Tim Hirschel-Burns
This past weekend, the G-20 countries endorsed a plan that would overhaul the international corporate tax system. The agreement fit neatly into U.S. President Joe Biden’s vision of a “foreign policy for the middle class.” Biden revived stalled global negotiations and achieved a deal that will cut down on multinational companies’ ability to avoid taxes. In turn, the deal will provide revenue to fund a major increase in government support for the U.S. middle class.
But for the global middle class, the vast majority of whom live in developing countries, the deal looked far less promising. One of the two major components of the tax deal is a global minimum corporate tax. Many companies currently use creative accounting methods to put their money in countries with low tax rates, a practice that the agreement would counter by raising those havens’ tax rates to at least 15 percent. But rather than sharing those additional revenues among the countries where a business operates, it would give them to a company’s home country—almost always a rich country. Indeed, according to some estimates the global minimum tax would distribute 60 percent of revenues to the G-7.
The second major component of the deal would impose a new tax on around 100 of the world’s richest companies based on where they sell their products. However, because the agreement requires countries to remove existing digital services taxes, it could actually cause developing countries that rely on such taxes to lose revenue. Kenya, Nigeria, Pakistan, and Sri Lanka refused to sign on to the final agreement, and a group of economists including Nobel laureate Joseph Stiglitz issued a statement arguing that the tax deal would “overwhelmingly benefit rich countries.”
Without the additional tax revenue developing countries hoped this agreement would provide, the type of social spending that Biden has pursued in the United States looks even more unattainable for them. These countries’ struggles to procure vaccines have ensured a prolonged pandemic and recession. A mounting debt crisis further stretches their finances, while a climate crisis that promises even more devastation looms in the background. Biden’s response to these challenges has been underwhelming at best and actively harmful at worst. From the perspective of much of the world, the phrase “foreign policy for the middle class” is starting to sound more like foreign policy for our middle class, and austerity for yours.
The phrase “foreign policy for the middle class” traces back to a 2020 report, and many of its authors have gone on to prominent positions in the Biden administration. In line with the report’s recommendations, Biden has taken a far more restrained view of foreign military intervention and free market globalization than his Democratic predecessors. On the domestic side, he has pursued a large slate of government spending.
Many of Biden’s reforms are producing real benefits for the U.S. middle class. These reforms also often push back against the preferences of the rich—as in the case of corporate tax reforms—and this dynamic should not be a surprise. The architects of “foreign policy for the middle class” recognized that the form of globalization that U.S. foreign policy had promoted had benefited wealthy Americans far more than middle-class Americans. Foreign Policy columnist James Traub writes that “twenty-five years ago, a policy ‘for the middle class’ would have been understood, sotto voce, as ‘and not for the poor.’ Today it means ‘and not for the rich.’”
Accountants in Chicago got stimulus checks worth a large portion of the annual incomes of teachers in Mumbai and taxi drivers in Istanbul, while those teachers and taxi drivers got next to nothing.
But in global terms, middle-class Americans are the rich. A family of four with a household income of $73,000 per year sits just above the median U.S. income. However, even when adjusting for differences in purchasing power, that same family is richer than 93 percent of households in the world. And while the COVID-19 pandemic has harmed almost the entire global income distribution, its effects have been far harsher for people in the global middle class. In 2021, people in the 93rd percentile of the global income distribution saw their incomes fall by an average of 2.7 percent. For people in the 50th percentile the income fall was more than twice as bad.
The key reason for this disparity is that the course of the pandemic diverged sharply between rich countries and developing countries. While countries like the United States could borrow extensively at low rates to fund pandemic spending, developing countries are far more constrained. For example, in 2020, the U.S. spent 9.1 percent of its GDP on fiscal stimuli. India and Turkey spent just 2.4 percent and 1.4 percent, respectively, of their much smaller GDPs. In other words, as economic activity shut down, accountants in Chicago got stimulus checks worth a large portion of the annual incomes of teachers in Mumbai and taxi drivers in Istanbul, while those teachers and taxi drivers got next to nothing.
And the pandemic’s worst effects are set to last far longer in developing countries. Middle-income countries have struggled to procure vaccines, while the situation is even worse in low-income countries, where just 4.8 percent of people have received one dose.
The prolonged pandemic and economic crises set developing countries further back on catching up with their debts. Falling commodity prices had pushed developing country debt to high levels prior to the pandemic, but no country could have planned for the rapid economic shock COVID-19 produced. Low-income countries experienced record debt increases in 2020, and total developing-country debt has increased to $11.3 trillion.
Climate change presents an even more foreboding challenge. Developing countries are disproportionately vulnerable to the impacts of climate change. Therefore, they urgently need global emissions reductions. Wealthy countries produced a large majority of historic emissions of greenhouse gases and continue to emit disproportionately, but most emissions increases now come from developing countries.
