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One Year On: Lessons Learnt and ‘New Normals’ in a Post-COVID World November 2020 Edition in conjunction with the G20 Summit under the Presidency of Saudi Arabia

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INTRODUCTION Piroska Nagy-Mohacsi

03  Insights from the LSE Maryam Forum volume: academics lead a public-private platform 04

You cannot solve a global pandemic with national policies Baroness Minouche Shafik

06 Politicians can’t hide behind scientists forever – even in a pandemic Andrés Velasco and Sir Tim Besley 08 Nine ideas to strengthen our global firepower against COVID-19 Erik Berglof 10 12 14 16 18

How can emerging economies deal with the debt crisis? Insights from the LSE Maryam Forum Jintao Zhu and Ricardo Reis

The quiet revolution of emerging market central banks Piroska Nagy-Mohacsi

What are the smart COVID-19 containment options for developing countries? Adnan Q. Khan

A renewed chance to address Climate Change and the Ocean Torsten Thiele

The case for a COVID-19 carbon tax John van Reenen and Ralf Martin

20 T  he ECB’s pandemic emergency programme is huge – use it to support the green transition John Gordon

22 M  essage to World Leaders from LSE Maryam Forum Student Leaders Maryam Forum Student Leaders


Introduction One Year On: Lessons from COVID-19 and ‘New Normals’ for a Post-COVID World Piroska Nagy-Mohacsi Interim Director, Institute of Global Affairs, London School of Economics and Political Science November 2020 Edition in conjunction with the G20 Summit under the Presidency of Saudi Arabia. The year 2020 may well be remembered as the biggest challenge humanity has faced since the Second World War. Indeed, in many respects it has felt like a war: unprecedented simultaneous health, economic shocks hitting every country and many lives lost. Economies and societies put on freeze in waves of lockdowns amidst what has been aptly called “radical uncertainty”. Families separated. Chaos in initial policy responses in many places and political chaos still in some. The virus is under control or even eradicated in some countries, while in others it is still spreading dangerously fast. Yet 2020 will also be remembered as transformational. Unprecedented global scientific cooperation has brought a vaccine within reach in less than a year from when the COVID-19 genome was posted on the internet in January 2020. Under lockdowns, digital technologies, while already extensively in use, have allowed an accelerated shift in the way we work, study, shop, interact and enjoy leisure. While policy responses have varied by government, by and large, the first battle to avoid a global economic meltdown has been won. The credit goes to fiscal and monetary authorities that have stepped out of their comfort zone to deliver unprecedented support to Wall Street and Main Street in both advanced, and for the first time, in most emerging markets. Risks still remain high and there is still much to be done to win the war. However, we can now draw on early evidence of what works and what does not in a host of areas from healthcare to education, to work and investment and what the related appropriate policy



We have created a unique ecosystem where renowned academics, policymakers, business leaders and our excellent LSE students work directly together on the biggest challenges of our time, organised into six work streams. At our virtual Maryam Annual Forum on 8, 9 and 10 December we will present our assessments and issue a public letter – our “Call to Action” – addressed to G7, G20 and national leaders with our research-informed policy recommendations. In this edition, we offer a taste of the work we have been doing and the evidence we have been collecting. We hope that our unique Maryam Forum platform will help national and international leaders to find the most optimal and sustainable policy solutions to our staggering global emergencies. ◆ responses can be. A key lesson is that leadership matters more than ever, and not only in government but in business and civil society as well. Another is that science and evidence matter. We are also learning that the young generation, whose economic and labour market prospects have been particularly hit by the pandemic, is eager to have its voice heard more clearly, particularly in areas where policy decisions today irreversibly impact their future. Science -informed inclusive leadership is what we need to tackle the big challenges ahead of us. This is the context in which we at the London School of Economics and Political Science recently launched a new initiative on transformative leadership, the Maryam Forum.

We have created a unique ecosystem where renowned academics, policymakers, business leaders and our excellent LSE students work directly together on the biggest challenges of our time, organised into six work streams.

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Insights from the LSE Maryam Forum volume: academics lead a public-private platform


ey to delivering on the Maryam Forum’s ambition of transformative leadership is a series of ‘“Co-Labs”. These year-round working groups of leading academics, policy makers, business representatives and LSE students seek to implement innovative research-based policy solutions to support the transition from rulership to leadership. In these Co-Labs, participants will work together to come up with policy and research priorities relating to six urgent challenges that the world is currently facing and that are critical to achieving the 2030 Agenda for Sustainable Development.

are not founded in evidence. This Co-Lab focuses on two urgent priorities: migration and labour markets, including integration and the role of cities; and public attitudes to and the politics of migration and the link to social cohesion.

Rethinking global finance and the international financial architecture: This Co-Lab looks at the rapidlychanging landscape of the global financial architecture. This includes the global financial safety net; the role of central banks; the changing interaction between monetary and fiscal authorities during the COVID crisis; as well as the intersection between monetary policy and financial markets in the context of current unprecedented levels of quantitative easing.

Democracy and Disinformation: Previously, non-democracies were defined by censorship and control over the media, while democracies guaranteed freedom of expression and the free flow of information across borders. Today, these assumptions have been turned upside down by digital technologies, and political actors can use online mobs and troll farms to drown out and intimidate critical voices and obscure truth. Against this backdrop, this Co-Lab examines whether we need a new way to define a democratic information environment, and discusses the kind of regulation and oversight that is required.

Global emergencies and responses: As the COVID-19 crisis continues, this Co-Lab reviews how to prepare for and respond to future global emergencies. This includes examining lessons learned from the public health and economic measures deployed during the first wave of the pandemic; reviewing the role and potential of both global and national institutions; understanding how to capture and share data; and identifying how to design and roll-out effective national policies in real time.

Climate and the Oceans: This Co-Lab seeks to further build and draw attention to the investment case for ex-ante climate adaptation and resilience. Two aspects in particular are highlighted: the important financial risks of inaction; and the multi-faceted benefits of investing in natural capital.

Innovation and inclusive growth: In the wake of the pandemic, economic policies, including industrial policy, are being rethought as part of a broader reflection on the role of the state. In parallel, global value chains are being redesigned to address health and food security concerns and to manage the risks of future disruption. These shifts come on top of already-existing changes driven by digitisation, with possibly dramatic implications for patterns of production, innovation and economic inclusion in the coming years. Human Mobility: Voluntary migration and forced displacement attract central attention in both popular and policy discussions. However, these debates are often shaped by political narratives that

During Autumn 2020, the Co-Labs have been busy identifying the most critical questions in each area and preparing recommendations for national and global leaders. These will be unveiled during the first Maryam Annual Forum taking place on 8, 9 and 10 December 2020.



You cannot solve a global pandemic with national policies Baroness Minouche Shafik Dame Minouche Shafik Director, London School of Economics Director of the LSEand Political Science

As we lock ourselves down to contain the spread of COVID-19, it is tempting to think that the solutions to the pandemic lie at a national level, writes Minouche Shafik (LSE Director). But although it will probably stall world trade, the virus respects no borders. International co-operation, woefully inadequate so far, will be vital if the pandemic is not to re-emerge. One of the paradoxes of this pandemic is that even as we are forced to turn inwards, we need each other’s cooperation more than ever. Most of us are becoming more self-reliant — staying at home, engaging less with others, even braving baking and home haircuts. And yet, only if everyone behaves in a collectively responsible manner will we be able to reduce infections and eventually normalise our economic and social lives. That same paradox applies to the world economy and the global health challenges we face. Nation states too are turning inward and throwing unprecedented resources at containing the pandemic. But the pandemic does not respect borders. Even if one country defeats it, the risks of it returning are high as long as it continues to plague the rest of the world. The world is still interconnected, just in different ways. What are the implications of the crisis for the world economy? And what does it mean for the balance of solving issues nationally versus globally? Trade growth has probably peaked Trade grew faster than GDP for several decades, but recent years have seen that slow. This crisis will accelerate that trend as supply chains will become shorter and more local. There are many reasons for this move toward localisation of


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already seen the boom of online shopping, entertainment, and financial services during this crisis. The movement of data across borders is increasing exponentially. This makes resolution of issues like digital taxation, profit shifting by platforms across borders, and the prosecution of cross-border digital crime even more imperative.

