On A Roll: Sustaining Strong Growth in Latin America


By Sebastián Sosa, Evridiki Tsounta, and Hye Sun Kim

(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.

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The Long-term Price of Financial Reform


by André Oliveira Santos and Douglas J. Elliott

In response to the global crisis, policymakers around the world are instituting the broadest reform of financial regulation since the Great Depression.

Some in the financial industry claim the long-run economic costs of these global reforms outweigh the benefits. But our new research strongly suggests the opposite—the reforms are well worth the money.

Granted, just as adding fenders, safety belts, airbags, and crash avoidance features can make cars slower, we know that additional safety measures can slow down the economy in years when there is no crisis. The payoff comes from averting or minimizing a disaster.

Five years after the onset of the current crisis, we sadly know all too well the cost in terms of economic growth, so the potential gains in avoiding future crises are very large.

Our study finds that the likely long-term increase in credit costs for borrowers is about one quarter of a percentage point in the United States and lower elsewhere. This is roughly the size of one small move by the Federal Reserve or other central banks. A move of that size rarely has much effect on a national economy, suggesting relatively small economic costs from these reforms.

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Promoting Multilateral Solutions for a Globalized World


Jeremy CliftBy Jeremy Clift

(Version in Español عربي)

We live in an increasingly globalized and interconnected world, helping to spread ideas, information, and technology ever more quickly. The globalized economy has created a complex and interlocking network of capital and trade flows that have brought major economic gains, lifting hundreds of millions of people out of poverty around the world.

But, as we have seen from the prolonged global financial crisis, our interconnectedness carries grave risks as well as benefits. With instant communication comes the risk of rapid contagion. There is, thus, a strong public interest in ensuring that global economic integration is supported by a coherent set of coordinated national macroeconomic policies and a harmonized international regulatory regime that addresses the fragilities in our global financial system.

The new issue of Finance & Development magazine looks at different aspects of interconnectedness. Kishore Mahbubani, dean of the National University of Singapore’s Lee Kuan Yew School of Public Policy and author of the forthcoming book The Great Convergence: Asia, the West, and the Logic of One World, argues that what he terms the global village increasingly requires global solutions to big emerging problems such as climate change.

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Lost & Found in Eastern Europe: Replacing Funding by Western Europe’s Banks


By Bas Bakker and Christoph Klingen

With Western Europe’s banks under pressure, where does this leave Europe’s emerging economies and their financial systems that are dominated by subsidiaries of these very same banks?  There is little doubt that the era of generous parent-funding for subsidiaries is over.  But parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe.

A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets fill the void. Policymakers should create the conditions for this to happen.

The ties that bind

The dependence of the banking systems in emerging Europe on Western European banks is well known:

  • Ownership— foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe. Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia. Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.

Global Financial Stability: What’s Still To Be Done?


By José Viñals

(Versions in Español, عربي)

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Much has been done

In recent months, important and unprecedented policy steps have been taken to quell the crisis in the euro area. At the national level, stronger policies are being put in place in Italy and Spain; a new agreement has been reached on Greece; and Ireland and Portugal are making good progress in implementing their respective programs. Importantly, the European Central Bank’s decisive actions have supported bank liquidity and eased funding strains, while banks are reinforcing their capital positions under the guidance of the European Banking Authority. Finally, steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the “firewall” at the euro area level.

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Latin America: Making the Good Times Last


By Nicolás Eyzaguirre

(Version in Español)

Last week I attended the Annual Meeting of the Inter-American Development Bank in Montevideo, Uruguay where I gave a preview for growth in the region.

If I had to summarize the global backdrop for Latin America in four words, I would say “favorable, but still risky.” The global setting is favorable for two reasons:

  • First, some of the recent data has come in a bit stronger than expected, particularly figures on U.S. economic activity and employment. In the emerging markets sphere, growth remains fairly solid. Notably, China continues to put in a good performance, even though growth is easing and its exports are down somewhat. Good growth in Asia supports demand for Latin America’s key commodity exports, keeping terms of trade favorable.
  • Second, major countries have taken some important policy steps to underpin global growth and stability. In Europe, the European Central Bank’s Long Term Refinancing Operation has eased liquidity pressures for European banks and sovereigns and headed off a large deleveraging that would have crimped growth. Also, stronger fiscal adjustment programs and progress in resolving Greece’s stresses have supported confidence. In the United States, the Federal Reserve’s lengthening into 2014 of its commitment to maintain ultra-low interest rates, along with the extension of payroll tax relief and unemployment benefits, are bolstering demand and employment.

Overall, conditions and the outlook remain relatively favorable for the region. Commodity prices continue to ride high, despite some recent setbacks, thanks to buoyant emerging-market demand. Accommodative monetary policies in the major countries, and ample liquidity, maintain easy financing conditions for the more creditworthy countries. Indeed, the reemergence of strong capital inflows is again putting unwelcome upward pressure on exchange rates in some financially-open countries.

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