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Financial globalization

May 5, 2021

[unable to retrieve full-text content]Financial integration of countries and financial globalization led to an extraordinary rise of foreign assets and liabilities as a share of GDP, followed by stability of total flows since the global financial crisis of 2008-2009. The apparent stability has been marked by an underlying metamorphosis of cross-border finance, with de-banking and rising foreign direct investment and non-banking financial flows. Blind spots and potential instability remain.

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What can Brazil expect from joining the OECD?

May 3, 2021

[unable to retrieve full-text content]Considering the evidence that institutions are behind a large share of long-term increases in welfare standards, the benefits of OECD membership go well beyond the modest costs involved in participating in the organization. Among the studied benefits are increases in trade – which are larger than those due to other international organizations such as the World Trade Organization (WTO) or the International Monetary Fund (IMF) –, increases in foreign direct investment, improvements in education, and better results in governance. Risks are small compared to potential benefits. We estimate the benefits by benchmarking against an estimate of the benefits of acceding to an institution with similar goals and policies – the European Union (EU) – and find them

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Central Banks and Climate Change

April 28, 2021

[unable to retrieve full-text content]There are three major reasons for central banks to engage on climate change issues. The first is the set of – physical and transition – risks to financial stability potentially brought about by natural disasters and trends derived from climate change. Second, the potential impact of climate change shocks and trends on economic growth and inflation and, therefore, on their monetary policy decisions. Finally, the possibility of using their balance sheets and their macroprudential toolkit to favor climate mitigation.

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Global Current Account Imbalances

April 21, 2021

[unable to retrieve full-text content]After peaking in 2007 at around 6% of world GDP, global current-account imbalances declined to 3% of world GDP in the last few years. But they have never left entirely the spotlight, albeit acquiring a different configuration from that which marked the trajectory prior to the global financial crisis (GFC). This is not because they threaten global financial stability, but mainly because they reveal asymmetries in adjustment and post-GFC recovery between surplus and deficit economies, and because of the risk of sparking waves of trade protectionism. They also reveal the sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential.

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Bloated central bank balance sheets

April 15, 2021

[unable to retrieve full-text content]There are good reasons to believe that there will be no return to the pre-QE configuration of balance sheets. First, the increasing global financial integration in the last few decades has imposed increasing challenges in terms of making liquidity management effective as cross-border volumes of capital flows have expanded significantly. Second, changes to financial regulation have induced private agents to alter their behavior and strategies. Finally, a new task has come under the purview of central banks: monitoring relationships between various benchmark curves—i.e., operating as quasi-market makers.

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Secular Stagnation and the Big Balance Sheet Economy

April 8, 2021

[unable to retrieve full-text content]Private balance sheets have risen relative to GDP in advanced economies in the last decades, in tandem with a trend of decline in long-term real interest rates. Asset-driven macroeconomic cycles, along with a structural trend of rising influence of finance on income growth and distribution, have become part of the landscape. Underlying secular trends of stagnation may also be suggested, making the macroeconomic dynamics dependent on the balance sheet economy getting bigger and bigger.

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April 1, 2021

[unable to retrieve full-text content]In the 1990s and 2000s, foreign trade expanded, and world poverty diminished. Such trade globalization process stabilized in the 2010s and tends to be partially reversed by the new wave of technological changes.

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April 1, 2021

[unable to retrieve full-text content]We point out two major challenges in the rebalancing. First, the transition toward a less investment- and export-dependent growth model has been taking place from a starting point of exceptionally low consumption-to-GDP ratios. Besides high profit-to-wages ratios, low levels of public social protection and spending lead to high household savings. An additional challenge comes from the lack of progress in rebalancing between private- and state-owned enterprises, something that is taking a toll on productivity.

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April 1, 2021

[unable to retrieve full-text content]Cross-border technological diffusion has contributed to rising domestic productivity levels in advanced and emerging economies and facilitated a partial reshaping of the global innovation landscape. However, there are local requisites to escalate the ladder of innovation capabilities.

