Friday, March 25, 2016

Combating the Rise of Inequality

Benedict Clements, co-editor of an IMF book on Inequality, discusses “one of the defining issues of our time”

Inequality is at the forefront of the economic policy debate today in much of the world
How is the IMF contributing to the debate about rising income inequality?  

On many fronts. First, we are doing new research on the causes of inequality and its macroeconomic implications. Second, we are doing studies on how economic policies and reforms can help countries achieve their equity goals. Our book on Inequality andFiscal Policy is an example of this kind of research.  Third, we are deepening our work on individual countries in the context of our annual consultations with them. 

What’s the importance of this work?

In many countries, achieving more “inclusive” growth—the kind that creates a high number of jobs and does not increase inequality—is a priority.  In this context, policymakers are eager to know the effects of economic policies on inequality and the effects of these policies on economic growth.  As an advisor to countries on macroeconomic and fiscal policies, the IMF has an important role.  In our book, we look at the evidence and provide guidance for policymakers and Fund staff on these issues.  The good news is that there are many reforms that both reduce inequality and boost growth.  Greater use of property taxes to raise revenues and the reform of energy subsidies are two such examples.     

How much has French economist Thomas Piketty’s book fueled this debate?

Piketty’s work has helped draw attention to the issue.  This is just one of many excellent studies that have documented the rise in inequality.  Of equal importance is the work that examines what countries can do to address it.

In your own case, what attracted you to economics and in particular to fiscal issues?

During my college years, I took a trip to Latin America with the Maryknoll Fathers, who work with the poor.  That trip helped show me that economics really matters when it comes to poverty and inequality. I’ve been interested ever since.

Benedict Clements is a division chief in the Fiscal Affairs Department of the IMF. He has worked in the IMF since 1991 and has published extensively on public finance and macroeconomic issues.

Monday, October 19, 2015

Understanding Global Recessions and Recoveries

The world is still recovering from the most recent global recession—dubbed the Great Recession because of its scale and global reach— and the likelihood of another downturn has never left the news as the world economy remains under the long shadow of a persistently weak recovery. The bankruptcy of Lehman Brothers, one of the largest U.S. investment banks, in 2008, pushed the world economy and financial system to the brink of collapse and the resulting recession had dire and extreme consequences.
 What began in the subprime mortgage market in the United States spiraled into a series of interlinked global events that scythed through the international financial and corporate sectors, slashed stock values and household wealth, made millions unemployed and triggered a huge rise in the debt of nations. Growing financial worries triggered a well-documented decline in the birth rate during and immediately after the 2008-9 recession in the United States, where vasectomy and suicide rates rose.

The 2009 recession ricocheted through Europe, left continued scars on the Japanese economy, and has also caused subsequent downturns in emerging market economies. The developing world has paid too with the subsequent sharp decline in commodity prices. A significant side effect has been the continued increase in inequality, particularly in advanced economies, where the wealthiest have advanced and middle classes stagnated.

But, despite the huge scale of the crisis, what’s clear is that we don’t really fully understand what triggers a global recession and how we can successfully stimulate a lasting recovery.

This book tracks the global business cycle through the destruction of a global recession to the uptick of recovery, drawing on four major episodes in the past half century, in 1975, 1982, 1991, and 2009. It defines key terms, document the main features of a recession and recovery, and describe the events that take place around these episodes.

Authors Ayhan Kose, now a leading economist at the World Bank, and Marco Terrones, a prominent researcher at the IMF, put the latest global recession and ongoing recovery in perspective and make a valuable contribution to the expanding literature on business cycles.

A companion website and DVD provide several unique tools to help readers understand the basics: interactive timelines of the four episodes, videos of author interviews explaining the context, several reports looking at the regional impact of the collapse, as well as coverage of the Lehman Brothers bankruptcy, and a commentary by Larry Summers.

