IMF update

 

Dear MARIA, We just published a new blog—please find the full text below.  Industrial Policy is Back But the Bar to Get it Right Is High (Credit: DINphotogallery/iStock by Getty Images) By Anna Ilyina, Ceyla Pazarbasioglu, Michele Ruta Governments have traditionally used targeted interventions known as industrial policy to make domestic producers more competitive or promote growth in selected industries. While some developing countries continued to use it, industrial policy fell out of favor across most of the world for years, because of its complexity and uncertain benefits. Now, industrial policy appears to be back everywhere. The pandemic, heightened geopolitical tensions, and the climate crisis raised concerns about the resilience of supply chains, economic and national security, and more generally about the ability of markets to allocate resources efficiently and address these concerns. As a result, governments came under pressure to have a more active industrial policy stance. Economists have long debated the merits and drawbacks of industrial policy. These measures can help address market failures, such as interventions related to the climate transition. But industrial policy is costly, and can lead to various forms of government failures ranging from corruption to mis-allocation of resources. Industrial policies can also lead to damaging cross-border spillovers, raising the risk of retaliation by other countries, which can ultimately weaken the multilateral trading system and worsen geoeconomic fragmentation. More data, more analysis and more dialogue are needed to avoid costly mistakes. In this blog, we unpack the return of industrial policy and ask three questions about what is driving this resurgence, the trade-offs that it raises, and what the IMF is doing about it. The new wave The IMF recently joined forces with the Global Trade Alert to monitor developments. Our new research shows that there were more than 2,500 industrial policy interventions worldwide last year. Of these, more than two thirds were trade-distorting as they likely discriminated against foreign commercial interests. This data collection effort is the first step toward understanding the new wave of industrial policies. The recent surge in such measures has been driven by large economies, with China, the European Union, and the United States accounting for almost half of all new measures in 2023. Advanced economies appear to have been more active than emerging markets and developing economies. Data for the past decade are less precise, but the available information shows that the use of subsidies has historically been more prevalent in emerging economies, contributing to large number of legacy measures still in place. Recent measures focus more on the green transition and economic security, and less on competitiveness. Competitiveness was the objective for one-third of all industrial policy measures last year. The remaining two-thirds were motivated by climate mitigation, supply chain resilience, and security considerations. Interestingly, the most-active sectors were military-civilian dual use products and advanced technologies, including semiconductors and low-carbon technologies, as well as their components, such as critical minerals. Industrial policy steers a reallocation of resources toward certain domestic firms, industries or activities that market forces fail to promote in a socially efficient way. To deliver net economic benefits, however, these interventions need to be well-designed, which means they need to be directed to address well-identified market failures, and based on competition-enhancing principles and sound cost-benefit analysis. Since industrial policy aims to alter incentives for private companies, it also entails a risk of resources being misallocated and governments being captured by industries over time. It can also affect trade, investment, and financial flows as well as global market prices which could have significant implications for trade partners and the global economy. IMF staff’s recent analysis of the new industrial policies underscores the need for caution. Measures announced or implemented last year were not always clearly related to market failures. This means that in some cases well-designed policies aimed at improving the general business environment would have been more appropriate than targeted government interventions which carry a risk of misallocating resources and potentially significant fiscal cost. Staff’s research provides further evidence of a tit-for-tat dynamic. The odds of interventions focusing on a certain product are higher if it was the target of interventions by other trading partners. In fact, measures such as subsidies often create cross-border spillovers that may induce other governments to react in a similar way. There is also some evidence that industrial policy can be captured by special interests. Analysis shows a high correlation between the number of measures and political economy variables such as the presence of an upcoming election and the importance of certain products in the export basket, which indicates that governments may favor established companies. The IMF’s role Given the novelty and macro-criticality of many recent industrial policy measures, IMF staff has stepped up work in three areas. The IMF has increased focus on collecting data and providing analysis of industrial policies to increase awareness and inform policy discussions. In addition to the new data monitoring initiative, staff examines the effectiveness of industrial policies in achieving stated objectives, such as innovation (see the April 2024 IMF Fiscal Monitor) and climate goals, as well as their cross-border spillover effects. In bilateral surveillance, IMF staff focuses on assessing industrial policy measures that can significantly affect the country’s domestic or external stability or have the potential to generate significant cross-border spillovers. The scope of staff’s analysis and policy advice depends on the type of industrial policy and its objectives, as well as on available information and expertise. Two recent IMF papers provide a conceptual framework and guiding principles for the coverage of industrial policy in IMF surveillance, including trade-related issues and consistency with World Trade Organization rules. Finally, the IMF is collaborating with the WTO to promote a multilateral dialogue on trade and industrial policy. A technical meeting on policies for resilience already took place in February with contributions from several countries and other international organizations. The goal is to deepen and broaden this work in the coming months. Discussions like these can improve information-sharing on enacted measures, their effectiveness and spillovers, and help develop a common understanding of the issues and possible cooperative solutions. —For more on the return of industrial policy, listen to our recent podcast. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Dear MARIA, welcome to a special edition of the Weekend Read We spotlight the managing director’s call for foundational reform to lift global growth in a curtain-raiser speech, as well as important insights from our flagship reports, including poor medium-term growth prospects, industrial policy, cyber attacks, growing “spillovers” from emerging markets, mortgages and monetary policy, and the fast-growing $2-trillion private credit market. We also look ahead to next week’s must-watch events. FULL SCHEDULE

