International cooperation during COVID-19

Sungbae An
Senior Research Fellow
Department of International Macroeconomics and Finance
Korea Institute for International Economic Policy (KIEP)

The rapidly evolving risks posed by the coronavirus outbreak are likely to reactivate cross-border coordination on macroeconomic policies.

The Fed cut its policy rate by half a percentage point after an unscheduled Federal Open Market Committee (FOMC) meeting March 3 (local time).

Three hours before the meeting, G7 finance ministers and central bank governors held a conference call, concluding with a joint statement that emphasized the use of "all appropriate policy tools" and "to cooperate further on timely and effective measures."

These events followed a series of statements by the Federal Reserve chair, the Bank of Japan governor, and the European Central Bank president.

Similar scenes were witnessed during the global financial crisis. Then, need for global policy coordination resulted in the G20 inaugural leaders' summit in 2008. What is being done now? Are we going through the same uncertainty we faced a decade ago?

Last November, the Korea Institute for International Economic Policy published its biannual forecast that the world economy would grow by 3.2 percent in 2020.

According to the report, policy uncertainties will continue to be the major risk, among which the affordability of fiscal and monetary easing in major economies was brought into question.

The policy space is narrow in that policy rates are already too low and that fiscal consolidation has long been a key issue in Japan and Europe.

In the U.S., policy direction can become blurry when growth signals are mixed with inflation and labor market development, not to mention policy effectiveness and financial stability concerns.

The wide spread of COVID-19 has limited growth in several dimensions.

Productivity fell directly as economic activities were held up intermittently, such as temporary factory shut downs or cancellations of meetings and trips.

At this point it is not clear if this outbreak can be properly dealt with in a reasonable frame of time.

Recent coronavirus cases show limited impacts on growth. It should be noted, however, that this adverse shock can be persistent due to propagation through global production networks.

This indirect channel delays production through hiccups caused in intermediate goods trade, while the direct channel spreads the disease itself.

A recent Organization for Economic Cooperation and Development (OECD) forecast update reflects the limited impact of the outbreak, reducing global growth rate by 0.5 percentage points to 2.4 percent.

On the uncertainty side, the U.S. economic policy uncertainty index jumped to 569.81 on March 6, a level comparable to during the global financial crisis or Sept. 11 attack. Now, preemptive, decisive and sufficient policy measures are in need worldwide.

However, cross-border policy coordination is not readily accessible. During the global financial crisis, major emerging economies had relatively ample policy spaces.

This time is a bit different. The growth gap between advanced and emerging economies has narrowed significantly and trade tensions have already delivered damage to global growth.

Hence, the current discussion should be extended to the global governance framework with good practices such as the G20, but with one principle kept in mind: cross-border policy coordination requires transparency among participants, which prevents manipulations by more informed players.

Up to this point, the government has put tremendous efforts into maintaining transparency in dealing with its COVID-19 cases and these efforts look successful, which may open the window for Korea to participate and lead international cooperation in this area.

Cross-posted with permission from the author. This article was originally published on: http://www.koreatimes.co.kr/www/biz/2020/03/488_285902.html