Taking Away the Punch Bowl: Lessons from the Booms and Busts in Emerging Europe

Posted on September 10, 2012 by iMFdirect

By Bas B. Bakker and Christoph Klingen

With all eyes on the euro area, it is easy to forget that only a few years ago the emerging economies of Europe, from the Baltic to the Black Sea, went through a deep economic and financial crisis. This crisis is the topic of a new book that we will introduce to the public this week in Bucharest, London, and Vienna.

One lesson is that your best chance to prevent deep crises is forcefully addressing booms before they get out of hand. Another is that even crises that look abysmal can be contained and overcome— policies to adjust the economy and international financial support do work.

In the half decade leading up to the crisis, easy global financial conditions, confidence in a rapid catch-up with western living standards, and initially underdeveloped financial sectors spawned a tremendous domestic demand boom in the region. Western banking groups bankrolled the bonanza, providing their eastern subsidiaries with the funds to extend the loans that fueled the domestic boom. (more…)

Filed under: Economic Crisis, Emerging Markets, Europe, International Monetary Fund, Public debt | Tagged: , , , , , , , , , , , , , , | 9 Comments »

Growing Institutions? Grow the People!

Posted on August 10, 2012 by iMFdirect

By Sharmini Coorey

(Version in Español)

“When you speak about institutions, in fact, you are speaking about the people.” These words, by Kosovo’s central bank governor Gani Gergüri at a recent conference in Vienna, capture an important truth that is often overlooked when we economists discuss amongst ourselves: without sound institutions, it’s very hard to achieve sustainable economic growth.

And the quality of those institutions hinges on the quality of the people running them―their educational background and training, and the prevailing business culture and approach to policymaking.

The work of Douglass North and the school of thought known as the new institutional economics has taught us that differences in deep institutions—defined as the formal and informal rules of economic, political and social interactions—are responsible for sustained differences in economic performance. This is also the central thesis in Acemoglu and Robinson’s fascinating new book, Why Nations Fail.

Inclusive (as opposed to extractive) economic and political institutions are central in nations’ efforts to avoid stagnation and ensure sustained prosperity. This is because sustained prosperity is a dynamic process of constant innovation and a never-ending cycle of Schumpeterian creative destruction, which can only be supported by open, inclusive institutions. Their thesis is certainly consistent with the contrasting experience of different countries in Central, Eastern and Southeastern Europe under communism and during the past two decades.

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Filed under: Advanced Economies, Africa, Asia, Civil Society, Economic Crisis, Emerging Markets, Employment, Europe, Finance, Financial sector supervision, Global Governance, Globalization, IMF, Inequality, International Monetary Fund, Latin America, LICs, Low-income countries, Middle East, Multilateral Cooperation, Politics | Tagged: , , , , , , , , , , , , , , , , , , , , , , , | 3 Comments »

Signs of Fiscal Progress: Will It Be Enough?

Posted on July 18, 2012 by iMFdirect

By Carlo Cottarelli

(Versions in  عربي, 中文, Español, Français, Русский, 日本語)

We’ve just updated our latest assessment of the state of government finances, debts, and deficits in advanced and emerging economies.

Fiscal adjustment is continuing in the advanced economies at a speed that is broadly appropriate, and roughly what we projected three months ago. In emerging economies there’s a pause in fiscal adjustment this year and next, but this too is generally appropriate, given that many of these countries have low debt and deficits.

The improvement in fiscal conditions in many advanced economies is welcome, but it’s going to take more than lower deficits to get countries under market pressure out of the crosshairs.
(more…)

Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Employment, Europe, Fiscal policy, Fiscal Stimulus, growth, IMF, International Monetary Fund, Public debt | Tagged: , , , , , , , , , , , , , , , , , | 3 Comments »

World Faces Weak Economic Recovery

Posted on July 16, 2012 by iMFdirect

By Olivier Blanchard

(Versions in  عربي, 中文, Español, Français, Русский, 日本語)

The global recovery continues, but the recovery is weak; indeed a bit weaker than we forecast in April.

In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries.  In the United States, growth is positive, but too low to make a serious dent to unemployment.

Growth has also slowed in major emerging economies, from China to India and Brazil.

Downside risks, coming primarily from Europe, have increased.

Let me develop these themes in turn.

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Filed under: Economic Crisis, Advanced Economies, Emerging Markets, International Monetary Fund, IMF, growth, Economic research, Europe, Fiscal policy, Employment, Economic outlook | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 10 Comments »

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

Posted on June 13, 2012 by iMFdirect

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.

Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Europe, Finance, growth, IMF, International Monetary Fund | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments »

Fiscal Consolidation: Striking the Right Balance

Posted on May 8, 2012 by iMFdirect

By David Lipton

(Version in Español, in عربي)

The debate on austerity vs. growth has gained in intensity, as countries in Europe and elsewhere struggle with low growth, high debt, and rising unemployment. In essence, policymakers are being asked to tackle a continuation of the worst crisis since the Great Depression.

This would be no easy task under any circumstances. But it is made considerably harder by the fact that a number of countries need to engage in fiscal consolidation simultaneously. Complicating the picture further is the fact that monetary policy in most advanced economies is approaching the limits of what it technically can do to stimulate activity, while global growth remains weak.

