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Otaviano Canuto

Otaviano Canuto

Mr. Otaviano Canuto currently holds the position of Executive Director at the Executive Board of Directors of the World Bank Group and its Affiliates, the same position he held when he was Executive Director of the World Bank from 2004-2007. He represents Brazil, Colombia, Dominican Republic, Ecuador, Haiti, Panama, Philippines, Suriname, and Trinidad & Tobago. He is also a member of both the Committee on Development Effectiveness (CODE) and the Budget Committee.

Articles by Otaviano Canuto

How to Fix Brazil’s Economy

October 2, 2018

Brazil’s future hinges on the implementation of smart, gradual, and coherent economic reforms that facilitate productivity growth and put the country on the path toward fiscal sustainability. Whoever wins the upcoming election has a responsibility to address that imperative.

SÃO PAULO – Brazil is approaching its most consequential election since the end of military rule more than three decades ago. But while the country’s politics are plagued by dysfunction, the election’s outcome will hinge on the next government’s economic reform agenda.

Spencer Platt/Getty Images

Bryan R. Smith/AFP/Getty Images


One of Brazil’s most serious economic challenges

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Realizing Globalization’s Innovative Potential

August 14, 2018

[unable to retrieve full-text content]The diffusion of knowledge and technology worldwide in recent decades has brought important changes to the global innovation landscape. But those changes could be much more profound if countries created more supportive investment environments.

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The Future of Manufacturing in the Global South

April 4, 2018

As a growth strategy for low-income countries, the efficacy of traditional manufacturing is waning. To compete in the technology-driven global economy of the future, developing countries will need new models to increase productivity and put people to work.
WASHINGTON, DC – In emerging markets, manufacturing has historically been a source of productivity, growth, and jobs. Since the 1950s, industrialization has kept economies in Latin America, Asia, and Eastern Europe on a steady glide toward higher stages of development.

The Year Ahead 2018

The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

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Brazil’s Economic Deliverance

September 28, 2017

Brazil’s proliferating corruption scandals have imposed substantial costs on some of the country’s largest companies. But, in the long term, today’s efforts to strengthen the rule of law and ensure fair market competition will prove to have been well worth it.
WASHINGTON, DC – Ongoing corruption investigations in Brazil have exposed a tangled network of illicit relationships between private firms, government bureaucrats, and elected politicians. The corruption scandals have already reached the highest levels of Brazilian society. Several high-level politicians and corporate owners and executives have been convicted and imprisoned. Even former President Luiz Inácio Lula da Silva is now under indictment.

Sean Gallup/Getty Images

Justin Tallis/Getty

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Matchmaking Finance and Infrastructure

July 17, 2017

The world economy – and emerging market and developing economies in particular – display a gap between infrastructure needs and its finance (Canuto, 2014). On the one hand, infrastructure investment has fallen far short of what would be necessary to support potential growth. On the other hand, abundant financial resources in world markets have been facing …

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Does Brazil’s Sector Structure Explain Its Productivity Anemia?

June 28, 2017

Brazil’s labor and total-factor productivity (TFP) have featured anemic increases in the last decades (Canuto, 2016). As we illustrate here, contrary to common view, sector structures of the Brazilian GDP and employment cannot be singled out as major determinants of productivity performance. Horizontal, cross-sector factors hampering productivity increases seem to carry more weight. Brazil’s productivity …

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Long-Term Finance and BNDES Tapering in Brazil

June 9, 2017

  One major policy issue in Brazil is how to boost productivity, while following a path of fiscal consolidation that will take at least a decade to bring the public-debt-to-GDP ratio back to 2000 levels (Canuto, 2016a). The productivity-boosting agenda includes not only the implementation of a full range of structural reforms, but also recovering …

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NAFTA at the Crossroads

May 24, 2017

The U.S. Senate voted to confirm Robert Lighthizer as United States Trade Representative last week, rounding out President Donald Trump’s cabinet and giving momentum to his trade agenda. At his swearing-in ceremony on May 15, Ambassador Lighthizer predicted that President Trump would permanently reverse “the dangerous trajectory of American trade,” and in turn make “U.S. …

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Brazil’s Pension Reform Proposal is Necessary and Socially Balanced

May 2, 2017

  Last week the World Bank released a Staff Note (2017) analyzing the pension reform proposal sent last December by Brazil’s Federal Government to Congress. It concludes that (p.16, our emphasis): “… the proposed pension reform in Brazil is necessary, urgent if Brazil is to meet its spending rule, and socially balanced in that the …

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Beyond the Ballot: Turkey’s Economy at the Crossroads

March 23, 2017

Turkey has been approaching a crossroads for some time now. Soon enough it will have to choose a direction. On April 16, 2017 Turks will vote in a referendum on President Recep Tayyip Erdogan’s proposed constitutional amendment that would shift the country’s power center from a parliamentary system to a presidential one. If successful, not …

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Mr. Trump: Can You Deliver it?