Adaptive rules for dam operation will be needed to deal with greater variability in reservoir inflows, and improved coordination of decisions across water– energy–food sectors will be required to achieve development goals sustainably. production. Because of the crisis, companies will give greater weight to security of supply over efficiency and cost. Automation is reducing the importance of wages in production costs, making it possible for firms to “re-shore” facilities nearer to home markets. And localisation is also a way to shield oneself from protectionism and trade wars. Globalisation will become more digital While the movement of people and goods is likely to decline, trade of online services will grow rapidly. We have

Interest rates will be low for a very, very long time Countries will emerge from this crisis with huge debt burdens. In past crises, those debts have been reduced through a combination of budgetary surpluses and economic growth rates that are greater than the rate of interest. Given how large debts are likely to become, it is hard to imagine being able to impose enough austerity to achieve the surpluses necessary to bring debt ratios down. Instead, many countries will likely resort to financial repression whereby savers earn returns below the rate of inflation to make it possible for governments to “inflate away” their debts. This will have implications for cross-border financial flows. Demand for social insurance will rise Warren Buffett famously said that when the tide goes in, you can see who is swimming naked. The coronavirus crisis has shown that millions of citizens around the world were in effect swimming naked – with no savings to fall back upon and no public safety net to support them and their families. Both poor and rich countries now have informal labour markets, as flexible modes of working have spread everywhere and employers’ commitment to their workers is ever weaker. So much of social policy in recent decades has

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shifted risks onto individuals in the name of efficiency and flexibility. The years ahead are likely to see a backlash against this as citizens demand that more health, work and old age risks be shared. While these are mainly national challenges, some will spill over into international agreements, especially around trade. All of these trends will reinforce countries’ tendency to focus on their domestic issues. Yet everything we know from history tells us that restoring economic prosperity and global health will require countries to look outwards and cooperate globally. The economic response must be global Many commentators from emerging markets took to referring to the 2008 financial crisis as the “North Atlantic Financial Crisis” to signal that the problem emanated from the US and Europe and was not truly global. This time is different. The economic consequences of coronavirus will adversely affect every country in the world. Commentators like Gordon Brown and Larry Summers have pointed out that while governments have broken all the economic rules to respond to coronavirus at the national level, the international response has been woefully inadequate. Even in the rich world, highly indebted countries like Italy or Spain have been less able to support their economies and populations than others like Germany or the Netherlands. For poor countries, many of which now have welldeveloped systems to transfer income to the poorest households through cash transfers and mobile banking, even fewer resources are available. This crisis needs a truly global response that includes more resources for the IMF and other multilateral institutions, comprehensive debt relief for the poorest countries, and a coordinated stimulus for economic recovery. The health response must be global, too You cannot solve a global pandemic at the national level. Just as the economic

response must be global, so the health response must include helping the poorest countries´ health systems to cope. The risks of spread in countries where social distancing is not possible (especially in slums, refugee camps and densely populated urban areas) may be devastating. Urgent funding is needed for essential equipment, vaccine development, therapeutics and support for weak health systems and vulnerable populations around the world. Without that, the epidemic will rage in highly populated parts of the world only to reappear in the countries that were hit first. At a time when there are strong forces pushing inward, we need to remind everyone that it is in their national interest to think outwardly and globally. This is not just about generosity — though that is a great thing — but also self-interest. ◆ This post represents the views of the author and not those of the COVID-19 blog or LSE.

Nemat (Minouche) Shafik is a leading economist, whose career has straddled public policy and academia. She was appointed Director of the London School of Economics and Political Science in September 2017. She did her BA at the University of Massachusetts-Amherst, her MSc at the LSE and her DPhil at the University of Oxford and, by the age of 36, had become the youngest ever Vice President of the World Bank. She taught at Georgetown University and the Wharton Business School. She later served as the Permanent Secretary of the Department for International Development from 2008 to 2011, Deputy Managing Director of the International Monetary Fund from 2011-2014 and as Deputy Governor of the Bank of England from 2014-2017, where she sat on all the monetary, financial and prudential policy committees and was responsible for a balance sheet of over £500 billion. Minouche has served on and chaired numerous boards and currently serves as a Trustee of the British Museum, the Supervisory Board of Siemens, the Council of the Institute for Fiscal Studies, and the Economy Honours Committee. She was made a Dame Commander of the British Empire in the Queen’s Birthday Honours list in 2015.

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Politicians can’t hide behind scientists forever – even in a pandemic Andrés Velasco Professor of Public Policy and the Dean of the School of Public Policy at LSE

Sir Tim Besley School Professor of Economics of Political Science, W. Arthur Lewis Professor of Development Economics in the Department of Economics at LSE. It is dangerous when politicians ignore expert advice. But it is just as dangerous when politicians outsource their judgement to experts, especially if the margin of error is huge and the advice is contested, write Tim Besley and Andrés Velasco (LSE). Ultimately, it is the job of politicians to make the tough decisions about trade-offs. It is tempting to describe the unfolding response to the Covid-19 virus as a battle between science and politics. When US president Donald Trump suggested that injecting people with household disinfectant might cure them, or when Turkmenistan president Gurbanguly Berdymukhamedov endorsed the view that smoke generated by burning a type of grass called yuzarlik would safeguard against the virus, plain ignorance of scientific facts seemed to be at work. In other cases, politicians have appeared to be playing… well, politics, ignoring both science and common sense. Mexican president Andrés Manuel López Obrador denied for weeks that the virus was a threat and continued to hug and shake hands with supporters, only to flip suddenly and impose a lockdown without warning. Trump blamed China for the virus and closed off the US to migrants, and his base cheered. Brazil’s president Jair Bolsonaro followed the same script, claiming that the coronavirus crisis is a media trick. As an epidemiologist from the University of São Paulo put it: “It’s as if everybody’s on the same train heading towards a cliff-edge and someone says: ‘Look out! There’s a cliff!’ And the passengers shout: ‘Oh no there isn’t!’ And the train driver says: ‘Yeah, there’s nothing there!’”


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Dhaka’s urban poor have not received enough state assistance either, despite the government’s promise of a stimulus package of over $11bn to provide soft bank loans and to assist people. It is easy to see why NYU’s Gernot Wagner has argued that it helps to have political leaders with a science background, judging by the success of Germany in managing the crisis under Angela Merkel, who is a trained physicist, or that of Ireland under Leo Varadkar, who is a doctor. In recent years populist politicians have earned anti-establishment credentials and scored political points by disparaging experts, but the tide seems to be turning. Precisely because scientific and medical knowledge are so obviously necessary when dealing with a pandemic, the crisis has had one healthy byproduct: restoring a modicum of respect toward technical expertise. Both Donald Trump and UK prime minister Boris Johnson and his ministers have made it a habit to hold press conferences with their scientific advisers. Even more striking, Trump has had to endure the indignity of a poll showing that Anthony Fauci, the government’s top infectious disease

expert, enjoys an approval rating nearly twice as high as his own. So are science and politics on opposing sides of the tussle to craft the right policy response? We do not think so. Politics uninformed by science quickly becomes quackery. But science unmediated by politics is of limited use when it comes to solving a collective action problem such as a pandemic. One reason why science needs politics is that in a fast-moving and uncertain situation, not even experts can be sure of what to do. During the COVID-19 outbreak, questions about how extensive the lockdown should be or how long should it last, or whether wearing face masks should be compulsory, are intrinsically contested. Economists tend to discuss policy as if politics is what gets in the way of doing the right thing, and there are echoes of this attitude in debates involving scientists in the current crisis. Such frustration is justified when there is unambiguous consensus about the right policy or right advice, which just requires political will to become a reality. That is not the case today. A particularly difficult set of issues arise when policies have winners and losers. In the current crisis, many professionals can safely continue to do their jobs (and receive their incomes) from home, but factory workers and shopkeepers cannot, and they suffer the consequences. Similarly, young people who could go out to work with little risk to their health have to stay in for the sake of older people who are most at risk if they contract the virus. How can society adjudicate those difficult distributional questions? What are the proper roles for science

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and politics? The conventional wisdom is that trading-off the interests of gainers and losers is a matter of value judgments, so that expert knowledge is of little help in performing this task. That view is not quite right. Many tools of cost-benefit analysis, for instance, can help render judgments about trade-offs both systematic and transparent. Nonetheless, in complex policy decisions where many elements are poorly measured or intangible, cost-benefit analysis is at best a useful guide for policy, not a tablet of wisdom from which simple answers can be read. In short: making distributional choices is the job of politics, but that is a job best done taking judicious advantage of what science and expert analysis have to offer. Johnson and Trump understand this. They may not be particularly fond of experts, but they keep inviting their own scientific advisors to their press conferences because soft-spoken scientists add credibility. Yet the doctors with their lab coats and charts in turn need the politicians for something else: legitimacy and trust. The effectiveness of a public institution or policy depends crucially on how much citizens trust it. Just as a central bank can only do its job if citizens trust the currency it prints, the medical profession requires trust. Doctors need patients to follow their guidance, take medicines that they are prescribed and be willing to undergo invasive medical procedures if needed. And while the trust I place in an expert institution matters, other citizens’ trust matters just as much or more. If everyone in my neighbourhood trusts medical advice enough to vaccinate their children against measles or mumps, then even if I do not vaccinate my own kids the risk of contagion they face is very low. So private actions have public consequences, something that economists refer to as externalities. Such externalities are everywhere in the crisis. People who decide to leave home in order to go to work may increase the probability of contagion for others, while people who wash

