Re-orienting Global Finance Towards Ecological and Social Goals

UNCTAD Director Richard Kozul-Wright and Kevin Gallagher, Global Development Policy professor at Boston University, discuss their book, The Case for a New Bretton Woods. Ever since the post-war economic order was dismantled beginning in the 1980s, a re-design of the global economic order has become increasingly urgent in light of the social and ecological crises that we face.

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Rob Johnson:

Welcome to Economics and Beyond. I’m Rob Johnson, president of the Institute for New Economic Thinking.

“There’s something happening here. What it is, ain’t exactly clear.” Buffalo Springfield saying that in the 1960s. But with what’s happening in the Ukraine, what’s happening with climate, what’s happening in financial instability, what’s happening in social unsustainability and field equality are raising questions among everyone about whether we have a system, whether we have, which you might call, the means to avoid a war, whether our children are going to be able to survive or thrive?

These two gentlemen, Kevin Gallagher, he’s from Boston University, runs a Global Development Policy Center, and Richard Kozul-Wright, who has been a guest on this podcast before. He’s the director of the United Nations Conference on Trade and Development, Globalization and Development Strategies. They’ve written a book that is, how do we say, the time is ripe for us to read and explore the vision that I’ve had the privilege of exploring here in the last couple of days since I’ve seen the book, The Case for a New Bretton Woods, Polity Press puts it out. And clearly as we approach the World Bank’s and IMF meetings and so forth, it’s a challenge that I really admire that you gentlemen have put together to go to the table and using the analogy of Bretton Woods. Meaning another time coming out of dysfunction when something coherent was created.

So thank you both for joining me today, and let me start with you, Kevin, what inspired you guys? I’m talking about all the craziness going on, but what inspired you guys to do this and to think you can make a difference?

Kevin Gallagher:

Well, it’s great to be on this show with you, Rob. We, in 2018 and 2019, were very concerned about the modest at best, response of the global system in responding to the 2008, 2009 financial crisis. And heading into 2018 and 2019, there was a massive rise of right-wing populism, rising inequality around the world, and a lack of real action on climate change. And so with UNCTAD, the Global Development Policy Center put together a bunch of focus groups with civil society heads, union representatives, policy makers, and so forth. And we said, “We need to re-pivot these institutions for the 21st century like we did in 1944 during Bretton Woods. And we need to put together a set of guiding principles that would do that.

And Richard and I released a short pamphlet in 2019, and then in the midst of the COVID crisis, where we saw, once again, not learning the lessons of 2008 and 2009, we saw how the multilateral system failed to vaccinate the world, failed to deal with the liquidity issues and failed to deal with the financial inability that came around from the COVID crisis that we just buried ourselves in our offices for a few weeks and banged out this larger book to spell out a larger case for a Bretton Woods moment.

We don’t want to go back to Bretton Woods. We’re not going to be issuing new MAGA hats around here, but what was amazing, especially for this time, we didn’t anticipate the war, is that the conversation about the need for a set of principles that would guide global economic governance for a century, started in say, 1933 and culminated in 1944 in the midst of massive populism, in the midst of massive inequality and in the midst of an actual war is when they actually forge these things.

That era did not let a good crisis go to waste, they put together a set of principles and a set of institutions that worked relatively well until say, the early 1980s and this book calls for that kind of a moment. We’re calling for a global discussion to realign global economic institutions for our collective climate, social and development goals.

Rob Johnson:

Richard, I must say right at the outset, I am so glad that my young scholars initiative has a summer school that’s an affiliate with UNCTAD and this is grist for the mill. This is really exciting to me to see you stepping up like this together.

Richard Kozul-Wright:

Yeah. And I think we will pick up these issues, Rob, in the summer school in August this year, very much, we want to focus on these issues. I would just add to what Kevin has said UNCTAD in a way been on the front line of these issues since the beginning, back in the 1960s, when we were disgruntled or dissatisfied to some extent with the way in which the development issue had been handled by the Bretton Woods institutions. Coming out of the increased political independence of developing countries, they didn’t think the rules of the game that had been hatched in the 1940s really touched on many of their concerns, particularly when it came to access to long term, stable, affordable finance.

So, UNCTAD has been at this, trying to reform those rules for some time, but it was very much in the 60s and 70s, a reformist agenda. There was a massive shift as you know, in the rules of the game, from the late 1970s, early 1980s and call it what you like, neoliberalism, hyper globalization, these are big debates I know, about how you actually describe that shift, but it was a fundamental shift away in many respects from what had actually been established in Bretton Woods, the need for a multilateral system, not to override governments, not to reduce their policy space, but to support governments in their endeavors for a more inclusive and sustainable growth and development path. It was heavily dictated by the needs and interests of advanced economies, but that was the intent of multilateralism.

Despite the conventional histories that you hear about a 75 year old rules based international order, that’s not really the story of the postwar era. There was a real radical rethinking and shift in the late 70s, early 80s in a that we found to be much more inhospitable to the needs and interests of developing countries, than was true of the original model.

