A Glimpse of the Future

Jeff Hayden altby Jeff Hayden

One of my favorite car trips in the United States heads east out of Los Angeles and runs through the windswept San Gorgonio Pass, gateway to the Mojave and Sonoran deserts. I’m a fan of the drive on Interstate 10 not only because it affords access to a dramatic desert landscape but also because the funnel-like pass at San Gorgonio prompts thoughts about the planet’s energy future.

The pass—one of the windiest places in the United States—is home to the San Gorgonio Pass Wind Farm, an array of more than 4,000 turbines that harness wind to produce “clean”—non-fossil-fuel-based—energy. It’s a stunning sight, and I always wonder, is this what a sustainable energy future looks like? Can thousands of turbines sprawled over the landscape be part of society’s answer to a most pressing question: how to balance the massive need for energy to power economic growth and development while addressing our urgent need to sharply reduce carbon emissions, a chief contributor to climate change.

The question fuels intense debate—one that has become increasingly polarized and that frequently puts growth and sustainable energy in opposition. But are the two—growth and a more sustainable mix of energy sources—really enemies? Can a more benign mix of energy sources and technology bring power to the 1.3 billion people who don’t have it?

These questions, along with December’s United Nations climate summit in Paris, provided the inspiration for this issue of F&D.

The answers are complex but reassuring. Nicholas Stern of the London School of Economics argues that the twin challenges of fighting poverty and climate change are not mutually exclusive. And the International Labour Organization’s Peter Poschen says we need not choose between green and jobs.

Continuing with the energy theme, IMF economist Ian Parry looks at the practical problems of setting a price for carbon that reflects its true costs. And F&D analyzes the four major declines in oil prices in the past 30 years and finds an eerie similarity today to the prolonged slump that began in 1986.

On other topics, Paul Collier and coauthors look at the costs of treating and preventing HIV/AIDS in Africa. This issue of F&D also examines the high penalty countries pay when they default on sovereign debt, skewering the conventional wisdom that the costs of default are minimal, and includes articles on the bad effect elections have on intelligent decision making about public investment, the increasingly common practice of offering citizenship “for sale,” and China’s investment in Africa. And we profile economist Richard Layard, who says economics has strayed too far from its original purpose of promoting happiness and maximizing well-being.

Reviving Credit in the Euro Area

by Jean Portier and Luca Sanfilippo

A stock in excess of €900 billion of nonperforming loans continue to clutter the European banking system, impeding economic growth. This issue remains a key challenge for policy makers. As we show in our latest Global Financial Stability Report, part of the solution to address this legacy is an upgrade in legal systems. Current inefficiencies—long foreclosure times and insolvency procedures—are a reason for the gap between the value of loans on bank balance sheets and the price investors are willing to pay. A reliable legal environment and an efficient judicial system maximize the value of nonperforming loans (NPLs), reduce the value gap and give banks greater incentive to get NPLs off the books. Our analysis, using time to foreclose as a proxy for effective insolvency regimes, shows there is a large upside for new lending capacity in the euro area (Chart 1).

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The Effects of Wage Moderation: Can Internal Devaluations Work?

By Jorg Decressin and Prakash Loungani

Devaluation is often part of the remedy for a country in financial trouble. Devaluation boosts the competitiveness of a country’s exports and curtails imports by making them more costly. Together, the higher exports and the reduced imports generate some of the financial resources needed to help the country get out of trouble.

For countries that belong to—and want to stay in—a currency union, however, devaluation is not an option. This was the situation facing several euro area economies at the onset of the global financial crisis: capital had been flowing into these countries before the crisis but much of it fled when the crisis hit.

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Migration: A Global Issue in Need of a Global Solution

2014MDNEW_04By Christine Lagarde

(Versions in عربي中文Français, 日本語, РусскийTürk, and Español)

As the Group of Twenty leaders gather in Turkey this weekend, they will have on their minds heartbreaking images of displaced people fleeing countries gripped by armed conflict and economic distress.  The surge of refugees in the last few years has reached levels not seen in decades. And these numbers could increase further in the near future. 

The immediate priority must be to help the refugees—who bear the heaviest burden, and too often tragically—with better access to shelter, health care and quality education.

Many of the countries neighboring conflict zones—which have welcomed most of the refugees—have stretched their capacity to absorb people to the limit. To support additional public services for refugees, they will require more financial resources. The international community must play its part. With the IMF’s support, for example, Jordan has been able to adjust its fiscal targets to help meet this need.

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Trading Out of Trouble in Latin America

By Natalija Novta and Fabiano Rodrigues Bastos

(Versions in Español and Português)

Growth in Latin America and the Caribbean is suffering a double whammy—economic activity has slowed down sharply and the medium-term outlook continues to deteriorate. It is therefore not surprising that policymakers across the region are eagerly searching for ways to revitalize growth.

One answer may be more trade—both within the region and with the rest of the world. Our new study analyzes the export performance in developing and emerging market regions over the past two decades to assess the potential for future export growth in Latin America. We find evidence that most countries in the region “undertrade” compared to what standard models would predict. This has been an entrenched problem for almost a quarter of a century, partly as a result of the region’s geography and a legacy of protectionist policies.

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What Future for Unconventional Monetary Policies

Maurice Obstfeld2By Maurice Obstfeld

How quickly should the United States tighten monetary policy and exit from quantitative easing?  Is the neutral real interest rate lower than before the crisis? Should we raise inflation targets?  What can we learn from the unconventional policies that emerging markets adopted during the crisis? Are we entering an environment of global deflation?  And if so, can the existing central bank toolkit stave off that threat?

Seven years after the crisis, the effects of unconventional monetary policies continue to be a matter of debate. There is little consensus not only about the effectiveness of these policies in promoting aggregate demand, but also about possible unintended side effects on financial stability.

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Shrinking Populations, Rising Fiscal Challenges

By Benedict Clements, Kamil Dybczak, and Mauricio Soto

(Versions in 中文 and 日本語)

Populations are getting older around the world—that’s no surprise in light of declining fertility and improvements in health care. But in many countries, something more dramatic is going on—the population is actually shrinking. These demographic developments portend stark fiscal challenges. What should countries—whatever their degree of economic development—do to respond to these challenges?

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