The Year Ahead 2023

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The Ukraine War and Asian Security

The Road to Fascism

YURIKO KOIKE

JOSEPH E. STIGLITZ

The Global Struggle for Tech Mastery

Resilient Trade

ERIC SCHMIDT

JANET L. YELLEN

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The Year Ahead 2023

Introduction

The year 2022 was one of grim and grisly returns: the return of major war – and nuclear brinkmanship – to Europe; the return of high inflation and the threat of stagflation globally; and the return of famine, extreme poverty, and other problems to the developing world, reversing decades of steady progress.

w i t h n e w f i n d i n g s a b ou t t h e s h e e r

pace and scale of glacier melt in Antarctica and Greenland, the year also shed a harsh light on the damage – much of it irreversible – that climate change is wreaking on the planet. And with Chinese President Xi Jinping securing a precedent-breaking third term, China will continue its backward march to Mao-style dictatorship.

More broadly, dangerous global developments – including the COVID-19 pandemic, the apparent reversal (or at least plateauing) of globalization, and high and unsustainable debt burdens across developing and emerging economies – continued in 2022. The spasms of political instability and civil disorder seen in Sri Lanka, Lebanon, Ghana, and Suriname may be a harbinger of similar turmoil elsewhere.

As for the broader threat to democracy, 2022 offered grounds for both optimism and concern.

Notwithstanding a few hiccups, Kenya held a successful presidential election and completed a peaceful transfer of power – offering some hope for others in the region. In the United States, the January 6 Committee revealed in startling detail just how close former President Donald Trump came to orchestrating America’s first-ever coup after his electoral loss in 2020, though subsequent polls showed that the committee’s work had little impact on public opinion.

Meanwhile, in France, President Emmanuel Macron won re-election against a far-right populist but lost the parliamentary majority that his party had commanded during his first term. In Brazil, voters signaled their discontent with President Jair Bolsonaro. But, taking his cues from Trump, Bolsonaro has proved utterly contemptuous of democratic norms or the people’s will. And in Italy and Sweden, far-right parties came to power, confirming the enduring appeal of populistnationalist forces for many voters.

Finally, with the rapid tightening of monetary policies, an extraordinarily long honeymoon for business, finance, and tech finally ended.

Bubbles have burst, and many business models have been exposed as unviable in the absence of ultraloose financial conditions and seemingly limitless liquidity.

Supply-chain disruptions, new sanctions and national-security measures, labor shortages, and other factors are posing challenges even for the strongest, most well-established businesses. The so-called Great Moderation, which policymakers worked to prolong after the 2008 global financial crisis, appears to be gone for good. Like it or not, the year ahead is certain to reveal more of what that means.

PS Editors

Advisory Board Publishing Bertrand Badré Co-Chair

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Gordon Brown

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Editorial Team Whitney Arana Editor Rachel Danna Deputy Managing Editor Roman Frydman Founding Editor Anatole Kaletsky Contributing Editor Nina L. Khrushcheva Contributing Editor Sami Mahroum Contributing Editor Kenneth Murphy Editor in Chief Andrzej Rapaczynski Joanna Rose Science/Health Editor Asher Schechter Associate Editor Jonathan Stein Managing Editor Laurence Tubiana Contributing Editor Stuart Whatley Senior Editor

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Year Ahead 2023

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The Year Ahead 2023

06 War and Populism Nina L. Khrushcheva

The Fog of Waronomics Beata Javorcik

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20 The Ukraine War and Asian Security Yuriko Koike

10 The Road to Fascism Joseph E. Stiglitz

24 United for Humanity Annalena Baerbock

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The Year Ahead 2023

Resilient Trade Janet L. Yellen

46 The Silver Tsunami Hippolyte Fofack

50 Navigating Economic Perfect Storms Sri Mulyani Indrawati

A Pandemic of Debt José Antonio Ocampo

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36 The Global Struggle for Tech Mastery Eric Schmidt

42 Is Economic Failure an Economics Failure?

Angus Deaton

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Will Central Banks Do What It Takes?

Carmen M. Reinhart

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64 Is Today’s China Yesterday’s Soviet Union?

74 A Diplomatic Winter?

Oscar Arias Beatrice Fihn Omezzine Khelifa Joseph S. Nye, Jr. Trita Parsi Minxin Pei

76 Book Recommendations Winter 2022

80 Events Forsaken Futures

Di Guo and Chenggang Xu

68 The Return of the End of History Sergei Guriev

86 Saadia Zahidi Says More

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Project Syndicate

War and Populism

The Year Ahead 2023

Russia may no longer be the totalitarian society that my great-grandfather Nikita Khrushchev ruled six decades ago, but totalitarianism seemingly remains in its DNA. The Kremlin still invents its own reality, no matter how absurd or impossible, and demands the people’s credulity.

War and Populism

NINA L. KHRUSHCHEVA Professor of International Affairs at The New School

i f wa r wa s pe ac e i n t h e o c e a n i a o f

George Orwell’s 1984, President Vladimir Putin’s “special military operation” is practically a form of peacemaking in the Russia of 2022.

The invasion of Ukraine on February 24 certainly was little cause for concern for Russia’s urban middle class, who continued to party like it was 2004 – the heyday of President Vladimir Putin’s oil- and gasdriven economic boom – as Russian tanks rolled across the border.

In fact, the surreal phony peace that Russia went through in the first six months or so after the invasion was hard to stomach. As Ukraine – the homeland of much of my family and a country of extraordinary beauty – was ruthlessly bombed, its capital encircled, and its people driven from their homes either to find refuge abroad or to fight for their country, ordinary Russians simply went about their lives.

Yes, sanctions brought some changes to the denizens of Moscow and Saint Petersburg. Some luxury goods were removed from store shelves, and some Western chains closed their doors.

But Russians could still enjoy enough

things – enough of the toys and pleasures and luxuries to which they gained access after the Soviet Union’s collapse three decades ago – that the war remained distant. The violence next door was too trivial – or perhaps too important – for ordinary Russians to give it much thought. Let Putin take care of it, as he takes care of everything. See no evil, hear no evil, say nothing.

Lest any Westerner feel a sense of superiority, recall that a similarly blinkered, consumerist reverie has predominated in Western societies through countless conflicts, crimes, and improprieties, committed both at home and abroad. And today, many people in Western democracies are happy to enter into a morally bankrupt bargain with their leaders that has more than a little in common with the one seen in Russia.

When Donald Trump lied ceaselessly, made racist and antiSemitic comments, feathered his own nest, and corrupted the Department of Justice, how hard did Americans resist?

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Yes, there were some protests, and Trump was eventually voted out of the White House. And a House committee continues to investigate his involvement in the January 6 insurrection at the Capitol.

But Trump has retained the steadfast support of a large swath of Americans, including virtually the entire Republican Party establishment. The reason is simple: he gave them three right-wing Supreme Court justices (who have since overturned precedent after precedent, including the halfcentury-old decision legalizing abortion nationwide), pursued business-friendly deregulation, and cut taxes for the rich.

Similarly, the British let former Prime Minister Boris Johnson get away with delivering countless government contracts to unqualified cronies, not to mention showing utter contempt for parliament and the crown, for more than three years. All that mattered, apparently, was that he delivered Brexit.

In Poland, Jarosław Kaczyński’s Law and Justice government has cowed the courts and most of the country’s media. But it has also bought the practically slavish support of rural and poor voters with plentiful subsidies.

The transactional character of governance has become increasingly pronounced – and has increasingly fostered authoritarianism. We cast our votes to advance our tribe’s interests and values, not for the good of our country, let alone the world. And, in exchange for meeting constituents’ demands – financial, religious, ideological, or otherwise – a leader effectively receives permission

USSIAN PRESIDENT R VL ADIMIR PUTIN S P E A K S AT A C O N C E R T C E L E B R AT I N G T H E A N N E X AT I O N O F F O U R UKR AINIAN REGIONS IN SEPTEMBER 2022.

to ride roughshod over democratic governance and ethical norms.

Because figures like Trump and Putin understand this, they pander to people’s material desires and stoke their fears. Indeed, just as Trump demonized Latin American immigrants, Putin has used the mere existence of transgender and non-binary people to justify his war on Ukraine, which he argues is necessary to resist the “dictatorship of the Western elites” that is attempting to “overthrow faith and traditional values.”

Hatred of a small minority can be a formidable political weapon.

Few have wielded it so effectively since Joseph Goebbels.

The great advantage for populists is that their bargain with their constituents is fluid. If their political

J A R O S Ł A W K A C Z Y Ń S K I O F P O L A N D ’ S R U L I N G L A W A N D J U S T I C E PA R T Y.

War and Populism

The Year Ahead 2023

R U B B L E A N D D E B R I S I N B U C H A , U K R A I N E .

base falls prey to a new narrative or embraces a new cause, they simply change their position and claim that they were the first to hold it. Anyone who points to their contradictory record is a member of the “lying and corrupt media elite.”

The Ukraine war is a case in point.

At its start, Putin-loving Trump loyalists – with the exception of some Fox News talking heads, such as Tucker Carlson – largely held their tongues. Trump went so far as to proclaim his opposition to Russia’s invasion, which he knew most Americans viewed as a barbaric act.

Today, Americans continue to tout Ukrainians’ heroism. But their commitment to helping them is waning. Many Republicans now say that US aid to Ukraine is costing too much, alleging that the US is providing a “blank check.”

U K R A I N I A N P R E S I D E N T V O LO D Y M Y R Z E L E N S K Y MEE TS WITH US S E C R E TA R Y O F D E F E N S E L LO Y D A U S T I N A N D U S S E C R E TA R Y O F S TAT E A N TO N Y B L I N K E N .

Trump’s “America First” slogan – which really means “America only” – retains its appeal.

The Russian middle classes seem increasingly to be stirring from their moral slumber on Ukraine, though it took the prospect of their own sons, fathers, and brothers being drafted – not the suffering of the Ukrainians – to awaken them. But this will do little to help Ukraine if a growing number of US Republicans shut their eyes and turn their backs.

A social contract is an implicit agreement by all members of a society to adhere to certain rules and norms in exchange for shared benefits. But populists prefer a bargain based on exclusion and tribalism, which is why they have embraced Putin as a model leader.

Putin’s recognition of the power of this approach to governance might be surprising, as he is not a man of deep reflection. Nor is Trump. Perhaps that is the most insidious aspect of the populist social contract under which too many of us now live: it is not based on thought at all, but rather on fear, humiliation, and alienation. These are the sentiments that perpetuate tyranny and fuel aggressive war.

Nina L. Khrushcheva, Professor of International Affairs at The New School, is the co-author (with Jeffrey Tayler) of In Putin’s Footsteps: Searching for the Soul of an Empire Across Russia’s Eleven Time Zones (St. Martin’s Press, 2019).

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The Road to Fascism

The Year Ahead 2023

The Road to Fascism

Economics has been called the dismal science, and 2023 will give full play to that proclivity. We are at the mercy of two cataclysms that are simply beyond our control. The first is the COVID-19 pandemic, which continues to threaten us with new, more deadly, contagious, or vaccine-resistant variants. This problem has been managed especially poorly by China, with its failure to inoculate its citizens with more effective (Western-made) mRNA vaccines.

JOSEPH E. STIGLITZ Nobel laureate in economics

t h e s e c o n d c atac ly s m i s ru s s i a’ s

war of aggression in Ukraine. The conflict shows no end in sight, and could escalate or produce even greater spillover effects. Either way, more disturbances to energy and food prices are all but assured. And, as if these problems weren’t vexing enough, there is ample reason to worry that the response from policymakers will make a bad situation worse.

Most importantly, the US Federal Reserve may raise interest rates too far and too fast. Today’s inflation is largely driven by supply shortages, some of which are already in the process of being resolved. Raising interest rates therefore might be counterproductive. It will not produce more food, oil, or gas, but it will make it more difficult to mobilize investments that would help alleviate the supply shortages.

Monetary tightening also could lead to a global slowdown. In fact, that outcome is highly anticipated, and some commentators, having convinced themselves that combating inflation requires economic pain, have been effectively cheering on the recession. The quicker and deeper, the better, they argue. They seem not to have considered that the cure may be worse than the disease.

The global tremors from the Fed’s tightening could already be felt heading into winter. The United States is engaged in a twenty-first-century beggar-thy-neighbor policy. While a stronger dollar tempers inflation in the US, it does so by weakening other currencies and increasing inflation elsewhere. To mitigate these foreignexchange effects, even countries with weak economies are being forced to raise interest rates, which is weakening their economies further.

Higher interest rates, depreciated currencies, and a global slowdown have already pushed dozens of countries to the edge of default.

Higher interest rates and energy prices will also push many firms toward bankruptcy, too.

Across every dimension, including the economy, the greatest threat to well-being today is political.

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There have already been some dramatic examples of this, as with the now-nationalized German utility Uniper. And even if companies don’t seek bankruptcy protection, both firms and households will feel the stress of tighter financial and credit conditions. Not surprisingly, 14 years of ultra-low interest rates have left many countries, firms, and households overindebted.

The past year’s massive changes in interest rates and exchange rates imply multiple hidden risks – as demonstrated by the near-collapse of British pension funds in late September and early October.

Mismatches of maturities and exchange rates are a hallmark of under-regulated economies, and they have become even more prevalent with the growth of non-transparent derivatives.

