Nazareth College was my second home. As a child, I spent countless evenings roaming the small liberal arts college in Rochester, N.Y., where my mother headed the office of graduate studies and continuing education.­

Most of her students worked day jobs, attending class at night. For her, this made for late hours at the office—and for a complex juggling act: off to work in the morning to manage a staff, drop everything at 3 p.m. to rush home to fix dinner for the family, and then back to work around 5 p.m.—with me in tow—to staff the office until evening classes let out. Sleep and then repeat. This was the rhythm of my childhood.­

I thought a lot about those days as we put together the special feature on women at work in this issue of F&D—about her example, and about the many women who share in her experience and the many who do not.­

If there is one meta-theme in this issue, it’s the diversity of women’s work experience across the globe.­

The world has seen tremendous progress in a relatively short time when it comes to women’s participation in the workforce. Women work in all fields and professions, and women are a driving force in many economies.

At the same time, as IMF Managing Director Christine Lagarde points out in her Straight Talk column, for the past decade women’s labor participation has been stuck at the same level, and women still lag men in many areas, especially in the developing world. What’s more, in some places, labor market participation rates are the last thing on a woman’s mind: safety, health, education—these concerns come first.­

We kick off our look at women at work with an overview by IMF economist Janet Stotsky, whose trailblazing 2006 paper on gender and macroeconomic policy found improved gender equality could boost growth.­

Her piece is followed by four articles, each providing a different insight into this complex subject: from the differing perceptions of men and women analysts on Wall Street, to the impact of India’s practice of setting aside a third of village council seats for women, to rising entrepreneurship among African women. An article on how the rising proportion of women in economics has begun to alter the profession’s views on a variety of policy questions rounds out the package.

Elsewhere in this issue we take up China’s changing labor market, the outflow of private capital from emerging market economies, bank stress tests, and the emergence of borrowers in international capital markets in sub-Saharan Africa. We also offer a profile of economist Carmen Reinhart, whose 2010 paper with Kenneth Rogoff on debt and growth recently put her at the center of a media firestorm.­

In short, this issue offers quite a mix. Pulling it together has been a juggling act that my mother—and many women—would appreciate.

Sub-Saharan Africa is the second fastest-growing region of the world today, trailing only developing Asia.  This is remarkable compared to the current complicated state of the global economy, with Europe still struggling and the United States slowly on the mend.

In 2012, Sub-Saharan Africa maintained solid growth, with output growth at 5 percent on average. The factors that have supported the region through the Great Recession—strong investment, favorable commodity prices, and generally prudent macroeconomic management—continued to be at play.

Within Africa, two speeds of growth

However, performance varies across countries, and the region has seen growth at two different speeds. Growth was very strong among oil-exporting and low-income countries. Exports such as oil, minerals, agricultural products, and tourism supported demand in these countries. Sectors that have been particularly dynamic include construction, agriculture, and mining (especially due to new extractive industry capacity coming on stream). In contrast, growth in middle-income countries slowed significantly in 2012, reflecting their closer ties to the euro area. South Africa was also adversely affected by labor unrest in the mining sector.

Our latest Regional Economic Outlook shows a broadly positive near future for the region, with a moderate acceleration of growth expected in 2013–14. This favorable prospect reflects in part the gradually improving outlook for the global economy. Domestically, investment in export-oriented sectors remains a key driver of growth. One-off factors will support growth in some countries, such as  Nigeria’s economy rebounding after floods, recovery of agriculture in regions previously affected by drought, and gradual normalization of activity in some post-conflict countries, such as Côte d’Ivoire.

Two-speed growth is expected to persist in the region for the next few years. Middle-income countries will continue to grapple with sluggish economic activity, with little room for policy stimulus, while we expect solid growth among oil exporters and low-income countries.  We expect regional inflation to continue the downward trend begun in 2012, although a handful of countries, such as Malawi, will still probably see high inflation going forward.

Remaining risks

Growth in sub-Saharan Africa is subject to downside risks, originating from inside and outside the region. Medium-term risks for the global economy remain high, although the near-term risk outlook has improved.

Among these outside factors, threats to sub-Saharan Africa include (i) a prolonged near-stagnation in the euro area and (ii) a slowdown in major emerging market economies. Risk scenario analysis conducted for the Regional Economic Outlook indicates that these adverse shocks would affect sub-Saharan Africa’s growth, but not derail it. That said, countries with limited policy buffers and  a narrow export base could experience more severe adverse effects.

Domestic risks include adverse climatic developments and internal conflicts. These events, though potentially severe in their impact on individual countries and their close neighbors, would not have significant effects on the region as a whole.

Policy challenges

The region’s positive outlook is conditional on the implementation of sound economic policies. In particular, there is a strong case for strengthening policies in the short run in a number of countries to contain or prevent imbalances:

• Sizable fiscal deficits in some countries, such as Ghana, point to the need for significant fiscal adjustments, although the pace of adjustment will need to take account of weak demand conditions in some cases.
• Large fiscal expansion plans in some oil exporters, such as Angola, Chad, and the Republic of Congo, raise concerns over absorption capacity and cost effectiveness.
• Continued higher interest rates set by the central bank are warranted in countries where inflation remains high and/or volatile, such as Ethiopia, Malawi, and Tanzania.
• Surging current account deficits in some low-income and fragile countries, although largely financed by export-oriented foreign direct investment, require careful monitoring.

In addition, with the risk of a significant global slowdown still present, rebuilding buffers to handle shocks from outside the region remains a priority in many fast-growing countries. Many countries in sub-Saharan Africa could find it difficult to raise sufficient financing for larger deficits in the event of a downturn, although the majority of them are not constrained from borrowing by high debt as of now. 

Job creation top priority

Accelerating job creation and reducing unemployment is a pressing challenge across the region. Middle-income countries have seen high levels of visible unemployment, whereas robust output growth in low-income countries is not producing strong growth in wage employment. Policy recommendations to redress this situation depend on individual country characteristics, but would include the following:

• Amending labor market regulations to reduce disincentives for hiring while maintaining worker protection;
• Investing in education systems that deliver workers with the skill sets required by employers;
• Revising hiring practices and compensation policies in the public sector to ensure an even playing field; and
• Improving the business climate to boost employment demand.

