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

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

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

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

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

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

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

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

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

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

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

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

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

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

This article was originally published in the Financial Times.

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

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

To register for this event, please click here. 

Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Managing the future

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

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

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

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

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

An infectious disease outbreak has long been a top national security risk in several countries, but the speed and extent of COVID-19’s spread and the scale of its social and economic impact has come as an enormous and deeply worrying shock.

This pandemic is not just a global medical and economic emergency. It could also prove a decisive make-or-break point for today’s system of global political and economic cooperation.

This system was built up painstakingly after 1945 as a response to the beggar-thy-neighbour economic policies of the 1930s which led to the Second World War. But it has been seriously weakened recently as the US and China have entered a more overt phase of strategic competition, and as they and a number of the other most important global and regional players have pursued their narrowly defined self-interest.

Now, the disjointed global economic response to COVID-19, with its enormous ramifications for global prosperity and economic stability, has blown into the open the urgent need for an immediate reaffirmation of international political and economic cooperation.

What is needed is a clear, coordinated and public statement from the leaders of the world’s major countries affirming the many things on which they do already agree, and some on which they should be able to agree.

In particular that:

• they will give the strongest possible support for the WHO in leading the medical response internationally;
• they will be transparent and tell the truth to their peoples about the progress of the disease and the threat that it represents;
• they will work together and with the international financial institutions to provide businesses, particularly SMEs, and individuals whatever support they need to get through the immediate crisis and avoid long-term damage to the global economy; 
• they will ensure the financial facilities for crisis support to countries - whether at global or regional level - have whatever resources they need to support countries in difficulty;
• they will avoid new protectionist policies - whether in trade or finance;
• they commit not to forget the poor and vulnerable in society and those least able to look after themselves.

Such a statement could be made by G20 leaders, reflecting the group’s role since 2010 as the premier forum for international economic cooperation.

But it could be even more appropriate coming from the UN Security Council, recognising that COVID-19 is much more than an economic challenge; and also reflecting the practical fact, in a time when international travel is restricted, the UNSC has an existing mechanism in New York to negotiate and quickly agree such a statement.

A public statement by leading countries could do a great deal to help arrest a growing sense of powerlessness among citizens and loss of confidence among businesses worldwide as the virus spreads.

It could also set a new course for international political and economic cooperation, not just in relation to the virus, but also other global threats with potentially devastating consequences for economic growth and political stability in the coming years.

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

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

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

Achieving public confidence

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Role within the international monetary system

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

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

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

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

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

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

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

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

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

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

What is quantitative easing? How was it used after the 2008 financial crisis?

Quantitative easing (QE) has been in existence since the Japanese central bank introduced it at the turn of the millennium. The simplest way to think about it is this: when interest rates can't go down anymore and play their normal role of stimulating growth, central banks try to expand the money supply. So, they're expanding the quantitative amount of money they put into the system. 

Of course, after 2008 because of the scale of the financial and economic collapse, many Western countries resorted to QE. Some have never gotten rid of it. Others have started to, but as a result of this crisis, have gone straight back to that playbook.

33 million Americans have now filed for unemployment and one in five American workers have lost their jobs due to COVID-19. These are levels not seen since the Great Depression. You recently called for G20 countries to provide income support for all citizens. Why is this so urgent to implement now?

It is incredible to reflect back on the short time since I published that piece. I entitled it the need for a so-called people's QE, and in some ways a number of European countries, including the UK, have executed some aspects of what I was suggesting. 

The United States has not, even though the absolute amounts of money the US authorities have put through their fiscal system to try and support the economy is actually bigger as a percentage of GDP than many in Europe. 

What they haven't done is support ongoing employment through various schemes that many European countries have done, of which the UK has, to some degree, been one of the most ambitious.

That’s partly why you see such enormous filing for unemployment claims in the US. There’s no direct support to encourage employers to keep their employees on, in complete contrast to what you see in many Scandinavian countries who were the first to do it in Europe, and something the UK has since done. 

On a practical level, what might a smart people’s QE look like? 

We are living in an extraordinary time. Like many others in my generation, it’s nothing that any of us have gone through. Perhaps economically, the only parallel one can find is from the 1920s and 1930s.

