IMF Weekend Read: Food Prices | Currencies | Chile | Southeast Asia

Dear reader,   In today's edition, we highlight: How to respond to surging food prices  When to let currencies fall Chile renews its IMF credit line   Rethinking development International cooperation is critical for Southeast Asia  INFLATION What Governments Should Do When Food Prices Surge The food security of millions of people, especially in low-income countries, is under renewed pressure. A stronger-than-usual El Niño could damage harvests, while an escalation of the war in the Middle East could further disrupt fertilizer and energy supplies. These shocks would increase costs for farmers and potentially raise food prices for consumers everywhere.    “For policymakers in some of the world’s most vulnerable countries, the question is not if a food shock will happen, but when,” write IMF staff David Amaglobeli, Rodrigo Cerda, Tewodaj Mogues, and Patrizia Tumbarello in a new blog. They note that food affordability is not merely an inflation problem: in many countries, food accounts for more than half of household spending.    The research recommends that governments first diagnose the problem: food availability, affordability, market functioning, or administrative capacity. Policymakers can then deploy the most targeted and cost-effective support. But they should generally avoid price-based subsidies; if used, they should be temporary, transparent, and tightly circumscribed. Targeted vouchers may work where food is available and administrative systems are strong, while direct food distribution is essential when supplies have broken down.   Read the blog CENTRAL BANKS When to Let Currencies Fall When a currency comes under pressure, central banks face a difficult choice: allow it to adjust or intervene. The answer depends on whether the move reflects changing economic fundamentals or a financial shock that is impairing market functioning. The exchange rate alone cannot settle that question.     New IMF research, which complements the IMF's Integrated Policy Framework, offers a method to distinguish between the two. Using 15 years of data from 25 emerging markets, the paper examines the extra return investors demand to hold a currency for signs of financial stress. In Chile and Brazil, for example, financial shocks account for about one-third of movements in that premium. Even though such shocks are infrequent, they can trigger sharp declines in output     “The lesson: most currency moves are best left alone,” because they reflect fundamentals such as movements in terms of trade, according to the authors, Ece Ozge Emeksiz, Andrés Fernández, Nikhil Patel, Ivan Petrella, and Tatjana Schulze. “Intervention may be warranted only when markets genuinely malfunction, and the toolkit can flag those moments as they unfold.”  Read the analysis FINANCING Chile Renews IMF Credit Line   Chile has renewed its $11.8 billion Flexible Credit Line with the IMF for two years. This precautionary arrangement is designed to help the country cope with external shocks as it continues to strengthen its resilience.     “Over the years, Chile has developed stronger buffers against shocks, including from the central bank’s ongoing reserve purchase program,” says incoming mission chief Bikas Joshi in an interview with IMF Country Focus. As the world’s largest copper producer, Chile has benefited from high prices for the metal, which is critical for AI infrastructure. “Chile can grow close to 3 percent a year over the medium term if copper prices stay high and reforms are delivered,” Joshi added.     The Flexible Credit Line is designed for countries with a track record of very strong economic policies and institutions. It provides unconditional access to financing during periods of uncertainty, at a lower cost than countries would typically face in financial markets. Chile has gradually reduced the arrangement from 1,000 percent of IMF quota in 2020 to 500 percent—about $11.8 billion—as part of its exit strategy.  Read the article PODCAST Rethinking Development  Export-oriented manufacturing helped many Asian economies grow rapidly and lift millions of people out of poverty. But it no longer creates enough jobs, leaving most workers in low-productivity domestic services, such as hospitality, food service, or gig work.    In a new Finance & Development podcast, Harvard University’s Dani Rodrik argues that development strategies must now focus on raising productivity in those services. The goal, he says, is a more inclusive growth model.    “The central challenge of economic development today,” says Rodrik, “is how to increase productivity in nontraded activity jobs, mostly in services, that do not require a standard college education.” Read more in his accompanying article in Finance & Development.  Listen to the podcast FINANCE & DEVELOPMENT The Cooperative Advantage   Asia’s economy has expanded eightfold since the end of the Cold War, while extreme poverty has fallen from more than half of the population to one-sixteenth. Danny Quah of Singapore’s Lee Kuan Yew School of Public Policy attributes much of that progress to engagement with a rules-based multilateral order that expanded trade and openness.    Southeast Asia, home to more than 700 million people, was a major beneficiary. “Without the rules-based multilateral world order that increased trade and openness, the region’s relatively small and isolated economies might have suffered the consequences of having larger, more powerful neighbors,” Quah writes in Finance & Development.    As that order gives way to geoeconomics and strategic interdependence, Quah argues, Southeast Asia faces particular risks—but also has a strong incentive to help repair a fracturing global economy.  Read the article Thank you 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.  Peter Walker Senior Editor | IMF Weekend Read  jdeslauriers@imf.org Stay connected with the International Monetary Fund:       This email was sent to politikimx@gmail.com on behalf of: International Monetary Fund 1900 Pennsylvania Ave NW · Washington, DC · 20431