November 15, 2016

U.S. assets reacted in a see-saw fashion to Donald Trump’s victory. Stock futures first dove deeply before climbing up to strong gains as investors developed a view on what kind of economic policy president-elect Trump is likely to pursue. They seem to be pricing in an expectation of higher growth and inflation, as well as an earlier Federal Reserve exit from ultra-low interest rates and from holding U$ 4.45 trillion of Treasury bonds.
Shock waves hit international financial markets leading to a rotation into equities and away from bonds. While global equities gained about U$ 1 trillion, global bonds lost close to U$ 1.2 trillion – according to Bloomberg. However, emerging markets have suffered from capital outflows, currency depreciations and losses in both equity and fixed-income markets, anticipating tighter monetary conditions and a potential “tariff tantrum”.
Reaganomics 2.0?
Three components of Mr. Trump’s platform and statements seem to be underlying such a view: a big surge of spending on infrastructure, corporate tax cuts, and (financial and business) de-regulation. Some analysts have pointed out that such an agenda may well be inspired in Reaganomics. The Ronald Reagan presidency (1981-89) witnessed higher GDP annual growth rates (3.1%) than the 2.4% p.a. of preceding Ford-Carter years (1974-81) and the 2.0% p.a.

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The Global Economy Remains Unbalanced

November 3, 2016

Discussions around large current account imbalances among systemically relevant economies as a threat to the stability of the global economy faded out in the aftermath of the global financial crisis. More recently, some signs of a possible resurgence of rising imbalances have brought back attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment.
Are global imbalances rising again?
For five years now, the International Monetary Fund (IMF) has produced an annual report on the evolution of global external imbalances – current account surpluses and deficits – and the external positions – stocks of foreign assets minus liabilities – of 29 systemically significant economies. Results for 2015 showed a moderate increase of global imbalances, after they had narrowed in the aftermath of the global financial crisis (GFC) and stabilized in the interim (IMF, 2016) – see Chart 1.

The evolution of imbalances in 2015 depicted in Chart 1 is explained by the IMF as mostly reflecting three major drivers:
First, the recovery among advanced economies proceeded in an asymmetric fashion. Stronger recoveries in the U.S. and the U.K.

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Protectionist Creeps

October 20, 2016

WASHINGTON, DC – Prospects for growth in global trade in 2016 and 2017 have been downgraded again. The World Trade Organization (WTO) now expects that trade this year will increase at its slowest pace since the post-2008 global recession. What is going on? This is not purely a function of an anemic global economic recovery. After all, trade growth has typically outpaced GDP growth; in the years before the 2008 global financial crisis, the average increase was double that of output. But the ratio of trade growth to GDP growth has been falling since 2012, a trend that will culminate this year, with GDP growth outpacing trade growth for the first time in 15 years. This reversal is driven partly by structural factors, including a plateau in the expansion of global value chains and a turning point in the process of structural transformation in China and other growth frontiers. The rising share of services in countries’ GDP likely implies further downward pressure on trade flows, given services’ lower trade propensity relative to manufactured goods. But not all of the forces undermining trade are so long-term. Crisis-related, temporary, and potentially reversible factors have also had an impact.

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A Straitjacket to Help Brazil Fight Fiscal Obesity

October 12, 2016

Brazil’s GDP contraction since mid-2014 has multiple non-fiscal roots – Canuto (2016a; 2014) – but it has morphed into an unsustainable fiscal trajectory (Canuto, 2016b). Dealing with the latter has become a precondition for full economic recovery and the Brazilian government has submitted to Congress a constitutional amendment bill mandating a public spending cap for the next 20 years. This piece considers how the Brazilian landscape evolved toward such a precipice and why additional reforms – particularly on pensions – will have to be implemented to make the spending cap feasible.
Toward fiscal obesity
As we discussed in our previous piece, Brazil has featured anemic productivity increases in the last decades (Canuto, 2016c). And those have taken place while a political desire to finally come to terms with the poverty and inequality, which remained unabated during previous decades of rising per-capita income levels, has also been exercised. Such a political desire, after the return to democracy, translated into a large and increasing role for the public sector; consider that primary government expenditures as a proportion of GDP rose from 22% in 1991 to 36% in 2014.
The uptick of public spending took place with increased earmarking of tax revenues and the ability of interest groups to maintain existing privileges.

