IMF Weekend Read

 

Dear maria, In today's edition, we highlight: Europe's Green Deal industrial plan Lucrezia Reichlin on bank stress Africa’s continental free trade area Caucasus and Central Asia outlook Inflation and public finance

CLIMATE CHANGE Europe, And The World, Should Use Green Subsidies Cooperatively (Credit: ezypix / iStock by Getty Images) Green subsidies can be helpful where there are market failures. When carbon emissions are underpriced in relation to their true cost to society, subsidies can steer businesses and consumers toward clean technologies that are less polluting. But subsidies should be carefully targeted to correct market failures and should not discriminate between firms, Alfred Kammer, the director of the IMF’s European Department, writes in a blog. As Europe considers a Green Deal industrial plan, partly in response to the US’ Inflation Reduction Act and concerns that companies could shift to the country that provides the largest tax break or subsidy, Kammer calls for a multilateral approach to stopping climate change and underscores the importance of preserving the integrity of the single market. A subsidy race between the world’s largest economies to lure green investment could undermine the level playing field in global trade, contribute to geoeconomic fragmentation and impose large fiscal costs, Kammer says. “It would ultimately reduce efficiency and undermine the rules-based global trading system that has served the world economy well over several decades.” Earlier, IMF Managing Director Kristalina Georgieva told the Brussels Economic Forum that subsidies in the EU’s Green Deal must be applied carefully or they could make the green transition more expensive for everyone. Watch here.

Agricultural productivity in Africa has lagged behind for decades and now climate change is making matters worse. Hamza Rkha Chaham was only 27 years old in 2018 when he co-founded a company that uses processed satellite imagery to provide farmers with invaluable data to increase crop yields. In this podcast, he says startups in Africa can be challenging but the rewards far outweigh the risks.

FINANCE & DEVELOPMENT Early Lessons From Recent Banking Stress (Credit: Frederic Bos / Adobe Stock) What started with the collapse of Silicon Valley Bank on March 10 was followed by strains in other US regional lenders before the failure of Credit Suisse and most recently of the US’s First Republic. Lucrezia Reichlin, professor of economics at the London Business School, speaks to Finance & Development about the state of financial regulation and why the recent events call for a reflection on the future of central banks. The first lesson from the SVB crisis is that mid-size banks can create contagion as well as large banks and intervention by public authorities is required to stop it, Reichlin says. “The distinction between systemic and non-systemic institutions, on which the post-crisis regulatory framework is based, is useless. All crises have potentially systemic effects.” Reichlin adds that all deposits are potentially volatile and partial deposit insurance is not credible. “In the case of Silicon Valley Bank, all depositors were bailed out, and this was a gift to wealthy depositors.”

FINANCE & DEVELOPMENT Debt for Nature Swaps This week Ecuador sealed the world’s largest debt-for-nature swap, selling a “blue bond” that will channel at least $12 million a year into conservation of the Galapagos Islands. Recent agreements in Barbados, Belize and Seychelles using a model developed by The Nature Conservancy have given these debt deals a new lease of life. Read an article from the F&D archives on how Belize is using a debt-for-nature swap to protect the Western Hemisphere’s longest coral reef, home to some 1,400 species, from endangered turtles and manatees to several threatened types of shark.

REGIONAL ECONOMIC OUTLOOK What lies ahead for the Caucasus and Central Asia?

Russia’s shallower-than-expected economic contraction and a surge in money-transfer inflows, including from Russian émigrés, lifted growth in the Caucasus and Central Asia to 4.8 percent last year, says Subir Lall, Deputy Director of the IMF's Middle East and Central Asia Department. But growth and inflation are expected to slow this year, Lall told a panel discussion with central bankers in Kazakhstan to launch the department’s latest regional outlook.

AFRICA Trade Integration in Africa (Credit: IMF Photo) Successful implementation of the African Continental Free Trade Area could unlock important benefits including for jobs and income, according to a recently published IMF paper. The paper investigates the role of trade policy and the broader trade-enabling environment in determining the bilateral goods trade flows and country-level trade in services. It sheds light on how the implementation of the trade area and supporting policies could boost trade and income as well as help African countries integrate into regional value chains. It finds that removing trade barriers would increase the median goods trade between African countries by 53 percent and with the rest of the world by 15 percent; raise the median African country’s real per capita GDP by more than 10 percent; and help lift an estimated 30-50 million people out of extreme poverty. The paper was launched in Nairobi at a discussion with IMF Managing Director Kristalina Georgieva, WTO Director General Ngozi Okonjo Iweala, Kenyan Cabinet Secretary Njuguna Ndung’u, and Moroccan Minister of Industry and Trade Ryad Mezzour. Watch the discussion

Almost half of workers employed in advanced economy central banks are women, but on average only a third of women are economists or managers, according to an IMF Survey. Instead, most women work in administrative or personnel roles. As the Chart of the Week shows, policies to eliminate gender gaps at Group of Seven central banks have been only partially successful. The wide ranges and variation in scores suggest that participating central banks could do more to reduce the gender gap. Read the survey

Weekly Roundup FINTECH Asia's "Too Big to Fail" Fintech Firms Fintech is revolutionizing financial services in Asia, but the pace of expansion poses financial stability risks, IMF Deputy Managing Director Bo Li said on Thursday. Risks can arise when BigTech firms use their large client base to scale up financial services rapidly across several countries, and when they are interconnected with traditional banks or use systemically important cloud or payment services, Li told a webinar hosted by the IMF’s Singapore Regional Training Institute. “Taken together, these risks can create scenarios where BigTechs become too big to fail.” STAFF PAPER The Limits of Debt Debasement Inflation shocks improve fiscal balances only temporarily, as nominal revenues track inflation closely, while primary spending takes longer to catch up, notes a recent IMF staff paper. Inflation spikes also lead to a persistent reduction in the ratio of debt to GDP. However, debt only falls with inflation surprises—rises in inflation expectations do not improve debt dynamics, suggesting limits to debt debasement strategies. STAFF PAPER Poor Countries Lose Most From Mining Declines A recent IMF staff paper assesses the macroeconomic impact of a permanent contraction in fossil fuel extractive sectors. Tracking 122 countries over 70 years, the authors find that declines in extractive activity led to persistent negative effects on real GDP and the trade balance. Effects on low-income countries are significantly larger than on high-income countries. Legacy effects of bad institutions could prevent countries from benefiting from lower resource extraction. STAFF PAPER Digitalization and Resilience A new IMF staff paper analyzes whether digitalization strengthens companies’ resilience to shocks, and if so, what role fiscal policy could play. Looking at 1.8 million non-financial firms from 53 countries, the authors find that digitalized firms weather shocks better than less digitalized ones. Aligning the tax regime on digital services with general taxation principles and competitive procurement rules on digital products could help companies to digitalize.

Thank you again very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.

Nick Owen Editor IMF Weekend Read nowen@IMF.org