And so we moved interestingly, in UNCTAD, from being essentially reformers of the system, right? We thought this was the system that was a good system in principle, as we try and articulate in the book too, but it needed change, but it didn’t need radical overhaul to a system that was … Because the need for developing countries to have their own development path in a way was accommodated within the old Bretton Woods system. By the time we got into the late 70s, early 80s, the system had shifted from that idea of a multilateralism that was there to support a progressive state agenda to essentially being enablers of this new, highly financialized world. And that was a world that we saw as being particularly hostile to what developing countries need to progress.

And so we’ve been very critical of this Bretton Woods, 2.0 or whatever you would like to call it for the last 30 or 40 years. And there are some big issues that we’ll talk about in there, I think, that we try and articulate in the book of which, perhaps the biggest and it’s become even more significant, I think, over the last decade is of course the question of public debt, sovereign debt, the whole pressures the developing countries now face because of the burden of debt that on them, which we don’t think essentially means that they can’t deliver the sustainable development goals that the international community has committed itself to and without fundamental change.

We’re not arguing for a completely new system, but without some fundamental changes in that system, it will be very difficult to meet the climate crisis, to meet the growing problems around inequality that Kevin talked about, and now, to meet the problem of the geopolitical problems that have emerged as a consequence of the war itself.

Rob Johnson:

In my experience in running a podcast, I get frequent comments about climate change. Why do we all talk about it and do nothing? And my sense is the specter and the danger related to climate deterioration and the fierce accidents and things that happen vis-à-vis the weather and flooding in coastal cities, is really haunting people. And the IPCC just put out a report that essentially said, “We better get on the horse, because it’s time to ride. It’s not time to talk about it.” What’s getting in the way? Obviously, each national government can’t take care of the system unto itself. And if one starts to do things and puts its society through transformation but the others don’t join, they can become despondent because things will continue to deteriorate unless we all cooperate. But either of you, what do you see that’s going to kickstart us, we might call out fantasy and fear world and into action with regard to climate?

Kevin Gallagher:

That’s another reason why we wrote this book. There’s some incredible points of light that you can point to all over the world of incredible action on climate change. But like you said, a stable climate is a global public good. And Charles Kindleberger wrote the classic book on the public goods that need to be provided by global institutions. But obviously, when Kindleberger was talking, there was no thought about climate change. The problem wasn’t even there. And so just like famines, Amartya Sen wrote great work many years ago about how there’s famines all around the world, but there’s no lack of food. There is a need for an incredible stepwise mobilization of finance to be able to transform the world economy south and north towards a low carbon and more socially inclusive economy. But it’s not that like the finance isn’t there though.

The number one tenet of our book is that global finance needs to be oriented towards our social and environmental goals. And in the 1940s when we created these institutions, the core thing everyone was concerned about in those days was, full employment and policy autonomy, to be able to manage that. The 21st century, that is still, full and core decent jobs have to be at the center, but so does a stable climate, and that can only be done at a global level.

One of the statistics that we think really screams out of this book is that if you look in the year 1980, the world economy has increased by a factor of about seven, and the trade has increased by a factor of about 10, but finance, which is now in trillions of dollars of global assets and liability is 25 to 35 times larger than it was in 1980, but gross fixed capital formation, what nerds like us call, it’s just basic investment, has not changed. And as a matter of fact, in developing countries, it’s gone down. If you take China out of the equation, that is the one country that has really been investing in a future, and most recently over the past decade, really putting together the industrial policies to focus on wind and solar. But like you said, the world has to do this, and this is why we call for a global solution and global institutions to make this robust.

With all due respect, I wrote this book with a great friend from the United Nations, and I think the United Nations treaties, the Paris Climate Agreement and so forth are super important treaties in and of themselves, but they have been satellited by these core international economic institutions. And one of the things, especially on climate change that we’re saying in this book is that we cannot pretend that this Paris Agreement is going on on some other part of the planet, and that it has to be mainstreamed and wired in to our global economic institutions, whether it be the G20, the IMF, the World Bank and the world’s network of central banks that provide so much liquidity and so much financial direction around the world.

Rob Johnson:

When we talk about whether it’s climate or the pandemic, I can envision that future textbooks cannot make externalities in public goods chapters 37 and 38. It’s on center stage right now and I believe that from reading your book, the map that you’re creating is acknowledging the power or the importance of this collaborative public goods. And I enjoyed Kevin when you were talking about the difference between finance, which is in some levels extracting from the system, from real capital, which is building the system.

And when you’re extracting more vigorously while not enlarging the pie, then the questions of social sustainability also come roaring onto the stage. And that balance particularly between north and south, seems to me to be essential at this time. And I believe in the Global South, some of the difficulties that others like Richard, when you and I did a thing with Patrick Bond in a panel, talking about how to, what you might call, get capital into the emerging world when people are afraid of corruption, meaning private capital flows are afraid to go there. They charge an enormous risk premium. But we need the capital to go to the equatorial region so that solar panels can provide a renewable source of non-carbon energy. There’s so many dimensions here.

