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African economists seek bolder monetary policy reforms to address inequality

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African economists attending the 12th African Economic Conference in Addis Ababa, Ethiopia, have called for more radical monetary policy reforms and an overhaul of the tax policy regime in most countries in order to guarantee the welfare needs of the local population.

The economic researchers from Ethiopia, Kenya and Sudan, who attended session of the conference to discuss “Macroeconomic policies for the inclusive development,” on December 5, 2017, noted broader reforms were required to secure stability in the foreign currency markets and to curb inflation.

“Consistent monetary policy yields the greatest welfare security to the citizens compared to discretionary monetary policy,” said Peter Wamalwa of the Central Bank of Kenya, presenting a paper on the impact of monetary policy on the prices of assets in an open economy.

Discretionary monetary policy is often based on the knee-jerk reaction of the key policy-makers on matters which have an impact on taxation policy, spending and fiscal activities carried out by the respective Central Banks, often known as the monetary policy decision-making bodies.

Wamalwa said while the monetary policy is often used by the respective Central Banks to correct market imperfections which require urgent intervention, the Central Bank should ensure as a priority that the social needs of the households and the firm are taken care off in order to guarantee economic stability.

“The monetary policy is not effective if the asset prices are not included. The response to the monetary policy is more significant,” said Wamalwa, who insists Central Bank interventions to stabilize the domestic prices should allocate the economy’s resources efficiently and in a socially desired manner.

The African Economic Conference is dedicated to discussions on the kind of economic and political governance reforms that are critical in order to ensure structural transformation takes place in Africa.

Wamalwa said focus should remain on the effectiveness of the monetary policy in battling key challenges such as inflation and the foreign currency exchange rate policy.

In his paper, Wamalwa did not entirely dismiss the possibility of the Central Banks relying on discretionary monetary policy, saying it has a role to play when policy weaknesses fail to address market distortions which affect prices in an economy in a more negative manner.

“This affords the monetary authority the flexibility to respond to unanticipated price and output changes as well as dynamic behavior of agents in an economy. This is more relevant to the financial markets where investors make decisions frequently to optimize their portfolio holding,” Wamalwa said.

Speaking during the same session, Saswan Abdul-Jalil, a teaching assistant at the University of Khartoum, Sudan, called for an overhaul of the tax regime in Sudan and broad measures to unlock restrictions which make it much harder for ordinary businesses and individuals to access bank loans.

Terming difficulties in accessing the domestic financial markets due to the government’s increased domestic borrowing and stringent capital controls the “financial repression,” Abdul-Jalil said the capital controls imposed by the government enabled it to borrow at a lower rate domestically.

According to the paper titled “Financial Repression and Capital Controls in Sudan: An Evaluation of Fiscal Effects,” the financial repression causes a bigger impact on the pace of economic growth in Sudan.

“It leads to high cost of domestic borrowing because the commercial banks prefer to lend to the government and its effect is 0.8 per cent on the Gross Domestic Product. The capital controls is part of the government’s efforts to raise revenue locally,” Abdul-Jalil argued.

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Economy

Upswing in global growth won’t last forever: IMF says world must prepare now for leaner times ahead

MD Staff

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While the world economy continues to show broad-based momentum, a new report released Tuesday by the International Monetary Fund (IMF) is warning that there may be choppy seas ahead, caused by increasing protectionism or tit-for-tat trade wars.

“Global growth is projected to soften beyond the next couple of years,” said the report, explaining that: “Once their output gaps close, most advanced economies are poised to return to potential growth rates well below pre-crisis averages – held back by aging populations and lackluster productivity.”

Looking at the largest economies, the World Economic Outlook , the Fund’s semiannual report on the health of the international economy, shows growth projections at 2.4 per cent for the euro area, 1.2 per cent for Japan, 6.6 per cent for China and 2.9 per cent for the United States.

“Despite the good near-term news, longer-term prospects are more sobering,” said Maurice Obstfeld, Economic Counsellor and Director of Research at the IMF, the specialized United Nations agency working to ensure stability in the global financial system.

“Advanced economies – facing aging populations, falling rates of labor force participation, and low productivity growth – will likely not regain the per capita growth rates they enjoyed before the global financial crisis,” he continued.

