Kenya is a prime example: In 2007, a local telecommunications provider launched a form of mobile money called M-PESA, which enabled peer-to-peer money transfers between mobile phones and became wildly successful. Within five years, it grew to fifteen million users, with a deposit value approaching almost one billion dollars. To address rising security concerns, in 2013, the Kenyan government implemented a law requiring every citizen to officially register the SIM card (for their cell phone) using a government identification (ID). The measure was enforced swiftly, leading to the freezing of millions of SIM cards. Over ten years later, SIM card ID registration laws have become common across Africa, with over fifty countries adopting such regulations. 

But that is not the end of the story. In parallel, a practice called third-party SIM registration has become rampant, in which cell phone users register their SIM cards using someone else’s ID, such as a friend’s or a family member’s. 

Our recent research at Carnegie Mellon University, based on in-depth user studies in Kenya and Tanzania, found that this phenomenon of third-party SIM registration has both unexpected origins and unintended consequences. Many individuals in those countries face systemic challenges in obtaining a government ID. Moreover, some participants in our study reported having privacy concerns. They felt uncomfortable sharing their ID information with mobile money agents, who could repurpose that information for scams, harassment, or other unintended uses. Other participants felt “frustrated” by a process that was “cumbersome.” As a result, many users prefer to register a SIM card with another person’s ID rather than use or obtain their own ID.

Third-party SIM registration plainly undermines the effectiveness of the public policy and has additional, downstream effects. Telecommunications companies end up collecting “know your customer” information that is not reliable, which can impede law enforcement investigations in the case of misconduct. For example, one of our study subjects shared the story of a friend lending their ID for third-party registration, and later being arrested for the alleged crimes of the actual user of the SIM card. 

A core implication of our research is that the Kenyan government’s goals did not fully take into account the realities of the target population—or the feasibility of the measures that Kenya and Tanzania proposed. In response, people invented their own workarounds, thus potentially introducing new vulnerabilities and avenues for fraud.

Good policy, bad consequences 

Several other case studies demonstrate how even well-intentioned regulations can have unintended consequences and practical problems if they do not appropriately consider security, privacy and usability together. 

• Uganda: Much like our findings in Kenya and Tanzania, a biometric digital identity program in Uganda has considerable unintended consequences. Specifically, it risks excluding fifteen million Ugandans “from accessing essential public services and entitlements” because they do not have access to a national digital identity card there. While the digitization of IDs promises to offer certain security features, it also has potential downsides for data privacy and risks further marginalizing vulnerable groups who are most in need of government services.
  
• Europe: Across the European Union (EU), a landmark privacy law called General Data Protection Regulation (GDPR) has been critical for advancing data protection and has become a benchmark for regulatory standards worldwide. But GDPR’s implementation has had unforeseen effects such as some websites blocking EU users. Recent studies have also highlighted various usability issues that may thwart the desired goals. For example, opting out of data collection through app permissions and setting cookie preferences is an option for users. But this option is often exclusionary and inconvenient, resulting in people categorically waiving their privacy for the sake of convenience.
  
• United States (health law): Within the United States, the marquee federal health privacy law passed in 1996 (the Health Insurance Portability and Accountability Act, known as HIPAA) was designed to protect the privacy and security of individuals’ medical information. But it also serves as an example of laws that can present usability challenges for patients and healthcare providers alike. For example, to comply with HIPAA, many providers still require the use of ink signatures and fax machines. Not only are technologies somewhat antiquated and cumbersome (thereby slowing information sharing)—they also pose risks arising from unsecured fax machines and misdialed phone numbers, among other factors.
  
• Jamaica: Both Jamaica and Kenya have had to halt national plans to launch a digital ID in light of privacy and security issues. Kenya already lost over $72 million from a prior project that was launched in 2019, which failed because of serious concerns related to privacy and security. In the meantime, fraud continues to be a considerable problem for everyday citizens: Jamaica has incurred losses of more than $620 million from fraud since 2018.
  
