Tweaking the Financial Stability Oversight Council to Reduce Risks of Another Financial Crisis

Brookings Institute Blog - Thu, 04/17/2014 - 13:00

The Financial Stability Oversight Council (FSOC), created by the Dodd-Frank Act, should be retooled to enhance its ability to maintain financial stability and minimize the risk of another financial crisis, says Donald Kohn, a senior fellow in Economic Studies at the Brookings Institution and its Hutchins Center on Fiscal and Monetary Policy.

“We’ve renovated our regulatory and supervisory structures in charge of making the financial system more resilient,” Mr. Kohn said. “We’ve made progress, but my view is that the job isn’t done yet.” Mr. Kohn is a member of the Bank of England’s Financial Policy Committee and a former vice chairman of the U.S. Federal Reserve Board.

In remarks delivered at Harvard’s Kennedy School of Government, Mr. Kohn cited several shortcomings of the structure of the 10-member FSOC, currently chaired by the Secretary of the Treasury:

  • It’s composed of several independent regulators, several of which have mandates to focus only on specific institutions or markets, not on the stability of the overall financial system.
  • There are gaps in regulation among FSOC and its member agencies that could interfere with the ability to reduce systemic risk
  • Data is not widely shared among the constituent agencies to the extent that it should be.
  • FSOC is likely to face big obstacles to implementing countercyclical macroprudential policies, that is, policies designed to make credit less plentiful in booms and more plentiful in busts.
  • FSOC has very limited tools [..] and recommendations to other agencies might take considerable time to be implemented.”

Accepting that Congress is highly unlikely to change the current fragmented structure of U.S. financial regulation, Mr. Kohn made six suggestions for changing FSOC:

  • Give each of the agencies with seats on the FSOC a clear objective to maintain financial stability, which would make it harder for an agency to reject or tone down a recommendation that FSOC deemed important to reduce systemic risk.
  • Require FSOC agencies to share data in response to requests from one another.
  • Require FSOC to include in its annual report to Congress an assessment of the regulatory perimeter, i.e. where risks are developed outside the most heavily regulated sectors, and whether laws need to be altered as a result.
  • To give FSOC the independence to act to implement unpopular counter-cyclical policies, give it a new, independent, presidentially appointed, Senate confirmed chair, making the Treasury secretary a member but not the chair of the committee, and give FSOC its own source of funding and staff, perhaps by folding the Treasury’s new Office of Financial Research into the FSOC.
  • Require the FSOC to consider the costs and benefits of its actions and recommendations.
  • Give the more independent FSOC tools it can use more expeditiously to address potential systemic risks, such as giving it more say over triggering countercyclical capital buffers for financial institutions, as outlined in the Basel III international capital accord.

“These changes would require legislation and that’s not going to happen any time soon in our contentious political environment,” he said. “But it can’t hurt to start a conversation that might bear fruit at some future date.”

Authors Image Source: © Keith Bedford / Reuters
Categories: Blog

Reassurance at the Heart of the Obama-Abe Summit

Brookings Institute Blog - Wed, 04/16/2014 - 15:06

Why reassurance is needed

The upcoming summit meeting between President Obama and Prime Minister Abe offers a good opportunity to inject a healthy dose of reassurance to allay two fundamental concerns that worry not only the United States and Japan but also many other countries in the region: 1) the ability of the United States to successfully execute its policy of rebalancing towards Asia, and 2) Japan’s ability to stay the course on a pragmatic foreign policy that avoids forays into historical revisionism and attaches the utmost priority to the task of economic revitalization through ambitious structural reforms. These are no small feats and there are limits to what a leaders’ summit can achieve, but the best way to get there is through actual deliverables.

The economic agenda—in particular the bilateral market access talks in the Trans-Pacific Partnership (TPP)—is the obvious candidate for both governments to aim for for a significant breakthrough.  An agreement in principle in the trade negotiations would boost confidence in the American commitment to remain a Pacific power and the Japanese resolve to tackle the sources of its economic stagnation and remain an influential actor in international affairs. There are of course other areas of promising bilateral cooperation, such as the drafting of new guidelines for defense cooperation, but these will not be ready by the time of the leaders’ meeting.

Trade, therefore, looms large in the success of the Obama-Abe summit. The key here is that the TPP agenda opens a new chapter in U.S.-Japan relations—not only because of the unprecedented ambition in the economic sphere (across the board tariff reductions, tackling of non-tariff barriers, and drafting new rules of trade and investment for the Asia-Pacific), but also because the outcome of the TPP talks has emerged as a focal point in solving the foreign policy credibility problems that both countries face. Trade can no longer be considered “low politics” when it figures so prominently in the final outcome of a bilateral summit meeting with important ramifications for core priorities in each country’s foreign policy: the American rebalance and Japan’s economic rebirth. This coming Obama-Abe meeting is a fresh and eloquent reminder of the growing importance of geo-economics in world affairs.

Trade as the politics of credibility

The Trans-Pacific Partnership is an integral pillar of the rebalance because it offers a richer strategy of U.S. engagement with the region, one that captures the deep and multi-dimensional ties in U.S.-Asia relations. The TPP guarantees that the American rebalance will not be perceived as a narrowly defined shift in military strategy. But more importantly, it is the TPP leg of the rebalance that can accomplish the most important task of all: to reassure Asian nations that the United States is not interested in fueling a Cold War in Asia by isolating its most important security competitor in the region. At the core of the American TPP policy lies an inducement—not containment—strategy towards China. The bet is that China, working of its own volition and setting its own pace, will find the TPP a useful lever to accomplish the set of ambitious economic reforms that it admits are essential to re-launch its development model. 

Critics of the rebalance toward Asia point to the lack of military resources (both because of the need to address pressing crises in other regions of the world and because of the budgetary cuts imposed through the sequester) and the weakening effect of polarized domestic politics (for example, the government shutdown that prevented President Obama from attending the APEC summit last October) as indicators of the rhetorical nature of the rebalance.  They even question American resolve to enforce its own red lines in Syria or prevent further Russian encroachments in Ukraine.  Hence, at this critical juncture the U.S. government can ill afford to let the TPP talks stall.  Securing a market access deal with Japan and passing trade promotion authority will be two essential tasks in rescuing the Asian rebalance.

Prime Minister Abe received high marks at home and abroad when he emphasized economic revitalization as the central priority of his administration and hinted at a pragmatic approach to foreign policy. However, his visit to the controversial Yasukuni Shrine last December and hints about possibly revising the Kono statement (which offered remorse for the plight of comfort women) caused concern for alliance managers on both sides of the Pacific. More recent statements from the Abe administration that the war apologies will stay in place are certainly a positive development, although the task of historical reconciliation is still a long way off. However, the Abe government should also redouble efforts in displaying its resolve to tackle the politically painful structural reforms that will determine the ultimate success of the economic revitalization strategy—popularly known as Abenomics. For “Japan to be back” success in the economic front is the first priority. But when Japan doggedly plays defense in agricultural liberalization, it undermines confidence in its ability to carry out bold reforms.

In order to grasp the importance of the TPP in the bilateral and regional agenda, we must also avoid overselling it. The TPP will do nothing to boost the credibility of America’s military deterrence in the region, will not help in healing the wounds of history, and will not be the main driver in many of the structural reforms that Japan needs to implement (for instance, in the labor market and health care). But it is certainly true that the TPP is an integral component of the American policy of rebalancing towards Asia, and Japan’s ability to exert international leadership by arresting the narrative of economic decline. A bilateral understanding on tariff liberalization would be a significant deliverable for this summit meeting and would also help reenergize the broader TPP talks. American and Japanese trade negotiators have engaged in marathon negotiations, but we are running out of time. The market access talks are important in their own right, but they hold a larger meaning in reassuring us that the United States will remain a fully engaged Pacific power and that Japan will leave economic stagnation behind.

Authors Image Source: © Yves Herman / Reuters
Categories: Blog

Latin America and the Changing Macroeconomic Landscape

Brookings Institute Blog - Wed, 04/16/2014 - 10:29

While the likelihood of major threats—such as the breakup of the eurozone—have been greatly reduced, Latin America  stills faces tough challenges on the road ahead, including the tightening global financial conditions as Fed tapering proceeds, a potential  slowdown of the Chinese economy, and the need to raise productivity and the mediocre growth potential in the region.  I sat down to discuss some of the most pressing issues facing the region today.