Mr. Obstfeld painted a diverse picture for emerging and developing economies, saying that among non-commodity exporters, some countries can expect longer-term, pre-crisis type growth rates.

However, despite some improvement in the outlook for commodity prices, he pointed out that some exporters will need to diversify their economies to boost future growth and resilience.

The IMF, which is holding its annual Spring Meetings in Washington, D.C., with the World Bank, continued to echo its advice that the current cyclical upswing offers policymakers a good opportunity to make longer-term growth more resilient and inclusive.

“Sound policies can extend the upswing while reducing the risks of a disruptive unwinding,” Mr. Obstfeld stated. “Countries need to rebuild fiscal buffers, enact structural reforms and steer monetary policy cautiously in an environment that is already complex and challenging.”

Trade tensions

While some governments are pursuing substantial economic reforms, trade disputes risk diverting others from the constructive steps they would currently need to take to improve and secure growth prospects, Mr. Obstfeld warned.

Despite widespread economic growth, public optimism has been eroding over time by job and wage polarization trends, raising the threat of political developments that could destabilize various economic policies – even beyond those of trade.

“Governments need to rise to the challenges of strengthening growth, spreading its benefits more widely, broadening economic opportunity through investments in people […] that could radically transform the nature of work,” underscored Mr. Obstfeld. “Fights over trade distract from this vital agenda, rather than advancing it.”

Trade tensions started in early March when the US announced it would levy steel and aluminum tariffs for national security reasons, provoking China’s announcement of retaliatory tariffs on US imports.

In the present environment, excessive global imbalances should be reduced multilaterally.

“Plurilateral arrangements, if consistent with multilateral rules, can also provide a useful springboard to more open trade,” stated Mr. Obstfeld.

While each Government can do much on its own to promote stronger, resilient and inclusive growth, multilateral cooperation remains essential to address a range of challenges – including climate change, infectious diseases, cyber-security, corporate taxation and corruption.

“Global interdependence will only continue to grow and unless countries face it in a spirit of collaboration, not conflict, the world economy cannot prosper,” Mr. Obstfeld underscored.

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Why Trade, Investment, and Competition Reforms Matter for Argentina

MD Staff

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A loaf of bread. A gallon of milk. Eggs, cheese, and chicken. Most people would not link these everyday staples with a country’s integration in the global economy. But in Argentina, where customers pay 49% more, on average, for these groceries than people would have to under similar conditions in OECD countries, higher food prices are a symptom of deeper economic issues.

The country faces challenges in three policy areas that reinforce each other in fostering further integration in the global economy: trade, investment, and competition. Argentina’s trade flows have fallen by almost half over the past fifteen years, and while most countries participate in about 14 free trade agreements each, Argentina is only party to one, Mercosur. Foreign direct investment levels are low in Argentina, amounting to just two percent of GDP between 2000 and 2015. Further, state-owned enterprises in 17 different sectors are not competing on a level playing field with private investors or delivering services less efficiently than the private sector could.

A report from The World Bank Group, Strengthening Argentina’s Integration in the Global Economy: Policy Proposals for Trade, Investment and Competition, analyzes the current state of affairs in these three policy areas and proposes reforms designed to boost integration with the global markets which would then provide opportunities to grow, create welfare for consumers, and generate better employment opportunities. The reforms suggested in the report cover a wide range and include recommendations such as lowering tariffs, removing bureaucratic hurdles that make private sector investments difficult, and strengthening anti-cartel enforcement, among others. Enacting these reforms would allow firms to be more competitive and better integrated into the global economy, the report finds.

Implementing economy-wide reforms will pay off in a variety of ways. For instance, with all else being equal, a more integrated Mercosur- with lower external tariffs and streamlined internal non-tariff measures – would expand Argentina’s GDP by at least 1%over baseline projections for 2030. Increasing competition in the manufacturing sector would add 7 percent to annual growth labor productivity. Reducing the restrictiveness of market regulation in Argentinian services sectors (such as energy, transport, professional services, and telecommunications) would translate into an additional 0.1 percent to 0.6 percent growth in annual GDP.