• United States [tax system]: The situation in Kenya and Jamaica mirrors the difficulties encountered by other digital ID programs. In the United States, the Internal Revenue Service (IRS) has had to hold off plans for facial recognition based on concerns about the inadequate privacy measures, as well as usability concerns—like long verification wait times, low accuracy for certain groups, and the lack of offline options. The stalled program has resulted in missed opportunities for other technologies that could have allowed citizens greater convenience in accessing tax-related services and public benefits. Even after investing close to $187 million towards biometric identification, the IRS has not made much progress.
  

Collectively, a key takeaway from these international experiences is that when policymakers fail to simultaneously balance (or even consider) usability, privacy, and security, the progress of major government initiatives and the use of digitization to achieve important policy goals is hampered. In addition to regulatory and legislative challenges, delaying or canceling initiatives due to privacy and usability concerns can lead to erosion in public trust, increased costs and delays, and missed opportunities for other innovations.

Policy as product design

Going forward, one pivotal way for government decision makers to avoid pitfalls like the ones laid out above is to start thinking like product designers. Focusing on the most immediate policy goals is rarely enough to understand the practical and technological dimensions of how that policy will interact with the real world.

That does not mean, of course, that policymakers must all become experts in creating software products or designing user interfaces. But it does mean that some of the ways that product designers tend to think about big projects could inform effective public policy.

First, policymakers should embrace user studies to better understand the preferences and needs of citizens as they interact digitally with governmental programs and services. While there are multiple ways user studies can be executed, the first often includes upfront qualitative and quantitative research to understand the core behavioral drivers and systemic barriers to access. These could be complemented with focus groups, particularly with marginalized communities and populations who are likely to be disproportionately affected by any unintended outcomes of tech policy. 

Second, like early-stage technology products that are initially rolled out to an early group of users (known as “beta-testing”), policymakers could benefit from pilot testing to encourage early-stage feedback. 

Third, regulators—just like effective product designers—should consider an iterative process whereby they solicit feedback, implement changes to a policy or platform, and then repeat the process. This allows for validation of the regulation and makes room for adjustments and continuous improvements as part of an agency’s rulemaking process.

Lastly, legislators and regulators alike should conduct more regular tabletop exercises to see how new policies might play out in times of crisis. The executive branch regularly does such “tabletops” in the context of national security emergencies. But the same principles could apply to understanding cybersecurity vulnerabilities or user responses before implementing public policies or programs at scale.

In the end, a product design mindset will not completely eliminate the sorts of problems we have highlighted in Kenya, the United States, and beyond. However, it can help to identify the most pressing usability, security, and privacy problems before governments spend time and treasure to implement regulations or programs that may not fit the real world.

Karen Sowon is a user experience researcher and post doctoral research associate at Carnegie Mellon University.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an assistant professor of electrical and computer engineering at Carnegie Mellon University.

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First, what is a strategic reserve? A strategic reserve is a stock of a systemically important input, which can be released to manage serious disruptions in supply. The most well known example—the strategic petroleum reserve (SPR)—was created as a response to the 1973-74 Arab oil embargo, as well as to meet the reserve obligations of the international energy program. Since the 1970s, the SPR has been tapped more than two dozen times for a range of reasons: from providing critical petroleum supply after natural disasters, to most recently reducing inflationary pressures on energy prices after Russia’s invasion of Ukraine. In addition, if managed well, drawdowns of the reserve can occur when the United States is able to sell the crude oil at high prices and buy it back when prices are low.

What purpose would a strategic bitcoin reserve serve? Proponents of the idea think of bitcoin as a national and economic security asset like oil or gold. However, in economic security terms,  bitcoin clearly does not serve the same function in the US economy as petroleum. Oil is one of the basic inputs that powers our economy and daily living—crypto is not. Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.

Moreover, as this week has made clear, bitcoin price is impacted by macroeconomic factors and recovers slower, even as markets are settling down this week. As the one-two punch of an unexpectedly weak jobs report and a surprising rate hike in Japan came in over the weekend, markets all over the world reacted strongly. A bigger, mirrored dip was seen in crypto prices after Friday. What we saw is a sell-off of crypto—an exchange of a liquid asset to pay off debts and higher borrowing costs—incurred by rising uncertainty in the markets as they begin to price in a possible conflict in the Middle East, in addition to the macroeconomic data. Compare this with gold—another reserve asset—which stayed relatively stable over this period. This volatility of crypto is persistent and makes it an ineffective hedge against inflation. 

