Spotlights: A Window of Opportunity
- International Monetary Fund
- Published Date:
- October 2018
The past year was one of growing economic anxiety tied to skepticism about both economic integration and an international approach to economic policymaking. To help make globalization work for all, the IMF focused on providing policy advice in the following macrocritical areas:
Making the system work better by tackling global imbalances and strengthening the global financial safety net
Making growth sustainable by dealing with climate change
Making growth inclusive by addressing inequality in its various forms
Securing the foundation through enhancing governance and addressing corruption
Harnessing technology for good in finance, in fiscal policy
This approach dovetails with the policy roadmap laid out by the United Nations (UN) Sustainable Development Goals (SDGs), which show a clear link between economic growth, social inclusion, and environmental sustainability. The IMF endorsed the SDGs in the areas relevant to its activities.
Spotlight: Making the System Work Better
Global macroeconomic stability requires commitment from all countries.
The IMF’s 2017 External Sector Report demonstrates that excess current account imbalances—deficits or surpluses in a nation’s transactions with the rest of the world—accounted for about one third of total global imbalances in 2016. This level, mostly unchanged since 2016, has become increasingly concentrated in advanced economies: deficits in the United States and United Kingdom, and surpluses in countries such as Germany, Japan, Korea, the Netherlands, Singapore, and Sweden. These imbalances make the global economy more vulnerable to the sudden reversal of capital flows and risk stoking protectionism, with detrimental effects on trade and growth. Excess deficit countries should cut fiscal deficits without reducing programs for the poor and gradually realign monetary policy with inflation targets. Excess surplus countries should provide greater fiscal stimulus. Both groups should prioritize structural reforms—boosting investment and promoting competition in surplus countries and encouraging saving and enhancing competitiveness in deficit countries. Global macroeconomic stability is an international public good that requires commitment from all countries.
Also, the IMF supported expanding the global financial safety net, which protects macroeconomic stability by providing insurance to help prevent crises, financing when a crisis occurs, and incentives for countries to adopt the policies that make crises infrequent and manageable. The resources behind the global financial safety net tripled between 2007 and 2016, reflecting that the global economy has become increasingly complex, volatile, and interconnected.
Over the past year, the IMF enhanced its contribution to the global financial safety net. It updated its rulebook for its crisis prevention lines of credit—the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL)—to make the qualification process more predictable and transparent. The IMF also proposed a framework for better collaboration with the regional financing arrangements to improve the global financial safety net and leverages the separate comparative advantages of regional financing arrangements (regional knowledge and connections) and the IMF (experience in macroeconomic adjustment and its universal risk pooling) in preventing and mitigating crises.
In capacity development, the IMF works with more than 40 bilateral and multilateral partners on core macroeconomic initiatives worldwide. Several thematic funds are aligned with key global development needs and initiatives, including the 2030 Agenda for Sustainable Development and the Financing for Development Agenda. Their activities are complemented by the IMF’s extensive work of regional capacity development centers, financed by development partners, member countries, and the IMF.
The global financial safety net has four main layers:
Countries’ own reserves increased from about $2 trillion in 2000 to about $11 trillion in 2017. IMF quota resources have doubled to about $670 billion.
Bilateral swap arrangements between two countries take the form of unlimited permanent swaps between the central banks of some of the major countries issuing reserve currency, and a network of swaps between China and others to support trade and investment.
Regional financing arrangements include the European Stability Mechanism, with a lending capacity of 500 billion euros; the Chiang Mai Initiative Multilateralization, with $240 billion; and the Contingent Reserve Arrangement between Brazil, China, India, Russia, and South Africa, worth $100 billion.
The IMF, in addition to lending to help countries overcome balance of payments crises, can provide credit lines, which can be used on a precautionary basis, to countries with sound economic fundamentals. These include the FCL, for countries with very strong fundamentals and policies, and the PLL, for countries with sound fundamentals and limited vulnerabilities.
Adequacy of the Global Financial Safety Net: Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals
The IMF’s review of the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) found that these instruments have effectively provided support to members on a precautionary basis against external risks, and that succeeding FCL arrangements and associated access levels have been appropriately tailored to country circumstances. The review introduced refinements to the qualification framework for the FCL and the PLL to make it more transparent and predictable for current and potential users.
