• The world is emerging from the pandemic facing new challenges.
  • The war in Ukraine and inflation have joined climate change as major global issues.
  • History professor Adam Tooze sets out the themes topping the agenda for the next 12-24 months.

In May, the World Economic Forum will be hosting its first in-person Annual Meeting for more than two years.

Looking ahead to this extraordinary Davos which is happening at an extraordinary moment in history, Jim Landale and Abhinav Chugh of the Forum’s Strategic Intelligence platform. have spoken to several leading thinkers to ask what they see as the biggest issues that will be discussed at the meeting and that will dominate the global agenda in the coming months.

One of the people they spoke to was the historian and economist Adam Tooze, Professor of History at the University of Columbia in New York. He is also host of Foreign Policy’s weekly economics podcast Ones and Tooze, and the author of books including Crashed: How a Decade of Financial Crises Changed the World and, most recently, Shutdown: How Covid Shook the World's Economy.

This is a transcript of the interview on the Radio Davos podcast,

The big global issues in the next 12-24 months

Jim Landale: So Adam Tooze, from your perspective, what would you say are the key challenges that leaders and decision makers attending Davos should be focusing on in the next 12 to 24 months?

Ukraine

Adam Tooze: Well, I think clearly the war in Ukraine. Russia's war in Ukraine is top of stack. It's the most dangerous potential for escalation that we've seen in a long time.

It's less, as it were, the shock, the almost civilizational shock that Europeans are feeling at the sight of conventional warfare and the destruction of cities on European soil, which, after all, unfortunately, has been the lot of people in the Middle East for some time, in part as the result of our doing that, I think should concern us. But the fact that it is now the announced strategy of the Western alliance led by the United States and emphatically led by the United States, successfully led by the United States, to inflict a defeat on Russia. And that may be desirable, and it's hard not to wish for that, but it is an astonishing objective.

In the history of NATO, in the history of Cold War relations, this is a very important departure. It may not be entirely unique in that during the phase of the Cold War in Afghanistan, for instance, we intended to attrit Soviet power and humiliate the Soviets. But we did it far more delicately than we're doing in this case. The Stingers were supplied then furtively and undercover, whereas what we're doing now is really just lining up openly and supplying Ukrainians with, at this point not everything they would like, but a remarkable arsenal of conventional weapons with the explicit purpose of stopping Russia's army, which means killing Russians and inflicting a humiliating setback on Putin's regime.

This general escalation of the tension between the two great nuclear superpowers is a dramatic historical departure.

And this is the number two nuclear power in the world. So that is a radical departure in terms of our willingness to bear risk globally. And it has ramifications that we are only just beginning to work our way through.

Even if we reach a cease fire, if we were to reach a situation in which a cease fire could be negotiated, let alone a peace, this will remain in the system. Everything Russia at every point previously said about our [the West's] disguised intentions with regard to them has now become manifest. The American president has said that Putin should not be in charge. And our intention at this point is to inflict a defeat on them.

It isn't, as it were, the economic impact of Ukraine, which is severe enough, or the shock to the European system. All of this is very real, but it's also quite local. This more general escalation of the tension between the two great nuclear superpowers is a dramatic historical departure.

Inflation

Jim Landale: Turning to other big challenges facing leaders, probably all in their different ways affected by the invasion of Ukraine and the fallout from it, what else would you put on the table in terms of big concerns that need to be thought about and addressed? I know in your most recent podcast you addressed inflation. You talked about the looming debt crisis with particular focus on Sri Lanka.

Adam Tooze: I think in terms of, as it were, the global agenda, the unfinished business of 2020, or rather what 2020 exposed, is the inadequacy really of the safety net, the financial safety net, in the global dollar system.

It works, as we've now twice demonstrated, for the rich country insiders who are amply provided by liquidity swap lines and everything else. That's been stress tested twice now and it stood up. You can ask a whole bunch of social equity issues questions about that. Why are we bailing out certain people as well, so on and so forth. But the real question that was fundamentally unanswered in 2020 is the question of low income in developing countries.

The problem is - or the 'problem' quote-unquote - or the reality - is that because of the fact of underdevelopment and poverty, the economies may be inhabited by just short of a billion people don't weigh heavily in the balance. They don't weigh heavily in the economic balance. So you don't get the enlightened self-interest driving support action that we saw, that we've seen twice over within the inner core.

But I think it would be immensely short sighted if we. even from a from a narrow perspective of self-interest, if we didn't understand the potential risks of destabilisation in a Sri Lanka, a Tunisia, an Egypt, a Nigeria. It's just bad, very bad politics, not to appreciate the significance. Just the sheer unpredictability and complexity of each of those places and the sorts of risks, if that is how you're going to map the world, that could emerge from them.

The beginning of this year we've seen a dramatic escalation in tension in the Sahel region in terms of security policy across that strip, the expulsion of the French from one of their key positions there. All of that zone is caught up in this logic of underdevelopment, poverty and stress.