But let’s zoom around again a little bit. Richard, where do you see this in relation to the pandemic? We’re surely learning that when we don’t vaccinate everyone and a handful of people, like they say, the 10 richest people doubled their net worth through the crisis and had we taxed them and given everyone a vaccination, we probably would’ve saved trillions of dollars in macro economic assistance that was induced by the crisis and the duration of that crisis. What is the pandemic teaching us about the structural reforms that need to be made?

Richard Kozul-Wright:

Yeah, there are a couple of things that I would add into what Kevin said too, Rob, that clearly come out of the last few years. One is, there has been, and I think this is very much linked to the whole financialization trend, there has been this short-termist mindset has become hardwired into decision making, not just in economic decision making, but political decision making too. And what we’re talking about are long term challenges that essentially require planning and industrial policy, things that have not been consistent or conducive to the narrative that has emerged over the course of the last two or three decades. So that short-termist kind of mindset is a huge challenge.

And of course, that’s linked to, and I think this gets back to the question that you raised about why we’re not really seeing the changes. Interests form around the behaviors that you’ve talked about these short-termist predatory type behaviors that are not conducive to the investment strategies that we need to see to deliver on these global public goods. And that’s been true of the pandemic, right?

The speed at which the scientific community collectively came up with a solution through the vaccine, has contrasted sharply with what you just mentioned, this huge asymmetry in the distribution of the vaccine between the North and the South. And not only that, the resistance of the advanced economies, particularly to wave intellectual property to allow developing countries to begin the process of actually being able to make the vaccines themselves, right. And quite clearly, the power of pharmaceutical interest groups is central to that in which intellectual property has itself become a source of rents and rent-seeking behavior. And as you know, all the evidence suggests that the intellectual property regime that we have in place now has far less to do with stimulating innovative behavior than it does with creating quick rents that boost profits through extracting value from elsewhere in the system.

And for us in Geneva and the WTO, that resistance to waving the TRIPS Legislation, I think, has been symbolic of what I would call a kind of neomercantilist type of behavior that has become endemic behind a veil of multilateralism. It’s these very powerful interest groups that have become very influential in shaping the international agenda, which seems to be inimical with the kinds of challenges that we’re talking about here, which require this longer term collective planning, oriented initiatives, if we’re going to meet them.

So that is particularly worrying. We can take positives, I think, from the way in which the scientific community did respond in this remarkable way to the pandemic. But as we get into the political economy of it, if anything, it may well have become worse as a consequence of the pandemic. And certainly as we come out of the pandemic and what we’re seeing now and what we’re experiencing with the policy shifts that are taking place in the advanced economies, tightening of monetary policy, et cetera, is taking place without any thought for what the consequences of that might be for developing countries that were struggling before the pandemic, and now face an increasingly hostile international environment that has already begun to tip some of these countries into social and political conflict. We’ve seen that in countries like Sri Lanka and unless something is done seriously about these issues and quickly, will become a much more prevalent feature of the geopolitical landscape. And that’s got to be a worry for everybody.

Rob Johnson:

Yeah. I’ll use an analogy from my own life experience. I grew up in Detroit, Michigan. When Detroit declared bankruptcy, people said, “What do you mean bankruptcy? You can tax people.” And I was working there as an advisor to people who were trying to resolve what was happening. And I said, “You can raise taxes on the body politics so you don’t have to reduce the pension and the healthcare for women who worked for 45 years in municipal government and earned those rights.” And by the way, they’re not eligible for social security or Medicare, because they were covered by this other system. And everybody said, “Well, what do you do?” I said, “Well, a company declares bankruptcy when it doesn’t have revenue. All you guys have to do is raise the taxes.” And a gentleman, happened to be in the Republican party from the state legislature said, “I need to talk to you.”

And he said, “You’re right, we could raise taxes. And as soon as we did, someone would run in a primary against me, well-funded by people because they threaten to move their capital out anytime you do anything, and we think that would devastate the base, but more important than that, I’ll lose my job if I back supporting these people.”

So you have these ladies 45 years of work, not being rewarded because capital has nanoseconds escape possibilities and politicians are afraid of them. I’m speaking about a particular institutional episode, but that’s what you might call the generic tension in the era of globalization where nation state control is deteriorated and capital and technology being so mobile have so much relative power compared to people.

Kevin, you have thoughts regarding the, how would I say? There’s that saying, we’re all in this together. But as I was listening to Richard, sometimes we’re not because they create an otherness and rally around what we might call the nation state or the community or a subset of the community to protect them. But not dealing with some of these things like disease can come flowing right back on top of us and being tribal is what you might call contributing to the cumulative damage that not only others will feel but we’ll feel.

Kevin Gallagher:

Throughout the book, we really see three inherent things that are fundamentally characteristic of the world economy right now. And like you said, they can’t be in chapters 37 and 38 of economics textbooks for the 21st century, right? Because what you just said about pandemics, if you don’t deal with it anywhere, it’s going to hurt people everywhere, is the same thing about climate change. If we don’t deal with climate change globally, it’s more droughts and more fires in California, it’s more taxing on the public budget here in the United States and it wipes out the entire capital stock in countries like Barbados, et cetera, and causes fundamental financial instability there. So climate and pandemics, we really see this book as acknowledging the fact that the world economy is now inherently, financially unstable, economically unequal and environmentally unstable.