their hands regularly have the opposite effect. Because staying home and forgoing income or queuing two metres apart all have costs, people will follow lockdown and social distancing orders only if they view those orders, and the process that lead up to them, as legitimate. And that legitimacy can only be provided by political leaders working within the confines of institutions that citizens both respect and trust. The fact that long before the virus hit most politicians’ credibility was at a nadir should not obscure another equally important fact: in modern secular societies, no one else can do the job of generating public trust. And if those modern societies are democratic, accountability is one key source of that trust. While the conventional view is that accountability is a constraint on political action, it is also an enabler. When politicians have announced lockdowns that impose economic costs, the public know that the politicians will ultimately be judged on whether the trade-offs are deemed to have been well-judged. Holding politicians responsible for a decision they have taken can enhance trust in that action. So it is dangerous when politicians ignore expert advice. But it is just as dangerous when politicians outsource

their judgement to experts, especially so if the margin of error is huge and the advice is contested. Making choices involving difficult trade-offs is what politics is all about. Politicians may not do this in a way that pleases many people, but that is in the nature of the beast. Their job today is both to get the balance between expert opinion and political representation right and to communicate the reasoning behind decisions taken. Some of the distributional effects of COVID-19 and the policies that have been put in place to fight it are only now becoming apparent. Those painful effects will doubtless make politics even more difficult and disputatious in the months to come. And that, unfortunately, is a problem that cannot be solved by injecting people with disinfectant or burning yuzarlik. ◆ This post represents the views of the authors and not those of the COVID-19 blog, nor LSE.

Andrés Velasco is Professor of Public Policy and Dean of the School of Public Policy at the LSE. He is a former member of the G20 Eminent Persons Group and ran for the presidency of Chile in the June 2013 primaries. He also was the Minister of Finance of Chile from March 2006 to March 2010. He is the author of nearly one hundred academic articles, several academic books and two novels. He has served as a consultant to the International Monetary Fund, the World Bank, the Inter-American Development Bank, and to governments, central banks and private businesses around the world. Sir Tim Beasley is School Professor of Economics and Political Science and Sir W. Arthur Lewis Professor of Development Economics at the LSE. His research spans public economics, development economics and political economy. He is President-elect of the Royal Economic Society and has been President of the Econometric Society and the International Economic Association. He is a fellow of the British Academy and a foreign honorary member of the American Academy of Arts and Sciences. He was also a member of the Bank of England Monetary Policy Committee and is a current member of the National Infrastructure Commission. In 2018, he was knighted for services to economics and public policy.

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Nine ideas to strengthen our global firepower against COVID-19 Erik Berglof

Professor,Chief Director, Institute of Global Affairs, London School of Economics Political Science Economist, Asian Infrastructure Investment Bank (AIIB) andand Professor, London School of Economics and Political Science

The two sides of the COVID-19 crisis – the medical emergency and the economic impact – are closely intertwined. Many emerging and developing economies feel the economic impact first. Falling commodity prices, drops in tourism revenues, reduced remittances from citizens abroad, and the rapid outflows of capital are ravaging their economies, even before the virus has taken hold. In turn, the economic devastation will undermine their capacity to respond to the virus and threaten social and political stability in the medium term. The pandemic is exposing the global financial safety net and development finance architecture – of which the IMF and the World Bank are central elements – to the most serious shock since the two institutions emerged out of the ruins of two world wars and the Great Depression. The G20 finance ministers presented a Global Action Plan to fight the COVID-19 crisis ahead of the IMF/ World Bank (virtual) Spring Meeting in April. The Plan is a good first step, but we need far, far more. We must urgently find new and innovative ways of putting global financial muscle, including the private sector, behind our multilateral institutions. This will require the same kind of bold leadership, innovative thinking and institution-building that marked their founding. The initial responses from the IMF and the World Bank, and the regional development banks, have been powerful. But the demands on them will only increase as the crisis accelerates, especially in the emerging and developing world.


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Europe and Asia – is critical in providing liquidity and maintaining financial stability. Yet the IMF’s current firepower is not enough to deal with the magnitude of this crisis. 1. Establish liquidity support lines: Create a liquidity facility to which pre-qualified countries in need could turn. Pre-qualification could avoid the stigma associated with applying for support. Such liquidity lines could be supplemented by IMF intermediating support lines, from systemic central banks to central banks, in well-run emerging economies with liquidity problems.

There have been many ideas for how to strengthen the development finance architecture and the global financial safety net. There have been many ideas for how to strengthen the development finance architecture and the global financial safety net. Several of them were discussed in the final report from the G20 Eminent Persons Group on Global Financial Governance (EPG), presented in October 2018. Here I suggest three measures for each of the global financial safety net, development finance architecture, and the capacity of the core institutions to ‘crowd in’ private and institutional capital. Three ideas on how to strengthen the IMF’s firepower The global financial safety net – with the IMF at the core, complemented by a patchy and incomplete system of regional arrangements mainly in

2. Issue Special Drawing Rights (SDRs): The current arrangements, which rely on the IMF’s existing resources, do not meet the expected liquidity requirements and eventual solvency threats in many countries. The most direct way to provide additional capital to the IMF would be to issue additional Special Drawing Rights, which would both increase firepower and offer a valuable stimulus to the global economy. 3. Transfer unused Special Drawing Rights: Many countries, particularly advanced economies, do not borrow up to their quotas with the IMF. These unused quotas could be transferred to countries with greater needs, either through an arrangement within the IMF or an external vehicle. This could also be part of an issuance of new SDRs to ensure that new resources really go to the countries most in need.

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Three ideas on how to enhance the lending capacity of MDBs The multilateral development banks (MDBs) also need reinforcement. The World Bank has responded with a massive effort to help address both the medical and economic emergencies. It has strong expertise in cash transfer programmes and local community schemes in many countries, which can be used to reach the most vulnerable. As the economic impacts of lockdowns and supply disruptions make themselves felt, financing needs will increase dramatically. While many MDBs were recently recapitalised or have the short-term capacity to respond, the MDBs will run out of “headroom” on the current trajectory, impeding their ability to respond. 1. Establish a liquidity backstop for MDBs: Unlike commercial banks, most multilateral development banks lack automatic access to liquidity support from governments. Rating agencies would upgrade them if a group of central banks came together, possibly intermediated through the IMF, and provided a liquidity facility. 2. Introduce a new form of equity capital: A related proposal would be to provide the development banks with a new form of capital. Rather than paid-in capital or callable capital, it would be useful to have an intermediate form of capital that could be called upon when banks are exposed to a shock like this one. 3. Make a G20 “whatever-it-takes” statement: Even if these two ideas cannot be realised at the moment, the G20 could, with support from other key shareholders, make a “whateverit-takes” statement, promising that additional capital would be forthcoming if the situation deteriorated further. This would inspire innovation and big ideas and reassure governments in the worst -hit emerging and developing economies that resources will be forthcoming. Three ideas on how to leverage the private sector Yet the governments behind both

agreements and generally become more coherent as a system.

the IMF and the development banks are also weakened by the crisis, and domestic needs will be gigantic. New ways must be found to ‘crowd in’ private and institutional capital. The EPG Report pointed to steps that could be taken. 1. Allow the IMF to borrow from the markets: The IMF could be allowed to borrow in the capital markets, potentially using currently unused SDRs as collateral, which could with appropriate safeguards significantly increase IMF firepower. 2. Pool balance sheets to increase MDBs’ borrowing capacity: On the side of the development finance institutions, there should be scope for more pooling of balance sheets. There are limits to what can be achieved through such efforts, but this could prove very important for smaller institutions with concentrated portfolios. As a by-product, the participating institutions would be encouraged to standardise loan

3. ‘Crowd in’ private and institutional capital on country platforms: A core EPG proposal is to establish country platforms where governments can coordinate their collaboration with international financial institutions, including bilateral donors and the entire UN system. These platforms, now being piloted, should be opened up to the private sector and be used to ‘crowd in’ private and institutional capital by using the international financial institutions to mitigate risk for investors. This would also ensure that agreed governance standards are enforced, and debt sustainability requirements respected. When the EPG was first set up, some questioned why the group should deal with both development finance architecture and the global financial safety net in the same report. The COVID-19 crisis has proven how intimately linked they are. These nine ideas would bring together the global financial safety net, the development finance architecture and the private sector to create a powerful global response. ◆ This post represents the views of the author and not those of the COVID-19 blog, nor LSE. A longer version of this blog was published as an article by the World Economic Forum.