Ernesto discusses the potential impact of both a steep and a gradual rise in U.S. interest rates on Latin America:

Ernesto explains why a financial crisis in Latin America is unlikely:

Ernesto explains how Mexico and Central America will experience the potential slowdown of the Chinese economy differently than South America:

Ernesto argues that improving the quality of education is key to raising the productivity and growth prospects of Latin America:

Categories: Blog

The Future of the State Revisited: Reforming Public Expenditure

IMF blog - Wed, 04/16/2014 - 07:46

By: Sanjeev Gupta and Martine Guerguil

The global financial crisis brought to the fore the question of sustainability of public finances. But it merely exacerbated a situation that was bound to attract attention sooner or later—governments all over the world have been spending more and more in recent decades. Here at the IMF, we’ve been looking into the factors behind this increase in public spending, particularly social spending, and our latest Fiscal Monitor report discusses some of the options for spending reform.

Explaining the Growth of Government 

How much governments spend mainly reflects a country’s individual preferences about the desired size of the government and services it delivers. Yet, over a number of years now, government spending as a share of overall economic output has been on a clear upward trend. Some of this may be due to fundamental economic factors (Chart 1).


Chart 1.  Upward Trends in General Government Spending (percent of GDP)

The nineteenth-century German economist Adolf Wagner theorized that the demand for public goods and services increases as countries become richer (“Wagner’s Law”). William Baumol provided another explanation, namely that the cost of public provision of goods and services tends to increase faster than productivity; his example was orchestra musicians, whose salaries rise even if they arguably don’t play much better than decades earlier (“Baumol’s cost disease”). Our own analysis reported in the Fiscal Monitorprovides evidence supporting both hypotheses.

These findings imply that, in the absence of mitigating measures, pressure on governments to spend will continue, though possibly at a slower pace as income and productivity growth level off.  In fact, our estimates suggest that, in the absence of reforms, government spending in emerging market economies could increase by between 3 and 6 percentage points of GDP through 2050.

And upward pressure on public spending is likely to come from at least two other sources:  population aging, which will increase the cost of providing health care and pensions; and the normalization of monetary policy, which will increase debt payments when interest rates eventually start to rise.

Options for spending reform

The main task for governments is to ensure their finances remain sustainable now and into the future while still fostering growth and equity, and somehow do this in the face of the pressures to increase spending. To square that circle, governments will need to strike a delicate balance between tax policy and spending reform.

In advanced economies, where consolidation needs are largest and room to raise additional revenue through taxes is limited, spending cuts may be necessary as part of a wider reform strategy. In many emerging market and low-income economies, on the other hand, large shares of the population lack access to a full range of public services such as education and health care. In their case, there is scope to expand the provision of public goods and services by raising taxes. But some reprioritizing of expenditure is also likely to be needed.

Country circumstances and preferences clearly matter and the devil—as always—is in the details, but some common elements emerge from the experience that countries have had with expenditure reform:

  • Countries should avoid across-the-board spending cuts . Although they may be expedient, such cuts are neither efficient nor welfare-enhancing, and have deleterious effects on the economy’s long-term ability to grow.
  • Restoring sustainability will require containing social spending and the public wage bill, which together make up the bulk of government spending. Reining in the growth of social spending requires tackling public pensions and welfare benefits. In the case of pension reform, gradually raising the retirement age, while protecting the vulnerable and expanding access when needed, seems to be the most attractive option. In both advanced and developing countries, improving the targeting of welfare benefits can generate fiscal savings without compromising equity. Reducing the wage bill in a durable way would require replacing the wage and hiring freezes implemented in several countries since 2009 with deeper structural measures.
  • Governments can achieve cost-savings by improving efficiency. The scope for efficiency gains appears to be large in the provision of education and health care and in public investment—the latter is particularly relevant for low-income countries.
  • The trend decline in public capital stocks in advanced and emerging market economies will need to be gradually arrested. Slowing this decline (Chart 2) will require more productive public investment or increased private sector participation.
  • Supportive fiscal institutions can boost the effectiveness of expenditure reforms.  Empirical evidence suggests that effective decentralization frameworks and expenditure rules, for example, can help promote spending control.
  • Last but not least, expenditure reforms are more likely to be successful and long-lasting if supported by wide political consensus. A broad communications strategy is especially important as political uncertainty and social pressures can easily derail reforms.

Chart 2. Downward Trends in Government Capital Stock

Categories: Blog

UPDATE: Cuba's Emerging Entrepreneurs One Year Later

Brookings Institute Blog - Mon, 04/14/2014 - 21:00

In Raul Castro’s Cuba, many small and medium-sized private businesses are yielding good returns to their investors. As the author discovered during his recent return to the island, successful entrepreneurs are reinvesting profits into their expanding enterprises – pointing to the emergence of a new group of on-island capitalists capable of generating some badly needed capital accumulation for the Cuban economy.

My 2013 Brookings monograph, Soft Landing in Cuba? Emerging Entrepreneurs and Middle Classes, included case studies of some of Cuba’s new private firms. During my return visit this spring, I located as many of these firms as I could to check on their progress, one year on. Here’s what I found.

In the delightful provincial city of Cienfuegos, the leading paladares (private restaurants often in family homes) I re-visited reported having had an excellent year. After pointing out the upgrades in her Restaurante Las Mamparas, Maylin Hernandez proudly walked me up the main boulevard to her sparkling new cafeteria, The Big Bang (see photo below). While Las Mamparas, with its higher prices and international fare, caters mainly to tourists, the second investment targets a Cuban market with lighter food and soft drinks. Opening early, the Big Bang hopes to persuade Cubans to accompany their morning coffees with a heartier breakfast, U.S.-style.

Maylin in Big Bang holding Soft Landing / Richard Feinberg, Brookings Institution

Across the boulevard, Dona Nora (featured on the cover of Soft Landing) had also benefited from some décor upgrades. Evidently, cash flow had been so good that the owners were off on a lengthy European vacation. Meanwhile the paladar Tranvía had moved to a more central location offering a stunning rooftop view of the city and an open-air BBQ grilling Cuban-style meats. 

In Havana, many new paladares had opened their doors in recent months, generating a more heated competitive culinary environment. Searching for new profit centers, investors have turned to serving up late-night entertainment at bars and dance clubs, catering both to foreigners and to middle-class Cubans with disposable income. Investors in one successful venture, Sangri-La, have already launched a second night club, “Up-and-Down,” with VIP lounges requiring a $20 consumption minimum per person, a hefty sum by Cuban standards.

In its assessment of private bed and breakfasts, Soft Landing described a composite case of such establishments. Over the past year, Havana and other major cities have seen more of the official “for rent” symbols over the doors of homes and apartments, such that some owners report vacancies and downward pressures on prices. Nevertheless, since the returns remain high – just one night’s rent can equal an entire month of salary for a state employee – many Cubans continue to upgrade their homes, banking on the arrival of more tourists. In fact, international tourism has been on the upswing in recent months; eventually, it is assumed, U.S. sanctions will be further eased and American tourists will arrive in such big waves that the large hotels will not be able to accommodate them. The spillover could fill the B&Bs. 

In the retail space, I returned to Piscolabis, a shop specializing in Cuban-designed artisan crafts, strategically located in the Old Havana district. Although the owners reported that profits had somewhat lagged expectations, evidence of expansion was everywhere: I could see a second floor addition being prepared, and a new sidewalk café – a profit center – had opened. The number of employees had grown smartly in percentage terms, from three to five. 

In the construction sector, builder Jesus maintains his brisk business in Havana, primarily remodeling private homes. Soft Landing had also drawn attention to the emergence of construction cooperatives, often created by worker brigades exiting state construction companies. These new non-state entities – where wages can be many times those paid by state builders – had become so attractive to workers that the larger state construction companies are suffering a shortage of skilled labor, raising questions about the nation’s capacity to implement large projects. A major foreign hotel chain warned the author: Cuba’s ability to respond to a sudden major influx of tourists could be endangered by a labor shortage impeding the rapid construction of major new hotels. Perhaps for this reason, the newly approved foreign investment law allows for workers to be imported, where necessary to overcome construction bottlenecks.