And all of these things are global public goods. When there’s financial instability, anywhere, we see it over and over again with the financial crisis that keep racking us, is everywhere. If inequality is creating increased polarization, rising of right-wing populism and obviously climate and pandemics are also just globally costing so much.

This book is really about starting a global conversation about putting these things at the center. And what I think is different about the 21st century now, because as Richard has said, and we say throughout the book, and obviously you know, a lot of these problems just started in the late 1970s and early 1980s. But what is so characteristic of the 21st century now, is that they’re all right on our front radar screen and the constituents, unfortunately, of the people who have been hurt are all over the planet.

It’s not just poor farmers in Mexico that were going to get hurt by the North American Free Trade Agreement, now it’s the folks in Detroit, it’s the folks in Poland who will have to shift from coal to clean air, same thing with South Africa and the folks in the Caribbean. And so there is a conversation that needs to happen that we hope to kick off with this book.

And that if you think about these three core parts of instability, financial instability, inequality and unstable climate and health systems, if you put those at the center and you say, “Hey, dealing with these things, they’re not charity. They’re not little issues that need to be dealt with. We need to rewire the system to make sure that these fundamental things that are public goods are at the heart of the system and that these are investments rather than charity giveaways.”

You start to have a different conversation with all different kinds of folks, including the Republican that you talked to in Detroit. Investing in people, investing in infrastructure, investing in a new economy, helps people get jobs and helps people get re-elected. And the big problem has been a lack of investment. The investment that we’ve had has been towards a 20th century economy, and it’s been anemic while we’ve extracted all of this financialization that has been going in a different direction, which has been feeding off of itself. We need to make sure that the financial system and the trade system is oriented towards our development, equality and climate change goals. And if we sit and have a set of principles that guide us and say, “Hey, what are these fundamental things for the 21st century?” We can rewire these institutions towards those goals. And that’s what we’re really talking about in this book.

Rob Johnson:


Richard Kozul-Wright:

Yeah. And I would just add, Rob. I know people are worried sometimes about historical parallels, but using the New Deal, it’s not an accident. Ironically, those three things that Kevin mentioned were of course, central to the Roosevelt Agenda. There was an environmental crisis linked to the Dust Bowl and other problems, there was obviously financial instability that came out the Great Depression and of course, there was rampant inequality that had to be dealt with by the original New Deal. So in a sense, what I think has often been lost in that telling of the historical story, there was a strong intenationalist dimension to the New Deals.

They’re often taught as somehow inward looking at protectionist agenda. And I find that to be very misleading in terms of the historical narrative. And it’s not an accident, it’s the same people that were concerned with these issues domestically, often were the same people who were behind the original discussions to build a multilateral architecture, that would also tackle these problems worldwide. Morgenthau who has a interesting history, and you wouldn’t necessarily think as being a hero in that kind of world is a hero in our books. I think that the contribution of people like him to the original Bretton Woods story is often forgotten, partly because there was a strong pushback in the United States fairly early from 40s after Roosevelt died against a lot of the original intentions of the designers of Bretton Woods.

The pushback against that need to control highly mobile speculative capital begins very early in the US. It took them a while really to rewire the system in a way that they wanted. And it doesn’t really happen till the late 70s, early 1980s, but they began that pushback early on. And so it was a very conscious effort to go back to the New Deal and it’s original intent, to think about what they achieved and were trying to achieve back then and what is still useful today. There have been significant changes, of course, in the structure of the global economy since then that have to be accommodated by any new multilateral agenda. But there are real lessons from that period that need to be recovered, I think, if we’re going to have that more inclusive and sustainable agenda that Kevin talked about.

Rob Johnson:

I’m drawn as I was reading your book to someone that, well, John Bellamy Foster and Robert McChesney turned me on to many years ago. And it was a man called the Earl of Lauderdale. He was the 13th Earl of Lauderdale, and he read The Wealth of Nations by Adam Smith. And I guess what I would say, he raised a specter in 1804 saying, “What do you mean air and water have no value because they have zero price? If you cut them off, we all die.” And I guess what Adam Smith was saying was that exchange value when the population was small in relation to the planet meant that you didn’t have to pay for air or water and you could survive.

It seems as though that balance has changed. And what I guess I’m getting at is, this is a little bit like I made a podcast recently with man named Peter Barnes, from Northern California. The idea is that the earth, the water, the ocean, the fish, the upper atmosphere are assets, but they haven’t been properly treated as assets that need to be preserved, cultivated, enhanced, whatever you want to call it. We don’t have the mindset that indigenous people had that were so dependent upon the earth. And perhaps since the Industrial Revolution, we’ve parted ways further with dependence upon the earth.