Erik Berglof is the Director of the Institute of Global Affairs (IGA) and its Global Policy Lab at the London School of Economics and Political Science (LSE). He has published widely in top journals on economic and political transition, corporate governance, financial development and EU reform. He was a member of the Secretariat for the G20 Eminent Persons Group on Global Financial Governance (2017-18) Erik Berglof is the inaugural Chief Economist and subsequently a member of the High-Level at the Asian Infrastructure Investment Bank. Wise Persons Group on European Development Before joining AIIB, he was Director of the Finance Architecture (2018-2019). Prior to Institute of Global Affairs at the LSE School joining LSE, Professor Berglof was the Chief of Public Policy and Chief Economist of the Economist and Special Adviser to the President European Bank for Reconstruction and of the European Bank for Reconstruction Development. Professor has published and Development (EBRD)Berglof and Director of the widely in top journals economicEconomics and political Stockholm Institute of on Transition transition, corporate at governance, financial (SITE) and Professor the Stockholm School development, EUalso reform. He was a member of Economics.and He is a Non-Resident Fellow of the the Brookings Secretariat Institution, for the G20 aEminent Persons at Research Fellow Group on Global EU of the Centre for Financial Economic Governance, Policy Research Wise Persons GroupFellow on European Development (CEPR) and Senior of the European Finance for Architecture, and the WorldIn Economic Council Foreign Affairs (ECFR). 2013, Forum Futures Council on the he was Global awarded the Leontief Medal forFinancial his and Monetary to Systems. contributions economic reform.

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How can emerging economies deal with the debt crisis? Insights from the LSE Maryam Forum Ricardo Reis Arthur Williams Phillips Professor of Economics, Department of Economics, London School of Economics and Political Science

Jintao Zhu Student BSc in Philosophy, Politics and Economics, London School of Economics and Political Science Private and public debt has soared as a result of lockdowns and policies to address the COVID-19 health emergency. As part of the LSE Maryam Forum, Ricardo Reis (LSE) chaired a panel discussion on the debt problem, which is key to financing the global response to COVID-19. Reis and Jintao Zhu (LSE) report on the insights. How should we handle corporate debt? Cynthia Balloch (LSE) discussed the challenges of handling corporate debt using the bankruptcy system. The credit market was weak even before the pandemic, with corporate debt at a historical high. The dramatic fall in revenue caused by the pandemic created an additional need for borrowing. Globally, companies borrowed 60% more in the first half of this year relative to the same period in 2019. Despite massive government support, we are likely to see companies in multiple sectors having difficulty in servicing their existing debts. Typically, the bankruptcy procedure – which allows companies to reorganise and renegotiate their obligations so that they can continue to operate – would ease this burden. However, using bankruptcy to deal with corporate debt in this pandemic presents three challenges. Firstly, bankruptcy courts do not work well for all firms, particularly SMEs. Secondly, they struggle when they become inundated with cases, as is happening now. For example, in the US, only 350 judges are available to



handle all corporate bankruptcy cases. Thirdly, bankruptcy proceedings require continuous financing to be available during the process. With a large number of firms defaulting, this financing is far from guaranteed. More needs to be done to encourage firms and lenders to restructure private debt, reduce administrative costs, and improve their bankruptcy procedures. Governments should focus on understanding where the pandemic may lead to the widespread loss of organisational capital invested in established firms. They should provide financial incentives for restructuring where it is likely to prevent this loss. However, we also want to avoid keeping doomed firms alive. After all, the aim is to maintain growth while preventing widespread liquidations. How can we support lower-income countries? Patrick Bolton (Columbia Business School) discussed the global effort to support developing countries over the debt issue. In March, there was a sudden and huge capital outflow from emerging markets when the pandemic hit rich countries. Today, while

developing countries are still mainly preoccupied by health and economic crises, the financial crisis is unfolding. Many countries face the dilemma of using their scarce financial capability to pay for debts, or covering health expenses. Since March, over a hundred middleand low-income countries have turned to the IMF for financial support. The G20 has initiated the DSSI (Debts Service Suspension Initiative). The G20, together with the Paris Club, agreed to suspend interest payments for International Development Association countries during 2020. So far, 41 of the 73 eligible countries have filed a request for DSSI. Of these, 32 of the 41 have approached the Paris Club for some kind of debt relief. However, this initiative only covers interest payments for official debts, which is only a fraction of overall payments. To further alleviate the debt burden, the G20 attempted to bring in private sector creditors to join debt relief efforts. However, until now the private sector has been standing on the sidelines. It justifies its inaction by the sudden reversed capital flow into emerging markets in the last few months. But it is not clear whether returning capital in the market can substantially alleviate the heavy financial burden these countries face. In brief, despite some efforts and hard work, the debt problem has not had enough attention. We lack accurate pricing of the credit risk issues for both sovereign and corporate debt. How we deal with this will be a major challenge.

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An ambulance at Hospital 28 de Agosto in Manaus, Brazil. Photo: Amazonia Real via a CC BY NC 2.0 licence

A case study in the cost of financing debt: Brazil Carlos Viana de Carvalho (Asset 1 and PUC-Rio) discussed the challenges faced by an emerging economy, using the case study of Brazil. Brazil had started various economic reforms before the pandemic. Beginning in 2016, it had conducted a series of structural reforms which were just starting to pay off. Many other emerging markets had made similar progress. The pandemic shock hit every country, but the consequences have been very different because countries were at different starting points. Emerging markets like Brazil do not have the fiscal space for necessary spending. They had been trying to consolidate public finances and bring public debt down. The pandemic forced the state to postpone these efforts and to start emergency spending in order to save lives, prevent corporate bankruptcies and maintain social stability. The challenge of financing the response to the pandemic is larger for emerging markets like Brazil. They face limits to the demand for their assets

and public debts. When countries with solid institutions and a long history of stability issue reserve currency, there is plenty of demand for their “safe assets�. When the pandemic shock hit, the demand for these safer assets went up. Interest rates went down and so did the cost of financing. However, for countries like Brazil, whose assets are perceived as risky, the risk premium goes up when the shock arrives. The cost of financing becomes more expensive. Advice for governments? Convince the market you have a long-term plan to rein in spending At this stage, governments in emerging markets should be cautious about policy decisions. While a temporary increase in public debt is unavoidable, they should make decisions that will convince society and investors that the government is still able to go back to a sustainable level of debts in the long run. If market confidence is established, the country will be able to enjoy low financing costs. However, if the government ends up increasing expenditure permanently, it will not be able to go back to a sustainable path

The pandemic shock hit every country, but the consequences have been very different because countries were at different starting points. for public finance. Current financing efforts will be expensive. Long-term reform efforts can be overthrown thanks to COVID-19 and, although the global market seems to have become increasingly optimistic, emerging countries will still be very susceptible to volatile global financial conditions.â—† Ricardo Reis is the A.W. Phillips Professor of Economics at LSE. Recent honours include the 2016 Bernacer prize for best European economist under the age of 40 working in macroeconomics and finance, and the 2017 Banque de France / Toulouse School of Economics junior prize. Professor Reis is an academic consultant at the Bank of England and the Federal Reserve system. He directs the ESRC Centre for Macroeconomics in the UK d is a recipient of an ERC grant from the EU. Jintao Zhu is a fourth year LSE student studying for a BSc in Philosophy, Politics and Economics.



The quiet revolution of emerging market central banks1 Piroska Nagy-Mohacsi Interim Director, Institute of Global Affairs, London School of Economics and Political Science

Central banking in emerging markets (EMs) has undergone a quiet revolution during the COVID pandemic. Unlike in the past, EM central banks have been able to mimic what advance country central banks are doing: counter-cyclical policies with quantitative easing (QE), asset purchases in local currency, lowering interest rates and monetising government deficits in support of their government’s crisis response. In the past such policies would have invariably led to inflation and exchange rate pressures. But not this time. Except for a few central banks in trouble already before the pandemic, EM central banks have managed to do QE, thereby increasing their countries’ policy room to flight the pandemic. The main reason for this is advance country central bank policy: spillovers from the ongoing massive advance country QEs and the expansion of currency swap arrangements. However, EMs are more vulnerable in the areas of financial stability and governance. What has enabled QE in emerging markets? The credibility of emerging market central banks is certainly an important factor. However, in the past credibility alone never allowed EM central banks to pursue sustainable QE. The real reason for EM QE are the policies of advanced country central banks: • Positive spillovers from advanced country central bank QE; • Enlargement of currency swaps and foreign exchange repurchase (repo) operations by a few key central banks, which we can call the globally systemic central banks (GSCB): the US Federal Reserve, the European Central Bank (ECB) and the People’s Bank of China (PBoC).