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April 1, 2021

[unable to retrieve full-text content]The global trend towards increasing globalization since the 1990s seems to have had two different distributional consequences: income inequality between countries has declined, while economic inequality within countries has increased. However, technological progress has made the biggest contribution to rising income inequality over the past two decades. Domestic policies – fiscal policies, social protection – are the locus where inequality is to be tackled.

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The Pandemic Will Leave Scars on the Job Market

April 1, 2021

[unable to retrieve full-text content]The pandemic will leave scars and countries will not return to where they were. There will be a need for retraining and job reallocation for part of the populations of all countries. The role of public policies will be central in the post-COVID-19 world, both in strengthening social protection—including through unemployment insurance and income transfer programs—and in the requalification of workers.

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The size of Biden’s fiscal package

February 22, 2021

[unable to retrieve full-text content]According to Treasury Secretary Janet Yellen, it would be better to run the risk of excess than insufficiency. In addition, the Federal Reserve’s new monetary policy regime puts the 2% inflation target as an average, not as a ceiling forcing monetary policy to act to prevent it in advance. After a long period of inflation below 2%, even in years with low unemployment and interest rates on the floor, monetary authorities can afford to wait some time with above-average inflation until they are compelled to pull the brake.

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Central Banks and Inequality

February 11, 2021

[unable to retrieve full-text content]If, on the one hand, it does not seem appropriate to say that stabilization policies by central banks increase inequality, on the other it is increasingly recognized how inequality in income and wealth affects the effectiveness of their policies

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Brazil at a Post-Pandemic Macroeconomic Crossroads

December 18, 2020

[unable to retrieve full-text content]Moving forward—or not—with structural reforms aimed at strengthening fiscal adjustment and lifting private investment in Brazil will define whether a sustainable—or unsustainable—growth-cum-debt trajectory will prevail in the next decade. The extent to which its economy regains its attractiveness for foreign investors will play a key role.

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Why a Weaker Dollar Might Be Good for Emerging Markets?

December 17, 2020

[unable to retrieve full-text content]There is currently a convergence of views that the US current account deficits and insufficient domestic savings tend to slide down the relative value of the dollar. Four “channels of dollar transmission” point to such a dollar devaluation as financially benefitting emerging market economies.

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Middle-income countries should not be rushed to graduate

December 14, 2020

First appeared at OECD Development Matters14 December 2020 Development MattersNew social contractGraduation, Middle Income Trap, New social contractBy Otaviano Canuto, Senior Fellow at the Policy Centre for the New South, Non-Resident Senior Fellow at Brookings Institution, and Former Vice President at the World Bank; Matheus Cavallari, Senior Advisor and Tiago Ribeiro dos Santos, Advisor at the Board of Executive Directors of the World Bank Group. Opinions here are their own. The authors wrote chapter 12 of the recent book: Alonso, J.A. & Ocampo, J.A. (eds.), Trapped in the Middle? Developmental Challenges for Middle-Income Countries, Oxford University Press, 2020Many donor countries seem eager to see middle-income countries (MICs) “master out” and graduate to a non-client status in

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The pandemic will reshape globalization

December 8, 2020

The pandemic is accelerating history, in the sense that some of its recent trends are being sped up. In the case of globalization, the pandemic will not reverse it, but it will reshape it. Here we take a bird’s eye view on global trade during the pandemic, relate it to previous trends, and guess how global value chain managers and governments’ trade policymakers are likely to react.A bird’s eye view on global trade during the pandemicWorld trade had a deep dive during the first months of the global pandemic. After all, mandatory or recommended lockdowns and travel restrictions disrupted economic activities, before being scaled back in the second half of the year. The latest WTO trade forecast pointed to a 9.2% drop in the volume of world merchandise trade in 2020, followed by a 7.2%

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The two sides of capital flows to Brazil

December 1, 2020

Foreign direct investment in Brazil this year remains weak (Chart 1). On the other hand, there was a significant inflow of funds in the external financial account in October and November for investments in both stocks and fixed income instruments.Source: Central Bank of BrazilThe portfolio investment account for the year remains in the red (Chart 2). The substantial departure in March and April, reflecting the tremendous shock that Covid-19 brought to the global financial markets, has not yet been fully offset by inflows since June. But, for some, the recent figures gave rise to a feeling that the improvement in international financial conditions was sufficient to guarantee tranquility on the external front.Source: Central Bank of BrazilThe external inflow was an important factor for