(Credit: IMF Photo/James Mertz) Georgieva Calls For “Foundational Reforms” To Lift Global Growth Policymakers must deal decisively with inflation and debt and promote economic transformation to boost productivity and growth, Kristalina Georgieva said in a curtain-raiser speech on the eve of the IMF’s Spring Meetings. Speaking at the Atlantic Council in Washington, the IMF managing director said global growth is marginally stronger on account of robust activity in the United States and many emerging market economies, but warned there are still plenty of things to worry about. “The sobering reality is global activity is weak by historical standards and prospects for growth have been slowing since the global financial crisis,” she said. The world has avoided a global recession and period of stagflation, but the IMF’s projection for medium-term growth of just above 3 percent is well below the historical average. Georgieva called on countries to eliminate economic constraints and create opportunities to boost productivity growth, including through “foundational reforms” such as strengthening governance, cutting red tape, increasing women’s participation in labor markets, and improving access to capital. New playbook The pandemic, wars, and geopolitical tensions have changed the playbook for global economic relations, she said. She called for more trade and cross-border investment flows to address global challenges and for more attention to how the benefits are shared in society. “In a fast-changing and more turbulent world, bringing countries together to tackle challenges and pursue opportunities is more important than ever.” Speaking to Atlantic Council president and chief executive Frederick Kempe, Kristalina Georgieva discussed geopolitics and protectionism, the US economic outlook, China’s global role, artificial intelligence, and the importance of thinking the unthinkable in risk analysis. Watch here.

(Credit: olaser/iStock by Getty Images) World Must Prioritize Productivity Reforms to Revive Medium-Term Growth The global economy has slowed over the past 15 years or so and the stronger growth rates of the past are unlikely to return without ambitious steps to enhance productivity, IMF economists write in a blog. Without major technological advances or structural reforms, global economic growth could slip to 2.8 percent by 2030, well below the historical average of 3.8 percent, the authors say in the blog, which draws on a chapter of the April 2024 World Economic Outlook. But a range of policies—from improving labor and capital allocation across companies to tackling labor shortages caused by aging populations in major economies—could collectively revive medium-term growth, they say. “In the long run, innovation-driven policies will be crucial to sustaining global growth.” 📺 Watch the IMF’s Nan Li and Diaa Noureldin talk to the New York Times’ Jeanna Smialek about how countries can boost their medium-term growth prospects.

Global growth will slow to just above 3 percent by 2029, according to five-year ahead projections in our latest World Economic Outlook, and could slip below this figure by the end of the decade. This threatens to reverse improvements to living standards and the unevenness of the slowdown between richer and poorer nations could limit the prospects for global income convergence.

(Credit: Traimak_Ivan/iStock by Getty Images) Industrial Policy Is No "Magic Cure" for Slow Growth Many countries are ramping up industrial policy to boost innovation in the hope of reigniting productivity and long-term growth. In a blog based on a chapter of the Fiscal Monitor, IMF economists say that industrial policy—in which the government supports certain sectors—can drive innovation if done right. But striking the right balance is key, as history is full of cautionary tales of policy mistakes, high fiscal costs, and negative spillovers in other countries. Governments should not see industrial policy as a magic bullet, the authors caution.  “Instead, well-designed fiscal policies that support innovation and technology diffusion more broadly, with an emphasis on fundamental research that forms the basis of applied innovation, can lead to higher growth” and accelerate the green transition. 📺 Watch the IMF’s Era Dabla-Norris discuss industrial policy's costs and benefits with Reuters senior correspondent Andrea Shalal.

(Credit: Altayb/iStock by Getty Images) Rising Cyber Threats Pose Serious Concerns for Financial Stability The risk of extreme losses from cyberattacks is increasing and could potentially cause funding problems for companies and even jeopardize their solvency, IMF economists write in a blog that draws on a chapter of the Global Financial Stability Report. The size of these extreme losses has more than quadrupled since 2017, to $2.5 billion. And indirect losses like reputational damage or security upgrades are substantially higher. “With the global financial system facing significant and growing cyber risks from increasing digitalization and geopolitical tensions…policies and governance frameworks at firms must keep pace,” the authors say. “Financial firms should develop, and test, response and recovery procedures and national authorities should have effective response protocols and crisis management frameworks in place.” 📺 Watch the IMF’s Fabio Natalucci and Felix Suntheim discuss increasing cyber threats at the Institute of International Finance.