Renewed interest of global investors

Recently, Sub-Saharan Africa’s access to international sovereign bond markets has grown significantly, as we show in our analysis. This development reflects both easy global financial conditions and the region’s favorable economic prospects. Zambia’s debut Eurobond in September 2012 was massively oversubscribed and priced below Spain’s 10-year bond at the time. Tanzania tapped global capital markets at end-February 2013, and just last month Rwanda did the same.

Increasing access to global capital markets creates both opportunities and risks to sub-Saharan African economies. To make the most of the renewed global investor interest, we recommend countries maintain prudent fiscal policies that safeguard long-term sustainability; consider bond issues against a range of financing instruments under an appropriate medium-term debt management strategy; and follow best practices to get the best possible access terms. In this context, international sovereign bonds may not be the best option for financing infrastructure investment, because other funding options may provide more tailored and cost-effective financing.

(Versions in Español and Português)

Latin America has enjoyed strong growth during the last decade, with annual growth averaging 4½ percent compared with 2¾ in the 1980s and 1990s. What is behind this remarkable economic performance and will this growth be sustainable in the years ahead?

Our recent study (see also our working paper) looks at the supply-side drivers of growth for a large group of Latin American countries, to identify what’s behind the recent strong output performance.

Supply side factors of growth

Increases in employment and the accumulation of capital, such as buildings and machinery, continue to be the main drivers of growth in Latin America. Together they explain 3¾ percentage points of annual GDP growth in 2003–12, compared with ¾ percentage points explained by improvements in the efficiency of the inputs of production (labor and capital), what economists typically refer to as total factor productivity (Figure 1). Employment has grown vigorously in the last decade and many countries are enjoying historically low unemployment rates. Investment in physical capital has also risen steadily amid favorable external financial conditions and high commodity prices.

While factor accumulation remains the main driver of growth, the recent pickup is mainly explained by higher total factor productivity (Figure 1). After exhibiting declines in most of the region in previous decades, total factor productivity is on the rise (Figure 2). This is a typical development observed during good economic times, such as the one the region is now experiencing—that is, changes in productivity are highly correlated with those of output. But improvements in total factor productivity also reflect some structural (permanent) factors, such as the movement of economic activity away from the informal sector in Latin America, as productivity tends to be higher in the formal sector.

Sustaining recent strong growth remains unlikely

Our analysis suggests that sustaining the recent high growth rates will be more challenging. While the region has, on average, grown at 4½ percent during 2003–12, our estimates suggest that the average potential GDP growth rate in 2013–17 is closer to 3¼ percent. Indeed, the strong growth rates observed in recent years are higher than the potential GDP growth ranges in most countries (Figure 3). Potential output ranges vary significantly across countries. These often reflect differences in population aging trends, labor force participation rates, savings and investment in physical and human capital, natural resource endowments, productivity performance, and other country characteristics.

Why do we expect output growth to slow down in the coming years? First, growth of physical capital is expected to moderate somewhat, as low global interest rates that facilitated large capital flows to the region start to rise and commodity prices stabilize. In addition, the contribution of labor will likely be limited in the coming years by some natural constraints, including population aging, limited scope for further increases in labor force participation rates (including for women), and currently record low unemployment rates that would hinder strong employment growth in the future.

Productivity growth plays pivotal role

So, the strong growth momentum in the region is unlikely to be sustainable unless capital accumulation surges (for instance, supported by rising savings, which are still very low in the region), human capital increases significantly (the quality of education has ample room for improvement), or total factor productivity performance improves significantly. Indeed, total factor productivity performance—despite its recent improvement—remains weak compared with emerging Asia, explaining most of the growth differential vis-à-vis this region. Thus, fostering productivity growth remains a key challenge and priority for Latin America.

The causes of low productivity growth in the region are many and varied, and designing a policy agenda to unleash it is a difficult task. Policymakers should aim at policies that help reduce distortions in the allocation of resources and this typically entails country-specific measures.

Policies to be considered include: improving the business climate and enhancing competition; strengthening entry and exit regulation to facilitate the reallocation of resources to new and high-productivity sectors; improving infrastructure; promoting deeper and more efficient financial markets; enhancing research, development and innovation; and strengthening institutions to secure property rights and stamp out corruption.

(Versions in Español and Português)

Commodity exporting countries in Latin America have benefited strongly from the commodity price boom that began around 2002. And the accompanying improvements in public and external balance sheets have fed a sense that this time the macroeconomic response to the terms-of-trade boom has been different (and more prudent) than in past episodes. But, has it?

In our recent work, we analyze the history of Latin America’s terms-of-trade booms during 1970–2012 and quantify the associated income windfall (i.e., the extra income arising from improved terms-of-trade). We also document saving patterns during these episodes and assess the extent of the “effort” to save the income windfall.

Our findings suggest that, although the additional income shock associated to the recent terms-of-trade boom is unprecedented in magnitude, the effort to save it has been lower than in past episodes.

The recent terms-of-trade boom in historical perspective

A historical comparison of episodes of large terms-of-trade shocks—found only in the 1970s and the 2000s—shows that, while sizable, Latin America’s recent boom has not been much larger than those seen in the 1970s (see Figure 1). However, it has been quite larger than in other regions, and only comparable to those experienced by the oil-exporting countries in the Middle East and North Africa region (see Working Paper for regional comparisons).

At the same time, the associated income windfall has been much larger in the recent episode than in the past (see Figure 2), due to a higher degree of trade openness and a longer duration of the boom. Furthermore, the effect of the recent boom has been quite sizable in absolute sense, with an increase in income close to 15 percent per year. In other words, income has been 15 percent higher than what it would have been had no terms-of-trade shock occurred.

Within the region, Bolivia, Chile, and Venezuela, stand out as having benefited the most, with increases of 30 percent per year for Venezuela and 20 percent for the other two. Again, these measures are only comparable to those seen in some Middle East countries. Brazil stands at the other extreme of the distribution, with significantly lower windfall estimates, while terms-of-trade changes in Mexico and Uruguay during the last decade do not qualify, under our definition, as booms.

Saving more of the income windfall this time?

A comparison of aggregate saving rates suggests that, compared to the past, the region’s response to the recent boom has been more prudent. The median saving rate increased by about 4-5 percentage points of GDP, as opposed to 2-3 percentage points in past episodes. This has been accompanied by a remarkable increase in investment (about 5 percentage points), in clear contrast with the past, but leading to a gradual weakening of current account balances.