Argentina’s government recognizes these opportunities and is taking active steps to open its markets. The Macri administration, which took office in 2015, has already reduced export taxes, replaced the import licensing system, approved reductions in energy and transport subsidies, pushed for a new Competition Law and facilitated $102 billion in new future investments in just 24 months.

“We are convinced that to defeat poverty, Argentina needs a profound productive transformation to become a developed country,” said Miguel Braun, Secretario de Comercio de la Nación, at an event in December 2017.

To reap the benefits of an open economy and increase prosperity in Argentina, the World Bank Group suggests tackling reforms across all three policy areas simultaneously, prioritizing those that can offer short-term wins and tangible benefits.

“No one policy alone ensures that firms can integrate into the global economy,” explains Martha Martinez-Licetti, Lead Economist in the World Bank Group’s Macroeconomics, Trade & Investment Global Practice and Lead Author of the report. “More must be done to ensure that everyone shares fully in the benefits of trade. Policies that help all people benefit from the opportunities that come with trade include investment and competition policies. It is only when implemented in a coherent way that reforms to trade, investment and competition can bring positive effects for the economy as a whole, better jobs for Argentine people, and more variety of goods and services at lower prices for consumers.”

The reforms suggested by the World Bank Group aim to address four particular challenges that firms in Argentina face.

  • Opportunities to enter and/or invest;
  • Access to efficient market inputs;
  • Ability to compete on a level playing field;
  • Capacity to thrive in global markets.

In the past, government interventions prevented investment from expanding or thriving. But today, Argentina is looking to the future and building policies that will help it reintegrate into the world economy.

“Even in this turbulence that we are experiencing, there is an opportunity to intelligently join the world,” said Argentina’s Minister of Production, Francisco Cabrera. “This report is an analytical anchor to understand where we are standing and to be able to make decisions.”

World Bank

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Growth Expected to Rebound in Middle East and North Africa

MD Staff

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The World Bank Group’s latest Middle East and North Africa Economic Monitor projects regional growth to increase to 3.1% in 2018, up from 2% in 2017. The increase in growth is expected to be broad based, driven by a favorable global economic environment, stability in the oil market at slightly higher prices, and the resumption of post-conflict reconstruction.

“There are grounds for optimism,” said Hafez Ghanem, World Bank Vice President for the Middle East and North Africa Region. “Now is the time to focus on creating more jobs and economic opportunities for youth. The positive outlook is an opportunity to speed up reforms for a renewed private sector as an engine of growth and job creation.”

On the back of a good performance by Gulf Cooperation Council countries, oil exporters could see growth reach 3% in 2018, double the rate in 2017. Growth among oil importers is expected to increase to 4% on average from 2018 to 2020, driven by a sharp rebound in Egypt and a rise in remittances, tourism and exports. Almost all countries in the region have embarked on major reforms to reduce or eliminate energy subsidies, identify new sources of non-oil revenues, and expand social safety nets to shield the poor from adverse effects of change.

“While stabilization policies have helped economies adjust in recent years, we need much faster growth to absorb the hundreds of millions of young people who will enter the labor market in the coming decades,” said Rabah Arezki, World Bank Chief Economist for the Middle East and North Africa Region, “In this report, we study ways for transforming rather than adjusting the region’s economies, to achieve the growth needed.”

Low oil prices and a global shift toward renewable energy to meet climate goals poses risks and opportunities. With its abundant sunshine, the region can leverage the power of solar technology. Turning risks into opportunities will require innovation and the adoption of new technologies. Along with helping the region adapt to the new reality of low oil prices, leveraging new technologies could be a new engine of growth and jobs for the regions. A focus on corporate governance will need to accompany efforts to improve the business environment, to create a new system of incentives at the firm level that encourages the bold and creative thinking required for economic transformation.

Adopting new technologies will require significant investments in infrastructure, which will require greater leveraging of private finance. This can be achieved through public-private partnerships, which Jordan has used to build the Queen Alia airport, and Egypt to attract sizeable private investments in its energy sector. Public-Private partnerships have the added advantage of drawing on the innovation and efficiency of the private sector, and are a step toward changing the role of the state from the main provider of employment to an enabler of private sector activity.

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