(Credit: IMF Photo) Emerging Markets Are Exercising Greater Global Sway The global economy is increasingly influenced by the Group of Twenty’s large emerging markets. Since China’s accession to the World Trade Organization in 2001, G20 emerging markets have doubled their share of world trade and foreign direct investment and now account for one third of global GDP. In a blog based on a chapter of the World Economic Outlook, IMF economists say that growth “spillovers” from domestic shocks in G20 emerging markets have increased and are now comparable to those from advanced economies. A decline in productivity in G20 emerging markets could lower global output three times more than would have been the case in 2000, they say. “At a time when growth prospects are weakening in China and several other large emerging markets, it is critical for policymakers…to understand the channels through which a slowdown could propagate through the global economy.” 📺 Watch the IMF’s Andrea Presbitero and Andres Fernandez Martin discuss emerging-market "spillovers" with Brad Setser of the Council on Foreign Relations.

(Credit: Kajdi-Szabolcs/iStock by Getty Images) Housing is One Reason Not All Countries Feel Same Pinch of Higher Interest Rates Central banks have raised interest rates sharply over the past two years to combat inflation, yet the world economy has defied predictions of a serious slowdown, with global growth remaining broadly steady in most countries. Why are some feeling the pinch from higher rates and not others? In a blog based on a chapter of the World Economic Outlook, IMF economists say that the answer lies partly in differences in mortgage and housing markets. Monetary policy has greater effects in countries where the share of fixed-rate mortgages is low, because homeowners see their monthly payments rise in line with monetary policy, the authors say. “By contrast, households with fixed-rate mortgages will not see any immediate difference in their monthly payments when policy rates change.” The authors say the likelihood that households will feel the pinch will increase over time the longer central banks keep interest rates high. 🔊 Listen to the IMF’s Rui Mano talk to Tim Phillips of VoxTalks Economics about how the housing channels of monetary policy help to squeeze out inflation.

(Credit: da-kuk/iStock by Getty Images) Fast-Growing $2 Trillion Private Credit Market Warrants Closer Watch The private credit market emerged about three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets. It has grown rapidly, topping $2.1 trillion globally last year. In a blog based on a chapter in the Global Financial Stability Report, IMF economists say that private corporate credit has created significant economic benefits by providing long-term financing to corporate borrowers. However, they warn that the migration of this lending from regulated banks and more transparent public markets to the more opaque world of private credit creates potential risks. “Valuation is infrequent, credit quality isn’t always clear or easy to assess, and it’s hard to understand how systemic risks may be building given the less than clear interconnections between private credit funds, private equity firms, commercial banks, and investors.” 📺 Watch the IMF’s Fabio Natalucci discuss the opaque world of private credit at the NYU Stern School of Business

NEXT WEEK'S HIGHLIGHTS

TUESDAY, APRIL 16

9:00 AM - 9:45 AM ET IMF Press Briefing: World Economic Outlook 10:15 AM - 11:00 AM ET IMF Press Briefing: Global Financial Stability Report 2:00 PM - 2:45 PM ET Unlocking Domestic Resources For Development Through Global Partnerships

WEDNESDAY, APRIL 17

9:00 AM - 9:45 AM ET IMF Press Briefing: Fiscal Monitor 10:30 AM - 11:15 AM ET New Challenges in International Taxation 11:30 AM - 12:30 PM ET Policymaking in Times of Conflict and Instability

THURSDAY, APRIL 18

8:00 AM - 8:45 AM ET IMF Managing Director Press Briefing: Global Policy Agenda 9:00 AM - 9:30 AM ET The Global Public Finance Partnership 10:15 AM - 11:00 AM ET Press Briefing: Asia and Pacific Department 11:30 AM - 12:15 PM ET Press Briefing: Middle East and Central Asia Department 2:15 PM - 3:15 PM ET Debate on the Global Economy

FRIDAY, APRIL 19

8:30 AM - 9:15 AM ET Press Briefing: African Department 10:00 AM - 10:40 AM ET Press Briefing: European Department 11:30 AM - 12:00 PM ET Press Briefing: IMFC 12:30 PM - 1:30 PM ET Capital Flows and Growth 2:00 PM - 2:24 PM ET Press Briefing: Western Hemisphere Department

SATURDAY, APRIL 20

11:00 AM - 12:15 AM ET Fiscal Forum

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