These economic travails will, of course, fall hardest on the most vulnerable countries, providing even more fertile ground for populist demagogues to sow the seeds of resentment and discontent. There was a global sigh of relief when Luiz Inácio Lula da Silva defeated Jair

ESIDENTS RECEIVING R SUPPLIES FROM A FOOD B A N K I N N E W Y O R K C I T Y.

Bolsonaro in Brazil’s presidential election. But let us not forget that Bolsonaro got almost 50% of the votes and still controls Brazil’s Congress.

Across every dimension, including the economy, the greatest threat to well-being today is political. Over half the world’s population lives under authoritarian regimes. Even in the US, one of the two major parties has become a personality cult that increasingly rejects democracy and continues to lie about the outcome of the 2020 election. Its modus operandi is to attack the press, science, and institutions of higher learning, while pumping as much mis- and disinformation into the culture as it can.

The aim, apparently, is to roll back much of the progress of the past 250 years. Gone is the optimism that prevailed at the end of the Cold War, when Francis Fukuyama could herald “the end of history,” by which he meant the disappearance of any serious challenger to the liberal-democratic model.

To be sure, there is still a positive agenda that could forestall a descent

F R I E D R I C H H AY E K .

The Year Ahead 2023

The Road to Fascism

The extremist policies that economists Friedrich Hayek and Milton Friedman pushed into the mainstream decades ago have put us on a truly dangerous course.

into atavism and despair. But in many countries, political polarization and gridlock have pushed such an agenda out of reach. With better-functioning political systems, we could have moved much faster to increase production and supply, mitigating the inflationary pressures our economies now confront. After a half-century of telling farmers not to produce as much as they could, both Europe and the US could have told them to produce more. The US could have provided childcare – so that more women could enter the labor force, alleviating the alleged labor shortages – and Europe could have moved more quickly to reform its energy markets and prevent a spike in electricity prices.

Countries around the world could have levied windfall-profit taxes in ways that might actually have encouraged investment and tempered prices, using the proceeds to protect the vulnerable and to make public investments in economic resilience.

As an international community, we could have adopted the COVID-19 intellectual-property waiver, thereby reducing the magnitude of vaccine apartheid and the resentment that

TRUMP SUPPORTER A AT A R A L LY I N O H I O .

it fuels, as well as mitigating the risk of dangerous new mutations.

All told, an optimist would say that our glass is about one-eighth full.

A select few countries have made some progress on this agenda, and for that we should be grateful. But almost 80 years after Friedrich von Hayek wrote The Road to Serfdom, we are still living with the legacy of the extremist policies that he and Milton Friedman pushed into the mainstream. Those ideas have put us on a truly dangerous course: the road to a twenty-firstcentury version of fascism.

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and a member of the Independent Commission for the Reform of International Corporate Taxation.

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The Fog of

The Year Ahead 2023

The Fog of Waronomics

In extraordinary times such as wars, pandemics, and natural disasters, all politicians introduce extraordinary measures to soften the negative economic and social impact on their country’s citizens. But only the best among them will do so with the future in mind, helping to create the conditions for longer-term prosperity. As the late Queen Elizabeth II put it, “What leaders do for their people today is government and politics.

But what they do for the people of tomorrow – that is statesmanship.”

BEATA JAVORCIK Chief Economist of the European Bank for Reconstruction and Development

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no one can blame governments for doing what they need to do to protect energy-insecure households under today’s extraordinary circumstances.

ow i n g t o t h e fa l l ou t f ro m

Now that coal is cheaper than natural gas, kicking the coal habit has become much more difficult.

But if the right policies are put in place, faster progress in the future could offset this setback. Besides,

C O S T TO T H E P O L I S H B A N K I N G S E C TO R F O R T H E “ B O R R O W E R S ’ S U P P O R T F U N D .”

What is harder to understand is the decision by many governments to lower taxes on energy and fuel.

A majority of the G7’s members (Canada, Italy, France, Germany, and the United Kingdom) have taken this step, and similar measures are popular in Central and Eastern Europe, where households have been hit even harder by rising heating costs.

$400m

True, we have not lost sight of climate change, and Europe’s energy crisis will most likely accelerate the green transition on the continent, as more investment is funneled to renewables and permits to build greener energy infrastructure become easier to obtain. But shortages of natural gas have also forced some countries to turn to coal, delaying their plans to phase out the most carbon-intensive fossil fuel.

$4–5.4bn

The current moment stands in stark contrast to the beginning of 2021, when most governments were focused on building resilience, preparing for another pandemic, and gently winding down the financial support that they had provided during the COVID-19 crisis. Preventing excessive strains on government budgets had become a priority alongside longer-term challenges like the fight against climate change. But that now seems like eons ago.

C O S T TO T H E P O L I S H B A N K I N G S E C TO R F O R A N E I G H T- M O N T H D E B T- S E R V I C I N G M O R ATO R I U M O N “ O W N U S E ” R E A L E S TAT E .

Russia’s invasion of Ukraine, many governments today are acting as if they are also at war. But they have failed to heed the queen’s implicit advice because short-termism has become all too common in economic decision-making.

The problem, of course, is that subsidizing fuel reduces the incentive to save energy and distorts the price signal needed to make the economy less carbon-intensive.

It is also much more burdensome on public budgets compared to means-tested transfers to vulnerable households. But sweeping subsidies are simpler to implement and more popular with voters, so politicians have seized on them.

Similarly, while poorer households are the ones that need help coping with rapidly rising interest rates (a development that caught even many economists by surprise), governments feel tempted to help everyone. Rather than focus on those who have lost their jobs or are temporarily unable to service their debts, they are exploring larger-scale interventions that could pay off in the next election.

IND TURBINES BEHIND W THE GARZWEILER OPEN- C AST LIGNITE M I N E I N G E R M A N Y.

The Year Ahead 2023

The Fog of Waronomics

to achieve the same effect. And by creating the expectation that the government will announce a debt holiday whenever there is a shock, it introduces moral hazard. In that case, banks may well increase the costs of their loans to price in the likelihood of future moratoria.

The ‘new normal’ has been discussed for so long that some policymakers have forgotten basic economics.

Poland’s government, for example, introduced an across-the-board debt-servicing moratorium on July 7, 2022, allowing all Poles with a mortgage covering “own use” real estate to avoid repayments for eight months. The National Bank of Poland and the Polish Bank Association estimate that the policy will cost the banking sector $4-5.4 billion.

This type of a moratorium is highly distortionary, and it comes on top of, and in response to, another distortion: Excess liquidity in the banking system has kept deposit rates very low, thus A R A N D S U N F LO W E R S W O U T S I D E O F K Y I V.

creating the impression that banks are unfairly raising interest rates on mortgages and other loans. While the moratorium is especially costly for the banking sector in the short run, its fallout will be felt more widely.

For starters, it is a highly regressive policy that will disproportionally benefit larger property owners. It also might weaken the monetarypolicy transmission mechanism, dampening the effect that higher interest rates have on economic activity and forcing the central bank to raise rates even higher in the future

A much cheaper and more sensible measure is the “Borrowers’ Support Fund” that Poland also expanded in 2022 to support those who lose their job or whose mortgage costs exceed 50% of their household’s monthly income. The fund has been financed with bank contributions to the tune of $400 million. By extending its coverage to more households in need, policymakers could avoid many of the aforementioned distortions while still protecting the most vulnerable. Of course, this approach might not provide as big a boost for the government at election time.

At this point, the “new normal” has been discussed for so long that some policymakers have forgotten basic economics. They have convinced themselves that it is possible to increase public spending without identifying any means to pay for it, and without having to worry about the signals they are sending to markets; or that lower interest rates will bring lower inflation (as Turkey’s president apparently believes); or that price controls do not lead to shortages. But just as we cannot wish away gravity, nor can we escape the laws of economics. Sooner or later, the day of reckoning must come.

The irony is that Ukraine – the country that actually is at war – has continued to focus on its long-term future. It was servicing its external debt until very recently, and it then asked for rescheduling to avoid a default and all the long-term consequences that would come with it. It is also already preparing plans for its reconstruction, even though no one knows when the war will end.

Ukraine knows what a wartime economy feels like. Shame on those who are not at war and yet lose sight of the future.

Beata Javorcik, Chief Economist of the European Bank for Reconstruction and Development, is Professor of Economics at the University of Oxford and a fellow of All Souls College.

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Russia’s war of aggression against Ukraine has prompted people across the Indo-Pacific region to ask if hidden or openly festering problems here could also lead to open warfare. Following China’s hysterical response to US Speaker of the House Nancy Pelosi’s visit to Taiwan in August, the answer seems all too clear. From the Hindu Kush to the South China Sea and the Korean Peninsula’s 38th parallel, the IndoPacific has no shortage of deep historical antagonisms and false claims to sovereignty that could explode into conflict without warning.

The Ukraine War and Asian Security

The Year Ahead 2023

The Ukraine War and Asian Security

YURIKO KOIKE Governor of Tokyo

t h e r e a l qu e s t i o n fac i n g l e a d e r s

across the Indo-Pacific, then, is whether the region can build a structure of peace to prevent national ambitions and hostilities from escalating to open warfare. Much will depend on whether the region’s democratic powers – Australia, India, Indonesia, Japan, South Korea, and the United States – can forge the type of strategic trust needed to make any potential disturber of the peace think twice before initiating hostilities.

Abe’s Foundation In pursuing this objective, the IndoPacific has been set back by one of the great political and human tragedies of 2022: former Japanese Prime Minister Abe Shinzō’s assassination by a lone gunman. Abe had spent the nine years of his two premierships, and the year left to him after he retired from office,

contemplating the types of alliances, treaties, and institutional structures that would be needed to provide guideposts and guardrails within which Asia’s inescapable dynamism could be peacefully channeled. He recognized that Asia is not nearly as dense with multilateral organizations and alliances as Europe is, and that such bodies are fundamental to the maintenance of peace and prosperity.

Acting on this insight, Abe became the architect of two key structures that, one hopes, will become the building blocks of a stable pan-IndoPacific peace: the Quadrilateral Security Dialogue (“the Quad”), a grouping of Australia, India, Japan, and the US, and the Comprehensive and Progressive Agreement for TransPacific Partnership, the successor to the Trans-Pacific Partnership after Donald Trump scuttled the

TPP at the outset of his isolationist presidency. The CPTPP now brings together 11 Pacific Rim countries – Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, Vietnam, and Japan – in the world’s largest trading bloc.

By kick-starting the Quad and salvaging the TPP, Abe helped create two institutions with the potential to establish rules of the road for the entire Indo-Pacific. The Quad is leading the way on security by deepening ties among its four core members, each of which is also strengthening other strategic partnerships, such as those between the US and South Korea, India and

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While China’s regular incursions into Indian territory in the Himalayas, together with Abe’s strong ties with Prime Minister Narendra Modi, helped convince India that it could no longer ensure its security by always going it alone, Modi, like most of his fellow countrymen, has found it hard to break with old habits.

Moreover, a major factor in India’s national-security strategy has long been its heavy reliance on Russia for military equipment and training. A legacy from the years when the US had tied its regional fortunes to Pakistan, this dependency long made sense for India. The Soviet Union was willing to back India in the 1971 Bangladesh War of Independence, supply it with modern fighter aircraft, and apply diplomatic pressure on Mao’s China after it invaded India in 1962.

Vietnam, and Australia and a proudly non-aligned Indonesia.

As amorphous as many of these security ties are, the Quad nonetheless is helping to create a network of countries determined to maintain peace and security across the region.

And other ties, such as the frequent joint military exercises that Japan and India now hold with Vietnam, are anything but amorphous.

E L E G AT E S AT T H E D SIGNING OF THE COMPREHENSIVE AND PROGRESSIVE AGREEMENT FOR TR ANS PA C I F I C PA R T N E R S H I P.

Now in its fourth year, the CPTPP is creating myriad opportunities for regional leaders to cooperate in a coherent, collective manner.

The Weakest Link Such cooperation must be nurtured further. A core lesson in building durable structures of peace and security in the post-World War II era is that solidarity among participating countries is indispensable. The rock-solid solidarity within NATO has dissuaded, at least thus far, Russian President Vladimir Putin from broadening his war beyond Ukraine. The sense of security that NATO provides its members has even convinced Sweden and Finland – countries with a long history of neutrality – to seek membership in the alliance.

In spearheading the CPTPP, Abe understood that Asia’s leaders could act effectively on their own even when the US chose to stand on the sideline. He and the other Asian leaders who signed the CPTPP understood that it would prevent China from achieving overwhelming economic dominance in Asia through its own trade agreement, the Regional Comprehensive Economic Partnership.

A B E S H I N ZŌ.

N A R E N D R A M O D I .

Of course, solidarity is easier to build when the issues are economic, or when there is an existential threat of the kind that Europe faced when NATO was founded at the height of the Cold War. Few will be surprised that the CPTPP has been adopted and implemented so smoothly even without a US imprimatur.

By contrast, a genuine sense of solidarity is lacking within the Quad, as demonstrated by India’s blinkered response to the war in Ukraine. Since it gained independence in 1947, India has long thought that it could assure its security through non-alignment and its own bilateral efforts.

