Asia and the IMF: A Closer Engagement


By Anoop Singh

In just a few days’ time, the Korean government and the IMF will jointly host a high-level international conference in Daejeon, Korea. At the Fund, we are trying continually to enhance our strategic dialogue with Asia, and the conference is an important part of this effort.

Asia’s leadership of the global recovery is undeniable, as I have said in earlier blogs. And the extensive reforms and improved macroeconomic policy frameworks that underpinned the region’s remarkable resilience to the global crisis will see Asia’s successes continue. In just two short decades, we expect it to become the largest economic region in the world.

The Korea conference will be an opportunity to showcase Asia’s economic successes, and also highlight the importance of regional integration and cooperation, which has been growing rapidly in Asia.

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Global Economy: Continuing Recovery But Clouds on the Horizon


By Olivier J. Blanchard 

The macroeconomic forecasts in the IMF’s latest  World Economic Outlook update reflect two opposing forces. Looking back, say over the first half of the year, numbers about economic activity have come in strong, indeed somewhat stronger than we had forecast. These would give reasons to be more optimistic than we were earlier.

Looking forward, however, strong clouds have appeared on the horizon.  They present real dangers and serious policy challenges, and give reasons to be less optimistic than we were earlier.

Assessing the balance of these two forces is a difficult exercise. Our forecast for world growth in 2010 is about 4½ %, a bit higher than our April forecast of around 4¼ %. This revision largely reflects the stronger activity during the first half of the year. Our forecast for 2011 is broadly unchanged, at about 4¼ %.

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Financial Reform: What Must Be Done


By José Viñals

Financial system reform has reached a critical point around the world. Pressure is building from the financial industry to slow reform and concerns about fiscal conditions risk drawing public and political energies away from the need to act on financial sector problems. Fortunately, the Group of Twenty (G-20) reaffirmed its commitment at a summit in Toronto on June 26-27 to a comprehensive reform agenda—and we must seize the moment.

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Ten Commandments for Fiscal Adjustment in Advanced Economies


By Olivier Blanchard and Carlo Cottarelli

(Version in عربي   中文    Français    Русский   Español)

Advanced economies are facing the difficult challenge of implementing fiscal adjustment strategies without undermining a still fragile economic recovery. Fiscal adjustment is key to high private investment and long-term growth. It may also be key, at least in some countries, to avoiding disorderly financial market conditions, which would have a more immediate impact on growth, through effects on confidence and lending. But too much adjustment could also hamper growth, and this is not a trivial risk. How should fiscal strategies be designed to make them consistent with both short-term and long-term growth requirements?

We offer ten commandments to make this possible. Put simply, what advanced countries need is clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms. With a little help from monetary policy, and from their (emerging market) friends.

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Emerging Europe: Managing Large Capital Flows


By Marek Belka

Conventional wisdom has been that capital flows are a blessing to emerging economies, bringing needed funds to countries where investments are most productive. But if history is any guide, capital flows have proven to be highly volatile—surging in good times and collapsing in gloomy ones.

The global financial crisis has renewed the debate over the desirability of capital flows to emerging economies. Adding fuel to this debate is the fact that two of the world’s largest emerging economies—China and India—have experienced strong growth and relatively limited fallout from the crisis, all the while maintaining hefty restrictions on the flow of foreign capital.

What can be done to ensure that emerging economies still benefit from productive foreign capital, while reducing the risks associated with highly volatile flows? Can we throw out the bathwater, but keep the baby?

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Unwinding Crisis Policies in Europe: Are We There Yet?


By Marek Belka

Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. This is something that IMF Managing Director Dominique Strauss-Kahn has repeatedly emphasized. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis, as Wolfgang Munchau and others have argued recently. I also agree with Jean Pisani-Ferry and his colleagues that exiting in an uncoordinated fashion will lead to a renewed build up of financial instability.

To successfully unwind the extraordinary policy measures taken in response to the crisis, we need more than just a good sense of the state of the economic recovery and the degree of financial stability. We also need to know to what extent the global economy currently is influenced by those supportive policy measures. Is it safe yet to change course?

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Too Important to Fail?


By José Viñals

Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.

We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons. 

  • When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard
  • Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector. 
  • Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.

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The Puzzle of Asia’s Rapid Rebound


By Anoop Singh

Now here’s the puzzle: how is it that Asia has rebounded sooner and more strongly than the rest of the globe from the economic slump when the region is so heavily dependent on exports for its growth? This, and the future prospects for the region, are two of the key issues we analyzed in the latest Regional Economic Outlook (REO) for Asia and the Pacific, recently launched in Seoul and Tokyo.

There are three pieces to the puzzle of Asia’s rebound: 

  • Exports (in value added terms) account on average for about one-third of GDP in emerging Asian countries, while many of the region’s large firms depend on global capital markets to finance their investment projects.
  • Recovery in the rest of the world has been unsteady.
  • Yet Asia’s own GDP figures for the third quarter have been impressive: Korea grew nearly 3 percent in that quarter alone, Singapore grew even faster, and China’s growth accelerated to 9 percent year-on-year, propelled by booming investment. 

Mideast Oil Exporters Face the Crisis Head On


By Masood Ahmed

Middle East oil exporters are squarely facing the worst financial crisis since the Great Depression head on. Despite the sharp drop in oil prices last year, the oil exporters rightly decided to maintain spending by drawing upon reserves amassed during the boom years.

High public spending and exceptional anticrisis financial measures have not only cushioned oil exporters’ own economies but are also contributing to sustaining global demand. They have also helped the interlinked economies of neighboring oil importers. 

Facing this boom-bust cycle 

Between 2004 and 2008, Middle East oil-exporting countries grew by about 6 percent a year and accumulated $1.3 trillion in foreign assets. With the striking drop in oil prices—from a peak of $147 per barrel in mid-2008 to around $30 per barrel at the beginning of 2009—the countries of the Gulf Cooperation Council (GCC) have been hardest hit. Iraq and Saudi Arabia are expected to see the most pronounced drops in oil GDP growth—8 and 15 percentage points, respectively—this year.

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

During the precrisis boom years, banks had lent substantial amounts for real estate and equity purchases and made large profits. With the onset of the crisis, asset values fell sharply and the global deleveraging led to a severe tightening of credit conditions, especially in the GCC. Banks’ balance sheets have come under pressure credit growth has slowed sharply—up to 40 percentage points in Qatar.

 

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A Generous Host—Twice


By Caroline Atkinson

Many of the world’s policymakers are now on their way to Turkey to attend the Annual Meetings of the IMF and the World Bank, where they are expected to make further progress toward addressing the global financial crisis. 

And, equally importantly, the Meetings are a chance for Turkey to showcase its role as an important player in the global economy. 

At a packed press conference on September 30, Turkey’s Deputy Prime Minister and Economy Minister Ali Babacan said that Turkey’s hosting of “such strategically important meetings is a very important event…It is a new occasion to enhance the visibility of not only Turkey but also Istanbul.”   

Turkey's Deputy Prime Minister and Economy Minister Ali Babacan: "A new occasion to enhance the visibility of not only Turkey but also Istanbul” (photo: Stephen Jaffe/IMF)

Turkey's Deputy Prime Minister and Economy Minister Ali Babacan: "A new occasion to enhance the visibility of not only Turkey but also Istanbul” (photo: Stephen Jaffe/IMF)

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