Other businesses featured in Soft Landing are also prospering, including Nostalgic Cars, with its fleet of gleaming 1950s model Chevrolets; and dance instructor Lidusoy, who is capitalizing on her years of performing with the iconic Hotel Nacional’s Parisien Cabaret, now offering private salsa lessons to foreigners.

But one featured business was notably absent: the Prometheus 3-D movie theater had shuttered, when the government suddenly outlawed all such establishments in late 2013. 

Similarly, the government ruled that private clothing retailers could no longer sell imported apparel, probably to protect domestic producers and the large state distributors. Consequently, many private clothing boutiques were forced to close their doors (see photo below). 

Boutique with “cerrado” sign / Richard Feinberg, Brookings Institution

Another worrisome signal: the government’s new foreign investment law permits foreigners to partner with officially-sanctioned cooperatives, but notably not with privately-owned firms. In Cuba’s rapidly evolving business climate, this could change, but in the meantime the official regulations discriminate against the emerging private sector.

Overall, despite some government backsliding, and signs of a tightening macroeconomic outlook, the business climate appears somewhat improved over the last year. Many businesses are quickly recouping their initial capital outlays, are reinvesting in business upgrades, and are searching for new investment opportunities. Emerging from within Cuban socialism, this dynamic private sector could become a major pillar of future growth – if the authorities permit it to do so.

Authors Image Source: © Enrique de la Osa / Reuters
Categories: Blog

Socrates & the Pope: Overheard at the IMF’s Spring Meetings

IMF blog - Mon, 04/14/2014 - 13:41

By IMFdirect editors

Socrates’ famous method to develop his students’ intellect was to question them relentlessly in an unending search for contradictions and the truth—or at the very least, a great quote.

The method was alive and well among the moderators, panelists and audiences of the IMF’s Spring Meetings seminars that took place alongside official discussions, where boosting high-quality growth, with a focus on the medium term, was at the top of the agenda.  Our editors fanned out and found a couple of big themes kept coming up.  Here are some of the highlights.

Monetary policy 

Lots of people are talking about what happens when the flood of easy money into emerging markets thanks to low interest rates in advanced economies like the United States slows even more than it has in the past year.

At a seminar on fiscal policy the discussion focused on the challenges facing policymakers as central banks slowly exit from unconventional monetary policy and interest rates begin rising.

A live poll of the audience found 63 percent said the global economy remains weak and unconventional monetary policies should remain in place.

“One of the big risks is that we withdraw our accommodative policies prematurely,” said Charles Evans President, Federal Reserve Bank of Chicago. Evans also stressed that inflation around the world is low.

“I think that’s a sign of weakness, and I think that’s a sign of risk,” he said.

In a full day discussion of what monetary policy ‘s new normal might look like, Axel Weber, Chairman of Zurich-based UBS, said the global economy is returning to normal, and higher returns in more advanced economy markets always leads to a reversal of capital flows, which means volatility for emerging markets.

“So get used to the new normal,” said Weber.

Emerging economies  

What emerging markets are thinking and doing about this was another hot topic.

The U.S Federal Reserve should consider the impact on other countries of its plan to gradually taper its policy of quantitative easing, said the head of the Reserve Bank of India, Raghuram Rajan during a day long series of panel discussions on emerging markets.

“Sensitivity to conditions in emerging markets while exiting would be useful,” said Rajan, who added that “what the Fed does now affects what the emerging markets do going forward.”

Others thought emerging markets should equip their economies with the right tools to deal with the impact of Fed tapering, which includes deeper local financial markets that can offer more products, services and liquidity.

“There is no substitute for good, sound policies,” said Rodrigo Vergara from the Central Bank of Chile. “We have sound fiscal policy.   You might want to try to start a pension fund, but if you don’t have sound fiscal policy it won’t work.  We have deep markets, and deep institutions.”

In another live poll during a panel discussion, 56 percent of the audience said domestic factors are key to growth in emerging market economies.

Liaquat Ahamed, Pulitzer Prize-winning author of The Lords of Finance said the U.S. Federal Reserve does have a key role to play in resolving a liquidity crisis, as it did following the Lehman Brothers collapse in 2008.

“But that is different from saying the Fed should conduct its day-to-day monetary policy with a view to avoiding spillovers,” Ahamed noted.

In the monetary policy seminar, Adair Turner, former chair of the U.K.’s Financial Services Authority, said that emerging markets and other countries should use macroprudential policy to guard against the impact of capital flows.

“You can’t ask advanced economies central banks to put on a global hat,” he said.

The audience from a seminar on emerging markets earlier in the week begged to disagree. In another live poll, 70 percent said the U.S. should take into account the impact of its policies on other countries.

U.S. central bank policy is not the main worry of all emerging market economies.

“The main risk for Chile isn’t taper, it’s China,” said Vergara.  “China is Chile’s main trading partner and main consumer of their commodities.  When you see that credit has gone from 120 % to 180 % you think about a financial crisis.

If you’re looking for more to worry about in the global economy, you should take Gillian Tett’s advice.  The Financial Times columnist gave kudos to the recent Global Financial Stability Report chapter on emerging economies.

“It’s jam packed with fantastic statistics and graphs, and scary ones too,” said Tett.

 Growth & more

In a conversation with PBS anchor Charlie Rose, IMF head Christine Lagarde talked about the global outlook and how policymakers’ concerns are now shifting from crisis recovery to creating durable and sustainable growth. To get there, countries need, among other things, key structural reforms in labor markets, infrastructure and other areas.

There were also seminars on Africa, the Middle East, and IMF’s turning 70 this year that you can watch online.


Rising income inequality is now acknowledged as a critical economic, social and economic issue for everyone.  Christine Lagarde is talking about it, the IMF’s chief economist Olivier Blanchard is talking about it, and the IMF has new research on redistributive policies to curb inequality and the potential trade-off between redistribution and growth.

Speaking on why inequality should be at the top of policymakers’ agendas, Winnie Byanyima, head of Oxfam International, said that “inequality is morally wrong…it is a real threat to democracy.”

“A consensus has emerged. The IMF says more equality brings more growth. The World Bank says the same. Obama says he cares about inequality. Even God is on our side. Look at what the Pope said.”

The question is, what are we going to do about it?

Contributors: Gita Bhatt, Maureen Burke, Jacqueline Deslauriers, Glenn Gottselig, Lika Gueye, Hyun-Sung Kang


Categories: Blog

From farm to chopsticks: Improving food safety in China

A challenge for Chinese businesses is to re-capture the vast domestic market owing to the recent food scares that have seriously undermined the domestic brands.

After several high-profile food safety incidents, according to one recent survey, around 64% of Chinese consider food safety as the number one priority that affects their daily lives and requires immediate action by the government.

The Chinese government is taking these concerns very seriously and has launched important reforms in its system of food control. It promulgated a new Food Safety Law in 2009, and created a new food safety authority in 2013 to deal with these issues. These reforms are now rolling out to provincial and local levels. These reforms will eventually affect more than one million state officials, restructure more than a dozen government ministries, and revise more than 5,000 regulations. The reforms will result in a complete overhaul of the food control system and introduction of new global best practice policies for food safety.

Categories: Asia, Blog

A Welcome Boost to the US Development Agenda: Recommendations of the Global Development Council

Brookings Institute Blog - Mon, 04/14/2014 - 12:28

Today the Global Development Council presented a first set of practical and valuable recommendations to the president and the public. I can already hear the yawns, and the queries asking for a reminder as to what is this council, which was first proposed as an independent advisory council on development three-and-a-half years ago in the president’s Policy Directive on Development and whose initial members were appointed 16 months ago. But this brief report is worth reading and discussing. It recommends four areas in which the development agenda can move ahead in the next few years. The recommendations are built on administration initiatives and do much to both integrate some of these initiatives and move them a further step along. The report is not comprehensive and does not touch on many elements of development, but does focus attention on four actionable recommendations that can advance the U.S. contribution to development.