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Brazil Needs an Honest Waste Loss

October 3, 2016

Brazil has been suffering from anemic productivity growth. This is a major challenge because in the long run, sustained productivity increases are necessary to underpin inclusive economic growth. Without them, increases in real labor earnings tend to conflict with global competitiveness; collecting taxes in order to fund government expenditures on infrastructure and social policies becomes a heavy burden; returns to private investment becomes harder to achieve; and ultimately citizens will have less access to high-quality goods and services at affordable prices. The focus on urgent fiscal reforms adopted by the new government– public spending cap, social security reform (Canuto, 2016) – must be accompanied by action on the productivity front.
Brazil’s recent social and economic progress was achieved without major productivity growth. Both minimum and average wages rose a lot faster than labor productivity, and employment moved toward sectors with few opportunities for productivity growth (Figure 1).

According to estimates reported in World Bank (2016a), Brazil’s Total Factor Productivity (TFP) increased at an annual rate of 0.3% from 2002 to 2014 – and only 0.4% p.a. during the roaring years from 2002 to 2010. Two-thirds of Brazil’s GDP increase can be accounted for by higher quantity and quality of labor being incorporated in the economy.

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Brazil’s Way Out

September 5, 2016

WASHINGTON, DC – Now that impeached Brazilian President Dilma Rousseff is out of office, it is up to the newly empowered administration of President Michel Temer to clean up Brazil’s macroeconomic mess. Can Temer’s government save Brazil’s crumbling economy?

The situation is certainly dire. In fact, Brazil has lately been experiencing the most powerful economic contraction in its recent history. Its per capita GDP will be more than 10% smaller this year than it was in 2013. And unemployment has soared to more than 11%, up four percentage points from January 2015.
Brazil has no easy route to recovery for a simple reason: the current rout derives from the intensification in recent years of long-standing economic vulnerabilities – in particular, fiscal profligacy and anemic productivity growth.

Consider Brazil’s fiscal position, which has deteriorated rapidly since 2011, with a 3.1%-of-GDP primary surplus giving way to a deficit of more than 2.7% of GDP, leading to an overall budget deficit of close to 10% of GDP. In fact, the groundwork for that deterioration was laid a long time ago.

Brazil’s primary government expenditures as a proportion of GDP rose from 22% in 1991 to 36% in 2014.

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Tales of Emerging Markets

August 8, 2016

Emerging market economies (EM) as a special class of financial assets have recently been subject to two competing tales. On the one hand, there is evidence of continued financial deepening and further integration within the global financial system, while the offer of higher yields remains hard to find elsewhere. On the other hand, there are frequent bouts of fear of systemic unwinding of positions triggered by investors “exiting” EM that exhibit signs of weak or unclear macroeconomic foundations.
The upbeat tale finds support, e.g. in the fact that, taking advantage of the relatively benign environment of low interest rates and available global liquidity, many developing economies heretofore perceived as weak candidates have debuted in the sovereign debt markets attracting large volumes of foreign exchange (Gevorkyan and Kvangraven, 2016). More recently, what seemed at times to be a peak in sovereign borrowing has continuously been topped off as investors keep reaching for the yield and flows keep moving to EM. Last month, e.g. the IIF EM Portfolio Flows Tracker and Flows Alert reported a further strengthening of portfolio flows to emerging markets after the Brexit vote.

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Suriname: Facing the Storm with a Correction of Course

June 22, 2016

Photo: Nicolas Raymond
Suriname is facing twin – external and fiscal – deficits that originated in the commodity price slump of recent years. In response, the Surinamese government started a four-pronged adjustment program in August 2015 to adapt to new circumstances.
Falling commodity prices led to multiple shocks on the Surinamese economy…
On the back of favorable commodity prices and appropriate domestic policies, the Surinamese economy grew at an average rate of 5% per year – amongst the highest in the Western Hemisphere – in the period 2003-2012. However, like other small commodity-dependent developing economies, Suriname has faced negative growth, external and fiscal deficits derived from falling commodity prices in recent years. The production of alumina, gold, and oil in the Surinamese economy accounted for 88% of exports and 40% government revenue in 2011. The global price decline of those commodities and the closure of the alumina refinery in late-2015 weighed drastically on economic growth (Chart 1).