But these assets now, it’s almost like if you want to say, the spirits are coming down on us pretty hard to change course. And it concerns me now because I feel like, and we haven’t talked about this yet, but the nationalism and the fear that the Ukraine conflict is bringing to the surface is taking us further to what I will call the Bismark playbook. When you can’t handle all the fear and instability at home, pandemic, social unsustainability, you declare a foreign enemy to rally everybody behind you to get them to obey. But in this context, with these other assets, these public goods deteriorating, that diversion of focus is going to exacerbate rather than ameliorate the kind of things we need to do together. How do we and China get together when Xi Jinping and Putin and the American administration are all playing, what you might call demonization games with one another?

Richard Kozul-Wright:

Yeah, that is, obviously, a major concern that we have where we are in Geneva, Rob, because what the big players do is going to be critical, that’s clear, that was clear at COP at the end of last year. Kevin has pointed out that China has done some pretty remarkable things over the course of the last two decades, including with respect to the environment, although it is now, of course, the world’s single largest emitter. That’s partly a reflection of its size, partly a reflection of the fact that it had to grow so quickly to be able to deliver the huge reductions in poverty that people were celebrating until a few years ago.

What worries me more out, Rob, is the attitude of the, what is still the hegemon, right? The US, despite all the talk of de-globalization and de-dollarization, the United States remains the hegemon in this world economically and militarily, that’s fairly clear. And we went through a brief period with the new administration, where there was a lot of talk about the parallels between the Biden administration and the Roosevelt administration, and the hope that kind of similar mindset would be … And including at the international level, clearly Biden had a much more of a multilateral spirit than the previous administration had, that’s clear. But it doesn’t seem to have lasted. And I think behind it and it’s this very intangible quality that is critical, but difficult to pin down at both the national and the international level, which is the role of trust in any system.

All systems have their different interests, but if you have a system which has different interests and no trust, it’s very difficult to get any degree of consensus and forward thinking in that system. And trust is being now hemorrhaged from the multilateral system. And the war is not the cause of that. I think it may well accelerate that in the way that you described, but behind that is the hemorrhaging of trust from particularly, the most powerful countries in the world. Trust is now a scarce fact in the advanced capitalist economies. And I think thinking about that problem of rebuilding trust in the leading market economies has to be central to any hope of being able to meet these challenges through collective action at the multilateral level. That is a difficult problem to think through, but it is a central issue in any progressive discourse that needs to be constructed.

Rob Johnson:

I was going to say, you [Kevin] and I live in the United States. When he talks about the deterioration of trust, we have people like Angus Deaton and Anne Case writing about the diseases of despair. We have a guy like Donald Trump getting elected for president by running around saying the system is rigged. I think he’s right on target about one of the assets that is deteriorating in the United States.

Kevin Gallagher:

Yeah. It’s absolutely true. And it’s disheartening to see that in a democracy where we should be deliberating, but we’re turning from deliberating to demonization. On a professional level, security and war is a bit above my pay grade, but I want to make sure we put Putin in a different category than China. And I think one silver lining is that China has provided some healthy competition to Western hegemony on these issues. The West, as hegemons, has not really acted, right? We failed in pulling together the world to adequately deal with the financial crisis and again, with COVID. And it wasn’t until China put together the Belt Road Initiative and started building roads and infrastructure all over around the world where all of a sudden the World Bank and international institutions, and the West started saying, “Oh, gosh, we have to start paying attention to infrastructure.”

And so now there’s infrastructure financing going on at the World Bank and there’s a whole global effort to try to do that. And sometimes this competition is getting increasingly unhealthy because the West is seeing it as a zero sum game, but not to deny that China has geopolitical motivations for all of their policy as do we. That’s what career rate of the entire regime in 1944 and the larger they get, the more interest they have to protect around the world, but their global policy on their Belt Road Initiative is to help create interconnectivity and lay the foundations in terms of infrastructure for the 21st century. And just in March of 2021, they committed for that to be a low carbon Belt Road Initiative. They’re no longer going to finance coal projects around the world, and they’re shifting into wind and solar.

And so I see that as, the United States doesn’t have a foreign policy like that, Europe doesn’t have a foreign policy like that, Japan doesn’t have a foreign policy like that. That’s healthy competition that will help green these institutions. And I think that the hegemonic states at this point really face a choice, to bring us back to the trust conversation. We need to learn how to make these institutions more inclusive in terms of governments, other countries and the citizens in those countries, and we need to make them broader to deal with also issues of inequality and climate change. And if we don’t, there are increasing alternatives where countries can go. If you don’t like the projects that you might get from the World Bank, you can have China finance a wind farm in your country.

Argentina doesn’t want to go to the International Monetary Fund because they keep making them privatize more and more and get rid of more and more government. So they went to China and got the largest solar power plant in Latin America. So I see the rise of the rest as Alice Amsden used to call it, a good, healthy, competitive signal to the world about how we need to be more accommodative and more inclusive and bring these issues right into the center.

Rob Johnson:

I think you’re really talking about something that’s very important in the dynamic. I just had a nice conversation with Kishore Mahbubani about 21st century Asia, a young lady named Joanna Chiu, who writes for the Toronto Star, who is from China originally. And they’re both capable of being very critical of China, but it’s not all good, all bad. Adair Turner who works closely with me here at INET, talks about how we’ve had a pleasant surprise because the cost of renewables, wind and solar have come down so much because of the public investment in R and D that’s been done in China. So there’s plus and minus columns in all of this and to demonize China is to miss some of the positive elements that you underscore.