This dynamic puts them in a bind: They could continue to accelerate emissions, jeopardizing global emissions goals and subjecting themselves to devastating climate impacts. Alternatively, despite their intense need for energy, they could scale back their use of fossil fuels and use scarce public resources to fund renewable energy. There is, of course, a third option: Wealthy countries like the United States could rapidly decrease their own emissions and provide extensive financial support for developing countries’ energy transitions. While wealthy countries have offered some rhetorical support for this option, their actions have yet to approach the scale needed to avert devastating levels of warming.
The most immediate priority for developing countries is bringing the pandemic to a close, but the Biden administration has secured a highly disproportionate share of existing global vaccine supply and done little to increase that supply. The administration struck a blow to global vaccination efforts by moving ahead with boosters despite the protestations of the World Health Organization, ensuring that many Americans have received three doses before much of the world has received their first. Although Biden has promised to donate over 1.1 billion doses, the United States has only donated around 200 million so far.
Even the full sum would not come close to filling the gap in the estimated 11 billion doses needed for global herd immunity. Nor has Biden used available tools to compel pharmaceutical companies to share technology and scale up vaccine manufacturing. While announcing support for an intellectual property waiver at the World Trade Organization was a positive step, the Biden administration has hardly criticized its close European allies that continue to obstruct the waiver five months later.
In response to developing countries’ economic crisis, the Biden administration helped push through an allocation of Special Drawing Rights, the International Monetary Fund’s foreign exchange reserve assets. But the allocation has not achieved nearly as much for developing countries as it could have.
Biden hasn’t used available tools to compel pharmaceutical companies to share technology and scale up vaccine manufacturing.
Two-thirds of the $650 billion in added liquidity went to wealthy countries, and while the G-20 has promised to redistribute an additional $100 billion to vulnerable countries, that redistribution has been slow to emerge and will largely take the form of loans. Debt relief efforts have focused on delaying the crisis rather than resolving it, but private creditors have largely refused to even suspend debts. During the pandemic, low-income countries have deferred less than one-quarter of their debts.
Biden’s promise to quadruple U.S. climate finance to developing countries by 2024 is progress. But at that level it would still constitute just 0.05 percent of U.S. GDP. Further, rich countries are already failing to meet their promise to provide developing countries with $100 billion in climate finance per year by 2020, and even a $100 billion total would not begin to approach the scale of climate finance needed. To limit global warming to 2 degrees Celsius, investments in the energy transition need to amount to an estimated $3.5 trillion per year, with 70 percent of that total coming in developing countries.
Biden’s domestic policy shows that he realizes that government action is the solution to the challenges facing the American middle class. His strategy to combat the pandemic depended on rapid government procurement of vaccines. In response to Americans’ economic needs, Biden hopes to pass a major expansion of social spending. And his response to climate change draws heavily from industrial policy. Middle-class Colombians and Indonesians face the same public health, economic, and climate crises, but they have received little such government support; their governments simply cannot afford it. Biden has not explicitly demanded austerity from developing countries, but it is the inevitable consequence of their current circumstances.
By and large, developing countries can’t restart their economies because the pandemic continues to rage. They can’t bring the pandemic to an end because they can’t procure vaccines. They can’t pay their mounting debts because their economies are in crisis, and they are struggling to fund the energy transition because they collect little tax revenue and are deeply in debt. All this while they face disproportionate and increasing climate impacts, and they experience widespread economic deprivation even in normal times. What does Biden expect them to do?
Well, as it turns out, a lot. The Biden administration wants developing countries to prevent migration to the United States. At the Glasgow climate summit, the U.S. delegation is asking developing countries to speed up their energy transition. And the administration has had little to say as many U.S. financial institutions insist developing countries use money that could fund the energy transition or pandemic response to instead repay the full principal and interest on their debts.
The fate of the U.S. middle class cannot be walled off from the fate of most humans.
The very fact that Biden has made these demands demonstrates that he realizes that the fate of the U.S. middle class cannot be walled off from the fate of most humans. Today’s most pressing challenges are global. Global economic and public health challenges have contributed to the supply chain crisis. The longer the pandemic continues in developing countries, the greater the likelihood that vaccine-resistant variants will emerge and plunge the U.S. public health system and economy back into crisis. And rising global emissions promise devastating hurricanes, floods, and heat waves in rich and poor nations alike.
As Biden knows, these problems cannot be solved by the market alone. A foreign policy for the global middle class would ensure that governments in developing countries—where the vast majority of the global middle class lives—are able to take the necessary actions to respond to the public health, economic, and environmental challenges facing them.
The United States is wealthy enough that expansions of international financing that could have extremely powerful impacts for developing countries would have only modest impacts on the U.S. budget. And other valuable changes, like forcing pharmaceutical companies to share vaccine technology or increasing issuances of Special Drawing Rights, would cost the United States almost nothing. Improving the lives of people in the global middle class has ample moral justification, but it is also necessary to address the global challenges that threaten the U.S. middle class.
However one defines the middle class, a struggling global economy, a raging pandemic, and a spiraling climate crisis are very bad news. Middle-class Americans may not spend much time thinking about the global middle class. But if insufficient global climate action causes their houses to flood or if slow global vaccination causes a vaccine-resistant variant to emerge, they will wish their president had.
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