So the question there is, can the IMF, can the World Bank, can they be equipped to act, respond more adequately? That's the first line.

Two years ago, we would have said the G20 is the forum in which to do the deal. But of course the G20 now presumably is dysfunctional because of the tension with Russia. So then that really puts the onus on the G7 and the G8. And it's been a long time since the G7 has had to act as a core and it's no longer in any way representative of the world economy. So figuring out the geometry of that relationship is very important, I think.

A sequence of pandemics would inflict economic losses comparable to worst case climate scenarios.

And then I think I'd be remiss, having written a book about COVID, not to remind everyone that there is still a pandemic ongoing and totally disrupting life in China. And every single person that gets sick is the risk of a mutation that could totally destabilise us as well.

So a continued, rigorous, disciplined focus on COVID variant risk and the need to continue high-pressure development of vaccines, broadband vaccines that can cover a whole range, medications to deal with people who get severely ill. Because, we'll be lucky, it's possible, but we'll be lucky if we're out of the woods on this. I still don't assume that we are simply going to return to normality at this point.

And in any case, the lesson we should surely have learnt is that everyone who was warning about this as a major global risk was absolutely right. And it's a trillion, it's a multi-trillion-dollar risk. So it's epic from the from the point of view of... it's much more immediate, almost - climate change is obviously the big long term. But a sequence of pandemics would inflict economic losses comparable to worst case climate scenarios. Even one was bad enough to inflict damage, which is a total tale to get the kind of damage we saw in 2020 from climate, you need to go far out on the spectrum of worst case scenarios and was our reality from which we're still recovering. So anyway, those would be three items.

Global governance

Jim Landale: In terms of the ability or performance of international institutions, the global governance structures, to deal with all of these interlinked problems. Do you have any observations on where we are in terms of their health?

Adam Tooze: With regard to the financial side of things, what's been revealed once again is the de facto global status of the Fed. The thing that really saw us through 2020 was both the liquidity support provided by the Fed in the form of swap lines and on the other hand, just simply the global influence of American monetary policy.

And so one should not underestimate when thinking about the global the significance of very large national actors: the Fed, the ECB, the Bank of China, the Bank of Japan, possibly. But those three anyway are globally significant actors. Each one of them has macro, regional and, in the Fed's case, global implications from its policy.

A major devaluation of the renminbi in the next couple of weeks, which seems to be the news of the last couple of days would send the shockwaves through the East Asian economies. It's not something anyone wants to see anyway. So that's one point.

And I start there because I think the answer on the IMF and the World Bank side is that they have not made the problem worse, I think one would say. So they are not crisis amplifying factors, but are they equipped to do the kind of large scale interventions that we would want to see? I don't think they are.

Mark Malloch-Brown had quite a good assessment in Foreign Policy a few weeks ago where he said, look, they just need much larger lending capacity. I also think that we have to address their ability to take risk. I mean, one of the utterly anomalous facts about, say, the World Bank is that they're so precious about their triple-A rating that they're not actually able to contribute to debt restructuring by way of their own outstanding loans.

And this this is this is crazy, right? What they need is a standing backstop from their shareholders, in other words, the rich countries of the world, to absorb those kind of risks so that of course World Bank loads can also be put into the mix. Because the problem right now is the sheer complexity of global debt even in low income countries. We've got this nasty mesh of multilateral debt, bilateral Paris Club debt, Chinese debt, bank loans, bond issuance. It's a real cat's cradle, a real mess, of overlapping obligations, and gaining leverage over that so as to structure a comprehensive write down on terms that mean that the ambitious low income countries are actually willing to take them on and don't end up in the Sri Lankan position of paying billions of dollars to the last minute until they absolutely have to default, which is totally counterproductive, is a huge governance challenge and it's not new. It's been around for a generation now. The conversation started in the late 1990s with Kruger's suggestions about sovereign default and restructuring, and we've not made enough progress on that front.

It's really two jurisdictions which could drive this: the US and the UK. It's English Law and New York state law which governs almost all of these private debts. And som e sort of sustained push - there's been moves from the G30, from the Bretton Woods group, but I don't see the leadership that one would want on this issue. And again, it's because in the end, people will treat this as not systemically relevant because the players are too small economically. So you don't get the blowback. But that's so shortsighted I think, and just doesn't calculate the ramifying potential risks. Think about a Tunisian crisis and its potential implications for the EU. It's silly not to understand how important it is to be proactive and constructive in a situation like that.

Food and energy

Jim Landale: I guess the same could be said for food security, energy.