Advance country interest rate cuts and huge liquidity injections have spilled over to emerging markets in search of yield. After an initial market stumble in March 2020, capital flows returned to EMs. EMs could reduce their interest rates too. At the same time, EM central banks have started purchasing local currency denominated assets in markets where the market for such issuance is sufficiently large (Arslan et al, 2020). Exchange rate pressures have been eased by the expansion of currency swaps by key central banks. Currency swap lines act as safety nets to avoid foreign currency shortages in local domestic markets. Facing the pandemic, the US Federal Reserve first reactivated currency swap arrangements with its most trusted five advance country central banks and extended the maturity of those swaps; then also extended the swaps to several, mainly advanced country, central banks.

We have seen such measures during the global financial crisis a decade ago. But this time the Fed has gone far beyond what it did then by offering a new additional temporary repo facility for foreign and international monetary authorities (FIMAs) at the end of March 2020. This allows central banks and monetary public institutions around the world to use their existing stock of U.S. treasury bills to get access to U.S. dollar liquidity with the help of the Fed. Although repos are not a genuine currency swaps – i.e., swaps between the dollar and a local currency — because the FIMAs must have U.S. dollar denominated assets as collateral to get U.S. dollar liquidity, these are still powerful for market confidence. Repos do not need to be used actually: they serve as safety nets and their mere availability can be enough to reassure markets. Moreover, repos can also be a precursor to true currency swap arrangements, as the example of ECB repo operations with Poland and Hungary showed in 2009. The ECB and the PBoC have also expanded swaps lines and repos in their respective monetary sphere of influence since the start of the COVID crisis. Exchange rate risks in EMs have been effectively slashed as a result. As Boris Vujcic, the Governor of the Croatian National Bank recently noted, the ECB’s generous currency swap line has helped Croatia manage and then avoid foreign exchange market volatility – market participants do not wish to go against the ECB, the CNB’s proxy. In the face of the world-wide COVID shock, the GSCBs, for the first time, have acted in crisis in a way that is commensurate with their global systemic role in international liquidity. The Fed’s monetary policy has created

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global dollar financial cycles as Helene Rey pointed out already in 2013. The ECB also has its own euro “mini” financial cycles in emerging Europe. The PBoC’s share in international reserves and transactions is much smaller, but its global impact comes from the financial arrangements around China’s mammoth Belt and Road Initiative (BRI), its lending to developing countries, and its large number of currency swaps – more than 40 - with developing and EM central banks. The objective of the latter may differ the from those of the Fed or the ECB, yet it has increased the use of the RMB in bilateral trade between China and its currency swap partners (Bahaj and Reis, 2020). Will Emerging Market QE last? This can last as long as monetary policy remains sufficiently expansionary in advanced economies. The chances for this is quite good for the coming years. Advanced country central banks have not been able, for one reason or another, to exit from QEs they created a decade ago, even after growth and employment had recovered. The Federal reserve has recently changed its mandate that will likely require continued QE for quite some time. Several central banks are formally committed to obtain maximum level of employment, as well as as keeping interest rates very low or even negative, and central bank digital currencies could make this technically relatively easy to implement. All this means that emerging market central banks are likely to continue to enjoy monetary policy spillovers from their advance country peers in the foreseeable future. However, EMs may soon face the unintended consequences in other

In the face of the world-wide COVID shock, the GSCBs, for the first time, have acted in crisis in a way that is commensurate with their global systemic role in international liquidity. The Fed’s monetary policy has created global dollar financial cycles as Helene Rey pointed out already in 2013.

References Arslan, Y, Drehmann, M and Hofmann, B, Central bank bond purchases in emerging market economies, BIS Bulletin No. 20. (2020)

areas: financial stability and governance. QE and prolonged recessions will inevitably hit the balance sheets of companies, households, and eventually of banks. Bankruptcies and non-performing loans will soar. EM countries still have much less fiscal space than their advanced country peers to deal with these problems. Governance issues will also likely surface: asset purchases by central banks beyond government papers raise concerns over the lack of transparency and accountability of the underlying process. These may become issues in advanced countries too, but their fiscal space and institutional arrangements are more robust. EM vulnerabilities are likely show up soon in the areas of domestic financial stability and governance. ◆ Note: this article was published in Project Syndicate, 18 August 2020.

Avdjiev, S and Takats, E, The currency dimension of the bank lending channel in international monetary transmission, BIS Working Papers 600 (2016) Benigno, G, Hartley, N, García-Herrero, Rebucci, A and Ribakova, E, Credible emerging market central banks could embrace quantitative easing to fight COVID-19, VoxEU (June 2020) Bahaj, S and Reis, R, Jumpstarting an international currency, Bank of England Staff Working Paper No. 874 (June 2020) 1. Based on the author’s article in Project Syndicate, August 18, 2020

Piroska Nagy-Mohácsi is a macroeconomist and Interim Director of the Institute of Global Affairs (IGA) and its Global Policy Lab at the School of Public Policy of the London School of Economics and Political Science (LSE). Previously she was Policy Director of the European Bank for Reconstruction and Development (EBRD) overseeing strategic directions in Emerging Europe, Central Asia and North Africa as well as major policy initiatives (2008-2015); and beforehand worked in senior positions for the International Monetary Fund (IMF) (1986-2008).



What are the smart COVID-19 containment options for developing countries? Adnan Q. Khan Professor in Practice, School of Public Policy, LSE

What are the smart COVID-19 containment options for developing countries? Adnan Q. Khan (LSE) writes that the pandemic has pushed policymakers there into an environment of great uncertainty. Not surprisingly, many governments have been emulating the policies of other countries before them. However, while continuing with blanket enforcement of lockdown measures may temporarily stop the spread of the virus, it could quickly generate a new kind of crisis in the form of a rise in non-COVID diseases, deprivation, and hunger, especially in the developing world. Following the herd is often perceived as less politically costly rather than announcing an independent response, though it may be seen as signalling competence and control. However, many governments have discovered that uniform policy responses are not delivering and, in fact, generate unintended consequences and resentment. Furthermore, they have realised that their hands are tied since they neither have the fiscal space, nor the state capacity to undertake grand, expensive plans that the developed countries have been able to undertake. This is all the more reason why developing countries should adopt policies that tailored to different local contexts, and that are effective yet feasible. The pandemic has forced leaders to confront two untenable options – lockdown and risk livelihoods, or open up and spread the disease. With many already living on the edge of subsistence, and with a range of pre-existing health issues, the likelihood of adverse health consequences as a result of the response to the pandemic may


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be comparable to the pandemic’s morbidity itself. The trade-off for developing countries is not just lives vs the economy, but lives versus lives. We argue the choice when it comes to containment does not have to be all or nothing. We propose a ‘smart’ containment approach for developing countries that is underpinned by active learning and a data-responsive graded response that tailors policy responses to different local contexts within countries with policy flexibility but it will have to be supported through the intense use of data in policy design and implementation. Within a framework of active learning, even governments with limited capacity can develop localised smart containment policies. Once operationalised, these plans will help generate further evidence for policymakers to learn from, and lead to better contextualised and sustained policy responses. This is how we can escape the curse of a binary choice between lockdown and no lockdown.

A ‘smart’ containment strategy First and foremost, a smart containment strategy should be underpinned by data. Most countries do have existing administrative data that can be drawn upon to help determine initial estimates of different health and risk profiles. This needs to be bolstered by regularly collecting data on health outcomes – both COVID prevalence, as well as health morbidity due to lockdowns – and socioeconomic outcomes to provide a powerful evidence base to support decision-making in uncertain times. Second, this data can be used to better understand prevalence and risk across different geographies, sectors or even age cohorts and thus employ targeted, graded approaches. This allows for flexibility and the ability to tailor the containment response to the needs of a locality. Furthermore, operationalising such an approach is far less economically costly as unaffected sections of the economy can continue working. And for those affected sectors, data should be used inform the lifting of lockdowns as soon as the risk profile has changed. Finally, it is important to recognise that each policy response will generate new data and learnings. Responding to this evidence by continuously evaluating the need to impose and lift measures in specific places is core to a smart containment policy. This process of active learning, involving the adaptation of strategies, is key to ensure any containment measures mitigate the economic consequences whilst still prioritising health considerations. To operationalise more graded and localised policies, clear, transparent, and regular communication will be

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First and foremost, a smart containment strategy should be underpinned by data. Most countries do have existing administrative data that can be drawn upon to help determine initial estimates of different health and risk profiles.

needed to coordinate actions among different actors and to leverage the agency and self-efficacy of citizens. Effective community messaging and compassionate enforcement are critical to ensure voluntary compliance among citizens. As the positive outcomes are realised, this will further increase trust in authorities, popular understanding, and support. Continued blanket enforcement of lockdown measures may temporarily stop the spread of the virus, but could quickly generate a new kind of crisis in the form of a rise in non-COVID diseases, deprivation, and hunger. A functioning economy, especially in highly vulnerable communities, is crucial to population health. As we move forward in the next few months, it is critical that containment options are tailored to local conditions. This is not easy but can be done by exercising adaptive leadership, by bringing expertise from different disciplines, by empowering local actors and communities, and by trusting citizens. If developing countries are to succeed, they should learn from others but importantly, chart their own way based on data and evidence.

