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Πέμπτη 3 Φεβρουαρίου 2022

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Governments will need to combine fighting inflation with structural policies that reignite growth.

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We just published a new blog—please find the full text below. 

Latin America’s Strong Recovery is Losing Momentum, Underscoring Reform Needs

(Photo: Oleg Shuldiakov/iStock by Getty Images)

By Ilan GoldfajnAnna Ivanova and Jorge Roldos

Governments will need to combine fighting inflation with structural policies that reignite growth.

Economies in Latin American and the Caribbean are losing steam after making a strong comeback last year.

After a dramatic economic collapse in 2020, growth in the region rebounded to an estimated 6.8 percent, driven by robust trading partners growth, higher commodity prices, and favorable external financing conditions. On the domestic front, progress on vaccinations, continued fiscal support in some countries (e.g. Chile and Colombia) and accumulated savings from 2020 also supported growth.

For 2022, we expect growth to slow to 2.4 percent, a downgrade from our October forecast of 3 percent.

A slowdown is inevitable as economies return to their pre-pandemic GDP levels. But the downgrade reflects other challenges, including slower growth in China and the United States, continued supply disruptions, tighter monetary and financing conditions, and the emergence of the Omicron variant.

Surging prices

Last year was marked by rising inflation. In some of the largest economies in the region (Brazil, Chile, Colombia, Mexico and Peru), prices increased by 8.3 percent in 2021—the largest jump in 15 years and higher than in other emerging markets.

This rapid increase partly reflected the surge in food and energy prices. Core inflation, excluding food and energy prices, rose by less (6.3 percent), but still exceeded pre-pandemic trends and outpaced core price inflation in other emerging markets (5.3 percent on average).

Core prices grew rapidly in Brazil (7.2 percent), Chile (6.4 percent) and Mexico (5.9 percent), suggesting that inflation threatens to become more broad-based, though there is substantial variation across economies.


Many factors have contributed to the rise in inflation: rising commodity and imports prices (in part, due to global supply disruptions), exchange rate depreciations, as well as released pent-up consumer demand and a shift in spending towards goods over services. In some countries, wage pressures and indexation practices (contracts that adjust their terms automatically with inflation) are pushing up prices further.

Responding decisively

Given the region’s history of high inflation, large central banks reacted quickly and decisively to the sharp rise in consumer prices.

The speed of monetary policy tightening has differed across countries depending on their position in the economic cycle, and the degree and scope of price pressures and central bank credibility. In Brazil, Chile, Colombia, Mexico and Peru, policy rates rose between 1.25 percentage points and 7.25 percentage points over the course of 2021. These were often combined with forward guidance that signaled further rate increases in the coming months.

The hike in policy rates have helped maintain anchored inflation expectations, as we noted in our October Regional Economic Outlook , while shoring up the hard-won credibility of central banks.


Long-term inflation expectations remain relatively well-anchored, which reflects trust in monetary policy to bring inflation back to targets. However, short-term inflation expectations are elevated, suggesting the need for continued vigilance and possible further action by central banks in some countries.

If rising inflation threatens to de-anchor inflation expectations, central banks will have to raise interest rates further to signal a continued commitment to inflation targets and to avoid persistent price increases. This would have to be accompanied by clear and transparent communication.


Lingering uncertainty

Uncertainty about the evolution of the pandemic more broadly continues to cast a shadow on the recovery globally and in Latin America and the Caribbean.

Inflationary pressures in the United States and across the region, which may call for an even faster withdrawal of monetary accommodation, the potential change in investor risk sentiment and associated tighter global and domestic financial conditions also represent major risks to the recovery. Policymakers could prepare for US monetary policy tightening by extending public debt maturities, reducing fiscal rollover needs more generally, and limiting the buildup of currency mismatches on financial sector balance sheets where possible.

Major challenges ahead

The pandemic hit after a year of widespread social unrest in the region, which had built up during years of economic stagnation following the end of the commodity boom. With a heavy election calendar looming, social unrest remains a major risk and inequality will need to be addressed.

Countries in the region must simultaneously tackle three major challenges: ensuring the sustainability of public finances; raising potential growth; and doing it in a manner that promotes social cohesion and addresses social inequities.

Addressing these challenges, which started even before the pandemic, will take time. Policymakers should start now to develop a comprehensive strategy for addressing them and building societal consensus around this strategy.

Countries in Latin America and the Caribbean region have a unique opportunity to reinvigorate growth engines and to build forward toward a more prosperous, sustainable, and inclusive region.

*****

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Jeff Kearns

Managing Editor

IMF Blog

jkearns@IMF.org

 

 

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Fragile and conflict-affected states confront some of the greatest challenges among the world’s economies


Franck Bousquet: Supporting Fragile and Conflict-Affected States

January 31, 2022

Fragile and conflict-affected states are home to nearly 1 billion people and confront some of the greatest challenges among the world’s economies. 220 million people live within 40 miles from a major conflict event and 155 million globally are acutely food insecure. Franck Bousquet is the deputy director, coordinating the Fund's work in fragile and conflict-affected states. In this podcast, Bousquet talks about the growing costs associated with fragility and conflict, and how the IMF is trying to help.

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Read the Transcript

 

*****

Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org.

 

Bruce

Bruce Edwards

Producer, IMF Podcasts

 


Whether it’s based in enlightened self-interest or pure altruism, social trust is paramount in Denmark.


