Taking Stock: Crisis Preparedness and Lessons Learned from the Great Recession

By Jake Werner

A major crisis shakes a society, exerting pressure that aggravates existing cracks in its foundations and forces to the surface flaws that previously went largely unnoticed. A healthy response requires grappling with newly exposed dysfunctions and injustices and taking action to repair and heal the underlying causes. But those seeking such reforms may face the resistance of conservative forces that gain their power from the status quo and so prefer, after the emergency is past, to suppress awareness of what the crisis has revealed.

Following the last global crisis, the Great Recession of 2008–2009, the conservative response largely won out. The recovery was hobbled by an early turn toward austerity with a majority of the world’s countries cutting public expenditures starting in 2010. Although China’s huge stimulus helped pull the global economy out of its tailspin, it also cemented the existing structure of growth. In China, doubling down on infrastructure investment and real estate led to a destabilizing surge of debt, while developing countries grew only by deepening their dependence on the export of raw materials. Around the world, the response left untouched or even aggravated root causes of the financial crisis, like extreme inequality and atrophied public goods.

The global crisis unleashed in 2020 by the COVID-19 pandemic thus returned to the surface many of the weaknesses and inequities that have characterized global society for the last 40 years. The global system has once again been shown lacking in terms of both emergency preparedness and foundational resilience. This time, however, the task of reform is far more urgent, as the highly uneven response to the pandemic indicates our global society is profoundly unprepared to respond to the looming climate crisis as well.

A new report from the Boston University Global Development Policy Center, Building Back a Better Global Financial Safety Net, provides a detailed blueprint for the reform of global organizations and practices. Well-grounded in institutional realities, the report also begins to identify the structural transformation of the global economy required by the scale of the problems we face. In a recent webinar, report contributors Edwin Truman, Isabel Ortiz, Rakesh Mohan and Ulrich Volz highlighted key arguments and recommendations.

The report’s proposals can be divided among those that: 1) strengthen the International Monetary Fund’s (IMF) powers of emergency response, 2) improve the recovery and rebuilding process and 3) seek to channel these efforts to establish long-term resilience and prosperity.

Emergency response

To begin, Edwin Truman discussed a significant network of central bank swap arrangements that has emerged over the last two decades. These arrangements cover half of the IMF’s members and 90 percent of world GDP, offering essential tools for responding to financial crises, but they remain ad hoc and disorganized. Linking them together through the IMF and scaling them up would strengthen the ability to respond in future crises to the needs of all countries, rather than just those favored in ad hoc arrangements.

Recovery and rebuilding

Isabel Ortiz then noted that immediately following the 2008–2009 crisis, countries across the world reduced public spending and weakened social protections, seriously impairing the recovery, while also undermining the political legitimacy of globalization. This problem was highly visible in the European Union’s struggles with debt and austerity, but was just as damaging in developing countries. Research by the Boston University Global Development Policy Center has shown that austerity is significantly associated with rising levels of inequality and poverty in implementing countries.

Governments worldwide are now in danger of repeating this mistake in the response to the COVID-19 crisis—with countries accounting for as much as 85 percent of the global population moving once again to premature austerity. Instead, Ortiz recommended a range of policies with an established track record: raising revenue through progressive levies, diverting spending to social priorities rather than the military, strengthening social protections, implementing accommodative macroeconomic policies and reducing and renegotiating debts.

Next, Rakesh Mohan highlighted the failure of voting power within the IMF to track the emerging global economic landscape, with both the major developing countries and the United States increasingly underrepresented compared to their share of world GDP. Adding insult to injury, the mechanism for reapportioning the vote quota is burdened by years-long delays. Representation in institutions like the IMF needs to reflect its members, Mohan argued, to ensure effectiveness as the debts accrued under pressure of COVID-19 are likely to significantly increase financial fragility.

Long-term prosperity

Finally, Ulrich Volz pointed to recent research showing that climate vulnerability already has a clear effect on sovereign risk premia paid by developing countries; as climate costs mount, the damage done to macroeconomic conditions will only intensify. Although the IMF now recognizes in principle the importance of incorporating climate considerations into financial planning, operational application of the principle lags behind. The climate crisis is undermining public finances and amplifying macrofinancial risks to economies. The IMF hence needs to step up efforts to mainstream systematic and transparent assessments of climate-related financial risks in all its operations and support vulnerable countries to climate-proof their economies and public finances. Volz also highlighted the urgent need to tackle the looming debt crisis in the Global South, arguing that debt relief needs to be designed in a way that countries that need it will be able to invest in green and inclusive recoveries.

Additional chapters of the report call for an increased allocation of special drawing rights at the IMF, a broad reform of the sovereign debt restructuring regime, and multilateral coordination on capital flow management. These suggestions demand broad discussion and robust civil society pressure if the international community is to respond more effectively—with greater consideration for future challenges—than it did to the last global crisis.