Spotlight: Making Growth Sustainable
Economic costs of rising temperatures could be substantial.
If unaddressed, climate change is likely to become one of the greatest economic shocks of the 21st century, owing to adverse effects including hotter temperatures, larger and more frequent natural disasters, rising sea levels, and the loss of biodiversity in depleted ecosystems.
IMF research in the October 2017 World Economic Outlook shows that the economic costs from rising temperatures could be substantial, especially for low-income developing countries, which generate very little greenhouse gas emissions. For the median low-income developing country, with a temperature of 25 degrees Celsius, an increase of 1 degree Celsius would reduce GDP per capita by an estimated 1.5 percent—and the loss would persist for at least seven years.
If emissions are not curbed, a median low-income developing country could lose up to one tenth of its income per capita by the end of the century. Rising temperatures affect economic outcomes in many ways—such as lower agricultural output, lower productivity of workers exposed to heat, worse health, and lower investment. About 60 percent of people in the world live in countries where these effects could occur.
To mitigate the effects of climate change by reducing emissions, the Paris Accord was agreed by nearly 200 countries. The IMF is developing spreadsheet tools for each IMF member country to quantify the levels of carbon pricing needed and the trade-offs with other instruments such as emissions trading, energy efficiency incentives, taxes on electricity, and individual fuels.
The findings emphasize the substantial climate, fiscal, and economic advantages of carbon taxes and the wide cross-country dispersion in needed prices, underscoring the case for international coordination. This year, the IMF’s Executive Board agreed to further assist developing countries facing urgent balance of payments needs by increasing the access limits of the Rapid Credit Facility and the Rapid Financing Instrument. In small developing countries, the annual cost of disasters is nearly 2 percent of GDP—more than four times higher than that of larger countries. Capacity development helps member countries build resilient public financial management frameworks, adopt environmental tax reforms, and price energy appropriately to reflect the harmful environmental side effects of climate change.
The IMF also introduced, in collaboration with the World Bank, Climate Change Policy Assessments, which provide an overarching assessment of climate mitigation, resilience building, and financing strategies for small states, within a sustainable macrofiscal framework.
The IMF’s Rapid Credit Facility
The IMF’s Rapid Credit Facility (RCF) is designed to provide rapid zero-interest loans with limited conditions to low-income developing countries facing an urgent balance of payments need. It places emphasis on countries’ poverty reduction and growth objectives. The facility was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the IMF’s support more flexible and better tailored to the diverse needs of low-income developing countries, including in times of crisis.
The facility is available to PRGT-eligible member countries, and assistance is a one-time loan disbursement. A country may request assistance under the RCF again within any three-year period if its balance of payments need is caused primarily by an exogenous shock or the country has established a track record of adequate macroeconomic policies. In June 2017, the IMF approved a disbursement under the RCF to The Gambia.
Behind the Scenes
The Effects of Weather Shocks on Economic Activity: How Can Low-Income Countries Cope?
The October 2017 World Economic Outlook on climate change states that temperature increases have uneven macroeconomic effects, with adverse consequences concentrated in countries with relatively hot climates, such as most low-income developing countries. Sound domestic policies and development, in general, and investment in specific adaptation strategies, could help reduce the adverse consequences of weather shocks. But given low-income countries’ constraints, the international community must support these countries as they cope with climate change—a global threat to which they have contributed little.
Spotlight: Making Growth Inclusive
Reducing inequality can open doors to growth and stability.
Global inequality—income differences among countries—has been declining, but the picture within countries is less clear and varies depending on income group and country-specific factors. IMF research has shown that persistently high inequality is associated with lower, less durable economic growth and greater financial instability—which makes reducing inequality directly relevant to the IMF’s work.
What is the impact of income distribution on growth and stability?
Inequality wastes resources. In highly unequal economies, the poor may not have access to education, financial markets, or other avenues to increase income. This makes it hard for them to develop their productive capabilities.
Inequality resulting from poor job prospects is associated with higher costs. Prolonged unemployment degrades skills, limits employability, and depletes trust in government. This effect is particularly serious among young people, who in some countries have high unemployment rates, and for women in countries where discrimination, social customs, or unequal opportunity keep them out of the labor force.