As a free agent with a foot in both Cold War camps, India figured it was living in the best of all possible worlds in security terms. But times have changed, and India’s old dependency on Russia is now pulling it toward the wrong side of history and increasing its vulnerability to an aggressive China.

We in Japan have long understood the critical role that India can and should play in creating a framework for peace and security encompassing the Indian and Pacific Oceans. As Japan’s defense minister, I visited India back in 2007 when the seeds of our countries’ first joint naval exercises were planted.

The relationship has since blossomed into an ever more dynamic form of military and intelligence cooperation.

As the Quad entrenches itself to become Asia’s premier security organization, one hopes that India will recognize that maintaining an

The Year Ahead 2023

Great and aspiring powers abhor a geopolitical vacuum. Vladimir Putin saw Ukraine’s isolation outside of NATO and the European Union as just such a void to be exploited.

The Ukraine War and Asian Security

saw national independence as a moral and a cultural triumph, as well as a political one. Today, with China claiming large swaths of India’s northern provinces, insistence on the principle of territorial integrity everywhere is the only way for India to ensure that its borders will always be respected. That principle is now on trial in Ukraine. Were Abe still alive, I have no doubt that he would be quietly persuading Modi to recognize what is at stake and fully embrace India’s Quad partners.

Clearing the Final Hurdles

equal distance between its Quad partners and Russia is no longer a viable policy, especially now that Russia is increasingly becoming a Chinese vassal state. In a conflict between India and China, Indians should not be surprised if China prevails upon Russia to stop supplying them with military hardware, energy, or other critical imports. No Indian government should be willing to bear so intolerable a risk going forward.

Modern India’s architects, from Mahatma Gandhi and Jawaharlal Nehru to Bhimrao Ramji Ambedkar,

Old habits are also jeopardizing security on the Korean Peninsula.

Nearly eight decades after the end of the Pacific War, disputes over its history still too often impede effective security cooperation between the South Korean and Japanese governments, despite North Korean dictator Kim Jong-un’s relentless drive to develop his nuclear arsenal.

Over the decades, the US has tried time and again to bridge this divide.

But, ultimately, only South Korea and Japan can do that. They should recognize that their differences pale in comparison to the very real security threat they both face from Chinese President Xi Jinping’s regional hegemonic ambitions and Kim Jong-un’s rogue regime.

It is encouraging to see that both countries are now heavily involved in assisting Ukraine (by providing both

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weapons and real-time intelligence analysis). Let us hope that the war will convince both countries’ political leaders to abandon fruitless historical debates and start focusing on joint national-security initiatives.

Great and aspiring powers abhor a geopolitical vacuum. Putin saw Ukraine’s isolation outside of NATO and the European Union as just such a void to be exploited. In Asia, allowing China to make ever more belligerent demands of its un-allied neighbors, particularly in the South China Sea, has created a similar dynamic. And in the South Pacific, neglect by the democracies of small-island states has encouraged China to make military mischief.

Fortunately, today’s search for solidarity and security is beginning to fill the region’s institutional vacuum in a way that will enhance the security of large and small countries alike. This evolving regional unity means that any power that seeks to alter the map of Asia unilaterally will be certain to meet staunch and unified opposition.

Yuriko Koike, Governor of Tokyo, is a former defense minister of Japan, national security adviser, and a member of the National Diet.

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How can we be optimistic about 2023?

As we enter the new year, a devastating war is raging on the European continent. Russia’s war of aggression has slashed a devastating wound far beyond Europe, exacerbating a food and energy crisis in large parts of Africa, the Middle East, and Asia. More than 800 million men, women, and children go to bed hungry every night. The climate emergency is deepening this pain, stirring conflict worldwide, and robbing people of their land, their homes, and their security.

ANNALENA BAERBOCK Minister for Foreign Affairs of Germany

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That outstanding unity was not a given. More than 140 states spoke out against Russia’s aggression at the United Nations General Assembly in March – from north to south, from east to west – all different in our histories, politics, and cultures. What unites us is a common cause – to do what our citizens expect from us: to make it unwaveringly clear that, in situations of injustice, we will not be neutral. We will take sides – for justice for the woman raped in Bucha, for the orchestra conductor shot in Kherson, and for the toddler forced from his home in eastern Ukraine.

ANNALENA BAERBOCK .

h ow c a n w e b e o p t i m i s t i c i n s uc h

frightful times of uncertainty?

I strongly believe that, as responsible world leaders, we simply have no other option than to face the next year with a firm sense of confidence that we can drive change to improve people’s lives. Not despite this “perfect storm” of crises – but because of it.

Nelson Mandela once described the moments when his faith in humanity was tested, but still he would not give in to despair. “Part of being optimistic is keeping one’s head pointed toward the sun, one’s feet moving forward” – that’s how he put it.

To look ahead and stay the course, confident in what we are able to achieve if we stand together – that is, to my mind, what should guide us into the new year. And I am not saying this from a position of naive hopefulness.

I am saying this with the confidence of a foreign minister who has learned in many – often difficult – instances over the past 12 months how much we can achieve if we let solidarity and humanity guide our actions and if we defend what we believe in.

That is exactly how we responded to Russia’s war of aggression against Ukraine – united, in Europe, across the Atlantic, and worldwide – with our clear stand against the war’s inhumanities, with our support for Ukraine, with sanctions aimed at Russia’s war machine, and with investments in our security.

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Because we could be them, and they could be us. And because, if we were to let this war of aggression pass by, no one, anywhere, could sleep peacefully while living in fear of being attacked by a bigger neighbor.

Our strength is in our unity.

United for humanity – it is this deep conviction that gives me confidence for the year ahead.

For that, we must be better listeners.

That is another crucial lesson I have drawn from the past few months – not just with a view to our partners in Europe, but also in Africa, Asia, Latin America, and the Near and Middle East.

When discussing Russia’s war with many of these partners, I often heard the following sentiment: “You want us to stand with you now that there is a war in Europe. But where were you in recent years when we were in the throes of conflict?”

I hear these concerns. And I truly believe we should be willing to critically question our own actions and our past engagement in the world.

We should also listen closely when our partners tell us how difficult it is to reduce their dependency on Russia – whether militarily, politically, or economically. This is an immense challenge. In Germany, we are seeing how the cost of overcoming our dependency is weighing on our citizens’ wallets.

For many partners, the slashes cut deeper, and, for them, setting up multi-billion-euro protective shields is simply not possible.

Our partners must know that they can rely on us. A foreign minister colleague recently said to me, “We need committed partners, not

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on the big emitters to pay their share for the climate losses and damages they are causing in the most vulnerable states. This is not about charity; it is about justice. It is something particularly small island states have been demanding for decades – and rightly so. This year, we finally sent a clear message: We heard you. We understood. And now, we will act.

In the climate emergency, as well as in other conflicts and crises, it is the most vulnerable who suffer the most: women, children, the elderly, and marginalized groups. I strongly believe that women’s rights are a yardstick for the state of our societies.

In autocratic regimes, they are often the first to give. And if they do, that is a sign of worse to come. What autocratic regimes are most afraid of is when women raise their voice.

partners who just want to please us.”

This should be our guiding principle.

Our clear message is that we are not turning our back on the world because there is a war raging in our neighborhood. On the contrary, we are seeing how this very war is driving suffering across the globe because Russia has been curbing access to Ukraine’s grain exports and has been spreading lies about who is to blame for the shortages.

Our response has been the most effective when it has been the most united. It was the UN, together with our Turkish partners, that negotiated the reopening of Ukrainian grain ports. The G7, which brings together economically strong democracies, committed over $14 billion by June 2022 to help alleviate the pain of those most in need, and Germany remains the second-largest humanitarian donor worldwide. This solidarity gives me confidence. But it is not enough.

The World Food Programme had to reduce food rations to Yemen, Somalia, and the Sahel. Every portion cut means another child goes hungry.

And if you see your son or daughter starving, you cannot fight for democracy, rights, or freedom. That is why, going into the next year, we must not waver in our joint support.

At the same time, we will rally partners to tackle one of the most severe underlying causes of the food crisis: the climate emergency.

For millions around the world, this crisis is a concrete threat to their lives.

I heard from women in northern Mali how droughts are destroying their harvests, driving farmers from their homes, and exacerbating conflicts over land and resources. In Palau, a fisherman took me to his local beach, showing me how the rising sea levels may swallow up his house in less than ten years’ time, robbing him of his home, his safety, and his livelihood.

At the UN Climate Change Conference (COP27), I met an activist from Chad who told me, “While we are talking, my country is under water, my mother has lost her home, my sister has lost her home, my cousins have lost their homes.”

The climate crisis harms, kills, and displaces. It is a direct threat to human life. It is a blatant injustice that countries like Chad and Palau suffer so tremendously from this crisis while having contributed next to nothing to its creation.

As industrialized countries that are largely to blame for the crisis, we have a special responsibility to help alleviate it, to reduce emissions and keep the 1.5-degree path within reach. Because every tenth of a degree less in global warming means less intense storms, floods, and droughts – and thus more security.

That is why it was a crucial step forward that we opened a new chapter for climate justice at COP27. It is now

R OT E S T E R S I N P I S TA N B U L D E C R Y T H E D E AT H O F M A H S A A M I N I , F O L LO W I N G H E R A R R E S T

BY IR AN’S MOR ALIT Y POLICE IN SEPTEMBER.

If half of the population is suppressed, no society or economy can thrive.

That is why, for my government, a Feminist Foreign Policy that promotes the equal rights of each and every one of us in our societies is a core issue of hard security.

It will figure prominently in our National Security Strategy that we are currently drafting.

“Women are the first victims of war, but only they hold the unique key to peace.” That is how Congolese humanrights activist Julienne Lusenge put it.

“Unless women are safe, no one is safe,” courageous women in Ukraine told me.

“Women, life, freedom,” is what the women in Iran have been chanting.

Resounding across the world, their chant is an anthem of courage.

If I am to take strength for the year 2023, I take it from brave women like them, whether they hail from the Congo, Iran, Afghanistan, or Ukraine.

Their chant is our anthem.

Their courage is our yardstick.

Their cause is our call – to not only be confident, but to boldly take action, united for humanity.

Annalena Baerbock is Minister for Foreign Affairs of Germany.

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Resilient Trade JANET L. YELLEN Secretary of the Treasury of the United States

Economies across the world have been strained by the events of the last three years. The COVID-19 pandemic claimed millions of lives and brought the world economy to a standstill. Russia’s brutal war has taken a devastating toll on lives and infrastructure in Ukraine, generating seismic repercussions for oil and food prices at a time when the global economy was finding its footing.

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been climate change. Severe droughts and floods have disrupted agricultural capacity and exacerbated energy shortages around the world. These disruptions have resulted in severe shortages of key goods – from lumber to microprocessors to food and fuel – that have in turn slowed global growth and contributed to high inflation in many economies. In the developing world, we have seen a rise in poverty for the first time in decades.

Over the past year, US President Joe Biden’s administration has advanced a historic economic plan to strengthen America’s resilience against costly supply disruptions like the ones we have experienced. Here at home, we have built on our work to ease bottlenecks in ports with ongoing monitoring of our supply chains and a historic investment in our physical infrastructure. And we have passed legislation that will expand domestic manufacturing capacity in core twenty-first-century sectors like semiconductors and clean energy.

But I believe that the success of our plan also depends on our economic policy abroad. The traditional conception of free trade emphasizes the efficiency of trade governed by comparative advantage. That’s the economic theory that suggests that each national economy should produce what it is comparatively best at. Comparative advantage explains the efficiency gains of international trade and specialization. But we have learned that we must also account for the reliability of trade.

In today’s world, I believe that any economic agenda must consider the potential for regional and global shocks to impact our supply chains, including those shocks driven by the policies of certain foreign governments. We are concerned about vulnerabilities that result from over-concentration, geopolitical and security risks, and violations of human rights. Through an approach called “friend-shoring,” the Biden administration aims to maintain the efficiencies of trade while promoting economic resilience for the United States and its partners.

The Importance of Secure Trade Let’s start with the fundamentals.

No country can, or should, produce every good its economy needs.

Trade brings significant economic benefits to all countries involved.

We can export goods that we produce more efficiently. And we can import goods produced more efficiently by other countries. For businesses, trade boosts production by providing a larger market for exports. It enables our most productive firms to expand and create good jobs for more people.

For consumers, it means lower prices and greater choice in the products we purchase. Trade also encourages the global flow of ideas that is essential for scientific discovery and technological advancement.

We must vigorously protect global economic integration. As we do so, we need secure trade that reaps the benefits of economic integration while providing greater reliability of supply for the goods we depend on. Three key risks are of particular concern.

The first risk is over-concentration.

The US and its partners have a strong interest in creating redundancies in our supply chains. We must avoid over-concentration of the production of critical goods in any particular market. Concentration of sources for key components can sometimes lower costs. But it leaves supply chains vulnerable to cascading disruptions that hurt workers and consumers.

imported nearly half of its personal protective equipment from China.

When global demand surged in early 2020, this concentration contributed to drastic shortages of PPE for American frontline workers.

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We must never again force our healthcare professionals to resort to using trash bags for protection during a public-health emergency. And that requires reshaping our supply chains.

Second, we must protect against geopolitical and security risks. Not only is Russia waging a brutal war against the Ukrainian people; it has also weaponized commodity exports against the world. For too long, much of the world was too willing to believe Russia’s claim that it was a reliable supplier of cheap and convenient energy.

