F&D June 2021

JUNE 2021
A COVID-19
tantrum? P.24
Rohini Pande
profiled P.34
Citizenship
FINANCE AND DEVELOPMENT for sale P.50
What Next For

Emerging
Markets?
I N T E R N A T I O N A L M O N E T A R Y F U N D
Contents
Emerging
markets must
reclaim their
hard-won
economic
strength as
they recover
from the
31 pandemic.
WHAT NEXT FOR EMERGING MARKETS?

4 Miles to Go 20 Inequality in the Time of COVID-19
Emerging markets must balance overcoming the All metrics are not equal when it comes to assessing
pandemic, returning to more normal policies, the pandemic’s unequal effect
and rebuilding their economies Francisco H. G. Ferreira
Rupa Duttagupta and Ceyla Pazarbasioglu
24 A COVID-19 Tantrum?
10 Is the Emerging World Still Emerging? The Federal Reserve’s post-pandemic stance will
Two decades on, the BRICs promise lingers expose vulnerabilities in emerging markets with
Jim O’Neill high private external debt
Şebnem Kalemli-Özcan
12 End of the Line
A looming oil price super cycle will likely be the last 28 Emerging Markets in Flux
Rabah Arezki and Per Magnus Nysveen Mahmood Pradhan chats with Richard House
and David Lubin on the outlook for this group
16 Global Clout, Domestic Fragility of countries
China’s long-term success will depend primarily
on addressing its internal challenges 31 From Stream to Flood
David Dollar, Yiping Huang, and Yang Yao Streaming video offers emerging markets an avenue
for content at home and around the world
Adam Behsudi
Subscribe at www.imfbookstore.org/f&d Read at www.imf.org/fandd Connect at facebook.com/FinanceandDevelopment

FINANCE & DEVELOPMENT
A Quarterly Publication of the International Monetary Fund
June 2021 | Volume 58 | Number 2
DEPARTMENTS
34 People in Economics
Inclusive Innovator
Peter J. Walker profiles Yale’s Rohini Pande, whose
work focuses on how better institutions can make
life fairer
38 In the Trenches
Putting People First
50 South Africa’s longest-serving finance minister,
Trevor Manuel, reflects on the country’s lost decade
48 Back to Basics
ALSO IN THIS ISSUE
Risk and Return: The Search for Yield
40 Monetary Meld Low rates of return tempt investors to take risks,
A currency union encompassing all of West Africa which can cause economic and financial instability
promises benefits but faces a multitude of obstacles Jay Surti
Eswar Prasad and Vera Songwe 56 Picture This
44 Inequality Interest Jobs Dilemma
Central banks should better communicate monetary Creating sufficient employment in emerging
policy’s distributional effects market economies will require a big boost to
Nina Budina, Chiara Fratto, Deniz Igan, and economic growth
Hélène Poirson
63 Book Reviews
50 Citizenship for Sale The Spirit of Green: The Economics of Collisions and
Programs that offer passports in return for investment Contagions in a Crowded World, William D. Nordhaus
have financial integrity risks that must be managed
Francisca Fernando, Jonathan Pampolina, and Rebellion, Rascals, and Revenue: Tax Follies and
Robin Sykes Wisdom through the Ages, Michael Keen and
Joel Slemrod
53 What We Owe Each Other The Profit Paradox: How Thriving Firms Threaten the
We need a new social contract fit for the 21st century Future of Work, Jan Eeckhout
Minouche Shafik
58 M
ilitary Spending in the
Post-Pandemic Era
Countries’ efforts to secure a
more peaceful world could have
a positive economic effect
Benedict Clements,
Sanjeev Gupta, and
Saida Khamidova
34
44
June 2021 | FINANCE & DEVELOPMENT 1
EDITOR'S LETTER FINANCE & DEVELOPMENT
A Quarterly Publication of the
International Monetary Fund
EDITOR-IN-CHIEF:
Gita Bhatt
MANAGING EDITOR:
Maureen Burke
SENIOR EDITORS:
Andreas Adriano
Analisa Bala
Adam Behsudi
Peter Walker
DIGITAL EDITOR:
Rahim Kanani
ONLINE EDITOR:
Lijun Li
The Next Move PRODUCTION MANAGER:

Melinda Weir
COPY EDITOR:
WE FOCUS THIS ISSUE on the road ahead for emerging markets, a label Lucy Morales
frequently applied to economies in the middle—neither advanced nor ADVISORS TO THE EDITOR:
low-income. Because of their growing systemic relevance, this group of Bernardin Akitoby Mame Astou Diouf
countries helps anchor global stability. Yet, as we drill down and define their Celine Allard Rupa Duttagupta
Steven Barnett Deniz Igan
characteristics, we find a widely diverse set of economies of varying sizes Nicoletta Batini Christian Mumssen
and growth rates that face different prospects, priorities, and challenges. Helge Berger İnci Ötker
Some, like China, have managed to emerge quickly from the present Paul Cashin Catriona Purfield
Martin Čihák Mahvash Qureshi
crisis. Others may struggle for years to deal with the pandemic’s aftereffects. Alfredo Cuevas Uma Ramakrishnan
Amid a multispeed economic recovery—including within countries and Era Dabla-Norris
across sectors, age groups, genders, and skill levels—this issue explores several
cross-cutting themes for emerging markets. The IMF’s Rupa Duttagupta © 2021 by the International Monetary Fund. All rights reserved.
For permission to reproduce any F&D content, submit a request
and Ceyla Pazarbasioglu take stock, with a focus on debt, economic policy via online form (www.imf.org/external/terms.htm) or by e-mail
trade-offs, and priorities for stronger growth. Two leading investors, Richard to [email protected]. Permission for commercial purposes also
House and David Lubin, discuss how emerging market assets have fared available from the Copyright Clearance Center
(www.copyright.com) for a nominal fee.
during the pandemic and why they are unlikely to suffer systemic crises
as in the 1980s and 1990s. Şebnem Kalemli-Özcan, in contrast, sees the Opinions expressed in articles and other materials are those of
the authors; they do not necessarily reflect IMF policy.
potential for greater turbulence as US interest rates rise. Francisco Ferreira
Subscriber services, changes of address, and
shows that the pandemic’s effect on inequality is manifested in counterin- advertising inquiries:
tuitive ways, depending on how you measure it. And 20 years after coining IMF Publication Services
the acronym “BRICs,” Jim O’Neill reconsiders the diverging fortunes of Finance & Development
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gains, they can do even better than before the pandemic. This will require
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As in a chess game, every move by leaders and policymakers has con- published quarterly by the
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English edition ISSN 0145-1707
ON THE COVER
Our June cover by Daniel Garcia Art depicts emerging markets’ struggle with COVID-19,
market turbulence, and the specter of mounting debt as a chess game. Just as pawns
can be “promoted” with the right moves, these countries can overcome challenges with
the right policies.
2 FINANCE & DEVELOPMENT | June 2021

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MILES
to go
Emerging markets must balance overcoming the pandemic,
returning to more normal policies, and rebuilding their economies
Rupa Duttagupta and Ceyla Pazarbasioglu

A
s the COVID-19 pandemic enters a second Emerging markets have made remarkable progress
year, concerns are rising about how well in strengthening their macroeconomic policies since
emerging markets will fare. So far, they have the turn of the century, which helped them more
been agile in responding to the economic than double per capita incomes on average. Monetary
fallout from the pandemic with unprecedented rescue policies in 65 percent of the countries we have iden-
packages for their hard-hit sectors and households. tified as emerging markets follow forward-looking
After a short-lived period of financial stress in March inflation-targeting regimes, and inflation has fallen
2020, most emerging markets were able to return to and stabilized in most. Public finances in several are
global financial markets and issue new debt to meet guided by fiscal rules. Many embraced major banking
their financing needs. However, in a global recovery sector reforms after the financial crises of the 1990s.
in which some countries are rebounding faster than Progress was tempered by the global financial crisis
others and uncertainty is high regarding the pandemic, in 2008–09, but not derailed.
there is likely to be more market volatility. This will
test the ability of policymakers in emerging markets Good economic track record
to navigate a shifting landscape, manage their policy This economic track record helped policymakers in
trade-offs, and achieve a durable recovery. emerging markets deploy bold measures during the
The emerging market universe is diverse and pandemic without unraveling market confidence.
defies a uniform narrative. Although there is no Economic relief measures included increases in
formal definition, emerging markets are generally government spending, liquidity support to firms and
identified based on such attributes as sustained
market access, progress in reaching middle-income
levels, and greater global economic relevance (see
box). Even so, these economies are dissimilar, and
the distinction between emerging markets and
other developing economies is also imprecise.
PLACEHOLDER IMAGE/ART CREDIT

banks, release of bank capital buffers with the intent The road ahead could be somewhat bumpier.
to support lending, and asset purchase programs by Because of threats from new COVID-19 strains,
central banks to stabilize domestic markets. Low countries will have to weigh the many trade-offs
domestic inflation and monetary easing by advanced between continued efforts to mitigate spread of
economies also gave central banks in emerging the virus—which will likely require maintaining
markets room to cut domestic policy rates substan- economic support to households and firms—and
tially. Household savings increased in most emerging normalizing policies and rebuilding economic
markets following the onset of the pandemic. Much resilience. Securing adequate vaccines is only a
of the domestic savings went to finance the gov- first step. Financial market volatility against a
ernment, reducing the need for foreign borrowing, backdrop of rising US long-term rates must be
which, together with lower private investment, kept deftly managed, particularly for countries with
current account deficits in check. large external financing needs. And political and
However, some measures—such as direct mone- social support will be central to implementing
tary financing of budget deficits or temporary freezes structural reforms. There are a number of areas
on loan repayments—raise new risks. Policymakers requiring policy action, although the priorities
defended them as temporary tools to alleviate enor- will vary from country to country.
mous economy-wide strains. Higher fiscal deficits Targeting corporate sector support: As the
have also added to already elevated sovereign debt in health crisis comes under control, countries must
some countries. In others, high corporate sector debt, begin to transition from wholesale crisis emergency
including of state-owned enterprises, and unhedged support measures to those that target support to
foreign exchange exposures in corporate debt pose viable firms and eventually allow a handover to
contingent fiscal risks in the event of corporate dis- private-led growth. How fast this can be done will
tress. Increased government debt held by domestic depend on the link between growth and employment
banks also intensifies the link between the health in the corporate sector and whether a country can
of the government and that of the banking system. afford to support viable firms long enough to allow
The pandemic is far from over, so it is too early to them to shake off pandemic-induced distress. How
determine which measures have worked. Economic efficiently that happens will depend on the strength
activity contracted sharply in most emerging of labor market institutions, safety nets, banking
markets in 2020. However, the IMF’s April 2021 system oversight, and insolvency procedures for
World Economic Outlook estimates suggest that a smooth reallocation of resources. As shown in
without the policy measures implemented across the IMF’s April 2021 Global Financial Stability
the world—including in advanced economies and Report, distinguishing between corporate liquidity
emerging markets—the contraction in global GDP and solvency will not be easy. Some companies in
would have been three times worse. emerging markets entered the crisis with already
elevated debt, and the economy-wide implications
Divergent responses of corporate distress need to be better assessed.
Divergent recoveries in emerging markets reflect dif- While advanced economies face similar chal-
ferences in economic positions and policy responses. lenges, the ensuing trade-offs are likely to be more
Those that were able to contain the virus or inoculate acute for emerging markets because they typically
their populations (such as China and the United face more imposing budget constraints. Emerging
Arab Emirates) are recovering earlier. Those with markets also tend to have weaker frameworks to deal
ample fiscal buffers, market access, or both were with corporate bankruptcies. Policy interventions
able to deploy greater fiscal support (such as the must therefore be designed to reduce both risks
Philippines and Poland). Central bank credibility from excessive liquidations that lead to a wave of
allowed some to cut policy rates to record lows and bankruptcies and risks of creating zombie firms that
engage in unconventional monetary policy without can operate on excessive credit support but cannot
severe exchange rate pressure (Fratto and others 2021). invest in new activity (Pazarbasioglu and Garcia
Emerging markets with macroeconomic imbalances Mora 2020). Past experience (such as Poland in 1992,
or elevated debt burdens continue to face sharp trade- Mexico in 1994, many southeast Asian countries in
offs between supporting recovery and reducing imbal- 1997–98, and Turkey in 2001) suggests that suc-
ances (among them Argentina, Egypt, and Turkey). cessful strategies include timely asset quality reviews

EMERGING MARKETS
What is an emerging market?

There is no official definition of an emerging market. The IMF • 0.40×nominal GDP+
World Economic Outlook classifies 39 economies as “advanced,” • 0.15×population+
based on such factors as high per capita income, exports of • 0.15 ×GDP per capita+
diversified goods and services, and greater integration into • 0.15×share of world trade+
the global financial system. The remaining countries are • 0.15×share of world external debt
classified as “emerging market and developing” economies.
Among these, 40 are considered “emerging market and middle- If a country is ranked in the top 20 for 2010–20, it receives a
income” economies by the IMF Fiscal Monitor, based on their score of 1 for that variable. Otherwise, it is assigned zero. The
higher incomes. final score is calculated as the weighted sum of the individual
Income isn’t the only characteristic of an emerging mar- scores. This approach identifies the following countries in the
ket. Most are economies with sustained strong growth emerging market group, in alphabetical order: Argentina,
and stability that can produce higher-value-added goods Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia,
and are more like advanced economies not only when it Iran, Malaysia, Mexico, the Philippines, Poland, Russia, Saudi
comes to income, but also in participation in global trade Arabia, South Africa, Thailand, Turkey, and the United Arab
and financial market integration. To identify an emerging Emirates. Two countries were excluded: Nigeria because of
market, we looked at its classification as a low-income country (eligible for IMF
• Systemic presence: The size of the country’s economy Poverty Reduction and Growth Trust financing) during the
(nominal GDP), its population, and its share of exports in sample period considered (2010–20) and Qatar because of
global trade its population of less than 5 million.
• Market access: The share of a country’s external debt in These 20 emerging market countries account for 34 percent
global external debt, as well as whether it is included in of the world’s nominal GDP in US dollars and 46 percent in
global indices used by large international institutional purchasing-power-parity terms. These countries are also
investors and the frequency and amount of international featured in commonly used indices for emerging markets, such
bonds issued as those of J.P. Morgan, Morgan Stanley Capital International,
• Income level: A country’s GDP per capita in nominal US dollars and Bloomberg.
We derive a score for each economy not considered advanced, FRANCISCO ARIZALA is an economist and DI YANG is a research
using five weighted variables: analyst in the IMF’s Strategy, Policy, and Review Department.
as well as a combination of out-of-court workouts, Generating job-rich, balanced, and sustainable

debt relief, and disposal of nonperforming assets growth: Beyond the immediate recovery, a vital
(Araujo and others, forthcoming). step toward long-term economic health is raising
Because bank-based financing is more prevalent productivity and lessening the scarring effects of the
than market financing in emerging markets, corpo- crisis on investment, employment, human capital
rate distress could affect financial stability if banks (because of setbacks to learning), and financial
have to recognize increased loan losses after the system strength. The long-term growth payoffs
pandemic. To provide greater transparency, bank from structural reforms can be significant if they
asset quality reviews may be necessary in some are well designed and properly sequenced (Duval
cases—especially because regulatory measures and Furceri 2019). Some priorities include
were eased during the crisis. The rise of shadow, • introducing market-oriented reforms, including
or nonbank, financing of the corporate and house- for state-owned enterprises (such as in China,
hold sectors in some emerging markets also raises India, and Mexico)
risks because the nonbank sector is largely unreg- • strengthening social safety nets (for example, in
ulated. Hence, a longer-term priority is designing Chile and China)
stronger debt resolution and insolvency regimes • closing infrastructure gaps (for example, in
and developing so-called macro-financial tools Indonesia and the Philippines)
to monitor risks to the overall economy from the • implementing pension, product market, labor
nonbank financial sector. market, and governance reforms in many countries

Chart 1
Emerging Market Global Bond Index spreads
Investors typically differentiate across emerging market debt.
(basis points)
700 All emerging markets (interquartile)
All emerging markets (median) service-oriented sectors and among unskilled,
600 High-debt emerging markets (median) young, and female workers. To ensure a sustained
500 recovery that does not leave anyone behind, the
rise in inequality and poverty must be contained.
400
Reducing informality, which accounts for one-
300 fourth to one-third of the economy for most
200
emerging markets (Medina and Schneider 2019),
will allow more people to benefit from better wages
100 and redistributive measures.
0 Some countries are seizing opportunities: in Asia,
2018
Pazarbasioglu, 5/2
2019 2020:Q1 2020:Q2 2020:Q3 2020:Q4 2021:Q1 digitalization is transforming the efficiency of pro-
duction, communication, and the inclusiveness of
Source: Bloomberg Finance L.P.
Note: The sample excludes Iran and Thailand due to data availability. Emerging Market government operations (Gaspar and Rhee 2018).
Global Bond Index data are missing for the United Arab Emirates and Saudi Arabia in 2018. Indonesia is addressing the threat from deforestation
High-debt emerging markets are defined as economies where government gross debt is
higher than the median. through a program on sustainable land use. Some
emerging markets, such as Malaysia, are strength-
ening the financial regulatory framework to better
Chart 2 monitor and manage transition risks as they move
Who owns the debt? to reduce the economy’s carbon footprint.
The large share of domestic debt held by foreigners makes the domestic financial Restoring macroeconomic resilience: The crisis
market a key transmitter of external financial shocks. was a sore reminder of the importance of building
(nonresident holdings of local currency debt as percentage of total local currency debt, 2019) economic health during peaceful times. Emerging
40 markets will soon need to start rebuilding fiscal,
external, and macro-financial buffers to prepare for
30 the next crisis. That means reestablishing fiscal rules
and restoring financial regulatory standards, which
20 were set aside during the pandemic, and rebuilding
external reserves if they are running low. Priorities
10 will vary and will need to be addressed without
hurting growth prospects—raising tax capacity for
0 spending on public services where safety nets are
Chile
China
Indonesia
Russia
Mexico
Malaysia
Colombia
Poland
Hungary
Thailand
Turkey
Philippines
India
South Africa
Brazil
weak, taking steps to reduce debt and debt accu-

mulation (fiscal consolidation) where the sovereign
debt burden is high, and tightening macroprudential
Source: Arslanalp, S., and T. Tsuda. 2014. "Tracking Global Demand for Emerging Market policies on financial institutions where financial
Sovereign Debt." IMF Working Paper 14/29.
stability risks are elevated.
Governments in many emerging markets will
Clear communication on policy intentions, with need to balance different goals, such as raising
measures to protect the vulnerable, is essential as spending on public investment and social safety
well to building social support for difficult reforms. while resuming fiscal consolidation to keep public
It is also the time to build stronger economies debt on a firm downward path. Public and exter-
than emerging markets had before the pandemic— nal debt have risen significantly for the median
by taking steps to create better and more equal emerging market economy, reaching 59 and 44
access to health care and education, strengthen- percent of GDP, respectively, in 2020, and gross
ing public infrastructure, and retraining workers financing needs are projected to stay above 10
displaced by the pandemic. Building resilience percent of GDP in 2020–21. While low global
to climate change and steering digitalization for interest rates have kept debt servicing costs man-
inclusive growth are also necessary. COVID-19 ageable, external borrowing costs should not
has caused more loss of human life in coun- be expected to stay low indefinitely. Investors
tries with weak health systems and social safety typically differentiate across emerging market
nets. It has triggered greater economic losses in debt (see Chart 1). Even when debt is incurred in

EMERGING MARKETS
domestic currency, the sizable share of domestic First, emerging markets must reclaim their hard-
debt held by foreigners makes the domestic finan- won macroeconomic strength, as they did after the
cial market an important transmitter of external financial crises in the 1990s and early 2000s and
financial shocks (see Chart 2). Sustained high debt the global financial crisis that began in 2008.
and gross financing needs will likely aggravate With recovery from the pandemic proceeding
policy trade-offs and expose emerging markets to at divergent speeds, emerging markets must also
abrupt changes in the risk appetite of investors. learn from one another how best to navigate
As the IMF’s April 2021 Fiscal Monitor argues, risks and maintain resilience. This affects more
stronger tax revenue generation would allow poli- than just emerging markets. With their growing
cymakers to provide better public services without systemic relevance in the global economy, a
adding to debt burdens. Tax revenues in emerging strong emerging market universe will also drive
markets indeed stand below 20 percent of GDP on global stability.
average compared with over 25 percent of GDP Second, major advanced economies must do their
in advanced economies. Emerging market govern- part: Multilateral cooperation on free trade, vaccine
ments also tend to spend a higher share of their supply, and taxes; commitment to providing dollar
revenues to meet interest payments. liquidity under resurgent financial stress; and joint
In the post-pandemic environment, policy space action toward climate change are all essential. Some
has shrunk. With higher fiscal deficits and debt, emerging markets will need financing support to
larger financing needs, and less room to cut domes- invest in building back stronger without further
tic interest rates, policies must therefore be better aggravating climate change.
integrated to achieve the best outcomes for growth Third, global development and financial institu-
and stability, while maintaining the autonomy tions must be complementary in their efforts: For
of fiscal, monetary, and regulatory authorities. the IMF, this will mean working through its
For example, where inflation pressure is subdued, key responsibilities—policy dialogue and advice,
monetary policy can continue to support domestic financial support, including through precaution-
demand, even as fiscal support is withdrawn. ary lines, and capacity building—serving as a
Other policy trade-offs must also be managed convening platform for cross-country learning
as multispeed recoveries give rise to market pres- and leveraging relevant expertise from other inter-
sure. While a flexible exchange rate generally national institutions to help its most dynamic
acts as an external shock absorber, under some member countries regain their footing in the
conditions, the effects can be the opposite. For post-pandemic landscape.
instance, depreciation in the domestic currency
can increase the stock of foreign-exchange- RUPA DUTTAGUPTA is a division chief in the IMF’s
denominated liabilities, further intensifying Strategy, Policy, and Review Department, where CEYLA
market pressure. Pass-through from depreciation PAZARBASIOGLU is director.
can generate inflation pressure when mone-
tary policy credibility is not fully established. References:
Concerns about navigating financial volatility are Araujo, J., J. Garrido, E. Kopp, R. Varghese, and Y. Weijia. Forthcoming. “Corporate Debt
foremost in the minds of many policymakers in Resolution in the Time of COVID-19.” IMF Departmental Paper, International Monetary
emerging markets and are a major plank of the Fund, Washington, DC.
IMF’s work on the Integrated Policy Framework. Duval, R., and D. Furceri. 2019. “How to Reignite Growth in Emerging Market and
Developing Economies.” IMFBlog, October 9.
Rebuilding resilience Fratto, C., B. Harnoys Vannier, B. Mircheva, D. de Padua, and H. Poirson. 2021.
“Unconventional Monetary Policies in Emerging Markets and Frontier Countries.”
Past crises demonstrate that emerging market poli- IMF Working Paper 21/14, International Monetary Fund, Washington, DC.
cymakers can overcome adverse shocks and rebuild
Gaspar, V., and C. Y. Rhee. 2018. “The Digital Accelerator: Revving Up Government
economic resilience. Moreover, medium-term in Asia.” IMFBlog, September 26.
growth in most emerging markets is projected to Medina, L., and F. Schneider. 2019. “Shedding Light on the Shadow Economy: A
remain strong. However, a collective global effort is Global Database and the Interaction with the Official One.” CESifo Working Paper
crucial for emerging markets to realize their growth 7981, Munich Society for the Promotion of Economic Research.
potential and generate much-needed dynamism in Pazarbasioglu C., and A. Garcia Mora. 2020. “Strengthen Insolvency Frameworks to
global activity, trade, investment, and finances. Save Firms and Boost Economic Recovery.” World Bank Blog, May 18.