Does this mean the region made a greater effort to save the windfall this time? Not necessarily. In fact, estimates of marginal saving rates—a measure of the increase in saving as a proportion of the estimated windfall—suggest that commodity exporters have saved less of the windfall this time (see Figure 3). Latin America’s saving effort is also low compared with countries with a similar income windfall (the oil exporting countries in the Middle East). And efforts to save the windfall have gradually declined following the 2008–09 crisis.

Also, a growing share of the windfall is being devoted to domestic (physical) capital formation rather than to improving countries’ international asset position (via increasing saving abroad), which has affected post-boom real income differently in the past. This has resulted in a gradual weakening of current accounts.

Saving the extra does pay off

What can we learn from saving patterns during past boom episodes, in terms of their implications for post-boom income? A simple econometric exercise points to a high pay off from saving the windfall during the boom, in terms of raising post-boom income. More importantly, the composition of the windfall saving matters as allocating the extra income to foreign asset accumulation appears to deliver higher post-boom income than when invested domestically. Whether this reflects the benefits of having a stronger net foreign assets position or a cost of misallocating domestic resources during the boom remains an open question. What we do see is that this result seems to have been especially true for Latin America in the past.

Overall, these results suggest that the improved balance sheets in the region may reflect mainly the sheer size of the income windfall of the latest terms-of-trade boom, rather than a greater effort to save it. And, with signs of further softening of saving rates and weakening external current account balances, a closer look into saving/investment patterns may be desirable.

The global regulatory landscape governing banks has changed from its pre-crisis status quo.

In addition to the Group of Twenty advanced and emerging economies led global regulatory reforms, like Basel III, the United States and the United Kingdom have decided to directly impose limits on the scope of banks’ businesses. The European Union is contemplating a similar move.

We discussed these structural banking reforms a few weeks ago with officials from finance ministries, central banks, and supervisory authorities from around the world during the IMF and World Bank Spring Meetings. The design and implementation of these measures will have implications for global financial stability and sustainable growth, so we wanted to bring people together for the first global debate of the issue with G20 and other countries.

Our analysis  suggests that structural constraints on banks’ activities, well designed and implemented, can usefully complement traditional tools. As a first best strategy, a targeted approach, where structural measures—such as “living wills”—are tailored to the specific risk profiles of individual banks at a global, group-level would be preferable to an across-the-board approach. However, sufficient confidence in supervisors’ capacity to design and implement the targeted approach, along with strong political support, are key to the ultimate success of structural measures to reduce risks in the financial system. If this confidence is lacking then, as a second best, across-the-board measures, in addition to bank-specific measures, would be appropriate, provided their global benefits are assessed to match or exceed their costs.

A tandem tactic to reduce risk

The crisis has made many skeptical of the ability of traditional prudential tools, such as risk based capital requirements, to keep under control the risk transmitted to financial institutions and the system as a whole by trading and certain investment banking activities. The crisis has strengthened the argument for excluding these activities from banks and hence impeding their access to taxpayer-funded backstops enjoyed by deposit-taking financial institutions.

The structural measures to reform banks such as the U.S. Volcker rule, the U.K.’s Vickers ring-fence, and the EU’s Liikanen proposal, which would create functional separation of businesses, all reflect a deep sense of unease with the risk culture engendered by the assumption of trading and speculative investments by deposit taking banks.

Looking back, however, restrictions on proprietary trading or investments in private equity alone would not have prevented major bank failures such as Lehman Brothers. Nor would reorganizing the bank into separate subsidiaries in each host and home country have facilitated its global, group-wide resolution. Legally, Lehman had a subsidiary structure, yet its resolution has been long and costly.

Looking forward, structural constraints on banks can work in tandem with strengthened capital requirements to limit banks’ excessive risk taking. Combining these prudential tools can make a banking group easier to resolve and attenuate the too-important-to-fail problem.

For example, if the investment bank is systemically important, ring-fencing deposits and credit will not necessarily resolve the too-important-to-fail problem. The temptation to bail-out creditors of the non-ring-fenced businesses will still be present. This suggests the salience of combining structural measures with higher capital requirements on all the systemically important subsidiaries.

Combining the requirement for higher capital (for the ring-fenced entity) and leverage ratio (for trading activities of the non-ring fenced entity) under each of the Vickers and Liikanen proposals would result in a more robust policy to counter too-important-to-fail.

If successfully implemented, these structural measures would make banks and banking systems safer in the United States, the United Kingdom, and the European Union, which would have a positive effect on global financial stability.

Three things to think through

But our analysis also suggests these policies will exert global costs given that they will be imposed on internationally active and systemic financial institutions. This is due to a number of factors.

First, structural measures will be challenging to implement. How are supervisors to consistently and correctly identify the intent behind bankers’ trades? While difficult in practice, enhanced supervisory collaboration in banks’ home and host countries is critical to the success of the Volcker rule. A broad restriction on banks’ trading activities in these countries could end up inhibiting their ability to make markets and hedge risks, activities that are not restricted under the Volcker rule. This could have adverse implications on liquidity and costs in capital markets.

Second, as authorities reduce banks’ ability to take excessive risk through structural measures, they must recognize that such risks could migrate to other parts of the financial system, including shadow banking entities. Policymakers may need to judiciously enlarge the regulatory perimeter and enhance the monitoring of shadow banks and their interactions with regulated entities for structural measures to reduce—and not simply redistribute— systemic risk.

Third, imposing constraints on banks’ activities at a global level, and on group-wide risk management tools, could make banks more resolvable. But this would potentially come at a cost in terms of loss of diversification benefits and efficiencies in risk management. And these costs may be felt globally.

Our analysis highlights the need for a global cost-benefit exercise that would encompass the extra-territorial implications of structural measures. The case for introducing these policies at the national or regional level would be strengthened by confirming whether their global benefits match or exceed their global costs, given the potential for the spillover of both benefits and costs to many countries and areas other than the United States, the United Kingdom, and the European Union.

Subjecting a global institution to different structural measures in different jurisdictions could exert further pressure on consolidated supervision and cross-border resolution. The more resources are taken up policing compliance with multiple rules, the less is available for monitoring risk, which could increase the cumulative costs of these national initiatives.

Our view is that, as a first best, a targeted approach, where structural measures—such as “living wills”—are tailored to the specific risk profiles of individual banks at a global, group-level would be a more effective than an across-the-board approach.