Richard Kozul-Wright:

And there’s an important lesson there, of course, for what we try and say in the book which is, the need. Again, part of the original model was, is this need to get back to public finance and public investment, international and domestic, which was the original intent of the Bretton Woods model. China is, essentially, a public finance, public investment model. One of our frustrations, even though we are critical in the book about some of the recent policy conditionalities and other practices of the multilateral institutions they’re massively underfunded given the scale of the problems that they face and the mechanisms that they could mobilize to address those problems. We want to see more financing come through the multilateral financing institutions, whether that’s at the international level or indeed at the regional level.

And with respect to the climate issue for example, there is a knee jerk reaction that somehow, only private finance can solve this problem. And whilst in any market economy, private finance has to have a critical role, this idea that public investment is somehow 20th century or mid-20th century as part of a policy paradigm is both deeply misleading. But ultimately, we’ll make it increasingly difficult to deliver on the investment projects for mitigation and adaptation.

As the IPCC report, essentially, needs to be in place over the course of the next five years. The private financing, particularly the way it’s currently constructed, is not going to deliver the projects we’re talking about over the next five years. And so unless we get the public financing model right, get back to the role that development banks can play, public banks can play using sovereign wealth funds and other mechanisms. It’s easy to take a fairly bleak view if you take the science seriously, of our abilities to meet these exacting targets that people now know we have to meet.

Rob Johnson:

Yes. There’s a writer with the New York Times who I recently talked to, Peter Goodman, who’s written his book, which is getting a lot of attention called Davos Man. But earlier than that, Peter and I talked about an article he wrote, which was called, I believe it was in the New York Times, late 2019, called, or early 2019, excuse me, We love the robots. And it was about the process of a society embracing transformation. In other words, what economists call the production possibility frontier improves with an innovation, but how you transit, who gets damaged, who are the losers, who are the winners? We used to get that parable when we were taking economics courses, free trade can make everyone better off and nobody worse off. But the asterisk on that comment is, you’ve got to do the transformational assistance.

I have friends from West Virginia now who are telling me, “Well, you grew up in Detroit, do you expect us to play along with this global public good and get trampled?” We need to work with China, but a whole lot of Americans who got trampled by globalization with no assistance, either from tech, machine learning and automation, or from globalization don’t want any part of that, but that’s not a failing of the possibilities. That’s a failing of our political economy and the transformation that could have made everybody better off. And we have to start to see that, like we talked about, the pervasiveness of the side effects and how we choose a pathway that considers everyone.

It’s almost as if people have to be given more power and money, less power where we might call votes, but it’s very, very daunting to see how despondent and discouraged Americans are about the possibilities of global cooperation at exactly the time as your book underscores in many contexts is necessary. How do we start that rebuilding of that trust that you’ve been talking about?

Kevin Gallagher:

Well, our book is one very small effort to try to start a conversation to put some of this together. And what you’re referring to is what a lot of us call a just transition and what we say in this book that we really need a just transition within borders and across borders. And the great experiment with free trade and globalization from 1980 to 2020, created an incredible amount of structural transformation and an incredible amount of wealth creation, but those that were left behind were just completely left behind. Like you said, the production possibilities expanded, they were Pareto efficient, but folks in Detroit, rural farmers in Mexico, industrialized workers in Brazil and in South Africa, these folks were not the winners, and there was no public insistence, no steering of private sector finance to help those entrepreneurs, those communities and those workers get the opportunities in the new sectors.

And we can’t make that mistake that we made on globalization, the mistake that we make on structural transformation for reworking the global economy into a low carbon and more socially inclusive one. It is clear that the Polands and the Kentuckys and the South Africas and the Trinidad and Tobagos do not have those natural assets that they were able to export and create livelihoods for in the 20th century, those are going to be stranded assets into the 21st century. We can strand the assets, but not the people and not the entrepreneurs and not the communities. And that’s an underscore or a role for global public institutions for the North-south component. If the Europeans are going to have a carbon border adjustment tax, well, part of that tax should go to finance transitions in places like Mozambique, that exports so much carbon intensive activity to the Europeans.

And just like in the United States, our economy will be much better off as we go low carbon, if you incorporate the externalities, but certainly, certain sectors, communities and workers are going to shrink, and we need to make sure that those folks are put at the front of the line that we’re investing in those people in those places, so they can be part of the transformation, because what we’ve learned from globalization, you talk about the rise of right-wing populism and Donald Trump and all this global conflict, is that we see a lot of this rise of conflict as a symptom of not doing the globalization transformation right over the past 40 years. And we have to do it, and as the IPCC report tells us, we have to do it now.

Richard Kozul-Wright:

And we have done it before, Rob. One of the funny things about the China story is that, back in the 60s and 70s, the rise of countries like Japan and the East Asian NICs and the rising share of global trade was tremendously rapid. It’s just that at that time, the response was not to become more introverted. It was to invest in alternative job opportunities for people in coal mines in the North of England or textile workers in New England, because you could generate better jobs for people than those kinds of jobs. But of course, it requires a capitalist class essentially, that is willing to take it’s profits and reinvest those profits in job creating areas. And that’s what happened to some extent in the 60s and into the 1970s.