Additionally, bitcoin is only one type of crypto asset. In the case of a strategic petroleum reserve, we don’t just use one provider of crude oil, regardless of its market share. Moreover, a large majority of the US government’s seized crypto assets are in the form of tether and other assets. It’s still an open question if they would become a part of the strategic reserve.  

Since it’s not about the resilience of bitcoin during a period of macroeconomic uncertainty, or its strategic importance in our economy—what is the idea of strategic bitcoin reserve actually about? Both critics and proponents have talked about how this proposal could make bitcoin and crypto more institutionalized and  enmeshed with traditional finance, raising its popularity and use for commercial purposes. For the last five years, the crypto industry has wanted to shed its outsider status and enter the mainstream of global finance. It has been somewhat successful with the introduction of BlackRock’s bitcoin ETF this year, in addition to increased interest in tokenization experiments. This sort of institutionalization has helped, largely because it has been realistic about crypto’s capabilities and importance in global markets. 

The biggest drawback of the strategic bitcoin reserve proposal is that it prescribes crypto values it does not have, at least for now. This proposal is at best, premature, and at worst, out of touch with the reality of markets and US national security objectives. Bringing bitcoin into mainstream use is not reason enough to create a strategic bitcoin reserve. 

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Data visualization created by Alisha Chhangani.

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The gulf between economic data and official pronouncements grew through the second quarter of 2024. Property markets, stock prices and consumer sentiment all indicated weakness while China showcased engagement with foreign investors and private Chinese firms to signal intent to boost activity. But new policy actions were not market friendly in the period before the July 2024 Third Plenum economic planning meetings. There were a few encouraging signs for foreign investors, including pledges to discipline local protectionism and arbitrary regulations, but these have been heard before, and “promise fatigue” is a serious problem. Most of the clusters we track showed limited progress or further divergence from OECD norms. On trade, China refused to acknowledge the legitimacy of the overcapacity concerns the world was alarmed about.

The second quarter generally reflected the takeaway from the July plenum meetings: China will leverage whatever it can to drive technological advancement, and national security will override efficiency at home and engagement abroad. New rules to address excess local regulation contain expansive national security carveouts, as do pilot measures to allow foreign investment in data centers and telecom. Beijing’s commitment to direct state support to vast swaths of the economy was reinforced this quarter, with the state planning plenum manifesto as a capstone.

Read the full issue brief below

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Sinographs Jul 23, 2024

Key takeaways from China’s Third Plenum 2024

By Hung Tran

The communiqué of the Third Plenum of the CCP Central Committee lacks major policy initiatives to address the country’s near-term growth challenges.

China Economy & Business

Issue Brief May 15, 2024

China Pathfinder: Q1 2024 update

By GeoEconomics Center and Rhodium Group

In the first quarter of 2024, Beijing pushed forward with a flurry of efforts to support a faltering stock market, ramp up exports to make up for domestic demand, and double-down on high-tech sectors with subsidies and other innovation funding.

China Fiscal and Structural Reform

Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

The China Pathfinder project examines whether China’s economy is converging or diverging with the world’s leading open market economies.

China Digital Policy

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Based on this feedback, this blog series was started to highlight important information about targeted human rights sanctions as they relate to the Islamic Republic of Iran; major updates on Iranian perpetrators who have been sanctioned for human rights abuses and why; and any other information that may be relevant to affected communities. Input is welcomed from readers, particularly in Iranian civil society, for questions and topics that should be addressed.

This page will be subsequently updated with a Persian translation of the post. 

Background

Despite the numerous sanctions issued against individuals linked to the Islamic Republic of Iran, an “illicit global network of shell companies, banks, and exchange houses” allows many of them to evade the consequences. This is partly due to the complications involved in identifying the true owner of an asset, the “beneficial owner.” A beneficial owner is a natural person—i.e., an individual, as opposed to a legal person or entity—who actually owns or controls a legal entity. 

Why is transparency over beneficial ownership important?