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Quantitative easing in emerging market economies

November 15, 2020

“This time was different”, one may say about monetary policy responses to capital outflow shocks by emerging market economies (EME), as pointed out by a bulletin of the Bank for International Settlements (BIS) released on November 12th (Aguilar and Cantu, 2020). The pandemic-related global financial shock that occurred in March and April led to an exit of close to US$ 100 billion from EME – see Canuto (2020a) – and it was answered by local monetary authorities in ways different from previous episodes. This time there was even the use of “quantitative easing” (QE) in some of them, that is, the expansion of the central bank balance sheet via acquisition of public or private securities as an additional monetary-financial management tool. Such asset purchase programs may either aim at simply

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Whither Interest Rates in Advanced Economies: Low for Long?

October 23, 2020

We have previously discussed how, between March 2020, when the financial shock caused by COVID-19 occurred, and the end of August, the stock and corporate debt markets in the United States performed extraordinarily, despite gloomy prospects on the real side of the economy. The decline in technology stock prices in September ended up taking the equivalent of a month from gains starting in April, but prices remain high.On the basis of such a ‘disconnect from reality’ in financial markets, we pointed to the Federal Reserve’s (Fed) interest rate cuts and liquidity flooding, which were done to avoid a dramatic credit crunch, massive bankruptcy waves, and even greater unemployment than what happened. Other central banks of advanced economies—the Eurozone, Japan, the United Kingdom—acted

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China on the way back to rebalancing

September 26, 2020

Otaviano CanutoFirst appeared at CGTN, 25 September 2020China’s economy keeps recovering from the coronavirus pandemic-led crisis through the third quarter of 2020, as revealed by the numbers of August activity. Its GDP grew by 3.2% in the second quarter, after falling by 6.8% in the first quarter, in both cases as compared from a year before. It is now the only major economy expected to exhibit growth this year. Successful containment of the pandemics has allowed it to be first-in-first-out relative to others.One feature in common with other countries, however, has been the unbalanced shape of the economic recovery. The supply side has run ahead of the demand side. Re-opening factories starting in February made possible a steady return of industrial output, which grew 5.6% on an annual

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Dependency and disconnect of U.S. financial markets

September 22, 2020

First appeared at Policy Center for the New SouthU.S. stock and corporate bond markets performed extraordinarily well from the March financial shock caused by covid-19 to the end of last month. Then, three consecutive weeks of decline in the three major stock market indexes have been followed this week by a global slump attributed to fears of new lockdowns. A period of disconnect of financial markets with the underlying real economy has culminated in a revelation of the former’s high dependency to Federal Reserve policies.Disconnect…From the response by the Federal Reserve (Fed) to the March shock – interest rate reduction and creation/expansion of several lines of acquisition of private assets and credit provision – the rise in stock price indices in the U.S. markets led them in August to

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Don’t Expect Miracles From the Multilaterals

September 11, 2020

First appeared at Americas QuarterlyWith Latin America and the Caribbean potentially facing years of difficulties due to the pandemic and related economic crises, attention has shifted to what multilateral institutions like the International Monetary Fund (IMF) might do to help. There’s no doubt they can play a crucial role in preventing another lost decade in the region. But these institutions will also face limitations because of capital constraints and other factors. The need is clearly acute. Latin America and the Caribbean remains the epicenter of the global pandemic, currently accounting for more than 43% of global deaths after a surge in COVID-19 fatalities in Brazil, Mexico and several other countries in the region. And GDP declines in the second quarter of 2020 have revealed how

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Brazil, South Korea: Two Tales of Climbing an Income Ladder

September 4, 2020

First appeared as Policy Brief PB-20/70, Policy Center for the New SouthThe “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies (Gill & Kharas, 2007, 2015) (Canuto, 2019). Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status (Figure 1).Such divergence of economic growth can be related to their distinctive performances of domestic accumulation of technological and organizational capabilities. Their different approaches to global value chains and trade globalization

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Global imbalances, coronavirus, and safe assets