The first recommendation is to Harness the Private Sector through modernizing the tools the U.S. government utilizes for development finance. The report endorses the concept of a “one-stop” U.S. Development Finance Bank and separately endorses specific improvements in the authorities and resources of USAID, OPIC, and the international financial institutions. It recommends pragmatic steps that in the last several years have picked up support from diverse sources, including the policy community, business groups and political leaders.

Coming from the policy community, the most far reaching of the council’s recommendations is the formation of a Development Finance Bank, first proposed by Ben Leo and Todd Moss at the Center for Global Development. Recommendations targeted to enhance the capabilities of specific U.S. development finance mechanisms have been advanced by scholars at the Center for American Progress, Council on Foreign Relations, Center for Strategic and International Studies, and the Brookings Institution. From the business community, in addition to the traditional business lobby organizations, a new business coalition, American Leadership in Global Development, has recently been formed to advocate strengthening U.S. development finance tools. And there is burgeoning interest in Congress as well, such as a multi-year authorization of OPIC that is included in HR 2548, the Electrify Africa bill, introduced by Representatives Ed Royce and Eliot Engel and now with 95 House cosponsors.

The most important step the members of the council could take to advance this agenda is to commit to the president, jointly and individually, to see these recommendations through the legislative process, and to offer to serve as the facilitator among the executive branch, business, civil society, and Congress—to work on a bipartisan basis to advance this national interest.

A second set of recommendations joins Innovation, Transparency, and Evidenced-Based Policy. It is particularly encouraging to see the spotlight put on transparency and the U.S. commitment to the International Assistance Transparency Initiative (IATI). Data transparency is an essential tool of accountability, informed evidence-based policy and innovation. The Millennium Challenge Corporation (MCC) has been a positive experiment in the value of bringing transparency to government and a demonstration of how transparency can help an agency stay true to its mission by helping to fend off political and bureaucratic diversions.

The strong U.S. commitment to be fully compliant with IATI by the end of 2015—having all U.S. assistance data posted and of good quality and detail—is commendable but has run into unfortunate delays. Both the Assistance Dashboard and U.S. postings of data to IATI have been inadequate in scope and nature of the data and have yet to reach a level where the data is very useful, especially to developing-country users. There has been recent indications of a renewed commitment to making the data comprehensive and sufficiently detailed so as to be useful, so hopefully the Global Development Council turning the public spotlight on IATI, and indirectly the Foreign Assistance Dashboard, will bring the political leadership, urgency, and resources needed to empower the agency staff responsible for bringing data transparency into fruition.

The council’s report appropriately calls on USAID’s new Global Development Lab to be bolder, more ambitious and tolerate risk.  In addition, the council should call on the Lab to embrace transparency as an operational methodology. The Lab gathers into one unit at USAID disparate efforts to bring science and technology and innovation into development, and is intended to integrate and build synergies between the programs. Bringing transparency to the operations of the Lab can further help promote innovation as expanding the knowledge of the activities and programs of the Lab can spark new thinking and experimentation elsewhere that can feed into the Lab.

The transparency agenda also needs to be expanded to government budget and policymaking, as transparency can lead to a better informed public, better informed policies and reduced corruption and favoritism.

There would appear to be conflict between “innovation” and “evidence-based policy.” The first requires risk taking, the second operating from the known and proven. This tension can exist within any single project, but the fact is that in development we are always balancing multiple objectives. Some activities, where there is a history of experience and success, can operate from known certainties and evidence; others that delve into lesser known solutions must tolerate more risk. But even in the latter, rigorous monitoring and evaluation is essential in order to learn and adjust according to the evidence.   

The third recommendation is focused on Climate-Smart Food Security.  The Global Development Council has very adroitly identified a concrete way to act on the charge of the UN High-Level Panel on the Post-2015 Development Agenda to integrate the sustainability and development agendas into a common strategy. The council’s report makes the connection very simply and clearly, noting that it is the “world’s poorest, particularly women (who will) suffer disproportionately from climate change” and that we must feed “an ever-growing global population without…accelerating climate change and environmental degradation.” The recommendation calls for integrating the Obama administration’s Climate Action Plan and Feed the Future programs and for the U.S. to launch a global initiative to reclaim the 600 million acres of degraded agricultural lands.

The fourth recommendation is for the president in the next 18 months to hold a Conference on Global Development. The purpose is to better educate the American people about the role and successes of development. My first reaction was, “not another conference, it will be a one-time flash that the American people never know about.”

But my second thought was, “Wow, if this could be bottom-up, maybe it could make a difference.”  Eighteen months might be just enough time to orchestrate a real grass-roots effort, the results of which could then be disseminated through the networks that were used to feed into the conference. 

This would not require the creation of any new organization or networks; they already exist. The U.S. Global Leadership Coalition brings together leading citizens at the state-level to discuss U.S. global engagement and smart power; the World Affairs Council and Organization of International Visitors have affiliates across the country in large and medium-sized cities; Rotary International and other service clubs are in all towns and cities and have various international connections and programs; and student forums populate university and college campuses. The list goes on. With the draw of reaching the ear of the president and influencing the national dialogue, the networks could be mobilized to feed a discussion across the country that would help bring the reality and success and needs of development to the American people and particularly to community leaders and activists. This endeavor could help identify the elements of a bipartisan consensus on the role of development for U.S. national interests. It would be important not to let this dialogue die after the conference but to transmit the results back through the networks to sustain longer-term attention. A model that council member Alan Patricof referenced during the public discussion today is the 1995 White House Conference on Small Business.

The council’s report appropriately recognizes and encourages the U.S. administration’s role in the development of the post-2015 agenda. I would add that the recommended conference on development, and the process suggested here to feed into and out of that conference, could be an important means of engaging the American people on that agenda both during its formulation and afterwards.

It is important to note that there are several imperatives integrated throughout the recommendations. One is the empowerment of women. This is a moral and a practical imperative, as eliminating extreme poverty and advancing sustainable development will not be achieved if half of the world’s population is left on the sidelines; the evidence is overwhelming that investing in women brings substantial economic and social returns. A second is the critical role of transparency and accountability. The third is consistency with the direction of the post-2015 development agenda, of which the council’s report reflects a careful reading.

The report importantly concludes by repeating the critical importance of transparency and accountability, calling on Congress and the Obama administration to work together, and restating the goal of inclusive and sustainable development.

Yes, we have waited a little too long for these recommendations, but let’s recognize their value and work alongside the Global Development Council to see their implementation. The focused and practical recommendations demonstrate the value of bringing knowledgeable and diverse voices to U.S. development policy. The public session today, held before presenting the recommendations to President Obama, was an open and informative exchange and sets a good example for transparency and public dialogue in the work of the council.

Categories: Blog


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Categories: Asia, Blog

Bold Steps for China’s Cities

Also available in: العربية  Español


In 2030, more than 300 million Chinese are expected to have moved into cities. By then, 70 percent will live in urban settings. Given China’s size, it will mean that one in six urban dwellers worldwide will be Chinese. The challenges coming with that demographic shift are already visible and well known, in China and beyond.

Urbanization is a global trend. So when we think about new approaches to urbanization here in China, we believe that they are of value for other countries facing similar issues. In other words, China’s success in urbanization could pave the way for global rethinking on how cities can be built to be healthy, efficient, and successful.

Categories: Asia, Blog





Categories: Asia, Blog

Europe’s Economic Outlook

IMF blog - Fri, 04/11/2014 - 11:30

By Reza Moghadam

Economic growth across Europe is slowly picking up, which is good news. But the recovery is still modest and measures to boost economic growth and create jobs are important.

Western Europe: picking up the pace

The recovery projected last October for the euro area has solidified. This is reflected in our revised forecasts—e.g., the 2014 forecast for the euro area is up from 1 percent last October to 1.2 percent now, with important upgrades in countries like Spain. These revisions reflect the stronger data flow on the back of past policy actions, the revival of investor confidence, and the waning drag from fiscal consolidation. The positive impact on program countries is palpable—improving economies, lower spreads, and evidence of market access. We’ve also seen a welcome pick-up in growth in the UK (almost 3 percent is expected for 2014).