The consequences are clear. In the first five months following Russia’s invasion of Ukraine, the price of natural gas in Europe jumped by 170%. Russia’s destruction of grain storages and blockade of Ukrainian ports have also driven up food costs. The World Food Programme estimates that Russia’s war could push up to 70 million additional people into acute food insecurity.

Take the example of semiconductors.

Microchips are essential building blocks of the modern economy.

Yet virtually all manufacturing of the most advanced chips is located in East Asia.

We have seen firsthand the consequences of a shortage which, according to one estimate, has affected at least 169 industries.

For the automotive industry alone, the pandemic chip shortage was estimated to have cost $210 billion in lost revenue in 2021, with manufacturers like Ford and General Motors forced to shut down several of their plants temporarily.

Concentration risks can manifest most acutely during a crisis. These events introduce sudden supply or demand shocks; they can also prompt countries to turn inward.

Prior to the pandemic, the US

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Third, we must shift away from supply chains that violate core human rights.

For decades, the US has prohibited the import of goods made with forced labor. One area of particular concern are imports from the Xinjiang region in China, where the Chinese government has perpetrated humanrights abuses against Uyghurs and other ethnic and religious minority groups. It has subjected detainees in its internment camps to forced labor – using threats of violence, physical and sexual abuse, and torture. The Biden administration is restricting imports of goods produced with forced labor from Xinjiang, including cotton, tomatoes, and certain silicabased products. The US will always stand up for human rights. And we must continue to do so, including through our supply-chain decisions.

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The Future Is Friend-Shoring Supply-chain risks are a cause for urgent concern. In the past two years, these risks have hampered our economic growth and hiked costs for our families. They have also harmed our national security.

It is time for a systematic approach to address these vulnerabilities.

We first need to recognize that the private sector does not internalize the right level of economic resilience by itself. Some firms are highly incentivized to focus on lowering costs in the short term and may not factor in longer-term risks like over-concentration in supply chains.

Even when companies pursue a privately optimal level of resilience through insurance policies and inventory build-up, they will often not consider national-security concerns or how an interruption in their production could affect other

firms or consumers. Governments play a critical role in strengthening economic resilience at a national level.

The Biden administration’s friendshoring approach aims to deepen our economic integration with a large number of trusted trading partners that we can count on. And it seeks to build in supply-chain redundancies to lower risks for our economies.

We believe that it is important to shift away from trade that only chases the cheapest supply chains without considering other factors like concentration, geopolitics and security, and human-rights risks. By doing so, we will create greater certainty and reliability for key goods and critical inputs for our consumers and businesses.

At the same time, friend-shoring is a rebuttal to those who argue that

economic security can be achieved only through protectionism. Friendshoring aims to achieve economic resilience and realize trade’s economic efficiencies simultaneously.

We don’t seek to produce everything ourselves. Nor do we seek to limit trade to a small group of countries.

That would substantially harm the efficiency gains of trade and hurt US competitiveness and innovation.

Rather, our core goal is to diversify away from risky countries and concentrated supply chains.

The Biden administration is pursuing our friend-shoring agenda through a broad array of bilateral and multilateral engagements.

Through the US-EU Trade and Technology Council, we are working together to create secure supply chains in the solar, semiconductor, and rare-earth magnet sectors.

The US is creating similar partnerships in the Indo-Pacific region through the Indo-Pacific Economic Framework and in Latin America through the Americas Partnership for Economic Prosperity. The countries in the IPEF – representing 40% of global GDP – have committed to establishing early-warning systems and coordinating with one another on efforts to diversify supply chains.

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Moreover, we are working with Australia to build rare-earth mining and processing facilities located in both of our countries. China traditionally holds a dominant market share in the global production of magnets and rare-earth elements, which are critical inputs for consumer electronics, clean-energy capacity, and military technologies.

Of course, in any discussion of friend-shoring, it is natural to ask: Who are our friends?

Friend-shoring is not for a closed group of countries. It is open and inclusive of our partners in emerging markets and developing countries, in addition to advanced economies. In fact, a key part of our agenda is to deepen the integration of the US and our partners with developing countries.

More broadly, many businesses are diversifying their supply chains as a response to the recent crises. In one survey, 81% of supply-chain managers worldwide said that they now source raw materials from two suppliers rather than one, up from 55% in 2020.

American businesses show growing interest in moving segments of the supply chain out of China, including to Southeast Asia or Mexico.

For example, the US International Development Finance Corporation has invested billions in developing countries, funding projects such as one that connects small-scale rural fishers in Indonesia with the global market, or another to construct a supply-chain regional logistics center in Georgia. Broader programs, like the new World Bank Financial Intermediary Fund for pandemic

We know that, over the longer term, climate change will pose increasingly severe risks to the reliability of critical supplies. Countries need to work together to develop climate resilience, particularly for the most vulnerable communities.

They must also work together to avoid the worst effects of global warming by achieving the goals of the 2015 Paris climate agreement.

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prevention, strengthen the capacity of developing countries to respond early to public-health threats and other risks. That, in turn, helps protect the resiliency of our supply chains.

Friend-shoring will be gradual.

But we are already seeing the development of new supply chains.

The European Union, for example, has worked with Intel to facilitate an investment of nearly $90 billion to build up a regional supply chain for semiconductors over the next decade.

The US is also doing its part. We are working with our trusted partners to develop a full semiconductor ecosystem here in the US. Our efforts have received a significant boost through the domestic semiconductor manufacturing incentives enacted by the Biden administration this summer.

S PRESIDENT JOE U BIDEN HOLDS A S E M I C O N D U C TO R .

In the US, we recently enacted our nation’s most aggressive domestic action on climate change, putting us on a promising path to achieve our emissions goals. We will also continue to help developing countries move decisively toward more resilient,

low-carbon futures. Beyond the effect on the climate, our collective movement away from fossil fuels will also reduce our vulnerability to oil- and gas-price shocks and our exposure to autocratic regimes, which often control much of the world’s reserves of fossil fuels.

As we pursue these initiatives, we will remain focused on friendshoring for sectors and products that are critical to our national and economic security. We will coordinate with our trading partners on high standards for human rights, labor, and the environment. And we will continue to support trade integration, which has yielded significant benefits for the global economy.

When we look back decades from now, I believe that the past three years will be viewed as a uniquely volatile period in our modern history. We have all been subject to enormous disruptions in our collective lives: the pandemic, a terrible war in Europe, and increasingly destructive natural disasters. But I also believe that it will be viewed as a moment when the US and its partners advanced a new pillar of our economic agenda, one focused on resilience. I am confident that this agenda will strengthen our economic dynamism while providing greater economic stability for our people.

Janet L. Yellen is Secretary of the Treasury of the United States.

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The Global Struggle for Tech Mastery

The Global Struggle for Tech Mastery ERIC SCHMIDT Chair of the National Security Commission on Artificial Intelligence

The past year offered some old lessons about great-power competition. But it also introduced some new ones about how technology is changing the strategic terrain.

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that China, Russia, and other authoritarian regimes pose to international rule of law, respect for sovereignty, democratic principles, and free people. These threats have grown as China and Russia have harnessed new technologies to surveil populations, manipulate information, and control data flows. They are setting an example for how authoritarians can further clamp down on freedom of thought, expression, and association.

Rising geopolitical tensions have coincided with growing encroachments by disruptive technologies into all aspects of public and private life. The implications for 2023 and beyond are clear: the technology platforms of the future are the new terrain of strategic competition. The United States therefore has a core interest in making sure that these technologies are designed, built, fielded, and governed by democracies.

Ukraine’s Window on the Future Ukraine’s resistance to Russia’s invasion (with considerable support from other democracies) crystallizes how technology is transforming geopolitics. A highly networked, tech-savvy country quickly came together against a much larger adversary that initially seemed to possess an overwhelming military advantage. Ukraine is now winning the world’s first digitally networked war, because it has harnessed software innovation and maximized the use of open-source technology and decentralized operations. Its tech capabilities are all stitched together by uninterrupted internet access.

Ukraine is also offering a glimpse of what a techenabled democracy could look like: cloud-based services allow the government to connect directly with the citizenry, mostly through everyday devices like personal phones with embedded encryption and privacy software. Young, innovative political leaders and policymakers are working closely with a talented tech workforce, sweeping away decades of bureaucratic sclerosis.

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privacy, where basic protections for freedom of expression had been extinguished. Neither the Ukrainians nor any other democratic polity would control their own destiny.

We should take seriously China’s success in exporting integrated network solutions that bundle hardware, software, and services for customers around the world.

These are extending the Chinese government’s sphere of influence and giving it an advantage over the US and other democracies, not just in the technology race but also in the broader geopolitical contest. One cannot simply assume that Western firms’ advantages in areas like cloud technology, data centers, and social media will naturally endure.

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If Ukraine can innovate under wartime conditions, all other democracies can and should be able to do so as well.

Large and small firms from across the democratic world have aided Ukraine’s tech-first transformation, emerging as important strategic actors in their own right. They protected critical Ukrainian government and financial data early on by shifting it to the cloud; they provided warnings of, and responses to, Russian cyberattacks; and they helped keep Ukrainians connected directly to one another and the global internet, so that the world would know about Russia’s lies, war crimes, and military setbacks. Without this broader ecosystem and access to technology platforms, the conflict might have taken a very different path.

But now imagine a future where authoritarian states control the technologies and firms that oversee network access, protect networks from cyber threats, build key digital infrastructure, determine what messages to censor, and manage flows of sensitive data. It would be a world of systematic political coercion and invasions of individual

TikTok’s meteoric rise, and the national-security concerns it implies, is a case in point. China’s inroads in fintech, e-commerce, and other platforms – built on networks managed by China-based companies, and run with hardware manufactured in China or under its shadow – offer a preview of just how contested the future will be.

Lessons for Democracies For the world’s democracies, the policy challenges are clear. First, we must abandon our hands-off approach to technological development. The dangerous developments described above came at a time when the US maintained a laissez-faire approach to tech strategy. In core areas of hardware, software, and network development, the US and its partners have had to react from a defensive crouch. That was the case with the US-led campaign against Huawei’s 5G first-mover advantage, the CHIPS Act’s $52.7 billion infusion for US semiconductor production (copied elsewhere in the West), and America’s belated effort to develop a comprehensive national artificialintelligence strategy. These reactive measures merely forestalled disaster, rather than instilling optimism that we are ready for the future.

Second, the US and its partners should identify the “next chips” and orient public policy accordingly. We need a repeatable public-private model for developing and executing a long-term national technology strategy. The risks of large public investments in

Winning the platform competition will not resolve complicated debates within democratic societies about how to govern technology, but it is a prerequisite for even having a debate in the first place.

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S O L A R P H OTO V O LTA I C MODULES ON A PRODUCTION LINE IN HEFEI, CHINA .

specific sectors – both political and economic – pale in comparison to the risks of ceding core techno-industrial functions to a strategic rival, or leaving them acutely vulnerable to supply-chain chokepoints.

The US and its allies are moving in the right direction by encouraging more mining and processing of the minerals that will be critical to building the technologies of the future. But there may be other hardware-manufacturing sectors that warrant greater attention and investment. For example, the West should be very worried about China’s dominance in the battery and solar-panel value chains.

Third, America and its partners must identify the next tech “offsets” and accelerate these technologies’ development and deployment.

Attempting to replicate every technology-manufacturing base within the democratic orbit is unrealistic and probably prohibitively expensive. Instead, the US and its allies should coordinate their investments in the technologies that will drive the next wave of economic development. I see biomanufacturing

and other advanced manufacturing techniques as exciting areas where the most competitive first movers can leap ahead. Equally, AI-enabled breakthroughs in fusion energy could represent an entirely new pathway to cleantech, with huge strategic ramifications.

Finally, democracies must retain optimism in new technologies’ ability to provide unforeseen opportunities and benefits. I worry that if we lose sight of the promise of AI, biotech, and other emerging technologies – or if we dwell on the challenges and become too risk-averse – we will regulate ourselves out of competitive leadership and into a strategic cul-de-sac. No one denies that powerful technology platforms raise deep ethical, economic, and political challenges, and that these will require systemic – rather than ad hoc – responses. But we must trust in democratic means to find a balance between innovation, regulation, and other national interests in disruptive sectors.

Civil society, governments, and companies across the democratic world are perfectly capable of

We cannot rerun the Cold War playbook for this new era. We must adjust to the rise of new players in technology innovation and funding – from the crowd to venture capital.

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finding a balanced approach to governing these technologies. By contrast, authoritarian states have no equivalent governance capacity, nor any checks on how the state might exploit tech platforms in ways that violate human rights, whether to extend its geopolitical reach, or to undermine its foes.

Winning the platform competition will not resolve complicated debates within democratic societies about how to govern technology, but it is a prerequisite for even having a debate in the first place.

We must accept that technology supply chains will still crisscross the world, as will the networks of universities, researchers, and companies that are building the future, albeit in shifting patterns, as we adjust to the new realities of strategic competition.

These shifts can be organized and harnessed to ensure that the US and fellow democracies retain their tech leadership. But democracies must heed the lessons of 2022 if the world is going to have a choice about which platforms it will use to build the future.

