Euro Area: An Unbalanced Rebalancing?


By John Bluedorn and Shengzu Wang

Since the financial crisis, the euro area current account, made up mostly of the trade balances of the individual countries, has moved from rough balance into a clear surplus. But the underlying rebalancing across economies within the euro area has been highly asymmetric, with some debtors, like Greece, Ireland, and Spain, seeing large current account improvements (sometimes into surplus), while creditors, like Germany and the Netherlands, have basically maintained their surpluses (Chart 1). A set of new staff papers look at the drivers of the improvements in debtor current accounts and the persistence of creditor current accounts, and whether these developments are a cause for concern.

Euro Area Current Account.Chart1

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Slowdown in Emerging Markets: Not Just a Hiccup


By Evridiki Tsounta and Kalpana Kochhar 

(Versions in Español)

Emerging market economies have been experiencing strong growth, with annual growth for the period 2000-12 averaging 4¾ percent per year—a full percentage point higher than in the previous two decades. In the last two to three years, however, growth in most emerging markets has been cooling off, in some cases quite rapidly.

Is the recent slowdown just a hiccup or a sign of a more chronic condition? To answer this question, we first looked at the factors behind this strong growth performance.

Our new study finds that increases in employment and the accumulation of capital, such as buildings and machinery, continue to be the main drivers of growth in emerging markets. Together they explain 3 percentage points of annual GDP growth in 2000–12, while improvements in the efficiency of the inputs of production—which economists call “total factor productivity”—explain 1 ¾ percentage points (Figure 1).

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How Emerging Markets Can Get Their Groove Back


By Kalpana Kochhar and Roberto Perrelli

(Version in Español  and عربي)

After a decade of high growth and a swift rebound after the collapse of U.S. investment bank Lehman Brothers, emerging markets are seeing slowing growth. Their average growth is now 1½ percentage points lower than in 2010 and 2011. This is a widespread phenomenon: growth has been slowing in roughly three out of four emerging markets. This share is remarkably high; in the past, such synchronized and persistent slowdowns typically have only occurred during acute crises.

Chart Growth Revisions.finalOur analysis attributes the slowdown in part to cyclical forces, including softer external demand and in part to structural bottlenecks, for example in infrastructure, labor markets, power sector. And this has happened in spite of supportive domestic macroeconomic policies, (still) favorable terms of trade, and easy financing conditions, which only began to tighten recently. However, a non-trivial portion of the slowdown remains unexplained, suggesting that other factors common to emerging markets are at play.

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Saving Latin America’s Unprecedented Income Windfall


by Gustavo Adler and Nicolás Magud

(Versions in Español and Português)

Commodity exporting countries in Latin America have benefited strongly from the commodity price boom that began around 2002. And the accompanying improvements in public and external balance sheets have fed a sense that this time the macroeconomic response to the terms-of-trade boom has been different (and more prudent) than in past episodes. But, has it?

In our recent work, we analyze the history of Latin America’s terms-of-trade booms during 1970–2012 and quantify the associated income windfall (i.e., the extra income arising from improved terms-of-trade). We also document saving patterns during these episodes and assess the extent of the “effort” to save the income windfall.

Our findings suggest that, although the additional income shock associated to the recent terms-of-trade boom is unprecedented in magnitude, the effort to save it has been lower than in past episodes.

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Moving Beyond Crisis Management in the West Bank and Gaza


By Oussama Kanaan, Udo Kock, and Mariusz Sumlinski

(Versions in  عربي)

It was an early spring morning in East Jerusalem in 2011, and we were wrapping up our two-week mission with a presentation to donor representatives on the Palestinian economy’s health. Our audience appeared encouraged by our assessment of performance over the previous three years (2008–10): the economy had been recovering strongly, supported by generous aid and an easing of Israeli restrictions on movement and trade.

And the Palestinian Authority had made impressive progress in institution-building, which alongside prudent fiscal management, had enhanced public-sector efficiency, reduced wasteful expenditure, and enabled a reduction in its recurrent budget deficit from US$1.7 billion in 2008 to US$1.1 billion in 2010.

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Capital Controls: When Are Multilateral Considerations of the Essence?


By Jonathan D. Ostry

One of the main arguments against capital controls is that, though they may be in an individual country’s interest, they could be multilaterally destructive in the same way that tariffs on goods can be destructive.

A particular concern is that a country might impose controls to avoid necessary macroeconomic and external adjustment, in turn shifting the burden of adjustment onto other countries.

A proliferation of capital controls across countries, moreover, may not only undercut warranted adjustments of exchange rates and imbalances across the globe, it may lead in the logical extreme to a situation of financial autarky or isolation in the same way that trade wars can shrink the volume of world trade, seriously damaging global welfare.

So should multilateral considerations trump national interests?

Possible rationales for controls

To begin, it is worth reviewing some of the reasons why countries may wish to impose controls.

