Over the past two weeks, Asia has played host to the most intense sequence of multilateralsummits since the pandemic began, as national leaders gathered for meetings organized by ASEAN, the G20 and APEC. Although overshadowed by geopolitical tensions, the meetings marked a welcome return to in-person summitdiplomacy, and the better-than-expected outcomes show hope yet for multilateralism.
As leaders moved on to Bali for the Group of 20summit, expectations were low after ministerial meetings in the run-up had failed to produce consensus. Earlier in the year, given fractures in the wake of Russia’s invasion of Ukraine, there was a question mark over whether the G20 could even go ahead or survive in its existing form.
In the end, the summit surpassed expectations by producing a joint declaration after intense negotiations, with leaders finding the compromises necessary to unite in declaring that “today’s era must not be of war” and pledging to uphold the multilateral system.
Reflecting on these three summits, three takeaways give reason for cautious optimism that multilateralism can yet be revived and play a major role in solving our challenges.
First, and perhaps most obviously, the return of in-person summitdiplomacy is a welcome uplift for global cooperation. Virtual formats played a useful interim role at the height of the pandemic but were never a substitute for getting leaders in the same room. That is especially when it comes to interactions on the sidelines, often as important as the main event.
China’s return to diplomacy at the highest level was a further boost, both for the nation and the rest of the world.
Leaders got to meet their new counterparts for the first time or build on existing relationships, which can only help global cooperation.
The second takeaway is that as grave as our challenges are, the threat of escalating conflict and severe economic pressures on all nations seem to be focusing minds and increasing the willingness to engage and cooperate—out of necessity if nothing else.
The G20summit was the second major one this year to surpass expectations after the 12th World Trade OrganizationMinisterial Conference in June surprised observers by agreeing on a plan to reform the organization and its dispute settlement mechanism. The G20 statement reiterated support for this WTO reform plan, which will be critical to get the free trade agenda back on track and provide a much-needed boost for the global economy.
Third, and perhaps most significantly for the long term, the recent summits marked an acceleration of the trend towards multi-polarization in international diplomacy, and in particular, the rising influence of non-aligned “middle powers” to shape multilateral outcomes.
The middle powers represented at ASEAN, the G20 and APEC have huge stakes in avoiding a bifurcation of the global economy that might result from a new cold war. They don’t want to be forced to pick sides and many show a growing willingness and ability to build bridges and restore positive momentum for multilateralism.
Indonesia is a prime example. The country’s strategic heft and non-aligned credibility make it well-placed to bridge different camps. PresidentJoko Widodo made a big political bet on the success of the G20 and has won praise for the deft diplomacy that kept the organization alive and got it to a joint statement.
There is scope for this trend to continue next year as middle powers continue to rise in stature, and India and Indonesia take over the presidency of the G20 and ASEAN, respectively. Brazil will host the G20 the year after.
Over in Sharm el-Sheikh at the COP27 UN climate summit, another middle power—the host Egypt—also won praise for helping to shepherd a historic financing deal for poor countries affected by climate change. But the ultimate failure to reach a commitment to phase down fossil fuels was a sobering reminder of the huge difficulties that remain in forging the global consensus needed to overcome our shared challenges.
On the first question, although the sanctions have been less effective than Europe and the U.S. had hoped, they also are proving more onerous than the Kremlin claims. Russia’s central bank expects GDP to contract by 8-10% this year, while other forecasters expect a larger fall, together with longer-lasting damage to growth potential. Imports and exports have been severely disrupted, and inflows of foreign investment have essentially stopped. Shortages are multiplying, pushing inflation higher. At this point, the country no longer has a properly functioning foreign-exchange market.
The sanctions would have bitten much harder had the West not opted for a carve-out of Russia’s energy sector, and had many more countries joined the U.S. and Europe in the effort. Because that didn’t happen, Russia has not felt nearly as much pressure as it would have. Moreover, it has been able to continue trading through various side and back doors that will likely become increasingly important as long as the sanctions regime, as currently designed, continues.