To operationalise more graded and localised policies, clear, transparent, and regular communication will be needed to coordinate actions among different actors and to leverage the agency and self-efficacy of citizens.

This post represents the views of the author and not those of the COVID-19 blog or LSE. It is based on policy proposals described in more detail in the following documents – “Policymaking in uncertain times” and “Smart containment with active learning”. ◆

Adnan Khan is Professor in Practice at the School of Public Policy at LSE. He is an Affiliate of the Poverty Action Lab (J-PAL) at MIT and an Affiliate with the Building State Capability Program at Harvard University’s Center for International Development (CID). He is a founder board member of Centre for Economic Research in Pakistan (CERP), co-leader of Reducing State Fragilities Initiative at the International Growth Centre, an Affiliate with Yale University’s Research Initiative on Innovation and Scale (Y-RISE), and with Precision Agriculture for Development (PAD). Earlier, he had served as Research and Policy Director at the International Growth Centre at the LSE. He was also a Visiting Lecturer of Public Policy at the Harvard Kennedy School during 2018-19. He spent more than 15 years in the policy world, and more than 10 years in the research world as an instructor, researcher and as a catalyser of research in Africa and Asia. He works on public policy, state capacity and political economy.

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A renewed chance to address climate change and the ocean Torsten Thiele Senior Visiting Fellow of the Institute of Global Affairs at the School of Public Policy, LSE

The wholesale integration of climate, biodiversity and ocean issues into the global financial architecture to align with nature and sustainability is long overdue. Disruptions caused by COVID-19, along with increased awareness of both the climate and the biodiversity threat to the ocean and human livelihoods, must now urgently be translated into urgent effective action. 2021 provides the opportunity for this critical realignment, particularly as climate change is back on the agenda of all major governments.

international ocean and create conditions for sustainable marine development; • The Green Climate Fund and the International Development Finance Club have formed a strategic alliance to help realise the potential of public development banks in financing the green and climate-resilient transition; • The recent T20 Communique clearly identifies critical pathways for a circular economy and in proposal 24 calls on the G20 to protect, conserve, and restore biodiversity

We have been seeing a number of hopeful signs in recent weeks: • Major economies, governments, subnational actors and corporations have committed to net zero 2050 goals and are developing credible de-carbonization strategies; • UNFCCC COP 21 looks set to deliver a solid global implementation framework, with the U.S. likely to rejoin the Paris Agreement; • The EU, the UK and others are targeting their COVID recovery funding with a clear “greening vision”; • Regulators are clarifying common approaches to climate risk, with specific guidelines and a roadmap to mandatory disclosures for companies by the Task Force on Climate Related Financial Disclosures (TCFD); • The Federal Reserve, the world’s global central bank, is moving closer to joining the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which can help shape global financial markets’ behaviour; • The European taxonomy of environmentally sustainable economic activities – a set of technical screening criteria for economic activities that can make

The G20 countries are the key international group that can provide leadership in this area, with 85% of global GDP and some 80% of the global greenhouse gas emissions. By supporting the international UN climate process with complementary political, economic and technological ambition to rapidly decarbonise and reduce emissions to net zero by 2050, there is still a chance to halt global temperature increases. This is provided that the world’s nations fully take account of the climate-biodiversityocean nexus as they transition to circular and sustainable economies. Total infrastructure capital around the world is expected to double in the next 15 years, so the format through which investment takes place will have a profound influence on “global commons”, such as the climate and the ocean. The international financial institutions have a critical role to play in ensuring the quality and sustainability of that investment. Multilateral development banks are well positioned to crowd in the required private resources. They need to develop contingent public finance facilities, launch support operations and system-wide



a substantial contribution to climate change mitigation or adaptation, while avoiding significant harm to the four other environmental objectives – provide a comprehensive framing to align investment strategies and capital markets to deliver sustainable finance; • The planned adoption of a post2020 global biodiversity framework by the Conference of the Parties to the Convention on Biological Diversity in 2021, together with adequate resource mobilisation, can offer a pathway to more effective support towards key measures that seek to safeguard nature and the human livelihoods that depend on it; • Private sector actors are increasingly taking the lead on climate and biodiversity commitments; • The commitment by the negotiators to conclude a workable UN Agreement on Biodiversity Beyond National Jurisdiction under United Nations Convention of the Law of the Sea in 2021 will deliver the opportunity to protect the

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insurance instruments to facilitate fast disbursement, effective implementation and solid impact assessment. The natural capital of the ocean is significant but not well quantified. Ocean ecosystem services are under threat from climate change, pollution and other stressors. The concept of ocean risk puts an economic perspective on these changes and can help develop viable approaches to protect the blue natural capital. This includes new funds to protect coastal and marine systems, such as coral reefs and mangroves. The UN Sustainable Development Goal (SDG 14) expressly aims to “conserve oceans and seas”. Moreover, the Paris Agreement’s Preamble notes the importance of ensuring the integrity of all ecosystems, including the ocean, with the proposed funding mechanisms for mitigation and adaptation applying to ocean and coastal solutions. Ultimately, public and blended finance is required to deliver investment into nature-based solutions. The development of a blue economy framework can provide the necessary tools to identify sustainable ocean activities and facilitate their financing. A better understanding of concentrations of ocean-related assets and exposure to risk facilitates informed capital allocation, better decision-making and encourages forward-looking information provision to owners, other stakeholders and regulators. The blue natural capital approach such as applied by the International Union for Conservation of Nature (IUCN) draws on nature-based solutions, which are then integrated into investment streams that support clean energy and water, plus data and

The development of a blue economy framework can be used to provide the tools to identify sustainable ocean activities and facilitate their financing.

communications services and local financing opportunities. New ocean financing tools such as blue bonds can help to deliver the financial resources required. In order for innovative finance mechanisms needed for coastal habitat protection to emerge at scale, they need to be consistent with the wider efforts on sustainable finance. The Sustainable Blue Economy Finance Principles, now hosted at UNEP-FI and the Climate Bond Initiative’s Adaptation and Resilience Principles, can provide specific guidance to funders on which projects and assets are compatible with a climate resilient economy. Marine habitats such as mangroves, salt marshes and seagrasses are relevant carbon sinks and opportunities exist to update blue carbon accounting based on science such as by adding macro algae, deep-water seagrasses and addressing carbon cycling in blue carbon ecosystems. Biodiversity is the foundation of life and of sustainable development. The G20 countries must promote ocean

science and technology, operationalise effective marine protected areas, mainstream ecosystem-based adaptation and nature-based solutions for climate change mitigation, and facilitate the economic valuation of blue carbon under the UNFCCC. G20 countries must take regulatory and fiscal measures in order to rapidly reduce industrial and agricultural sources of pollution, including safe use of plastics and chemicals. Furthermore, bio-based alternatives and circular business models require research and funding support. A possible G20 Oceans Fund or an Ocean Sustainability Bank with the ability to issue blue bonds could therefore accelerate urgently needed cooperation to preserve marine biodiversity, ocean and human health. ◆

Torsten Thiele is a Visiting Fellow in the Institute of Global Affairs at the London School of Economics. His research areas are ocean governance and blue finance. Founder of the Global Ocean Trust and Senior Research Associate at lASS, Torsten Thiele had a long career in infrastructure finance in the City of London, where he was Head of Telecom Project Finance for Investec Bank plc till 2013. He holds graduate degrees in economics and in law from Bonn University, an MPhil from the University of Cambridge and an MPA from the Harvard Kennedy School. He returned to Harvard University as a 2014 Advanced Leadership Fellow. Torsten Thiele is also active on a number of advisory boards, including DOSI and EU ocean projects SOPHIE and iAtlantic.