Inequality can spur polarization and mistrust. When citizens feel treated unfairly, the lack of social cohesion can lead to more political struggles for public resources, rent-seeking efforts, and greater difficulty for governments to adopt the welfare-enhancing reforms needed for longer-term inclusive growth. In extreme cases, polarization can lead to instability and conflict.
Inequality can lead to macroeconomic instability. Inequality impairs the ability to cope with risk—highly unequal societies tend to have limited ways of insuring against economic disruptions. High inequality can also increase financial fragility—especially by simultaneously increasing the savings of the rich and the demand for credit by the poor and middle class.
Policies to address inequality and help enhance growth and economic inclusion at the same time include expanding access to quality education and healthcare for the poor, investing in infrastructure, deepening financial inclusion to reach the most vulnerable, and incentivizing increased female labor force participation.
Revenue collection and targeted spending are especially important in this context—the October 2017 Fiscal Monitor: Tackling Inequality discusses some options for addressing inequality while striking the right balance between efficiency and equity. Well-designed progressive income taxes, as well as certain wealth taxes, can contribute to reducing inequality without sacrificing growth. Ongoing empirical work shows that a “universal basic income” has the potential to reduce poverty and inequality but is contingent on a country’s administrative capacity and ability to enhance targeting of social spending.
Behind the Scenes
Fostering Inclusive Growth
There is growing evidence that economic growth does not always benefit citizens equally and that a lack of inclusion can be macroeconomically harmful. An IMF paper shows that domestic policies are key for translating strong growth into prosperity for all. Countries should adopt policy frameworks that maintain sustainable growth with macroeconomic stability. Fostering inclusive growth requires measures to boost productivity and at the same time make sure that higher growth doesn’t come at the expense of equality. The IMF’s “Inclusive Growth” course, which was launched in 2013, discusses analytical and operational tools to promote inclusive growth and has become one of the most highly demanded IMF course offerings around the world.
...but remains high within countries.
Although income gaps between countries have narrowed, inequality within countries rose from the mid-1980s to the mid-2000s, especially in advanced economies. Numerous factors explain these trends:
Technological advances have mainly benefited owners of capital and highly skilled workers.
International trade, while remaining a vital engine of growth and poverty reduction, has—in tandem with labor-saving technologies and outsourcing—led to some job losses and displacement in the advanced economies.
Financial integration, without adequate regulation, can increase vulnerability to financial crises and boost the bargaining power of capital.
Domestic policies, in some countries, have reduced the bargaining power of labor, increased corporate concentration, made taxes less progressive, and weakened social protection.
Spotlight: Reducing Corruption
Peeling back the many layers of corruption.
Good governance, including the absence of systemic corruption, is vital for macroeconomic stability as well as sustainable and inclusive economic growth. IMF research shows that systemic corruption—defined as abuse of public office for private gain—is associated with lower growth and investment and higher inequality.
Corruption weakens the state’s ability to tax, in part by undermining the tax system through perceptions of unfairness and favoritism, which can drain state coffers. Corruption also distorts government spending by promoting oversize, wasteful projects that generate kickbacks, to the detriment of investments in areas like health and education that have a positive economic and social impact. And since the poor rely more heavily on government services, these distortions disproportionately affect them and limit their economic opportunities.
Sustainable and inclusive growth is also jeopardized if the government is unable to ensure a business environment based on impartiality and the rule of law. Bribes make investments more expensive—when corruption is systemic, bribery acts as a tax on investment. And if corruption spills over to financial sector regulation and supervision, financial stability could also be at risk.
Corruption can lead to mistrust of government and divisiveness in a country, which in turn has an indirect effect on stability and inclusive growth. For example, when young people see few rewards for investing in skills and education, it both shrinks prospects for increased productivity and fuels resentment.
The IMF recently updated its policy on governance and corruption. The new policy provides guidance on assessing the nature and extent of corruption and its macroeconomic impact. To ensure more systematic, candid, and evenhanded IMF work on governance and corruption, the policy focuses on both the “supply side” of corruption (the bribe given) and the “demand side” (the bribe taken). Dealing effectively with corruption must include steps to curb corrupt practices, whether direct—bribing foreign officials—or indirect—laundering dirty money.