Nonetheless, it is only a matter of time before the Russian economy experiences a harder hit. Inventories of imported goods – including many critical technological and industrial inputs – are dwindling fast, and many sectors are becoming less resilient. The cumulative damage to Russia’s economy over time will be significant and long-lasting – a fact that has not yet been fully captured by consensus medium-term forecasts.
But it is impossible to replace something with nothing, which means that no significant loss of dollar or U.S. financial primacy will occur in the immediate future. Rather, the sanctions will lend further momentum to the gradual process of global economic fragmentation, which was also fueled a few years ago by the tariffs imposed by the Trump administration. More countries now have even more of a reason to pursue greater financial resilience and inherently inefficient forms of self-insurance.
That brings us to the third debate. With no end in sight for the war, what should the West do next? Fearing the implications for energy prices and the supply of gas to Europe, many in the West are tempted to call for a moratorium on any new sanctions – or even for additional carve-outs. Others, however, favor additional measures to hold Russia accountable for its indiscriminate attacks on Ukrainian civilians.
Doing so would undoubtedly have a severe short-term economic impact on European economies and the rest of the world, amplifying the “little fires everywhere” syndrome that I warned about in May. It is therefore critical that governments use their available fiscal space to provide targeted support to vulnerable segments of the population, as well as to fragile countries; and multilateral agencies must support developing countries through aid and a more operational debt relief framework. If done properly, this option would yield better outcomes in the medium and long term than the current strategy.
“In Europe, we are not seeing inflation spiral out of control. We assume energy prices will stabilize from the middle of 2022, bottlenecks will also stabilize in 2022 and gradually, inflation numbers will decline.”
The U.S. and the EU owe more than half the cost of repairing future damage says the report, authored by Civil Society Review, an independent group that produces figures on what a “fair share” among countries of the global effort to tackle climate change should look like.
“The poorer countries are bearing the overwhelming majority of the human and social costs of climate change. Consider only one tragic incident—the Cyclones Idai and Kenneth—which caused more than $3 billion in economic damages in Mozambique alone, roughly 20% of its GDP, with lasting implications, not to mention the loss of lives and livelihoods” argues the report. “Given ongoing and deepening climate impacts, to ensure justice and fairness, COP25 must as an urgent matter operationalize loss and damage financing via a facility designed to receive and disburse resources at scale to developing countries.”
An April 2019 report from ActionAid revealed the insurance and other market based mechanisms fail to meet human rights criteria for responding to loss and damage associated with climate change. The impact of extreme natural disasters is equivalent to an annual global USD$520 billion loss, and forces approximately 26 million people into poverty each year.
Michelle Bachelet, UN High Commissioner for Human Rights, recently warned that the climate crisis is the greatest ever threat to human rights. It threatens the rights to life, health, housing and a clean and safe environment. The UN Human Rights Council has recognized that climate change “poses an immediate and far reaching threat to people and communities around the world and has implications for the full enjoyment of human rights.” In the Paris Agreement, parties to the UN Framework Convention on Climate Change (UNFCCC) acknowledged that they should—when taking action to address climate change—respect, promote and consider their respective obligations with regard to human rights. This includes the right to health, the rights of indigenous peoples, local communities, migrants, children, persons with disabilities and people in vulnerable situations and the right to development, as well as gender equality, the empowerment of women and intergenerational equity. Tackling loss and damage will require a human-rights centered approach that promotes justice and equity.
Across and within countries, the highest per capita carbon emissions are attributable to the wealthiest people, this because individual emissions generally parallel disparities of income and wealth. While the world’s richest 10% cause 50% of emissions, they also claim 52% of the world’s wealth. The world’s poorest 50% contribute approximately 10% of global emissions and receive about 8% of global income. Wealth increases adaptive capacity. All this means that those most responsible for climate change are relatively insulated from its impacts.