POINT OF VIEW
Is the Emerging World Still Emerging?

Two decades on, the BRICs promise lingers
Jim O’Neill
BRICs revisited
My primary goal in my first paper, “The World
Needs Better Economic BRICs,” was to make a case
for changing the framework for global economic
governance, not necessarily the inevitable future
growth of these countries.
In subsequent papers I laid out what the world
could look like, in the highly unlikely event that the
countries we studied reached their potential. We
defined this potential using the standard method-
ology for macroeconomics, in which real economic
growth is determined by two variables: the size of a
nation’s workforce and the economy’s productivity.
Because of their population size, the associated size
of their workforce, and the scope for productivity
catch-up, it was quite easy to show that the poten-
tial growth rates of BRICs were higher than those
of most advanced economies. What our analysis
was not meant to show was that all these countries
PHOTO: COURTESY OF JIM O’NEILL
would persistently grow at their potential. That

frankly is not realistic, and not what we intended
as our message.
In this context, the second decade of this
century has been quite a contrast to the first
decade, which for all four countries turned out
WITHOUT COVID-19, GDP growth in the past decade even better than in the scenarios I outlined in
would have been about 3.6 percent—just below 2001. While India has notably disappointed in
the 3.7 percent experienced in 2000–09. Not recent years, it is broadly developing along the
bad given all the challenges, and contrary to path we envisioned. For both Brazil and Russia,
the mood of pre-pandemic times. Indeed, each however, 2010–20 economic performance was
decade has witnessed stronger economic growth very disappointing, which has occasionally led
than the 1980s and 1990s, each about 3.3 percent. me to joke that perhaps I should have called the
Hundreds of millions of people have been taken “BRICs” the “ICs.” Brazil and Russia have both
out of absolute poverty as a result, in part because suffered from the well-known commodity curse
of the growth miracle led by the so-called emerging and, as evidence suggests, are far too dependent
markets, of which my beloved BRICs were front on the world commodity cycle for their own sus-
and center. tainable development. Each of these countries has
The year 2021 marks the 20th anniversary of my considerable differences, but they both need to
coining the acronym “BRICs” to summarize the diversify their economies away from commodities
likely rising economic relevance of Brazil, Russia, and grow the role of the private sector.
India, and China and the implications of their In contrast, the ongoing strength of the Chinese
rise for global governance. As the world looks to economy suggests that it is fully achieving its poten-
the remainder of 2021 and beyond, what can we tial. China’s GDP, in excess of $14 trillion (as of
expect from emerging markets? 2019), is more than twice that of the other BRICs

EMERGING MARKETS
in aggregate. The sheer scale of China means that links between economics, finance, and health should
the BRIC economies combined are now larger than be at the center of our emerging ideas.
that of the European Union and are approaching
the size of the United States. Bolder and smarter
In the aftermath of COVID-19, emerging market
Back to the future economies, especially the larger ones, must adopt
Although China’s real GDP growth rate will slow smart fiscal policies—policies that prioritize public
beginning in 2021, given its increasing demographic investment. We need a different basis for assessing
challenge, that will not stop it from overtaking the the real economic framework and circumstances
United States as the world’s biggest economy. For of fiscal policy. To be specific, the time has come
the world to grow faster in aggregate, countries with to truly distinguish between government invest-
favorable demographics must boost their productivity. ment spending and consumption spending; the
It will be very hard for the world to get to a real former is likely to have a positive multiplier effect
GDP growth rate of 4 percent; even the 3.7 percent and should not be treated from an accounting
of the past two decades could be challenging. Four perspective the same as government expenditures
factors will determine whether we get the growth on consumption. Tackling climate change and
we need: productivity in developed economies; how future health threats requires such investments.
quickly China’s growth trend slows; the success of Emerging market economies’ achievement of their
India; and, crucially, whether the other highly pop- growth potential depends on such investment,
ulated emerging market economies emerge. Can the which is arguably more important for economic
likes of Indonesia, Mexico, Nigeria, Vietnam, and growth than financial conditions.
others get close to their long-term potential? If they A framework for smarter fiscal policy will almost
do, then real GDP growth for the world could have definitely require stronger domestic financial
a better chance of emulating that of the past decade. systems. Continued dependence on a monetary
Obviously, an immediate strong post–COVID-19 system based on the US dollar makes this difficult.
recovery almost exclusively depends on developing Despite the relatively smooth but ongoing slow rel-
and distributing vaccines and treatments to eradicate ative decline of the share of the US economy in the
this pandemic. In my judgment, the multiplier world, the dollar-based monetary system remains
benefits of the required $20–$30 billion from as dominant, broadly speaking, as it was when I
donors are such that it would represent the biggest started my financial career in 1982. This means
no-brainer economic stimulus any generation has that the world must ride the cyclical roller-coaster
had the chance to agree to, dwarfing the potential of the Federal Reserve’s monetary policy, its conse-
benefits of 2008–09. quence for the United States, and the global financial
The IMF must play an active role in encouraging conditions that follow. As the Fed tightens, by and
this stimulus and—in addition to its newfound large, financial conditions for emerging markets
focus on climate change—must enter the arena tighten—often chaotically. As the Fed eases, the
of health systems and integrate analysis of health reverse happens.
spending in its surveillance work. Aligning with There is a way out, and one day, this change will
finance ministers to support the Access to COVID-19 take place. The monetary system needs to evolve
Tools (ACT) Accelerator—a collaboration between to be more reflective of the changing dynamics
leading global health organizations—is a small of the world, and until it does, emerging market
beginning, but it needs to be bigger. nations’ ability to reach their growth potential
Having led the UK government’s independent will remain challenging, albeit perhaps not quite
Review on Antimicrobial Resistance (AMR), I know as challenging as other domestic initiatives such
there are other health threats out there equal to as health and education systems.
COVID-19. AMR could cause as many as 10 million Many emerging market nations need to be bolder
deaths annually by 2050 and, as a result, a cumula- and smarter about these issues, and the IMF of
tive $100 trillion in lost economic opportunity. Some course will be there to help them.
observers find such numbers hard to believe, but as
a result of the pandemic, we now know such things JIM O’NEILL is chairman of Chatham House and former
are unfortunately a reality. Trying to strengthen the chairman of Goldman Sachs Assets Management.

End of
the Line
A looming oil price super cycle will likely be the last
Rabah Arezki and Per Magnus Nysveen
A
fter a pandemic and a price war sent
petroleum prices tumbling in 2020,
they are again on the rise. A new
oil price super cycle—an extended
period during which prices exceed their long-
term trend—seems to be in the making, driven
by pervasive supply shortages from the lack
of investment that has continued since the
2014 collapse in oil prices and, more recently,
reduced investment in shale oil production;
and demand growth triggered by a strong
recovery in countries such as China, a big
stimulus package in United States, and global
optimism about vaccines.
Some of these factors have persistent com-
ponents and will likely more than offset
any downward pressure on consumption
that becomes part of a new normal post–
COVID-19 environment.
Nevertheless, this could be the last super
cycle for oil because major economies appear
committed to replacing fossil fuels, and mass
car manufacturers have responded by commit-
ting to replacing internal combustion engine
vehicles with electric vehicles over the medium
term. This shift will transform the oil market
into one consistent with climate goals, but
poses a risk of disorderly adjustment for econo-
mies dependent on oil, with far-reaching effects
that in some cases could spill over their borders.

Oil investment crunch spending. This reduced investment will lessen the
Even with relatively lower oil prices, extraction and role of shale as swing production and plants the
exploration companies have been highly profitable. seeds of a price super cycle. On the other hand,
At the same time, perhaps in recognition of a less the Organization of the Petroleum Exporting
buoyant future, they have reduced their investment. Countries will likely increase production to counter
Production in oil fields and the number of wells that upward pressure on price.
are declining, and reserve depletion is rapid. The
drop in both capital expenditure and replacement The debate over peak demand
of oil reserves has persisted since 2014. Several commentators and major oil market players,
COVID-19 has exacerbated the investment including BP and Shell, argue that global demand
decline. For example, shale oil output—which for oil peaked in 2019 at about 100 million barrels
has a shorter production cycle and therefore is a day and that it will never again reach that level
more sensitive to changes in investment—is now because of pandemic-related structural changes.
increasing by half a million barrels a year, compared That view seems supported by the sharp reduction
with 2 million barrels a year before the onset of in oil consumption for transportation, including jet
the pandemic. While the Biden administration’s fuel. After travelers started cancelling flying plans
announced ban on drilling on federal land in the in March 2020, jet fuel consumption collapsed
United States will have little direct impact on shale and only began to creep up as travel restrictions
production, it signals a shift in federal government started to ease.
sentiment against the oil industry. Those who believe consumption has peaked
Shale producers have adopted a noticeably more still anticipate that gasoline consumption will
cautious investment posture. As a result, they rise in mid-2021, despite higher prices as a result
will be operating with positive cash flows—cash of the inevitable lag between any demand-
flow was previously directed toward investment induced increase in crude oil production and the
increase in refined products to meet demand. With
Industry shift vaccine developments and optimism from a proximate
Traditional car manufacturers are increasingly replacing vehicles powered by internal reopening of the global economy, it is expected that
combustion engines with electric vehicles. oil consumption will continue to recover, but to a level
Car Production Target lower than what prevailed before the pandemic—
manufacturer targets year effectively the peak of oil consumption.
VW Group 30 percent of total global sales of electric vehicles 2030 Yet proponents of the view that oil demand has
Nissan Electric vehicles 100 percent of sales in key markets 2030
peaked overlook the structural increase in con-
sumption that will eventually offset any downward
Renault 30 percent of total vehicle sales battery electric, 35 percent hybrid vehicles 2025
shift from COVID-19. Rising living standards
Toyota 5.5 million global electric vehicle sales, at least 1 million of them battery 2030 and a growing middle class in China and India
electric and the rest some version of electric, including hybrids
will lead to increased demand for individual cars
GM 100 percent of global sales to be zero-emission vehicles 2035 and air travel. So even if economic growth slows,
Hyundai-Kia Group Cumulative battery electric vehicle sales to reach 1 million units 2025 the large numbers of people crossing the income
Kia Electric vehicles to account for 40 percent of global sales 2030 threshold that enables them to afford a car will
Ford 100 percent of European vehicle sales to be battery electric 2030 support demand for travel. In emerging markets
such as China and India, any shift toward electric
Honda Two-thirds of global vehicle sales to be electric 2030
vehicles will likely be slower than in advanced
Daimler Group At least 50 percent of total car sales to be electric 2030
economies given concerns over the availability of
BMW Electric vehicles to account for 30 percent of year-over-year sales growth 2020–30 charging stations. The rate of adoption of electric
Volvo 100 percent of new vehicle sales to be fully electric 2030 vehicles will, by and large, be the major driver of
Mazda 5 percent of total sales to be fully electric and all new vehicles to have an 2030 future oil demand because road fuel accounts for
electric component half of global oil demand.
PSA Group 100 percent of vehicles to be electric 2025 The structural increase in oil demand, together
with a persistent reduction in production from
Source: Rystad Energy. insufficient investment, will likely precipitate—and
keep alive for some time—an oil price super cycle.

EMERGING MARKETS
But will an increase in oil prices prompt more stranded assets. That could lead
investment and lead to another price bust as has to severe economic woes, includ-
happened in the past? ing bankruptcies and crises, in turn
leading to mass migrations, especially
Technology and its consequences from populous oil-dependent economies,
Technological innovation may make things dif- many of them in Africa. Other larger oil-
ferent this time. Large investments will likely be dependent economies in the Middle East,
discouraged by the new technology at the heart central Asia, and Latin America are also an
of carmaker plans to replace internal combustion important source of remittances, employment,
engine vehicles with those that run on electricity. and external demand for goods and services that
The stock market capitalization of electric carmaker benefit many neighboring countries. The end of
Tesla points to the imminence of the transforma- oil, then, could not only devastate oil-dependent
tion of the automobile market. Tesla’s capitalization economies but could also overwhelm their neigh-
dwarfs that of traditional carmakers—even though bors. It is not all bad news for countries with
those manufacturers produce vastly more cars than mineral deposits important to the energy transition.
Tesla. That disparity has prompted traditional car Cobalt, essential for car batteries, will be in much
manufacturers to commit to replacing vehicles higher demand. Uranium could be valuable as well
powered by internal combustion engines with as electricity generation moves away from fossil
those powered by electricity, which in turn has fuels and nuclear power becomes more attractive.
triggered massive research and development on The end of oil thus makes economic transforma-
electric vehicles by manufacturers seeking to grab tion imperative. Oil-rich countries must diversify to
shares of the new market (see table). become resilient to the changes in energy markets.
A frenetic ramping up of production of electric An appropriate governance framework to manage
vehicles is not without risk, however. It could cause proceeds from oil in good and bad times has always
supply to exceed demand—which would lead to been important to fostering economic diversifica-
negative cash flows, illiquidity, and bankruptcies tion. But with stranded assets a new risk, radical
of car manufacturers. The automakers’ bet is driven shifts in governance in oil-dependent economies
both by the commitment of governments to achiev- are urgent. Dubai, for example, facing the deple-
ing zero net carbon emissions and by the belief that tion of its oil reserves, transformed itself into a
consumers will want to adopt cleaner modes of global trade hub. Countries and businesses reliant
consumption—transportation accounts for about on these markets must formulate policies to address
a quarter of global energy-related carbon dioxide this transformation, including the development of
emissions. But it is unclear whether consumers will renewable energy. To jettison their hidebound econ-
merely pay lip service to cleaner consumption or omies, which have led to low productivity and waste,
actually change their behavior. Will higher carbon oil-rich economies should commit to reforms that
prices become less important to consumers than lessen obstacles to innovation and entrepreneurship.
concern about an inadequate charging infrastruc- Reforming corporate governance and legal systems,
ture for automobile batteries? promoting markets that have no barriers to entry
That said, mass manufacturing will eventually and exit, and ending favoritism for both state-owned
make the price of electric cars attractive, and a enterprises and politically connected private firms
spike in oil prices would hasten the conversion to will help attract investment and change attitudes
electric vehicles. This last oil price super cycle will toward innovation (Arezki 2020).
be consistent with climate goals and associated
with commitments by large economies to net zero RABAH AREZKI is chief economist at the African
carbon emissions in the medium term. However Development Bank and a senior fellow at Harvard University’s
felicitous a development that will be for the global Kennedy School of Government. PER MAGNUS NYSVEEN is
climate, however, it poses a risk that the oil reserves senior partner and head of analysis at Rystad Energy.
so many oil-dependent economies count on will
be less valuable—especially for reserves where Reference:
extraction costs are high. The reserves and the Arezki, Rabah. 2020. “The Economics of Sustainability: Causes and Consequences of
investment surrounding them become, in effect, Energy Market Transformation.” Economics of Energy & Environmental Policy 9 (2).

GLOBAL CLOUT,
DOMESTIC FRAGILITY
China’s long-term success will
depend primarily on addressing
its internal challenges
David Dollar, Yiping Huang, and Yang Yao
I
n 2012 the Chinese govern-
ment set a long-term goal: build
China into a fully developed and
prosperous country by 2049,
100 years after the founding of the
People’s Republic. Given its success
since the beginning of economic
reform in 1978, this kind of trans-
formation is certainly possible. But
it is difficult and not guaranteed.
China faces serious domestic
challenges such as an aging pop-
ulation, a rural-urban divide, an
underdeveloped financial system,
insufficient innovation, and reliance
on carbon-based energy sources.
Furthermore, China’s external econ-
omic relations have become
contentious with a number of major
partners, resulting in growing trade
and investment barriers in both
directions. Our book, China 2049,
examines the policies that can help the
country achieve this ambitious goal.
An older population
The COVID-19 pandemic has been
a reminder that there will be many
unpredictable events between now
and 2049. But one thing is certain:
China will have a rapidly aging pop-
ulation. Total fertility has dropped
to 1.7 births per woman, far below
the replacement rate of 2.1. This

Dollara, 3/30
decline may have been helped along by the one- Chart 1

child policy, but relaxing it did not produce more The old will be older
babies. China is like many other densely populated China will see a boom in its 85+ population.
Asian countries, with high housing and education (millions)
costs, where many couples choose to have one child, 400
or none. Even some increase in fertility would not
affect the labor force for 20 years.
China’s population may have already peaked. 300
More important, the working-age population
has already started to decline. The elderly pop-
200
ulation is expected to increase dramatically in
the next few decades (see Chart 1). The over-65
cohort will more than double to 400 million 100
people by 2049. Especially striking is that the
“old-old,” 85 and over, will more than triple to
about 150 million people, surpassing their peers 0
in the United States and Europe combined. The 2019 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
only working-age bracket that will increase is the 65–84 85+
55- to 64-year-olds.
Source: China Population Prospects 2018, China Population and Development
This population aging is both a social and an eco- Research Center, Beijing.
nomic issue. Taking care of the elderly will require
devoting more resources to health care, long-term
care, and assisted living. Traditionally, the elderly are year, from 20 percent at the beginning of the reform
cared for by their children. But, with smaller families, to 60 percent today. That includes more than 200
many elders could end up with no one to rely on. It million urban migrant workers still registered as
makes humane and economic sense to socialize costs rural residents under the hukou household registra-
that previously were privately borne. tion system. This migration has been an important
The COVID-19 pandemic has revealed both the source of dynamism and productivity growth in the
strengths and weaknesses of China’s health care economy. But migrants face various constraints. If
system. The pandemic was brought under control laid off in a downturn, they are expected to return
with a huge ad hoc mobilization that shifted scarce to their rural village. It is difficult to bring chil-
resources to where they were needed most. But dren or parents along when migrants move to cities
many Chinese now feel the need to strengthen where they do not have full access to social benefits
the health care system and resource it adequately. (education, health care, pensions). The result is
This is especially true in rural areas, where many divided families with parents working in cities while
of the elderly live. grandparents maintain the family farm and raise
Although challenging, the working-age the children left behind.
population decline need not presage a dramatic The restrictions on urban registration are gradu-
drop in the labor force, depending on what ally being dismantled, especially in smaller cities.
happens with participation. Retirement age, in Jiangxi province recently scrapped these restrictions.
particular, needs to be reformed and gradually But controls are still strong in the largest centers
ART: ISTOCK / VIKTORIA_YAMS; KONGJONGPHOTOSTOCK; NIKADA
increased: male civil servants can retire at 60, with the highest productivity, such as Guangzhou
female civil servants at 55. Many people over 65 and Shanghai. Despite this migration, the ratio
choose to continue to work if they are healthy. of urban to rural income rose steadily. By 2007,
Family-friendly policies can sustain and enhance urban workers were making 3.14 times as much as
female labor force participation. those in rural areas—one of the highest levels of
rural-urban inequality in the world (see Chart 2).
Urban-rural gap China has about one-fifth of the world’s population
China’s 40 years of reform and growth have coin- but only 7 percent of its arable land, making it diffi-
cided with steady urbanization. The urban popu- cult for 500 million people to live well off the rural
lation has been increasing by 1 percentage point a economy. Even including rural migrants, China’s

urbanization rate is low relative to the country’s one of the most repressed among major econo-
per capita income and population density. Fast- mies, similar to India. It ranks as moderately more
growing Asian economies such as South Korea had financially repressed than Russia and South Africa
urbanization closer to 80 percent at this stage of and considerably less liberalized than advanced
development. It is encouraging that the disparity economies. Almost completely controlled until the
has come down over the past decade, but it is still 1980s, the Chinese financial system made good
high, with urban workers making 2.71 times more. progress toward liberalization until about 2000,
China would benefit from fully scrapping the but has stalled ever since.
internal migration restrictions. On the social side, Our interpretation is that the initial steps
the rural population is disproportionately com- in liberalization were sufficient to carry out the
posed of children and elderly people. Schools are straightforward task of channeling the country’s
much better in cities, allowing the workforce of high savings into export-oriented manufacturing
the future access to better education. While some and housing. A moderate amount of financial
elders will prefer to remain in rural areas, others repression can be helpful at this stage of development
perhaps would like to move to cities closer to their to ensure that the cost of capital remains relatively
adult children and to high-quality medical care. low. In both these sectors, lending depends on phys-
Economically, there is still an excess supply of ical collateral (property, buildings, machinery), so
workers in rural areas, and easier migration policies allocation is not that difficult. China’s exports come
would help maintain the urban workforce. largely from private firms, not state enterprises. Real
estate development and housing ownership are also
More bits, fewer bricks private. So a policy that encouraged exports and
Dollara, 3/30 An interesting paradox of China’s success is its real estate was indirectly a policy that channeled
rapid growth despite an underdeveloped financial resources to the private sector.
system. An index of “financial repression”—based The period between accession to the World Trade
on ownership of banks, regulation of interest rates, Organization, in 2001, and the global financial crisis,
intervention in credit allocation, and control of in 2008, was the golden age of China’s growth. There
cross-border capital flows—shows China to be was rapid credit growth, but sufficient GDP growth
to keep metrics such as the ratio of nonfinancial
Chart 2 corporate debt to GDP stable. This all changed in
2008. To maintain demand in the wake of the global
Income gap shock, China invested massively in infrastructure by
Urban workers make almost three times as much as rural workers.
(ratio)
lending to local governments and upstream sectors
3.5 such as steel that tend to be state-dominated.
At the same time, the central government decided
to channel more resources into key state enterprises,
3.0
hoping to help them become global champions.
The surge in lending to local governments and
2.5 state enterprises caused overall indebtedness in the
economy to grow at an alarming rate, showing that
2.0 the financial system was not performing well in the
new environment. If the financed investments had
1.5 produced strong growth effects, the debt-to-GDP
ratio would have remained stable or risen more
slowly. A rapidly rising leverage ratio is a sign that
1.0
1981 83 85 87 89 91 93 95 97 99 2001 03 05 07 09 11 13 15 17 poor investments are being financed.
Consumption Income In recent years, the weakness in capital allocation
is also underscored by the stalling of total factor
Source: National Bureau of Statistics of China.
Note: The ratio shows how much higher income and consumption are for urban
productivity, which measures productivity growth
workers than for rural workers. not explained by labor or capital increases. In the
early 2000s, following significant direct investment