Behind the scenes
IMF policy and capacity development fights corruption
The IMF policy on governance and corruption notes that the IMF has provided detailed policy advice on reducing corruption in reports on individual health checks. Advice was often developed to inform ongoing or prospective IMF loans and reflected the findings of IMF capacity development missions, in collaboration with the World Bank and other partners. Detailed policy advice on strategies for reducing corruption was provided as part of several Article IV reviews.
How does corruption affect the economy?
IMF research shows that reducing corruption is associated with higher economic growth: sliding down from the 50th to 25th percentile in an index of corruption or governance is associated with a fall in the annual rate of growth of GDP per capita by half a percentage point or more, and a decline in the investment-to-GDP ratio by 1½–2 percentage points.
Spotlight: Harnessing Technology for Good
Ensuring technology gains are widely shared.
Since the beginning of the industrial revolution, the effect of technological change on job prospects and inequality has been a concern. This is especially the case with recent rapid advances in information technology. The IMF has been exploring the topic in various areas that include the future of work and implications for both financial stability and fiscal policy. The goal is to ensure that technological advances support rather than impede macroeconomic soundness and inclusive growth.
Since machines can perform an increasing array of tasks and are becoming cheaper relative to labor, new technological advances could prove highly disruptive. This could lead to fewer, less stable job prospects, as well as greater inequality, given that technology progress tends to benefit business and the most educated workers, exacerbating the decline of the middle class and the gap between the richest and the poorest citizens. An IMF paper analyzes the effects of technology on work and offers some policy options, such as increasing public spending on education and training and using fiscal policy to make sure growth is broadly shared.
The IMF also explored both the potential for and risks of new financial technologies. Dubbed Fintech, this nexus of new technologies includes artificial intelligence, big data, biometrics, and distributed ledger technologies such as Blockchain. These technologies offer many advantages, including faster, cheaper, more transparent, more inclusive, and perhaps even more user-friendly financial services. For example, artificial intelligence plus big data could automate credit scoring, smart contracts could allow investors to sell assets when predefined market conditions are satisfied, and mobile phones combined with distributed ledger technology could allow for direct financial transactions that bypass banks. The IMF found that digitalization can simultaneously make tax compliance easier and improve public service delivery. Digitalization can also improve governance and fiscal transparency, which makes corrupt transactions harder to hide.
Yet, there are also risks. By accelerating the speed and volume of transactions, new technologies can induce greater market volatility, and heighten vulnerability to cyberattacks, increase concentration risks, and lead to fewer internal controls. And they can open the door to nefarious activity—not only cyberattacks and violation of privacy, but fraud, money laundering, and terrorism financing. Regulation needs to adapt to this new financial world, including to address vulnerabilities stemming from new opportunities for fraud and cyberattacks.
How can Fintech be regulated without undermining innovation?
Expanding oversight. As financial services move increasingly from well-defined intermediaries to looser networks and market platforms, focus regulation on specific financial services as well as entities like banks and insurance companies.
Boost international coordination. As technological networks and platforms do not respect national borders, ensure international coordination to stop a regulatory race to the bottom.
Modernize legal principles. Clarify rights and obligations in the new financial landscape, including the legal status and ownership of digital assets and tokens.
Strengthen governance. Develop rules and standards to ensure the integrity of data, algorithms, and platforms and enhanced consumer protection across numerous dimensions, including transparent and balanced contracts and privacy rights.
Behind the Scenes
Digitalization—the integration into everyday life of digital technologies that facilitate the availability and processing of more reliable, timely, and accurate information—presents important opportunities and challenges for fiscal policy.
The April 2018 Fiscal Monitor analyzes how it can change the design and implementation of fiscal policy now and in the future, with illustrative examples of tax administration and policy, public service delivery, and spending efficiency. The analysis suggests that adopting digital tools could increase indirect tax collection at the border by up to 2 percent of GDP per year. On the spending side, the experiences of India and South Africa show how digitalization can help improve social protection and the delivery of benefits. Mitigating risks from digitalization requires a comprehensive reform agenda, adequate resources, and a coordinated approach toward a long-term version of the international tax architecture.