In the 1980s, oil companies like Exxon and Shell carried out internal assessments of the carbon dioxide released by fossil fuels, and forecast the planetary consequences of these emissions, including the inundation of entire low-lying countries, the disappearance of specific ecosystems or habitat destruction, destructive floods, the inundation of low-lying farmland, and widespread water stress.
Nevertheless, the same companies and countries have pursued high reliance on GHG emissions, often at the expense of communities where fossil fuels are found (where oil spills, pollution, land grabs, and displacement is widespread) and certainly at the expense of public understanding, even as climate change harms and risks increased. Chevron, Exxon, BP and Shell together are behind more than 10% of the world’s carbon emissions since 1966. They originated in the Global North and its governments continue to provide them with financial subsidies and tax breaks.
Responsibility for, and capacity to act on, mitigation, adaptation and loss and damage varies tremendously across nations and among classes. It must also be recognized that the Nationally Determined Contributions (climate action plans or NDCs) that have thus far been proposed by the world’s nations are not even close to being sufficient, putting us on track for approximately 4°C of warming. They are also altogether out of proportion to national capacity and responsibility, with the developing countries generally proposing to do their fair shares, and developed countries proposed far too little.
Unfortunately, as Kevin Anderson (Professor of Energy and Climate Change at the University of Manchester and a former Director of the Tyndall Centre for Climate Change Research) has said: “a 4°C future is incompatible with an organized global community, is likely to be beyond ‘adaptation,’ is devastating to the majority of ecosystems, and has a high probability of not being stable.”
The report assess countries’ NDCs against the demands of a 1.5°C pathway using two ‘fair share’ benchmarks, as in the previous reports of the Civil Society Equity Review coalition. These ‘fair share’ benchmarks are grounded in the principle-based claims that countries should act in accordance with their responsibility for causing the climate problem and their capacity to help solve it. These principles are both well-established within the climate negotiations and built into both the UNFCCC and the Paris Agreement.
To be consistent with the UNFCCC’s equity principles—the wealthier countries must urgently and dramatically deepen their own emissions reduction efforts, contribute to mitigation, adaptation and addressing loss and damage initiatives in developing countries; and support additional sustainable actions outside their own borders that enable climate-compatible sustainable development in developing countries.
For example, consider the European Union, whose fair share of the global emission reduction effort in 2030 is roughly about 22% of the global total, or about 8 Gigatons of CO2 equivalent (GtCO2eq). Since its total emissions are less than 5 GtCO2eq, the EU would have to reduce its emissions by approximately 160% per cent below 1990 levels by 2030 if it were to meet its fair share entirely through domestic reductions. It is not physically possible to reduce emissions by more than 100% domestically. So, the only way in which the EU can meet its fair share is by funding mitigation, adaptation and loss and damage efforts in developing countries.
Today’s mitigation commitments are insufficient to prevent unmanageable climate change, and—coming on top of historic emissions—they are setting in motion devastating changes to our climate and natural environment. These impacts are already prevalent, even with our current global average surface temperature rise of about 1°C. Impacts include droughts, firestorms, shifting seasons, sea-level rise, salt-water intrusion, glacial retreat, the spread of vector borne diseases, and devastation from cyclones and other extreme weather events. Some of these impacts can be minimized through adaptation measures designed to increase resilience to inevitable impacts.
These measures include, for example, renewing mangroves to prevent erosion and reduce flooding caused by storms, regulating new construction so that buildings can withstand tomorrow’s severe weather, using scarce water resources efficiently, building flood defenses, and setting aside land corridors to help species migrate. It is also crucial with such solutions that forest dwelling and indigenous peoples be given enforceable land rights, for not only are such rights matters of basic justice, they are also pragmatic recognitions of the fact that indigenous peoples have successfully protected key ecosystems.
