The issue of rising income inequality is now at the forefront of public debate. There is growing concern as to the economic and social consequences of the steady, and often sharp, increase in the share of income captured by higher income groups. While much of the discussion focuses on the factors driving the rise in inequality—including globalization, labor market reforms, and technological changes that favor higher-skilled workers—a more pressing issue is what can be done about it.
One area where the IMF can help to promote sustainable development is by “getting the prices right.” Getting appropriate pricing means, for example, making sure that companies and individuals pay the true cost of polluting our planet. The best way to come up with the true costs is through fiscal instruments, such as environmental taxes or emissions trading systems where governments sell pollution rights, to reflect environmental damages in the prices we pay for energy, food, driving our cars, and so on. Getting the prices right should form the centerpiece of policies to promote green, or environmentally sustainable, development.
Simulations show that despite increasing financial integration, output costs associated with global financial shocks in Latin America have declined in the past 15 years. Of course, the progress made so far does not make the region immune, but has helped it to ride more safely through the recent global financial waves. As we’ve pointed out previously, the region should take precautions in case of a bigger global downturn. But so far it can take credit for its hard work on the policy front.
There is little doubt the era of generous funding from Western Europe's banks to their subsidiaries in the East is over, but this doens't have to translate into a reduction of bank credit in the emerging economies of Europe. The IMF's latest analysis shows an increase in local deposits in most countries of the region has offset the withdrawal of funding from Western Europe.
Going forward, while the space for a macroeconomic policy response is smaller than it was entering the global financial crisis, Asia’s policymakers still have ample room to react appropriately to a sharp deleveraging of foreign banks arising from a euro area shock. In addition, capital adequacy ratios, which exceed regulatory norms in most economies, and low nonperforming loan ratios, combined with room to offer liquidity support, suggest that relatively healthy local banking systems should also provide a buffer, as they did in the wake of the global financial crisis.
The Baltic country of Latvia has gone through the most extreme boom-bust cycle in emerging Europe, and was among the first countries to ask for financial assistance from the international community. Today, it is one of the fastest growing economies in the European Union. Real GDP grew by 5½ percent in 2011, and is now projected to expand by 3½ percent in 2012, a number that possibly will come out even higher. Latvia has also successfully returned to international capital markets.