Suriname’s current-account and fiscal balances have deteriorated (Chart 2). The fiscal balance moved from a small surplus in 2011, prior to the commodity price downfall, to a deficit of 8.8% of GDP last year, with the drop in government mineral revenue being responsible for 82% of that change (IMF, 2016).

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China’s Spillovers on Latin America and the Caribbean

May 10, 2016

Photo: AK Rockefeller
The Chinese economy is rebalancing while softening its growth pace. China’s spillovers on the global economy have operated through trade, commodity prices, and financial channels. The global reach of the effects from China’s transition have recently been illustrated in risk scenarios simulated for Latin American and the Caribbean economies.
The Chinese economy is rebalancing while softening its growth pace…
The weight of the Chinese economy in the global economy rose on its way to become the world’s second largest economy at market exchange rates and first in terms of purchasing power parity. As noted by the IMF (2016a, p.47), approximately one third of global growth during 2000-15 took place in China, while its exports increased from 3 percent to 9 percent as a share of world exports (Chart 1)

More recently, China’s economic growth has been morphing from one led by public investment and exports of manufactures, towards one where consumption and services are the main drivers (Canuto, 2013a) (IMF, 2016a). The new growth pattern entails lowering the GDP growth rates to levels that are more balanced and sustainable, based on rising purchasing power of its population and less dependent on huge trade deficits elsewhere in the global economy.
China’s transition, on the other hand, may face bumps.

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Brazil at the Crossroads

April 28, 2016

With the impeachment of President Dilma Roussseff being sent to the Senate on April 17, Brazil continues a period of turmoil that has lasted for more than a year now. With images of protests, counter-protests and the minutia of the country’s legal proceedings blasted by media outlets around the world, it seems important to take a step back and remember that a lot more lies beyond the headlines.
Over the last 20 years, Brazil has taken crucial strides towards achieving its weighty, if elusive, potential. Finance minister (later President) Fernando Henrique Cardoso’s Real Plan established a stable macroeconomic foundation in the 1990s, which allowed his successor, President Luiz Inácio Lula da Silva, to preside over a growing economy and implement social programs. This combination lifted upwards of 40 million people out of poverty in the first decade of the 21st century (Canuto, 2014).
Strong growth gave Brasília fiscal leeway during the global financial crisis; an aggressive stimulus package in 2009 led to claims that Brazil was the last country in and first country out of the Great Recession. Investment poured in and many wondered if a new day had finally dawned for the perennial “country of the future”.
See The Crossroads Brazil Documentary Pt. 1 – The Economy Swimming Naked
[embedded content]
 And where are we now? In recession, Brazil’s economy contracted by 3.

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TTIP & TPP – A Threat to Latin America?

March 21, 2016

For centuries, Latin America’s economies have revolved around exporting commodities – be it digging up minerals and hydrocarbons, planting soya or coffee, or taking advantage of what animals leave behind, the region has historically relied on shipping natural resources overseas.

Depending on the era, this could certainly be a lucrative endeavor, but commodity prices are notoriously fickle, and a focus on natural resources stunted the region’s efforts to build the manufacturing supply chains that have been instrumental in East Asia’s rapid industrialization.

In the post-World War II era, many Latin American countries attempted to address this commodity reliance by implementing import-substitution industrialization policies. In practice, this meant high tariffs to discourage imports, thus protecting domestic industry.

But without international competition, Latin American products often turned out over-priced and underwhelming. And when the region did try to liberalize in the 1990s, it did not work out so well.

As the 20th century gave way to the 21st, a number of Latin American countries returned to commodities, including agricultural products produced using increasingly sophisticated technologies. And they also went back to protectionist measures such as local content requirements aimed at supporting a domestic manufacturing sector struggling with currency appreciation.