Tackling underlying social injustices and inequalities—including through technological and financial transfers, as well as though capacity building—would also contribute to increasing resilience. Other climate impacts, however, are unavoidable, unmanageable or unpredictable, leading to a huge degree of loss and damage. Experts estimate the financial damage also will reach at least USD$300-700 billion by 2030, but the loss of locally sustained livelihoods, relationships and connections to ancestral lands are incalculable.
Failure to reduce GHG emissions now—through energy efficiency, waste reduction, renewable energy generation, reduced consumption, sustainable agriculture and transport—will only deepen impacts in the future. Avoidable impacts require urgent adaptation measures. At the same time, unavoidable and unmanageable change impacts—such as loss of homes, livelihoods, crops, heat and water stress, displacement, and infrastructure damage—need adequate responses through well-resourced disaster response plans and social protection policies.
For loss and damage financing, developed countries have a considerable responsibility and capacity to pay for harms that are already occurring. Of course, many harms will be irreparable in financial terms. However, where monetary contributions can help restore the livelihoods or homes of individuals exposed to climate change impacts, they must be paid. Just as the EU’s fair share of the global mitigation effort is approximately 22% in 2030, it could be held accountable for that same share of the financial support for such incidents of loss and damage in that year.
The table below provides an illustrative quantification of this simple application of fair shares to loss and damage estimates, and how they change if we compute the contribution to global climate change from the start of the industrial revolution in 1850 or from 1950.
Table 1: Countries’ Share of Global Responsibility and Capacity in 2019, the time of Cyclones Idai and Kenneth, as illustrative application of a fair share approach to Loss and Damage funding requirements.
The advantage of setting out responsibility and capacity to act in such numerical terms is to drive equitable and robust action today. Responsible and capable countries must—of course—ensure that those most able to pay towards loss and damage repairs are called upon to do so through domestic legislation that ensures correlated progressive responsibility. However, it should also motivate mitigation action to ensure that harms are not deepened in the future.
In the Equity analysis used here, capacity—a nation’s financial ability to contribute to solving the climate problem—can be captured by a quantitative benchmark defined in a more or less progressive way, making the definition of national capacity dependent on national income distribution. This means a country’s capacity is calculated in a manner that can explicitly account for the income of the wealthy more strongly than that of the poor, and can exclude the incomes of the poorest altogether. Similarly, responsibility—a nation’s contribution to the planetary GHG burden—can be based on cumulative GHG emissions since a range of historical start years, and can consider the emissions arising from luxury consumption more strongly than emissions from the fulfillment of basic needs, and can altogether exclude the survival emissions of the poorest. Of course, the ‘right’ level of progressivity, like the ‘right’ start year, are matters for deliberation and debate.1
The report acknowledges “the difficulties in estimating financial loss and damage and the limited data we currently have,” but it recommends nevertheless “a minimal goal of providing at least USD$300 billion per year by 2030 of financing for loss and damage through the UNFCCC’s Warsaw International Mechanism for Loss and Damage (WIM).” Given that this corresponds to a conservative estimate of damage costs, the report further recommends “the formalization of a global obligation to revise this figure upward as observed and forecast damages increase.”
The new finance facility should provide “public climate financing and new and innovative sources of financing, in addition to budget contributions from rich countries, that can truly generate additional resources (such as air and maritime levies, Climate Damages Tax on oil, gas and coal extraction, a Financial Transaction Tax) at a progressive scale to reach at least USD$300 billion by 2030.” This means aiming for at least USD$150 billion by 2025 and ratcheting up commitments on an annual basis. Ambition targets should be revised based on the level of quantified and quantifiable harms experienced.
Further, developing countries who face climate emergencies should benefit from immediate debt relief–in the form of an interest-free moratorium on debt payments. This would open up resources currently earmarked for debt repayments to immediate emergency relief and reconstruction.
Finally, a financial architecture needs to be set up that ensures funding reaches the marginalized communities in developing countries, and that such communities have decision making say over reconstruction plans. Funds should reach communities in an efficient and effective manner, taking into account existing institutions as appropriate.