The case for a COVID-19 carbon tax John van Reenen Ronald Coase School Professor, LSE and Gordon Billard Professor, Massachusetts Institute for Technology

Ralf Martin Associate Professor of Economics, Imperial College Business School and Director, Growth Research Programme, Centre for Economic Performance, LSE Ralf Martin and John Van Reenen (LSE) explain how a carbon tax could both help pay for the enormous costs of the pandemic and encourage ‘clean’ investment. Crucially, it should be levied in a few years’ time, when the UK economy has begun to recover. Life on earth has changed fundamentally over the last three months. While in the short run the immediate response to the COVID-19 crisis is paramount, many have started to ask about the impact of the pandemic on the looming climate emergency. Optimists hoped that the shock of the pandemic coupled with the experience of lockdown translates into a new momentum for the transition to a clean economy. Attitudes towards scientific advice might have changed, new – less pollution intensive – ways of working remotely might have been learned. Governments might embark on stimulus spending with a strong emphasis on investments in clean infrastructure and innovation. However, our big concern is that, despite good intentions, governments and business will be severely constrained in their spending once the immediate crisis is over, due to the extraordinary financial burden of the lockdown. Hence, far from an increase, this could lead to reductions in investments needed for the transition to a clean net zero carbon economy. In this situation, a moderate carbon tax (of say £50/€56 per tonne of CO2, as proposed by the Grantham Institute) announced now, but imposed only at some point well into the



recovery period (say around 2025) could solve several problems simultaneously. First, it would help governments to bolster the public finances. For example, the UK government put together a package of around £400 billion to help the COVID-19-stricken economy. If the UK reaches its net zero carbon goal by 2050 the total remaining revenue from a £50 carbon tax starting in 2025 would amount to something on the order of £150 billion, recovering a large chunk of the government’s COVID-19 spending. Secondly, it will send the right signals to businesses and households to invest in reducing carbon emissions. It will also safeguard against the potential threat to ‘clean’ investments due the low cost of fossil fuels in response to the COVID-19 fallout (i.e. negative oil prices). At same time, it will not have cash flow implications for businesses struggling with the fallout from the crisis, as no actual tax will be levied immediately. Thirdly, it will help promote growth. In our research, we have identified that carbon and fuel price increases spur clean innovation and deter dirty innovation with a net positive impact. Furthermore, we have evidence that

clean innovation also raises productivity elsewhere in the economy. Moreover, some of the revenues raised by the tax can be used to subsidise green technologies. Since innovation is the key driver of sustained economic growth, a carbon tax is therefore likely to lead to more economic growth, which is exactly what is needed to recover post-lockdown. Fourthly, while the efficiencyimproving elements of a carbon tax or other forms of carbon pricing have long been stressed by economists, political opposition has hampered their widespread adoption. However, if done carefully, the post pandemic economic and political landscape might prove an opportune environment for carbon pricing. People realise that the crisis spending must be recouped in the long run, so some revenue raising will be inevitable. In this case, why not do it in a way that helps tackle the climate crisis? Success will in part depend on how fairly the carbon tax is implemented as well as how it is communicated. For fairness, we must address the distributional impact of carbon pricing to avoid the poor being hit harder than the rich. This can be accomplished by paying back some of the revenue in the form of an allowance to lowerincome households. This provides also an opportunity for making a carbon tax popular – as the recent experience of British Columbia seems to indicate. Our efforts must also be sensitive to existing carbon-pricing schemes. Even though in terms of impact on the climate it does not matter how a given unit of a greenhouse gas is emitted, existing regulations treat different

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Yur big concern is that, despite good despite good intentions, intentions, governments and governments and business business will be be severely severely constrained will constrained in their their spending spending once in once the the immediate crisis immediate crisis is is over, over, due due to the the extraordinary extraordinary financial to financial burden of burden of the the lockdown. lockdown.

emitters (and even different more expensive than it needsemissions to be. from the same emitter) vastly A COVID-19-related general increase differently. This makes in carbon pricing couldcarbon be used to regulation inefficient therefore rectify some of these and differences. more expensive than it needs to be. To successfully implement this policy A COVID-19-related general increase in the future will need a cross-party in carbon pricing be in used consensus. This iscould feasible theto UK rectify some of these differences. as the Conservatives have recently To successfully this policy committed to theimplement net zero carbon in the future will need a cross-party target by 2050 and Labour has been consensus. This is feasible in the UK championing climate change action as the Conservatives have recently over recent decades. committed to the the net government’s zero carbon Is paying down target by 2050 and Labour has been COVID-19 debt the best use for the championing climate change action carbon tax revenue? We think so, as over recent decades. this could be part of a new “Marshall Is paying down the government’s Plan for Growth” after the pandemic, COVID-19 debt the best use for the one that is tilted towards the green carbon tax revenue? We think so, as transition. By providing an additional this could be part of a new “Marshall form of tax revenue, this opens fiscal Plan for Growth” after the pandemic, space for governments to rise to one that is tilted towards the green the challenge of rebuilding our transition. By providing an additional shattered economy. ◆ form of tax revenue, this opens fiscal space for governments to rise to the challenge of rebuilding our This post represents the views of the authors shattered economy. ◆

and not those of the COVID-19 blog, nor LSE.

Success Success will willin inpart partdepend depend on on how how fairly fairlythe thecarbon carbontax tax is is implemented implementedas aswell wellas as how how it it is is communicated. communicated.For For fairness, fairness, we wemust mustaddress addressthe the distributional distributionalimpact impactof ofcarbon carbon pricing pricing to to avoid avoidthe thepoor poorbeing being hit hit harder harderthan thanthe therich. rich.

This post represents the views of the authors and not those of the COVID-19 blog, nor LSE.

John JohnVan VanReenen ReenenisisRonald RonaldCoase CoaseSchool School Professor Professorat atthe theLondon LondonSchool SchoolofofEconomics Economics and andthe theGordon GordonBillard BillardProfessor Professoratatthe the Massachusetts MassachusettsInstitute Institutefor forTechnology Technology(jointly (jointly in the MIT Economics Department and in the MIT Economics Department andSloan Sloan Management ManagementSchool). School). He Hehas haspublished publishedover over aahundred hundredpapers paperson onmany manyareas areasin ineconomics economics with a particular focus on firm performance with a particular focus on firm performance and the causes and consequences of innovation. and the causes and consequences of innovation. He was the 2009 winner of the Yrjö Jahnsson He was the 2009 winner of the Yrjö Jahnsson Award (the European equivalent of the Clark Award (the European equivalent of the Clark Medal); the Arrow Prize (2011); the European Medal); the Arrow Prize (2011); the European Investment Bank Prize (2014), and the Investment Bank Prize (2014), and the HBR-McKinsey Award (2018). He is a fellow of HBR-McKinsey Award (2018). He is a fellow of the British Academy, the Econometric Society, the British Academy, the Econometric Society, the NBER, CEPR and the Society of Labor the NBER, CEPR and the Society of Labor Economists. In 2017, he was awarded an OBE Economists. In 2017, he was awarded an OBE for “services to public policy and economics” for “services to public policy and economics” by the Queen. by the Queen. Ralf Martin is an Associate Professor of Ralf Martin is an Associate Professor of Economics at Imperial College Business Economics at Imperial College Business School and the Director of the Growth School and the Director of the Growth Research Programme at the Centre for Research Programme at the Centre for Economic Performance of the London School Economic Performance of the London School of Economics. His research - which has of Economics. His research - which has appeared in leading economic journals - focuses appeared in leading economic journals - focuses on the relationship between firm performance, on the relationship between firm performance, economic growth and our impact on the natural economic growth and our impact on the natural environment. In 2015 he was the joint winner environment. In 2015 he was the joint winner of the Erik Kempe Award for the best paper in of the Erik Kempe Award for the best paper in Environmental and Resource Economics. Environmental and Resource Economics.

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The ECB’s pandemic emergency programme is huge – use it to support the green transition Insights from the LSE Maryam Forum John Gordon Student MSc Economics, London School of Economics and Political Science The European Central Bank’s PEPP will purchase vast amounts of assets in an effort to support Eurozone economies. John Gordon (LSE) says it should take the opportunity to ‘green’ its balance sheet and avoid investing in polluting industries. The COVID-19 pandemic has unexpectedly reversed the European Central Bank’s (ECB) policies. While the Bank was planning to slowly phase out its asset purchases, it has now announced a EUR1.35 trillion Pandemic Emergency Purchase Program (PEPP) to support the Eurozone economies. But one policy it should not reverse is its increasing commitment to fighting climate change. With the crisis, greenhouse gas emissions could drop by up to 7% this year – the same reduction necessary year-on-year if we are to meet the objectives set out in the Paris Agreement. Clearly, this is not a sustainable way to do it. Instead, the ECB should heed calls to ‘build back better’ and use the PEPP to enable the transition towards a green economy. The ECB has a mandate for green quantitative easing The debate around ‘Green QE’ isn’t new. Ever since the post-2008 asset purchases, campaigners and politicians have appealed for QE to also fulfil social and environmental goals – particularly through the preferential purchase of green bonds. This has always been met with resistance in Frankfurt. Social and environmental goals are, of course, not part of the ECB’s mandate. For an institution that can only function on trust and credibility, any venture into the political domain is very risky indeed. But last year, things changed. In her confirmation hearing, Christine Lagarde announced she wanted to make climate change “mission-



failure. Actively recognising their impact is therefore no longer a controversial or political decision; it aligns with the ECB’s primary objective of price stability. One person’s price distortion is another’s price correction.