Toward a Tech Agenda The agenda hinted at here will require national leadership and systematic organization. The US and other democracies have confronted such challenges before, such as during the mid-twentieth-century space race, which continues to this day.

But we cannot rerun the Cold War playbook for this new era. We must adjust to the rise of new players in technology innovation and funding – from the crowd to venture capital.

Eric Schmidt, a former CEO and chair of Google/Alphabet, is Chair of the National Security Commission on Artificial Intelligence.

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Is Economic Failure an Economics Failure?

As 2023 begins, it is clear that an ever-growing number of people hold democratic capitalism in disrepute, and economists along with it. But how much responsibility – and what kind – do economists bear for our economies’ ills?

ANGUS DEATON Nobel laureate in economics

2010, a n i n f lu e n t i a l , o s c a r winning documentary portrayed us as scoundrels concerned only with our own financial gain, and as lobbyists and apologists for the rich, who reward us generously for our work. Our pronouncements are often predictable from our politics. Whenever several hundred economists signs a petition in support of some policy, it is only a matter of days before several hundred other economists sign a petition condemning it. in

Moreover, we economists often assume a mantle of policy expertise for which we have no qualification, with predictably disastrous outcomes.

Even so, thoughtful critics contend that we still retain great influence over economic policy, and thus continue to cause great harm. But does the fault lie with just a few powerful individuals, or is there a deep flaw in economics that continuously leads its practitioners astray?

I tend to favor the latter hypothesis.

American democratic capitalism is serving only a minority of the population well. The 2008 financial crisis and its grim aftermath gave the lie to the fable that everyone would benefit from letting financiers get richer. In the intervening years, less-educated Americans have been succumbing to deaths of despair and turning to populism in reaction to a political system that is not helping them.

Not only did most economists fail to predict the crisis; by some accounts, they facilitated it. After all, they are proud apostles for the globalization and technological change that have enriched a narrow financial and managerial elite, redistributed income and wealth from labor to capital, destroyed millions of jobs, and hollowed out communities and their residents’ lives. Worse, when confronted with deaths of despair, some economists blame the victims and those who try to help them.

Advise and Consent According to my friend and colleague Alan S. Blinder, who has held several different roles in government and public policymaking, politicians rarely do what economists suggest.

Instead, they use economic analysis in the way that a drunk uses a lamppost: for support, not illumination. The problem is not that all economists are paid hacks who adopt positions to please their masters – though there are plenty of those. It is that even good work can be selectively misused.

Similarly, Jason Furman, who served as chief of President Barack Obama’s Council of Economic Advisers, rejects the idea that economists have too much sway, arguing that he “could only dream of having the power” that is attributed to his profession. And other administration economists have claimed that, at best, they play only a negative role of stopping bad things from happening. Politicians must respect budgets, but they often live in fantasy worlds where their pet schemes pay for themselves.

Economists in the CEA or the Congressional Budget Office play a valuable role in bringing some realism to the policymaking process.

Not only did most economists fail to predict the 2008 financial crisis; by some accounts, they facilitated it.

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I believe that Blinder and Furman are correct, but not always. When Lawrence H. Summers was US Secretary of the Treasury in President Bill Clinton’s administration, from 1999 to 2001, he used his enormous intellect, knowledge, and persuasiveness to weaken restrictions on the international flow of speculative funds, as well as on derivatives and other more exotic financial instruments. It is worth remembering that other economists, including Blinder and Joseph E. Stiglitz, fiercely opposed those decisions. Many have since argued that those Clinton-era changes contributed to both the 1997-98 Asian financial crisis and the global financial crisis a decade later.

Earlier, when Robert Rubin was Treasury Secretary, Summers was his deputy, and the libertarian business economist Alan Greenspan was chairman of the Federal Reserve, Time Magazine featured the three men on its cover as the “Committee to Save the World,” teasing an article about how they had “prevented a global economic meltdown – so far.” That cover was the product of a time when

A central problem of modern mainstream economics is its limited scope. The field has become unmoored from its proper basis, which is the study of human welfare.

most economists felt more admiration than antipathy. To a greater or lesser extent, we bought into the notion that modern economics had given us the tools to sweep away the growth-restricting regulations of the past, many of which were based on prejudice and myth, not science.

I suppose a mea culpa is now in order.

R A D E R S AT T H E N E W T Y O R K S TO C K E X C H A N G E DURING THE 2008 FINANCIAL CR ASH.

It is important to recognize that this earlier episode was exceptional.

Janet Yellen, another immensely distinguished economist who now serves as Treasury Secretary, does not have same influence or power.

As Ezra Klein of the New York Times observes, she “holds real weight in internal discussions, and so do some others, but economists are one of many voices at the table, not the dominant voices.” President Joe Biden does not listen to economists in the way that Clinton or Obama did.

Beyond that, Yellen and Summers are themselves exceptional cases.

Academic economists do not usually get to be Treasury Secretary.

The Year Ahead 2023

Is Economic Failure an Economics Failure?

Economics should be about understanding and doing away with the factors behind the sordidness and joylessness that come with poverty and deprivation.

The Power of Scribblers

this way; like other governments, it often makes things worse, and can be beholden not to all of its citizens, but to the beneficiaries of the system.

John Maynard Keynes, who spent much of his life advising policymakers, and not without effect, had a different view of the power of economists: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” Note his inclusion of the word “wrong”; it is not just good ideas that survive and prosper.

For example, Jeb Hensarling, a Texas Republican who chaired the House Financial Services Committee from 2013 to 2019, says he became a politician to “further the cause of the free market,” because “freemarket economics provided the maximum good to the maximum number.” Hensarling’s view is an example of what James Kwak of the University of Connecticut School of Law calls “economism,” the idea that the world operates exactly as described in introductory economics textbooks. Clearly, those textbooks matter. In the US, some 40% of college students – including most future politicians, lawyers, and CEOs – take at least one economics course.

There is folly on the left, too. If the right cannot see the flaws in markets, the left can be equally blind to the flaws in government that prevent it from acting reliably to fix the flaws in markets. Government, it is imagined, is a representative body, elected by fully informed citizens, whose job is to correct markets’ flaws, be it the tendency to monopoly, the exploitation of workers, or excesses of income inequality. In practice, however, the US government does not operate

In my view, a central problem of modern mainstream economics is its limited scope. The field has become unmoored from its proper basis, which is the study of human welfare. As Amartya Sen contends, the discipline took a wrong turn with the British economist Lionel Robbins’s famous and now-dominant definition of economics as the allocation of scarce resources among competing ends. That was a terrible narrowing of scope compared with what the American philosopher Hilary Putnam called the “reasoned and humane evaluation of the social well-being that Adam Smith saw as essential to the task of the economist.”

J O H N M AY N A R D K E Y N E S .

Sen contrasts Robbins’s definition with that of the late nineteenth and early twentieth-century economist Arthur Pigou, who wrote: “It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science.” Economics should be about understanding and doing away with the factors behind the sordidness and joylessness that come with poverty and deprivation. Once again, Keynes’s General Theory has a good summary.

“The political problem of mankind,” he avers, is “how to combine three things: economic efficiency, social justice, and individual liberty.”

We appear to have abandoned the last two of Keynes’s trio. We need to overcome our fixation on money alone as a measure of human well-being.

We need a better acquaintance with the way that sociologists think. And above all, we need to spend more time with philosophers, recapturing the intellectual territory that used to be central to economics.

Angus Deaton, the 2015 Nobel laureate in economics, is Professor Emeritus of Economics and International Affairs at the Princeton School of Public and International Affairs and Presidential Professor of Economics at the University of Southern California. He is the coauthor (with Anne Case) of Deaths of Despair and the Future of Capitalism (Princeton University Press, 2020).

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The Silver Tsunami

Since 2011, sales of adult diapers in Japan have outpaced those for infants, reflecting a decline in the country’s fertility rate (live births per woman) from 3.66 in 1950 to around 1.5 by the early 1990s. Since then, Japanese fertility has remained stuck far below the “replacement rate” (2.1), amounting to a mere 1.3 in 2021.

The Year Ahead 2023

HIPPOLYTE FOFACK Chief Economist and Director of Research at the African Export-Import Bank a n d g e r i at r i c ja pa n i s n o t a l o n e .

Fertility rates have also dropped below the replacement level in all eurozone countries, and they are strikingly low in Hong Kong, Macao, Singapore, South Korea, and Taiwan – the five wealthiest East Asian economies, omitting China. At 0.81 and 1.38, respectively, South Korea and Hong Kong’s 2021 fertility rates are among the lowest in the world.

Moreover, China is likely to record an absolute decline in its population in 2023. Though the government ended its 35-year-old one-child policy in 2016, China’s fertility rate stood at just 1.16 in 2021, down from as high as 6.3 as recently as 1968. The United Nations has revised down its projection of the size of China’s working-age population (those between 15 and 64) in 2100 by a startling 201 million, from 579 million

The Silver Tsunami

to 378 million. This trend poses a big problem for the Chinese economy.

“Today, every 100 working-age Chinese need to support 20 retirees,” Oxford historian Rana Mitter wrote recently in The Spectator. “If trends continue, by the turn of the next century, every 100 workers will have to support 120 retirees.”

Meanwhile, the US fertility rate has more than halved over since 1960, falling from 3.7 to 1.66 in 2021. And even an emergingmarket powerhouse like India is experiencing a population decline, recording fertility rates of 2.03 in 2021 and 2.05 the year before, the first time the country had fallen below the replacement rate.

According to the UN’s World Population Prospects 2022 (WPP2022) report, the global fertility rate, which stood at 2.3 overall in 2021, will hit the demographic tipping point of 2.1 by 2050, owing to a globally synchronized decline in birth rates, including in Africa and Latin America.

Declining fertility rates have already shifted the age distribution of the population upward in many

WORKING -AGE CHINESE TO R E T I R E E S I N 2 0 2 2 …

… A N D I N 2 10 0 ( P R O J E C T E D ).

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economies. According to the WPP2022, “Worldwide, persons aged 65 or over outnumbered children under five for the first time in 2018.” By the middle of this century, there will be twice as many senior citizens as people under five, and around as many as the total number of people under 12.

The consequences will be immense, particularly in high-income economies. In addition to straining pension and health-care systems, low fertility rates – in the absence of more immigration – will reduce the working-age population, in turn lowering household consumption and economic growth. Fewer workers also will lead to wage inflation, which could add to uncertainty and volatility in the global economy. Historically, per capita output growth has accounted for around half of average annual world economic growth, with the other half coming from population growth. But population aging risks upsetting this balance.

As low fertility rates become increasingly entrenched, many countries may adopt aggressively pro-natalist policies. Following Nobel laureate economist Gary Becker’s modeling of household behavior and family planning – which suggests that the demand for children responds to changes in the price of the “marginal child” – such policies tend to emphasize financial incentives, such as paid maternity leave, “bonuses” for couples that have children, monthly grants for mothers who take time off work to raise a third child, and personal tax deductions to cover childcare expenses.

But these inducements have not proven especially effective.

France offers substantial support to families, but its fertility rate stood at just 1.83 in 2021. Adding to the challenge, rising per capita incomes and medical advances have increased life expectancy, tempering the historical “utility” of having more children as a kind of intergenerational insurance policy.

+80.5m N E T M I G R AT I O N I N TO HIGH-INCOME COUNTRIES, 2 0 0 0 –2 0 2 0 .

+66.2m B A L A N C E O F N AT I V E B I R T H S O V E R D E AT H S ACROSS HIGH-INCOME C O U N T R I E S , 2 0 0 0 –2 0 2 0 .

In the late eighteenth century, the clergyman and economist Thomas Malthus, worried about rapid population growth, posited two sets of factors that might stabilize it: “positive checks” that increase mortality, including wars, famine, and disease; and “preventive checks” such as celibacy, birth control, and attitudes toward family planning.

In addition to advances in medicine, the rules-based international order that emerged after the second world war helped to diminish positive checks on population growth. But Malthus could not have imagined how effective the preventive checks of the last 70 years would be.

These developments were fueled by two key influences. First, changes in family-planning approaches can become quite “sticky” once they take hold as social norms, as the resurgent

O D E L S S H O W C A S E T H E L AT E S T M S T Y L E O F A D U LT D I A P E R S AT A FA S H I O N S H O W I N TO K Y O .

S Y R I A N R E F U G E E AT T E N D S A A J O B -T R A I N I N G P R O G R A M I N H A N O V E R , G E R M A N Y.

The Year Ahead 2023

Throughout modern history, international migration from lowincome, high-fertility countries to those with higher average incomes and lower birth rates has helped shield the latter from demographic headwinds.

The Silver Tsunami

debate about access to abortion in the United States makes clear. Second, and even more consequentially, extremely low fertility rates exhibit a persistence effect, becoming increasingly difficult to reverse the longer they endure.

Throughout modern history, international migration from lowincome, high-fertility countries to those with higher average incomes and lower birth rates has helped shield the latter from demographic headwinds. According to the WPP2022, high-income countries’ population growth between 2000 and 2020 was driven primarily by international migration, with net inflows (80.5 million) exceeding the balance of native births over deaths (66.2 million) by more than 20%.

Moreover, international migration is set to become the sole driver of population growth in these economies in the coming decades.