While stronger growth prospects and market sentiment are welcome, there is still much to do to solidify and pick up the pace of the recovery, not least because unemployment remains unacceptably high in too many places. Unfortunately, the headwinds in the euro area are many. We have previously emphasized the role of debt overhangs in firms and households, of fragmented financial markets, and of policy uncertainty. Action is being taken in all these areas, both at the country level and pan-European level, with steps to Banking Union—the single supervisor, the asset quality review and stress tests—especially important to ensuring the adequacy of bank capital and market confidence.

More recently, we have emphasized the role of “lowflation”, i.e., of a large and persistent undershoot relative to the ECB’s medium-term inflation target of 2 percent. Persistently low inflation puts pressure on debtors, real lending rates, relative price adjustment and jobs. We welcome the attention the ECB is paying to this risk, and its recent statement stresses that it is considering further action, including unconventional policies within its mandate.

I would also emphasize the role of structural reforms in reviving longer-term growth, which has taken a hit from several years of under-investment and unemployment. This is the subject of our book, just published on Jobs and Growth: Supporting the European Recovery. Beyond the near term challenges for macroeconomic policy support and deeper integration in Europe, the book focuses on three medium-term priorities: reducing high levels of public and private debt; implementing product and labor market reforms; and taking advantage of new growth opportunities through innovation and further integration into global supply chains.

Emerging Europe: strengthening policies

Growth in most of Central, Eastern and Southeastern Europe is recovering in the wake of euro area recovery, but growth in the region as a whole will be held back—we have marked it down since last October—by the expected contraction in Ukraine and slowdowns in Russia and Turkey. External funding conditions have also become more challenging. Even before tensions in Ukraine flared, we saw that capital flows into the region had started to reverse, with portfolio flows turning negative in late 2013 (this development comes on top of the on-going bank deleveraging the region has faced). In the near-term, these forces will offset—perhaps even more than offset—the tailwind from Euro Area recovery.

Although the reversal in capital flows has hurt most emerging markets, the hit to those with stronger policy frameworks and fundamentals has been less. This underlines the need to strengthen policies. Those with exchange rate and monetary policy flexibility should continue to use it as the first line of defense against volatility. All countries, especially those with weaker fundamentals, need to address legacy issues and problems exposed by the crisis: structural weaknesses that hold back growth and keep unemployment high; non-performing loans that hamstring credit; and exhausted fiscal buffers.


Finally, a word on Ukraine, where we face the very difficult confluence of a geo-political crisis and an economic one. The authorities are showing a remarkable capacity to rise to the occasion, with unprecedented action to tackle not only immediate problems but also chronic ones. This includes action to:

  •  ensure exchange rate flexibility and competitiveness;
  •  stabilize the financial system and confidence in banks;
  •  gradually reduce the fiscal deficit;
  •  adjust energy prices from far-below-world levels (with safeguards for the poor); and
  • implement wider reforms to tackle corruption, governance and the business climate.

There is still work to do to finalize some actions and ensure that the program is financed. If all goes well, we expect our Board will consider the program in late April/early May.

See webcast of the Europe press conference.

Categories: Blog

Arab Economic Transformation Amid Political Transitions

IMF blog - Fri, 04/11/2014 - 07:37

By Masood Ahmed

(version in عربي)

The International Monetary Fund released today a new paper entitled “Toward New Horizons—Arab Economic Transformation amid Political Transitions.”

The paper makes the case for the urgency of launching economic policy reforms, beyond short-term macroeconomic management, to support economic stability and stronger, job-creating economic growth in the Arab Countries in Transition—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen.

These countries face the risk of stagnation if reforms are delayed further.Economic conditions have deteriorated from transition-related disruptions, regional conflict, an unclear political outlook, eroding competitiveness, and a challenging external economic environment.

As economic realities fall behind peoples’ expectations, there is a risk of increased discontent. This could further complicate the political transitions, impairing governments’ mandates and planning horizons and, consequently, their ability to implement the policies necessary to catalyze the much-needed economic improvements.

How can these countries create jobs, lift growth, and foster fairness? Here are seven lessons from the report:

1)     There’s a need for a medium-term vision to set policies for the economic future. Countries need prudent economic management, paired with bold reforms to create an enabling environment for private sector–led growth, to safeguard the promise of the Arab transitions for better living conditions and job creation on a meaningful scale. Better economic conditions can then help reduce discontent and thereby smooth the political transitions.

2)     One size does not fit all. Individual countries should design specific reform programs based on their starting positions and reform goals. A number of reform areas, however, will be common for them, including deeper trade integration, a focus on business regulation and governance, labor market and education reform, improved access to finance, and better social safety nets. 

3)     Near-term policies need to focus on quickly creating jobs. Delays in the revival of private investment, in the context of impaired economic confidence, indicate a need for governments to shore up economic activity in the near term. Experience from other countries suggests that well designed infrastructure projects can create jobs and lay a better foundation for private sector activity.

4)     Fiscal reforms should aim to foster fairness. Expenditure-side reforms should include redirecting social protection from expensive and inefficient generalized subsidies to transfers that better target the poor and vulnerable. Some countries also have room for raising income tax progressivity and increasing excise and property tax rates, and the closing of tax exemptions and loopholes. Together, these policies would enhance equity while freeing scarce resources for priority expenditure in infrastructure investment, health, and education.

5)     Budgets need to be anchored in strong medium-term policy frameworks. In some cases, there may be room to scale up deficits in the near term, when adequate financing is available, but all countries will need to consolidate their budgets in the medium term to buttress economic stability. The slower the pace of adjustment, the larger the financing needs will be, underscoring the need to anchor policies in medium-term consolidation plans that will help secure the continued willingness of creditors to provide the necessary financing.

6)     Effective communications need to be front and center. Communications are critical as governments transform their economies. Governments must be able to explain persuasively the reasoning behind difficult decisions if people are to support them.

7)     The international community needs to step up support. Even as countries need to stay in the driver’s seat and plan their policy programs through wide national consultation, there is a need for the international community to support policy efforts. Such international support can be in the form of finance, technical assistance, or access to trade.

Building the future

This report will serve as an important input to the upcoming regional conference organized by the IMF, in collaboration with the Jordanian government and the Arab Fund for Economic and Social Development, in Amman, Jordan titled “Building the Future: Jobs, Growth, and Fairness in the Arab World,” during May 11-12.

The conference, which will be attended by Ministers and Governors from the region, as well as the IMF Managing Director Christine Lagarde, will provide an opportunity for high-level policymakers, leading private and public sector executives, development partners, civil society representatives, and academics, to enrich the dialogue on the main elements of an economic vision for the 6  Arab Countries in Transition including by drawing on regional expertise and vision, and on lessons from similar episodes of fundamental economic transformation in other parts of the world.

Categories: Blog

The Vienna Document, the Open Skies Treaty and the Ukraine Crisis

Brookings Institute Blog - Thu, 04/10/2014 - 08:59

As the Ukraine crisis has developed and fears of a broader Russian military intervention have grown, the Organization for Security and Cooperation in Europe’s (OSCE) Vienna Document on confidence- and security-building measures and the Open Skies Treaty have been used to provide some transparency regarding Russian military activities. In a recent interview, Russian Deputy Defense Minister Antonov disputed that Russia had deployed thousands of troops near the Ukrainian-Russian border. Antonov remarked that there are agreements on conventional arms control and that “these instruments can permit everybody to verify, to know about undeclared military activities…”

As the potential for conflict between Ukraine and Russia looms, participants in conventional arms control agreements, including the Vienna Document and Open Skies Treaty, are seeking to clarify the specifics of the Russian military build-up on the Ukrainian border. Deemed relics of the Cold War by many, the utility of these agreements has been underscored by the Ukraine crisis. These agreements will not be a panacea to resolve the crisis, and Russia has been uncooperative in fully adhering to their requirements, but their ability to increase transparency has nevertheless yielded some valuable benefits.

First, the Vienna Document has provided useful indicators about the Russian military build-up near Ukraine. The document was originally created in 1990 but has periodically been revised, most recently in 2011. The document is an agreement between 57 states, all party to OSCE. The documents consists of a set of confidence- and security-building measures to enhance transparency, including an annual exchange of military information, on-site inspections and notifications of certain types of military activities.

