To Owe or Be Owned—Depends on How You Tax It


By Ruud de Mooij

In February, President Obama said “Companies are taxed heavily for making investments with equity; yet the tax code actually pays companies to invest using leverage”. And he is right: the corporate tax code in the United States creates a significant bias toward debt finance over equity.

Of course, the U.S. is not unique. In most of Europe, Asia and elsewhere in the world, the tax advantages of debt finance are even bigger than in the U.S.

The crux of the issue is that interest paid on borrowing can be deducted from the corporate tax bill, while returns paid on equity—dividends and capital gains—cannot.

The debt distortion is not new. What is new, however, is that we have come to realize that excessive debt (or leverage) is much more costly than we have always thought. Continue reading

Seven Pillars of Prosperity—Diversifying Economic Growth in the Caucasus and Central Asia


By David Owen

(Version in Русский)

Medium-term economic growth prospects in the Caucasus and Central Asia region are strong. But, to secure ongoing prosperity, the eight countries of the region—Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan—will need to look beyond traditional sources of growth.

The challenge for policymakers will be to foster new and more diverse growth drivers, outside mining, oil, and gas.

There are seven policy pillars that can help them do that: Continue reading

Confessions of a Dismal Scientist—Africa’s Resilience


By Abebe Aemro Selassie

(Version in Français)

Like many economists, I tend to fear the worst. I have witnessed phenomenal changes for the better in sub-Saharan Africa over the past 20 odd years. Part of me still worries that this trajectory will not endure. But, the more I see of the region’s economic performance and outlook, the more I’m changing my tune.

Old anxieties set aside

Until my latest source for anxiety took hold a few months ago (more on this in a moment), I’d worried about the impact of the global financial crisis on sub-Saharan Africa. The crisis hit just as many countries in the region were starting to enjoy a hard-earned period of economic growth, their best since at least the 1970s. I did not want this to be derailed by the crisis. Continue reading

Connecting the Dots Between Global Risks


By iMFdirect

Finance ministers and central bank governors from around the world, gathering at the Spring Meetings of the IMF and World Bank in Washington last week, identified a slew of continued and emerging risks to the global economy, including higher food and fuel prices, the disaster in Japan, unrest in the Middle East, lingering unemployment in parts of the world, and the risk of overheating in some dynamic emerging markets.

With the recovery solidifying but still fragile, ministers put the spotlight on how to strengthen the IMF’s surveillance—its economic assessment and analysis—to help countries take the action needed to address risks and avoid future crises. Continue reading

Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability


By José Viñals

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath.

But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive.

Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Continue reading

Macroprudential Policy—Filling the Black Hole


By José Viñals

When the global financial system was thrown into crisis, many policymakers were shocked to discover a gaping hole in their policy toolkit.

They have since made significant progress in developing macroprudential policy measures aimed at containing system-wide risks in the financial sector. Yet progress has been uneven. Greater efforts are needed to transform this policy patchwork into an effective crisis-prevention toolkit. 

Given the enormous economic and human cost of the recent financial debacle, I strongly believe that we cannot afford to miss this opportunity for substantial reform. Continue reading

Reducing the Chance of Pulling the Plug on Liquidity


By Jeanne Gobat

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets.

Many financial institutions were unable to roll over or obtain short term funding without sustaining significant losses. This threatened to sink them.

Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down and less stable—that is, they underestimated their contribution to systemic liquidity risk in good times, and did not bear the cost of their actions on others in bad times.

It only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. Continue reading

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