Adam Tooze: The food security situation - I think it's a very complex picture. Obviously that is something we need to pay attention to. The obvious thing to do is to think about more productive ways of restructuring the global subsidy system, creating a global market that genuinely encouraged low-income surplus food production. It's a very weird market. Because the amount that's traded which shows up in all of these alarmist accounts of the potential food crisis, is a tiny fraction of overall global production, most of which stays within the big blocks. So the very least, I think we need to think about how policy could be gigged in the EU, North America, Latin America and China so as to ensure that the relatively small amount that needs to be pumped into global markets is actually available at prices the low income countries can afford.

But poverty is their real problem, right? This is again and again - the same with energy - it's not per se the energy or the food price that is the issue which often is sending a quite useful signal to markets, but the fact that they don't have the financial resources to cushion those shocks.

Jim Landale: On the question of inflation, is there anything more you could say in terms of the ways in which governments are trying to address inflation, taking lessons from the past, and whether or not those those lessons are still applicable, relevant, effective today?

Adam Tooze: I think, frankly, and given the range of risks we've canvassed for the rich countries to be treating inflation as some sort of mega-risk on the horizon, there's a little self-indulgence, really. This isn't to say that it doesn't matter and that especially for vulnerable people at the bottom of the income distribution, these shocks aren't quite severe in rich countries as well. But the sort of alarmist calls for draconian monetary policy action mercifully have been resisted by the central banks to date. The striking thing about the moment is that, say, the Fed talks tougher now, but it hasn't really done very much. And the ECB likewise, has been hovering on the edge of maybe ending quantitative easing. And it will, I think and I think probably prematurely.

But it's interesting that we haven't seen the knee jerk dramatic action. And I think that's to be welcomed. That's really a learning process we've gone through.

And it also just screams out of the data and it's even more pronounced now, of course, in the last couple of months, it's an energy-driven story right now, the spike. There was some widening of the scope of inflation over the winter, but it hasn't escalated. In fact, in America, it seems to be coming down again. So broadly, the transitory inflation story is still the right one, though the spike is higher and the length might be a little longer.

We have to keep our eye on the ball of the socially equitable energy transition. That has to be the long-run objective.

And that then, I think, should also inform our policy response, which is: go easy on monetary policy, do enough to keep the bond markets from losing their heads and provoking a sell off and an involuntary interest rate spike. But then focus attention on income support in a way which is minimally distortionary. So in general, far better to provide low income houses with income support than, say, to freeze diesel prices across the board, which sends all the wrong signals.

We have to stay, have to keep our eye on the ball of the socially equitable energy transition. That has to be the long-run objective here. And so I think of this as almost a laboratory for experimenting with those kind of techniques.

And there are some good examples of relying on already structured energy markets in some places, like Spain, for instance, to contain the impact on lower income households. But general efforts to reduce petrol and diesel prices by lowering taxes and so on, I think is the wrong way to go. It's understandable. And this is part of a broader calculus of everyone holding their nerve and not losing their minds in this moment, which is very important in an America where - we haven't even mentioned the problem of American democracy remains a very important one and, come next meeting [Davos, January 2023] everyone will be talking about this. Anything that helps the struggling effort to avoid a further derailment of American democracy is to be welcomed. There are some really tough trade-offs here.

Jim Landale: Let me just quickly turn to my colleague Abhinav. Do you have any follow up questions, Abhinav?

'Degrowth'?

Abhinav Chugh: Just one question. Since you've written about this recently, I'm just curious to hear your thoughts on - to avoid another crisis of the Anthropocene. where do you stand now on on 'degrowth' as an imperative, especially for rich countries.

Adam Tooze: I think degrowth is very bad politics. I sympathise with its objectives and its diagnosis, but it's terrible politics. As a global slogan I find it irresponsible and just reflects a misunderstanding about the situation of the majority of humanity for whom degrowth can't be an option. The only the only possible option can be smart growth.

For Europe and Japan you could say that something like degrowth is already an achieved reality. Their rates of growth in recent years have been so modest as to not pose a fundamental challenge. What we need to do there is to curtail various types of specific high income consumption which are particularly expensive, like the massive amounts of leisure air travel and so on and so forth; we clearly need to adjust our eating habits and so on in ways which people perceive as very radical but but are essential.

I think where degrowth, where the question really bites, is in societies like the United States, with very high per capita CO2 emissions and relatively buoyant growth rates, and also a politics that is completely bought in on that. And I have to say that, you know, you cannot imagine, it's just simply inconceivable to imagine, a successful American political campaign run on such a basis.

So for me, the slogan has an appeal in helping Europe, for instance, and Japan, to think constructively about its future. Jason Furman in the US was brave enough to say that American policy for the average American should focus on redistribution as well. But you cannot say that out loud! The actual applicability, the relevance of this, as politics seems to me quite unclear. That would be my answer. It's not to me a viable politics as such. Should we be focussed on quality of life, distributional issues and on decarbonisation of what we do at our current level? Absolutely we should. Should we do that under the slogan of degrowth? I don't think so.

Find all our podcasts here.

Join the World Economic Forum Podcast Club on Facebook.