That means there will be a swelling of high-income countries’ foreign-born populations, which accounted for over 14.7% of their total population in 2020 – with higher ratios for some of the largest economies, including the US (15.3%) and Germany (18.8%).

Despite the strict immigration policies that many governments have promoted in recent years, international migration has helped high-income countries sustain economic growth and ease the burden of supporting their growing elderly populations, including by keeping state pensions on a sustainable path. At a time of heightened geopolitical tensions and the risk of global fragmentation, it is more important than ever to recognize the mutually beneficial relationship that exists between low- and high-fertility countries.

Still, facilitating migration cannot be the sole long-term solution. If global fertility does fall below the replacement rate within the next 30 years, the consequences for the entire planet may be dire. Our children may be the future, but they will be growing up in a geriatric world.

Hippolyte Fofack is Chief Economist and Director of Research at the African ExportImport Bank (Afreximbank).

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Navigating Economic Perfect Storms

The Year Ahead 2023

Navigating Economic Perfect Storms

During the opening of the summit of G20 finance ministers and central-bank governors on October 12, 2022, I warned that the world is facing increasing and compounding risks from high inflation, weak growth, energy and food insecurity, climate change, geopolitical fragmentation, and rising debt distress.

Low-income countries will bear the highest burden, but also middle-income and even advanced economies face the prospect of substantial pain.

SRI MULYANI INDRAWATI Finance Minister of Indonesia

the globa l econom y h as been

heading into a perfect storm. The COVID-19 pandemic has left scars on all our economies, precipitating a drop in aggregate demand and then aggregate supply. The symptoms are similar to those of a “liquidity trap,” with third-party funding in the financial sector remaining high while the real economy stagnates.

To solve this problem, the great twentieth-century economist John Maynard Keynes proposed countercyclical fiscal policy. If the economy works well, the annual budget deficit should be reined in; but if the economy is slowing, deficits should be permitted to grow.

Indonesia, under a 2003 law, disciplined its fiscal policy by limiting annual budget deficits to less than 3% of GDP, and total public debt to 60% (using the same parameters as

the European Union’s Stability and Growth Pact). But when COVID-19 caused the economy to contract, the annual budget deficit was expected to rise above 3% of GDP to create room for stimulus. To enable that flexibility, the government waived the budget-deficit limit.

Within weeks of the World Health Organization’s March 11, 2020, declaration of a pandemic, the Indonesian government revised the budget law to allow for an expanded deficit. Indonesia’s annual deficit then grew to 6.5% of GDP in 2020, before falling to 4.6% in 2021 as the economy recovered. In Keeping Indonesia Safe from the COVID-19 Pandemic, a book published by the Indonesian Ministry of Finance in 2022, we detail how Indonesia managed to be one of the few countries in the world that sustained its economic performance even through a global aggregate demand shock. By expanding the deficit, the Indonesian government kept growth from shrinking by more than 2.1% in 2020, and created the conditions for 3.7% growth in 2021, with consumer price inflation remaining low, at 1.7% in 2020 and 1.9% in 2021.

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Moreover, in 2021, economic output increased by around 1.6%, exceeding its level in 2019. This year, the annual budget deficit is expected to be around 4.5%, reflecting the government’s response to the latest wave of global supply-side shocks. But starting in 2023, the deficit should return to below 3%, barring another crisis.

After the initial economic storm that COVID-19 whipped up, the global economy is now in the midst of a second tempest. Mobility restrictions and other public-health measures from the height of the pandemic disrupted services, snarled supply chains, and curtailed production in key sectors such as semiconductors (which are used in many other manufactured products, including new cars). The total value added in global manufacturing has decreased by 4% from 2019 to 2020, as did the number of mother vessels shipping freight between major ports.

Unlike the first storm, this second one brought both weaker growth and high inflation, owing to rising costs of global production and transport, which were pushed even higher in 2022 by the spike in hydrocarbon and food prices. The Indonesian Crude Price rose above $100 per barrel and settled around a consensus forecast of $105 per barrel, on average. As food prices have risen, tens of millions more people have fallen into food insecurity.

Unfortunately, regardless of what happens in the geopolitical domain, food prices are likely to remain high as a result of ongoing climate shocks.

These food and energy supply pressures have left a heavy burden on the global economy, which is still struggling to heal from the wounds that the pandemic inflicted on global value chains (GVCs). Nonetheless, Indonesia’s economy remains relatively resilient, for several reasons.

For starters, Indonesia’s own connections to GVCs are weighted more heavily toward food and beverage products than automotives and electronics. Second, the country generates a healthy share of its electricity from renewable-energy sources. And third, Indonesia has a greater comparative advantage in raw materials than intermediate goods, which means it is less exposed to semiconductor shortages. It also means that it benefited from windfall

-2.1% INDONESIAN ECONOMIC GROWTH IN 2020.

+3.7% INDONESIAN ECONOMIC GROWTH IN 2021.

S R I M U LYA N I I N D R A W AT I .

E D I C A L P E R S O N N E L T E N D TO C O V I D -1 9 M PAT I E N T S I N B O G O R , I N D O N E S I A .

The Year Ahead 2023

W O R K E R S I N I N D O N E S I A’ S F U T U R E C A P I TA L , N U S A N TA R A .

Navigating Economic Perfect Storms

income and a current-account surplus when the prices of primary products (including palm oil, coal, rubber, and nickel) rose in 2021. Looking ahead, however, Indonesia still aims to boost domestic manufacturing by producing more intermediate goods, particularly for major GVCs such as automotives and electronics.

In 2022, the pandemic shock to aggregate demand met new shocks to the supply of food and energy stemming from the war in Ukraine, resulting in forecasts of global stagflation and recession in 2023.

Yet Indonesia’s economy continues to move in a positive direction, with significant improvements both in aggregate demand, as measured by the consumer confidence index (CCI), and aggregate supply, as measured by the purchasing managers’ index (PMI).

A higher CCI allowed Indonesia to maintain robust growth in the second quarter of 2022, when year-on-year household consumption growth exceeded total economic growth for the first time since the start of the pandemic. With the CCI still rising from July at 123.2 to August at 124.7,

and the PMI increasing in the third quarter of 2022 from 51.3 in July to 53.7 in September, Indonesia’s economic performance continued to improve as the year progressed.

Against the backdrop of an increasingly gloomy global economy, Indonesia and a few other countries have become exceptional. The same advantages that have helped shield it from the storms of the past few years should continue to do so again in 2023.

Sri Mulyani Indrawati is Finance Minister of Indonesia.

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The COVID-19 pandemic increased low- and middle-income countries’ debt levels to a 50-year high. With soaring inflation, rising interest rates, and the strengthening US dollar compounding their debt-service burdens, a crisis is now unfolding in several countries of the developing world.

A Pandemic of Debt

The Year Ahead 2023

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A Pandemic of Debt

economies’ key characteristics and their public-sector liabilities.

The 53 debt-distressed countries that The Economist identified represent 18% of the world’s population – more than 1.4 billion people – but just 5% of global GDP.

JOSÉ ANTONIO OCAMPO Minister of Finance and Public Credit of Colombia 53 vulnerable countries that have either defaulted on their debts or are at high risk of debt distress. While it is true that most of these countries are among the world’s poorest, a growing number of middle-income economies are also facing severe debt problems. According to the World Bank, nearly 60% of all emerging and developing countries have become high-risk debtors. the economist h as iden tified

To gauge the full scope of this crisis and identify possible solutions, we must first consider these

The figure below shows gross public debt as a percentage of GDP in different regions of the developing world. The debt-to-GDP ratio is 55% in Sub-Saharan Africa, and exceeds 70% in the emerging and developing economies of Asia and Latin America and the Caribbean.

This higher debt burden is a direct result of the pandemic. And while debt levels have decreased in every region but Asia since 2020, they are still higher than they were in 2019. Moreover, tightening financial conditions have made it

much more difficult for developing countries, already struggling to access financing, to restructure their existing debts and avoid insolvency.

Currency depreciation is another risk. Many developing and emerging economies’ currencies have fallen steeply against the US dollar, raising the costs of servicing dollardenominated debt. Although some emerging-market governments have developed domestic sovereign-debt markets and several multilateral lenders have issued loans in local currencies, 16% of emerging-market public debt is denominated in foreign currencies. This problem is particularly pronounced in Latin America and the Caribbean and in Sub-Saharan Africa, where the ratio of external debt to exports is expected to reach 167% and 147%, respectively, in 2023.

G R O S S P U B L I C - S E C TO R D E B T ( % O F G D P ) 80

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36.5% M U LT I L AT E R A L D E B T A S A S H A R E O F TOTA L E X TERNAL DEBT ACROSS LO W - I N C O M E C O U N T R I E S .

8% M U LT I L AT E R A L D E B T A S A S H A R E O F TOTA L E X T E R N A L DEBT ACROSS MIDDLEINCOME COUNTRIES.

Preventing the Worst Creditors can and must play a critical role in providing debt relief for low-income countries.

Multilateral development banks typically offer long-term loans at concessional interest rates – a competitive advantage in the current environment, particularly for poorer countries. For low-income countries, the ratio of multilateral debt to total external debt has been around 36.5% over the past decade, compared to 8% for middle-income countries, which depend heavily on costlier private-sector financing.

Before COVID-19, the main body providing debt relief to low- and middle-income countries was the Paris Club of sovereign creditors.

But, in response to the liquidity crisis caused by the pandemic, the G20 and the Paris Club introduced the Debt Service Suspension Initiative. With support from the World Bank and the International Monetary Fund, the DSSI suspended $12.9 billion in payments owed by 48 low-income countries between May 2020 and December 2021. Yet this was only a temporary solution: the DSSI did

not reduce debt levels and attracted minimal participation by privatesector creditors. Since it expired in December 2021, access to financial markets has tightened, and nearly half of the 73 eligible countries are now at risk of debt distress.

At the end of 2020, the G20 and the Paris Club endorsed the Common Framework for Debt Treatments which is meant to coordinate and provide debt relief to DSSI-eligible countries. But only three countries – Chad, Ethiopia, and Zambia – have applied to it so far. Earlier this year, the World Bank and the IMF offered a roadmap for improving the program, featuring four recommendations: a clear timeline, suspension of debt payments during negotiations, establishment of clear processes and rules, and expanded eligibility requirements.

But several countries that require immediate debt relief are not among those eligible for the DSSI. Some middle-income countries, such as Lebanon, Sri Lanka, and Suriname, have already defaulted. Others, including Egypt, Ghana, Pakistan, and Tunisia, face severe debt distress.

And Argentina and Ecuador already restructured their foreign debts in 2020, using traditional mechanisms and with implicit IMF support.

Long-term Fixes But more ambitious reforms are clearly needed. In October 2020, the IMF emphasized the need to improve its existing debt-restructuring mechanism – the so-called “contractual approach” – which was last redesigned in 2014. At the same time, the IMF highlighted the growing problems associated with non-bond and collateralized debts and noted the lack of transparency in this domain.

But these contractual arrangements are also insufficient, because half of the sovereign debts of emerging and developing countries lack enhanced collective-action clauses, which allow several debt contracts to be renegotiated simultaneously.

Another possible approach would be to create an independent panel for sovereign-debt negotiations that would operate within the United Nations. The IMF already tried to create a similar body at the beginning

The Year Ahead 2023

A Pandemic of Debt

debts through US-backed “Brady bonds.” In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries Initiative, which allowed for the cancellation of debts to multilateral creditors in exchange for economic reforms. The Multilateral Debt Relief Initiative, which was launched in 2006, took this approach a step further and canceled eligible countries’ debts to the IMF, the World Bank, and the African Development Fund.

of this century, but the idea was rejected. It was proposed again by the UN Conference on Trade and Development during the pandemic.

While such an undertaking is necessary (I have expressed support for it previously), it would take too long to make any difference in addressing the current debt crisis.

Nonetheless, any future reform must allow for greater provision of multilateral financing and create a temporary mechanism to facilitate debt renegotiations.

A large issuance of special drawing rights (SDRs, the IMF’s reserve asset), like the one undertaken during the pandemic, should be part of the solution. To the extent that the problem of many middle-income economies is more one of access to finance than of insolvency, it should be complemented with abundant low-interest, long-term financing from multilateral lenders.

A N A N T I - G O V E R N M E N T P R OT E S T I N S R I L A N K A .

As for effective debt-restructuring models, three historical examples come to mind. During the Latin American crisis of the 1980s, developing countries restructured

F O R M E R U S S E C R E TA R Y OF THE TRE ASURY NICHOL A S BR ADY AT T H E C H I C A G O MERC ANTILE E XCHANGE IN MARCH 1996.

But the best way to ensure that low- and middle-income countries get the relief they need would be for the World Bank or regional development banks to create a credit facility that distressed debtors could tap voluntarily. The facility would apply to all bilateral and commercial debts on equal terms, and during debt renegotiations, it would be subject to strict monitoring by the multilateral bank managing the process. Moreover, international financial institutions could facilitate debt-restructuring agreements by offering complementary credit to the countries involved.

But, given that the level and nature of debt vary greatly from country to country, international institutions must make decisions about relief on a case-by-case basis. This should be complemented by more financing from multilateral development banks not only to countries requiring debt relief, but also to those that don’t. And, of course, all developing countries should implement structural and fiscal reforms to ensure long-term debt sustainability.

