Top Five Policy Priorities to Brighten America’s Economic Future

Deniz IganBy Deniz Igan

(version in Español)

There was a time in the not-so-distant past when science fiction could make us look forward to a better world. We had uplifting visions of the future in shows like Star Trek and Back to the Future. Today, the menu of options only offers a dystopian world ruined by poverty and violence (think The Hunger Games, Divergent, or Elysium).

It sure is easy to get pessimistic these days. Six years after the financial crisis, the recovery in the United States has been fragile and weaker than anything we have seen in the post-WWII period. Growth figures, in large part, have been serial disappointments, disrupted by government shutdowns, debt ceiling showdowns, or meteorologically-triggered slowdowns.

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The Long-term Price of Financial Reform

In response to the global crisis, policymakers around the world are instituting the broadest reform of financial regulation since the Great Depression. Some in the financial industry claim the long run economic costs of these global reforms outweigh the benefits. But our new research strongly suggests the opposite—the reforms are well worth the money.

Trade Winds—Has the Spectre of Protectionism Blown Away?

The global crisis has pushed trade reforms off—or at least to the edge of—the political radar screen. But shying away from improving the trade system may actually jeopardize growth and jobs, and in these tough economic times that seems a little like cutting off your nose to spite your face. The Fund may not be the main player on the trade ‘block’, but we certainly take an interest given its macroeconomic importance. And, in the spirit of moving forward the discussion, and indeed the policies in support of, trade integration, the Fund has three main lines of work in the pipeline.

Latin America: What’s Ahead in 2012?

A few days after the first sunrise of 2012 kissed the shores of Latin America, it is natural to ask: What does the New Year hold for the region’s economies, especially with Europe still under stress? For sure, a dimmer economic environment, here and abroad. Growth has softened in the larger countries of the region. Looking North, the United States is growing a bit more, but elsewhere activity is softening, including in China—an increasingly important customer for the region’s commodities. Perhaps more importantly, global financial markets are still strained, because many questions about advanced economies remain unanswered. What should countries do in the face of this risky outlook? A lot depends on their current macroeconomic situation.

Lurking in the Shadows—The Risks from Nonbank Intermediation in China

One of my all-time favorite movies is “The Third Man” starring Orson Welles and Joseph Cotten. Perhaps the most striking part of the movie is the shadowy cinematography, set in post-World War II Vienna. Strangely, it springs to mind lately when I have been thinking of China. Many China-watchers looked on in 2009 as the government’s response to the global financial crisis unfolded, causing bank lending to expand by close to 20 percentage points in less than a year. At the same time, a less visible phenomenon was also getting underway. One that, like Orson Welles’ character in the movie, resided firmly in the shadows. Various types of nonbank financial intermediaries were gearing up to provide more credit. Talking to people in China, and looking at what numbers are available, one cannot help but have an uneasy feeling that more credit is now finding its way into the economy outside of the banking system than is actually flowing through the banks. This worries me for four broad reasons.

By | November 3rd, 2011|Asia, Financial regulation, International Monetary Fund|24 Comments

Africa’s New Janus-Like Trade Posture

It wasn’t all that long ago when virtually all of sub-Saharan Africa’s exports were destined for Europe and North America. But the winds of Africa’s trade have shifted over the past decade. There has been a massive reorientation towards other developing countries, in particular China and India. Like Janus, the Roman god, Africa’s trade is now, as it were, facing both east and west. Our latest Regional Economic Outlook for sub-Saharan Africa looks closely at these developments and its policy implications. In addition to the well-known gains from international trade, Africa’s trade reorientation is also beneficial because it has broadened the region’s export base and linked Africa more strongly to rapidly growing parts of the global economy. These changes will help reduce the volatility of exports and improve prospects for robust economic growth in Africa.

Capital Flows to Asia Revisited: Monetary Policy Options

Capital flows emerging Asia should be high on the ‘watch list’ for policymakers in the region. But, perhaps, not in the way we had previously anticipated. Twelve months ago we were keenly attuned to the risks posed by the foreign capital that flooded into Asia from mid-2009 onwards. Now, what we’re seeing is not really all that “exceptional.” With the recent surge, net overall capital flows to emerging have not surpassed the peaks reached in past episodes of large inflows to the region. Of course, that’s not to say it's all blue skies. The nature of inflows is different this time—dominated by portfolio flows—and that poses new challenges and risks for policymakers.

Capital Flows to the Final Frontier

Sub-Saharan Africa’s “frontier markets”—the likes of Ghana, Kenya, Mauritius, and Zambia—were seemingly the destination of choice for an increasing amount of capital flows before the global financial crisis. Improving economic prospects in these countries was a big factor, but frankly, so too was a global economy awash with liquidity. Then the crisis hit. And capital—particularly in the form of portfolio flows—was quick to flee these countries as was the case for so many other economies. Fast forward to 2011. Capital flows are coming back to the frontier, but in dribs and drabs. In our recent Regional Economic Outlook we examined the experience of sub-Saharan Africa’s frontier markets, with a view to understanding how they can best make use of these inflow to meet their own development and growth objectives.

By | May 24th, 2011|Africa, Economic outlook, IMF, International Monetary Fund|1 Comment

To Owe or Be Owned—Depends on How You Tax It

Corporate tax codes in the United States, most of Europe, Asia and elsewhere in the world, create a significant bias toward debt finance over equity. The crux of the issue is that interest paid on borrowing can be deducted from the corporate tax bill, while returns paid on equity—dividends and capital gains—cannot. This debt distortion is not new. What is new, however, is that we have come to realize that excessive debt (or leverage) is much more costly than we had. The global financial crisis was a stark lesson about the risks of excessive leverage ratios in financial institutions. Designing a better system will ultimately pay off. And now is the time for change. A recent IMF Staff Discussion Note offers two alternatives that reduce or eliminate the more favorable tax treatment of debt.

Seven Pillars of Prosperity—Diversifying Economic Growth in the Caucasus and Central Asia

Medium-term economic growth prospects in the Caucasus and Central Asia region are strong. But, to secure ongoing prosperity, the eight countries of the region—Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—will need to look beyond traditional sources of growth. The challenge for policymakers will be to foster new and more diverse growth drivers, outside mining, oil, and gas. There are seven policy pillars that can help them do that, including strengthening economic and financial ties within the region.

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