EMERGING MARKETS
that helped build up the domestic private manu- decoupling would hurt not only China but also
facturing sector, total factor productivity grew 2.6 global productivity growth more generally.
percent a year, accelerating to an impressive 3.9 A countervailing trend is China’s recent mem-
percent in the later part of the past decade. Since bership in major economic agreements, such as the
the global financial crisis disruption, it has never Regional Comprehensive Economic Partnership
recovered, growing only 0.2 percent a year between with countries in the Asia-Pacific region and the
2015 and 2019. Comprehensive Agreement on Investment with
Stagnant productivity is a signal that China the European Union. China has also opened
needs more innovation, and a diversified finan- a dialogue with members of the Trans-Pacific
cial system to support it. China has many of the Partnership about future membership, which
ingredients that contribute to innovation—a large would require significant reforms, such as limits
domestic market; high spending (2.4 percent of on state enterprises and subsidies and opening
GDP) on research and development; millions up new sectors to foreign investment. China has
of scientists, engineers, and software developers also made overtures to the Biden administration
graduating every year; and gradually improving concerning reduction of trade and investment
intellectual property protection. Still, innovation barriers between the two economies.
output is inconsistent. There are some impressive
areas of technical advancement, such as fintech Success or failure will depend
and artificial intelligence, but productivity growth
for the economy as a whole is weak. The state still primarily on China addressing its
channels a lot of resources to its own enterprises,
whereas most patents are generated by private firms. domestic challenges.
The financial system does a better job of
funding firms with traditional assets (buildings, In conclusion, China is at an inflection point in its
machinery) rather than dynamic start-ups built external economic relations. It makes sense for the
on intellectual property. As China fine-tunes its country to continue opening up its own economy
next five-year plan, it should focus on strength- and negotiating trade and investment agreements
ening the innovation ecosystem, including its in all directions. But success or failure will depend
financing, rather than supporting particular primarily on addressing its domestic challenges.
industries and technologies. Innovation will be The aging population and the rural-urban divide
the key to meeting the country’s environmental are interrelated: more integration can help meet the
goals, especially the target of zero net carbon needs of the growing elderly population and prevent
emissions by 2060. an unnecessarily sharp decline in the urban labor
force. Financial reform and innovation policy are
More trade and investment interrelated as well. Moving away from targeted
China’s ability to catch up with advanced econ- industrial policy toward more general support of
omies in GDP per capita depends on continued innovation calls for a diversified, competitive finan-
integration into global trade and investment. It cial system that no longer favors state enterprises.
went from virtual self-sufficiency to being the Innovation will be the key to eliminating carbon
world’s largest trading nation and, last year, the emissions without compromising productivity or
largest recipient of foreign direct investment. living standards.
The current international environment is chal-
lenging, however. A bad dynamic has emerged DAVID DOLLAR is a senior fellow in the John L. Thornton
in which China’s plan to develop leadership in China Center at the Brookings Institution, YIPING HUANG
specific technologies worries its partners, which is Jinguang Chair Professor of Economics and Finance at the
in turn place trade and investment restrictions National School of Development and director of the Institute
on Chinese tech firms. There is a danger that of Digital Finance at Peking University, and YANG YAO is a
China will turn inward, following its “dual cir- Cheung-Kong Scholar and Liberal Arts Chair professor at the
culation” program, which emphasizes domestic China Center for Economic Research and the National School
demand and national innovation. Technological of Development, Peking University.

A boy is home schooled in Guerrero state, Mexico,
amid the COVID-19 pandemic.
INEQUALITY
in the time
of COVID-19
All metrics are not equal when it comes to assessing the pandemic’s unequal effect
Francisco H. G. Ferreira
T
he severe impact of the COVID-19 capita? Or even of mortality rates themselves, across
pandemic is clearly seen in the numbers: different groups? Inequality among whom: should
more than 3.1 million deaths and rising, it be viewed at the level of individuals? Households?
120 million people pushed into extreme Countries? Even once a distribution is precisely
poverty, and a massive global recession. As suffering specified—so that we are clear about what is dis-
and poverty have risen, some data show an increase tributed among whom—firm conclusions about
in another extreme: the wealth of billionaires. the direction of inequality change will generally
With both extreme poverty and billionaire depend on what part of the distribution you care
wealth on the rise, the pandemic’s effect on about most. Different measures of inequality—
inequality may appear obvious. The reality is such as the Gini coefficient, the Theil index, and
not as simple as you may think. the income share of the wealthiest in society—are
Inequality is a notoriously challenging concept sensitive to different parts of the distribution and
on which to make definitive statements. Inequality can in principle rank inequality before and after
of what? Of household income or of GDP per the pandemic differently. Clarity about which

EMERGING MARKETS
inequality is being measured matters a great deal coefficient of variation. This represents a continua-
for assessing the unequal impact of the pandemic. tion of the trend since the turn of the millennium,
Consider first the global distribution of COVID-19 when Concept 1 global inequality began to fall,
mortality itself. Using the concept of life years lost owing in large part to the rise of China and India.
to the disease—estimated using ages at death and But Deaton argues that, if anything, the pandemic
the residual life expectancies at those ages—we accelerated the decline.
find that the mortality burden of the pandemic is This calculation takes countries as the unit of
positively correlated with national income per measurement and thus attaches the same weight
capita, despite the superior health and public pre- to Luxembourg as to China. One might ask, alter-
vention systems in rich countries (Ferreira and natively, what happened during COVID-19 to the
others 2021). The chart plots the number of years distribution of GDP per capita among countries
of life lost to the pandemic per 100,000 inhabitants when these are weighted by population. That approach
against GDP per capita for 145 countries, using log is the same as measuring inequality in an imaginary
scales on both axes (see chart, next page). distribution of all individuals in the world, where
Although there is enormous variation at each all people are assigned their country’s GDP per
income level—with Brazil’s mortality burden capita—Milanovic’s “Concept 2” global inequality.
(adjusted by population) 1,000 times greater than
Thailand’s, for example—there is nonetheless a
very clear positive association. Richer countries Inequality is a notoriously
suffer greater losses of life years per capita than
poorer countries. Measurement error is likely sub-
challenging concept on which to
stantial, with a number of poor countries, such
as Burundi and Tanzania, clearly underreporting
make definitive statements.
deaths, but the association is so strong that it is When differences in GDP per capita are
unlikely to be spurious. Among other things, it weighted by population, inequality between
reflects the older age structure of the population countries increased during 2020—which Deaton
in richer countries and an illness whose lethality argues can be attributed to the pandemic. More
is highly age-selective. Higher life expectancies, specifically, it can be attributed to the sharp eco-
greater urbanization, and the pandemic’s spread nomic contraction in India, which suffered a great
along major trade routes also likely have played deal both in terms of mortality and economic
a role. performance—even before the massive second
wave in 2021. Although China’s positive growth
Examining income inequality (and far fewer deaths) helps offset India’s decline,
But what about the distribution of income, instead China is now too close to the global average
of mortality? How did global income inequal- income to completely compensate for India’s
ity change during the pandemic? Well, global economic losses. When India is omitted from
inequality in incomes can be understood in at least the calculation, Concept 2 inequality continues
three ways: first is the question of what happened to decline, as it had been doing since the 1990s.
during COVID-19 to the distribution of GDP Through India, the pandemic did contribute to a
per capita among countries—labeled “Concept reversal in the previous pattern of falling weighted
1” global inequality by Branko Milanovic. In a inequality between countries.
recent paper, Nobel laureate Angus Deaton shows Of course, people are very far from earning
that, on average, richer countries also experienced the same income within any given country.
larger economic contractions than poorer countries Concept 3 global inequality refers to the inequal-
in 2020 (Deaton 2021). And although by itself ity among all the world’s individuals when they
PHOTO: GETTY IMAGES / PEDRO PARDO
this result does not necessarily imply a decline in are assigned their own incomes. This is argu-
inequality between countries, it turns out that the ably the most interesting of Milanovic’s three
actual pattern of income declines did indeed lead concepts of global inequality, and it is the only
to a reduction in (unweighted) inequality between one that takes inequality within countries into
countries during 2020, whether it is measured account. For many “good” inequality measures,
by the Gini coefficient, the Theil index, or the this Concept 3 inequality is just the sum of

(appropriately weighted) inequality within coun- preexisting income gaps within countries. There
tries and Concept 2 inequality between countries. is long-standing evidence from many countries
Since Concept 2 inequality appears to have that people entering the labor market during
risen in 2020, it would be enough for “average” a severe recession earn less than the cohorts
inequality within countries also to have risen just before and after them—and that those dif-
for us to conclude that global inequality among ferences linger for many years. By inducing a
individuals has grown during the pandemic, in massive global recession, COVID-19 has cer-
conformance with what most people suspect. tainly created new inequalities among cohorts
Unfortunately, it is too early to tell whether or of young people.
not that is the case: data on individual incomes
come from household surveys and administrative Preexisting conditions
sources that are simply not yet available for 2020. The pandemic has also exacerbated preexisting
For most countries, it will be at least a year, and inequalities in the labor market, largely because the
typically more, before data on income inequality ability to work remotely is highly correlated with
within countries become available. education, and hence with pre-pandemic earn-
For the moment, though, it certainly seems ings. Despite all the talk of “essential workers” and
plausible that inequality within many coun- everyone being “in this together,” the stark reality
tries is on the increase, given evidence of rising is that job and income losses are likely to have hit
poverty and rising billionaire incomes. There lower-skilled and uneducated workers the hardest.
are good reasons to expect that the pandemic Early evidence from both public and private big
both created new inequalities and exacerbated data sources in the United States seems to confirm
Wealth and health

Despite their advantages, richer countries have shown a larger loss in life years due to the pandemic than many
poorer countries.
(life years per 100,000 people)
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IRN PAN SVN ITA
ESP USA
BOLBLZ ARM
MDA BGR CHL CZE GBR
FRA
SWE CHE
00
ROUHUN LUX
JOR ZAF IRQ HRV POL NLD
CRI PRT AUT IRL
10
HND GEO
TUNALB CAN
PSE UKR PRY ISRMLT
KGZ GTM RUS
TUR LTU
GRC
CPV DOM
LBN SUR SRB DEU
MAR
GUY
SLV AZE SVK
MDV KAZ
LVA DNK
IND BLR
JAM ARE
100 GMB NPL MRT
PHL NAMIDN DZA
EGY
EST
TTO
CYP FIN ISL NOR
LY per 100,000 people
BGD MMR
10
KEN PAK
SDN
NIC GAB AUS
GNB YEM SEN ZMB
ZWE CMR COG LCA URY
LBR HTI
ETH LSO UZB BWA
JPN
MLI GHA AGO MYS
CAF MWI TJK KOR
SLE MDG
TGO COM
10 TCD
UGA GIN
NGA LKA MUS
CIV
10
MOZ RWA
CODNER BFA BEN
CHN
FJI
THA
1 PNG
1
TZA
VNM
BDI
Low-income countries
0.1 Lower-middle-income countries
1
0.
Upper-middle-income countries
High-income countries
0.01
01
500 1000 2000 5000 10,000 20,000 50,000 100,000

0.
500 1,000 2,000 5,000 10,000 20,000 50,000 100,000

GDP per capita (PPP,
(PPP, constant constant
2011 US dollars) 2011)
Source: Ferreira and others (2021).
LIC Organization
Note: Country abbreviations are International LMICfor Standardization
UMIC (ISO) country
HIC codes. PPP = purchasing
power parity.

EMERGING MARKETS
this—although there are interesting nuances that disastrous response to the health emergency. Similar
we don’t have space for here. In developing econo- claims have been made about five European countries:
mies, the same labor market forces are, if anything, France, Germany, Italy, Spain, and Sweden (Clark,
turbocharged by informality: when lower-skilled D’Ambrosio, and Lepinteur 2020).
labor is predominantly informal, those workers have The upshot is that we will not know the effects of
no access to furlough programs or unemployment the pandemic on income inequality within countries
insurance. This year, hundreds of millions of such for sure until reliable administrative and household
workers faced very stark trade-offs, on a daily basis, survey data become available. In the meantime, the
between staying safely at home or facing the threat tentative good news that income transfers can provide
of infection to provide food for their families. an effective response, at least in the short term, should
Given preexisting racial and gender occupational spur other countries into action. But more action is
differences, the exacerbation of these inequalities in needed: perhaps the most insidious new inequality
the labor market is also likely to have translated into spawned by the pandemic is between children who
even greater racial and gender disparities in many have been able to continue their schooling over the
countries. In addition, with the burden of additional past year—whether in person or online—and those
time required for childcare and housework falling who have not, because of poor connectivity or weaker,
disproportionately on women, gender inequality in poorer schools. Students in the latter category are
earnings is particularly likely to have grown even wider. often at great risk of falling substantially behind in
Capital markets are also likely to have played a their learning, or even of dropping out altogether. The
nontrivial role in generating inequality during the learning and schooling inequalities arising from these
pandemic, particularly at the top. In response to the differences are as stark as they are widespread, and as
widespread economic collapse in March and April these children join the labor force the consequences
2020, the world’s key central banks further loosened are likely to be with us for decades to come.
monetary policy, injecting enormous amounts of The overall picture that emerges from these con-
liquidity into financial markets. While that addi- siderations is, for the moment, one of falling income
tional liquidity has not so far translated into goods gaps between countries (when not weighted by
price inflation, it has certainly helped keep asset population) and—speculatively and preliminarily—
prices high. It is the main reason stock markets rising gaps within countries, on average. Given
boomed while the economies that underpin them the educational and labor market dynamics I have
were in the doldrums. These monetary policy inter- outlined, the latter gaps may well persist for more
ventions were well-intentioned, and they are likely than a generation. What is more, it now appears
to have helped prevent bankruptcies and preserve plausible that even unweighted inequality between
jobs. Nonetheless, they did inflate the value of assets countries may well rise in 2021, if the unequal
held primarily by rich people and have a lot to do spread of vaccination allows countries such as the
with the generalized growth of billionaire incomes. United States, the United Kingdom, and parts of
Owning shares in Amazon or Zoom wasn’t the only developed Asia to recover much more rapidly than
way to gain wealth during this period. India, Latin America, and much of Africa.
Social transfers FRANCISCO H. G. FERREIRA is the Amartya Sen Professor

Yet, despite these multiple reasons the pandemic of Inequality Studies and director of the International
can be expected to have raised income inequality Inequalities Institute at the London School of Economics.
within countries, we cannot yet be sure of just how
general those increases are. For one thing, evidence References:
is emerging from some (apparently) unlikely places Clark, Andrew, Conchita D’Ambrosio, and Anthony Lepinteur. 2020. “The Fall
that social protection policy responses—such as in Income Inequality during COVID-19 in Five European Countries.” ECINEQ
Working Paper 2020-565, Society for the Study of Economic Inequality, Palma
income transfers targeted to poor and vulnerable de Mallorca, Spain.
workers—have worked rather well. Early work out
Deaton, Angus. 2021. “COVID-19 and Global Income Inequality.” NBER Working Paper
of Brazil’s well-respected IPEA think tank suggests 28392, National Bureau of Economic Research, Cambridge, MA.
that generous “emergency support” transfers helped Ferreira, Francisco, Olivier Sterck, Daniel Mahler, and Benoît Decerf. 2021. “Death and
reduce both poverty and inequality in Brazil between Destitution: The Global Distribution of Welfare Losses from the COVID-19 Pandemic.” LSE
May and September 2020, despite the country’s Public Policy Review 1(4), 2.

A COVID-19
TANTRUM?
The Federal Reserve’s post-pandemic stance will expose vulnerabilities in emerging
markets with high private external debt
Şebnem Kalemli-Özcan
T
he pandemic has not yet led to a full- rates eventually start to rise? That will depend on
blown debt crisis for emerging markets, three key issues:
but substantial risks remain. • The effect of US monetary policy on emerging
The current situation might be an market capital flows, which will vary across emerg-
“illusion” of stability that largely results from ing markets depending on country-specific risk;
the mitigating role of US monetary policy on • The currency and sector composition of these
emerging markets’ external financing conditions. economies’ external debt—largely in US dollars
By weakening the dollar, providing swap lines, and borrowed by the private sector—at the outset
and reducing external dollar financing costs for of the pandemic; and
emerging markets, US monetary policy kept • Limited fiscal space in emerging market econo-
capital flowing to these economies. US mone- mies to fight the pandemic, requiring continuous
tary policy, because of its influence on global domestic and external government borrowing.
investors’ perception of risk, has always been the
single most important determinant of emerging US monetary policy
markets’ capital inflows and outflows. Will there Historically, sovereign borrowing has played a major
be an emerging market crisis when US interest role in emerging market economies. Literature going

EMERGING MARKETS
Kalemli, 4/29
back to the 1980s has argued that the difference in Chart 1

interest rates between US Treasury securities and Policy and government bond rates less influential
emerging market government bonds affects demand The difference between emerging market and US policy interest rates has affected
for emerging market debt. More recently, this tight emerging market capital inflows less since the global financial crisis.
link has begun to weaken. (flows, percent) (rate differential, percentage points)
Chart 1 shows a much lower correlation since 35 30
the global financial crisis between capital flows and 30 25
policy interest rate differentials, which directly affect 25
Capital flows/GDP
short-term government bond rates. This is because Policy rate differential 20
20
private capital flows, such as cross-border bank 15
flows and corporate loans and bonds, have become 15
10
a much more significant component of emerging 10
markets’ total external borrowing since the early 5 5
2000s. Private capital flows are more likely to be 0 0
affected by private investors’ perceptions of risk for 1996 98 2000 02 04 06 08 10 12 14 16 18
a particular emerging market economy than by gov-
ernment bond interest rate differentials. Of course, Source: Adapted from Kalemli-Ozcan (2019), Jackson Hole Symposium. Author’s
calculations are based on IMF data.
public flows can also be sensitive to global risk Note: Policy rate differentials are in logs and vis-à-vis the United States. Capital flows are
perception, especially if they are in local currency. normalized by GDP and plotted as three-quarter moving averages. All variables are
averaged across countries on a given date. Quarterly observations are from 46 emerging
Thus, US policy affects both private and public market economies.
capital flows in and out of emerging markets. Note
that these flows can also go in opposite directions:
public flows could come into emerging markets flows out of emerging markets—$70 billion in port-
and private flows could go out, if US policy rates folio equity and $30 billion in portfolio debt (IMF
go down and global risk sentiment goes up. April 2020). Knowing what types of capital flows
Unprecedented action by the Federal Reserve were most drained during previous emerging market
led to a comeback of the initial $100 billion in crises and the composition of the stock of external
outflows of public and private portfolio holdings debt in emerging market economies at the outset
(securities such as stocks and bonds) that had left of the pandemic will deliver a fuller understanding
emerging markets between January and May 2020. of emerging markets’ remaining vulnerabilities to
The Fed’s action not only lowered borrowing costs possible future capital outflows under changing
for emerging markets, but it also helped to ease global conditions.
global risk aversion, which in turn encouraged
private sector capital flows into emerging markets Currencies and sectors
during the second half of 2020, with a lower risk So what was the currency and sector composition of
premium on such investments. There was also het- emerging market debt at the end of 2019, just before
erogeneity in capital flows across emerging markets the pandemic? While portfolio debt, composed of
depending on how they handled the pandemic emerging market government and corporate borrow-
(Çakmaklı and others 2020; IMF April 2020). ing in bonds, constitutes a significant portion of their
This heterogeneity was not surprising, as we knew external debt, cross-border bank loans are equally
from the previous episodes of US monetary policy important. Yet these loans are not included under
changes (Kalemli-Özcan 2019). The responses of portfolio flows. In emerging markets, a dispropor-
emerging markets to the Federal Reserve’s policy tionate share of external liabilities (65 percent) is
stance vary according to country-specific risk, in portfolio debt (bonds) and other investment
which is directly affected by their handling of debt (loans), in about equal amounts. Portfolio
the pandemic. equity and foreign direct investment constitute the
This is all good news, but since we lack real-time remaining 35 percent. Sovereigns account for over
ART: ISTOCK / FLORIANA
balance of payments data to track total capital flows, 60 percent of the portfolio debt, whereas banks
we might get an incomplete picture about potential and corporate loans together account for 80 per-
capital flow responses to COVID-19 and to US mon- cent of other investment debt (Avdjiev and others
etary policy from figures that cover only portfolio 2020). Although sovereigns can borrow externally

via local currency bonds, most cross-border bank global financial crisis and the taper tantrum, thanks
and corporate bonds and loans are in US dollars. to fast, clear, and unprecedented action by the Federal
It is important to know which borrowing sector Reserve. US monetary policy is the key determinant
and what type of asset class lost the most foreign of emerging market private sector flows, which are
capital during previous emerging market crises, in dollars and borrowed from private creditors, and
such as the 2008 global financial crisis and the sensitive to the risk appetite of global investors.
2013 “taper tantrum,” when US Treasury yields
surged on speculation that the Federal Reserve Fiscal policy
would slow, or “taper,” its purchases of financial Will we witness another taper tantrum event, with
assets to boost the economy. During those epi- capital fleeing emerging markets once US policy
sodes, the largest capital outflows from emerging rates rise as the US economy strengthens? The
markets were cross-border bank loans, followed by answer depends on country-specific risk, which
cross-border corporate loans and corporate bonds, is not only a function of classic vulnerabilities,
as shown in Chart 2. such as high external debt, high domestic private
The 2008 and 2013 episodes show that what sector foreign currency debt, and inflation, but also
we witnessed in terms of capital outflows from emerging markets’ policy response to COVID-19.
emerging markets at the beginning of the pan- So far, emerging markets, like advanced economies,
demic in March–May 2020 actually could have have adopted a fiscal/monetary policy mix. As we
been worse. During the financial crisis and taper know from emerging markets’ own histories, fiscal
tantrum episodes, outflows focusing on total debt policy has a specific role in the nexus of external
of the private sector—as opposed to portfolio debt debt, domestic debt, and inflation.
alone—were understandably much larger than Emerging market governments must fight the
the $30 billion in portfolio debt outflows early pandemic domestically, and their private sectors
on in the pandemic. As for the $70 billion that
Kalemli, 4/29 must roll over their external foreign currency debt.
left portfolio equity, this was not surprising since This means that these governments need to raise
this is the riskiest emerging market asset class and financing both domestically and externally, not
COVID-19 was the biggest shock since the global only to fund the fight against the pandemic but also
financial crisis in terms of investor flight from risk. to prepare for possible private sector defaults leading
Banking and corporate debt flows for emerging to government-financed bailouts. However, these
markets stayed intact in 2020, unlike during the countries’ governments have limited fiscal space.
Chart 2
Past capital outflows
Bank loans represented the largest capital outflows from emerging markets during the 2008–09 global financial crisis and
the 2013 “taper tantrum.”
Global financial crisis Taper tantrum
(billions of US dollars) (billions of US dollars)
150 200
100 150
50
100
0
50
–50
0
–100
–150 -50
Public
–200 Bank -100
Corporate
–250 -150
2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2013:Q1 2013:Q2 2013:Q3 2013:Q4 2014:Q1 2014:Q2
Sources: Adapted from Avdjiev and others (2020). Author’s calculations are based on IMF and Bank for International Settlements data.

