 50 percent of its budget in the 1990s to more than 80 percent in 2016. Ironically, the US which has recently announced a temporary withholding of contributions to the WHO, had been instrumental, along with the UK, in advocating for a freeze in its core budget. The US and the UK also constitute the largest non-core funders which allow them to drive the agenda of the organisation.
Second, the reliance on donor-dominated institutions to design and deliver COVID-19 financing will mean that donor interests will drive the short, medium and long-term solutions for many developing countries.
The aforementioned creeping ‘bilateralism’ or ‘Trojan multilateralism’ in the constitution of international institutions responsible for financing global public goods have resulted in the widespread embedding of bilateral and, in some cases, private, objectives and interests into multilateral institutions and development programmes extended to the global south. The diversion of funds at the WHO from core to earmarked funds and the rise of so-called ‘vertical funds’ for health focused on specific health interventions, notably prevention, control and treatment of communicable diseases, have resulted in the underfunding of public health systems as a whole, radically diminishing developing countries’ capacity to deal with health emergencies. Additionally, it is likely that the routing of existing aid funds to pandemic finance and debt relief will divert attention from other equally pressing areas, including funding for climate change mitigation and adaptation, reproductive health and maternal services and education.
Development interventions are not merely technical operations but are deeply political processes. They alter not only the economic structures within recipient states but also reconstitutes state-society relations and the states’ broader relationships with external actors. As several commentators have already pointed out (see here and here), over the years, financing conditionalities imposed by the IMF and the World Bank have exacerbated developing countries’ vulnerability to health epidemics and social and economic shocks resulting from natural and man-made disasters. Yet despite evidence that these structural and macroeconomic conditionalities, such as fiscal austerity, trade liberalisation, deregulation and privatisation of social and economic sectors, are leading to significant retrenchment in health services and social protection floors, these measures have continued to be a feature of adjustment programmes tied to financial packages. At the same time, there has been a concerted promotion by international development community — primarily by the Bretton Woods institutions and the OECD but also by the UN — towards encouraging and leveraging private financing for development. The aim has been courting commercial investors as ‘partners’ in development and humanitarian process, a move that has prompted widespread concerns in regards to the accountability, transparency and regulation of these new channels of development finance.
Whether there will be any significant departure from this ‘business as usual’ scenario in the COVID-19 pandemic remains to be seen. On the positive note, there is some renewed commitment by most major western states to core funding of international organisations, including the UN and the WHO, and widespread agreement among international financial institutions that a departure from fiscal ceilings and a move towards fiscal stimulus and social protection measures is necessary to mitigate the social and economic dislocations of the crisis. However, there is also evidence to indicate that these policies are only to be implemented as temporary and exceptional measures to stabilise economies and that a return to fiscal austerity and deregulated markets would be expected once the crisis abates. There are also signs that financing responses will continue to be driven by broader geopolitical and economic interests of donor states, including in regards to the securitisation of refugee and migration flows and the safeguarding of commercial interests, including private investors and commercial sovereign creditors.
Third and finally, the large-scale financial response of the international community will not succeed if not matched by a similarly large-scale framework of policy coherence and accountability.
The fragmented, ad-hoc and donor-driven framework of international development cooperation and public finance has meant that there is little coordination in the mobilisation and disbursement of financing at international or national levels. Despite numerous commitments to alignment, harmonisation and country ownership, there has been little uniformity, or indeed platforms for collaboration and oversight of financial support to developing countries. This means that developing countries are often left to deal with a byzantine maze of overlapping rules and jurisdictions, creating significant administrative burdens on overstretched institutions and providing little scope for countries to engage proactively in the design of programme support.
At the same time, there is little institutional scope for accountability attached to IFI or bilateral donor financing, including in circumstances where their policies impact on human rights. Existing mechanisms for oversight and accountability for development finance interventions are often limited to providing redress for communities affected by development projects rather than broad-based economic programmes. The World Bank’s Inspection Panel for example, only has jurisdiction to consider breaches of operational policies relating to project-based harms, such as the impact on communities of dam construction, but not for impacts emanating from its policy-based lending. Developing countries are being made to jump through numerous hoops in order to access critical financing and debt relief to tackle the pandemic and subject themselves to surveillance by international financial institutions and multilateral and bilateral donors but there is no corresponding framework in which financiers are subjected to similar accountability and oversight.