As Nicholas Bloom, Professor of Economics at Stanford University, remarks: “Finally, a clear and insightful guide to global recessions and recoveries. And just in time, with the world trying to recover from its worst economic beating since the Great Depression. This book, written by two leading economists operating in the heart of Washington, will become the bible on global growth and collapse.”

See Trailer:

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"This is a landmark book that will have a profound influence on how scholars and policy economists think about booms and busts for many years to come. Pioneers in the field of analyzing and defining global recessions, Kose and Terrones argue that it no longer makes any sense to analyze national downturns as if they always occur in isolation. Particularly interesting and original is their emphasis on the asynchronous nature of recoveries. After 2009, for example, advanced economies experienced their slowest post-war recovery, yet for several years emerging markets experienced their fastest. Kose and Terrones analysis underscores why one needs to think differently about recessions and recoveries in today s globalized world" Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics, Harvard University.

"This is super cool stuff!   Ugo Panizza, Pictet Chair in Finance and Development, The Graduate Institute, Geneva


Friday, July 10, 2015

Tackling Climate Change Through Prices

This is an important year for galvanizing action on climate change. “Getting prices right” is convenient shorthand for the idea of using fiscal instruments to ensure that the prices that firms and consumers pay for fuel reflect the full costs to society of their use, which requires adjusting market prices by an appropriate set of “corrective” taxes.

In practice, many countries, far from charging for environmental damage, actually subsidize the use of fossil fuels. For many others, energy taxes—if currently implemented at all—are often not well targeted at sources of environmental harm, nor set at levels that appropriately reflect environmental damage. Clearly there is much scope for policy reform in this area, but there are also huge challenges, both practical and analytical.

From a practical perspective, higher energy prices burden households and firms and, even with well-intentioned compensation schemes, can be fiercely resisted. These challenges—not to understate them—are largely beyond the scope of this book; however, a complementary volume (Clements and others, 2013) distills lessons to be drawn from case studies of energy price reforms. Moreover, getting energy prices right need not increase the overall tax burden; higher fuel taxes could partially replace broader taxes on income or consumption (or environmentally blunt taxes on energy), broadening support for the policy. Where new revenue sources might be needed, corrective energy taxes are an especially attractive option because, unlike most other options, they improve economic efficiency by addressing a market failure.

The main focus here is on assessing the analytical challenges, that is, the pricing that needs to be put into practice. For the vast majority of countries, there has been no attempt to measure the magnitude of environmental damage across fossil fuel products—yet these measures are critical for actionable guidance to be given on how countries can get energy prices right.

The corrective energy tax estimates presented in this book should be treated with a good deal of caution, given data gaps, and controversies—for example, about the valuation of climate damage and the link between air quality and mortality risk. Nonetheless, the estimates provide a valuable starting point for dialogue about policy reform, scrutiny of the key uncertainties, and cross-country comparisons estimated on a consistent basis.

Moreover, the impact of alternative assumptions on corrective tax estimates can be derived from accompanying spreadsheets. Although tax assessments may change significantly as evidence evolves and data improve, the basic findings—most notably, the strong case for substantially higher taxes on coal and motor fuels in many countries—are likely to remain robust.

Main Findings

The main policy messages include the following:
  • Coal use is pervasively undercharged, not only for carbon emissions, but also for the health costs of local air pollution. 
  • Air pollution damage from natural gas is modest relative to that from coal, but significant tax increases are still needed to reflect carbon emissions. 
  • Higher taxes on motor fuels are warranted in many countries, though more to reflect the costs of traffic congestion and accidents than carbon emissions and local air pollution. 
  • Corrective taxes can yield substantial reductions in pollution-related deaths and in CO2emissions, and large revenue gains:
    • Fuel tax reform can reduce worldwide deaths from outdoor, fossil fuel, air pollution by 63 percent
    • Tax reforms could reduce CO2emissions by 23 percent globally
    • Potential revenue from implementing corrective taxes averages 2.6 percent of GDP globally
    • In short, the case for substantially higher energy taxes does not rest on climate change alone. Decisive action need not wait on global coordination.