However, sufficient confidence in supervisors’ capacity to design and implement the targeted approach, along with strong political support, are key to the ultimate success of structural measures to reduce risks in the financial system. If this confidence is lacking then, as a second best, across-the-board measures, in addition to bank-specific measures, would be appropriate, provided their global benefits are assessed to match or exceed their costs.

We suggest development of principles to evaluate the global implications of these measures. These principles would facilitate corrections by policy makers and thus mitigate adverse implications. These principles may also be useful for future measures that may be contemplated by other jurisdictions.

What has been the role of foreign banks in financing growth and convergence in Central, Eastern and Southeastern Europe, and how is that role changing? This is discussed in the first issue of a new series of analytical work on the region called Regional Economic Issues, which we launched at a joint IMF/Czech National Bank conference two weeks ago in Prague.

In the 1990s, there were very few foreign banks—state-owned banks were dominant. Many countries went through severe banking crises. When banking systems were opened to foreign investors, foreign ownership quickly became prevalent (Figure 1) and the incidence of banking crises dropped dramatically. And where they still occurred, they were the usually the result of failing domestic banks—not foreign-owned banks.

During the mid 2000s, though, foreign banks fueled and financed tremendous domestic demand booms which in many countries ended in busts. This was because foreign banks had access to large amounts of foreign funding (Figure 2)—mostly from their parent banks in Western Europe, who in turn were tapping wholesale funding markets—which they used to expand credit where demand was strongest and profits were highest.  Countries in the region, with their bright growth prospects and relatively low credit penetration to start with, were attractive lending destintations. The ensuing booms were extraordinary in many countries.

When the global crisis hit in 2008, new parent funding dried up and much of the previous inflows reversed, triggering deep recessions. The larger were the inflows during the boom years, the larger have been the outflows since 2008 (Figure 3), and the sharper the economic contraction (Figure 4).

Since late 2008, parent banks have been scaling back funding of their subsidiaries, who are increasingly relying on domestic deposit funding. Over time, this will help reduce boom-bust cycles, since retail deposits tend to be more stable. But the shift bears close watch to make sure it does not go too fast nor too far.

How can policy makers help? Establishing a banking union would facilitate home-host supervisory cooperation which, together with more coordinated use of macro prudential policies, would reduce the magnitude, and possibly also the likelihood, of future credit cycles. And tackling nonperforming loans—which in many countries are still very high—and developing local capital markets as an alternative source for investment finance would offset some of the headwinds to economic growth from less plentiful foreign funding.

(Versions in 中文 and 日本語)

Fiscal management has improved in Asia over the past decade. It has become more responsive to economic conditions and thereby helped stabilize growth, especially during the global financial crisis. While these are important achievements, major challenges still lie ahead—as our latest Asia and Pacific Regional Economic Outlook points out.

What are these key challenges? In a nutshell, fiscal policy can, and should do more to make Asia’s growth sustainable and more inclusive.

In the near term, budget consolidation has to proceed as the recovery takes hold to rebuild the fiscal space needed to respond to future output fluctuations.

At the same time several emerging and low income economies need to create room for higher infrastructure and social spending to support long-term growth, reduce income inequality, and fight poverty.

The role of investment

Public investment and the promotion of public-private partnerships can help more fill the significant infrastructure gaps in some economies. For example, government investment remains relatively low in Indonesia, the Philippines, and Sri Lanka, despite substantial infrastructure shortages. At the same time, fiscal risks in some countries, stemming from investment spending conducted outside of the general government budget and from public-private partnerships, need to be countered through enhanced public expenditure management and fiscal transparency.

Public spending on education and health also needs to be scaled up to enhance human capital and living standards in most Asian emerging and low income economies. Indeed, in spite of still relatively poor health conditions, low education levels, and the surge in per capita income of the past decade, government expenditure on health and education has barely increased in Asian emerging and low-income countries since 2001, and remains about 4 percentage points of GDP lower than in peers in other regions.

How can Asian governments make room for higher spending on infrastructure, education and health, while still maintaining or even strengthening fiscal space?

Spending differently and more efficiently

Spending differently and more efficiently can go a long way. In several Asian emerging economies  and low-income countries, subsidies—which are often distortive and not well targeted to the poor— take up a higher share of total government expenditure than in peers in other regions. The average annual budget cost—which does not even fully capture the total fiscal burden— of energy and food subsidies is nearly 2 percent of GDP in Asian emerging and low-income countries. In a few cases, such as Bangladesh, Indonesia, and Malaysia, it is even higher. In Indonesia, at more than 4 percent of GDP, the direct fiscal cost of oil and food subsidies is close to total government spending on health and education.

Energy subsidies, which create distortions and other economic costs, are damaging to the environment, and in practice, often benefit higher income groups more than the poor. Furthermore, the effectiveness of subsidy programs in the region is sometimes compromised by implementation problems, such as targeting errors, illegal diversions, and procurement inefficiencies.

Alleviating the impact on the poor

Any subsidy reform should include compensatory measures to alleviate the adverse impact of price increases on the poor, which could be substantial. Targeted cash transfers or vouchers can be effective instruments in this respect, provided data and administrative capacity are adequate. And indeed, some subsidy reforms along those lines are taking place. India, for instance, has initiated a wide-ranging project to shift many subsidy programs away from in‑kind delivery toward direct cash transfers, and in parallel is enhancing the system to indentify eligible individuals.

Finally, reforms are needed not just on the spending side but also on the tax side. Reducing complex and poorly targeted tax incentives and enhancing tax administration can create space for social and infrastructure spending. And a number of Asian economies could also consider making their current revenue structure more growth-friendly by making greater use of general consumption taxes and property taxes and reducing their reliance on corporate income taxation.

(Versions in Español and Português)

Latin America continues to be one of the fastest growing regions in the world, even though growth slowed down a bit in 2012. Many economies in the region are operating at or near potential, inflation remains generally low, and unemployment is at historically low levels.

In the near term, the region will continue to benefit from easy external financing and relatively high commodity prices. In our May 2013 Regional Economic Outlook, we project that the region will expand by about 3½ percent in 2013. In Brazil—the region’s largest economy—economic activity is strengthening, driven by improving external demand, measures to boost investment, and the impact of earlier policy easing. In the rest of Latin America, output growth is expected to remain near potential.