José Antonio Ocampo is Minister of Finance and Public Credit of Colombia.

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The Year Ahead 2023

Will Central Banks Do What It Takes?

The advanced economies are experiencing their highest inflation in 40 years, with a median rate of nearly 9% for the 12 months ending in September 2022. For central banks and financial markets, the expectation – or, more accurately, the hope – that the inflation spike would be transitory has been broadly replaced by the sobering realization that price growth is a persistent problem that demands significant and sustained monetary tightening.

With the exception of the Bank of Japan, the major central banks are now raising interest rates and moving to stabilize or reverse balance-sheet growth.

CARMEN M. REINHART Professor of the International Financial System at Harvard Kennedy School f e w wou l d d ou b t t h at , a f t e r

15 years of exceptionally low interest rates, this policy shift will be difficult, especially with the global economy teetering on the edge of recession. But with 2023 expected to bring heightened global financial and economic risks – not to mention rising geopolitical tensions – it will almost certainly become even more complicated.

A historical perspective illuminates some of the challenges that are likely to emerge as international financial conditions tighten. Real policy interest rates (nominal interest rates minus inflation) in the world’s financial center, the United States, have been consistently negative since the 2008-09 global financial crisis.

Real interest rates have remained negative for multiyear periods in a global financial center only four times since the mid-1800s (at least). The first three episodes were during the two world wars and in the aftermath of the OPEC oil shock from 1974-1980. In these three cases, average inflation in the US ranged from 7% to 15%, and the restoration

of positive real interest rates was part of an effort to tackle inflation.

The current period of prolonged negative real interest rates is the longest of the four. Moreover, real rates in other advanced economies have been even more deeply negative.

In much of Europe and Japan, nominal interest rates were also negative – a historical novelty.

Yet another historically anomalous feature of the recent “low-for-long” interest-rate era is that, under the heading of quantitative easing, advanced-economy central banks have purchased massive amounts of government (or governmentguaranteed) debt, setting new peacetime records. While centralbank balance sheets shrank modestly after the global financial crisis ended, they remained far larger than they were before the crisis, and swelled to new highs during the COVID-19 pandemic.

This exceptional accommodation explains why, despite significant rate hikes, the US federal funds rate remains well below the 12-month inflation rate of about 8%. Likewise, the European Central Bank’s policy rate remains well below the US federal funds rate, while eurozone inflation nears double digits.

Against this backdrop, restoring positive real interest rates – thereby stabilizing inflation – may require monetary policy to be kept tighter

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-1 5 “ W O R L D ” R E A L I N T E R E S T R AT E ( %) 1 8 7 0 –1 91 8 – U K D I S C O U N T R AT E M I N U S U K C P I I N F L AT I O N 1 91 9 –1 9 5 6 – U S D I S C O U N T R AT E M I N U S U S C P I I N F L AT I O N 1 9 5 7–2 0 2 2 – U S F E D E R A L F U N D S R AT E M I N U S U S C P I I N F L AT I O N

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for longer than many policymakers and market participants seem to expect. Yet it is far from clear that central banks will maintain their commitment to tightening in the face of weakening economic activity.

The persistence of inflation in the 1970s can be explained partly by the US Federal Reserve’s tendency to do too little too late or to waver in the tightening process.

Experience also points to another underappreciated risk: the return of volatility in fixed-income (bond) markets. The recent turmoil in the United Kingdom, which forced the Bank of England to launch an emergency bond-buying program, is a case in point.

Price volatility is standard in global commodity markets, regardless of the interest rate. But, in fixedincome markets, higher volatility

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is the handmaiden of higher and more unstable inflation rates. The variation in inflation rates across the major advanced economies was about seven times higher in 1974-89 than in 2008-21.

This means that, in the era of sustained ultra-low interest rates, fixed-income-market volatility declined steadily. Low and stable inflation rates across the advanced economies also contributed significantly to a reduction in exchange-rate volatility after 2008, as Kenneth Rogoff, Ethan Ilzetski, and I have shown.

Persistent ultra-low interest rates shaped balance sheets by encouraging private-sector and government borrowing and aggressive risk-taking in search of yield (increasing the likelihood of asset-price bubbles). While ultra-low

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The risks posed by the exit from sustained negative real interest rates extend well beyond recession. The question is how central banks will respond when those risks manifest.

The Year Ahead 2023

Will Central Banks Do What It Takes?

HE US FEDER AL RESER VE T I N W A S H I N G TO N , D C .

rates technically strengthen government balance sheets, they may have created or aggravated offbalance-sheet losses, including by undermining pension-fund solvency (especially among local governments). “Low for long” has, in some cases, weakened fiscal discipline and delayed reforms.

For countries with very high debts (such as Italy), negative interest rates – together with massive debt purchases by central banks – may have replaced debt restructuring, which at least in principle can deliver faster and greater progress on debt reduction. It remains to be seen how that gap will be filled in an era of tighter monetary policy.

The message is clear: the risks posed by the exit from sustained negative real interest rates extend well beyond recession. The question is how central banks will respond when those risks manifest.

Central-bank independence seems to have eroded – not necessarily de jure, but possibly de facto, as officials weigh the broader consequences of their actions. If leverage (public and private) and risk exposures raise doubts about financial stability, will central banks return to accommodation?

What if fears of a market crash emerge, or sovereign insolvencies seem imminent (as might occur in the eurozone)? In the 1970s, economies endured years of high inflation before the exit from negative real interest rates was complete.

And yet more risks loom in 2023. China – a key engine of global economic growth after the last global financial crisis – is grappling with financial and political fragilities. Tighter global financial conditions could severely damage emerging-market and developing economies in the short run. Those with large US-dollardenominated debts will suffer even more. Already, more than 60% of low-income countries are either at high risk of distress or already there.

But just as the exit from the “low-for-long” interest-rate era raises grave risks, so, too, does persistent high inflation, which, among other things, exacerbates inequality within and across countries. To say that this is a challenging time for governments and central banks would be a massive understatement.

Carmen M. Reinhart, a former chief economist of the World Bank Group, is Professor of the International Financial System at Harvard Kennedy School.

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The Year Ahead 2023

Is Today’s China Yesterday’s Soviet Union?

DI GUO Senior Lecturer of Strategy at Brunel University’s School of Business

CHENGGANG XU Senior Research Fellow at the Stanford Center on China’s Economy and Institutions at Stanford University

The 20th National Congress of the Communist Party of China (CPC), held this past October, confirmed President Xi Jinping and China’s top political leadership for the next five years. But what that means for the Chinese economy going forward will depend on three factors: the state of the country’s institutions, past and current economic conditions, and the leadership’s political intentions.

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as the institutional foundation for new reform policies. Under the new model, regional economic performance would determine the promotion of local partystate bureaucrats, which led to competition between subnational bureaucrats. To gain an advantage, some covered up or even supported illegitimate private enterprises, and thus inadvertently unleashed rapid growth in China’s private sector – a development that was incompatible with totalitarianism and certainly never tolerated in the Soviet Union.

c h i na’ s m o s t f u n da m e n ta l

institutions are totalitarian, reflecting and reproducing the CPC’s monopoly control over every facet of society, including the economy. The partystate institutions of totalitarian control were transplanted, in full, from the Soviet Union in 1949. While Soviet-style totalitarianism collapsed three decades ago under the dead weight of its economic failures, China appeared to be an exception. The question now is whether China’s own totalitarian experiment can last.

To answer that, one must understand the structure of “totalitarianism with Chinese characteristics.” A key pillar is regionally decentralized totalitarianism (RDT), which combines highly centralized totalitarian control over politics, ideology, and personnel with decentralization in administrative and economic affairs.

With private enterprise becoming increasingly embedded in the Chinese economy, the CPC took the additional step of amending the constitution to recognize private-property rights, making China the first communist state to do so. At this point, there was a relative relaxation of control, and RDT began giving way to RDA.

This is the arrangement that facilitated the post-Mao reforms.

Centralized totalitarian control of the economy was relaxed, and RDT evolved into regionally decentralized authoritarianism (RDA). But since Xi came to power in 2012, China has shifted back toward totalitarianism, with the CPC leadership reasserting control, particularly over the burgeoning private sector. That reversal is a central reason for China’s sharp economic slowdown in 2022.

Opening Up Much of China’s rapid economic growth in the early post-Mao reform era was recovery following the devastation inflicted from the late 1950s until the late 1970s by the Great Leap Forward and the Cultural Revolution. But the remaining share represented something beyond mere recovery, and is something of a puzzle.

I K I TA K H R U S H C H E V N AND MAO ZEDONG.

Under the RDA model, the private sector, a rudimentary civil society, and non-state-owned mass media outlets were allowed to grow – and did so rapidly – provided that they did not challenge the CPC’s political monopoly. Then came China’s 2001 accession to the World Trade Organization, which brought an enormous inflow of foreign investment and a dramatic increase in exports. That development and the rapid expansion of the private sector became the decisive drivers of China’s rapid growth this century.

Beijing, We Have a Problem But though RDA enabled this early growth, it is also the root of a longerrun problem. The sustainability of China’s economic dynamism is persistently threatened by the exclusive state ownership of land, a state monopoly in the banking sector, the absence of judicial independence, discrimination against the private sector, and a dearth of domestic demand. While the CPC’s desire to rebuild its legitimacy drove the relaxation of totalitarian control in the early reform years, the 2008 global financial crisis gave the party an excuse to renew its push for total control.

The regime relied on a massive accumulation of debt to boost infrastructure development across the board, which generated a high economic growth rate, at least for a while. But most of these investments were inefficient, and China entered a vicious cycle of overleveraging and overcapacity. Worse, the massive debt-backed public spending sidelined the non-state sector.

As the public sector advanced, the private sector retreated.

Another problem is China’s lack of an independent judicial system to uphold the private-property rights the constitution recognizes.

Instead, the judiciary tends to protect state-owned enterprises and party-controlled assets; sometimes, it even serves as a channel through which the party-state expropriates private owners. This lack of judicial independence is bad for business for another reason, because it means that contracts are not enforceable in any predictable way.

China’s reforms succeeded where all of the reform efforts by its communist counterparts in the Soviet Union and Central and Eastern Europe had failed, because China had managed to solve a fundamental incentive problem that characterizes partystate bureaucracies. This earlier success offers clues about whether its economy remains sustainable today.

Meanwhile, the exclusive state ownership of land and the state monopoly of banking have led to severe problems in the real-estate sector, which contributes directly and indirectly to about one-third of GDP. China’s real-estate marketization, which began in 1998, was designed to convert state-owned land into local party-state fiscal revenue.

The key reform was to make each local government the sole landowner within its jurisdiction.

Following Mao’s death, the CPC leadership came to believe that economic growth was the key to its survival, and it settled on RDT

But to maximize their financial gains from land, governments at all levels try their best to raise prices by reducing supply. Consequently,

The Year Ahead 2023

Is Today’s China Yesterday’s Soviet Union?

Following the CPC’s recent Congress, it now seems clear that totalitarian control over every corner of society will be strengthened. The number of moderate technocrats and their weight in party-state agencies will be reduced. Economic policy will be politically determined. Stateowned enterprises and party-state bureaucracies will steadily crowd out private enterprises and markets.

The devastating “zero-COVID” policy has already showcased how far the CPC’s power can and will extend.

C H I N E S E FA R M E R S IN HEBEI PROVINCE.

Chinese real estate, measured by the ratio of local real-estate prices to average per capita household income, is among the world’s most expensive. In the Xi era, China’s real-estate value exceeds that of the United States and the European Union combined. But this intentionally created bubble is now on the verge of bursting.

In addition to creating trouble in the real-estate sector, exclusive state ownership of land and the state’s banking monopoly have destabilized the Chinese financial and fiscal systems. Using land as collateral, governments across China have borrowed massively from state-owned banks, pushing the country’s total debt-to-GDP ratio to 300% in the first quarter of 2019 and making its leverage rate among the highest in the world.

Worse yet, most debts in China are mortgage loans that use land and financial securities as collateral. Now that the Chinese economy has been slowing, the devalued mortgages behind these pro-cyclical debts are starting to weigh on the entire economic system, possibly triggering financial and fiscal crises.

Low domestic demand is compounding all these problems.

In the past, China could substitute the revenue from exports for low domestic demand. But now that China’s ties with the world’s highconsumption advanced economies are deteriorating, exports can no longer be relied upon to drive growth. China’s own ratio of private consumption to GDP remains one of the lowest in the world – just 38.5% in 2021, compared to nearly 70% in the US and 56% in Japan.

The fundamental reason for chronically low domestic demand is that household income growth has been lower than GDP growth for decades, because the state has taken too much through state agencies and monopolies. But another reason is severe income inequality. A massive number of people – especially the officially defined rural population – live in absolute poverty regardless of their livelihoods, owing to various institutional constraints. In a 2020 speech, then-Premier Li Keqiang reported that about 600 million Chinese had a monthly income of around CN¥1,000 ($140); in fact, 500 million earn less or even much less.

There and Back The greatest new challenge to the Chinese economy is the change in the CPC’s objectives for it.

Economic development for the sake of the party’s survival has been supplanted by the goals of peaceful political evolution and the prevention of “color revolutions.”

Since 2012, the CPC leadership has been systematically tugging China’s political economy back toward totalitarianism.