Targeted sanctions generally—though not always—involve freezing the assets of designated individuals or entities. Identifying property, including legal entities, they own or control is, therefore, a key component of sanctions enforcement. 

Increased transparency over beneficial ownership, as well as leaked documents, have yielded examples that highlight why beneficial ownership information is critical for sanctions enforcement. Leaked documents show that Russian oligarch Roman Abramovich changed the beneficial ownership of trusts shortly after the start of Russia’s 2022 full-scale invasion of Ukraine—seemingly to avoid asset freezes. His seven children are now the beneficial owners of at least $7 billion. When Luxembourg established a public database of beneficial ownership in 2019, investigators used it to map the local activity and businesses of Calabrian crime group ‘Ndrangheta; uncover additional evidence of allegedly corrupt dealings undertaken by former-Argentinian President Mauricio Macri’s family while he was in office; and identify the beneficial owners of properties throughout Europe bought by companies registered in Luxembourg, such as those of an Indonesian businessman accused of human rights abuses and tax evasion.

Such transparency can help investigators identify Iranian-linked assets globally, but especially in jurisdictions where they are known to have traveled. While there are critical privacy considerations that must be taken into account,  obstacles to accessing the information must be limited to ensure as much transparency as possible. This can ultimately increase the effectiveness of targeted sanctions through the identification of all relevant assets which can be promptly frozen, and, where the appropriate legal standards are met, seized.

When do jurisdictions restrict the legal entities of designated persons?

Asset freezes vary depending on the jurisdiction, but they generally prevent designated persons from accessing their property, such as bank accounts, real estate, and other real property, and ban others from engaging in financial transactions with those designated persons. When it comes to legal entities—which may have multiple owners and stakeholders, only some of whom are designated—jurisdictions generally require that designated persons’ ownership or control reaches a certain threshold.

• Australia: The Australian government prohibits dealing with “controlled assets,” which are those owned or controlled by a designated person or entity, but there does not appear to be public guidance or a definition for determining ownership or control.
• Canada: When a property is deemed controlled by a designated person, Canadian persons are prohibited from “dealing in” it. In 2023, Canada amended its Special Economic Measures Act and Justice for Victims of Corrupt Foreign Officials Act to include provisions under which a designated person is considered to control an entity when it meets one of three criteria: if they have at least 50 percent ownership or voting rights; they have the direct or indirect ability to “change the composition or powers of the entity’s board of directors”; or, it “is reasonable to conclude” that they are directly or indirectly able to direct the entity’s activities. 
• European Union: If an entity is owned or controlled by a designated person, then the funds and economic resources of that entity must also be frozen. Ownership involves possession of over 50 percent “proprietary rights” or a majority interest. Control is determined according to a non-exhaustive list of criteria, which includes the right or exercise of power “to appoint or remove a majority of the members of the administrative, management or supervisory body”; the right to use all or part of the entity’s assets; and the sharing of financial liabilities of the entity, or guaranteeing those liabilities. 
• United Kingdom: An entity is subject to an asset freeze and restrictions on “some financial services” when it is owned or controlled, directly or indirectly, by a designated person. Like Canada, the United Kingdom requires one of three criteria to be met to establish ownership or control: when the person directly or indirectly holds more than 50 percent of the shares or voting rights; when they have the right to directly or indirectly appoint or remove a majority of the board of directors; or when it’s “reasonable to expect” the person would be able to “ensure the affairs of the entity are conducted in accordance with the person’s wishes.”
• United States: The US government uses the “50 Percent Rule”: when one or more “blocked” (i.e., designated) persons own an entity “by 50 percent or more in the aggregate,” then that entity is itself considered blocked. While the United States does not evaluate control under this rule, it may designate the entity itself if it is determined to be controlled by a designated person.

How are jurisdictions changing beneficial ownership frameworks?

To prevent designated persons from hiding their ownership of assets, jurisdictions have strengthened corporate transparency and reporting requirements on beneficial ownership. The Financial Action Task Force (FATF)—an intergovernmental organization tasked with combatting money laundering and terrorist and proliferation financing—released updated guidance on beneficial ownership in 2023. It recommended that countries establish a beneficial ownership register or alternative mechanism to document ownership information. 