Since 2003, Latin America has experienced a period of resurgence, with strong growth, low inflation, and improved social outcomes (see Chart 1). Prudent macroeconomic policies and important structural reforms have been the cornerstone of this performance. However, except for the period immediately following the 2008 global financial crisis, exceptionally benign external conditions also have been an important factor. Foreign financing has been cheap and abundant, and there has been a large and persistent increase in the prices of the region’s commodity exports.

However, even gold can lose its luster. These blissful external conditions will not last forever. Commodity prices are projected to stay flat or decline somewhat in the coming years, and interest rates will eventually rise as growth in the advanced economies returns.

The key challenge for policymakers in the region is to adjust policies to preserve macroeconomic and financial stability, and build strong foundations for sustained growth in the future, under possibly less favorable external conditions. In the rest of this piece, I will look at the way Latin America has managed the good times of the past decade, and discuss how it can best meet future challenges.

Managing the windfall

The income windfall from persistently high commodity prices over the past decade has been unprecedented. The windfall averaged 15 percent of domestic income on an annual basis, and close to 90 percent on a cumulative basis (see Chart 2). This good fortune has spurred rapid growth and has made possible a substantial improvement in government and external balance sheets. However, efforts to save the windfall have eroded since the 2008 global crisis. In many countries, public debt at end-2012 remains above pre-crisis levels and fiscal balances are much weaker.

Looking forward, it would be prudent to increase fiscal savings, so that the economies are in better shape to manage the likely fading of the external tailwinds. Fiscal consolidation will also help to alleviate pressures on capacity and help narrow the external current account deficits.

Higher capital inflows

Easy monetary conditions in advanced economies and stronger fundamentals in the region have fueled large private capital inflows. Net capital flows to the financially integrated economies in Latin America have more than doubled from an average of below 2 percent of GDP during 2005–07 to about 4 percent in 2010–12, with the increase explained mainly by higher net portfolio flows (see Chart 3).

Preventing these inflows from generating financial excesses remains a key policy challenge. Bank credit continues to grow at a relatively fast pace, and asset prices have increased significantly (including housing prices in key metropolitan areas). These developments call for tighter fiscal policy. In addition, exchange rate flexibility should be used to discourage speculative flows, while faster reserve accumulation could be considered in cases where currencies are on the strong side of the range consistent with fundamentals. Prudential measures, such as tighter loan-to-value ratios, higher capital requirements, and limits on sectoral exposure, could also be deployed to prevent a buildup of financial vulnerabilities.

Sustaining high growth

From a supply perspective, Latin America’s growth over the last decade continued to be driven by increases in physical capital and labor. Productivity growth also picked up, contrary to the trends of past decades, but remains well below that recorded in other fast growing regions. During 2003–12, labor and capital accumulation contributed 3¾ percentage points to Latin America’s annual GDP growth, while total factor productivity contributed around ¾ percentage points.

With labor participation at historically high levels and very low unemployment rates, future growth would have to rely increasingly on productivity gains. Boosting productivity is not an easy task and countries need to tailor measures to the circumstances of each country. Policies that would be conducive to this outcome include higher investment in infrastructure and human capital, more modern legal frameworks, and more efficient and competitive product and labor markets. In the near term, it would be important for policymakers to calibrate macroeconomic policies based on a realistic assessment of the supply potential of the economy.

The key challenge for Latin America is to take advantage of the still favorable external conditions to anchor its progress in the last decade and lay the foundations for sustainable growth. This entails strengthening fiscal positions further, prudent management of capital flows to avoid financial excesses, and pressing ahead with structural reforms to increase productivity and potential growth.

(Versions in 中文, Français, 日本語, and Русский)

In analyzing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became  dominant—have given us a wealth of experience and mountains of data.  If we look over a 150 year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that  this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation. One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.  There are not only short‑run endogenous shocks; there are long‑run structural transformations and persistent shocks.  The models that focused on exogenous shocks simply misled us—the majority of the really big shocks come from within the economy.

Secondly, economies are not self-correcting.  It’s clear that we have yet to fully take on aboard this crucial lesson that we should have learned from this crisis: even in its aftermath, the tepid attempts to fix the economies of the United States and Europe have been a failure.  They certainly have not gone far enough.  The result is that we continue to face significant risks of another crisis in the future.

So too, the responses to the crisis have not brought our economies anywhere near back to full employment.  The loss in GDP between our potential and our actual output is in the trillions of dollars.

Of course, some will say that it could have been done worse, and that’s true. Considering that the people in charge of fixing the crisis included some of  the same ones who created it in the first place, it is perhaps  remarkable it hasn’t been a bigger catastrophe.

More than deleveraging, more than a balance sheet crisis: the need for structural transformation

In terms of human resources, capital stock, and natural resources, we’re roughly  at the same levels today that we were before the crisis.  Meanwhile, many countries have not regained their pre-crisis GDP levels, to say nothing of a return to the pre-crisis  growth paths. In a very fundamental sense, the crisis is still not fully resolved—and there’s no good economic theory that explains why that should be the case.

Some of this has to do with the issue of the slow pace of deleveraging.  But even as the economy deleverages, there is every reason to believe that it will not return to full employment.  We are not likely to return to the pre-crisis household savings rate of zero—nor would it be a good thing if we did.  Even if manufacturing has a slight recovery, most of the jobs that have been lost in that sector will not be regained.

Some have suggested that, looking at past data, we should resign ourselves to this unfortunate state of affairs.  Economies that have had severe financial crises typically recover slowly.  But the fact that things have often gone badly in the aftermath of  a financial crisis doesn’t mean they must go badly.

This is more than just a balance sheet crisis.  There is a deeper cause:  The United States and Europe are going through a  structural transformation.  There is a structural transformation associated with the move from manufacturing to a service sector economy.    Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries.

Reforms that are, at best, half-way measures

Markets by themselves do not in general lead to efficient, stable and socially acceptable outcomes.  This means we have to think a little bit more deeply about what kind of economic architectures will lead to growth, real stability, and a good distribution of income.

There is an ongoing debate about  whether we simply need to tweak the existing economic architecture or whether we need to make more fundamental changes.  I have two concerns.  One I hinted at earlier:  the reforms undertaken so far have only tinkered at the edges.  The second is that some of the changes in our economic structure (both before and after the crisis) that were supposed to make the economy perform better may not have done so.

