India’s Investment Slowdown: The High Cost of Economic Policy Uncertainty


By Rahul Anand and Volodymyr Tulin

India, after witnessing spectacular growth averaging above 9 percent over the past decade, has started to slow in the last few years. The slump in infrastructure and corporate investment has been the single biggest contributor to India’s recent growth slowdown.

India’s investment growth, averaging above 12 percent during the last decade fell to less than one percent in the last two years. What is especially worrisome is that more and more investment projects are getting delayed and shelved, while the pipeline of new projects has become exceptionally thin.

This slowdown has sparked an intense public debate about its causes. Some commentators, including representatives of the business community, argue that high interest rates, which raise financing costs, are the major culprit, dampening investment.  Others maintain that interest rates are only partly responsible for the current weak levels of investment, suggesting that a host of other factors, particularly on the supply side, are at play.

Our new Working Paper seeks to shed some light on the reasons behind this investment malaise. Using a novel index of economic policy uncertainty—an innovation in our analysis—we find that heightened uncertainty regarding the future course of broader economic policies and deteriorating business confidence have played a significant role in the recent investment slowdown. 

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A New Frontier for Kenya and Africa


MD's Updated Headshot By Christine Lagarde

For yet a third year I have kept my tradition of starting the New Year with a visit to Sub-Saharan Africa—a region that truly offers great promise! As the world economy has remained focused on the crisis of the advanced economies, Africa has quietly forged ahead with strong growth led by a vibrant private sector and surging foreign investment. Over the past decade Sub-Saharan Africa has posted growth averaging 5.6 percent a year.

The countries of East Africa have done especially well. So what better place to begin my travels this year than in Kenya, which has emerged as one of the region’s “frontier economies”—countries whose recent performance is propelling them toward middle-income status.

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Less Red Tape, More Credit: How the Private Sector Can Flourish in the Middle East


Min ZhuBy Min Zhu

(Versions in عربي)

To almost all economists it is clear that the private sector is critically important in creating jobs and achieving strong growth. The public sector is already overburdened in most countries. But what is not clear is how to support the private sector for it to play this important role.

To shed some light on how to facilitate strong job creation and growth by the private sector in the Middle East and North Africa, we held a conference in Riyadh, Saudi Arabia, in December 2013, jointly with the Council of Saudi Chambers and the International Finance Corporation.

As the date of the conference approached, registrations kept increasing, and by the time we opened the conference, the registration numbers had skyrocketed to more than 800! I can think of no better sign of the importance of this topic for the people in this region.

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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

Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow


Alejandro WernerBy Alejandro Werner

(Versions Español and Português)

Public finances in most Latin American countries strengthened significantly before the global financial crisis. Since 2009, countries have generally increased public deficits, drawing down on their fiscal coffers.

These expansionary policies continue and are yet to be reversed. With further pressures likely to build over the period ahead—as economic growth has slowed, commodity prices have softened, and external funding costs are bound to rise—now is the right time to rethink fiscal policies across the region.

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Myanmar: Awakening to Countless Possibilities


MD's Updated HeadshotBy Christine Lagarde

Having visited Cambodia and Korea on this whirlwind tour of the region, I touched down in my third and last country—Myanmar.

What a place! It is rare to find such a combination of enchanting beauty, warm hospitality, and an unstoppable drive to succeed. Myanmar is undergoing a great awakening to the world and all that it has to offer. And it is engaging on multiple fronts. For example, it has recently taken over the chairmanship of ASEAN, and when I arrived I found the country in the midst of hosting the South East Asian games.

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Unleashing Brazil’s Growth


By Martin Kaufman and Mercedes García-Escribano

(Version in Español and Português)

Since the early 2000s, Brazil’s economy has grown at a robust clip, with growth in 2010 reaching 7.5 percent—its strongest in a quarter of a century. A key pillar of its hard-won economic success has been sound economic policies and the adoption of far-reaching social programs, which resulted in a substantial decline in poverty.

In the last couple of years Brazil’s growth slowed down. Although other emerging market economies experienced a similar slowdown, the growth outturns in Brazil were particularly disappointing. And the measures taken to stimulate the economy did not produce a sustained recovery. This is because unleashing sustained growth in Brazil requires measures geared not at stimulating domestic demand but at changing the composition of demand towards investment and at increasing productivity.

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Cloudy With a Chance of Rain—Outlook for Latin America and the Caribbean


Alejandro WernerBy Alejandro Werner

(Version in Español & Português)

For many Latin American and Caribbean economies, clouds have appeared on the economic horizon. As the global growth momentum shifts from the emerging to the advanced economies, the strength of domestic economic policies will be crucial for how countries can cope with the combination of lower commodity prices and tighter external financing conditions.

Lower commodity prices have already started to affect the region’s commodity exporters. Even though prices remain high by historical standards, countries can no longer count on the tailwind from ever-improving terms of trade, which had propelled economic activity over the past decade.

Meanwhile, longer-term U.S. interest rates have started to rise, with knock-on effects for emerging markets. Across all of the financially integrated economies of Latin America, bond yields have increased, equity prices have fallen, and currencies have depreciated since May, when the U.S. Fed first mentioned the possibility of tapering its bond purchases later this year. Financial conditions remain fairly benign for now, but the strong tailwind from ultra-low external financing costs may also be gone for good.

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Inclusive and Sustained Growth in Asia: The Role of Fiscal Policy


ASinghBy Anoop Singh

(Versions in 中文 and 日本語)

Fiscal management has improved in Asia over the past decade. It has become more responsive to economic conditions and thereby helped stabilize growth, especially during the global financial crisis. While these are important achievements, major challenges still lie ahead—as our latest Asia and Pacific Regional Economic Outlook points out.

What are these key challenges? In a nutshell, fiscal policy can, and should do more to make Asia’s growth sustainable and more inclusive.

In the near term, budget consolidation has to proceed as the recovery takes hold to rebuild the fiscal space needed to respond to future output fluctuations.

At the same time several emerging and low income economies need to create room for higher infrastructure and social spending to support long-term growth, reduce income inequality, and fight poverty.

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Subsidizing Energy Consumption: Why it’s Wrong and What Can Be Done About it


Carlo CottarelliBy Carlo Cottarelli

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

Let’s face it. Everybody loves cheap energy. Almost all human activities require energy consumption and, if something is so basic, it seems pretty obvious that it should not be denied to anyone and government should make it as cheap as possible to both households and companies, including through subsidies. This can help households avoid paying exorbitant energy bills at the end of the month, something that the poor may not be able to afford even for basic needs like heating and cooking.

Companies may also need energy subsidies to help them stay competitive. Energy subsidies appear even more appropriate, and even the obvious thing to do, in countries that have a large supply of energy, like oil producers. After all, this natural wealth in the form of energy belongs to the people; why shouldn’t it be cheap?

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