There is no getting around the need to reduce debt levels. High debt leaves countries exposed to interest rate shocks, limits their capacity to respond to future shocks, and reduces long-term growth potential.

At the same time, we all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can and usually does stifle growth. With more than 200 million people out of work worldwide, and with growth in advanced countries forecast at a mere 1½ percent for 2012, getting the pace of consolidation right is therefore of paramount importance. So how do policymakers strike the right balance?

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Filed under: Advanced Economies, Economic Crisis, Economic outlook, Economic research, Emerging Markets, Employment, Europe, Finance, Financial Crisis, Fiscal policy, growth, IMF, Inequality, International Monetary Fund, Multilateral Cooperation, Public debt, recession | Tagged: , , , , , , , , , , , , , , , , , | 8 Comments »

Making Goldilocks Happy

Posted on April 20, 2012 by iMFdirect

By Carlo Cottarelli

When it comes to adjusting public spending, getting the balance right is important. Fiscal adjustment is taking place in economies around the world, but risks remain high. Bringing debt and deficits down to more moderate levels is important to easing risks.

From one perspective, the sooner this happens, the better.

But, slashing budgets too abruptly can impede the overall economic recovery. And if the recovery stalls, debt and deficits will rise, and so will unemployment.

According to our analysis, what is needed is a steady but gradual adjustment. So, as we’ve been saying at the IMF for a while now, the pace of adjustment needs to be appropriate—not too fast, not too slow, but just right, for countries where financing conditions allow.

Improving picture

Compared to six months ago, there has been some decline in risks. This is primarily because of progress in policy implementation, with progress being made particularly in Europe.

(more…)

Filed under: Advanced Economies, Economic Crisis, Economic outlook, Economic research, Finance, Fiscal policy, growth, recession | Tagged: , , , , , , , , , , , , | 2 Comments »

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

Posted on April 18, 2012 by iMFdirect

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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Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Europe, Finance, Financial Crisis, Financial regulation, Financial sector supervision, G-20, IMF, International Monetary Fund | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 5 Comments »

Disappearing Deficits

Posted on March 28, 2012 by iMFdirect

By Tim Irwin

Suppose a government must reduce its budget deficit. Perhaps it made a commitment to do so; perhaps investors are beginning to doubt its ability to repay debt. It could cut spending or raise taxes, but that is painful and unpopular. What can it do?

In our work at the IMF, we sometimes discover that governments choose to employ accounting devices that make the deficit smaller without actually causing any pain, and without actually improving public finances.

In ideal accounting, this would not be possible. In real accounting, it sometimes is.

How the devices work

Some governments, for example, have been able to reduce their reported deficits by taking over companies’ pensions schemes. The government’s obligation to make future pension payments has a real cost, but it doesn’t count as a liability in the accounting. So when the government receives a pension scheme’s assets from the company, it can treat the receipt of those assets as revenue that reduces its deficit.

Many other governments have been able to defer spending, without significantly reducing it in the long run, by entering into public-private partnerships. Under these contracts, a private company builds and maintains an asset like a road or a hospital. In return, the government agrees to pay the company for its costs over 20 or 30 years. In a sense, the government has bought the asset on an installment plan, but government accounting seldom counts this obligation as a liability.

In each of the above cases—and in others analyzed in my note, Accounting Devices and Fiscal Illusions—the government’s deficit is lower at first, but only at the expense of bigger future deficits.

(more…)

Filed under: Advanced Economies, Economic research, Emerging Markets, Financial sector supervision, Global Governance, Globalization, IMF, International Monetary Fund, Low-income countries, Public debt | Tagged: , , , , , , , , , , | 7 Comments »

Avoiding a Lost Generation

Posted on March 15, 2012 by iMFdirect

By Nemat Shafik (Version in  عربي)

Young people were innocent bystanders in the global financial crisis, but they may well end up paying the heaviest price for the policy mistakes that have led us to where we are today.

Young people will have to pay the taxes to service the debts accumulated in recent years.

Moreover, the global economy is threatened by continued strains in the euro area, and unemployment is still climbing in several countries, in particular in Europe. Young people (those aged 15 to 24) are the most affected, and youth unemployment has reached record levels in a number of countries.

If the right policies are not put into place, there is a risk not only of a lost decade in terms of growth but also of a lost generation.

Consider this. In Spain and Greece, nearly half of all young people cannot find jobs. In the Middle East, young people account for 40 percent or more of all unemployed people in Jordan, Lebanon, Morocco, and Tunisia and nearly 60 percent in Syria and Egypt. And in the United States, which traditionally has had a strong job creation record, more than 18 percent of all young job seekers cannot find employment.

Legacy of loss

Youth unemployment has long-term consequences for economic growth because of the loss or degradation of human capital. But it also has many other consequences, both for the individuals affected and for society as a whole.

(more…)

Filed under: Advanced Economies, Economic Crisis, Economic outlook, Economic research, Emerging Markets, Financial Crisis, growth, IMF, Inequality, Low-income countries, Middle East, Public debt, recession | Tagged: , , , , , , , , , , , , , , , , , | 13 Comments »

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