Ultimately, financial packages will only serve as sticking plasters if broader structural issues are not addressed to remediate the conditions that led to the COVID-19 health pandemic and the social and economic impacts arising from it. Responses to the pandemic must go beyond mitigation and containment measures and towards reforming the very structural conditions of the global economy that enable the crisis to take hold and worsen. Temporary standstills on sovereign debt repayments will be ineffective for the majority of indebted states in the longer term as it only postpones debt repayments while allowing them to accumulate more debt. The current G20 debt relief deal only covers debt owed to official bilateral creditors and applicable to low-income developing countries. Many countries, especially middle-income emerging market economies will face significant risk of debt default and higher borrowing costs on international capital markets due to downgrades by credit ratings agencies. Without outright debt cancellation and the inclusion of commercial debt, financial resources will be ultimately deployed to service debt repayments rather than on social — including health-related — and economic expenditures. If debt relief is funded from aid resources (for example, via debt swaps or donor-funded debt service as is the case under the CCRT), this too will reduce funds available for other fiscal expenditure, including shoring up health systems. Alongside the mobilisation and disbursement of financial resources, there needs to be, as a result, the establishment of sovereign debt restructuring mechanisms and a serious reform of the global financial architecture, including the allowing capital controls to prevent sudden surges in outflows from developing countries.
Towards a New Architecture
International institutions and global political and economic elites have been quick to respond to the urgent and anticipated medium to longer-term financing needs of developing countries as a result of the COVID-19 pandemic. Yet discussions of these funding commitments have not been accompanied by a systematic evaluation of the mechanisms used to mobilise and disburse such funding. While it is important to advocate for immediate relief and support, it is as important to shine a spotlight on the framework of public finance and international development cooperation that will mobilise pandemic-related funds. Given that there is no opportunity for substantive reform of the system during the crisis, it is imperative that we use existing mechanisms to monitor, track and account for the financial packages, while at the same time, start taking the first steps towards a radical revision of the rules and premise of international public finance.
The pandemic is highlighting the urgent need to rethink the rationales and the institutional and regulatory model of international public finance. The current model of financing for collective public good, including fighting pandemics and intervening in financial crises, relies on discretionary aid contributions by developed countries and private donors rather than on collective and mandatory pooling of funds. This model is not sustainable, accountable or redistributive. It continues instead to reproduce already existing global inequalities. Solidarity meanwhile has been increasingly replaced by philanthropy which is sustained by unequal economic relations. Current global economic structures continue to enable the industrialised states to extract resources and accumulate profits from developing countries. International public finance has been routinely used to mitigate the social and economic externalities of this highly unequal relationship, including financial crises, ecological disasters and health epidemics, but have not been utilised to properly redistribute global wealth. The responses to the pandemic illustrate this very well.
Moving forward, any disbursement of financial resources should take into account the resources that have already been extracted from the global south to the global north, including financial resources (e.g. capital remittances), natural resources (e.g. commodities), and labour resources (e.g. migrant medical personnel and care workers). Ultimately, these financial packages, as discussed above, should be also located within an overall process of rethinking and reforming the international legal and regulatory architecture that govern the global economy. As advocated by activists, community organisations and south-focus scholars, there is a critical need, once again, to centre health, social protection, human life and the environment above profit and power.
Celine Tan is Reader in Law and Director of the Centre for Law, Regulation and Governance of the Global Economy (GLOBE) at the School of Law, University of Warwick. She is also coordinator of the New Frontiers in International Development Finance project. She would like to thank Luis Eslava, Paolo Vargiu, Donatella Alessandrini, Daria Davitti, Jean Ho and Serena Natile for their constructive comments on the article. All errors and omissions remain the author’s own.