• Australia: The Australian government has committed to beneficial ownership reform between January 2024 and December 2025 as part of its Third Open Government Partnership National Action Plan. This will include implementing a public beneficial ownership register, for which the Treasury previously undertook a consultation process in 2022.
• Canada: As of January 22, 2024, all corporations governed by the Canada Business Corporations Act are required to file beneficial ownership (or “individuals with significant control,” or ISC) information. Businesses have been required to maintain their own ISC registers since June 2019 but were not previously required to file them with the government. Some of the information in the filings—such as full legal names, the description of the significant control, the dates of significant control, and certain addresses—will be available through an online search on Corporations Canada, the country’s federal corporate regulator.
• European Union: The EU uses the Beneficial Ownership Registers Interconnection System (BORIS) to link the national registers of member states Iceland, Liechtenstein, and Norway. This was set up in line with a 2015 European Parliament and Council directive, as amended in 2018. Access to some information is restricted according to national laws. In November 2022, the Court of Justice of the European Union annulled provisions of a directive that granted public access to beneficial ownership information. A new version of the directive would instead grant access to the register to persons with a “legitimate interest” in the beneficial ownership information, like journalists or civil society. In January 2024, the European Council and Parliament reached a provisional agreement that includes provisions to make beneficial ownership rules “more harmonised and transparent,” for example, by clarifying rules to prevent beneficial owners from “hiding behind multiple layers of ownership of companies.” Notably, the beneficial ownership threshold was set at 25 percent.
• United Kingdom: The UK has three registers: for “people with significant control,” for trusts, and for overseas entities. Overseas entities were required to register with Companies House, the country’s corporate regulator, and tell them who the beneficial owners or managing officers were by January 21, 2023. Still, in February 2023, it was reported that almost half the companies required to do so had not. An act in the final stages of legislative approval will include reforms to Companies House, such as identity verification for certain personnel, more effective investigation and enforcement powers, and enhanced personal privacy protections.
• United States: Effective January 1, 2024, as required under the 2021 Corporate Transparency Act, certain “reporting companies”—including US-based corporations and limited liability companies, as well as foreign companies registered to do business in the US—must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This information will be stored in the Beneficial Ownership Information database. The Department of the Treasury issued a final rule that makes money services businesses, casinos, and “other non-bank financial institutions that have anti-money laundering obligations” eligible for access to the beneficial ownership registry. 

Celeste Kmiotek is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

Lisandra Novo is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

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While previous G20 meetings have been noteworthy for their disagreements, Brazil has emphasized substance and consensus over geopolitics during its G20 presidency. Felipe Hees, the Brazilian diplomat and sous-sherpa of this year’s G20 presidency, explained this strategy on July 25 at an Atlantic Council conference on the sidelines of the meeting. Brasília, he said, has sought to acknowledge fundamental disagreements on geopolitics between some members, and then to sidestep them entirely at the ministerial level. The big question now is: How long can this approach last?

So far, Brazilian officials have chosen to focus on economic development issues that already enjoy widespread support. Last week, this approach resulted in one of the few joint G20 ministerial-level communiqués in the past two years. Released on July 26, this communiqué displays G20 members’ alignment on launching the Global Alliance against Hunger and Poverty under the Brazilian presidency. It’s an important topic for the host country, since Brazil is the world’s leading producer of soybeans, corn, and meat, and Brazilian President Luiz Inácio Lula da Silva has emphasized his country’s role in alleviating global food insecurity. At the same time, the issue has a wider resonance. At the Atlantic Council conference, Cindy McCain, executive director of the World Food Program, emphasized that “food security is a national security issue, and it should be labeled as one.”

Climate finance and the energy transition were at the forefront in Rio last week as well. Discussions focused on how to mobilize the public and private sector in achieving climate goals. At the Atlantic Council’s conference, Renata Amaral, the Brazilian secretary for international affairs and development in the Ministry of Planning and Budget, formally called for technical assistance from multilateral development banks for catastrophic weather events, such as the floods in southern Brazil this May. Immediately following the summit, US Treasury Secretary Janet Yellen headed to Belém, the capital city of the northern Brazilian province Pará. Located near the mouth of the Amazon River, Belém was a symbolic choice for the unveiling of the US Treasury’s Amazon Region Initiative Against Illicit Finance, which is intended to help combat nature crimes.