EMERGING MARKETS
At a time when emerging market economies need all the

support they can get, they need to raise both domestic and
external financing.
There were large differences between advanced and them, the increase in the budget deficit would
emerging market economies in the scale of their flood the market with government bonds, forcing
fiscal packages early in the pandemic. As of early interest rates higher. By purchasing these bonds,
2021, these differences had grown larger; emerging emerging market central banks hoped to prevent
market economies put together fiscal support worth this (BIS 2020; IMF 2020). So far, most of these
only 6 percent of their GDP on average, compared programs, though small, have been successful,
with average support of about 20 percent of GDP with a few exceptions where central banks did not
in advanced economies (IMF 2021). have the credibility to assure markets that they
A close look at the US numbers can put things in would not fund the government indefinitely. The
perspective when it comes to the size of this shock cost of credit default swaps (CDSs)—essentially
relative to the global financial crisis. So far in the insurance against default, a good barometer of
pandemic, US active and promised future support external financing costs—reflects in part this lack
amounts to $7.25 trillion, which is 34 percent of of confidence. The CDS spreads have increased
2019 US GDP. In comparison, US support of $830 on certain emerging markets but not on others,
billion in the wake of the 2007–09 financial crisis reflecting the heterogeneity in the credibility of
amounted to just 6 percent of 2007 GDP. The the monetary/fiscal policy mixes.
fiscal support needed for a shock like COVID-19 At a time when emerging market economies need
was dramatically larger. all the support they can get, they need to raise both
Many emerging market economies, lacking the domestic and external financing. Higher costs for
resources to mount fiscal packages on this scale, external financing can lead to disastrous outcomes
added monetary policy to the mix. Like advanced at such a juncture, especially if the Federal Reserve
economies, they turned to asset purchases, so-called starts raising rates, reversing the accommodating
quantitative easing (QE) programs. Academics tide it has provided to emerging markets so far.
and policymakers immediately warned of debt So emerging market economies should balance the
monetization—printing money to buy government monetary and fiscal policy mix carefully, commu-
debt. The fear is that this will lead to inflation in nicating these policies in a transparent way and
emerging markets, reversing the hard-won gains watching closely their effects on their external
of the past two decades, as a result of the adoption borrowing costs.
of inflation-targeting regimes.
The link between inflation and fiscal policy has ŞEBNEM KALEMLI-ÖZCAN is a professor of economics at
always bedeviled emerging market economies. the University of Maryland, College Park.
Many of them learned the hard way that fiscal dis-
cipline is the key to successful inflation targeting. References:
Any emerging market central banker will tell you Avdjiev, Stefan, Bryan Hardy, Şebnem Kalemli-Özcan, and Luis Servén. 2020. “Gross
that controlling inflation calls for fiscal discipline. Capital Flows by Banks, Corporates and Sovereigns.” NBER Working Paper 23116, National
Bureau of Economic Research, Cambridge, MA.
The consensus that fiscal backing and central bank
independence are the key to taming inflation arose Bank for International Settlements (BIS). 2020. BIS Bulletin, June.
in advanced economies first, after the high-inflation Çakmaklı, Cem, Selva Demiralp, Şebnem Kalemli-Özcan, Sevcan Yesiltas, and
Muhammed A. Yildirim. 2020. “COVID-19 and Emerging Markets: A SIR Model, Demand
episodes of the 1970s. For emerging markets, as in Shocks and Capital Flows.” NBER Working Paper 27191, National Bureau of Economic
advanced economies, central bank independence Research, Cambridge, MA.
and fiscal discipline can prevent QE programs from International Monetary Fund (IMF). 2020. Global Financial Stability Report, Washington,
being inflationary. The backbone of a successful DC, April and October.
QE program is policy credibility. ———2021. World Economic Outlook. Washington, DC, April.
Fifteen emerging market economies undertook Kalemli-Özcan, Şebnem. 2019. “The U.S. Monetary Policy and International Risk
these programs with the rationale that, without Spillovers.” Jackson Hole Symposium Proceedings, September.

EMERGING
MARKETS IN FLUX
Mahmood Pradhan chats with Richard House and David Lubin on the outlook
for this group of countries
E
merging market assets have proved F&D: Are you surprised by how well the emerging
remarkably resilient over the past year, market asset class has fared during the pandemic?
confounding more dire expectations RH: No, for two reasons. First, emerging markets
at the outbreak of the COVID-19 have become a much more diversified asset class.
pandemic. The very large liquidity injections Second, ownership now is mostly domestic.
from central banks in advanced economies have When I started out, 25 years ago, there were
undoubtedly helped. But some emerging market just a handful of countries to choose from, and
economies have also found more policy space, foreign investors like ourselves dominated the
including turning to unconventional monetary pol- asset class. Today, there are more than 80 coun-
icies that many would have thought available only tries to choose from, and average ownership of
to advanced economies. This crisis will, however, foreigners is about 20 percent, including corporate
leave scars. Debt burdens of emerging markets and debt. Large domestic ownership limits contagion
low-income countries are rising to unprecedented and has made the whole asset class more resilient.
levels. Will more countries need financial assistance DL: The scale of the health crisis was so devastating
when the tide of global liquidity turns? And will that there could have been any number of out-
private investors be willing to share the burden? comes. But the collapse of US real interest rates
Two veteran market players—Richard House, starting in late March was critical—40 years of
chief investment officer for emerging market history teaches us that when that happens, capital
debt at Allianz Global Investors, and David is pushed toward emerging economies. For the
Lubin, head of emerging market economics at whole of 2020, Eurobond issuance by emerging
Citibank—explain why the maturity of this asset economy borrowers was some $800 billion, more
class helped limit the fallout and bodes well for than a 10 percent increase over 2019. This was
its resilience and return to a more normal global particularly surprising because many emerging
liquidity environment. But they do see a need for economies saw their external financing needs go
the private sector to share the burden of adjust- down due to the recession-induced reduction in
ment in some countries. They also call for the their current account deficits.
public sector, including the IMF, to help countries
take advantage of the growing demand for debt F&D: What will happen when long-term yields
issuance that complies with environmental, social, begin to normalize in advanced economies and
and governance standards. central banks start to unwind asset purchases?

EMERGING MARKETS
emerging economies lose more through capital

outflows than they gain from more exports. The
reason is that in recent years, the main driver of
global investment trade and commodity prices has
not been the United States, but China. Emerging
markets’ capital accounts are impacted by decisions
taken in Washington; their current accounts are
more influenced by Beijing.
The ideal combination would be a weaker US,
with low interest rates pushing capital toward
emerging markets, and a stronger China boosting
Richard House David Lubin
trade and investment. Should the United States be
more able to shape global investment growth with
DL: Rises in US interest rates have been a threat to President Biden’s infrastructure plan, that would
emerging markets’ capital flows since the 1970s. help emerging countries, particularly if China
A recent small increase in 10-year US Treasuries refocuses toward consumption.
caused some turbulence. But by any historical
standards, a 10-year US Treasury yield that remains F&D: Emerging markets used unconventional
negative in real terms is absurdly low. As long as policies more actively. Does this suggest some
that remains the case, the threat of significant countries have more tools in their arsenal than
capital outflows should be contained. previously envisaged?
RH: It’s very hard to generalize: there have been
F&D: You both think emerging markets are more several different forms of quantitative easing. But
resilient for being less dependent on foreign compared to only a few years ago, every central
investors. But are foreign investors also better bank has been unconventional. The narrative that
at differentiating between countries? Or has emerging countries cannot do quantitative easing
the large-scale policy response from advanced or all hell breaks loose is long past.
economies muddied the waters? DL: There is a lot of diversity. India, for example, has
RH: Almost all asset classes collapsed early last year, successfully announced expansionary fiscal policy
then bounced back strongly. Liquidity injections have together with caps on bond yields. If others tried
masked some problems, but not everywhere. While a that, there would be massive capital outflows. The
rising liquidity tide has certainly lifted many boats, difference is often in markets’ confidence about
macro and political drivers ultimately drive asset each country’s growth potential, but also how
prices. There has been reasonable differentiation, open their capital account is.
certainly in sovereign credit and foreign exchange.
DL: The biggest surprise last year was how almost F&D: How concerned are you about mounting
all emerging economies were able to ease mone- debt burdens? Can emerging markets, and
tary policy. This was significantly facilitated by especially low-income countries, grow their
the Fed, which basically said, in March of 2020, way out of debt?
“Leave it with us; we’ve got this covered.” That was RH: Coping with COVID-19’s financial impact is
a very powerful signal that monetary policy could a global concern. An immediate concern for me is
come to emerging markets’ rescue as well. Fiscal the disparity in growth rates across countries. Sadly,
PHOTOS: MATTHEW LUMB AND COURTESY OF DAVID LUBIN
policy turned out to be more difficult because vaccine distribution in emerging economies will be
many countries did not have the firepower of much slower than in advanced ones. Markets are
advanced economies. not paying attention to that disparity. Although
emerging economies will bounce back, I don’t see
ART: ISTOCK / MICROSTOCKHUB
F&D: If long-term rates are moving up because debt-to-GDP levels coming down to pre–COVID-19
of stronger US growth, could that offset the levels for many years.
impact of higher borrowing costs? DL: I would agree. Accumulating large debt
DL: Under normal circumstances, I would say no. in foreign currency is much more dangerous.
When US monetary conditions tighten, I think However, we’re still far away from that. Indicators

like the external debt service ratio and debt to of total funds under management in emerging
foreign exchange reserves ratio don’t look too markets. All investors are demanding them now—
stretched in historical terms. Low US interest three-quarters of my client meetings are about our
rates will help keep the debt service cost low. The strategies on these investments.
common denominator of the 1980s and 1990s The IMF can play a role in helping smaller
crises was emerging economies’ lack of dollar countries get involved, particularly given its
assets. During the last 20 years, many of them commitment to helping them achieve the UN
made strenuous efforts to accumulate foreign Sustainable Development Goals. There are now
currency reserves. The domestic debt problem internationally used principles on green, social,
is more serious in some countries. Investors and and sustainable bonds—and lots of public and
the IMF have very little experience and don’t private data available. The Fund can help in mon-
know what such a crisis might look like. Our itoring engagement and reporting.
experience in the last 40 years has been mostly
with foreign debt. F&D: Should the IMF focus on helping countries
RH: The biggest difference is that pegged exchange develop capacity to issue green bonds, or on
rates have been thankfully consigned to history. monitoring and enforcement?
So I don’t think there’s ever going to be another RH: Investment banks are eager to help countries
big systemic emerging markets crisis again. issue these bonds. The Fund could help more
Maybe in some countries at the corporate level, on monitoring and engagement, and especially
but certainly not at the sovereign level. on social and governance aspects. It has been
encouraging that IMF reports have covered these
F&D: Do you expect many countries will need issues. Engagement with countries is critical. It’s
financial assistance from the IMF or other the question investors always raise.
multilateral institutions? And can the private DL: It is a complicated area because money is fun-
sector share the burden of adjustment? gible. A country says it is raising money to invest
RH: We have seen record issuances from emerg- in this green project or to build schools in rural
ing markets, sovereign and corporate, in the first communities. How can we know for sure?
quarter of 2021, despite a pretty sizable repricing A second problem is that ESG ratings are highly
of US Treasuries. Some countries facing liquidity correlated to per capita GDP. I worry that, as
or solvency issues will need more assistance from green and socially responsible bonds become more
the Fund and potential private sector participa- entrenched in global markets, there could be per-
tion in restructurings. They are well known to verse consequences. Capital flows to lower-income
anyone with a basic grasp of sovereign balance sheet countries could be at risk.
analysis. I do not think there will be contagion.
There was no contagion from the most recent F&D: But isn’t that exactly the point, to
defaults or restructurings in Argentina, Ecuador, exert economic pressure on governments to
and Lebanon. Why would it be different now? The abandon bad practices?
private sector should definitely participate when DL: Investors are used to making risk-based assess-
debt is clearly unsustainable. ments of ESG. Social and governance aspects
DL: Portfolio managers are paid to do risk assess- have always been part of the analysis, because
ment. The IMF first introduced its lending into they are part of credit risk. But values-based
arrears policy in the 1980s. If private creditors investing is increasingly the case. “This country
still think the IMF will bail them out, they’re not treats its journalists terribly; I couldn’t possibly
doing their job properly. invest there until they sort this out,” for example.
If that kind of thinking seeps into the investment
F&D: Can emerging markets and low-income process, I’m not sure who benefits. The leverage
countries benefit from the growing demand investors might have could end up perpetuating
for environmental, social, and governance– a situation.
compliant borrowing (ESG)?
RH: It’s a nascent asset class, but with huge potential. MAHMOOD PRADHAN is deputy director of the IMF’s
At an estimated $16 billion, it’s still only 4 percent European Department.

From Stream
to Flood
Streaming video offers emerging markets an avenue for content at
home and around the world
Adam Behsudi
S
he is a beautiful Nigerian attorney. He is so, they’ve opened burgeoning film and television
a dashing Indian investment banker. Just industries in some of the most vibrant emerging
as their romance spans the international markets to new possibilities, changing the economic
divide, the movie that immortalizes it is calculation for producing films and redefining what
equally cross-cultural: filmed and produced in can be a hit.
Nigeria, edited in India, and released by Netflix “What’s beautiful about it is we’re sitting on the
to a global audience. same platform. That’s what’s exciting—being a
Beyond a plotline of disapproving parents and Nollywood movie—where it’s going, what we’re
saccharine-sweet dance numbers, the merging of sitting next to in terms of Hollywood production and
Nigeria’s Nollywood and India’s Bollywood with it being received in that way,” said Hamisha Daryani
BEYHANYAZAR; OATAWA; METAMORWORKS
the release of Namaste Wahala (“Hello trouble” in Ahuja, a third-generation Nigerian with Indian roots
ART: ISTOCK / VIDEOWOK_ART; NIKADA;
Hindi and Nigerian pidgin) represents how small the who created, directed, produced, and acted in the
world of entertainment has become in a new age of movie that Netflix released on Valentine’s Day.
streaming video. Ahuja’s romantic comedy broke into Netflix’s top
Streaming giants like Netflix, Disney+, and 10 list in the United States for a short period, gen-
Amazon are growing new audiences and overlap- erating buzz for the streaming company’s recent
ping markets in ways never seen before. In doing expansion into African content.

The growth of streaming services has only enhanced in India, where you just had a massive data spike,”
the entertainment industry as a driver of economic said Vivek Couto, the Singapore-based executive
activity in large emerging markets like India, where director of Media Partners Asia. “The landscape
by some estimates the sector accounts for 1 percent from an infrastructure perspective has multiplied.”
of GDP; Nigeria, where more than a million people In India, rapid expansion in internet access has
work directly or indirectly for Nollywood—the fueled fierce competition between the country’s
second-highest employer after agriculture; and largest telecommunications providers, which has
China, which overtook the United States in box driven down data prices to some of the lowest in the
office sales last year. Even though the pandemic world. Most people access streaming video services on
has had an unavoidable impact, people’s desire to their smartphones, and India has some of the highest
be entertained remains a constant, and the digiti- data usage per smartphone in the world.
zation of content is changing the rules of the game. In 2019, Netflix in India launched a mobile-only
“I think right now we are at the beginning of a plan that would allow users to stream content to
huge wave of international content and more invest- their smartphones or tablets for less than $3 a month.
ment in international content than we’ve ever seen,” Netflix rolled out a similar plan in Malaysia. On the
said Stefan Hall, project lead for media, entertain- other side of the world, Spain-based Telefónica, one of
ment, and culture at the World Economic Forum. the largest providers of telecommunications services
in Latin America, announced in 2018 a multiyear
Infrastructure is king partnership that would allow subscribers to seam-
In Asia’s largest emerging markets, the growth lessly sign up for Netflix on its platforms across the
of streaming services has exploded (see Chart 1). region. In Africa, where internet service poses more
Subscriptions to video streaming services in India of a challenge, the streaming service is working with
grew from 4.5 million in 2017 to 59.6 million in telecommunications operators to make it easier for
2020. Indonesia saw growth increase from 200,000 potential subscribers to make payments.
subscribers in 2017 to 8 million in 2020. Thailand The trend has only accelerated with the
and the Philippines saw growth in the same peri- COVID-19 pandemic. An annual survey of thou-
od of 130 percent and 71 percent, respectively, sands of viewers from 10 advanced and emerging
Behsudi, 4/13 according to Media Partners Asia, an independent market economies found that nearly half of those
research and consulting firm. surveyed subscribed to streaming services in the
“In the last three to four years, there has been a first half of 2020, with spending more time at
mobile revolution in those markets, particularly home as the main reason.
This new level of connectivity in many countries
Chart 1
has eased the entry of major streaming players, which
has in turn redefined the possibilities and increased
Streaming surge competition in the area of content creation.
Subscriptions to streaming services in some of the largest emerging markets in Asia
have grown exponentially in recent years. While streaming services have made it easier for
(millions) content to travel beyond a country’s borders to a
300 regional market or a global audience, enticing and
298.0
2017 retaining subscribers who seek more options from
2020 their own countries remain a key focus.
In 2019, Disney+ acquired Hotstar, India’s
200
158.7 leading streaming service, which now comprises
30 percent of the streaming service’s subscriber
base. Netflix is steadily ramping up investment
100 in the creation of local content in new parts of
59.6
the world, including a new push into Africa last
4.5 0.2
8.0 0.5 6.1 0.4 2.0 year with more original content. The streaming
0 titan that started as a mail-order DVD rental
China India Indonesia Thailand Philippines
service gained 36.6 million customers in 2020,
Source: Media Partners Asia. its largest annual gain, and now boasts more than
200 million subscribers worldwide. After making a

EMERGING MARKETS
rare public apology in India in 2019

for a TV series deemed offensive to
Hindus, Amazon gave no sign of retreat-
ing from the market after announcing in March
that it would move beyond television shows and trend has accelerated even in markets like India,
co-produce its first big Bollywood feature. where straight to streaming has lagged behind
While US-based companies face some competition the United States.
from domestic streaming services, they have come Streaming services have elevated lower-budget
to dominate through a willingness to use their deep productions and glossy high-dollar films to the
pockets to finance local content. same platform.
“The local content ecosystem is important,” said “Cultural products are extreme examples of
Couto. “As the big internet giants (Netflix and products where it’s very hard to predict what will
Amazon) and Disney grow within these big local be good, meaning appealing to consumers at the
geographies, their commitment to invest locally time the investment decision gets made,” said
and grow the creative economy is critical because Waldfogel. “There’s an expression in Hollywood,
otherwise there will be a greater degree of hostility ‘nobody knows anything.’”
against them.” However, the rise of streaming services has taken
some of the guesswork out of film production. In
A two-way street economic terms, the internet has created economies
Trade in cultural goods such as movies and music of scale and scope, meaning there is more supply
has always been fraught with cultural and political and demand for greater quantity and variety of
sensitivities. It still is. creative content. By matching viewers more easily
European countries have long mandated that with what they want to see, it has created a more
a certain portion of content broadcast, and efficient business model that can be adapted almost
now streamed, be locally produced. China has anywhere in the world.
fashioned a landscape where foreign content is That’s been good news for emerging markets with
carefully monitored, giving rise to robust stream- large captive audiences and the capacity to produce
ing dominated by Chinese players Tencent and content. Streaming services from Netflix and Amazon
iQiyi. Cultural sensitivities in India have forced have played a key role in providing another avenue
large US companies to make course corrections for TV and film industries in these markets and
to keep business growing. increasing competition with domestic broadcasters.
But in markets where US-based giants like “For a producer, there’s nothing more than to be
Netflix and Amazon operate, they’ve acted more seen beyond your natural geographic reach,” said
as facilitators of free trade than cultural hegemons, Couto, of Media Partners Asia. “For the cultural
said Joel Waldfogel, a professor of economics at entities of a country, whether they are governments
the University of Minnesota. or institutions, to have a story that showcases your
“The happy surprise here is that this trade is a country, that has those values and gives a global
two-way street. So now it’s a horse race,” said name to your content—that’s huge as well, because
Waldfogel, who studies how digitization of content it all comes back in economic contribution.”
has affected creative economies. “What we’ve seen in For Ahuja, the creator of Namaste Wahala, the
even the slightly longer run is the costs of producing opportunity came with an invite to a launch event
things have fallen so much that there has been an with Netflix executives in Lagos in February 2020.
explosion in creation in music and movies.” Pre-release promotion of her movie had garnered
Waldfogel argues in his 2018 book Digital attention. The movie was set to release in Nigerian
Renaissance that digitization of content is ushering cinemas in April 2020, but then the pandemic
in a golden age of popular culture. hit. The streaming giant provided an opportunity.
New technologies have put filmmaking capa- “I feel like this is a content market right now,”
bilities into more hands. The internet, meanwhile, she says. “I don’t think there’s a limit on how much
has expanded distribution channels. For movies content can be put out there.”
that means bypassing traditional theaters and
box office releases. Amid the pandemic, this ADAM BEHSUDI is on the staff of Finance & Development.