critical”, opening the door to more affirmative policies. This was not without controversy. Jens Weidmann, the head of the Bundesbank, immediately cautioned the newly-appointed president. He would be reacting “very critically” to any inclusion of climate goals within the ECB’s strategy. Yet, in January, he declared that the ECB should start accounting for “the financial risks that result from climate change”. On the surface, this does not recognise the fight against climate change as an ECB objective. But in substance, it means it could favour green bonds and avoid the most polluting assets, which are highly exposed to environmental risks. His reversal is not entirely surprising. The financial sector has become increasingly aware of the variety of risks resulting from climate change. These range from the physical risks of a changing environment to transition risks affecting economic activity that could be displaced by a greener economy. The fact that they are not fully accounted for in financial markets can be seen as a market

Increase the supply of green bonds An important barrier to a preferential purchase of green bonds is their availability. Although the market was growing healthily at 51% last year, the monthly issuance averaged EUR17.5 billion. Any substantial share of the PEPP’s EUR1.35 trillion would dwarf these amounts. In fact, it could nearly buy up the entire market twice over – and the pandemic hasn’t helped. In March, the issuance totalled a meagre EUR2.5 billion, the lowest volume since December 2015. As French central banker François Villeroy de Galhau pointed out, any substantive intervention could “seriously distort the market”, well beyond any reasonable price correction to account for environmental risks. It is therefore up to investors, development banks and most importantly governments to push forward the issuance of green bonds. In this, they can build on expanding notions of sustainable finance. Blue Finance, and the issuance of Blue Bonds, were pioneered in 2018 by the government of Seychelles. These were developed in response to the issue of ‘Ocean risk‘, which emerged in recent years and has given a literal meaning to the idea of stranded assets. The projects that those bonds finance help prepare for future disasters, transition to sustainable economies and boost growth. In a post-COVID world, all these appear indispensable. A striking example is that of blue infrastructure,

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The development of a blue economy framework can be used to provide the tools to identify sustainable ocean activities and facilitate their financing.

The Seychelles has pioneered ‘Blue Bonds’. Photo: dronepicr via a CC BY 2.0 licence

which integrates nature-based solutions in the multi-trillion infrastructure market: it helps builds coastal resilience, protects the Ocean’s biodiversity and creates jobs. These are the types of projects the PEPP could and should support. The need for a ‘just transition’ towards a green economy has also led to calls for the issuance of sovereign ‘just transition bonds’. These build on the idea of sustainability bonds and are a mix of social and green bonds. They would not only include green projects but also socially and economically beneficial activities for those displaced by the transition. Although strict guidelines would be needed to prevent greenwashing, this idea has enormous potential to increase the stock of sustainable bonds. Out with the old, in with the new The limited availability of sustainable bonds does not mean the ECB should wait for others before it acts. Avoiding the purchase of carbon-

intensive bonds would in itself represent progress. On this, the ECB’s actions have been less than laudable. Between March and May, EUR7.6 billion of the EUR30 billion corporate purchases went to fossil fuel companies. This isn’t surprising. In 2017, Sini Matikainen, Emanuele Campiglio and Dimitri Zenghelis showed that ECB asset purchases were skewed towards high-carbon sectors. This is linked to the myth of market neutrality. In short, in trying to avoid any distortion in the price of financial assets, the ECB actually encourages continuity and the persistence of current economic choices. When it comes to the climate crisis, this means supporting rather than displacing the polluting industries which dominate our economy. This is not to say that the ECB is inactive on the issue. It has launched the second monetary policy strategy review in its 20-year history, which will outline how it can help combat the climate crisis. It has also released a draft proposal on the inclusion of environmental risks and launched

a public consultation which is due to end in September. But all of these initiatives may be too little, too late for the PEPP. With a programme of this scale, it is vital that these initiatives are applied to the pandemic response. Wherever possible, the ECB should bring this agenda forward. In the meantime, greener asset purchases are not the only policy option for central banks to help build back better. In their recent briefing note, Simon Dickau, Nick Robins and Ulrich Volz outline nine possible instruments for a sustainable crisis response from central banks. At the top of the list is a readjustment of collateral frameworks to better account for environmental risks and impose haircuts on heavily exposed assets. Not only would this encourage divestment from high-carbon industries, it could boost the issuance of green bonds. As Kjell Nyborg remarked, “if central bank money is only available against igloos, or igloo-backed securities, igloos will be built” . There is still time for the ECB to limit its purchase of brown assets and explore the numerous ways to tackle the climate crisis. The PEPP could be a great enabler of the transition towards sustainable economies, but for that to happen the ECB needs to move fast – and do ‘whatever it takes’. ◆ The author thanks Professor Sam Fankhauser, Torsten Thiele and Dr Simon Dikau for valuable feedback.



Message to World Leaders from LSE Maryam Forum Student Leaders We divide history into two parts, the one we like to remember, and the one we seek to actively forget. With an effective distribution of a vaccine still far off, it is important to think about how we will remember COVID-19. The pandemic has been a watershed for all of us. It has shaken us to the core, challenged our innate sense of invulnerability, and forced us to question everything, from our healthcare systems to the legitimacy of our governments. We, the next generation of leaders, have expected a lot from our current leaders. The COVID challenge is enormous. It can be overcome only if the world is able to unite, drawing on our diversity and power of collective wisdom. Yet what we have seen too often is distrust and division. Many leaders have failed us by not acting quickly and disregarding/abandoning global cooperation; others have even profited from corruption in the face of a global emergency. We have suffered enormously from this unspoken collective trauma. We now suggest radical changes to ensure that lessons are learnt from this crisis. As the young citizens of nations, we respectfully demand a shift in perspective to find a new momentum:

• We demand that our leaders ensure transparency, trust and national unity along with robust economic measures. Leaders that stand in solidarity are especially valuable now that we have come to terms with how fragile we are as a human race. • We need our leaders to build resilient governments that can effectively manage crises, with the wellbeing and protection of their citizens at the forefront of policy decisions. • We demand the leaders of developed countries that have a comparative advantage in the production and distribution of vaccines to join hands and build partnerships across the world, by combining their capacities in making testing mechanisms, vaccines and treatments accessible to everyone, regardless their age, gender or socioeconomic status. In our global world we are protected only if all of humanity is protected. • We request that countries which have been more resilient support developing countries to deal with the economic impact of COVID-19 and to tackle job losses and economic and financial instability. • We ask leaders of the developing world to adapt “smart” targeted

policies in which lockdowns do not disproportionately affect the most vulnerable. • We ask leaders to design policies for recovery and post-COVID growth that help reduce poverty and inequality. We suggest inclusive recovery strategies that do not leave anybody behind and ensure communities such as migrants and refugees also get access to medical services. • We strongly support ”build back better” policies from the pandemic to confront the climate crisis and change global attitudes and intentions. Climate change is a looming emergency where we expect our leaders to take action and preserve what is truly important: the planet. Our leaders must ensure governments and industries are active defenders of the planet. Therefore, we expect strong green and blue recovery packages. • We demand more representation by young citizens in tax reforms and social benefits policy. As our economic systems are under tremendous stress, much of the burden will be intergenerational. We seek to actively participate and shape economies to build

Doménica Avila, Human Mobility work stream

Hassan Gali, Global Emergencies & Responses

John Gordon, Rethinking Global Finance and the Global Financial Architecture



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back better, with green-minded investments and decent jobs. • We demand leaders and governments devise strategies that effectively tackle disinformation. In an era of massive disinformation with devastating real-world impacts, we want healthy democracies with competing ideas instead of struggling democracies flooded by strategic misinformation and fake news/propaganda. We reject information that seeks to divide our societies and dismantle vital institutions. • We ask our leaders to look beyond winning elections and redirect their focus and politics towards good governance. The leaders of today need to ask what kind of legacy they want to leave behind, and what kind of world their children and grandchildren will inherit. • Finally, we ask our leaders to hear the fresh perspectives, the digital nativism, and the activism from young people in every corner of the world, in every debate and every policy design. We need policymaking to be inclusive, with representation of the young generation from around the world. We need you to please trust us

 This is why, as young citizens from around the world, we are joining platforms where our voices can be heard. This is why we have joined the Maryam Forum, where we work with policy-makers, business leaders and academics to seize the moment and rise beyond the COVID crisis. ◆

Mahima Andrew, Maryam Forum Secretariat

Ben Grazda, Democracy & Disinformation

Karina Rodriguez, Climate Change & the Ocean

Jintao Zhu, Innovation & Inclusive Growth

We, the next generation of leaders, have expected a lot from our current leaders. The COVID challenge is enormous. It can be overcome only if the world is able to unite, drawing on our diversity and power of collective wisdom. Yet what we have seen too often is distrust and division. Many leaders have failed us by not acting quickly and scuttled global cooperation; others have even profited from corruption in the face of a global emergency.

and listen to us. We are eager to contribute with ideas and creativity to frame recovery strategies and shape the future of the next generation.


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One Year On: Lessons Learnt and ‘New Normals’ in a Post-COVID World.