There are some reforms, for instance, that may enable the economy to better withstand small shocks, but actually make it less able to absorb big shocks.  This is true of much of the financial sector integration that may have allowed the economy to absorb some of the smaller shocks, but clearly made the economy less resilient to fatter‑tail shocks.

It should be clear that many of the “improvements” in markets before the crisis actually increased countries’ exposure to risk.  Whatever the benefits that might be derived from capital and financial market liberalization (and they are questionable), there have been severe costs in terms of increased risk.  We ought to be rethinking attitudes towards these reforms—and the IMF should be commended for its rethinking in recent years.  One of the objectives of capital account management, in all of its forms, can be to reduce domestic volatility arising from a country’s international engagements.

More generally, the crisis has brought home the importance of financial regulation for macroeconomic stability.  But as I assess what has happened since the crisis, I feel disappointed.  With the mergers that have occurred in the aftermath of the crisis, the problem of too-big-to- fail banks has become even worse.  But the problem is not just with too-big-to-fail banks.  There are banks that are too intertwined to fail and banks that are too correlated to fail.  We have done little about any of these issues. There has, of course, been a huge amount of discussion about too- big-to-fail. But being too correlated is a distinct issue.  There is a strong need for a more diversified ecology of financial institutions that would reduce incentives to be excessively correlated and lead to greater stability.  This is a perspective that has not been emphasized nearly enough.

Also, we haven’t done enough to increase bank capital requirements.  Missing in much of the discussion is an assessment of the costs vs. benefits of higher capital requirements.  We know the benefits—a lower risk of a government bailout and a recurrence of the kinds of events that marked 2007 and 2008.  But on the cost side, we’ve paid too little attention to the  fundamental  insights of the Modigliani‑Miller Theorem, which explains the bogusness of arguments that increasing capital requirements will increase the cost of capital.

Deficiencies in reforms and in modeling

If we had begun our reform efforts with a focus on how to make our economy more efficient and more stable, there are other questions we would have naturally asked; other questions we would have posed.    Interestingly, there is some correspondence between these deficiencies in our reform efforts and the deficiencies in the models that we as economists often use in macroeconomics.

The importance of credit

We would, for instance, have asked what the fundamental roles of the financial sector are, and how we can get it to perform those roles better.  Clearly, one of the key roles is the allocation of capital and the provision of credit, especially to small and medium-sized enterprises, a function which it did not perform well before the crisis, and which arguably it is still not fulfilling well.

This might seem obvious. But a focus on the provision of credit has neither been at the center of policy discourse nor of the standard macro-models.  We have to shift our focus from money to credit.  In any balance sheet, the two sides are usually going to be very highly correlated.  But that is not always the case, particularly in the context of large economic perturbations.  In these, we ought to be focusing on credit.  I find it remarkable the extent to which there has been an inadequate examination in standard macro models of the nature of the credit mechanism. There is, of course, a large microeconomic literature on banking and credit, but for the most part, the insights of this literature has not been taken on board in standard macro-models.

But failing to manage credit is not the only lacuna in our approach.  There is also a lack of understanding of different kinds of finance.  A major area in the analysis of risk in financial markets is the difference between debt and equity.  And in standard macroeconomics, we have barely given this any attention. My book with Bruce Greenwald, Towards a New Paradigm of Monetary Economics ((Cambridge University Press, 2003) was an attempt to remedy this.

Stability

As I have already noted, in the conventional models (and in the conventional wisdom) market economies were stable.  And so it was perhaps not a surprise that fundamental questions about how to design more stable economic systems were seldom asked.  We have already touched on several aspects of this:  how to design economic systems that are less exposed to risk or that generate less volatility on their own.

One of the necessary reforms, but one not emphasized enough, is the need for more automatic stabilizers and fewer automatic destabilizers—not only in the financial sector, but throughout the economy. For instance, the movement from defined benefit to defined contribution systems may have led to a less stable economy.

Elsewhere, I have explained how risk sharing arrangements (especially if poorly designed) can actually lead to more systemic risk:  the pre-crisis conventional wisdom that diversification essentially eliminates risk is just wrong.  I’ve explored this is some detail in this article, along with this paper and this one.

Distribution

Distribution matters as well—distribution among individuals, between households and firms, among households, and among firms.  Traditionally, macroeconomics focused on certain aggregates, such as the average ratio of leverage to GDP.  But that and other average numbers often don’t give a picture of the vulnerability of the economy.

In the case of the financial crisis, such numbers didn’t give us warning signs. Yet it was the fact that a large number of people at the bottom couldn’t make their debt payments that should have tipped us off that something was wrong.

Across the board, our models need to incorporate a greater understanding of heterogeneity and its implications for economic stability.

Policy Frameworks

Flawed models not only lead to flawed policies, but also to flawed policy frameworks.

Should monetary policy focus just on short term interest rates? 

In monetary policy, there is a tendency to think that the central bank should only intervene in the setting of the short-term interest rate.  They believe “one intervention” is better than many.  Since at least 80 years ago with the work of Ramsey  we know that focusing on a single instrument is not generally the best approach.

The advocates of the “single intervention” approach argue that it is best, because it least distorts the economy.  Of course, the reason we have monetary policy in the first place—the reason why government acts to intervene in the economy—is that we don’t believe that markets on their own will set the right short-term interest rate.  If we did, we would just let free markets determine that interest rate.  The odd thing is that while just about every central banker would agree we should intervene in the determination of that price, not everyone is so convinced that we should strategically intervene in others, even though we know from the general theory of taxation and the general theory of market intervention that intervening in just one price is not optimal.

Once we shift the focus of our analysis to credit, and explicitly introduce risk into the analysis, we become aware that we need to use multiple instruments.  Indeed, in general, we want to use all the instruments at our disposal.  Monetary economists often draw a division between macro-prudential, micro-prudential, and conventional monetary policy instruments.  In our book Towards a New Paradigm in Monetary Economics, Bruce Greenwald and I argue that this distinction is artificial. The government needs to draw upon all of these instruments, in a coordinated way.  (I’ll return to this point shortly.)

Of course, we cannot “correct” every market failure. The very large ones, however—the macroeconomic failures—will always require our intervention.  Bruce Greenwald and I have pointed out that markets are never Pareto efficient if information is imperfect, if there are asymmetries of information, or if risk markets are imperfect.  And since these conditions are always satisfied, markets are never Pareto efficient.  Recent research has highlighted the importance of these and other related constraints for macroeconomics—though again, the insights of this important work have yet to be adequately integrated either into mainstream macroeconomic models or into mainstream policy discussions.