PEOPLE
PEOPLE IN
IN ECONOMICS
ECONOMICS
INCLUSIVE
INNOVATORPeter J. Walker profiles Yale’s Rohini Pande,
whose work focuses on how better
institutions can make life fairer
PHOTO: PORTER GIFFORD

PEOPLE IN ECONOMICS
I
n 1990 the Indian government said it would Political economy
set aside some government jobs for lower-caste “I have learned a lot from Rohini over the years,”
citizens, leading to widespread student protests says former colleague and Harvard professor Dani
and violence, including self-immolations. In the Rodrik. “Her approach to development has always
relative peace of the classroom, Rohini Pande, a been infused with the sense that underdevelopment
second-year undergraduate economics student at and disadvantage are rooted as much in politics as
Delhi University, argued that people should get they are in economics.”
jobs based on merit, not through special treatment. For her doctoral thesis at the London School of
A new experience two years later transformed Economics after Oxford, Pande focused on India’s
her position. After coming of age as a member of efforts to increase minority representation in politics
India’s privileged elite, she found herself an outsider by allowing only disadvantaged castes to contest
at the University of Oxford, though she was there elections in specified jurisdictions, a policy known
as a prestigious Rhodes scholar. as “political reservation.” She found that at the state
“There was a distinct hierarchy between those from level the practice increased redistribution in favor
the United States and those from Asia and Africa,” of disadvantaged groups, indicating a direct link
Pande says in a video interview. “Scholars from between political representation and policy influence.
poorer countries came to Oxford for a high-quality Pande continued to explore this association by
education not available in their home country, while focusing on the importance of sound political
for many American scholars it was just a two-year institutions for development and for alleviating
break before they returned to elite US universities.” poverty. She recently made the case that success-
This imbalance compelled Pande to think more fully tackling poverty depends less on direct aid and
deeply about fairness, and she now saw the plight more on creating effective democratic institutions
of India’s lower castes from the perspective of so that vulnerable populations can push their rep-
disadvantage, she says. resentatives to implement redistributive policies.
“Like many born into privilege, it took me a “Functional democracy requires far more than
long time to recognize what privilege meant,” she just an institution that allows everyone to vote
says. This experience has reverberated through her every few years,” she says. “Critically, it requires
career as she has sought to understand the role of citizens to be well-informed, and we need to protect
institutions in people’s lives. democratic institutions from corruption.”
Pande, 49 years old, is “one of the most influ- Politics is also personal for Pande. Her mother
ential development economists of her generation,” is Mrinal Pande, one of India’s leading journalists,
according to the American Economic Association, who was recently accused of sedition for reporting
and has made groundbreaking contributions to on a major farmers’ protest.
political economy, international development, “A vigorous free press is necessary for an effec-
gender economics, anti-corruption, and efforts to tive democracy,” Rohini says. “Politicians can see
combat climate change. it as an unwelcome distraction—but without it,
“Running through her work is an insistence not they’re flying blind, and the country will end up
simply to ask what will work to improve the lives of paying the price.”
the poor, but why it works, and what this teaches us
about how institutions should be structured and how Challenging thinking
we should view the world,” says Charity Troyer Moore, Effective financial institutions are also essential
Yale’s director for South Asia economics research. for development, and Pande’s work has repeatedly
In 2019, Pande was named the Henry J. Heinz II tested conventional wisdom.
Professor of Economics at Yale University and direc- Her 2005 paper on rural banks with the London
tor of the Economic Growth Center. She spent the School of Economics’ Robin Burgess challenged
previous 13 years as a senior professor at the Harvard the prevalent view at the time that because rural
Kennedy School. There she co-founded Evidence banks backed by public funds were unprofitable,
for Policy Design, which works with developing they were not a good way of supporting develop-
economy governments to address policy problems. ment. However, the researchers showed that rural
Pande won the 2018 Carolyn Shaw Bell Award for banks were designed not necessarily to be profitable
furthering the status of women in economics. but to reach poor households and reduce poverty.

PEOPLE IN ECONOMICS
Based on that metric, specifically in India, rural The authors surveyed 7,000 households in 495
banks achieved their primary goals. randomly selected villages in the largely rural and
“The paper made an extraordinarily import- poor district of Birbhum in West Bengal. In each
ant contribution to development economics by household, they interviewed one male adult, one
establishing a causal relationship between credit female adult, and all 11- to 15-year-olds.
and poverty reduction,” IMF mission chief Petia They found that the more people experienced
Topalova tells F&D. Topalova was a visiting scholar female leadership, the more they perceived the lead-
at Harvard while Pande was there and collaborated ers as acting effectively. They also discovered that
with her on research. having female leaders raised parents’ aspirations for
In the related area of microfinance, Pande has their daughters as well as the girls’ ambitions. “The
challenged the view that repayments must be frequent long-lasting effect of our work was that people’s
to prevent defaults. Focusing on the primary purpose beliefs may actually be changed by seeing women
of these initiatives, over several years she identified in leadership positions,” Pande says.
the benefits of more flexible repayment periods. While the role model effect was clear, the study
These include lower transaction costs, less financial did not find evidence of changes in young women’s
stress for recipients, and greater business investment. labor market opportunities. Because “close to 100
Together with Nobel laureate and frequent million Indian women say that they would accept
collaborator Esther Duflo, of the Massachusetts a job if it was offered to them,” Pande says there’s
Institute of Technology (MIT), Pande took on evidence that they would rather be employed than
firmly entrenched thinking about the role of dams do housework.
in development. The researchers showed that dams As a result, Pande is focusing on social norms
actually increase poverty in the areas where they that discourage women from employment. One
are built by causing disruption and displacement way to circumvent such notions is to let women
for which poorer people are not adequately com- manage the money they earn, she says.
pensated. Although poverty falls in areas down- But more than just having a bank account,
stream, such gains do not make up for worsening women also need financial education, according
the situation in a dam’s vicinity. to Pande’s recent study with Simone Schaner, of
These findings ruffled some feathers. A senior the University of Southern California.
World Bank official complained to senior develop- “Giving women basic bank skills training and sign-
ment faculty at Yale and MIT, much to the faculties’ ing them up for direct deposit, relative to just having
amusement. The protest “came from the strong belief their own account or no account at all, increases
at the time—around 2005—that big infrastructure their participation in both the government work-
projects were good for growth and that distribution fare program and the private sector labor market,”
was of lesser importance,” Pande says. Schaner says.
“Rohini has an unparalleled sense of empathy,” Pande emphasizes that peer networks “can create
Duflo says. “This leads her to understand things a recognition that a woman has someone else to
about the lives of people that had not even crossed my learn from, to depend on—and to gauge that beliefs
mind. Traveling with her the long journey from that about women working might not be as negative
initial intuition to a publishable piece of research has in a community as an individual may think,” she
been one of the great rewards of our collaboration.” wrote for India’s ET Evoke, a publication of India’s
Economic Times newspaper.
Gender politics
Together with Duflo and Topalova, Pande has Corruption to climate
explored questions around political representation Changing attitudes is also an important part of
and gender. Pande’s work on corruption. Her widely cited
A decade ago they studied how quotas for female review and analysis of corruption research with
local leaders affect people’s perceptions of their effec- Benjamin Olken of MIT contested the view that
tiveness. India amended its constitution in 1993 to poorer countries are more susceptible to corruption
reserve a third of local government seats for women. because they are willing to put up with it. Instead,
Between 1992 and 2005, the proportion of female they showed that “people are potentially as cor-
local leaders rose from 5 to 40 percent. rupt in rich and poor countries, but what varies

PEOPLE IN ECONOMICS
is institutions,” suggesting the need to improve of her mentees, tells F&D. Pande treats others
transparency and strengthen control mechanisms. with a generosity “otherwise unheard of in this
Through her interest in corruption Pande became profession,” Rigol says. She points out that Pande
involved in climate issues, though somewhat by insists on listing as authors every person involved
chance. Just over a decade ago she met a woman in academic papers—no matter how junior.
attending an executive education course at Harvard, In her efforts to ensure that women are involved,
Amee Yajnik, a lawyer from the Gujarat Pollution and comfortable, in the study of economics, Pande
Control Board who is now a member of Parliament brings her expertise on institutions to bear. Her
for Gujarat. They had a conversation about the recommendations include tackling stereotypes,
difficulty of obtaining reliable emissions data. acknowledging diverse perspectives and views,
This interested Pande, who investigated how to standardizing how job candidates are assessed, and
improve the quality of information by addressing giving greater visibility to female role models. She
conflicts of interest between emitters and regula- stresses the importance of ensuring that there is at
tors. “My interest in climate issues came very much least one female speaker in each seminar series and
from thinking about issues of corruption,” she has threatened to boycott conferences that lack
says. She worked with Duflo and the University of sufficient gender balance. Economics students cited
Chicago’s Michael Greenstone on aligning incen- Pande as their inspiration when they successfully
tives to obtain reliable information on pollution. petitioned to remove a set of paintings of white male
One piece of advice was to move away from professors from the department’s main entrance. In
allowing emitters to choose their own auditors, her own case, Pande identifies Harvard’s Claudia
which created conflicts of interest, and instead to Goldin and Yale’s Penny Goldberg as inspirations.
assign auditors randomly and have them be paid a
fixed rate. While this policy reduced corruption,
their other work suggests that a potential cost is an In her efforts to ensure that women are involved,
inability to leverage the fact that some monitors
may have valuable soft information—suggesting
and comfortable, in the study of economics, Pande
a delicate balancing act. Better information, how- brings her expertise on institutions to bear.
ever achieved, can be invaluable for regulating
carbon emissions and tackling climate change. The respect is mutual. Goldin says she has “always
Pande and her colleagues are now examining the been impressed by Rohini’s generosity as a teacher,
feasibility of reducing emissions via emissions her dedication as a mentor, and her unstinting efforts
trading schemes enabled by innovations in con- at providing public goods of all kinds (including
tinuous monitoring. delicious food).” For her part, Goldberg cites
Institutional changes like these could deliver a Pande’s “cutting-edge research, her editorial com-
real blow to climate change. Pande and her col- mitments, and her leadership of Yale’s Economic
leagues estimated that perfect information on Growth Center.”
factory emissions, which could become possible A new initiative called Inclusion Economics
through innovations in continuous monitoring, provides a focal point for Pande’s work on poverty.
would increase total abatement by 30 percent. Led by Pande and Charity Troyer Moore and head-
Pande has engaged with policymakers on climate quartered at Yale, it uses data-driven approaches
change and in 2019, through Harvard’s Evidence to work out ways for the poor to increase their
for Policy Design, helped to launch the world’s first influence and claim their fair share of growth.
particulate emissions trading system in Gujarat. “There’s a vicious circle of rising inequality and
weakening institutions—particularly democratic
Mentoring others institutions—which is going to be exacerbated by
Pande is a committed mentor. The letter in support planetary limits on growth,” Pande says. “What
of her Carolyn Shaw Bell Award and comments kind of institutional reforms might help us reverse
during the award ceremony were packed with appre- this vicious circle and create instead a virtuous circle
ciation and praise from students past and present. of better institutions and lower inequality?”
“Everything about Rohini is unusual,” Natalia
Rigol, a Harvard professor who used to be one PETER J. WALKER is on the staff of Finance and Development.

IN THE TRENCHES
pace in more than two decades, and the budget

deficit was close to zero—outcomes few thought
possible. “Part of leadership,” Manuel said, “is that
you must not be afraid to take a stand on some
issues if you are on solid ground.” It’s a position
that has guided him throughout his career. Blunt
in his criticism of the “old order,” he put voice and
representation of emerging market and developing
economies squarely on the international agenda,
both as chair of the World Bank’s Development
Committee and as head of the Committee on IMF
Governance Reform.
His advocacy for a level playing field contin-
ues, as special envoy of the African Union for
Africa’s COVID-19 response, following 20 years as
a Cabinet minister under the first four presidents
of democratic South Africa. In an interview with
F&D’s Analisa Bala, Manuel talks about South
Africa’s struggles and the resources needed to get
ahead of the pandemic in Africa.
F&D: As finance minister you introduced difficult

budgetary reforms and ultimately oversaw the
longest phase of economic growth in South
PHOTO: COURTESY OF TREVOR MANUEL
Africa. What advice do you have for countries

facing hard choices?
TM: In the Constitution, members of the Cabinet
are accountable collectively and individually to
Parliament. The budget represents that collective
responsibility, so it was my job as finance minister
to persuade the Cabinet that we needed to reduce
the debt-to-GDP ratio. We set up technical com-
Putting People First mittees in the Treasury inviting other departments
to explain their spending needs and introduced a
medium-term expenditure framework to improve
South Africa’s longest-serving finance planning. Months in advance of budget day, we’d
minister, Trevor Manuel, reflects on the table a budget policy statement in Parliament to
set the size of the spending envelope, in line with
country’s lost decade and financing Africa’s government priorities. In a way, the system was
COVID-19 response designed to compel us to live within our means—
that was our strength. We could agree on how to
run things because people wanted to be part of
WHEN THE APARTHEID regime ceded power following delivering democracy.
South Africa’s first democratic elections in 1994, That attitude doesn’t exist anymore. The decade
the economy was in shambles and deeply unequal. under Jacob Zuma wasn’t just “lost” as though
Debt service costs as a share of GDP were crippling. everything was static. We regressed. The Treasury
Trevor Manuel—a veteran of the anti-apartheid was considered too powerful, so the president tried
struggle who was appointed minister of finance— to take it apart. That weakening has produced
made a tough call. He revamped the budgeting the outcomes we now have. The ability to collect
process and set a stringent deficit reduction target. taxes has been weakened and our overall allocative
By 2006, the economy was growing at its fastest efficiency destroyed by the extent of corruption.

IN THE TRENCHES
It may be the same party in power, but it’s a very TM: As envoys we were tasked with finding a solu-
different country. tion for what still is a major risk—rising debt ser-
vice costs. The obvious place to start was with the
F&D: South Africa emerged from international IMF and the G20. That is how the Debt Service
isolation to become one of the world’s most Suspension Initiative was born. Of the more than
promising emerging markets, but in recent $12 billion that was to be deferred, only about $5
years it has underperformed relative to its peers. billion has been released. It’s a drop in the ocean.
What’s holding it back? When Lehman Brothers collapsed, the G20
TM: Probably 60 percent of members of the trade convened for the first time ever at the heads-of-state
union federation, COSATU, are public servants. level in October 2008. By April 2009, a proposal
If you compare the pay scales for public servants in for an SDR [special drawing right] allocation was
South Africa with their emerging market peers at PPP agreed. The world today needs the same quality
[purchasing power parity] averages, they do relatively of leadership. We need a new SDR allocation and
well. But that takes state resources off the table. a discussion on ways to deploy unused SDRs to
Many people who worked at the Treasury when boost liquidity for low-income as well as struggling
I was minister weren’t there because they were middle-income countries.
paid extraordinarily well. There was an esprit de
corps that compelled them to deliver—that is F&D: Reflecting on past debt relief efforts, what
how you drive change. When together you take should we bear in mind today?
responsibility and can agree on an agenda that is TM: At some point there will need to be discus-
not ideologically driven, you’ve got institutions sions on debt reduction, not unlike the joint
that can outlive ministers. Ideological purity is the IMF–World Bank debt relief initiative launched
biggest retardant to transformation in South Africa. in 1996. Leaving aside the debate on whether the
conditions set were viable or not, a number of
F&D: The country has long struggled with countries benefited. The difference between then
inequality. What can be done differently? and now is that many more developing countries
TM: Providing a social safety net is of paramount have access to capital markets. There are countries
importance—it’s very broken in South Africa—and who desperately need debt relief but are afraid
that means constantly reexamining what consti- that once they apply, their credit rating will be
tutes a “social wage.” It’s more than just unem- downgraded—it’s a Catch-22.
ployment benefits. It’s about whether your welfare
system works for people who need it the most. It’s F&D: You grew up in a segregated city on the
about the quality of education and health care, wrong side of the tracks—a reality that would
and whether people have access to clean water, shape your career in Cape Town’s resistance
sanitation, and refuse collection. movement, eventually landing you in jail. What
A high school student who lives in an informal kept you going during the struggle, and how
settlement called Kosovo graduated last year with did you stay grounded when you transitioned
99 percent for mathematics and 100 percent for to the Cabinet?
physics. Kosovo has the highest homicide rate TM: I wouldn’t let circumstances control me. My
in the country. Bullets flew past his shack every mother was always present in my life when I was
night as he studied. You cannot deal with issues of going through anything big. I said at her funeral
equality without changing the environment these last year that whenever I presented the budget, I
students live in. Social capital is not easily defined, would always look for her in the audience. What
but you can see it in the confidence of young people mattered to me most was knowing whether she
coming out of an education system that works—it understood what I was saying. I can talk “eco-
empowers them to do all kinds of things. nomics,” but what does it matter unless people
whose lives are affected understand what it means
F&D: You estimate a funding gap of about $100 for them? That’s what’s important in life—people.
billion annually over the next three years for You can’t let them down.
Africa’s pandemic response. How do countries
cover the shortfall? This interview has been edited for length and clarity.

