How Biden can play a crucial role on the world stage 

Ahead of the inauguration of President Biden, there was understandable anticipation and  hopes for his policy initiatives. A lot of this has focused — justifiably — on the domestic aspects, especially as they relate to economic policy and the likely enhanced fiscal stimulus. On international policy, quite a lot of attention has been given to diplomatic issues, but very little to economic issues or policy co-ordination. Hopefully, now Biden has become President, we will get more flavour of  his ideas and plans for international economic policy.

Here is what he should do.

He needs to have thought carefully about what past international initiatives from the US have seemingly worked well, and what have not. In this context, the build-up and response to the Asian crisis in 1998 and the build up to the 2007/2008 global economic crisis are important examples to learn from. The new President had a front seat and, at times, a role in both of these crises.

From the Asian crisis, one of the biggest lessons to have learnt from the response, I would suggest, is the subtle but vital role China played in bringing that crisis to an end — albeit from a distance and with Washington’s central role. At the core of that crisis was the balance of payments current account deficits of a number of Asian countries, and with it, their build up of external US dollar debt, exacerbated by rigid exchange rates. 

The central lesson of those mistakes has certainly been learnt by many Asian countries. It explains why most of them have spent many years building up considerable foreign exchange reserves, and being more thoughtful about their exchange rate policies — although many haven’t done anything like as much as they should to have developed alternatives to US dollar debt issuance. That crisis escalated dramatically in a circular manner, with the burden of debt servicing becoming bigger the more local exchange rates declined. 

One of the major factors that contributed to bringing the mess to an end was the action of the then US Treasury Secretary Robert Rubin, who decided to “tweak” his foreign exchange policy to halt a further destructive rise against the yen. One of the major reasons for this was that, if he had not done so, the Chinese had made it reasonably clear that they would have had to devalue the renminbi, which would have brought about an even more worrying escalation to the crisis.

Among other takeaways from that crisis, were that the US learned to be more thoughtful about how to encourage many countries to run their economic policies, both directly and through its dominant influence on the International Monetary Fund (IMF). That lesson perhaps carried follow-on consequences that became more important post 2007/2008. It is not appreciated by many that the advent of the Group of 20, which came to the fore in 2007/2008, was thought up in 1998 by Rubin’s Undersecretary, Larry  Summers.

For me, the lesson for President Biden and his team, even more valid today, is that one has to try to be inclusive. This is especially true for far-away parts of the world, including those that might not think the same way you do.

In the Great Financial crisis and its aftermath, not only was the G20 brought to life by a Republican President, George W Bush initially, but then in 2008, it undertook closely co-ordinated actions led by the UK under Gordon Brown in conjunction with the new Democrat President, Barack Obama. Crucially, this was also the period when the US Treasury actively encouraged more reform of the structure and voting rights of the IMF and World Bank, which led to a bigger role for China and other  previously underrepresented countries.

Fast forward to today. After four years of Donald Trump — a President who has effectively ignored the norms of international economic governance, if not tried to dismantle them — Biden’s team needs to rebuild a spirit of using international governance to drive some good. His starting position of choosing Janet Yellen to be US Treasury Secretary is an excellent beginning.  She will be at the heart of anything they pursue on international economic affairs.

I hope the Administration will not obsess about their ambition to pursue an alliance of democracies  (although that might play some part). In a courteous manner, President Biden should ask the Italian hosts of this year’s G20 to hold a special G20 meeting very soon. This could be followed by the follow-up meeting that the Italians have been planning for and should still go ahead.

In this early G20, the US should lead the world to pursue further reforms of the IMF and World Bank. Biden should also preside over a spirit of continued monetary and fiscal support to the world economy, to ensure that the latter recovers strongly, in 2021 and beyond, from this dreadful pandemic.

As part of this, as well as the commitment already made to rejoin the World Health Organization, the US should  encourage other G20 members to quickly find the $28 billion that ACT-A (Access to Covid-19 Tools Accelerator) needs to ensure as rapid as possible production and distribution of Covid-19 related therapeutics, diagnostics and vaccines. Otherwise, a sustainable world recovery is simply not ultimately feasible, as I have argued before both here and elsewhere.

In addition to, or as part of this commitment, the US should also lead the G20 to agree a further increase in the SDR issuance for the IMF. This would advance its role in supporting economies in trouble as a result of the crisis and, crucially, perhaps even enable the IMF to help finance the necessary contributions to ACT-A.

And lastly, while the US under Biden needs to pursue alliances with like-minded nations to encourage China (and others) to behave to the highest standards of internationally accepted norms, it also should consider presiding over further improvements in the truly representative role many of the current international institutions play, rather than replacing or adding to them. The President has already shown his readiness to do this with the US return to membership of the WHO.

A Message from TheArticle

We are the only publication that’s committed to covering every angle. We have an important contribution to make, one that’s needed now more than ever, and we need your help to continue publishing throughout the pandemic. So please, make a donation.