It became obvious to me in early March that governments are going to have to essentially force as many of us as possible, if we weren't doing absolutely crucial necessities, to stop working or to work from home. It was pretty obvious that the consequences could be horrific. 

So, the idea of a people's QE that I suggested then, some would have regarded as quite audacious. The most dramatic thing that could be done was, to put it simply, governments effectively pay for every business and every employee to have a two month paid holiday. Obviously, this would cost a very large amount of money for governments, but it would be the least disruptive way of getting us all to stay home.

And when the time is right to start letting us get back to anything vaguely like normality, there wouldn't be as much permanent disruption. I think about six weeks have passed since I wrote that piece. Actually, given the policies many governments have announced, I'm not sure undertaking the audacity in generosity of what I suggested would have cost any more. Over the long term, it might have actually turned out to be less. 

Of course, there are ethics issues around whether the system could be gamed or not, amongst other issues. But six weeks later, I still believe that would have been the smartest thing to do. It certainly would have been much better than trying to encourage many businesses, particularly smaller ones, to take out loans.

A couple of countries got close to what I was suggesting – Germany and Switzerland were very quick to give 100% government guarantees to business, as well as generous wage support systems. But a number of other countries haven't, like the US, even though they wrote a $1200 check for each citizen. 

Should a people’s QE involve the purchase and write off of consumer debt and student debt by a central bank? 

I think these things might have to be considered. I remember being on a conference call to Chatham House members where we discussed what would be the likely economic consequences and what policymakers should do. One person on the call was talking about quite conventional forms of policy just through various forms of standard QE. 

During the Q&A, someone asked whether we thought the US Federal Reserve might end up buying equities. And I said, well, why not? Eventually, it might come to that. 

Actually, before that discussion was over, the Fed coincidentally announced they were going to buy high-yield corporate bonds, or very risky company debt. This is something that would have been unheard of even by the playbook of 2008. 

So, I don't think ideas like a kind of provision to help student debtors is entirely crazy. These are things that our policymakers are going to have to think about as we go forward in the challenging and unpredictable days and weeks ahead. 

Poorer countries like El Salvador have gone as far as cancelling rent and major utility bills for its citizens. Do you think countries like the US and UK have gone far enough to help people during the crisis?

Going one step further than a people’s QE and postponing major payments is a pretty interesting concept. I think in reality, it would be very disruptive to the medium to long-term mechanism of our societies. It could be very, very complicated. 

But, of course, some parts of the G20 nations, including the UK, have moved significantly in these areas as it relates to rent payments or mortgage payments. There have been significant mortgage holidays being introduced for many sectors of our community. I think the British government has been quite thoughtful about it without doing the whole hog of potentially getting rid of our transaction system for two months or beyond.

You know, this may well be something that has to be considered if, God forbid, there is a second peak of the virus. If countries come out of a lockdown and all that results in is a dramatic rise in infections and then death again, we're going to end up right back where we are. Policymakers may have to implement more generous versions of what we've done already, despite what the long term debt consequences could be.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US has been criticized as a corporate bailout while offering little to the American people. It was recently reported that hedge fund managers are applying for bailouts as ‘small businesses.’ Do you think more oversight is needed in how the stimulus funds are allocated? 

The speed at which many countries have responded and introduced policies means that there's going to be some gaping holes which allow people to unfairly benefit from the system. And if indeed, that were to be the case, I cannot see why a hedge fund should benefit from government generosity.

A true hedge fund is supposed to be a form of investment manager that thrives in times of great volatility, and knows how to better navigate such financial markets than more conventional funds. So this shouldn’t be an environment where hedge funds seek the same kind of help as small businesses. That is certainly something the government should be very careful about.

Some economists argue that central banks are not independent as they finance fiscal spending through purchase of government bonds. Do the strong measures taken by central banks in response to the crisis undermine the argument for central bank independence? 

In my view, an effective central bank has to do whatever is necessary, including doing very unconventional things, when the society in which that central bank operates needs it. 