CDG event with IMF Managing Director Christine Lagarde

Comments from Nancy Birsall

Review on Energy Matters

Friday, May 22, 2015

Overcoming the Legacy of Japan's Lost Decades

With much at stake and multiple goals, Japan clearly needs a comprehensive and coordinated set of reforms. This recognition lies at the heart of Abenomics --the set of economic policies advocated by Shinzō Abe to revive Japan-- and the chapters in this book offer detailed recommendations in the areas of monetary policy, fiscal adjustment, and structural and financial sector reforms to make Abenomics a success for Japan and the rest of the world.

The various recommendations in this book are presented as a package and, ideally, one would like to see progress on all three arrows of Abenomics equally and simultaneously, not least because they create mutual synergies. However, there is a clear recognition that the amount of emphasis on each policy area needs to be state-dependent. This was evident, for example, around the time of the consumption tax increase to 8 percent in April 2014. Faced with weak demand and a possible reversal of actual and expected inflation, the Bank of Japan significantly further scaled up its asset-purchase program in October 2014. The authorities also decided to delay the second consumption tax increase to 10 percent and adopt further fiscal stimulus while placing greater emphasis on formulating a medium-term consolidation plan to maintain fiscal credibility. The key take away from this experience is that most, if not all, of the agenda for Abenomics laid out in this book will likely have to be implemented for Japan’s efforts to be successful, but the reader should remain mindful that priorities need to be recalibrated at times depending on how economic conditions unfold.

Four interrelated issues lie at the heart of Japan’s economic challenge: ending deflation, raising growth, securing fiscal sustainability, and maintaining financial stability. These objectives need to be achieved against the background of Japan’s rapidly aging society, entrenched deflationary expectations, and a global economy that remains mired in subdued growth.

Most readers will be familiar with the following striking statistic: in 2013, Japan’s level of nominal GDP was about 6 percent lower than it was in the mid-1990s. There can be little doubt that this in part is caused by persistent deflation. Nonetheless, it remains a challenge to quantify exactly how much of the slow growth was due to deflation rather than the typical post-bubble blues, population aging, and the waning effects of technological convergence. As a result, it is also difficult to measure how much living standards will improve from a successful reflationary effort and whether these potential gains are lower now than they would have been in the 1990s. Compared to other advanced countries, Japan has fared relatively well in terms of productivity growth, suggesting that the biggest bang for the buck will likely come from greater capital accumulation (domestic investment rather than outsourcing) and providing additional, high-quality, employment opportunities (rather than increasing part-time work with lower wages and less investment in human capital). The Bank of Japan’s quantitative and qualitative easing measures should lead to greater portfolio rebalancing and financial risk taking, raise inflation expectations, and support aggregate demand, which, together with complementary fiscal and structural measures, should help greatly to revive Japan’s economy and decisively end deflation.

Another striking statistic—unprecedented among advanced economies—is the debt-to-GDP ratio, which now tops 240 percent and has risen by 50 percentage points in the last five years. Restoring fiscal sustainability by putting the debt ratio on a firm downward path is a priority for Japan’s future. Although bond yields in Japan have remained very low despite ever increasing government debt, this is partly due to special factors, including a marked home bias of Japanese investors. None of these special factors can be taken for granted in the future especially with the prospect of higher yields as the Bank of Japan exits from its quantitative easing policies after achieving its two percent inflation target. Indeed, managing the normalization of interest rates along all asset classes and maturities in a way that maintains economic and financial stability will depend, in no small part, on the credibility of the government’s fiscal adjustment strategy.

