[Global Column] International Politics of Economic Policy

As U.S. President Biden mentioned in his congressional speech last April, COVID-19 has been the worst pandemic in a century, causing the most severe economic crisis since the Great Depression of the 1930s. Currently, the economic shock and damage caused by COVID-19 are so severe that how to respond has emerged as a critical political issue.

Immediately after the outbreak of COVID-19 in 2020, major countries including the United States responded to the economic shock caused by COVID-19 by increasing liquidity supply through active fiscal spending such as disaster relief payments and expansionary monetary policies including lowering and freezing benchmark interest rates. Going forward, active fiscal and monetary policies are likely to remain the core methods for responding to the economic crisis.

Even though active fiscal and monetary policies are inevitable to respond to the economic crisis, the potential problems these policies may cause must also be seriously considered. First, the increase in liquidity due to active fiscal and monetary policies can cause financial instability. The economic shock caused by COVID-19 has not yet developed into a financial crisis. However, as the International Monetary Fund (IMF) pointed out, the rapid increase in liquidity during the response to COVID-19 has already created an environment that could lead to serious financial instability. Therefore, if active fiscal and monetary policies continue in the future, the risk of asset market bubbles and increased financial instability must always be taken into account.

Additionally, the impact that each country’s fiscal and monetary policies may have on other countries’ economies must also be considered. So far, as COVID-19 rapidly spread worldwide, most countries experienced similar economic shocks. Therefore, policy conflicts among countries have not been a serious problem.

However, since the economic recovery speeds of countries differ due to variations in vaccine rollouts and other factors, the possibility of policy conflicts is high going forward. When the Biden administration implemented the $1.9 trillion American Rescue Plan as a fiscal policy to revive the U.S. economy, criticism arose not only domestically that large-scale fiscal spending could cause inflation but also from China, which argued that such fiscal spending could increase global liquidity and exacerbate financial instability in the Chinese economy.

Currently, while there are countries like China with rapid economic recovery, there are also countries like India where COVID-19 is becoming increasingly severe. Therefore, if each country focuses solely on its own economic situation when implementing economic policies, economic confusion could worsen due to conflicts among differing economic policies. In this regard, how to achieve international coordination of macroeconomic policies will emerge as an important international issue during the economic recovery process. In particular, the G20 summit scheduled for October will be a crucial turning point in determining the pattern of international coordination of economic policies going forward.

However, both the United States and China have failed to exercise international leadership during the COVID-19 response process, and political conflicts between the U.S. and China are also intensifying. Therefore, despite the obstacles of the absence of international leadership and U.S.-China conflicts, it is time to consider what contributions South Korea can make as a member of the G20 to help achieve international consensus.

Jae-Hwan Jung, Professor, Department of International Relations, Ulsan University