Beginning in early March, the OSCE convened an observation team of 56 unarmed military and civilian personnel from 30 party states to assist in monitoring military developments in Ukraine following Russia’s occupation of Crimea. The observation team was assembled under Chapter III of the Vienna Document, which “allows for voluntary hosting of visits to dispel concerns about unusual military activities.” Through the Vienna Document, the OSCE observation team has conducted inspections along the Ukrainian border. However, the observation was refused access into Crimea to observe military activities there.

Under different provisions within the document, OSCE members are allowed to carry out three inspections and two evaluation visits in Russia per calendar year. Earlier this year, Russia conducted large military activities in northwestern Russia, distinct from the military exercises on the Ukrainian border. Latvia and Switzerland each conducted one inspection in that time frame, leaving only one inspection available for the more recent military build-up on the Ukrainian border. For the last inspection, Ukraine assembled a team to monitor developments in the Belgorod and Kursk regions of Russia near the Ukrainian border. Additionally, both evaluation visits, intended to gather specific information about military units in garrison, were used on the Russian military exercise earlier in the year.

Because of the exhausted quotas, the Vienna Document has been limited in its ability to garner information on the ongoing military build-up on the Ukrainian border. While Russia could voluntarily allow for additional inspections or evaluations, there are currently no indications that Russia is interested in doing so.

Aside from on-site inspections, the Vienna Document requires states to notify other parties to the treaty of certain military activities. In one stipulation, the document requires 42 days prior notification of certain military activities, specifically those exceeding 9,000 troops, 250 tanks, 500 armored combat vehicles or 250 pieces of artillery. A second provision calls for the OSCE to monitor all military activities exceeding 13,000 troops, 300 tanks, 500 armored combat vehicles and 250 pieces of artillery. Finally, parties to the document will carry out no more than one military activity every three years involving more than 40,000 troops, or 900  tanks, or 2,000 armored combat vehicles or 900 pieces of artillery.

It is estimated that Russia currently has 40,000 troops deployed near Ukraine’s eastern border. Russia has not provided advance notification to OSCE members of the military buildup, despite being well over the numerical requirements under the Vienna Document.

In addition to the Vienna Document, the Open Skies Treaty has provided information about Russia’s military build-up on the Ukrainian border. Signed in 1992, the treaty allows its 34 members to conduct a predetermined number of flights to collect imagery of territory of other members of the treaty. All aircraft must be equipped with specific sensors to ensure that the data collected is not excessively detailed. For example, camera resolution is limited. While some states party to the treaty maintain their own National Technical Means (e.g., imagery satellites) that provide more accurate imagery intelligence, an important goal of the treaty is to enhance confidence amongst parties to the treaty by granting all the opportunity to collect imagery.

Two different sets of observational over flights have been conducted in response to the Ukraine crisis. The first set was permitted under Annex L of the Open Skies Treaty, which allows states on a bilateral and voluntary basis to conduct observational flights. On March 13, Sweden conducted an observational flight over Ukraine, followed by a March 14 observational flight over Ukraine conducted by the United States. On March 20, Ukraine carried out an observational flight over Russia under Annex L of the treaty. In addition to the observational flights permitted under Annex L, regular quota flights have been used to monitor the situation in Ukraine. On March 19, Romania flew over Ukraine and on March 20, the U.S. and Germany jointly conducted an observational flight over Russia. Currently, Open Skies states are continuing to conduct over flights to monitor developments in the region.

Developed during the last years of the Cold War as mechanisms to increase transparency between the NATO and the Warsaw Pact, the Vienna Document and Open Skies Treaty are finding newfound relevance during the current Ukraine crisis. While the full benefits of the agreements have not been realized, given lack of access to the Crimean peninsula and Russia’s failure to provide advanced notification of military activities, the agreements have still provided useful information. Russia has fulfilled its obligations with regard to over flights under Open Skies and has hosted the requisite number of Vienna Document events, allowing for some enhanced transparency. These agreements provide important means to gain greater understanding about military activities and could play a role in helping to de-escalate the crisis.

  • Ariana Rowberry
Image Source: © Reuters Photographer / Reuter
Categories: Blog

India’s Rajan Calls for More International Monetary Cooperation

Brookings Institute Blog - Thu, 04/10/2014 - 08:50

The governor of India’s central bank, Raghuram Rajan, called for better international coordination among the world’s central banks, saying the Federal Reserve is paying insufficient attention to the ripple effects that its exit from today’s ultra-easy monetary policy will have on emerging markets.

Speaking Thursday at the Hutchins Center on Fiscal and Monetary Policy at Brookings, Gov. Rajan urged the Fed and other major central banks to reinterpret and broaden their mandates, now largely defined in domestic terms, to take into account the effect their policies will have on others.

“This would mean,” he said in remarks prepared for delivery, “that while exiting from unconventional monetary policies, central banks would pay attention to conditions in emerging markets [in] deciding the timing of moves while keeping the overall direction of moves tied to domestic conditions.”

The Fed’s decision in September 2013, although made for domestic reasons, to delay scaling back its purchases of long-term bonds gave emerging economies time to prepare for the eventual tapering move, which came in December, and didn’t disrupt markets, he noted. In contrast, he criticized the Fed for failing to mention turmoil in emerging economies in its January 2014 policy statement, sending “the probably unintended message that those markets were on their own,” a sentiment reinforced by public comments by regional Fed bank presidents.

Gov. Rajan, on leave from the University of Chicago, said he saw merit in assigning the International Monetary Fund or a similar institution the responsibility of assessing the spillover effects of major central banks policies – much as the World Trade Organization does with trade rules – but acknowledged this isn’t politically viable. He endorsed stronger international safety nets to provide liquidity to individual countries when the Fed or other central banks trigger major shifts in global financial markets.

Responding to Gov. Rajan’s remarks were Charles Evans, president of the Federal Reserve Bank of Chicago; Vitor Constancio, vice president of the European Central Bank; Alexandre Tombini, governor of Brazil’s central bank, and Eswar Prasad of Brookings.

Authors Image Source: PAUL MORIGI
Categories: Blog

Public Finances Are on the Mend, but No Clean Bill of Health

IMF blog - Wed, 04/09/2014 - 08:38

By Sanjeev Gupta and Martine Guerguil

(Version in Español FrançaisРусский中文, and 日本語)

We’ve had a spate of good news on the economic front recently. Does this mean that we are finally out of the fiscal woods? According to our most recent Fiscal Monitor report, not yet, as public debt remains high and the recovery uneven.

First, the good news. The average deficit in advanced economies has halved since the 2009 peak. The average debt ratio is stabilizing. Growth is strengthening in the United States and making a comeback in the euro area, and should benefit from the slower pace of consolidation this year. Emerging markets and developing countries have maintained their resilience, in part thanks to the policy buffers accumulated in the pre-crisis period. Talks of tapering in the United States have left a few of them shaken, but not (quite) stirred.

But there is still some way to go. The average debt ratio in advanced economies, although edging down, sits at historic peaks, and we project it will still remain above 100 percent of GDP by 2019 (Chart 1). The recovery is still vulnerable to several downside risks, including those stemming from the lack of clear policy plans in some major economies. The recent bouts of financial turmoil have raised concerns that the anticipated tightening of global liquidity could expose emerging markets and low-income countries to shifts in investor sentiment and more demanding debt dynamics.

Countries face varied risks

In Japan, for example, the approval of the second stage of the consumption tax rate increase next year remains uncertain, and the government has not yet articulated a medium-term fiscal strategy beyond 2015. In the United States, the bipartisan budget agreement substantially reduced near-term uncertainties, but lawmakers have yet to agree on a comprehensive medium-term plan to place the debt and public finances on a sustainable basis. And in the euro area, fiscal risks stemming from the banking sector have not been completely eliminated, and the possibility of a prolonged period of subpar growth is a growing concern.

Emerging market and developing countries, too, are fiscally vulnerable—albeit to varying degrees. A gradual build up of fiscal and external imbalances, coupled with structural factors, makes many of them susceptible to the emergence of a more challenging global environment.

In particular, nonresident holdings of local currency debt have more than doubled since 2009 in emerging market economies, and account for sizeable shares of the debt of Hungary, South Africa,  and Malaysia (Chart 2). While this is a welcome development for domestic market deepening and overall financial development, it does come with some risks. Large non-resident holdings of local currency debt strengthen the linkages between global market conditions and domestic markets and increase the responsiveness of nonresident demand for government bonds to domestic conditions, such as inflation.