Denmark


Denmark’s Social Trust in Action


People line up for COVID testing in Copenhagen, Denmark. The population has maintained a high level of trust in the country’s health authorities during the pandemic. (Photo: Sofia Busk/IMF)

By Adam Behsudi

 

Editor’s note: This article first appeared in the most recent issue of Finance & Development.

By her own count, Cordelia Chesnutt has taken at least 32 COVID tests. A negative test was a requirement each time she wanted to pursue her side passion of playing badminton once Denmark lifted its lockdowns.

The tests, free and easy to schedule, were a small price to pay, she said, for ensuring the safety of others and, especially, maintaining a bit of happiness during the pandemic. It was also, to a large extent, an example of how many people in Denmark see their actions as a part of a collective effort.

Whether it’s based in enlightened self-interest or pure altruism, social trust is paramount in Denmark. Citizens trust that the government will enact policies in the public’s interest. Government trusts that citizens will maintain the social fabric. People trust that their fellow Danes will do what is required for the greater good. This social phenomenon played out during the pandemic, leading to a remarkably successful effort at stemming the virus at a relatively low human cost.

“It’s that I want to be safe, and it requires that everyone else follows the same rules and we trust that our government won’t go too far,” says Chesnutt, a 36-year-old Dane who works as a consultant on refugee issues.

Researchers often point to trust as the most important cultural trait when explaining Denmark’s consistent top rankings on various measures of happiness and contentment. Rooted within society’s trust is the country’s robust social welfare system, providing generous unemployment, free health care and higher education, and heavily subsidized childcare.

“Essentially with all the social support from the government, you’re redistributing a lot of money to strangers, and we know people are not likely to vote for that kind of system if they don’t have at least some degree of trust in strangers,” says Christian Bjørnskov, a professor of economics at Denmark’s Aarhus University.

Bjørnskov, who recently published a book called Happiness in the Nordic World, said the cultural trait of trust is almost unique to Danish and other Nordic societies. But he argues that it’s not necessarily the extensive social welfare that makes Danes content or happy but rather a combination of trust, tolerance, strong institutions, a long history of economic development, and a resilient democracy.

Happiness and trust

In at least one Danish town, officials have used happiness as a measure for setting an agenda. In 2014, the council of the picturesque fishing village of Dragør, near the capital city of Copenhagen, acted on a survey of its residents.

“We wanted to see what our community’s priorities are, what are their dreams and, basically, what makes them happy,” says Eik Dahl Bidstrup, who was mayor at the time.

The study, done in conjunction with the Denmark-based Happiness Research Institute, found the town’s citizens wanted better infrastructure for their leisure time. The research resulted in the construction of a new indoor swimming center, improvements to the town’s sports facilities, more programming for senior citizens, and improvements to public space in the town’s historic center and harbor.

“It’s a lot about work-life balance. Work is very important to us, but our free time is just as important. It’s an important priority for the community leaders to make sure there are good facilities, good possibilities for people to use their spare time,” says Bidstrup, now the chairman of Krifa, a Danish labor union.

A lack of corruption is also key to a high level of trust.

“We don’t have a corrupt political system. Most people have confidence in the political system,” says Mogens Lykketoft, a member of the Danish Parliament who in the 1990s oversaw major tax and labor reforms as the country’s longest-serving finance minister.

It is this lack of corruption, a long tradition of consensus building (no single party has held a majority since the early 1900s), and general efficiency of government services that allow most people in Denmark to accept high tax rates, he said.

“There is also underlying understanding of the fact that what the government provides in services for education, childcare, old-age care, health is more or less a contribution either to the efficiency of the business community or to the efficiency of the labor market,” Lykketoft says.

Still, the system faces challenges. Difficulties integrating immigrants and refugees into the labor market and the perceived strain on the social welfare system have been an argument for reducing social benefits, Lykketoft concedes. Although the government has put in place initiatives to address this challenge, the resulting debate over immigration has eroded trust in some corners of society.

Averting politicization

During the pandemic, however, the country remained united, and policies to contain the virus averted the politicization that plagued many other democracies.

Michael Bang Petersen, a professor of political science at Aarhus University, led a data-driven project looking at how democracies reacted and coped with the pandemic. The project surveyed more than 400,000 people in Denmark and seven other countries. It showed that high and stable trust in Denmark’s health authorities was a key reason for the country’s success. More than 75 percent of eligible citizens as of late October were fully vaccinated. At the height of the pandemic, more than 60 percent of the adult population was being tested each week.

“I was a little bit worried when the test system was being rolled out. Is this something that people will see as an infringement on their rights?” Petersen says. “People instead saw it as something you did for each other. I’m being tested not because the state says that I need to be tested, but I am being tested so that I protect you, so that we can get back to a normal way of life much faster.”

The experience from the pandemic has only reinforced the country’s overall high levels of trust both in terms of people trusting the government (the survey found over 90 percent of Danes trust national health authorities) and vice versa.

“There is increasing evidence that there is a tight relationship between the functioning of political institutions and social trust,” says Petersen. “Essentially you come to trust your fellow citizens when you know the political institutions in your country have your back if something goes wrong.”

*****

Read the entire Winter 2021 health issue of Finance & Development.

Adam Behsudi is on the staff of Finance & Development.


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