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Economy

American Jobs Plan Beckons More Uncertainties

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Authors: Chan Kung and Wei Hongxu*

On the 31st of March, U.S. President Joe Biden unveiled a new USD 2.25 trillion American Jobs Plan. As a follow-up to the USD 1.9 trillion stimulus plan implemented recently, Biden’s American Jobs Plan aims to invest USD 1.2 trillion in infrastructure, new energy, and digital networks over 8 years, as well as about a trillion in the welfare of the elderly, employment and training. At the same time, the U.S. government will increase the statutory tax rate for domestic companies from 21% to 28% and take measures to prevent profit outflows in order to fund infrastructure expenditures within 15 years. In general, this new plan aims at improving the structure of long-term economic growth in the United States and alleviating the deteriorating problem of unequal distribution of social wealth. The proposal of this plan is undoubtedly targeted towards the recovery of the U.S. economy in the post-pandemic era. For the capital market, it means stronger inflation expectations, which brings about new uncertainties as to the direction of the U.S. economy and capital market.

Although the USD 2.25 trillion plan seems huge, it will be implemented over the course of eight years, which means there will be no observable impact in the near future. According to Goldman Sachs’ estimates, the new infrastructure plan will spend an average of about USD 275 billion a year in additional expenditures for the next eight years, accounting for about 1.25% of the U.S. GDP. This scale is not significant compared with the U.S. government’s cumulative fiscal expenditure of approximately USD 6 trillion since last year in supporting economic recovery from the COVID-19 pandemic. Hence, there will not be any major impact on the liquidity of the dollar in the short-term. Instead, this new plan focuses more on the continuous improvement of the long-term economic structure. According to an analysis by the China International Capital Corporation (CICC), Biden’s goal is not only to help infrastructure financing, but more importantly, it aims to resolve the deep-seated contradiction between the rich and the poor in the United States. In Biden’s view, the polarization between the rich and the poor, racial conflicts, and social divisions are root problems that the United States most urgently needs to address. Of course, there are still a lot of uncertainties on whether this plan will be able to achieve its goals. Many doubt if this welfare plan is likely to bring about an increase in domestic employment and wages in the United States. While promoting the development of the high-tech industry in the United States, it will further accelerate the outflow of American manufacturing and aggravate the United States’ social differentiation. This is an uncertain factor in the long-term changes in the U.S. economy.

This plan of expanding expenditure will undoubtedly further complicate the expansion of the U.S. fiscal deficit and bring about more uncertainties to the future U.S. government debt problem. Regarding the source of funding for the new infrastructure plan, Biden hopes to fund the American Jobs Plan by increasing corporate taxes. He also announced a corporate tax reform plan, proposing to increase the federal corporate income tax rate from the current 21% to 28%, and raise the minimum tax rate for U.S. companies’ overseas profits from 10.5% to 21% in order to restrict U.S. companies’ from using overseas tax avoidance methods and to encourage them to expand investments in the United States. The Biden administration stated that this tax increase plan will add approximately USD 2 trillion in revenue to the U.S. treasury within 15 years to make up for the expansion of expenditures. However, some analysts believe that this plan will actually still bring about a USD 500 billion fiscal deficit. At the same time, many market institutions estimate that under the opposition of the Republican Party and the corporate world, this tax increase plan may have to make compromise and will be greatly discounted in the future. Therefore, once this plan is really implemented, it would mean that the debt burden of the U.S. government will be further aggravated, which will also have a realistic and long-term impact on the U.S. Treasury bond market, further impeding the independence of the Federal Reserve’s monetary policy.

Of course, under the Biden-Harris administration’s continuous fiscal stimulus plan, there is very little disagreement regarding the short-term optimistic prospects of economic recovery. Federal Reserve officials have recently repeatedly emphasized that they will push inflation levels back to how it was before the pandemic as soon as possible, so as to reach the policy target of 2%. In such a case, with the enhancement of the fiscal stimulus, the recovery of the U.S. economy will be faster when the pandemic is brought under control. Currently, the yield of U.S. long-term Treasury bonds has risen significantly in the first quarter, which means that the market has gradually adapted to the expectation of rising inflation in the short and medium term. The market’s divergence lies in whether the rate of inflation rises moderately in the case of rapid demand growth. Many institutions worry that the rapid rise in demand will cause inflation to far exceed the Fed’s policy goals and cause changes in the Fed’s policy. The Fed’s chair Jerome Powell’s previous talk about reducing the scale of QE has exacerbated the concern.