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Capital Flows and Deleveraging in Emerging Markets

February 26, 2016

Capital outflows from emerging market economies have substantially accelerated since last year. The cycle of intense debt leveraging that took place in those economies after the 2008 global financial crisis has also started to reverse. Furthermore, 2015 was also a fifth consecutive year of growth deceleration in emerging markets.
Some analysts have taken those features as pointing to a high likelihood of a “third wave” of the global financial crisis, this time centered on emerging markets. While arguably their combination may acquire a disorderly nature and materialize systemic risks to those economies as a group – and therefore to the global economy going forward – there are also reasons to expect the significant portfolio rebalancing at play not to lead to a disruptive break. The bulk of massive capital outflows corresponds to portfolio adjustments following China’s expected economic rebalancing. On the side of the other emerging markets, in turn, available foreign exchange reserves remain substantial. Furthermore, only in part the non-financial corporate debt has been used to create new assets that would now be facing low returns, as it served in many cases rather to diminish costs of funding and increase cash balances.

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What’s Ailing Brazil?

February 15, 2016

WASHINGTON, DC – After decades of rapid economic growth and per capita income gains, Brazil is struggling. According to the International Monetary Fund, the country’s GDP is poised to contract by more than 7% in 2015-2016. No single factor explains this reversal of fortune. Four do.
For starters, there is the structural trend of rising primary government expenditure as a share of GDP, which reached 36% in 2014, up from 22% in 1991. This increase reflected a political desire to address the poverty and inequality that had gone unaddressed during previous decades. To support the increase, Brazil’s government increased taxes on consumption and promoted progress toward labor-market formalization. Nonetheless, public investment, particularly in infrastructure, took a hit. In fact, with the exception of the 2005-2008 period, total investment as a share of GDP has remained below 20% since 1991.

The second factor shaping Brazil’s fortunes is the commodity-price super cycle. The upswing in commodity prices that began in 2004 brought many benefits for Brazil: external surpluses, the accumulation of foreign-exchange reserves, positive wealth effects, and higher investment in natural-resource-related sectors.

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Has the Global Trade-Development Link Peaked?

January 26, 2016

Trade has been a key driver of global growth, income convergence, and poverty reduction. Both developing countries and emerging market economies have benefited from opportunities to transfer technology from abroad and to undergo domestic structural transformation via trade integration in the last decades. Yet, more recently, concerns have been raised over whether the current pace and direction of world trade lead towards a lesser development-boosting potential.
What happened to world trade? Is it cyclical or structural?
World trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade during the first half and only low growth during the second half. This follows a similar pattern since the onset of the global financial crisis (GFC), in which world trade volumes have lagged behind GDP growth (Figure 1).
Figure 1
World Real GDP and Trade Volume
(Annualized quarterly percentage change)
Source: IMF, World Economic Outlook, October 2015.
Economists have indicated some circumstantial factors to explain this post-GFC pattern (Dadush, 2015) (Didier et, 2015, p.18). For instance, world GDP and trade figures would be reflecting the fact that the highly open-trade countries of the Eurozone have had a sub-par growth performance relative to the rest of the world.

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Whither Emerging Markets Foreign Exchange Reserves

December 15, 2015

After a exponential rise in foreign exchange reserves accumulation by emerging markets from 2000 onwards, the tide seems to have turned south since mid-2014. Changes in capital flows and commodity prices have been major factors behind the inflection, with the new direction expected to remain, given the context of the global economy going forward. Although it is too early to gauge whether the on-going relative unwinding of such reserves defenses will lead to vulnerability in specific emerging markets, the payoff from strengthening domestic policies has broadly increased.
Emerging markets foreign exchange reserves reached a peak in mid-2014
 One of the landmarks of the global economy in the new millennium has been the steep rise in foreign-exchange reserves held by central banks. From a total of US$ 1.8 trillion in 2000, global reserves reached a peak of US$2 trillion by mid-2014. They have declined since then (Figure 1)

Figure 1 – World Currency Composition of Official Foreign Exchange Reserves
Source: IMF
The accumulation of foreign exchange reserves by emerging market economies has been a major factor during both upward and downward phases of the tide.

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A New Day in Colombia

December 4, 2015

Given Colombia’s recent economic success during years of war, what it could achieve in years of peace?
Colombia’s inherited reputation for cocaine, drug-trafficking and conflict may not be entirely undeserved. But in recent years, a new reputation has emerged – one of a serious, safer country with dynamic growth opportunities.
Colombia has averaged 4.6 percent annual growth over the last ten years, and it is neck and neck with Peru for Latin America’s fastest growing major economy.
But Colombia’s momentum is about more than just growth. Macroeconomic stability has helped it make inroads against poverty levels, which have halved since year 2000.
Moreover, Colombia has paired the economic momentum with institution building. The country’s democracy has rapidly matured. It is still based on free and fair elections, the results of which have been respected, and there have been successful transfers of power.
Watch The Crossroads Colombia Videos! Pt.1 A New Day?
Stronger institutions have helped Colombia improve its safety record – homicides, for example, are down 50 percent in the last decade—a critical achievement considering the turmoil of the 1990s and early 2000s.
Yet there is no guarantee that this momentum will continue. Any future success would greatly benefit from Colombia successfully implementing a peace agreement with domestic guerillas.