Elsewhere, fiscal accounts are also coming under pressure. In low-income countries, for example, fiscal balances are some three percentage points worse than before the crisis. In frontier economies such as Ghana, Honduras, and Zambia, debt has increased without any associated increase in investment. The external environment is also becoming a lot less benign. Many low-income economies expect projected declines in commodity prices and donor aid flows to have a significant impact on the budget.

Charting a course for fiscal policy

  • Advanced economies should elaborate credible and growth-friendly medium-term plans to put debt on a firm downward trajectory. In the event that downside risks to the recovery materialize, and to the extent financing allows, automatic stabilizers should be allowed to kick in. And if growth were to remain low for a prolonged period, measures to boost potential growth should be on the table.
  • Emerging markets and low-income countries should rebuild fiscal buffers in order to insure against market turbulence or adverse external shocks, particularly for those countries that are currently most exposed to shifts in investor sentiment.

Policies to reduce government debt and deficits need to take into account longer-term pressures on public finances. Economic considerations suggest that spending pressures, already on the rise in many countries, will continue to build up over the coming decades.

Indeed, as countries become richer, both the demand for public goods and services and the cost of providing them increases relative to other goods and services produced in the economy. Population aging is projected to add to these increases by driving up the costs of health care and pensions. In this respect, the shift in the composition of fiscal adjustment in advanced economies towards expenditure measures is both timely and relevant. In emerging market and developing economies, too, spending pressures will need to be addressed through expenditure reform sooner or later.

Categories: Blog

The Upcoming World Bank and IMF Spring Meetings: What Should Latin America's Policymakers Be Concerned About?

Brookings Institute Blog - Wed, 04/09/2014 - 07:27

This week, Latin American policymakers are descending on Washington, D.C. for the World Bank and IMF Spring Meetings.  As they gather together with their counterparts to discuss the global economy, it would be fair to say that emerging economies are breathing a sigh of relief. The odds of tail-risk scenarios—such as the breakup of the eurozone or the Fed removing monetary stimulus and raising interest rates too soon and too fast—appear to have been greatly reduced. Such scenarios, which the markets now estimate as unlikely to materialize, would have resulted in a highly disruptive interruption in capital inflows, sharp declines in commodity prices and severe macroeconomic adjustment.

Suffice it to say that the mere announcement of the Fed tapering in May 2013 led to a full 1 percentage point increase in U.S. Treasury bond yields, a rise in EMBI yields in excess of 2 percentage points, and severe declines in asset prices and currencies. Moreover, countries that were the main beneficiaries of nearly a decade of very large capital inflows—leading to above average historical growth, a steep rise in asset prices, large currency appreciation and current account deficits—were hit the hardest.

The reduced probability of extreme events that could traumatize international financial markets comes at a time when markets expect the recovery of advanced economies to gain momentum in 2014.

Moreover, most countries in the region are in a stronger financial position to withstand financial turbulence due to higher levels of international liquidity relative to short-term liabilities and lower balance sheet vulnerability to currency depreciation than in the late 1990s. The combination of an improved financial position and a relatively benign external environment has shifted the market’s sight from financial risks to productivity issues.  With Latin America´s expected growth of a lackluster 3 percent in 2014, productivity-enhancing reforms become a priority. In fact, low growth rates are the main reason behind the more negative perception that rating agencies have taken towards most of the region.

This shift in focus towards pro-growth reforms is welcome after a decade of complacency in which many countries in the region displayed above average performance riding on favorable —and now waning— external tailwinds. However, the shift in focus away from macro-risks is premature to say the least.

Back to Fundamentals?

With financial risks apparently in retreat, policymakers need to turn their sights to a different kind of macro-risk: gradually deteriorating fundamentals.

Even if expected —and even worse if unexpected— a relatively small rise in long-term U.S. interest rates can have a disproportionately large macroeconomic impact, resulting in a potentially significant slowdown in investment and durable consumption.

First, it is precisely the expectation of future increases in interest rates that keeps the demand for investment and consumption of durable goods high, as consumers and firms bring forward spending in these items to lock-in low rates. As rates increase and domestic demand contracts, slower growth, currency depreciation, declining revenues (which in Latin America are very sensitive to domestic spending), and higher fiscal deficits are the inevitable outcomes.

This is especially true for those economies where domestic demand growth fueled by large capital inflows has so far remained strong in spite of growth deceleration since mid-2011. These are precisely the economies that display current account deficits and where the dollar value of assets and unit labor costs is still very high. In fact, it is these economies that were hit the hardest in the aftermath of last year’s surprise Fed tapering announcement.

Second, the levels of total indebtedness in the region (public and private, external and domestic) are currently as high as they were in the late 1990s (close to 100 percent of GDP) as a result of very high domestic financial institutions’ credit growth and abundant foreign financing. As U.S. interest rates rise, financial deleveraging will be an extra drag on the economy, depressing further consumption and investment, growth and fiscal revenues.  

Higher borrowing costs, lower growth and weaker revenues in light of relatively inflexible expenditures (a recent Inter-American Development Bank report documents that, on average, more than two-thirds of the increase in spending since the Great Recession stems from items that could be labeled inflexible), will lead to higher fiscal deficits and potentially unsustainable public debt dynamics.

After close to a decade of high growth, booming revenues and public spending, and high expectations about the active role of the state, a dissatisfied electorate will be putting pressure on governments to avoid necessary adjustments in public spending, making governments prone to accommodate popular demands at the expense of sound and sustainable policies.

First, in order to avoid cuts in politically sensitive programs, governments may choose to adjust public finances by introducing distortionary taxation and/or sub-optimally reducing investment, thus hampering future growth. Alternatively, countries with access to credit markets may allow public debt to rise, delaying politically costly reductions in public spending.

In countries such as Argentina with no access to international capital markets, these tensions are already obvious. The deterioration in its fiscal position since 2011, financed by money creation and thus higher inflation and the loss of international reserves, has raised the specter of a currency crisis.


While remaining vigilant about apparently fading financial risks, policymakers should turn their attention not only to productivity-enhancing pro-growth reforms but also to another kind of macro-risk: gradually deteriorating fundamentals. In contrast to financial risks that disrupt access to international liquidity, deteriorating fundamentals are a more subtle, less dramatic and more elusive strain of macro-risk, since they do not usually require immediate attention if access to credit is available.

Ironically, after experiencing a succession of 21st century liquidity crises in the region since the tequila crisis in 1994 and having made substantial progress in reducing financial vulnerabilities, there is a chance that some of the long-forgotten fundamental problems that haunted the region just a few decades ago might gradually come to the forefront. For most countries in the region, this is not a clear and present danger, but policymakers should take due notice.

Categories: Blog

Global Financial Stability: Beginning To Turn The Corner

IMF blog - Wed, 04/09/2014 - 06:32

By José Viñals

(Version in  EspañolFrançaisРусский中文 and 日本語)


Global financial stability is improving—we have begun to turn the corner.

But it is too early to declare victory as there is a need to move beyond liquidity dependence—the central theme of our report—to overcome the remaining challenges to global stability.


We have made substantial strides over the past few years, and this is now paying dividends.  As Olivier Blanchard discussed at yesterday’s press conference of the World Economic Outlook, the U.S. economy is gaining strength, setting the stage for the normalization of monetary policy.

In Europe, better policies have led to substantial improvements in market confidence in both sovereigns and banks.

In Japan, Abenomics has made a good start as deflationary pressures are abating and confidence for the future is rising. And emerging market economies, having gone through several recent bouts of turmoil, are adjusting policies in the right direction.


But financial stability also faces new challenges even as the legacy of the crisis recedes. Let me outline the key challenges.

Can the United States make a smooth exit from unconventional policies? I call this the “Goldilocks exit” – not too hot, not too cold, just right. This is our baseline, and most likely outcome. After a turbulent start, the normalization of monetary policy has begun. Improved communications is smoothing market adjustment, while “green shoots” of economic recovery are increasingly visible —easy money is leading to credit and the latter is spurring growth.

The Fed is now taking its foot off the accelerator gradually through a smooth tapering path. Our baseline is for the Fed to begin lightly touching the brakes with policy rates starting to rise by mid-2015, all the while keeping the car driving smoothly down the road to growth and recovery.