Another issue that garnered attention last week was wealth inequality, which the Brazilian president spotlighted in his speech on June 24. “The poor have been ignored by governments and by wealthy sectors of society,” he said. Despite disagreements on whether the G20 is the right forum for the issue, it issued the first ever ministerial declaration on taxation. While Brazil’s ambition was to move the needle on a 2 percent global wealth tax, the declaration simply said that ultra-high-net-worth individuals must pay their fair share in taxes. While this fell short of Brazil’s hopes on this issue, the meetings in Rio have done more on building consensus than the past two presidencies, which have been rife with outbursts over geopolitical issues between member states.

In 2022, the then G20 president, Indonesia, saw its plan to build international cooperation for the post-pandemic recovery paralyzed by Russia’s full-scale invasion of Ukraine in February. When finance ministers and foreign ministers met in April and July of the year, officials from Russia and from the United States and Europe walked out of the room when their counterparts spoke. Ministers failed to agree on a communiqué, and negotiations on climate and education also broke down over criticisms of the war. Ahead of the leaders’ summit in November 2022, Western leaders balked at the thought of sharing a table with Russian President Vladimir Putin, who ultimately did not attend the summit. In the end, the leaders could only agree to a declaration that was a broad, noncommittal summary of approaches to addressing global challenges.

Last year, India focused its G20 presidency on depoliticizing the issue of the global supply of food, fertilizers, and fuels, as well as on addressing climate change and restoring the foundations of negotiations at the forum. Its strategy was to move geopolitics off center stage by highlighting perspectives from the “Global South,” including formally adding the African Union as a full member, and thus shaping the platform as an action and communication channel between advanced economies and emerging markets.

This was difficult. Shortly into India’s presidency, Russia and China withdrew their support for the text in the Bali statement on Ukraine. At the technical level, none of the ministerial meetings produced a joint communiqué, and New Delhi was forced to issue chairs’ statements instead. Since the leaders’ summit in New Delhi, the outbreak of war between Israel and Hamas in October 2023 has made the job of navigating geopolitical tensions all the more difficult for Brazil.

While the Russian and Chinese leaders did not attend last year’s leaders’ summit, the New Delhi Declaration was nevertheless bolder and more specific than its Bali predecessor. It set the agenda for the G20 for the years ahead but offered few specifics on how to achieve these goals.

Will Brazil’s strategy of sidestepping geopolitics work at the leaders’ summit scheduled for November 18-19 in Rio? Finance ministers and central bank governors can ignore geopolitics; presidents and prime ministers often cannot. If Brasília concludes technical negotiations on the various proposals ahead of the leaders’ summit, then consensus-building at the gathering will be easier, as geopolitics will remain just an elephant in the room.

If Brazil is successful, it can end the stalemate that the G20 has found itself in and remake it into a relevant economic coordination body—one that can adequately address the goals of its emerging market and advanced economy members. If Brazilian officials are not successful, however, the forum’s relevance may begin to wane.

It has been in the interest of the last few G20 presidencies to keep up the balancing act between the United States, China, and Russia. Moreover, it is likely that South Africa will follow this approach as it takes on its presidency in 2025. As many of the discussions in Rio noted, however, what happens in the US presidential elections this November could determine both the relevance and the tone of the G20 meetings going forward.

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Mrugank Bhusari is assistant director at the Atlantic Council’s GeoEconomics Center.

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On Thursday, May 23, 2024, Senior Fellow Pepe Zhang of the Adrienne Arsht Latin America Center gave testimony before the US-China Economic and Security Review Commission in a hearing on key economic strategies for leveling the US-China playing field in trade, investment, and technology. Below is a written version of his testimony.