Monetary
Meld A currency union encompassing all
of West Africa promises benefits
but faces a multitude of obstacles
Eswar Prasad and Vera Songwe

D
uring the COVID-19 pandemic advanced these countries could make progress, and for a few
economies have tapped their central banks there is already progress to report.
for extensive liquidity support to their
economies and to stave off an even deeper Impediments to integration
global economic crisis. African countries called for The closer economies are in areas such as growth and
a $100 billion stimulus to respond to the pandemic inflation, the more appropriate a common monetary
but lacked the tools to finance such an injection of policy. In ECOWAS many differences present major
capital. Would strong regional central banks or even obstacles to uniting 15 countries under a common
a continental central bank have helped? The regional currency—differences in their levels of develop-
experience of the Economic Community of West ment, the size of their economies, population, and
African States (ECOWAS) gives a glimpse of what economic structure, among others.
is needed to accomplish monetary integration. But Six of the fifteen can be classified as middle-income
it also highlights the limits of such an approach, countries (with annual per capita income of at least
the difficulties the continent faces, and some fun- $1,000, based on market exchange rates); the others
damental issues that must be resolved to promote are low-income countries.
resilience in the region and foster alternative avenues The disparity in the size of the economies is enor-
to regional integration. mous. Nigeria, the continent’s largest economy,
The leaders of the 15 ECOWAS member coun- accounts for about 67 percent of the ECOWAS
tries aimed to achieve a monetary and currency GDP, while the five smallest members together total
union by the end of 2020 but abandoned that less than 2 percent.
timetable because the group was not ready. They Population differences are only slightly less pro-
were far from the macroeconomic convergence— nounced. Three countries—Nigeria, Ghana, and
especially similar levels of inflation and sufficiently Côte d’Ivoire—constitute about 67 percent of the
low public-debt-to-GDP ratios—necessary for 350 million people in ECOWAS, while six countries,
such a union to function well. The emergence of each with fewer than 10 million people, together
the COVID-19 pandemic, with its massive eco- represent 7 percent of the ECOWAS population.
nomic and health consequences, has pushed any Economies in the region are structured differently
proposed union to the back burner for countries too. There are oil exporters and oil importers. Many
in the 46-year-old ECOWAS. countries rely heavily on agriculture and extractive
Still, a monetary union for the region remains industries for most of their GDP and exports, while
an aspiration with myriad potential benefits. An some have a manufacturing component.
ECOWAS currency union could improve trade Because of these differences, GDP growth and
and investment flows in the region, bring added inflation do not move simultaneously across coun-
discipline to the macroeconomic and structural tries. Changes in the relative prices of exports and
policies of member countries, and enhance stability imports account for a significant share of the vari-
against external shocks. A currency union with a ation in GDP growth and inflation in ECOWAS
strong central bank could have helped the region countries, but these so-called terms-of-trade shocks
better weather the damaging economic effects of are not symmetric across the region. For example,
the COVID-19 pandemic. It could also serve as an the effect of a change in petroleum prices on oil
anchor for inflation expectations within the area exporter Nigeria is very different from the effect
and as a catalyst for beneficial labor and product on oil importers.
market reforms. In addition, a currency union can These disparities pose important technical and
exert external discipline on fiscal policies. governance challenges to a unified currency among
The desire for a monetary union also speaks to a the 15 countries. Because member countries have
ART: ISTOCK / ARTINDO; LYSENKOALEXANDER
deep-seated desire for greater economic integration different production and economic structures,
among the countries in the region and, indeed, the loss of an adjustment mechanism—that is, an
for the continent as a whole—as evidenced by the independent currency and monetary policy—puts
advent of the African Continental Free Trade Area a significant burden on tax and spending policies to
(AfCFTA). Whatever the timing, and perhaps even maintain stability. Shocks such as the COVID-19
the outcome, of the monetary union project, there pandemic that put varying stresses on economies in
are many other elements to integration on which the region point to the difficulties posed by the loss

of a key policy instrument. Nigeria, for instance, done to remove explicit and implicit barriers to
suffered far more than others from plunging oil trade within the region.
prices in the early stages of the pandemic. Such integration would benefit the region by
Moreover, eight ECOWAS countries, largely reducing impediments to cross-border flows of
francophone, are already members of a currency goods, capital, and labor and would help prepare
union—Benin, Burkina Faso, Côte d’Ivoire, the region for a possible monetary union. Of course,
Guinea-Bissau, Mali, Niger, Senegal, and Togo. freer flows have costs. They can complicate domestic
These members of the West African Economic and policymaking. Unfettered financial flows within a
Monetary Union (WAEMU) share a monetary region can contribute to boom-bust cycles in prop-
policy and a currency, the CFA franc, which is erty and other asset markets in certain countries.
linked to the euro. That currency union has worked Moreover, workers moving from one ECOWAS
well, in part because its members have a similar country to another in search of better opportunities
economic structure and, because they are all small, can cause social and political tension.
they benefit from a common central bank.
The countries in ECOWAS are more disparate, Steps to greater integration
adding a number of technical, operational, and polit- ECOWAS leaders must decide what level of eco-
ical obstacles to a well-functioning and durable mon- nomic union is necessary to promote the stability
etary union that can deliver economic benefits to the of a monetary union. There are important lessons
ECOWAS community. There have been some calls for both ECOWAS and the rest of Africa from the
for a broader, pan-African monetary union. These experiences of the euro area. Large net fiscal transfers
obstacles would be magnified in such an arrangement to economically weaker countries, particularly during
because disparities would be even greater. and after the euro area debt crisis, generated enor-
At the same time, it should be recognized that mous political and economic stress that threatened
the countries of the ECOWAS region are already to tear the monetary union apart. Because banking
integrating through flows of people, goods, and regulations differed across euro area countries, finan-
services. Another perspective on the issues discussed cial system problems in some of the countries with
earlier is that they are about ways to build on and high borrowing spreads added to system-wide stress.
intensify this integration. Full economic union is certainly not essential for
the successful operation of a monetary union. But
Tightening linkages without macroeconomic convergence and strong
The AfCFTA—formally ratified by 36 of the institutional frameworks, a partial union could
54 signatory countries as of February 2021— generate enormous stress. Differences in productiv-
substantially reduces tariff and nontariff barriers to ity growth between countries, for instance, could
the free movement of commodities, goods, and ser- require fiscal transfers that in turn generate politi-
vices across Africa. It gives Africa a common voice on cal tension if other adjustment mechanisms, such
global trade policy issues in multilateral forums. The as equilibrating flows of capital and labor, do not
AfCFTA will promote integration among ECOWAS compensate. Tension in the euro area between core
countries and strengthen their trade ties with other and stressed economies highlights this problem.
countries on the continent. There are other issues that affect both the strength
ECOWAS has also taken steps to promote trade and sustainability of growth in the ECOWAS region
integration among its members, including the and the equitability of its distribution, regard-
ECOWAS Trade Liberalization Scheme and the less of whether there is a monetary union. These
common external tariff, introduced in 2015. But include regional financial market development and
there are still some barriers—countries apply tariffs integration, especially as it relates to markets for
in an uneven manner and leave in place other government and corporate bonds and money markets.
restrictions on trade across their borders. There Making financial services available to more people
has been progress: national authorities have taken (financial inclusion) through traditional and new
measures at the country level—complemented by technologies—such as mobile banking—is also
ongoing work at the regional level—to remove important. Coordinated regulation of financial
obstacles to trade flows. But more needs to be markets—including banks and nonbank financial

institutions, which have become more closely linked The path forward
in the region—is beneficial as well. ECOWAS leaders must consider carefully the signif-
A strong institutional framework is needed at the icant costs, operational issues, and transitional risks
regional level. A key element is the uniformity of of a currency union. Member countries’ different
regulations on current account and capital account production and economic structures mean that
transactions to facilitate the freer flow of goods, ser- the loss of an independent currency and monetary
vices, and capital. A regional payment system that is policy puts a significant burden on other policies
well integrated with domestic and global payment in each country.
systems and that expedites settlement of cross-border The recent experience of the euro area suggests
transactions would facilitate commerce across the that a currency zone would be fortified by a broader
region. Harmonized banking supervision and regula- economic union—including a banking union, a
tion that takes into account both institution-specific unified financial regulatory system, and harmo-
and systemic risks are also top-priority. nized institutions that underpin the functioning
An effective regional mechanism for gathering of labor and product markets. These are long-term
macroeconomic and financial data, along with mul- considerations for ECOWAS leaders. Robust and
tilateral surveillance that cross-checks the policy
stances of ECOWAS countries, could help coun-
tries maintain good discipline even in the face of A single ECOWAS currency
domestic pressure for looser policies. A risk-pooling
mechanism among members to deal with external
would be a major and
shocks (such as commodity price shocks and even ambitious undertaking, with
unique events such as the COVID-19 pandemic)
that affect some countries more than others would many potential benefits.
be worthwhile.
sustainable growth and spreading the benefits of
Alternative approaches growth more evenly in the ECOWAS region also
Alternative approaches that generate greater call for regional financial market development
regional trade and financial integration are also and integration and increased financial inclusion
worth considering. For instance, Asian countries through traditional and new technologies.
have an extensive set of trade and financial arrange- A single ECOWAS currency would be a major
ments, but each retains monetary policy auton- and ambitious undertaking, with many potential
omy. Regional risk-sharing mechanisms such as benefits. If leaders commit to building resilient
the Chiang Mai Initiative, which includes some policy and institutional frameworks that can
pooling of foreign exchange reserves among the create positive benefit-risk trade-offs, it could
participating countries, have taken on some of the boost the economic well-being and prosperity of
proposed functions of a currency union. ECOWAS countries.
Whether such regional trade and financial agree- The COVID-19 pandemic has reignited discus-
ments would be as beneficial as a currency union sion across Africa about monetary instruments to
when it comes to trade flows and broader economic deal with the crisis and is likely to generate renewed
integration is an open question. But the experience interest in the African Monetary Fund. The lessons
of Europe—where the currency union has bene- of the ECOWAS experience will be invaluable if
fited trade and investment flows but also fostered such an agency becomes a reality.
economic and political tension among euro area
countries—cautions against moving hastily toward a ESWAR PRASAD is a professor at Cornell University and a
currency union. Moreover, in light of Asia’s approach senior fellow at the Brookings Institution. VERA SONGWE
and the progress on the AfCFTA, it is worth consid- is the United Nations under-secretary-general and execu-
ering whether a set of arrangements to promote trade tive secretary of the Economic Commission for Africa and a
and financial integration would serve as a useful— nonresident fellow of the Brookings Institution.
and perhaps even necessary—precursor to a more This article draws extensively on a forthcoming book by the authors, A Single Currency for
durable and resilient ECOWAS currency union. West Africa: A Driver of Regional Integration? Brookings Institution Press, July 2021.

INEQUALITY
INTEREST
Central banks should better
communicate monetary policy’s
distributional effects
Nina Budina, Chiara Fratto, Deniz Igan,
and Hélène Poirson

Budina, 3/31
C
entral banks across the globe are responding
to the economic effects of the COVID-19 Chart 1
pandemic through extensive monetary The young ones
easing, including interest rate cuts and asset Young people are more likely than older people to become unemployed.
purchases. Such accommodative policies have served
to limit the fallout from the pandemic. Whether, at 10
POL PRT
Volatility of youth unemployment, standard deviation
the same time, these policies exacerbate inequality, LTU
IRL
however, is up for debate. Monetary policy is seen, in 8 LVA
SVK
part, as responsible for boosting equity markets from ITA
pandemic lows, which is, in the first instance, good
2000–19, ages 15–24
HUN EST
6
news mainly for the rich. Yet monetary easing also
has the potential to reduce inequality; for instance,
because low interest rates can encourage small busi- 4 GBR
SVN
nesses to take out loans and hire workers. USA
BEL NLD DEU
So, on balance, is easy monetary policy increasing FRA
2
or reducing inequality? AUT FIN
0
Meet the Sampsons 0 2 4 6 8 10
Monetary policy discussions are often fairly abstract, Volatility of old-age unemployment, standard deviation 2000–19 (ages 55–65)
so let’s think about this on a more personal level.
What does it mean for you when your central bank Sources: Organisation for Economic Co-operation and Development; and IMF staff
calculations.
eases monetary policy? Does it help or hurt your Note: The young, who typically earn less, face a higher risk of unemployment,
finances, and how do you fare compared with others? because youth unemployment is more sensitive to economic cycles. Data labels use
At a basic level, this depends on your income, wealth, International Organization for Standardization (ISO) country codes.
savings, and debt.

To illustrate, let’s introduce the Sampsons, a hypo-
thetical family composed of Lisa, a young woman earnings gap between her and her uncle would have
in her early twenties; her parents Margarita and been even larger. Even if Lisa had found a new job,
Homero; and her uncle Arturo, an accountant in it might have been precarious—for example, with
his fifties. How does monetary easing affect them? a short-term contract and few benefits.
First consider Lisa, who relies on her income as a Now consider Arturo, who earns a wage, has
waitress to pursue a nursing degree part-time. She capital income from investments in bonds and
is currently a low-skilled worker and earns less than stocks, and owns a house. Lower interest rates would
older, higher-skilled, and more experienced workers, boost his capital income; hence Arturo would benefit
such as her uncle Arturo. Lisa is also more likely via the income composition channel, as well as
than older workers to lose her job during a recession from the higher value of his investments in bonds,
and become unemployed (see Chart 1). stocks, and real estate via the balance sheet channel.
The good news for Lisa is that monetary easing Lisa, however, would not gain directly from higher
makes recessions less harsh on unemployment. capital income nor from higher asset prices, as she
Through this labor earnings channel, monetary does not have any assets.
easing stimulates economic activity and reduces Finally, let’s examine the case of Margarita and
unemployment, disproportionately benefiting Homero, who are retired after saving all their lives
ART: THE NOUN PROJECT
younger, less experienced, and lower-paid workers, and rely on their retirement income and interest
who are often the first to lose their jobs in a reces- from bank deposits. They are net savers. Lisa is a
sion. In the absence of monetary easing, she would net borrower, with both student and car loans. With
have been more likely to lose her job, and the labor an interest rate cut, Lisa would owe the bank less

in interest payments, either because her loan rates losses on interest income from their savings could be
would be lower (if the loan is adjustable) or because offset by a higher home value—and possibly from no
she could refinance at a lower rate. But Margarita longer having to support their previously struggling
and Homero would lose out because their interest daughter if monetary actions help secure her job.
income would fall as a result of lower interest rates
(and possibly in real terms, as inflation could increase Different channels
with monetary easing). Their retirement income As illustrated by the Sampsons, the magnitude
could fall in real terms. of the distributional effects of monetary easing
All else equal, monetary easing tends to hurt depends on the relative importance of different
savers with little debt and large bank deposits channels, which may also vary based on different
while benefiting net borrowers (Auclert 2019; country characteristics.
Tzamourani 2021). In other words, it redistrib- In countries with higher levels of financial inclu-
utes from savers to borrowers: this is known as sion, for instance, poor households have easier access
the savings redistribution channel. to credit and are more likely to be able to take
out mortgages to buy houses—thereby benefiting
The winner is… from lower interest rates. In other countries, people
The net effect for Lisa, her parents, and uncle would who tend to buy homes for cash would not benefit
depend on the combined impact of monetary policy from lower rates. In countries with bank-based
action via different channels, as they would gain financial systems, people who hold their savings
through some channels but lose through others. in bank deposits and are not in debt could lose out
Lisa, for example, would benefit from monetary from monetary easing through the savings redistri-
easing, via her labor earnings and her lower debt ser- bution channel. In countries with more extensive
vicing cost, although she would not benefit directly social protection, a lower risk of unemployment
from higher asset prices. for lower-income workers as a result of monetary
Budina, 3/31 Arturo would benefit following monetary easing easing may be more muted than in countries with
from both higher labor earnings and higher capital less social protection.
income—but if he is a net saver, he would be hurt In the European Union and the United States, the
by lower interest income. Margarita and Homero’s impact of the balance sheet channel on inequality
can vary depending on the types of assets people
own. Capital income tends to matter most for the
Chart 2 wealthiest households because they hold more finan-
What you own matters cial assets. This is especially true in the United States,
People in different parts of the wealth distribution own different assets. where almost two-thirds of the assets of the wealth-
US: Composition of household assets EU: Composition of household assets iest 10 percent are in bonds (16 percent) and stocks
across the net wealth distribution across the net wealth distribution (46 percent—see Chart 2). Except for this group,
(percent of total) (percent of total)
100 100 real estate is the largest asset for most households
80 80
in both the European Union and the United States.
This means that the impact of monetary easing may
60 60
have more equitable effects via house prices than
40 40
through capital income, and people with mortgages
20 20 also benefit from lower debt payments.
0 0 Studies (pre–COVID-19) that put together
Bottom 20 Middle 70 Top 10 Bottom 20 Middle 70 Top 10
several of the above channels find mixed and often
Real estate primary Bonds Liquid assets
Real estate secondary Stocks Other economically negligible net distributional effects
overall from transitory monetary policy easing,
Sources: Household Finance and Consumption Survey (2016) for the European Union; with some variation across countries and between
Survey of Consumer Finances (2016) for the United States; and IMF staff calculations. conventional (interest rates) and unconventional
Note: The EU group comprises Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Malta, The Netherlands, (asset purchases) monetary policy. In the United
Poland, Portugal, the Slovak Republic, Slovenia, and Spain. States, for example, income inequality rises and
consumption inequality falls following monetary

easing—but the effects are small and temporary Major central banks are starting to explicitly
(Kaplan, Moll, and Violante 2018). discuss the distributional effects of their actions
(Carney 2016; Lane 2019). The Federal Reserve
The big question has also recently revised its mandate, including to
Given widening income and wealth gaps, and limited emphasize maximum employment as a broad-based,
room in the budget in many countries, should mon- inclusive goal and to strengthen the benefits of
etary policy do more to address inequality? monetary policy stimulus for the poor.
The problem is that monetary policy is a blunt
tool that is poorly suited to the challenges facing Beyond COVID-19
specific demographic or socioeconomic groups. The pandemic is having considerable distributional
Moreover, adding one more objective for central effects, and debates about inequality continue,
banks may undermine the efficacy of monetary including in the context of central banks. The relative
policy, since pursuing lower inequality might be importance of the various channels through which
at odds with the mandate to maintain price and monetary policy affects inequality may change if
output stability. Other actors, most notably the the pandemic persistently alters the distribution of
government, are better able to tackle issues related income and wealth.
to rising inequality given that these long-term trends While macroeconomic stability remains their
are driven largely by structural factors and require primary goal, central banks do have a role to
finer tools to target specific groups. play by communicating about, monitoring, and
Central banks, by remaining focused on their analyzing the distributional effects of monetary
primary function, will be free to do what they do policy. Central banks should also highlight coun-
best: take appropriate action to counter economic terfactuals—the overall increase in welfare thanks
downturns and protect jobs while maintaining price to monetary policy actions, despite possible dis-
stability. At the same time, central banks should tributional effects. Finally, central banks should
better understand and factor in differences among explain that the secular increase in inequality and
households within their existing policy frameworks, long-term decline in interest rates are driven largely
including through modeling and analysis of the by structural factors, which can be tackled only
distribution of income and wealth, which affects with other government policies.
monetary policy transmission.
At the same time, supportive fiscal policy and NINA BUDINA is a senior economist and HÉLÈNE POIRSON
structural reforms combined with monetary policy is a deputy division chief, both in the IMF’s Strategy, Policy,
easing can improve both macroeconomic and dis- and Review Department. CHIARA FRATTO is an economist in
tributional outcomes. Targeted fiscal support, along the IMF’s Western Hemisphere Department. DENIZ IGAN is a
with well-sequenced structural reforms—such as division chief in the IMF’s Research Department.
active labor market policies, including job search This article is based on a recent IMF Working Paper (“Distributional Effects of
assistance and retraining—is especially well suited Monetary Policy”) by the article authors and Valentina Bonifacio, Luis Brandao-
to addressing rising inequality and helping those Marques, Balazs Csonto, Philipp Engler, Davide Furceri, Rui Mano, Machiko Narita,
Murad Omoev, and Gurnain Pasricha.
left behind by economic transformation.
The key role for central banks in the inequality
References:
debate—including during COVID-19—is clear
communication through various outlets, including Auclert, A. 2019. “Monetary Policy and the Redistribution Channel.” American Economic
Review 109 (6): 2333–367.
speeches by central bank officials, official reports,
Carney, M. 2016. “The Spectre of Monetarism.” Roscoe Lecture, John Moores University,
and community outreach events, about the distri-
Liverpool, UK, December 5.
butional effects of monetary policy actions, both
Kaplan, G., B. Moll, and G. L. Violante. 2018. “Monetary Policy According to HANK.” American
positive and negative. They need to explain how their Economic Review 108 (3): 697–743.
actions may increase aggregate welfare by boosting
Lane, P. 2019. “Households and the Transmission of Monetary Policy.”Speech at the Central Bank
the employment prospects of the poorest and reduc- of Ireland/ECB Conference on Household Finance and Consumption, Dublin, December 16.
ing consumption inequality. Clear communication
Tzamourani, P. 2021. “The Interest Rate Exposure of Euro Area Households.” European
is essential for the preservation of public trust and Economic Review 132 (February): 103643.
the clarification of capabilities under their mandate.

BACK TO BASICS
Risk and Return: The Search for Yield

Low rates of return tempt investors to take risks, which can cause economic
and financial instability
Jay Surti
Safe assets, risky assets
The ability to take risks and the appetite for doing
so vary: households, firms, and financial institu-
tions all act differently. Yet they are influenced
by common forces. Especially important is the
Treasury bill equilibrium interest rate (the rate of
interest at which the amount of money demanded
is equal to the amount of money supplied). This
safe asset return influences the return on other
investments, including long-term government
bonds, bank deposits, and company bonds and
shares. Returns on these riskier assets tend to rise
and fall in line with the safe asset return.
The temptation to search for yield rises when the
safe asset return falls to very low levels over a long
period of time, as has been the case in Japan and sev-
eral European economies for the past two decades.
For households, this translates into a low return on
savings and slower wealth accumulation. It makes
it more difficult to fulfill life cycle ambitions such
as buying a home, saving for a secure retirement,
WHEN INTEREST RATES are high and inflation is low, or passing on wealth to children.
investing is a cinch: savers can earn easy returns Households will try to compensate by saving
by simply parking their funds in Treasury bills or more and spending less. (An important exception is
similar safe assets. But it becomes much harder Japan, where older and wealthier households, with
when interest rates are low, as they have been in less of a need to increase precautionary savings and
most advanced economies since the global financial a greater capacity to search for yield, have invested
crisis of 2008–09 and in some of them for longer in high-risk emerging market bonds and stocks.)
still. Fed up with zero or near-zero interest rates, Lower household borrowing and consumption
savers may be tempted to experiment with riskier reduce demand for goods and services sold by
assets or strategies in the hope of higher returns. firms. Corporate sales and profits slide as a result.
Economists call this the search for yield. The financial sector suffers, too. Bank lending to
Individual investors may shift money out of households declines. As interest rates fall to very
savings accounts and into stock markets. Firms low levels, the difference between banks’ lending
might seek to boost income through speculative and deposit rates is squeezed. It all combines to
investments financed by debt because borrowing drive down profits.
is cheap. Financial institutions such as banks and
insurance companies may make risky bets to main- Search-for-yield strategies
tain profits or even to survive. But riskier portfolios Firms typically attempt to compensate for the con-
increase the likelihood of loss. Higher indebtedness sumption deficit caused by higher household saving
ART: ISTOCK / RASTUDIO
means firms are in a more precarious position when by opportunistically taking advantage of low interest
confronted by adverse shocks. The result is greater rates and borrowing to finance high-risk, high-return
institutional vulnerability and increased likelihood investments. This usually happens in one of two
of economic and financial instability. ways. Firms may invest in higher-yielding financial

BACK TO BASICS
securities. Or they might expand into new sectors periods of low interest rates in the United States
or countries by creating a subsidiary company or are not limited to American banks and firms.
buying an existing one. The debt component of such Firms from other countries may also borrow in the
transactions tends to be higher, and the contribution United States to invest at a higher rate of return at
of a firm’s own retained earnings or other resources home. This carry trade is financially risky since any
is lower than would be the case if expansion were tightening of monetary policy in the United States
the natural outcome of strong economic growth (or a domestic shock) could result in a loss-inducing
and corporate profits. appreciation of the dollar. The “taper tantrum” of
Like firms, financial institutions deploy differ- 2013 was one example where large emerging market
ent search-for-yield strategies. Large banks may firms experienced carry trade losses due to dollar
expand abroad to countries where growth and appreciation. These losses were significant enough
investment returns are brighter. Mid-sized banks to materially dent firms’ market valuations. In
may expand domestically, across sectors or regions, some cases, losses increased volatility in domestic
taking business from smaller local lenders. Smaller financial markets.
banks, for their part, may merge or partner with Banks that expand abroad may face losses if they
mid-sized banks, or with each other, to fend off do not adapt to new challenges of risk management.
the competition. A bank’s head office may, for instance, find it most
Economists do not oppose risk-taking to boost effective to expand into a foreign country by dele-
returns per se: some individuals and institutions are gating operational decisions to local managers. But
better at managing risk than others, and risk-taking
does not necessarily imperil economic growth
and financial stability. However, search-for-yield Firms that use debt to fund risky
strategies can have system-wide consequences if
they are widely adopted by firms and financial acquisitions face new risk exposures that
institutions. This would concern policymakers.
are difficult to manage.
Risks to the economy
The search for yield can increase the likelihood of the bank then faces the more difficult challenge of
deeper and longer recessions. When confronted providing effective performance incentives. It may
with adverse economic shocks, firms with a lot of be tempted to make pay and promotion contingent
debt would be forced to make larger and longer on returns that are unrealistically high and so push
cuts to investment than if they were debt-free. This local managers to take too many risks.
decreases national income and economic growth. Finally, consolidation of the banking sector
Some of them would default on loans, which would through mergers of small banks or their acquisi-
pressure banks’ profits, curbing their ability to tion by larger ones can stifle competition. This may
extend credit, and so lower economic growth even increase borrowing costs especially for households
further. Some banks might not even survive. and small businesses, which would find it more
Firms that use debt to fund risky acquisitions face expensive to consume and invest—a serious setback
new risk exposures that are difficult to manage. A for inclusive growth.
firm from the United States that borrows at home to The search for yield can have benefits. When
expand abroad, or an emerging market firm borrow- risky bets pay off, they increase income from sav-
ing in the United States to expand at home, may face ings and investment when interest rates are low
significant risk from a change in the exchange rate. and it is hard to earn a return. They also spread
Since they repay loans and interest in dollars and their capital to new markets. But policymakers must be
earnings are in a foreign currency, an appreciation alert to the dangers—of speculative debt-financed
of the dollar could increase the repayment burden investment especially. Some bets will inevitably go
substantially. Firms use financial markets to hedge sour. The consequences for economic and financial
such risk but find it too expensive to do so entirely. stability can be severe when they do.
When losses do occur, they can be large.
Since the dollar is a global funding currency, JAY SURTI is a deputy division chief in the IMF’s Monetary
the search-for-yield incentives arising from long and Capital Markets Department.