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Trade Facilitation: Diplomacy May Be Catching Up

December 2, 2015

In September 2003, one of us was among the delegations of trade representatives from around the world that gathered in Cancun, Mexico, for one of the first Doha rounds of the World Trade Organization (WTO) negotiations. The goal was ambitious: work to reduce trade barriers, while ensuring that developing countries secure their fair share of global trade growth. A couple of days later, however, negotiations were declared to be stalled and everybody went home. In the usual “blame game” that follows such impasses, resistance to trade facilitation negotiations by developing countries was somewhat paradoxically fingered by some participants as one of the reasons for failure!
What is and why trade facilitation matters
Trade facilitation can be defined as the simplification, harmonization, standardization and modernization of procedures of international trade. Essentially, by harmonizing certain rules between countries to promote greater efficiency, transparency and predictability, based on norms, standards and internationally accepted practices, trade facilitation measures reduce trade barriers. Together with other nontariff issues, it has acquired increasing relevance particularly as protectionist tariff rates have fallen in a large chunk of the world (Canuto, 2013).
Trade facilitation matters from the standpoint of a singular country.

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Shadow Banking in China: A Morphing Target

November 19, 2015

China’s shadow banking system thrived in the years after the global financial crisis, until reined in by regulators since 2013. Nevertheless, new forms of shadow banking are emerging.
China’s style of shadow banking
“Shadow banking” has become a buzzword ever since Paul McCulley, then with PIMCO, coined the term in 2007 to describe the financial intermediation routed outside balance sheets of commercial banks and other regulated depositary institutions. He pointed out how banking functions thereby exercised – without access to central bank liquidity or public sector credit guarantees but free of regulatory costs – had been at the core of a powerful liquidity-generating, maturity-transforming machine at play in the US economy in the 2000s. Its apparently smooth handling of risks reduced financial intermediation costs but was in fact blowing serial bubbles in asset markets in the run-up to the global financial crisis (Canuto, 2009).
Shadow banking systems have since been observed in many places and are now subject to regular monitoring by the International Monetary Fund (IMF) and the Financial Stability Board (FSB).

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Nicaragua: A Success Story in the Making

November 10, 2015

Nicaragua is far more than just the newest and swankiest destination for world travelers.  It is -and mark our words – on its way to becoming the latest success story in the western hemisphere. Let us just tell you why.
Nicaragua already is a post-conflict-state success story where peace has become deep-seated and long lasting. The last shots of the “contra” war (1982-1990) against the Sandinista government were heard 25 years ago when close to half of today’s Nicaraguans hadn’t even been born. The other half, the war generation, has – quite pragmatically – reconciled, taking their differences to the political landscape. Today´s Nicaraguans abhor violence and conflict and stand hopeful and happy about their future prospects.   Many, exercising their freedoms, have even flipped sides making alliances with their former foes, or have simply detached themselves from politics to savor the longest time-span of peace they have ever lived in.
Nicaragua is the safest country in the CAPDR (Central America, Panama, and the Dominican Republic) region.

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De-Risking Is De-Linking Small States from Global Finance

October 22, 2015

Photo: Images Money
Small states, like the Caribbean countries, have been negatively affected by recent “de-risking” policies implemented by international banks, with particularly damaging consequences on correspondent banking relationships. While recommendations from the Financial Action Task Force (FATF) to deal with risks of money laundering and terrorism financing have often been mentioned to justify those de-risking practices, a wide variety of factors seems to have been at play. Urgent action to address the issue is needed to avoid unintended potentially devastating effects on the economies of those countries.    
Managing risks is no de-risking
The Financial Action Task Force (FATF) has recommended banks to follow a risk-based approach in doing their part of the Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) efforts. Together with competent government authorities, financial institutions are expected to identify, assess and understand the risks of money laundering and terrorism financing to which they are exposed and take AML/CFT measures commensurate to those risks in order to mitigate them effectively.

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