Summary

At the Commission’s request, this testimony evaluates US economic engagement with Latin America and the Caribbean (LAC)—taking into account competition and comparison with Chinese efforts, where applicable—and provides recommendations for improvement. Specifically:

• Section I: The testimony provides an overview of China’s rise in LAC’s economic context
• Section II: It then describes recent US economic engagement—with an emphasis on the Americas Partnership for Economic Prosperity (APEP)—as well as regional reception and needs across three areas:
  • Greater US policy attention
  • More US resources
  • Enhanced policy continuity
• Section III: Based on the above, the testimony prescribes three policy tools and pathways to enhance US economic engagement with the region, related in particular to supply chains:
  • Trade policy: tariff, nontariff, and complementary measures
  • Industrial policy that induces self-sustaining and whole-of-ecosystem supply chain enhancements
  • Development policy: financial and nonfinancial development assistance and cooperation
• Section IV: In conclusion, it distills the preceding analysis into nine recommendations to the Commission and congressional and other stakeholders across three levels:
  • Policy level: Recommendations regarding trade policy, industrial policy, and development policy tools
  • Resource level: Recommendations to unlock more resources for specific US government agencies and efforts and multilateral development organizations
  • Strategic level: Strategic recommendations to ensure US policy attention, resources, and continuity towards LAC

I. The rise of China in regional economic context

The Latin American and Caribbean region (LAC) has registered on average a modest 2-2.5 percent annual growth rate over the past thirty years, among the slowest in the world. To varying degrees, most countries in the region saw considerable improvements in monetary and fiscal policymaking. But, they continue to face structural challenges such as limited productivity gains, socioeconomic inequality, and low levels of foreign investment. In the same period, the lack of significant new domestic growth drivers—coupled with waves of trade liberalization efforts around the world and several regional economies’ growing export success—prompted LAC efforts to enhance and diversify economic engagement with international partners.

Against this backdrop, China swiftly emerged as a key economic player in LAC, especially in South America, across four main areas: trade, foreign direct investment (FDI), official lending, and infrastructure development.¹

1. Trade

Trade represents the most significant area of Chinese economic engagement with LAC. The dramatic expansion in bilateral trade underscores the growing economic interdependence between these two regions. Over the past twenty-five years, trade between China and LAC has multiplied over twenty times to nearly $500 billion in 2023. China has become by far the largest trading partner for countries like Chile, Peru, and Brazil, accounting for over 30-40 percent of their total exports. By comparison, this is three to four times higher than China’s share of total US, German, or European Union (EU) exports (less than 10 percent).

Trade flows remain robust in the other direction as well. LAC consumers increasingly favor Chinese goods and services, including high value-add technology products such as cell phones and automobiles or services like TikTok. One important caveat on China-LAC trade is that sizable differences exist across LAC subregions: South America (mostly commodity exporters) is much more dependent on trade with China than Central America, Mexico, and the Caribbean (Figure 1).

Figure 1: China’s participation in LAC subregions’ trade in 2005, 2020, and 2035 (projected, in percent) ²

2. Investment

While Chinese investment cratered globally starting 2016, particularly in major markets like the EU and the United States, it has shown smaller decline and relative resilience in LAC. This is attributable to at least two regional factors: still-attractive assets and valuations and a friendlier regulatory environment for Chinese investors (compared to heightened scrutiny in advanced economies).

Brazil is the largest recipient of Chinese investment in LAC, and China is Brazil’s top investor. In 2021, Brazil received a record $5.9 billion in Chinese FDI, surpassing the $4.7 billion China invested in the United States in the same year—remarkable considering that the Brazilian economy is one tenth the size of the United States’. In terms of sectors, Chinese FDI and mergers and acquisitions in the region traditionally concentrated in energy, mineral, and utilities, but have been diversifying into new areas such as ICT and manufacturing.

3. Lending

Chinese official lending to LAC peaked between 2007 and 2016, averaging more than ten billion dollars annually. But it has since declined significantly as part of a global retrenchment in Chinese government lending overseas. As Beijing’s cautiousness continues, new activities in this space will likely involve renegotiations and restructurings of existing loans rather than new disbursements. Venezuela, which represents less than 5 percent of regional GDP, has been the top recipient (approximately 40 percent of stock) of Chinese official lending to LAC.

4. Infrastructure development

Chinese construction firms have actively participated in LAC’s infrastructure development through public tenders, winning numerous high-profile projects and at times outcompeting US and European firms. The visible, tangible nature of infrastructure projects (roads, ports, stadiums, hospitals, etc.) contributes to China’s growing economic presence in the region. As well, they help to alleviate excess capacity in China’s domestic industrial and construction sectors.