August 10, 2020

Originally posted at the Policy Center for the New SouthThe International Monetary Fund (IMF) released, on August 4, its ninth annual External Sector Report, where current account imbalances and asset-liability stocks of 30 systemically large economies are approached. This time the report went beyond looking the previous year and tried to anticipate what will be some of the impacts of the still on-going COVID-19 crisis.The report shows that the global economy entered the COVID-19 crisis with a configuration of external imbalances that has persisted since 2013, with a corresponding elevation of stocks of foreign assets and liabilities. While the outbreak of COVID-19 has brought a deep contraction to world trade and a substantial realignment of exchange rates, the IMF does not

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The economic recovery from coronavirus may look like a square root

July 21, 2020

There are signs of recovery in various parts of the global economy, starting in May, after the depressive dip imposed by Covid-19. Such signs emerged after the easing of restrictions on mobility established to flatten out the pandemic curves, and also reflected policies of flattening the recession curve (income transfers to part of the population, credit lines to vulnerable companies and others).Besides remaining far from giving back the GDP lost, in all countries, the recovery faces doubts about its strength. There is a similar sequence in each country, but there are differences due to the rhythms of the pandemic and the effectiveness, magnitude, and time length of the policies to flatten out the recession curve. The pace of the pandemic matters not only because of the possibility of

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Brazil’s Economic Crossroads: Which Path Will It Choose?

July 3, 2020

First appeared at Americas QuarterlyAs the pandemic unfolds, Brazil is paying a huge human cost, with the number of victims rising quickly. The scar of COVID-19 will take a long time to heal. And the country will also have to battle on the economic side, where the impact will be deep and long-lasting.Starting from a jump in the already high level of debt in relation to its GDP, coming from both sides of the equation: spending has skyrocketed while a steep decline in its gross domestic product is expected for this year. The trajectory for the country’s economy over the next decade, it is clear, will be lower than what was expected prior to COVID-19.Current projections illustrate Brazil’s coming fiscal crossroads: The country can choose either stagnation and insolvency or a gradual fiscal

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The Impact of Coronavirus on the Global Economy

June 30, 2020

First appeared at the Policy Center for the New SouthCOVID-19 brought the global economy to a sudden stop, causing shocks to supply and demand. Starting in January 2020, country after country suffered outbreaks of the new coronavirus, with each facing epidemiological shocks that led to economic and financial shocks as a consequence.How quickly and to what extent will national economies recover after the pandemic has passed? This will depend on success in containing the coronavirus and on exit strategies, as well as on the effectiveness of policies designed to deal with the negative economic effects of the coronavirus.The impact of coronavirus on the global economy will extend beyond 2020. According to forecasts from the International Monetary Fund and World Bank, GDP per capita at the end

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Higher Debt, Deeper Digitization, and Less Globalization Will be Coronavirus Legacies

June 11, 2020

Three features of the post-pandemic global economy can already be anticipated: the worldwide rise in public and private debt levels, accelerated digitization, and a partial reversal of globalization. The first arises from the public sector’s role as the ultimate insurer against catastrophes, government policies to smooth pandemic curves and the coronavirus recession. These will leave a legacy of massive public-sector debt worldwide (as discussed in a previous post. Lower tax revenues and higher social and health expenditures reflect the choice of trying to avoid widespread destruction of people’s productive and livelihood capacity during the pandemic. On the private-sector side, indebtedness will be the way to survive the sudden stop, if the result is not to be bankruptcy or closure.The

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What shape will the coronavirus recovery be ?

May 12, 2020

First appeared at the Policy Center for the New SouthData recently released on the first-quarter global domestic product (GDP) performance of major economies have showed how significant the impact of COVID-19 has been on economic activity and jobs, with large contractions across the board. The ongoing global recession is poised to be worse than the “great recession” after the 2008-09 global financial crisis, especially from the standpoint of emerging market and developing economies. The depth and speed of the GDP decline will rival that of the Great Depression of the 1930s.But how swiftly will national economies recover once the pandemic has passed? And when will that happen? That will depend on how successful the containment of coronavirus and exit strategies will be, as well as on how

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