The Time is Nigh: How Reforms Can Bring Back Productivity Growth in Emerging Markets


By  Era Dabla-Norris and Kalpana Kochar

(Version in Español)

The era of remarkable growth in many emerging market economies fueled by cheap money and high commodity prices may very well be coming to an end.

The slowdown reflects not just inadequate global demand, but also structural factors that are rendering previous growth engines less effective, and the fact that economic “good times” reduced the incentives to implement further reforms to enhance productivity. With the end of the period of favorable global financing and trade conditions, the time is nigh for governments to make strong efforts to increase productivity—the essential foundation of sustainable growth and rising living standards. Continue reading

Lurking in the Shadows—The Risks from Nonbank Intermediation in China


By Nigel Chalk

(Version in 中文)

One of my all-time favorite movies is “The Third Man” starring Orson Welles and Joseph Cotten. It is a British film noir from the 1940s. Perhaps the most striking part of the movie is the shadowy cinematography, set in post-World War II Vienna. Strangely, it springs to mind lately when I have been thinking of China.

Many China-watchers looked on in awe in 2009 as the government’s response to the global financial crisis unfolded, causing bank lending as a share of the economy to expand by close to 20 percentage points in less than a year. This, subsequently, led to a lot of hand-wringing about the consequences of those actions and the eventual credit quality problems that China would have to confront and manage.

However, around the same time, a less visible phenomenon was also getting underway. One that, like Orson Welles’ character in the movie, resided firmly in the shadows. Various types of nonbank financial intermediaries—some new, some old—were gearing up to provide a conduit through which China’s high savings would be tapped to finance the corporate sector. The available data on this is terrible—the central bank’s numbers on social financing are the only credible and comprehensive public source, but even that gives only a partial picture.

Talking to people in China, and looking at what numbers are available, one cannot help but have an uneasy feeling that more credit is now finding its way into the economy outside of the banking system than is actually flowing through the banks. Continue reading

A Tale of Titans: The Too Important to Fail Conundrum


By Aditya Narain and İnci Ötker-Robe

Folklore is riddled with tales of a lone actor undoing a titan: David and Goliath; Heracles and Atlas; Jack and the Beanstalk, to name a few.

Financial institutions seen as too important to fail have become even larger and more complex since the global crisis. We need look no further than the example of investment bank Lehman Brothers to understand how one financial institution’s failure can threaten the global financial system and create devastating effects to economies around the world. Continue reading

Global Recovery Strengthens, Tensions Heighten


By Olivier Blanchard

The world economic recovery is gaining strength, but it remains unbalanced.

Three numbers tell the story. We expect the world economy to grow at about 4.5 percent a year in both 2011 and 2012, but with advanced economies growing at only 2.5 percent, while emerging and developing economies grow at a much higher 6.5 percent.

On the good news side. Earlier fears of a double dip—which we did not share—have not materialized. Continue reading

Time Waits for No Man: How to Secure Financial Stability in 2011


By José Viñals

(Version in Español | 中文 | Français | 日本語 | Русский | عربي )

This morning, I presented our latest views on global financial stability in Johannesburg, South Africa.

So, where does the global financial system stand at the moment? Yes, we have witnessed improvements recently, but we are also observing a dichotomy between the economy and the financial system. While the global economic recovery has been continuing, financial stability is still at risk, because of a persistent lack of investor confidence in some advanced country sovereigns and their banking systems.

At this cross-roads, we see three key messages. Continue reading

Financial System Fragilities – Achilles’ Heel of Economic Recovery


By José Viñals

It would be unfair for any assessment of global economic and financial stability not to acknowledge that tremendous progress has been made in repairing and strengthening the financial system since the onset of the global crisis.

Still, the key message from the IMF’s October 2010 Global Financial Stability Report (GFSR) is clear. Progress toward global financial stability has suffered a setback over the past six months—the financial system remains the Achilles’ heel of the economic recovery. Continue reading

Just Do It—Shaping the New Financial System


By José Viñals

Fearful financial markets, an uncertain growth outlook, fiscal anxieties, long unemployment lines….no other financial crisis since the Great Depression has led to such widespread dislocation in financial markets, with such abrupt consequences for growth, trade, and employment.

The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision―nationally and internationally―of financial institutions and markets.

On the bright side, the crisis has provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? Continue reading

Forewarned Is Forearmed: How the Early Warning Exercise Expands the IMF’s Surveillance Toolkit


By John Lipsky

“Never again can we let ourselves be caught unprepared by an economic and financial crisis of such global magnitude.” This was the spirit in which G-20 Finance Ministers in late 2008 tasked the IMF and the newly-formed Financial Stability Board to jointly develop an Early Warning Exercise (EWE), to be ready by the IMF’s 2009 Istanbul Annual Meetings.

The inspiration was clear: In the wake of the September 2008 onset of unprecedented financial turmoil, policymakers recognized that earlier danger signs had not been synthesized into an actionable warning. The EWE was intended to fill the analytical gap: the goal is to produce an effective “call to arms” as threats emerge—but well before crises erupt. Continue reading

Toto, we’re not in Kansas anymore: Exploring the Contours of the Financial System After the Tornado


By Laura Kodres

Just as a tornado in Kansas transplanted Dorothy and, her dog, Toto, from familiar comforts to the unknown land of Oz, the global crisis has led many to wonder what has become of the global financial system and, more importantly, what will it look like next. Is the wicked witch of the West—excessive risk taking and leverage—really dead?

But now, as the storm subsides, there is time to speculate about what the future financial sector might look like. My IMF colleague, Aditya Narain, and I have done just that in a new Staff Position Note that attempts to discern the contours of this new financial landscape. What is clear is that the new landscape will be influenced by both the private and public sectors—their reactions to the crisis and to each other.

Continue reading

Don’t Forget Financial Sector Reform


By John Lipsky

There is a broad consensus on at least one conclusion from the turmoil of the past few years: Fundamental changes are needed in the global financial sector.

Some of these changes seem relatively clear:

  • Risk management of many financial firms needs strengthening
  • Compensation schemes need to be re-evaluated
  • Capital standards need to be bolstered
  • Regulation needs fundamental reform
  • Supervision needs to be improved
  • And financial institutions’ balance sheets need to be freed of the burden of impaired assets.

Nonetheless, important tradeoffs will have to be addressed—and political hurdles surmounted—before significant progress can be achieved.

Continue reading

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