Citizenship
For Sale Programs that offer passports in
return for investment carry financial
integrity risks that must be managed
Francisca Fernando, Jonathan Pampolina,
and Robin Sykes

A
s countries closed their borders to slow affecting their economic and financial stability and
the spread of COVID-19, a second worsening inequality.
passport became an ever-more- New citizenship can disguise a higher risk profile.
desirable commodity, for those who Criminals and terrorists may shop around for a
could afford it. While not a new phenomenon— country that offers a safe haven from law enforcement
several countries have adopted “golden passport” or extradition. They might hide behind alternative
programs over the years—the onset of the pan- identities to gain access to financial products or evade
demic generated renewed interest. Price tags for a sanctions and watch lists. They could use secondary
second citizenship—sometimes in only 30 days— citizenship to conceal a bank account that would
range from $100,000 to $2.5 million. Antigua otherwise require declaration under international tax
and Barbuda, Cyprus, Grenada, Jordan, Malta, St rules, or they might seek citizenship in a country that
Kitts and Nevis, and Vanuatu are among the many has not agreed to such tax information exchange.
countries that have offered such deals. The risks from these programs can spill over to
There are few figures about the trade in pass- other countries, too. Members of organized crime
ports given the overall opacity of these programs. may use their newly acquired passports to move
Nevertheless, firms that offer such services reported freely between countries and establish illegal enter-
increasing demand for second passports in the midst prises. The European Commission has launched legal
of the pandemic. Requests from high-net-worth proceedings against two member states (Cyprus and
individuals in advanced economies have skyrocketed. Malta) for offering golden passports to people with-
The demand has been further fuelled by discounts out a “genuine link” to the bloc; it says they threaten
offered by some countries. the integrity of EU citizenship as a whole, since a
A second passport has many benefits, such as the citizen of one EU member state has the right to
ability to travel freely without visas and flee political move, live, and work freely in the other 26 members.
persecution, conflict, or civil unrest. It can offer Citizenship by investment can lead to corruption
attractive tax and wealth management benefits, too. and rent-seeking. Without proper oversight, public
Usually citizens from autocratic countries, where the
rule of law is weak, are the most anxious to obtain What are golden passports?
a golden passport.
Golden passport programs allow individuals and their
But as the coronavirus threatened to overwhelm families to buy new citizenship through targeted
health services before vaccines became available, investments or contributions.
wealthy individuals from developed democracies
also looked for an escape route. For countries seeking Investments and contributions: These include direct
monetary contributions, the purchase of government debt
to rebuild pandemic-stricken economies, the sale of instruments (for example, investment in government
passports can seem an easy way to secure revenue stocks, bonds, securities), investment in specific sectors (for
and investment. In the past, such arrangements have example, real estate, construction), and the establishment
generated large inflows, which can have a significant of businesses. Qualifying amounts typically range from
economic and fiscal impact—consider, for example, $100,000 to $2.5 million (excluding fees) and have
revenue generated by such programs in the Caribbean various financing terms (for example, up-front payments,
(see IMF Working Paper No. 20/8). Some countries installments, bank loans).
have used these programs to replenish their coffers Administration: Typically, a government agency oversees
after natural disasters (for example, a decline in tax the program, and may rely on third parties to market the
revenue after Hurricane Maria hit Dominica was program, facilitate application submissions, and carry out
partly offset by golden passport revenue). due diligence. Some programs have statutory quotas that
Ultimately the bestowal of citizenship is a gov- limit the number of applications.
ernment’s sovereign decision. However, the risks of Application process: The application process usually
selling citizenship can be high. Abuses are widely requires some background checks (for example, criminal
documented, including enabling corruption, money background checks, vetting by third parties), though
laundering, tax evasion, and other crimes. If the requirements differ. Processing applications can take from
risks are not properly managed, countries that offer 30 days to more than a year—many offer fast-track options
these programs can suffer reputational damage, in exchange for higher contribution amounts.

Countries that offer these programs can suffer
reputational damage, with impacts on their
economic and financial stability.
officials may accept bribes or pocket the fees. Programs and politically exposed persons. Agents who
linked to specific sectors can cause overdependence handle applications must exercise appropriate
that leads to economic imbalances. Some countries, for due diligence regarding their clients, establish the
example, offer citizenship to investors who purchase legitimacy of their sources of wealth and income,
an expensive property. Foreign money can drive up and report suspicious activity. Applicants should
local property prices and give rise to real estate bubbles. not be admitted without thorough vetting. All
In reaction to countries that sell passports with- sectors and agents involved should be supervised
out proper vetting, other governments may respond for compliance with anti-money-laundering and
with countermeasures such as enhanced checking counter-terrorism-financing requirements.
of regular passport holders from these countries. In • Authorities should consider enhanced measures for
some cases, countries could be labeled as high risk. transparency and oversight. One way to do this
The Organisation for Economic Co-operation and is to publish the names of successful applicants.
Development, for instance, publishes a list of high-risk This can in turn be useful for banks and other
programs it suspects allow people to hide their taxable businesses when they need to conduct due dili-
assets abroad. Foreign banks can react to these negative gence on their clients and for authorities carrying
risk perceptions, putting pressure on correspondent out investigations. Another way is to ensure that
banking relationships. This can have far-reaching the passport and other citizenship documents
implications for financial stability. issued indicate that these are golden passports.
Authorities should also consider periodic public
Evaluating programs audits to ensure that the proceeds of the program
The IMF is working with members on policy advice are used for their intended purposes.
to highlight the risks of these arrangements, with • Countries could consider a regional approach to level
an eye to properly balancing risks and benefits and the playing field. A coordinated approach among
avoiding a long-term negative economic impact. countries with golden passport programs can
For example, the IMF has advised members on the help discourage criminals from shopping around
financial integrity risks of such current and past for citizenship and prevent a race to the bottom.
programs in Article IV consultations for Comoros, Effective arrangements for information sharing,
Cyprus, Dominica, Grenada, Malta, St. Kitts and standardizing best practices, and enhancing the
Nevis, and St. Lucia. More broadly, transparency of the processes for granting (and
• Countries should clearly understand the risks. Before revoking) citizenship can strengthen safeguard
launching or continuing with citizenship-by- mechanisms. Pooling of resources can reduce costs
investment programs, authorities should carefully and establish consistent regional due diligence,
assess the costs and benefits, including their own monitoring, and enforcement practices.
capacity to manage the financial integrity risks.
Are the application, monitoring, and revocation Golden passports grant all the privileges of a coun-
procedures robust? How effective are the supporting try’s citizenship. Ultimately, the decision to grant
mutual legal assistance, tax information exchange, citizenship is up to each country. Yet citizenship and
and anti-money-laundering and counter-terrorism- its attendant benefits should be zealously safeguarded,
financing frameworks? Such risk assessments should given the financial and reputational risks when such a
be ongoing to respond to changes in the environment. precious commodity is bestowed unwisely. Countries
• Authorities should ensure that there is robust vet- should take the time to consider whether the costs
ting of applicants. Government agencies or third of giving noncitizens a second passport really do out-
parties responsible for processing golden passport weigh the benefits. In some cases, they may not.
applications should carry out rigorous back-
ground checks on an ongoing basis, including FRANCISCA FERNANDO and JONATHAN PAMPOLINA are
by checking with the home authorities of appli- counsels and ROBIN SYKES is a senior counsel in the IMF’s
cants and consulting databases of sanctioned Legal Department.

POINT OF VIEW
What We Owe Each Other

We need a new social contract fit for the 21st century
Minouche Shafik
intergenerational tensions over climate change.

Discontent is widespread. Four out of five people
in China, Europe, India, and the United States
feel that the system isn’t working for them, and in
most advanced economies parents fear that their
children will be worse off than they are (Edelman
2019). The pandemic served as a great revealer as it
hit the most vulnerable—the old, the sick, women,
and those in precarious jobs—the hardest and
exacerbated existing inequalities.
Most of this disaffection stems from the failure
of existing social contracts to deliver on people’s
PHOTO: COURTESY OF THE LONDON SCHOOL OF ECONOMICS
expectations for both security and opportunity. Old

arrangements have been broken by varied forces,
including those whose overall impact on society
has been positive. These include technological
change, which is revolutionizing work, and the
entrance of increasingly educated women into the
labor market, which interferes with their ability to
care for the young and the old for free. Looking
ahead, population aging means that we will need
to find new ways to support the elderly, and climate
EVERYONE PARTICIPATES in the social contract every change compels us to work even harder to make
day, and we rarely stop to think about it. Yet social the world environmentally sustainable.
contracts shape every aspect of our lives, including The good news, however, is that a new social
how we raise our children and engage in education, contract is possible that can satisfy people’s need for
what we expect from our employers, and how security and opportunity while also addressing the
we experience sickness and old age. All of these challenges that affect society as a whole. This new
activities require us to cooperate with others for social contract depends on three pillars: security,
mutual benefit, and the terms of that cooperation shared risk, and opportunity. What would this
define the social contract in our society and the mean in practice?
shape of our lives.
Laws and norms underpin these daily interac- Security
tions. In some societies, the social contract relies Labor markets have become more flexible, and
more on families and communities for mutual informal working is now a common feature of
support; in others, the market and the state play a life in both developing and advanced economies.
greater role. But in all societies, people are expected Increasingly, we are on our own in society: workers
to contribute to the common good when they are shoulder the risk when it comes to their income,
adults in exchange for being looked after when they how many hours they work, and how they cope if
are young, old, or unable to care for themselves. they are ill or unemployed. The balance has tilted
My interest in social contracts grew out of a too far in the direction of flexibility for employers
desire to understand the underlying causes of the at the expense of security for workers.
recent anger manifested in polarized politics, cul- Every society can put a floor on income below
ture wars, conflicts over inequality and race, and which no one can fall. This can be achieved through

POINT OF VIEW
Harnessing everyone’s talents is not just an issue of fairness; it is

also good for the economy.
cash transfer programs in developing economies example, it takes on average about two generations
or tax credits for low-wage workers in advanced for a person to rise from lower to middle income; in
economies. At the very least, societies should ensure the United Kingdom and the United States it takes
access to a basic health care package and a min- five; and in countries such as Brazil, Colombia, and
imum state pension to prevent destitution in old South Africa it takes more than nine generations.
age. Sick leave, unemployment insurance, and In most countries, the architecture of opportunity
access to reskilling should be provided regardless tends to hold back women, minorities, and children
of the type of employment contract. In developing born to families, or in places, that are poor.
economies, this means bringing more workers into Yet harnessing everyone’s talents is not just an
the formal sector; in advanced economies it means issue of fairness; it is also good for the economy.
mandating that employers pay benefits to flexible For instance, better use of all the talent in society
workers. The bottom line is that everyone must explains between 20 and 40 percent of the produc-
have a minimum level of security for a decent life. tivity gains in the US economy between 1960 and
2010 (Hsieh and others 2019). Instead of drawing
Shared risk on a limited talent pool of mainly white men,
Too many risks in our society are borne by individ- changes in laws and norms meant that employ-
uals when they would be more efficiently managed ers were able to choose from a broader pool of
by others or collectively. Employer flexibility when it skills and match people with jobs that suited them
comes to being able to hire and fire workers depend- best. Similarly, if today’s “lost Einsteins”—women,
ing on market conditions is feasible if workers are minorities, and people with low incomes—could
guaranteed unemployment insurance and retraining innovate to the same degree as white men from
until they find a new job. The risks from economic high-income families, the rate of breakthroughs
shocks should be shared by employers and society could quadruple (Bell and others 2017).
as a whole and not placed solely on individuals. How can we harness all that talent? Start early:
A similar rebalancing of risks needs to occur the first 1,000 days of life are the most import-
around childcare, health, and old age. It is not clear ant for brain development. Intervening during
why, for example, the costs of parental leave are this period is the most efficient way to equalize
usually borne by employers when funding it through opportunities and provide the foundational skills
general taxation would create a more level playing for future learning.
field for men and women in the labor market and Extra nutrition for preschoolers and help with
be less of a burden for firms, especially smaller ones. parenting skills also make for better educational
Similarly, many health risks are more efficiently outcomes and higher incomes later in life. For
managed by pooling them across a large population instance, in Jamaica, young children visited just
while strongly motivating individuals to manage once a week by a community health worker earned
risks through diet and exercise. Linking pension 42 percent more 20 years later than children who
ages to life expectancy would make sure that indi- did not get such support (Gertler and others 2014).
viduals save enough for their retirement. Financial All young people should be entitled to education
security in old age can be funded through general and training and a lifetime endowment to pay for
taxation rather than linking it to employment as additional skill development over what will be
is usually the case—but automatic enrollment in much longer careers. Hundreds of studies of adult
pension plans and insurance for old-age care would learning demonstrate how strong links to employ-
give people more security at the end of their lives. ers, early intervention, and sustained funding can
keep people in work and contributing to society.
Opportunity While most countries have equalized educational
Too often, talent is wasted because people aren’t opportunities for girls and boys, women are still
given opportunities to advance. In Denmark, for disadvantaged in the workplace because they do

POINT OF VIEW
about two hours a day more unpaid household work minimum incomes, education, and health care. It
than men. More generous parental leave, public also means better rules around global taxation so
funding to support families, and a fairer division that companies pay taxes where economic activity
of labor at home would make better use of female takes place for the benefit of the people where those
talent and allow more people to contribute to the companies operate. Such an international system
common good. would shore up the global economy with a social
contract that is both efficient and fair and therefore
Is it affordable? more likely to garner public support.
A new social contract is not about higher taxes,
more redistribution, and a bigger welfare state. It MINOUCHE SHAFIK is the director of the London School of
is about fundamentally reordering and equalizing Economics and Political Science. This article is based on her
how opportunity and security are distributed across recent book, What We Owe Each Other: A New Social Contract.
society. This would increase productivity and more
efficiently share risks around childcare, health, References:
work, and old age that cause so much anxiety. We Bell, Alex, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen. 2017.
should tax the things we want less of, like carbon “Who Becomes an Inventor in America? The Importance of Exposure to Innovation.” CEP
and smoking, and subsidize things we want more Discussion Paper 1519, Centre for Economic Performance, London School of Economics.
of, like education and a greener economy. Giving Edelman Trust Barometer: Global Report. 2019. New York: Edelman.
everyone the opportunity to use their talent and Gertler, Paul, James Heckman, Rodrigo Pinto, Arianna Zanolini, Christel Vermeersch,
contribute reduces the need for redistribution later. Susan Walker, Susan M. Chang, and Sally Grantham-McGregor. 2014. “Labor Market
Returns to an Early Childhood Stimulation Intervention in Jamaica.” Science 344 (6187):
An international system that enables such a
998–1001.
transformation is essential. This means ensuring
Hsieh, Chang-Tai, Erik Hurst, Charles I. Jones, and Peter J. Klenow. 2019. “The Allocation
that international financial institutions have the of Talent and U.S. Economic Growth.” Econometrica 87 (5): 1439–74.
resources to help societies invest in and support
.
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I N T E R N A T I O N A L M O N E T A R Y F U N D

PICTURE THIS
JOBS DILEMMA Creating sufficient employment in emerging market economies will require a big
boost to economic growth
LAST YEAR, COVID-19 prompted an unprecedented number of jobs in the past. We use these relation-
economic collapse in emerging market economies, ships and population projections through 2035 to
although a recovery soon followed. While growth calculate how much countries must grow in the
will remain bumpy until vaccination rollouts are future to create enough jobs for people entering
well underway, the focus will soon shift back to the labor market, while keeping stable the ratio
medium-term growth in emerging markets. of employment to the working-age population
Prior to the pandemic, emerging market growth (the proportion of the working-age population
was on a secular decline—that is, it was deteriorat- that is employed).
ing over time irrespective of temporary economic We find that creating jobs will still be chal-
bright or dark spots. Secular stagnation, as it is lenging, even though working-age populations
known, is associated with many problems, includ- will grow more slowly. The high growth needed
ing unemployment. Keeping people at work, or to create jobs is close to recent outcomes in
helping them get jobs, is tough when growth only a few countries, including India. In other
slows down. countries, such as Brazil and South Africa, how-
As our recent note from the Institute of ever, unemployment will increase unless growth
International Finance shows, the uncomfortable picks up.
truth is that creating sufficient jobs in emerging
markets will require higher growth rates than SERGI LANAU is deputy chief economist of the Institute of
PT, 4/23
PT, 4/23
those of the past decade. We calculate how much International Finance. This feature is based on “Can EMs Create
emerging markets had to grow to create a certain Enough Jobs?” published in Economic Views, January 2021.
Lost decade
Chart 1 Chart 2
Dwindling growth Stagnant economies
Economic growth in emerging markets has slowed markedly since the global Secular stagnation in economic growth makes creating jobs a challenge.
financial crisis, especially relative to advanced economies.
(average annual real GDP growth, percent)
Russia
8 China
Advanced economies Brazil
Emerging markets Argentina
6 South Africa
Chile
Colombia
4 Turkey
Malaysia Slower economic
Mexico growth
2 Indonesia Greater economic
India growth
Poland
0 Hungary
1994–98 1999–2003 2004–08 2009–13 2014–19 Philippines
–6 –5 –4
–4 –3
–3 –2 –1 0 1 2
Sources: Haver Analytics; and Institute of International Finance.
Gap between economic growth before and after the global financial crisis, percent

PICTURE THIS
PT, 4/23 PT, 5/11
Growth for jobs

Chart 3 Chart 4
Slowing population growth Significant action needed
Creating enough jobs will remain challenging even as the working-age population History suggests that emerging markets need to grow significantly to create
grows more slowly. enough jobs.
Hungary China
Poland Chile
Russia 2000–20 Argentina
China Russia
Chile 2021–35 UN projection
Brazil
Brazil Mexico
Argentina Colombia
Colombia South Africa
Turkey Slower growth Hungary
Indonesia Poland
Mexico Turkey
India Indonesia
South Africa Malaysia
Malaysia Philippines
Philippines India
–2 –1 0 1 2 3 4 –3 –2 –1 0 1 2 3 4 5 6 7
Working-age population growth, percent Economic growth rate required in 2022–35 to maintain
unchanged employment rate, percent
Sources: Haver Analytics; and Institute of International Finance. Sources: Haver Analytics; and Institute of International Finance.
PT, 4/12
Next steps
Chart 5
Growth turnaround
Many emerging markets did not grow enough
in the past decade to keep people employed.
South Africa
Brazil
Argentina
Colombia
Turkey
ART: ISTOCK / AELITTA; ROBUART; AJWAD CREATIVE
Malaysia Not growing

Russia enough to
India create jobs
Indonesia
Hungary
Poland
Mexico
Philippines
Chile
China
–2 –1 0 1 2 3 4 5 6 7 8
Gap between recent economic growth (2015–19 average) and economic growth
required to maintain unchanged employment rate, percent