Ambitious structural reforms are pivotal for lasting success of Abenomics. Ending deflation and eliminating the government debt overhang will be good for potential growth, but these efforts themselves depend a great deal on the economy’s expected growth rate in the future. Specifically, ambitious labor market reforms would strengthen the monetary policy transmission channel and accelerate the attainment of the Bank of Japan’s inflation target by enhancing the pass through of rising inflation expectations into higher wages. Ambitious structural reforms will support demand in the near term as expectations of permanent income rise. As we have seen recently in Europe, fiscal consolidation without faster growth is unlikely to succeed. A more dynamic Japan is also key from a multilateral perspective, by preventing excessive reliance on monetary and fiscal easing and an undue weakening of the exchange rate.

As David Lipton says in his Foreword: "This is not just a book about Japan. The main message that policymakers should use all policy levers at their disposal in a coordinated manner when faced with persistently weak demand and high public and private balance sheet vulnerabilities extends to other important parts of today’s global economic landscape. As such, policymakers around the world have much to learn from Japan’s experience and from the analyses presented in this volume."

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Review in The Diplomat

Blog: Can Abenomics Succeed? Overcoming the Legacy of the Lost Decades

Friday, May 15, 2015

Frontier Economies -- The New Darlings

For some time now, emerging markets have played an ever more important role on the global
economic stage. Today they account for half of the world’s GDP and are a key driver of global growth. 

At the same time, a new group of countries is getting more and more attention, including from global investors. These are fast-growing low-income countries often referred to as frontier economies. Work on frontier economies is in its infancy and publications on the subject are limited. This book aims to fill part of this void. It relies on cross-country analytical work and draws on experience in today’s emerging market economies to provide insights and make recommendations relevant for policymakers, think tanks, and academics.

Although there is no formal definition, frontier economies are increasingly regarded as a separate group of low-income countries that warrants special attention. Compared with other low-income countries, they tend to be dynamic economies that have experienced rapid growth and, in most cases, demonstrated a fair degree of macroeconomic stability over an extended period of time. Given their strong growth, the question arises whether they can become the next generation of emerging market economies and show the way to other low-income countries striving to improve living standards.

Within Asia, this group includes countries such as Bangladesh, Cambodia, Mongolia, and Vietnam. They are located in the world’s fastest-growing region and benefit from favorable population dynamics.
Similar problems and challenges

Many of these economies face similar macroeconomic and institutional challenges. Will they follow the success of other Asian emerging markets? What are the policy lessons that might be relevant for other low-income countries? This book addresses these questions, based on the IMF’s experience of working with Asia’s emerging, frontier, and developing economies over many years.

This book highlights that continued structural transformation and increased emphasis on inclusive growth will be critical to achieve the full potential of these countries. Also, drawing on the success of today’s emerging markets, high growth and rapid structural transformation needs to be complemented by increased investment in “soft” infrastructure to avoid crises down the road. In particular, to realize the strong potential of frontier and developing Asia, upgrading of monetary and fiscal policy frameworks and continued strengthening of financial sector regulation and supervision will be critical.

Editor Alfred Schipke discusses the book:

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Conference: Frontier and Developing Asia

Friday, January 16, 2015

Tracking a Budgetary Revolution

Public financial management (PFM)—the fine art of budgeting, spending, and managing public monies—has undergone a “revolution” since the late 1980s. This uniquely interdisciplinary combination of economics, political science, public administration, and accounting has seen an influx of innovative ideas and reforms that have sought to address some of the perennial challenges of managing public finances.

To constrain the likely temptation to increase expenditure and spend, rather than save, in times of plenty, countries have introduced fiscal rules and fiscal responsibility laws. To understand and plan for the impact of today’s policy choices on finances in the years ahead, governments have adopted medium-term budget frameworks. To help guard against over-optimistic economic and budgetary estimates, some countries have established independent fiscal councils. To shift the focus of decision making from how much money programs receive to the results they can achieve, many governments have introduced performance budgeting and management initiatives. To better understand the true state of public finances and underlying risks, some governments have sought to increase the comprehensiveness and coverage of fiscal reporting and accounting and have introduced risk management techniques.

This profound wave of change in the ways public spending is managed largely started in Australia, New Zealand, and the United Kingdom and has since then passed through virtually all advanced economies, and to some extent, has also reached emerging market economies and low-income countries.