Price versus quantitative interventions

These theoretical insights also help us to understand why the old presumption among some economists that price interventions are preferable to quantity interventions is wrong.  There are many circumstances in which quantity interventions lead to better economic performance.

Tinbergen

A policy framework that has become popular in some circles argues that so long as there are as many instruments as there are objectives, the economic system is controllable, and the best way of managing the economy in such circumstances is to have an institution responsible for one target and one instrument.  (In this view, central banks have one instrument—the interest rate—and one objective—inflation.  We have already explained why limiting monetary policy to one instrument is wrong.)

Drawing such a division may have advantages from an agency or bureaucratic perspective, but from the point of view of managing macroeconomic policy—focusing on growth, stability and distribution, in a world of uncertainty—it makes no sense.  There has to be coordination across all the issues and among all the instruments that are at our disposal.  There needs to be close coordination between monetary and fiscal policy.  The natural equilibrium that would arise out of having different people controlling different instruments and focusing on different objectives is, in general, not anywhere near what is optimal in achieving overall societal objectives.  Better coordination—and the use of more instruments—-can, for instance, enhance economic stability.

Take this chance to revolutionize flawed models

It should be clear that we could have done much more to prevent this crisis and to mitigate its effects.   It should be clear too that we can do much more to prevent the next one. Still, through this conference and others like it, we are at least beginning to clearly identify the really big market failures, the big macroeconomic externalities, and the best policy interventions for achieving high growth, greater stability, and a better distribution of income.

To succeed, we must constantly remind ourselves that markets on their own are not going to solve these problems, and neither will a single intervention like short-term interest rates. Those facts have been proven time and again over the last century and a half.

And as daunting as the economic problems we now face are, acknowledging this will allow us to take advantage of the one big opportunity  this period of economic trauma has afforded: namely, the chance to revolutionize our flawed  models, and perhaps even exit from an interminable cycle of crises.

(Versions in 中文, 日本語, and Русский)

As I listened to the presentations and discussions, I found myself thinking about the conference from two perspectives. One is intellectual: Are we asking provocative questions? Are interesting ideas being proposed? Are we talking about important issues? By that standard, the conference was very successful: the discussion was extremely stimulating, and I learned a great deal.

The second perspective is practical: Where do we stand in terms of averting another financial and macroeconomic disaster? By that standard, unfortunately, I fear we are not doing nearly as well. As I will describe, my reading of the evidence is that the events of the past few years are not an aberration, but just the most extreme manifestation of a broader pattern. And the relatively modest changes of the type discussed at the conference, and that in some cases policymakers are putting into place, are helpful but unlikely to be enough to prevent future financial shocks from inflicting large economic harms.

Thus, I believe we should be asking whether there are deeper reforms that might have a large effect on the size of the shocks emanating from the financial sector, or on the ability of the economy to withstand those shocks. But there has been relatively little serious consideration of ideas for such reforms, not just at this conference but in the broader academic and policy communities.

The financial sector as a continued source of shocks

My view that we should think of financial shocks as closer to commonplace than to exceptional is based on history. Consider the United States over the past thirty or so years. By my count, there have been six distinct times over that period when financial developments posed important macroeconomic risks. In three of them, the risks were largely averted and the costs ended up being minor. In two, the costs were modest to moderate. And in one, the damage was enormous.

Concretely:

• In the throes of the Volcker disinflation, the combination of the severe recession and banks’ exposure to Latin American debt caused many major banks to be in serious trouble. It was only a last-minute turn in policy and the willingness of regulators to ignore the banks’ extremely shaky financial condition for a few years that kept the financial system from falling apart. So that was a danger averted.

• The 1987 stock market crash was a significant financial shock, but rapid and highly visible responses by the Federal Reserve to keep markets functioning and reduce interest rates again prevented large damage to the economy.

• The savings and loan crisis of the late 1980s and early 1990s did some damage to the economy through misallocation of investment and impaired lending, and somewhat more damage to the government budget through the direct costs of the bailout.

• The Russian debt crisis and the collapse of Long-Term Capital Management in 1998 caused central bankers some sleepless nights as they worried about the stability of the world financial system. Stability was preserved through the arranged rescue of LTCM, lower interest rates, and other actions. Thus, that is the third case where the danger was averted.

• The dot-com bubble and bust of the late 1990s and early 2000s caused a considerable misallocation of investment, and more importantly, a recession.

• And, obviously, we had the housing-price collapse and financial meltdown of the past few years, which have had catastrophic effects.

Given that record for just one country over a third of a century, the idea that large financial shocks are rare, and that we therefore should not worry greatly about them, seems fundamentally wrong.

What I find striking about this list is not just its length, but its variety. And if you look outside the United States, it is easy to find examples of other kinds of financial shocks. You see Iceland and Cypress, where the financial shock came from a vastly expanded banking sector with huge foreign deposits. You see Greece, where the problem was disguised fiscal profligacy. You see the classic sudden stops. And I am sure that with a little more work, you could add even more types of financial shocks to the list.

In short, the range of potential financial shocks is long and varied. There are only a few on my illustrative list of domestic and foreign financial shocks that took the form of big run-ups in asset prices followed by some kind of crash. Indeed, there are only two (the dot-com episode and the recent crisis) that ex post one could reasonably call bubbles. So I think the right conclusion to draw is that financial shocks are likely to be both frequent and hard to predict – not just in their timing but in their form.

Small-scale solutions

The question, then, is what to do. Let me start with two small-scale policies, one of which I think is largely a nonstarter and one of which I think will be helpful but very far from a complete solution to the risks of future crises.

The nonstarter is using the short-term policy rate as a tool for dealing with financial imbalances and financial risks. Even if that were the only objective we were using the policy rate for, it is much too crude. Often the concern is a potential problem in one part of financial markets, or different types of problems in different markets. In such situations, a single tool that affects all markets is of limited value. Indeed, as Janet Yellen pointed out in the discussion, often it is not even clear which direction you would want to move the policy rate to address a potential financial risk to the economy. And, of course, we want to use it for other very important purposes as well. So we can debate whether there is a little bit of benefit to taking financial developments more into account in the setting of interest rates, but at best it can improve things only marginally.

