ΙΜF weekend read

Dear MARIA, In today's edition, we highlight: Political parties of all stripes pushing for higher government spending Strategic pivot in global fiscal policy needed: Gopinath Michael Spence on AI's promise for the global economy September 2024 F&D magazine Upgrading fiscal frameworks in Asia-Pacific, and much more

FISCAL POLICY Political Parties of all Stripes Pushing for Higher Government Spending  (Credit: Bombaert/iStock by Getty Images) Conservative politics has traditionally been defined by its emphasis on fiscal prudence and the idea of a small state, while parties leaning left are usually associated with more spending and a larger presence of the state in the economy. But the reality may be different, write the IMF’s Era Dabla-Norris, Enrico Di Gregorio, and Yongquan Cao in a new blog.  As new analysis shows, parties across the political spectrum sound increasingly similar when it comes to fiscal policy: they all campaign on ideas of a bigger government and on promising more spending. “From socialists to nationalists, support for more spending has steadily increased, while fiscal restraint rhetoric has lost favor across the board in the last three decades, after being most popular in the 1980s,” write the authors. Looking ahead, widespread calls for bigger and more active governments tasked with addressing climate change, defense, and costs associated with aging societies are accompanied by expectations of higher public spending, they note. The crucial question of how to pay for this increased spending remains open. Large fiscal deficits and elevated debt levels call for greater fiscal prudence, but political forces are pulling in the opposite direction. “Scholars, policymakers, and voters alike will need to rally around viable political strategies to keep fiscal sustainability at the center of the public debate, as uncertainty about the future of public finances mounts,” the authors say. Read the Blog

IMF MANAGEMENT Strategic Pivot in Global Fiscal Policy Needed, Gopinath Says (Credit: IMF Photo) A strategic pivot in global fiscal policy is necessary to ensure that governments will have the resources needed to invest in structural transformations and to fight future crises, the IMF’s First Deputy Managing Director Gita Gopinath said this week. Speaking at the Central Bank of Ireland’s Whitaker Lecture in Dublin, Gopinath noted, “such a pivot begins with a recognition of the true scale of fiscal risks: it is worse than you think. This calls for further recognizing that the economic consequences of high debt can no longer be dismissed in advanced economies. Borrowing costs and economic activity are increasingly impacted by loose fiscal policy.” For any fiscal strategy to succeed, economically and politically, it will need to focus on growth, guardrails, and grassroots, she said in her speech: higher growth is essential to improve prosperity, reduce debt, and create policy space to tackle mounting spending pressures; guardrails must protect against political expediencies and optimism bias; and grassroots efforts are needed to engage with civil society and other key stakeholders to help shape the public discourse towards more sustainable fiscal policy. Read the Speech

F&D MAGAZINE AI's Promise for the Global Economy (Credit: CFOTO/Future Publishing via Getty Images) Artificial intelligence and other emerging technologies have the potential to underpin a major surge in global productivity, Nobel laureate Michael Spence writes in the latest edition of F&D magazine. But, for AI to achieve its full economic potential, it must be accessible to all sectors of the economy, and to companies large and small, he notes. “Policies for accessibility, diffusion, and skills to help realize the full potential of AI are currently weak in comparison with the intense focus on risk mitigation and misuse.” Read the Article

ASIA-PACIFIC REGION  Upgrading Fiscal Frameworks (Credit: IMF Photo/Noriko Hayashi) Recent years have demonstrated the critical role of fiscal policy in shielding households and the economy from large global shocks. Asia-Pacific countries took unprecedented fiscal measures, but the fiscal costs were large especially when policies were not well targeted and timely, as recent IMF staff research shows. Public debt levels in Asia-Pacific are on average 50 percent of GDP higher relative to 2007 among advanced economies, and 15-20 percent of GDP higher among developing economies. The impact of the COVID-19 pandemic also highlighted the fact that fiscal frameworks in the region have not been sufficiently robust and, for example, led to large deviations from fiscal rules (e.g. breaches in deficit or debt limits). The new study assesses existing fiscal tools, rules, and frameworks more generally, and provides insights into how Asian-Pacific countries can make fiscal policy more effective to tackle the risks and challenges posed by aging and climate change.

For many emerging market economies, moving from an export-oriented strategy with labor-intensive manufacturing to a more sophisticated production process was key to their development. But the world is quickly changing, and Raghuram Rajan says India need not follow that same path. In their new book, Breaking the Mold, the former Reserve Bank of India governor and co-author Rohit Lamba argue that India has lost its labor cost advantage and must focus on developing its human capital. In this recent podcast, IMF Asia and Pacific Department Head Krishna Srinivasan and Rajan discuss how India might leverage its growing workforce and pivot from “brawn to brain”.

Weekly Roundup SPEECH Artificial Intelligence and its Impact on Financial Markets and Financial Stability Advancements in Artificial Intelligence (AI) continue to unfold at a rapid pace. In the coming years, new technologies enabling computers and machines to simulate human learning, comprehension, and problem solving will become further intertwined with our day-to-day lives, and the financial sector is no exception. There, these technologies—in particular the new and dramatic advances in Generative-AI—are poised to impact financial markets. In a recent speech at the Bund Summit 2024 in Shanghai, the IMF’s Tobias Adrian discussed some of these recent and potentially far-reaching developments, as well as their potential impact on financial stability. STAFF PAPER Central Banks, Banking Law and Climate Change: Key Legal Issues Climate change poses major threats to long-term growth and prosperity, with repercussions for price and financial stability - dimensions that are at the core of central banks’ and bank supervisors’ objectives. It is in the pursuit of their objectives that, within their existing legal framework, that central banks and bank supervisors can and should integrate climate change into their activities. New staff papers on Central Banks and Climate Change and Banking Law and Climate Change explore the key legal issues surrounding these topics.

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

Miriam Van Dyck Editor IMF Weekend Read mvandyck@IMF.org