In regards to the global market, due to implementations of fiscal and monetary stimulus, the United States and other major market are on a continuous upward trend since the COVID-19 pandemic struck last year. That being said, this trend has now reached a turning point. Not only has the market’s disagreement on the future not been eliminated, but it has instead further intensified. After the announcement of the American Jobs Plan, the U.S. stock market and bond market did not experience any major fluctuations, with only technology stocks recovering significantly due to policy factors. Some market participants believe that stock prices have risen rapidly to digest the potential U.S. infrastructure package, and any signs of difficulty in passing legislation may trigger a sell-off. The uncertain outlook is also becoming more and more obvious in the U.S. Treasury bond market. J.P. Morgan Asset Management said that after the recent bond market volatility, the “proper place” for the U.S. 10-year bond yield should be around 2%. HSBC believes that the U.S. 10-year yield will fall to 1% before the end of the year, and the economic recovery brought about by stimulus measures will be insufficient to bring about a lasting rebound in price pressure. However, judging from the continued rise in the yield of long-term U.S. Treasury bonds, the zero-interest-rate market environment is changing. This scenario may cause the capital market to change from quantitative to qualitative, and the new American Jobs Plan is undoubtedly accelerating this. From this point of view, changes in inflation are currently the biggest risk that the U.S. economy and its capital markets are facing.

Final analysis conclusion:

The American Jobs Plan focuses not only on short-term economic recovery, but also on the improvement of long-term U.S. economic structures. However, this plan brings about more than small amount uncertainty. Under the policy stimulus, whether the recovery and growth of the U.S. economy can overcome the side effects brought about by inflation is even more uncertain.

*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing.

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

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Economy

Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage

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The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.

The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.

The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.

According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.

Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.

While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.

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Economy

Synchronicity in Economic Policy amid the Pandemic

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business-economy

Synchronicity is an ever present reality for those who have eyes to see.Carl Jung

The Covid pandemic has elicited a number of deficiencies in the current global governance framework, most notably its weaknesses in mustering a coordinated response to the global economic downturn. A global economy is not fully “global” if it is devoid of the capability to conduct coordinated and effective responses to a global economic crisis. What may be needed is a more flexible governance structure in the world economy that is capable of exhibiting greater synchronicity in economic policies across countries and regions. Such a governance structure should accord greater weight to regional integration arrangements and their development institutions at the level of key G20 decisions concerning international economic policy coordination.

The need for greater synchronicity in the global economy arises across several trajectories:

· Greater synchronicity in the anti-crisis response across countries and regions – according to the IMF it is a coordinated response that renders economic stimulus more efficacious in countering the global downturn

· Synchronicity in the withdrawal of stimulus across the largest economies – absent such coordination the timing of policy normalization could be postponed with negative implications for macroeconomic stability

· Greater synchronicity in opening borders, lifting lockdowns and other policy measures related to responding to the pandemic: such synchronicity provides more scope for cross-country and cross-regional value-added chains to boost production

· Greater synchronicity in ensuring a recovery in migration and the movement of people across borders.

Of course such greater synchronicity in economic policy should not undermine the autonomy of national economic policy – it is rather about the capability of national and regional economies to exhibit greater coordination during downturns rather than a progression towards a uniform pattern of economic policy across countries. Synchronicity is not only about policy coordination per se, but also about creating the infrastructure that facilitates such joint actions. This includes the conclusion of digital accords/agreements that raise significantly the potential for economic policy coordination. Another area is the development of physical infrastructure, most notably in the transportation sphere. Such measures serve to improve regional and inter-regional connectivity and provide a firmer foundation for regional economic integration.

The paradox in which the world economy finds itself is that even as the current crisis is leading to fragmentation and isolationism there is a greater need for more policy coordination and synchronicity to overcome the economic downturn. This need for synchronicity may well increase in the future given the widening array of global risks such as risks to cyber-security as well as energy security and climate change. There is also the risk of the depletion of reserves to counter the Covid crisis that has been accompanied by a rise in debt levels across developed and developing economies. Also, the speed of the propagation of crisis impulses (that effectively increases with technological advances and globalization) is not matched by the capability of economic policy coordination and efficiency of anti-crisis policies.

There may be several modes of advancing greater synchronicity across borders in international relations. One possible option is a major superpower using its clout in a largely unipolar setting to facilitate greater policy coordination. Another possibility is for such coordination to be supported by global international institutions such as the UN, the WTO, Bretton Woods institutions, etc. Other options include coordination across the multiplicity of all countries of the global economy as well as across regional integration arrangements and institutions.

Attaining greater synchronicity across countries will necessitate changes in the global governance framework, which currently is characterized by weak multilateral institutions at the top level and a fragmented framework of governance at the level of countries. What may be needed is a greater scope accorded to regional integration arrangements that may facilitate greater coordination of synchronicity at the regional level as well as across regions. The advantage of providing greater weight to the regional institutions in dealing with global economic downturns emanates from their greater efficiency in coordinating an anti-crisis response at the regional level via investment/infrastructure projects as well as macroeconomic policy coordination. Regional development institutions also have a comparative advantage in leveraging regional interdependencies to promote economic recovery.