Dramatic change

While the field of PFM has changed dramatically over the last two decades, very little has been written about this revolution, with the exception of a few specialized articles. In filling this gap in the literature, this book takes advantage of the unique perspectives provided by IMF public financial management experts, who, over the last two decades, have gained practical experience with many if not all of these reforms and are well placed to draw lessons, make sense of the PFM revolution, and share their cross-country experiences of what has worked in practice and what has not.

The book poses critical questions about these reforms and evaluates what they have accomplished and the issues and challenges they have encountered, including with the global financial and economic crisis.

Critical importance

The 2008-09 crisis highlighted the critical importance of a sound public financial management framework in ensuring that well-designed fiscal policies are effectively implemented. But it also demonstrated the underlying limitations of some countries’ PFM frameworks and the flawed design and weak implementation of some PFM innovations, as well as their failure to entrench themselves. Based on these experiences, this book draws general lessons to help guide reformers in their pursuit of the next generation of PFM reforms.

This publication can help countries, policymakers, and those interested in public finances meet the challenges of managing public finances in an increasingly complex and uncertain global environment.

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Tuesday, January 6, 2015

Testing the Soundness of Banks

The global financial crisis placed a spotlight on the stress testing of financial systems. Although weaknesses in stress tests were exposed by the devastating 2007-09 crisis, the recent experience of several countries has conversely provided a stark illustration of their potential benefit in examining the resilience of bank balance sheets when performed credibly and transparently. Nonetheless, the large menu of stress testing approaches, methods, and models raises questions about their appropriate application under different situations and, consequently, the comparability and reliability of the associated analyses.

The International Monetary Fund has had a long and detailed involvement in the stress testing of financial systems. Since the introduction of its Financial Sector Assessment Program more than a decade ago, IMF staff have conducted stress tests of banking sectors in over 120 countries, typically in close collaboration with country authorities.

Stress testing is also playing an increasingly important role in the IMF’s multilateral economic surveillance, through the analysis in its Global Financial Stability Report. Separately, member countries are increasingly requesting IMF technical assistance in stress testing as they develop their own expertise in this area. As a result, IMF economists have amassed a wealth of hands-on experience with stress testing techniques and their practical application.

Compendium of models

This book represents a compendium of stress testing methods, models, and tools developed or adapted by IMF staff over the years. Almost all the methods and models that are included in this volume have, at one time or another, been applied in its surveillance of, or technical assistance to, member countries. To guide users, each chapter offers a summary describing the application of a method or model, its strengths and weaknesses, and the data requirements. Where available, the stress testing tools or program codes are also provided for wider public use.

Although this volume will provide a valuable resource for policymakers, supervisors, academics, and private sector participants alike, caveats still apply. The crisis has underscored that stress tests, irrespective of their level of sophistication, are not fail-safe, stand-alone diagnostic tools.

Assessments of the soundness of any financial system cannot and should not be based solely on a “model” and must be complemented by other quantitative analyses, qualitative information, and, most important, expert judgment. Especially in light of evolving market practices, risks, and regulatory requirements, stress testing will necessarily continue to be art rather than science.

Ongoing work

Jose Vinals, head of the IMF's Monetary and Capital Markets Departments, says in a Foreword IMF staff are continually working to strengthen the analytical underpinnings of its stress testing, in ways that will help bolster its consistency and comparability and hence its credibility.

Key areas of focus, according to Vinals, include extending the analysis to better cover nonbank financial institutions and infrastructures; to take account of spillovers between institutions and across borders; to consider the interaction between liquidity and solvency risks; and to address data gaps. In addition, IMF economists are developing the policy-related aspects of stress testing, namely, “best practice” principles, concepts, and frameworks, to complement and strengthen the application of the models. "These efforts represent a challenging and exciting part of the IMF’s broader support of global efforts to improve financial surveillance and promote sound macroprudential frameworks," Vinals writes.

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