The provision of financial services and products is undergoing rapid transformation, including through the development of stablecoins, which seek to stabilize the price of a digital currency by linking its value to that of a pool of assets. Stablecoins can potentially serve as a means of payment and store of value, and may contribute to the development of global payment arrangements that are faster, cheaper, and more inclusive. Yet these potential benefits can only be realized if significant risks are addressed. Stablecoin initiatives built on an existing big tech platform with a global customer base may have the potential to scale rapidly, and could pose regulatory and oversight challenges and risks related to consumer protection, fair competition, and the combating of money laundering and terrorism financing, among others, as well as have a significant impact on public policy goals such as financial stability and monetary policy transmission. This paper, written jointly by G7 members, the BIS, and the IMF, including RESMF staff, scopes the causes and implications of the adoption of global stablecoins, and the potential policy efforts to rein in the risks they can bring about.
We estimate world cycles using a new quarterly dataset of output, credit and assetprices assembled using IMF archives and covering a large set of advanced and emerging economies since 1950. World cycles, both real and financial, exist and are generally driven by US shocks. But their impact is modest for most countries. The global financial cycle is also much weaker when looking at credit rather than assetprices. We also challenge the view that synchronization has increased over time. Although this is true for prices (goods and assets), this not true for quantities (output and credit). The world business and credit cycles were as strong during Bretton Woods (1950–1972) as during the Globalization period (1984-2006). For most countries, the way their output co-moves with the rest of the world has changed little over the last 70 years. We discuss the reasons behind these new findings and their policy implications for small open economies.
by Nina Biljanovska, Lucyna Gornicka & Alexandros Vardoulakis
An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.
by Senay Agca, Deniz O Igan, Fuhong Li & Prachi Mishra
Why do firms lobby? This paper exploits the unanticipated sequestration of federal budget accounts in March 2013 that reduced the availability of government funds disbursed through procurement contracts to shed light on this question. Following this event, firms with little or no prior exposure to the federal accounts that experienced cuts reduced their lobbying spending. In contrast, firms with a high degree of exposure to the cuts maintained and even increased their lobbying spending. This suggests that, when the same number of contractors competed for a piece of a reduced pie, the more affected firms likely intensified their lobbying efforts to distinguish themselves from the others and improve their chances of procuring a larger share of the smaller overall. These findings are stronger in government-dependent sectors and when there is intense competition. The evidence is more consistent with a rent-seeking explanation for lobbying.
by Deniz O Igan, Hala Moussawi, Alexander F. Tieman, Aleksandra Zdzienicka, Giovanni Dell’Ariccia, Paolo Mauro
We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.
Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradablecapital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.
We study the impact of bankcredit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italiancorporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.
by Antonio Fatás, Atish R. Ghosh, Ugo Panizza & Andrea F Presbitero
Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax-smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation.
by Harald Hau, Peter Hoffmann, Sam Langfield & Yannick Timmer
New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.
Are EMDEs ready to face a deeper global downturn, if it materializes? Our new study A Decade After the Global Recession: Lessons and Challenges for Emerging and Developing Economies [PDF] takes on this question. It examines developments of the past decade, draws lessons for these economies, and discusses policy options. The study is the first comprehensive analysis on the topic with a truly EMDE focus. It offers three main conclusions. First, perhaps for the first time, many EMDEs were able to implement large-scale countercyclical fiscal and monetary policy stimulus during the last global recession. Second, looking ahead, policymakers in many EMDEs are now equipped with stronger policy frameworks than in earlier global downturns or financial crises. Third, EMDEs have now less policy room to face a global downturn than they had before the 2009 global recession. Irrespective of the timing of the next global downturn, the big lesson of the past decade for EMDEs is clear: since they are less well prepared today than prior to the 2009 episode, they urgently need to undertake cyclical and structural policy measures to be able to effectively confront the next downturn when it happens.
You can download the book here [PDF]. Its table of contents is below (each chapter individually downloadable). All charts featured in the book (with underlying data series) are also available below.