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Promoting Multilateral Solutions for a Globalized World


Jeremy CliftBy Jeremy Clift

(Version in Español عربي)

We live in an increasingly globalized and interconnected world, helping to spread ideas, information, and technology ever more quickly. The globalized economy has created a complex and interlocking network of capital and trade flows that have brought major economic gains, lifting hundreds of millions of people out of poverty around the world.

But, as we have seen from the prolonged global financial crisis, our interconnectedness carries grave risks as well as benefits. With instant communication comes the risk of rapid contagion. There is, thus, a strong public interest in ensuring that global economic integration is supported by a coherent set of coordinated national macroeconomic policies and a harmonized international regulatory regime that addresses the fragilities in our global financial system.

The new issue of Finance & Development magazine looks at different aspects of interconnectedness. Kishore Mahbubani, dean of the National University of Singapore’s Lee Kuan Yew School of Public Policy and author of the forthcoming book The Great Convergence: Asia, the West, and the Logic of One World, argues that what he terms the global village increasingly requires global solutions to big emerging problems such as climate change.

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Latin America: Making the Good Times Last


By Nicolás Eyzaguirre

(Version in Español)

Last week I attended the Annual Meeting of the Inter-American Development Bank in Montevideo, Uruguay where I gave a preview for growth in the region.

If I had to summarize the global backdrop for Latin America in four words, I would say “favorable, but still risky.” The global setting is favorable for two reasons:

  • First, some of the recent data has come in a bit stronger than expected, particularly figures on U.S. economic activity and employment. In the emerging markets sphere, growth remains fairly solid. Notably, China continues to put in a good performance, even though growth is easing and its exports are down somewhat. Good growth in Asia supports demand for Latin America’s key commodity exports, keeping terms of trade favorable.
  • Second, major countries have taken some important policy steps to underpin global growth and stability. In Europe, the European Central Bank’s Long Term Refinancing Operation has eased liquidity pressures for European banks and sovereigns and headed off a large deleveraging that would have crimped growth. Also, stronger fiscal adjustment programs and progress in resolving Greece’s stresses have supported confidence. In the United States, the Federal Reserve’s lengthening into 2014 of its commitment to maintain ultra-low interest rates, along with the extension of payroll tax relief and unemployment benefits, are bolstering demand and employment.

Overall, conditions and the outlook remain relatively favorable for the region. Commodity prices continue to ride high, despite some recent setbacks, thanks to buoyant emerging-market demand. Accommodative monetary policies in the major countries, and ample liquidity, maintain easy financing conditions for the more creditworthy countries. Indeed, the reemergence of strong capital inflows is again putting unwelcome upward pressure on exchange rates in some financially-open countries.

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How to Exit the Danger Zone: IMF Update on Global Financial Stability


By José Viñals

(Versions in  عربي, 中文, EspañolFrançaisРусский日本語)

Since September of last year, risks to global financial stability have deepened, notably in the euro area.

However, over the past few weeks, markets have been encouraged by measures to provide liquidity to banks and sovereigns in the euro area. This recent improvement should not be taken for granted, as some sovereign debt markets remain under stress, and as bank funding markets are on life support from the European Central Bank (ECB).

Main sources of risk

Many of the root causes of the euro area crisis still need to be addressed before the system is stabilized and returns to health. Until this is done, global financial stability is likely to remain well within the “danger zone,” where a misstep or failure to address underlying tensions could precipitate a global crisis with grave economic and financial consequences.

Despite the recent improvements, sovereign financing stress has increased for many countries—with almost two-thirds of outstanding euro area bonds at spreads in excess of 150 basis points—and financing prospects are challenging. Markets remain very volatile and long-term foreign investors have sharply reduced their exposure to a number of euro area debt markets, including some in the core. Keeping these investors involved is essential to stabilizing markets.

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Driving the Global Economy with the Brakes On


By Olivier Blanchard

(Versions in  عربي中文EspañolFrançaisРусский日本語)

After the speech by the IMF’s Managing Director in Berlin yesterday, my main messages on the global outlook will not surprise you.

Starting with the bad news–the world recovery, which was weak in the first place, is in danger of stalling. The epicenter of the danger is Europe, but the rest of the world is increasingly affected.

There is an even greater danger, namely that the European crisis intensifies. In this case, the world could be plunged into another recession.

Turning to the good news–with the right set of measures, the worst can definitely be avoided, and the recovery can be put back on track. These measures can be taken, need to be taken, and need to be taken urgently.

And now the numbers, starting at the epicenter:

The IMF’s forecast for growth in Euro Area for 2012 is ‑0.5 percent—this marks a decrease of 1.6 percentage points relative to our September 2011 projection. In particular, we predict negative growth in Italy (‑2.2 percent) and Spain (‑1.7 percent).

We have also revised downwards our forecasts for other advanced countries, although by less. Only for the United States, is our forecast unchanged at 1.8 percent.

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