In a world where huge chunks of profits are being used to buy back shares or to pay out large dividend payments, then that social role of investment is being eroded and the symptoms that we’ve seen, the pathologies of 21st century politics follow from that inability of the system to use the resource it has available, to create new opportunities for people that are moving out of declining industries. And in our story, those new opportunities have to be in a low carbon or carbon free economy. And the opportunities are there. We have some systemic problems though that make that virtual circle, I think, difficult to establish. But again, I would go back, at least getting back to a story in which the opportunities for public investment are given much greater room. Gets us back to some awkward questions about, do we need to nationalize the fossil fuel industries to be able to make the changes that Kevin talked about? This takes you into more politically uncomfortable territory.

But it’s not that we haven’t been here before. We have been here before and we did some things right then, we did some things wrong then I think learning those lessons as we move forward to meet these 21st century challenges, is at least in a small way, the intent of the book. And I think is a conversation that is urgently needed if we are going to address these problems.

Rob Johnson:

Yeah. I’m haunted at times, going back to your reference to the New Deal. There seem to be a time when, if you looked at public opinion polls, people on the far right, we would just say, worshiped markets and people on the left worshiped government. And what really haunted me is, during the Obama years, and by the way, I would always recommend David Sirota and Alex Gibney’s new podcast called Meltdown about the deterioration of the country in the aftermath of not doing what that opportunity that crisis created. But what I saw in 2010 and 2011 was polls like the Gallup poll about belief in government. And what happened was, the people on the right still believed in the market, but the people on the left thought government was captured.

And the reason I raise that spectrum now, I have read a book, a year or so ago by Naomi Klein’s older brother, Seth Klein called The Good War about the, essentially the analogy to a Canadian war preparation at the time of World War II. They entered the Allied side three years before the United States. And Seth talks about essentially, the need to do that, but a whole lot of very interesting people like Geoff Mann and Joel Wainwright and everybody said, “Whoa, whoa, whoa, whoa, whoa. We’re in a place where people are so afraid government is captured. If we give them that power, will they actually do good or they’ll continue in what you might call the rent extraction process?

And so inspiring the body politic of the need for the state and the pervasiveness of externalities public goods like we’ve been talking about, seems to me to be a formidable challenge because of the woundedness in recent years in the distrust of governance that has ensued. How do we overcome? You can sing, we shall overcome, but we got to have a hypothesis here. How do we get there? And I think, guys, I went to a conference recently that was a exploration of Dr. King’s speech, Time to Break The Silence; Beyond Vietnam.

And you guys are like Dr. King, you’re calling out the truth. He took quite a beating, New York Times, Washington Post, many of the affiliates that he had in the civil rights movement got mad at him, because he went after that when he talked about militarism, materialism and racism as the triad of poisons to our society. But I’ve watched you write a book, like his speech. You rose to the occasion, you brought this out. But how do we now evolve? Which you might call the north star you created. How do we create the spaceship to get us to that north star?

Kevin Gallagher:

Well, it’s interesting that you say that you just read that, because if you look at page one in our book, we actually quote Dr. King and I should say on this podcast, a great graduate of Boston university here. If I could, I’d love to share that quote because we feel like that those words around the Vietnam War really ring true for the call that we’re making today. He says, “We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of the now. In this unfolding conundrum of life and history. There is such thing as being too late. This is no time for apathy or complacency, this is a time for vigorous and positive action.” So we are re-echoing that same call that he made and saying, gosh, those words are even more resonant or just as resonant now, and especially if you bring climate change into this story and listen to what the IPCC just said. But how to do it?

We are researchers economists and think tanks. We’re writing a book to try to have a global conversation, but in our last chapter, we evoke the words of another great person in history, John Kenneth Galbraith in his concept of countervailing power. One of the reasons why the Roosevelt administration and ensuing years moving forward was that there was coalitions of countervailing power, different kinds of actors that were able to negotiate with Capitol to be able to discipline Capitol and discipline the state. We think that the Capitol needs to be disciplined, the state needs to be disciplined, and these international institutions. We’re not just saying pump more money into the government, into the International Monetary Fund it’s going to change these problems. Is that well, there needs to be countervailing power.

And we see it in a lot of different places. I already mentioned that China is a healthy form of global competition on some of these issues. The different movements, we see Amazon organizing for unions in the United States we see the Green New Deal movement in the United States, we see the fact that the European Union has legislated net zero and has legislation that they’re deliberating about just transitions. Those are the kinds of countervailing power that you can see in the North. And what’s inspiring now in the South, especially in the midst of Russia’s war in Ukraine is the reemergence of a non-aligned movement. A reemergence of a number of countries around the world, that of course are going to condemn the obstruction of the sovereignty of an individual nation. But they’re not going along with the sanctions and they want something to be done with the global economic ramifications.