But a bumpy exit—though not our baseline—is possible. This adverse scenario could be produced by growing concerns in the United States about financial stability risks, or higher-than-expected inflation. The result would likely be a faster rise in policy rates and term premiums, widening credit spreads, and a rise in financial volatility that could spill over to global markets.

Though not a new story, we continue to track growing hotspots in the U.S. financial system. Many of these are in the shadow banking system, such as strong issuance of high-yield bonds and leveraged loans, weakened underwriting standards, and underpricing of risk. For instance, high-yield issuance over the past three years is now more than double the amount recorded before the last downturn while high yield bond spreads have fallen close to pre-crisis levels. Supervisory measures, while now more intense, have not yet sufficiently restrained some of these excesses. So a sudden rise in yields could lead to a substantial widening of credit spreads and add to concerns about leverage and future defaults.

Emerging markets are especially vulnerable to a tightening in the external financial environment, after a prolonged period of capital inflows, easy access to international markets, and low interest rates.

This has induced substantial amounts of borrowing, particularly by emerging market companies. But rising interest rates, weakening earnings, and depreciating exchange rates could put substantial pressure on emerging market corporate balance sheets under our adverse scenario. Indeed, in this scenario, emerging market corporates owing almost 35 percent of outstanding debt could find it hard to service their obligations. While the situation varies widely across countries, those economies under recent pressure owing to macroeconomic imbalances also share some vulnerabilities in their corporate sectors.

In China, achieving an orderly deleveraging of the shadow banking system is a key challenge. Nonbank financial institutions have become an important source of financing in China, doubling since 2010 to 30 to 40 percent of GDP.

This non-bank lending, though a sign of the system becoming more diversified, is also prone to risks as savers may not realize the higher risks that lie behind the more attractive rates of return offered by nonbank savings products due to the perception of implicit guarantees.

The challenge for policymakers is to manage the transition to a financial sector in which market discipline plays a larger role and prices more accurately reflect risks—including through the removal of implicit guarantees—without triggering systemic stress.

In the euro area, the incomplete repair of bank and corporate balance-sheets continues to place a drag on the recovery. Fragmentation between periphery and core countries persists, as accommodative monetary conditions have not translated into the flow of credit needed to support a stronger recovery, particularly for smaller companies. Thus, further efforts must be made to strengthen bank balance sheets, through the European comprehensive bank assessment and follow-up, and to tackle the corporate debt overhang.

While so far spillovers surrounding developments in Ukraine have been limited, geopolitical risks remain elevated and could pose a shock to global markets.

Finally, failure to adequately address any of the challenges that I mentioned could have a significant impact on global stability. The sizeable inflows into emerging markets over the past number of years could reverse. Assets price moves may be amplified by the lower market liquidity conditions, with more investors running for the exit than the exit door can accommodate. This rush for the exit could extend to some segments of developed markets straining market liquidity and amplifying market volatility.

Policy recommendations

The key message is that strong policy actions are needed to definitely turn the corner from the Great Financial Crisis and engineer a successful shift from “liquidity-driven” to “growth-driven” markets.

First, is to get the normalization of US monetary policy right—its timing, execution, and communication. Effective macro-prudential policy is key to allow for smooth exit by containing financial stability risks, particularly in the shadow banking system.

Second, emerging markets need to continue to prepare for tightening in global financial conditions by enhancing resilience through strong macro and prudential policies, building policy buffers, and managing corporate financial risks. They should also stand ready to ensure orderly market conditions through adequate provisioning of liquidity in the event of turbulence.

Third, while Japan needs to complete Abenomics, the euro area needs to finish cleaning both bank and corporate balance sheets, start the banking union right, and develop non-bank sources of credit to smaller companies. This is paramount for confidence and recovery.

But, beyond national actions, we need greater global policy cooperation as we are all in this together. This extends to monetary policy, financial regulation and supervision, and ensuring orderly market conditions.

Categories: Blog

As Demand Improves, Time to Focus More on Supply

IMF blog - Tue, 04/08/2014 - 11:00

By Olivier Blanchard

(Version in  FrançaisEspañol, Русский, عربي中文  and 日本語)

The dynamics that were emerging at the time of the October 2013 World Economic Outlook are becoming more visible. Put simply, the recovery is strengthening.

In our recent World Economic Outlook, we forecast world growth to be 3.6 percent this year and 3.9 percent next year, up from 3.0 percent last year.

In advanced economies, we forecast growth to reach 2.2 percent in 2014, up from 1.3 percent in 2013.

The recovery which was starting to take hold in October is becoming not only stronger, but also broader.  The various brakes that hampered growth are being slowly loosened.   Fiscal consolidation is slowing, and investors are less worried about debt sustainability. Banks are gradually becoming stronger. Although we are far short of a full recovery, the normalization of monetary policy—both conventional and unconventional—is now on the agenda.

Brakes are loosened at different paces however, and the recovery remains uneven.

It is strongest in the United States, where growth is forecast to be 2.8 percent in 2014.

It is also strong in the United Kingdom and Germany, where some imbalances persist, but where we forecast growth to be 2.9 percent and 1.7 percent respectively.

In Japan, where we forecast 1.4 percent growth in 2014, fiscal stimulus has played a large role, and the strength of the recovery depends on private demand taking the relay.

And, going back to the Euro area, the good news is that, for the first time in two years, Southern periphery countries are forecast to have positive, if admittedly still low, growth.  But, while their exports are generally strong, internal demand is still weak, and it has to become stronger for the recovery to be sustained.

Emerging and developing economies continue to have strong growth, lower than before the crisis, but high nevertheless.  We forecast their growth to reach 4.9 percent this year, slightly up from 4.7 percent last year.   In particular, we forecast growth of 7.5 percent for China, and 5.4 percent for India.   Of particular note is the performance of sub Saharan Africa, where we forecast growth of 5.4 percent.

These emerging and developing economies have to operate however in a changing world environment.  Stronger growth in advanced economies implies increased demand for their exports. The normalization of monetary policy in the United States, however, implies tighter financial conditions and a tougher financial environment. Foreign investors are less forgiving, macroeconomic weaknesses are more costly.   And financial bumps, such as those we saw last summer and earlier this year, may well happen again.

Acute risks have decreased, but risks have not disappeared.

Japan will need all three arrows if it is to both sustain growth and maintain fiscal sustainability.  Adjustment and recovery in southern Euro countries cannot be taken for granted, especially if Euro area wide inflation remains very low or even, worse, turns to deflation, making the task of reestablishing competitiveness in the South even harder.  As discussed in the Global Financial Stability Report, financial reform is incomplete, and the financial system remains at risk. Geopolitical risks have arisen, although they have not yet had global macroeconomic repercussions.

Looking ahead, the focus must increasingly turn to the supply side, and I want to make three points:

First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment.

Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome.

Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come.

Categories: Blog

3 Things We Can Learn about the Earned Income Tax Credit from a Map

Brookings Institute Blog - Mon, 04/07/2014 - 11:00

Our interactive map of the Earned Income Tax Credit (EITC) in your county looks at the average EITC amount, in dollars, and the share of taxpayers that claim the EITC at the county level nationwide.* Here are three main takeaways from the map:

1. The map of EITC benefits by county looks like a lot like a map of single motherhood

The map of the EITC benefits mirrors the map of single motherhood in the United States. The similarity can be explained by the design of the EITC, which makes it especially valuable for single parents. Childless households can only receive a small maximum benefit and married couples with children can face a significant marriage penalty.

2. Reliance on the EITC is widespread

In nine out of ten counties, at least 10 percent of taxpayers file the EITC. Even those counties with relatively high average incomes see a notable portion of their tax units benefitting from the EITC.

3. The benefits of the EITC are especially pronounced in the Southeast

A striking feature of the map of EITC benefits is the share of counties with high EITC take-up in Alabama, Mississippi, Georgia, and South Carolina. In these states, at least four out of ten counties have tax filer EITC take-up rates of at least 30 percent. EITC take-up rates outside the Southeast tend to be much lower.

See the full set of the tax maps here »

*Data are from 2007.

Categories: Blog
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