Even though China’s social pluralism (private businesses, civil-society organizations, independent media) remains limited, CPC leaders still worry that this narrow space provides a basis for rebellion. Prominent private-sector entrepreneurs have been purged, and leading non-state companies in the digital economy have been ruthlessly suppressed – developments that have both undermined the private sector and reduced China’s access to the world’s advanced economies.

By the 1980s, the Soviet Union’s per capita GDP (measured by purchasing power) was about one-third that of the US, whereas China’s per capita GDP today is only slightly above one-quarter that of the US. Even worse, as a consequence of the CPC’s decades-long “one-child policy,” China’s population growth rate has started to decline and the demographic structure implies that both labor supply and domestic demand will run into deeper trouble.

All of this means that China still has a long way to go just to catch up with the relative development level of the Soviet Union. Whether it will do so is an open question now that it is moving back to the failed Soviet system of central control.

In the 1950s, one of the CPC’s most famous slogans was, “The Soviet Union’s today is our tomorrow.”

1.05pm ish? That tomorrow may well have arrived, with the CPC on its way to transforming today’s China into yesterday’s Soviet Union.

The party’s leaders apparently do not realize that the same problems that sank the Soviet economy are now threatening to sink China’s.

With each passing day, that outcome appears more certain.

Di Guo is a senior lecturer of strategy at Brunel University’s School of Business.

Chenggang Xu is Senior Research Fellow at the Stanford Center on China’s Economy and Institutions at Stanford University.

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The Return of the End of History SERGEI GURIEV Provost of Sciences Po

The Year Ahead 2023

The Return of the End of History

Thirty years after Francis Fukuyama published his famous book, The End of History and the Last Man, history returned with a vengeance. Following Russia’s unprovoked invasion of Ukraine, Europe is once again the site of a largescale war that is so characteristic of the twentieth century that no one expected to see anything like it today. Far from the “clash of civilizations” that political scientist Samuel Huntington anticipated would shape the twenty-first century, Russia wants to eradicate an independent country with a similar ethnolinguistic and religious background. The conflict is primarily about different political systems: autocracy versus democracy, empire versus national sovereignty.

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F R A N C I S F U K U YA M A .

w h i l e t h e wa r h a s pro duc e d

countless tragedies, I believe that it will show Fukuyama to have been more right than wrong. He argued that communism’s implosion had ushered in a world where democracies with market economies would be preferred over alternative forms of government. While Russia’s war of aggression never should have happened, it clearly is an exception that proves Fukuyama’s rule. It has caused enormous suffering for Ukrainians, but they have fought courageously with the knowledge that history is on their side.

Meanwhile, the life expectancy of Vladimir Putin’s regime has abruptly fallen. To paraphrase Talleyrand, Putin’s war is worse than a crime; it is a fatal mistake that other potential invaders will learn not to repeat. It also reminds us that folly is a feature, rather than a bug, of dictatorships.

Without political checks and balances, free media, and an independent civil society, autocrats do not receive the feedback needed to make wise and competent decisions.

In Putin’s case, living in a filter bubble has proven exceptionally costly. Russia’s economy is in a deep recession, its fiscal revenues have taken a massive hit, and the damage will continue to mount in 2023 after the European Union’s oil embargo and the G7’s oil-price cap take effect.

Lacking cash, Putin has already moved from a strategy of recruiting soldiers for pay to mobilizing them by

conscription, undercutting his own popularity and driving hundreds of thousands of educated Russians to flee the country. Making matters worse for him, Russia is losing the war.

Russia’s dismal performance is no accident. After the “end of history” 30 years ago, most dictators learned that the old twentieth-century methods of maintaining non-democratic rule no longer worked. In a globalized and technologically interconnected world, open repression is simply too costly. As Daniel Treisman and I show in Spin Dictators: The Changing Face of Tyranny in the 21st Century, most non-democratic leaders have adopted a new strategy: pretend to be a democrat. Hold elections (that are neither free nor fair), permit some independent media (though no outlets with a large audience), and allow some opposition parties, all to create the illusion of a popular mandate to rule.

Putin was a master of this approach for 20 years. But as his regime’s corruption and cronyism undermined economic growth, and as digital and social media began to spread, his popularity began to decline. Mindful of this trend, he swiftly annexed Crimea in 2014, which boosted his popularity for a while. Then, in 2022, he tried to replay this strategy on an even grander scale. But he gravely underestimated Ukrainian resolve and Western unity in supporting Ukraine and imposing unprecedented economic sanctions on Russia.

U K R A I N I A N R E F U G E E S I N H U N G A R Y.

Vladimir Putin has learned the hard way that it is unwise to start a twentieth-century war in the twenty-first century.

The Year Ahead 2023

The Return of the End of History

business and the tech industry, and his government’s inability to manage the collapse of a real-estate bubble.

In a system as opaque as China’s, it is hard to predict whether such secondguessing will affect the country’s shift toward authoritarianism. But Xi’s mistakes have clearly made the “Chinese model” less attractive to others around the world.

Putin has learned the hard way that it is unwise to start a twentiethcentury war in the twenty-first century. And other autocratic and authoritarian regimes will heed this lesson for years to come. One certainly hopes that Russia’s Ukraine debacle will deter China from trying to seize Taiwan by force. Senior officials in the Communist Party of China should see that President Xi Jinping’s consolidation of power poses many risks to the regime.

Moreover, Putin’s war has also caused substantial damage to the global economy, which in turn has contributed to China’s unprecedented economic slowdown. Chinese elites are probably asking themselves whether Xi ought to have done more to prevent the invasion or cut the war short. That question joins a long list of others about Xi’s zero-COVID policy, his crackdown on private

V L A D I M I R P U T I N AND XI JINPING.

HE RUSSIAN FOREIGN T MINISTRY BUILDING LO O M S B E H I N D A BILLBOARD RE ADING “FOR A WORLD W I T H O U T N A Z I S M .”

Finally, the past year has underscored the importance of solidarity. During the Cold War, the geopolitical West faced a perpetual, existential threat that superseded internal differences and disagreements. But, following the Soviet Union’s collapse, there was less to unite Western countries, and many succumbed to domestic divisions.

Polarization within and between many democracies deepened, with factors such as rising inequality and the spread of social media accelerating the process. Nonetheless, Western societies came together in 2022 when it counted. While many Western politicians openly praised Putin at the start of the year, almost none do today.

That brings us to the most important question for the year ahead. If the war ends in 2023 – as seems likely – will we return to the polarized status quo ante? Or will we find a new common project? We need not look far. As hot as the summer of 2022 was, it will probably be one of the coolest summers of the rest of our lives. Climate change is a challenge that should unite not just Western democracies but all the world’s governments. That may seem an unlikely outcome in the near term, but we must not stop working toward it.

Sergei Guriev, Provost of Sciences Po, is the co-author (with Daniel Treisman) of Spin Dictators: The Changing Face of Tyranny in the 21st Century (Princeton University Press, 2022).

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76 PS Commentators’ Picks for Winter 2022 Book Recommendations

80 Forsaken Futures PS Events

86 Saadia Zahidi Says More...

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Saadia Zahidi

OnPoint

Saadia Zahidi Says More…

Says More...

In this edition of Say More, PS talks with Saadia Zahidi, Managing Director and Head of the Center for the New Economy and Society at the World Economic Forum.

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PROJECT SYNDICATE: In June 2020, you heralded the arrival of “an era of bigger – and perhaps bolder – government” policies in the wake of their responses to the COVID-19 pandemic. More than two years later, do you think the pandemic’s potential to catalyze a “Great Reset” – closer “collaboration between businesses, public and government institutions, and workers” – has been realized, wasted, or something in between? What else can be done to accelerate it?

SAADIA ZAHIDI: Government spending over the last two years has been higher than before the pandemic, owing to the need to support households and businesses. But it has not always been accompanied by visionary thinking about how public resources can best be used to build resilience and open new growth paths for the future. Some countries have made investments in green-transition (decarbonization) strategies and traditional infrastructure, but few have invested in transforming their social infrastructure, even though the pandemic exposed weaknesses in social safety nets and across the care, health, and education sectors.

In a rapidly evolving job market, much bolder action could be brought to bear to improve human-capital development, including upskilling and support for job transitions through collaboration between government, business, and workers. This mindset of investing in the future – even in the face of shortterm crises – will determine the long-term systemic health of our societies for generations to come.

PS: One area where “bigger” and “bolder” government might make a difference today is in tackling a cost-of-living crisis that, as you recently pointed out, is hitting the most vulnerable hardest and calls for “specific support to those who need it most.” While recognizing that there is no one-size-fits-all solution, which approaches

show promise? Do you see potential in proposals to cap prices on essential goods like energy?

SZ: With real wages and purchasing power falling amid soaring food and energy prices, the young and the vulnerable in our societies are bearing the brunt of the cost-of-living crisis. But policymakers face a delicate balancing act: They must protect the vulnerable while also managing public debt and ensuring that fiscal policies remain aligned with monetary-policy objectives.

Social safety nets – enhanced unemployment support, direct cash transfers, caregiving support, energy and food subsidies – must be not only strengthened but also customized and targeted to ensure efficiency. That is how you address the needs of the most vulnerable while minimizing these programs’ inflationary effects and eliminating wasteful spending. In advanced economies and in large emerging markets with good digital infrastructure, governments already have the data and technology to ensure that these forms of support are better targeted.

PS: In 2014, you and Laura Tyson highlighted an often-overlooked remedy to low growth: increase the economic participation and advancement of women. Four years later, you published your book Fifty Million Rising: The New Generation of Working Women Transforming the Muslim World, which focuses on the changing nature of work and employment for Muslim women. What structural factors enabled this revolution? What impact are ongoing crises, from the COVID-19 pandemic to food- and energy-price shocks, likely to have on it?

SZ: A rapid increase in access to education for girls was the key to strengthening women’s human capital across many Muslim countries. In parallel, globalization and the digital revolution vastly

OnPoint

Saadia Zahidi Says More…

This mindset of investing in the future – even in the face of short-term crises – will determine the long-term systemic health of our societies for generations to come.

expanded the opportunities available to young women. Together, these developments drove an increase in the number of working women across these economies and seeded an economic revolution.

Across the 30 largest predominantly Muslim emerging-market countries, 100 million women were working in 2002. By 2018, that number was 155 million, equivalent to a trillion-dollar market.

The disruptions of the last two years are likely to produce a mixed outcome. On one hand, there will be a greater need for dual incomes in households during the cost-of-living crunch. On the other hand, women shouldered a greater caregiving burden during the pandemic, and are also more likely to feel the impact of a food crisis. In oil-rich economies, the trend toward women’s economic integration is likely to accelerate further.

PS: The World Economic Forum’s latest Chief Economists Outlook warns that debt defaults are becoming increasingly likely. As monetary-policy tightening raises the costs of debt service for sovereign borrowers, a looming recession threatens to weaken revenues and increase their debt burdens further. What interventions are most urgently needed to support debt-distressed countries?

SZ: The International Monetary Fund is projecting global government debt to reach 91% of GDP in 2022, around 7.5 percentage points above prepandemic levels, while around 60% of low-income countries are at high risk of, or are already in, debt distress. In the context of significant monetary tightening, we need a more responsible approach to deficit reduction and fiscal consolidation.

The existing G20 Common Framework for Debt Treatment could support debt-distressed countries, but only if there is greater coordination and uptake by all the relevant stakeholders. Closer coordination, and a bolder vision for future growth, is also needed to increase the flows of climaterelated finance that developing countries need to advance their mitigation and adaptation efforts.

By the Way...

PS: In a 2019 interview, you describe the moment when you, as a young girl growing up in Pakistan, realized the breadth of opportunities that were

available to you. How does that experience illustrate the “role-model effect,” which you say has contributed to the phenomenon you describe in Fifty Million Rising? How can the role-model effect be strengthened or harnessed to help countries reap the economic and social benefits of greater female labor-force participation?

SZ: Global digital connectivity for half of the world’s population means that information is ubiquitous, and that role models can come from a global community, rather than just one’s family or neighborhood. But role models alone are not enough if local conditions do not allow inspiration to be converted into action. The recipe for helping countries reap the economic and social benefits of greater female labor-force participation is complex. It includes more education, especially in STEM (science, technology, engineering, mathematics) and digital skills; expanded digital connectivity and care-economy infrastructure; safe public transportation; more finance for women-owned businesses; and workplaces that ensure work-life balance and opportunity for all.

PS: Fifty Million Rising upends many widely held assumptions about Muslim countries, including Iran. At a time when Iranian women are leading the biggest protests the country has seen in years, are there stories, trends, or statistics that offer insight into women’s changing role there?

SZ: Female gross university enrollment shot up in Iran from under 20% in 2000 to nearly 70% by 2015. In Iran, 34% of students in STEM fields are women, compared to just 30% in the United States. I have met many inspiring women and girls across the country – entrepreneurs, students, engineers, architects – who are determining their economic future despite restrictions.

In the Muslim world, the fight for equality, so far, has unfolded through battles that are quietly won in the workplace rather than loudly in the streets.

But even as the economy trumps culture, it then shapes culture. Educational ambitions and growing economic agency provide the foundation for young women to demand their social rights. This, in part, explains what we are seeing in Iran today.

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