Most of the time, central banks are pretty boring places, but they really become crucial organizations when we go through times like the 1920s, 1930s, 2008, and of course, this current crisis. If they want to maintain their legitimacy, whatever the true parliamentary or congressional legal standing is, they have to do things quickly and as we've seen in this case, differently than the convention in order to do what our societies need. 

Somebody was asking me just last week whether the Fed buying high grade debt was legal or not. I think that’s a pretty irrelevant conversation because if it’s not legal now, it will be made legal tomorrow. So, I think central banks have to keep their legitimacy and they have to do what is necessary when the time requires it. In that sense, I think most central banks have handled this crisis so far pretty well.

The second wave of Arab uprisings that started in Sudan in December last year and extended to Algeria, Lebanon and Iraq this year have built on past experiences of political transitions during the Arab Spring, both its mistakes and achievements. Protesters from this new wave have already learned five lessons from previous transitions.

The first lesson is that toppling the head of a regime does not mean that the political regime has fallen.  In Tahrir Square on 11 February 2011, Egyptian protesters celebrated the decision of Hosni Mubarak to step down and left the square, thinking his resignation was enough to allow a democratic transition to take place. In contrast, in Sudan and Algeria, protesters continued to demonstrate after the resignation of Abdelaziz Bouteflika and the military-led ousting of Omar al-Bashir.

Protesters understood the lesson that the regime is found not only in the head of the state, but rather in the rules that govern the political sphere. By extension, political change requires changing the rules, not just the names of those in charge of implementing them.

The second lesson is that resorting to violence is the fastest way to end any hope for democratic change. Protesters who decided to take up arms offered their regimes the chance to reframe the political uprisings as civil war, as was the case in Syria. Even when armed groups manage to bring down the regime, their presence endangers the transitional phase afterwards, as is the case in Libya.

Although protesters in Sudan and Iraq have been faced with government violence and repression, they have insisted on their non-violent approach. In Sudan, the protesters responded to the massacre outside of the General Command of the Armed Forces on 3 June by organizing a mass demonstration on 30 June, which put pressure on the military to resume talks with the revolutionary forces.

The third lesson is that once the old regime has fallen, the transition period must be a collective decision-making process in which the opposition has, at least, veto power. The example of Tunisia after 2011 is a case in point. The Higher Authority for Realization of the Goals of the Revolution, Political Reform and Democratic Transition, which formulated the planned course of the transition, included representatives from across the political spectrum and civil society.

Although the military forces in Algeria and Sudan will not cease to play a political role any time soon, this does not have to mean exerting complete control over the transitional period. Sudan could offer a positive example in this regard, if it succeeds in implementing a power-sharing deal according to which a joint civilian-military sovereign council will govern Sudan during the transitional period.

The fourth lesson is that political transitions should achieve agreement on the rules of the game before proceeding to elections. In Egypt after 2011, rushed elections served to divide the political opposition and dramatically increase polarization in society. In this second wave, protesters have perceived elections as a trap which enable old regimes to reproduce themselves with new names.

In both Algeria and Sudan, protesters have resisted attempts by the military to hold elections as soon as possible. In Sudan, the agreement between the revolutionary forces and the military council postponed the elections until after the end of a three-year transitional period of technocratic rule. In Algeria, protesters are taking to the streets every Friday to demonstrate against the authorities’ decision to hold presidential elections in December.

The fifth and final lesson is that the call for change in the region goes beyond electoral democracy and extends to deep socioeconomic reforms. Iraq and Lebanon show this clearly: relatively free and fair elections have already been held but have served only to reinforce corrupt sectarian regimes.

According to the fifth wave of the Arab Barometer, the economic situation and corruption are perceived as the main challenge for Algerians (62.2%), Sudanese (67.8%), Lebanese (57.9%), and Iraqis (50.2%), while democracy is perceived as the main challenge for only 2.3%, 3.9%, 5% and 1.4% respectively.  The experience of the Arab Spring has shown people that democratic measures are only a means to an end.

Unlike in 2011, when the Arab Spring revolts enjoyed broad international support, this second wave is taking place in a hostile environment, with stronger Russian and Iranian presences in the region and an indifferent international climate. But where protesters have the advantage is in experience, and across the region they are clearly adapting their tactics to lessons learned from the early part of the decade.