MILITARY
SPENDING
in the Post-Pandemic Era
Countries’ efforts to secure a more peaceful world could have a positive economic effect
Benedict Clements, Sanjeev Gupta, and Saida Khamidova
G
overnments across the world adopted Military spending absorbed on average about 6½
stimulus packages in 2020 to address percent of government budgets across the world
the COVID-19 pandemic, with those in in 2019, according to data from the Stockholm
advanced economies outstripping those International Peace Research Institute, the most
in the rest of the world. The resulting high budget comprehensive and comparable source of data on
deficits must be brought in line with available military spending. Since the end of the Cold War
resources as pre-pandemic growth resumes. In in 1990, defense outlays have declined both as a
doing so, governments will need to reassess their share of government spending and of the econo-
overall tax and spending policies. A key question my’s total output (GDP). This has made room for
is how major government spending categories will other forms of public spending, such as on educa-
likely evolve over the next several years and where tion, health, and infrastructure. But will military
additional spending needs will rise or ease. spending remain at historically low levels? In this

Worldwide military spending has declined by nearly half, from
3.6 percent of GDP during the Cold War period to 1.9 percent of
GDP in the years following the global financial crisis.
article, we take a closer look at military spending cannot rule out the possibility that a large number
over a long period and offer tentative implications of countries share a trend toward a similar level of
for government budgets. spending to GDP over time.
Trends in military spending Convergence in military spending

Worldwide military spending, when estimated We find that military spending in relation to GDP
on the basis of unweighted country averages, has is not converging to a common level in 138 coun-
declined by nearly half, from 3.6 percent of GDP tries in our sample, but rather taking three different
during the Cold War period (1970–90) to 1.9 paths (Clements, Gupta, and Khamidova 2021). In
percent of GDP in the years following the global the first group of 20 countries experiencing a high
financial crisis (2010–19) (Chart 1). degree of conflict, spending has actually risen to a
Several factors could explain the observed decline substantially higher level and has diverged from the
in military spending—beyond the end of the Cold global trend (Charts 3 and 4). This group accounts
War and the associated reduction in international for 5 percent of global military expenditure and
tensions. In advanced economies, one reason may includes Armenia, Azerbaijan, the Democratic
be the pressure for fiscal consolidation, which has Republic of the Congo, Oman, and Saudi Arabia.
persisted—with the average debt-to-GDP ratio The second group has the largest number
exceeding 100 percent in the period following the of countries—77, of which 30 are advanced
financial crisis. The advent of the COVID-19 pan- economies—accounting
Clements, 04/23 for more than 90 percent
demic and the accompanying support from budgets of global military spending. In this group, outlays
to combat it have raised the ratio by another 16 on average have plateaued at about 2–2½ percent
percentage points (IMF 2021). of GDP. Their average military outlays in relation
Second, since the early 2000s, developing econ-
omies have sought to allocate a larger share of their
budgets to education, health, and infrastructure Chart 1
to meet their populations’ growing needs and Steady drop
to promote growth by investing in physical and Military spending worldwide has declined by half since 1970.
human capital. (percent of GDP)
More recently, the focus has shifted to achievement
5
of the United Nations Sustainable Development
DEs AEs World
Goals, which requires a major increase in govern- 4
ment spending on the development of human capital.
Last, advanced economies are faced with rapidly 3
aging populations. In the absence of major reforms
of pension and health systems, rising age-related 2
spending will continue to exert pressure on other
public spending (Clements and others 2018). 1
Cold War Peace dividend Post 9/11 Post financial crisis
Although military spending has declined, it varies
PHOTO: ISTOCK / SHAUNL; NIRUNYA JUNTOOMMA
0
considerably across countries. Chart 2 shows which 1970 75 80 85 90 95 2000 05 10 15 19
countries spend less than 2 percent of GDP on
defense (83 in total), between 2 and 5 percent (48), Source: Stockholm International Peace Research Institute.
and more than 5 percent (7). Several advanced Note: Military expenditure as a percentage of GDP is calculated as the unweighted
country average within each country group. Data for 1991 on a global basis are not
economies are among the top 15 military spenders available due to the breakup of the former Soviet Union. AEs = advanced economies;
and responsible for more than 80 percent of military DEs = developing economies.
spending worldwide. Despite this heterogeneity, one

Chart 2
Military spending by country
The top 15 spenders are responsible for over 80 percent of military spending worldwide.
e been at least 15 large

edeaths.
been at least 15 large
edeaths.
End
deaths. Deaths
End Deaths
1353
End 75,000,000
Deaths
1353 75,000,000
1632
1353 280,000
75,000,000
1632 280,000
1652
1632 2,000,000
280,000
1652 2,000,000
1666
1652 100,000
2,000,000
1666 100,000
1722
1666 100,000
100,000
1722 100,000
1826
1722 100,000
100,000
1826 100,000
1851
1826 100,000
100,000 <2% of GDP
1851 100,000 2–5% of GDP
1860
1851 1,000,000
100,000
1860 1,000,000 >5% of GDP
1890
1860 1,000,000
1,000,000
1890 1,000,000
1923
1890 800,000
1,000,000
1923 800,000
1926
1923 1,500,000
800,000
1926 1,500,000
1920
1926 Sources: Stockholm International Peace Research Institute; IMF, World Economic Outlook; and authors’ calculations.
100,000,000
1,500,000
1920 100,000,000
Note: The chart shows military spending from 1970 to 2019, except for countries shaded in gray, which are outside the sample of countries studied.
1958
1920 2,000,000
100,000,000
1958 2,000,000
1969
1958 1,000,000
2,000,000
1969 1,000,000
2009
1969 203,000
1,000,000
2009 203,000 to GDP fell significantly from 1990 through the advanced and developing economies, respectively,
and Cirillo
2009 (2020); and
203,000
and Cirillo
demics and(2020); and
references mid-2000s, but have changed little since then. This could sway budget allocations for defense. The
and Cirillo
demics and(2020); and
references group includes China, India, Russia, the United competition for budget resources may be less fierce
demics and references
Kingdom, and the United States. All these coun- in developing economies that have the potential
tries are members of the top 15 military spenders to raise more taxes and are striving to do so; this
in absolute terms. is unlikely in advanced economies.
In the third group, comprising 41 countries, Finally, whether a country is likely to be in
spending has come together at an even lower one group rather than another can be affected
level of slightly less than 1 percent of GDP. This by membership in a military alliance, such as the
group consists of 41 countries, only 2 of which are North Atlantic Treaty Organization (NATO).
advanced economies—Lithuania and Slovenia. Membership in an alliance could exert pressure to
either raise or lower military spending. A country
that belongs to any of the eight major military
High military spending by neighbors can alliances in the world has certain obligations when
be perceived as threatening, prompting a it comes to military spending, while also benefiting
from the spending of other alliance members.
country to allocate more to defense. We find that political stability and little risk of
violence or terrorism, high social spending, and
a low level of military spending by neighbors are
There are many considerations that influence associated with a higher likelihood of being in the
the likelihood of a country’s being in a particular low-spending groups (groups 2 and 3). Our analysis
spending group. First, high military spending shows that membership in military alliances (such
by neighbors can be perceived as threatening, as NATO) does not have a discernible effect on
prompting a country to allocate more to defense. military spending.
In addition, a country is likely to spend more on
the military when it faces significant political insta- Implications for the post-COVID era
bility, violence, and terrorism within its territory. Our results highlight different trends in spend-
Moreover, as discussed earlier, growing age-related ing across country groups. In a small group of
and social spending (on education and health) in countries (group 1), conflict has driven increases

Chart 3
Global distribution
Military spending is not converging to a common level around the world: it is taking three different paths.
ve been at least 15 large

0vedeaths.
0vedeaths.
0tdeaths.
End Deaths
t End Deaths
1t 1353
End 75,000,000
Deaths
1 1353 75,000,000
13 1632
1353 280,000
75,000,000
3 1632 280,000
73 1652
1632 2,000,000
280,000
7 1652 2,000,000
57 1666
1652 100,000
2,000,000
5 1666 100,000
05 1722
1666 100,000
100,000
0 1722 100,000
06 1826
1722 100,000
100,000
6 1826 100,000
96 1851
1826 100,000
100,000 Group 1
9 1851 100,000 Group 2
92 1860
1851 1,000,000
100,000 Group 3
2 1860 1,000,000
92 1890
1860 1,000,000
1,000,000
9 1890 1,000,000
99 1923
1890 800,000
1,000,000
9 1923 800,000
59 1926
1923 1,500,000
800,000
5 1926 1,500,000
Sources: Stockholm International Peace Research Institute; andClements, 04/23
authors’ calculations.
85 1920
1926 100,000,000
1,500,000
8 1920 Note: The chart shows military spending from 1970 to 2019, except for countries shaded in gray, which are outside the sample of countries studied.
100,000,000
87 1958
1920 2,000,000
100,000,000
7 1958 2,000,000
87 1969
1958 1,000,000
2,000,000
8 1969 1,000,000
98 2009
1969 203,000
1,000,000
9 2009 in outlays
203,000 to a substantially higher 5 percent of
b 9 and Cirillo
2009 (2020); and
bidemics
and Cirillo
and(2020); and
references GDP,203,000
while in a group of primarily developing Chart 4
bidemics
and Cirillo economies
and(2020); and
references (group 3), spending has fallen to rel- Diverging paths
idemics and references
atively low levels. A country’s particular group In countries experiencing significant conflict, military spending has risen to a
is influenced by its political stability and risk of substantially higher level.
violence, its social spending, and military spend- (ratio of military spending to GDP, percent)
ing by its neighbors. These results underscore the 5
positive economic side effect of efforts to secure
4
a more peaceful world by reducing internal and
external conflicts—not only on economic growth 3
but also on government budgets, by reducing
military spending. 2
Group 1 (20 countries)
For the largest country group (group 2), it Group 2 (77 countries)
appears that two countervailing forces will deter- 1
Group 3 (41 countries)
mine the future path of military spending. On
0
the one hand, the need to reduce non-COVID- 1970 75 80 85 90 95 2000 05 10 15 19
related spending to support fiscal consolidation
Sources: Stockholm International Peace Research Institute; IMF, World Economic Outlook;
and maintain social spending will put downward and authors’ calculations.
pressure on these outlays. On the other hand,
military spending in this group has plateaued
in recent years as a share of GDP and no longer
shows a tendency to decline over time. Defense
spending may in fact start to inch up if global References:
tensions rise. Clements, B., K. Dybczak, V. Gaspar, S. Gupta, and M. Soto. 2018. “The Fiscal
Consequences of Shrinking and Ageing Populations.” Ageing International 43 (4):
BENEDICT CLEMENTS is a visiting professor at the Universidad 391–414.
de las Américas, Ecuador; SANJEEV GUPTA is senior policy Clements, B., S. Gupta, and S. Khamidova. 2021. “Is Military Spending Converging to a
Low Level across Countries?” Economic Modelling 94 (January): 433–41.
fellow at the Center for Global Development, Washington, DC;
and SAIDA KHAMIDOVA is an independent researcher. International Monetary Fund (IMF). 2021. A Fair Shot, Chapter 1. Washington, DC, April.

Corporate Income Taxes Under Pressure
Why Reform Is Needed and How It Could Be Designed
Ruud De Mooij, Alexander Klemm, Victoria Perry
International tax issues have long been at the core of IMF research and the
IMF has provided much advice on this topic. This volume offers a complete
assessment of the current international tax architecture while remaining
accessible to a relatively broad audience. It is meant to be a guide to the various
facets of international taxation. Many of the topics covered have increased in
importance with COVID-19, such as the need for globally coordinated efforts to
further reduce profit shifting and tax competition.
bookstore.IMF.org
English. Paperback. ISBN 978-1-51351-177-1
BOOK REVIEWS
The Scent of
Green Spirit
THE SPIRIT OF GREEN by William Nordhaus compre-
hensively tours the landscape of economics, ethics,
and the environment. It is a discursive inventory of
matters environmental, with eye-opening insights.
His account of using lumens per hour as a proxy William D. Nordhaus
for productivity builds on the groundbreaking The Spirit of Green:
series of experiments he conducted in his 1994 The Economics of
paper. And he details the scope and limitations Collisions and Contagions
of green accounting, emphasizing the importance
of good data to manage environmental resources in a Crowded World
Princeton University Press
and guide decisions.
Princeton, NJ, 2021, 368 pp., $29.95
Nordhaus puts a premium on objectivity. He
eschews ideology in favor of evidence, reaffirming
his long-standing belief that effective climate policy
is “a question of balance.” Here too, he stakes his breakthroughs might conceivably be discovered
Goldilocks approach midway between the “far that can reduce the costs dramatically, experts do
left” “deep green movement” and the profiteering not see them arriving in the near future.” But as his
“far right…muck brown” (as he puts it) approach. co-recipient of the Nobel Prize for economics Paul
Consciously steering clear of motivated reasoning Romer notes, there is far more room to be condition-
on a contentious subject is refreshing and welcome. ally optimistic about our ability to cost-effectively
But by focusing mostly on backward-looking evi- decarbonize the world’s economy.
dence, much of the analysis relates to marginal Abatement costs are shaped by innovation.
changes in the context of static market failures. Once a globally scaled and integrated technology
Yet the big environmental questions of our time becomes sufficiently competitive, economies of
concern non-marginal transformations and poten- scale in production and discovery allow it to under-
tially catastrophic systemic shifts. These include the cut incumbents and alter the entire environment
collapse of fisheries, the dieback of tropical rain for- in which it operates. Nordhaus’s preference for a
ests, ecosystem destruction, and runaway climate uniform global carbon price, rising with time, is
change—calamities that scientists believe might premised on a static marginal abatement schedule
occur once irreversible thresholds are breached. whereby investors pick off the most cost-effective
The same critique can be leveled at his assessment emissions reductions at the margin. But many
of the options available to fend off environmental economists argue that inducing innovation may
crises. He rightly emphasizes the centrality of in fact require front-loading a credibly high carbon
pricing damaging behavior in an efficient and price and focusing on the most expensive sectors
nondiscriminatory manner, a message that has yet to kick-start innovation where the potential for
to make a tangible impact on US climate policy. induced cost reductions is greatest.
But by mostly ignoring the theory of endogenous This book is a rigorous and far-reaching introduc-
technical change he undersells the importance of tion to environmental economics, yet The Spirit of
driving innovation. Green could be less murky in color were it infused
The author argues that emissions reduction is with more spirit of discovery.
extremely expensive, costing “in the range of 2 to 6%
of world income . . . to meet international targets.” DIMITRI ZENGHELIS, senior visiting fellow, Grantham
He concedes that while “miraculous technological Research Institute, London School of Economics

BOOK REVIEWS
A Colorful History offers some wisdom and displays some follies we

should avoid.
of Taxation
Every chapter is good reading and worth at least
a skim for even the most knowledgeable. Chapter
2, for example, is an impressive capsule review
TAX HISTORY RESEMBLES the warehouse in the final of the history of taxation, dating back to ancient
scene of the movie Raiders of the Lost Ark—an Egypt, China, and Greece. Chapter 4’s title—“Fair
enormous, poorly lit jumble of unlabeled boxes, Enough”—tells the story of what tax equity is all
one of which may be hiding the answer to all the about. The discussion of who really pays taxes in
world’s tax problems. This new book by two leading Chapter 7—“Stick or Shift,” another wonderful
tax analysts turns up the lights, organizes many of title—demonstrates that tax analysts may have
the boxes in an enlightening way, and presents the learned much about tax economics, but they still
results with a style and flair that make the subject fall short when it comes to the policy implications
not only understandable but—and this may come of their work. Chapter 12 (“Vlad the Impaler and
as a surprise to many—actually fun to read. The the Gentle Art of Tax Collection”) is a fine intro-
authors may not have found the answer, but even duction to the important and still unduly neglected
the most experienced reader can learn something subject of tax administration. The discussion of
from this lively and informative book. this issue is generally excellent, although it does
not raise the question of why China’s tax system,
“Taxes are us” in the sense

that everywhere and always,
they change and develop with
the times.
Michael Keen and Joel Slemrod which seems to be administered very differently
Rebellion, Rascals, and than the book suggests as preferable, works as
well as it does.
Revenue: Tax Follies and
Finally, Chapter 11 is a masterful review—if
Wisdom through the Ages not as easy a read—of the international dimension
Princeton University Press of taxation. The chapter concludes that problems
Princeton, NJ, 2021, 511 pp., $29.95 in this area can be resolved only if countries “…
pool and exercise the collective sovereignty that
they still possess.” The authors return to this
theme in the concluding chapter, suggesting that
This is a rare find that can and should be read many current tax problems can be resolved only
and enjoyed not only by experts but by anyone who by “deeper international cooperation.” I am less
has ever had questions about taxation. As Michael optimistic about the outcome of ongoing inter-
Keen (of the IMF) and Joel Slemrod (University national discussions of taxation than the authors
of Michigan) show, “taxes are us” in the sense that seem to be. But they make a strong case for their
everywhere and always, they change and develop view, and in this, as in all respects, the book is
with the times. an excellent read.
Although countries’ tax practices are usually
shaped more by specific and immediate concerns RICHARD BIRD, professor emeritus of economic analysis and
than by higher motives, tax history nonetheless policy, University of Toronto

BOOK REVIEWS
Market
Juggernauts
THE PRE-COVID WORLD carried more than its share
of economic anxieties and puzzles. In advanced
economies, stunning new technologies failed to
translate into significant economic growth. Even
this slow growth failed to boost worker incomes
much, as labor’s share of income declined. And Jan Eeckhout
whatever small income gains workers enjoyed The Profit Paradox: How
essentially went to top incomes, while low- and Thriving Firms Threaten
medium-skilled-worker wages stagnated or even
fell. The pandemic is reinforcing these trends:
the Future of Work
Princeton University Press
output is still far below where it would have been
Princeton, NJ, 2021, 336 pp., $27.95
without COVID-19, low-skilled workers have suf-
fered the brunt of job losses, and dominant firms
have thrived as many smaller enterprises struggled.
In The Profit Paradox, Jan Eeckhout posits that new technologies, stronger antitrust enforcement,
new technologies can still deliver tremendous both, or something else altogether?
gains in living standards for all. What’s holding While the book convincingly argues for some role
things back is the rise of dominant firms, which of market power in workers’ woes, it leaves open
can be traced back to the winner-takes-all nature the question of how big that role has been. Had
of new technologies and weak pro-competition market power been contained, would the (increas-
policies. Dominant firms’ successes, reflected ingly labor-saving) nature of technological progress
in massive profits and booming stock markets, still have hit workers hard, as the work of Daron
are not beneficial for workers—hence the profit Acemoğlu and Pascual Restrepo, among others,
paradox. Market power needs to be reined in, implies? If so, does addressing market power really
Eeckhout argues, just as it was during the robber hold the promise of enhanced prosperity for all?
baron era.
Through a mix of cutting-edge academic research,
personal stories, and colorful examples—from beer Dominant firms’ successes, reflected
to textiles to online advertising—Eeckhout estab-
lishes a connection between workers’ woes and in massive profits and booming stock
market power. He sees the latter as an amplifier
of societies’ other ills, too—from declining social
markets, are not beneficial for workers.
and geographical mobility to rising mortality and
climate change—as firms leverage their power to What should be done? Antitrust needs to be
buy politicians into inaction (on climate) or harmful strengthened and intellectual property rights
policies (on opioids). rethought, Eeckhout argues. Some of his propos-
His thesis is vividly illustrated by examples from als line up with current thinking, while others are
the United States, making one wonder whether newer to the debate, such as ex-post fines on mergers
lessons could be learned from international expe- that fail to deliver, or “inverse” data patents that
rience. After all, labor force participation has not would grant the collectors of data only temporary
fallen in Europe in recent decades, and increases exclusivity. At a time when antitrust frameworks are
in wage inequality and declines in labor income being reconsidered on both sides of the Atlantic,
shares have been much more modest than in the Eeckhout’s book is a powerful reminder that this
United States. At the same time, Europe stopped rethink must go big.
converging to US living standards four decades ago.
Do these facts point to Europe’s lesser embrace of ROMAIN DUVAL, assistant director, IMF Research Department

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JUNE 2021

What Next For

WHAT NEXT FOR EMERGING MARKETS?

Subscribe at www.imfbookstore.org/f&d Read at www.imf.org/fandd Connect at facebook.com/FinanceandDevelopment

The Next Move PRODUCTION MANAGER:

2 FINANCE & DEVELOPMENT | June 2021

• Featuring articles by leading scholars, such as Paul Krugman,

4 FINANCE & DEVELOPMENT | June 2021

PLACEHOLDER IMAGE/ART CREDIT

June 2021 | FINANCE & DEVELOPMENT 5

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What is an emerging market?

as well as a combination of out-of-court workouts, Generating job-rich, balanced, and sustainable

June 2021 | FINANCE & DEVELOPMENT 7

weak, taking steps to reduce debt and debt accu-

8 FINANCE & DEVELOPMENT | June 2021

June 2021 | FINANCE & DEVELOPMENT 9

Is the Emerging World Still Emerging?

would persistently grow at their potential. That

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June 2021 | FINANCE & DEVELOPMENT 13

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June 2021 | FINANCE & DEVELOPMENT 15

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decline may have been helped along by the one- Chart 1

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June 2021 | FINANCE & DEVELOPMENT 19

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June 2021 | FINANCE & DEVELOPMENT 21

Wealth and health

500 1000 2000 5000 10,000 20,000 50,000 100,000

500 1,000 2,000 5,000 10,000 20,000 50,000 100,000

22 FINANCE & DEVELOPMENT | June 2021

Social transfers FRANCISCO H. G. FERREIRA is the Amartya Sen Professor

June 2021 | FINANCE & DEVELOPMENT 23

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back to the 1980s has argued that the difference in Chart 1

June 2021 | FINANCE & DEVELOPMENT 25

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At a time when emerging market economies need all the

June 2021 | FINANCE & DEVELOPMENT 27

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emerging economies lose more through capital

June 2021 | FINANCE & DEVELOPMENT 29

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rare public apology in India in 2019

June 2021 | FINANCE & DEVELOPMENT 33

PHOTO: PORTER GIFFORD

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June 2021 | FINANCE & DEVELOPMENT 37

pace in more than two decades, and the budget

F&D: As finance minister you introduced difficult

Africa. What advice do you have for countries

38 FINANCE & DEVELOPMENT | June 2021