The fact that oil prices and wheat and grain prices are skyrocketing when before the invasion of Ukraine in January, well, the World Bank sounded the alarm and said that just the interest rate rises in the United States might put 60 countries that are in debt distress over the cliff into a debt crisis. And we already saw Sri Lanka step over that. Now with the spikes in grain and oil, that debt issue is even an even bigger one. And if we have a debt crisis like we had in the past, that again hurts everybody here wherever you are in the world.

Richard Kozul-Wright:

Yeah. And for us building coalitions amongst developing countries is critical to rebalancing the international orders. And we have to be honest, it’s what we lack at the moment say compared with the 1970s, when we got the initiative to try and create a new international economic order that developing countries pursued through the United Nations. But as Kevin said, there are clearly signs of change. And just to follow up on Kevin’s point, I think there is a growing recognition that we cannot make the kinds of investments that we need to make to deal with the climate and other problems given the burden of debt that many developing countries now operate under. It just doesn’t add up.

And I think there is slowly a move to fill this gap within the multilateral order of mechanisms that can properly handle the debt problem. And Martín Guzmán, as I think you know, the finance minister of Argentina, Rob, has always said, we have a system that always delivers too little too late. And countries, even if they go through some restructuring, often find themselves back in the same position, four or five years later. Not necessary through any corruption or incompetence on their part, but simply because outside pressures just force them back into a corner.

And I think there is a real serious conversation now building to think more creatively about the need to handle an issue like that. Which is, it’s going to be the big issue for the next three or four years in the developing world in a much more effective way than we have. There’s the famous aphorism of Bertolt Brecht, because things are the way they are, things will not stay the way they are. And I think that at this moment in time, I think that’s a particularly appropriate degree of optimism for thinking about the challenges ahead that we face.

Rob Johnson:

Well, Kevin, I’m smiling when you reminded me of Dr. King being at Boston University. In part because the person that I am most immersed in reading for my own education, my own evolution right now was his mentor, a man named Howard Thurman. Books like The Luminous Darkness, are extraordinary. And this is a man, when he was trying to figure out early in the 20th century, how to be effective, he got himself sent to India to meet Gandhi and explore how to be what you might call fierce and inspire trust or alleviate fear at the same time. And he is a very, very profound influence on Dr. King.

When I was at this conference a few days ago, Dr. King’s youngest child, Bernice King was one of the speakers at the end, and she and the other panelists, Andrew Bacevich from the Quincy Foundation, a former military official and others were really quite powerful. And I started thinking about the question of how fear is really the obstacle in the way of what we need to do. Your book as a north star, gives us a destination. We know where the voyage has to go through the clarity and the insight and the profoundness of your argument, but to alleviate fear, as we’ve talked about, we also have to bring the trust together. We have to have action. We have to see people doing things that deliver results.

But I think the alleviation of fear was very profoundly in the mind of Dr. King in his writings. And at this conference, they closed with a song and the name of the song by a man named Brian Courtney Wilson is, Fear Is Not Welcome. And in the beginning of the song, I’ll read you the lyrics, “Let me begin and confess, I need Your healing. I made a friend of the fear that I have been feeling. And I believed the lies it spoke that led me into doubts, but I’m calling on Your angels army now.” And then the chorus. “Fear is not welcome. Fear is not welcome. Fear is not welcome in my heart anymore. I’m casting it away by the power of Your name. Fear is not welcome in my heart anymore.”

I believe that the two of you have made a contribution. I’ll just speak personally to reducing my fear, because you’re rising to the challenge, and as I call it a North Star, you’re creating a vision and we’ve got to get to the place where our government officials recognizing the structure of this global world, the pervasiveness of externalities and probably goods is such that they should be embarrassed if they don’t follow your roadmap, they should suffer embarrassment. Not just public embarrass, but as custodians for their own children, for the societies that they govern, if they don’t start to see the light that, how would I say it? You have helped create.

So, first of all, I want to congratulate you. Secondly, I want to remind my young scholars of what kind of an example for their career development. That’s a pathway where you are also guides is they can see you grasping the challenge, the purpose, stepping out of line with the courage to go after this. And so I thank you both. Any final thoughts?

Kevin Gallagher:

How could you follow those great words? Thanks so much for having us on and thanks for letting us have this conversation with you and all of your audience.

Rob Johnson:


Richard Kozul-Wright:

Yeah. And let me second that, Rob. It’s always a pleasure, of course, to talk to you. And those are, I think very optimistic words, as well as calling people to account, to some extent, I think is part of your story.

Rob Johnson:

Well, Dr. King knew he had to call things out and bear the burden of resistance from power as a prelude to success. Calling things out is the first, envisioning the destination, and then marshaling the trust and the alleviation of fear getting there, that’s the playbook I see. And you’ve made a very, very fine contribution and I look forward to the next chapter, because me and my audience will all follow you closely in light of what you’ve created. Thanks for today.

Kevin Gallagher:

Thanks for having us.

Richard Kozul-Wright:

Thanks a lot. Thank you.

Rob Johnson:

Bye-bye. And check out more from the Institute for New Economic Thinking @ineteconomics.org.

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