In conclusion, the global economy has arguably become more fragmented as a result of the Covid pandemic. The multiplicity of country models of dealing with the pandemic, the “vaccine competition”, the breaking up of global value chains and their nationalization and regionalization all point in the direction of greater localization and self-sufficiency. At the same time there is a need from greater synchronicity across countries particularly in the context of the current pandemic crisis. Regional integration arrangements and institutions could serve to facilitate such coordination in economic policy within and across the major regions of the world economy.

From our partner RIAC

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Economy

A New Strategy for Ukraine

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Authors: Anna Bjerde and Novoye Vremia

Four years ago, the World Bank prepared a multi-year strategy to support Ukraine’s development goals. This was a period of recovery from the economic crisis of 2014-2015, when GDP declined by a cumulative 16 percentage points, the banking sector collapsed, and poverty and other measures of insecurity spiked. Indeed, we noted at the time that Ukraine was at a turning point.

Four years later, despite daunting internal and external challenges, including an ongoing pandemic, Ukraine is a stronger country. It has proved more resilient to unpredictable challenges and is better positioned to achieve its long-term development vision. This increased capacity is first and foremost the result of the determination of the Ukrainian people.

The World Bank is proud to have joined the international community in supporting Ukraine during this period. I am here in Kyiv this week to launch a new program of assistance. In doing this, we look back to what worked and how to apply those lessons going forward. In Ukraine—as in many countries—the chief lesson is that development assistance is most effective when it supports policies and projects which the government and citizens really want.

This doesn’t mean only easy or even non-controversial measures; rather, it means we engage closely with government authorities, business, local leaders, and civil society to understand where policy reforms may be most effective in removing obstacles to growth and human development and where specific projects can be most successful in delivering social services, particularly to the poorest.

Looking back over the past four years in Ukraine, a few examples stand out. First, agricultural land reform. For the past two decades, Ukraine was one of the few countries in the world where farmers were not free to sell their land.

The prohibition on allowing farmers to leverage their most valuable asset contributed to underinvestment in one of Ukraine’s most important sources of growth, hurt individual landowners, led to high levels of rural unemployment and poverty, and undermined the country’s long-term competitiveness.

The determination by the President and the actions by the government to open the market on July 1 required courage. This was not an easy decision. Powerful and well-connected interests benefited from the status quo; but it was the right one for Ukrainian citizens.

A second area where we have been closely involved is governance, both with respect to public institutions and the rule of law, as well as the corporate governance of state-owned banks and enterprises. Poll after poll in Ukraine going back more than a decade revealed that strengthening public institutions and creating a level playing field for business was a top priority.

World Bank technical assistance and policy financing have supported measures to restore liability for illicit enrichment of public officials, to strengthen existing anticorruption agencies such as NABU and NACP, and to create new institutions, including the independent High-Anticorruption Court.

We are also working with government to ensure the integrity of state-owned enterprises. Our support to the government’s unbundling of Naftogaz is a good example; assistance in establishing supervisory boards in state-owned banks is another. We hope our early dialogue on modernizing the operations of Ukrzaliznytsia will be equally beneficial.

As we begin preparation of a new strategy, the issues which have guided our ongoing work—strengthening markets, stabilizing Ukraine’s fiscal and financial accounts; and providing inclusive social services more efficiently—remain as pressing today as they were in 2017. Indeed, the progress which has been achieved needs to continue to be supported as they frequently come under assault from powerful interests.

At the same time, recent years have highlighted emerging challenges where we hope to deepen and expand our engagement. First, COVID-19 has underscored the importance of our long partnership in health reform and strengthening social protection programs.

The changes to the provision of health care in Ukraine over recent years has helped mitigate the effects of COVID-19 and will continue to make Ukrainians healthier. Government efforts to better target social spending to the poor has also made a difference. We look forward to continuing our support in both areas, including over the near term through further support to purchase COVID-19 vaccines.

Looking ahead, the challenge confronting us all is climate change. Here again, our dialogue with the government has positioned us to help, including to achieve Ukraine’s ambitious commitment to reduce carbon emissions. During President Zelenskyy’s visit to Washington in early September we discussed operations to strengthen the electricity sector; a program to transition from coal power to renewables; municipal energy efficiency investments; and how to tap into Ukraine’s unique capacity to produce and store hydrogen energy. This is a bold agenda, but one that can be realized.

I have been gratified by my visit to Kyiv to see first-hand what has been achieved in recent years. I look forward to our partnership with Ukraine to help realize this courageous vision of the future.

Originally published in Ukrainian language in Novoye Vremia, via World Bank

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