The type of small-scale policy that I think is more promising is the one we heard about in the sessions on macroprudential policies and capital account management. The positive way to put it is that it is the wise central banker model; the negative way to say it is that it is the “Whac-a-Mole” strategy. Regardless of how one labels it, the idea is to use regulations and interventions creatively to address potential problems as they develop. For example, if you think there is a bubble developing in the real estate market in Seoul, you adopt regulations directed specifically at mortgages in Seoul.

I was very impressed with the descriptions of policymakers’ actions in such countries as Israel, South Korea, and Brazil in dealing with a wide range of financial developments, and one thing I learned from the conference is that such targeted actions are a useful addition to the policy toolkit. But given the enormous range of potential financial shocks, the idea that we are going to stabilize the financial system by counting on very smart policymakers to perceive each problem as it is developing and design a specific intervention to target it quickly is surely wishful thinking.

What I take from this is that we need to be thinking more broadly and creatively, looking for more fundamental solutions rather than particular interventions. At a general level, these can take two forms.

Deeper solutions on the financial side

The first approach is to reform the financial system so that the shocks that it sends to the real economy are much smaller. The discussion of micro regulation showed that there are promising ideas in that area. Here I am thinking of stronger capital and liquidity requirements, special rules for institutions that create more systemic risk, and restrictions on the form or capabilities of what financial institutions can do, such as ring fencing in the United Kingdom and the Volcker rule in the United States. Those approaches are broader than responding to individual problems as they arise, and they all appear to be promising avenues.

But at the end of the day, it is hard to believe that the relatively modest changes along these dimensions that were talked about at the conference are really big enough to give us a financial system that is so robust that it is not going to periodically cause severe problems. Shadow financial institutions may escape the rules altogether; rules can be gamed; and shocks can be so large that they overwhelm the moderate changes that were being discussed.

Thus, I was disappointed to see little consideration of much larger financial reforms. Let me give four examples of possible types of larger reforms:

• There were occasional mentions of very large capital requirements. For example, Allan Meltzer noted that at one time 25 percent capital for was common for banks. Should we be moving to such a system?

• Amir Sufi and Adair Turner talked about the features of debt contracts that make them inherently prone to instability. Should we be working aggressively to promote more indexation of debt contracts, more equity-like contracts, and so on?

• We can see the costs that the modern financial system has imposed on the real economy. It is not immediately clear that the benefits of the financial innovations of recent decades have been on a scale that warrants those costs. Thus, might a much simpler, 1960s- or 1970s-style financial system be better than what we have now?

• The fact that shocks emanating from the financial system sometimes impose large costs on the rest of the economy implies that there are negative externalities to some types of financial activities or financial structures, which suggests the possibility of Pigovian taxes.

So, should there be substantial taxes on certain aspects of the financial system? If so, what should be taxed – debt, leverage, size, other indicators of systemic risk, a combination, or something else altogether?

I do not know the answers to these questions, but it seems to me that they deserve serious analysis. Yet radical redesign of the financial system was largely missing from the conference.

Larger-scale solutions on the macroeconomic side

The other way to make larger changes is to try to make the macroeconomy more resilient to financial shocks. I thought the lack of discussion of possible changes in this dimension was the largest gap in the conference. Let me discuss this issue in three areas of macro policy: measures to deal with shocks to a common currency area; monetary policy; and fiscal policy.

With regard to a common currency area: imagine that at some point in the not-too-distant future, the eurozone is hit with another large financial shock that has asymmetric effects across different countries. Are things going to play out very differently than they have over the past few years?

There would surely be fewer late-night meetings, because policymakers have learned more about how to do short-term crisis management. But I see little progress toward measures that would cause any fundamental changes in the effects the shock would have. Policymakers have taken at most baby steps toward addressing the instabilities created by the fact that the responsibility for cleaning up insolvent banks is at the level of individual countries rather than of the eurozone as a whole. And even less has been done in terms of a fiscal union and in terms of mechanisms to deal with large differences in competitiveness.

Concerning monetary policy, inflation targeting appeared to be a wonderful framework for its first fifteen or twenty years. But we have now had an extended period where it has shown itself incapable of providing aggregate demand at the level that is widely recognized to have been needed. So it seems important to think about whether we should have a different framework for monetary policy. But again, progress has been minimal. The idea of targeting a nominal GDP path has been mentioned on and off for a few years, but the debate has not proceeded to serious quantitative analysis of its costs and benefits and of whether it could make the economy substantially more resilient. And other ideas for significant changes in the monetary policy framework have been discussed even less.

With regard to fiscal policy, I think the biggest idea that has achieved substantial support is that it would be desirable to have more fiscal space. But how to get from here to there, given the challenges of just getting back to the amount of fiscal space we had before the crisis, is a hard issue, and one on which progress has been minimal. And given the terrible problems that have afflicted some countries that started the crisis with very responsible fiscal policies, fiscal space is clearly not a magic bullet.

I heard virtually no discussion of larger changes to the fiscal framework. The possibility of measures to make automatic stabilizers stronger, for example through macroeconomic triggers for changes in fiscal policy, was not mentioned. And the status of this idea in the broader policy community resembles the status of targeting a nominal GDP path: the idea is mentioned from time to time, but has not proceeded to the point of concrete proposals and quantitative evaluation.

Another fiscal idea that has received little attention either at the conference or in the broader policy debate is the idea of fiscal rules or constraints. For example, one can imagine some type of constitutional rule or independent agency (or a combination, with a constitutional rule enforced by an independent agency) that requires highly responsible fiscal policy in good times, and provides a mechanism for fiscal stimulus in a downturn that is credibly temporary. Roberto Perotti and Avinash Dixit raised the idea of fiscal rules or councils very briefly, but it got no further than that.

The fact that we are making so little progress in terms of larger changes on the macro policy side appears to further strengthen the case for thinking about deeper financial reforms. But I also think we need broader thinking about the macro side.

Conclusion

After five years of catastrophic macroeconomic performance, “first steps and early lessons” – to quote the conference title – is not what we should be aiming for. Rather, we should be looking for solutions to the ongoing current crisis and strong measures to minimize the chances of anything similar happening again. I worry that the reforms we are focusing on are too small to do that, and that what is needed is a more fundamental rethinking of the design of our financial system and of our frameworks for macroeconomic policy.