China’s economic engagement is generally seen as a growth driver and therefore well-received by regional stakeholders. For some South American nations, trade flows and business cycles have already become more aligned and synchronized with China’s than with traditional partners’ including the Group of Seven (G7) economies (Figures 2 & 3). Such strong economic linkages have potential implications for the effectiveness of US policy. For instance, the United States may find it increasingly challenging to leverage certain geoeconomic tools (e.g., US-led coordination of multilateral sanctions) against China in the region. In general, most LAC countries already avoid being caught up or publicly choosing sides in the US-China competition.

Figure 2: Major trading partners’ participation in LAC Trade from 2000 to 2035 (projected) ³

Figure 3: G7 vs. Chinese growth impact on and correlation with LAC economies ⁴

Note: Placement above the forty-five-degree line indicates a country’s growth is more responsive to China than to the G7.
SA stands for South America. MCC stands for Mexico, Central America, and the Caribbean.

II. Recent US economic engagement and regional reception

1. Recent US economic engagement including APEP

Despite China’s growing economic footprint in South America, the United States remains LAC’s most important economic partner in aggregate terms. LAC trades more with the United States than it does with any other country on the back of stronger-than-ever commercial ties between the United States and Mexico. In 2023, the size of US-Mexico trade alone (approximately $800 billion) far exceeded the size of China’s trade with the entire LAC region (approximately $500 billion). The United States also maintains an expansive, outsize network of existing trade agreements in the hemisphere, boasting twelve free trade agreement (FTA) partners in it (and only eight outside). Additionally, the United States is consistently the largest foreign investor in the region, followed by Spain. The potential for investment and collaboration in strategic and emerging sectors is significant: three out of the seven countries eligible for US government support through the International Technology Security and Innovation (ITSI) fund—created under the 2022 CHIPS Act to strengthen semiconductor and telecommunications supply chains—are located in LAC.

With a handful of ideological exceptions, countries in the region largely welcome pragmatic international economic engagement including with the United States. The latest flagship US regional economic policy initiative is APEP, announced by the Biden administration in June 2022 during the Ninth Summit of the Americas in Los Angeles. APEP’s four main priorities are to foster regional competitiveness, resilience, shared prosperity, and inclusive and sustainable investment in LAC. It currently has twelve members: Barbados, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, the United States, and Uruguay.

APEP is structured around three tracks (foreign affairs, finance, and trade), with respective working groups led by individual countries. The working groups cover a wide range of topics, with the initially established ones addressing eight: entrepreneurship, digital workforce development, clean hydrogen, rule of law, sustainable health infrastructure, sustainable food production, water and basic sanitation, and space. Notable announcements so far include a USAID Entrepreneurship Accelerator with initial support from Canada and Uruguay, digital technology workforce development including the first APEP Semiconductor Workforce Symposium held in Costa Rica, and innovative development finance cooperation with the Inter-American Development Bank on climate and migration issues. ⁵

A significant component of APEP is its focus on hemispheric trade and supply chain resilience. In particular, the first APEP trade ministers’ meeting in March 2024 emphasized three key priorities: trade facilitation and digitalization of customs procedures; conducting a gap analysis of critical value and supply chains; and trade for the benefit of small and medium-sized enterprises and underserved communities. Sector-wise, APEP has initially targeted energy, semiconductors, and medical supplies as priority sectors, largely consistent with the four product categories identified by the Biden administration’s Executive Order 14017, as well as broader US interagency efforts on friendshoring/nearshoring.

2. Regional reception

APEP and other efforts of US economic engagement are generally well received in LAC. But they can be improved in three ways from a regional perspective:

a. Policy attention

A main criticism of US foreign policy towards LAC over the past two decades is that Washington has overlooked the region to accommodate priorities elsewhere. More recently, the symbolism of hosting two highest-level hemispheric political events in the United States (the 2022 Summit of the Americas and the 2023 APEP Leaders’ Summit) helped to mitigate such perception to some extent. But systematically shoring up US commitment to the region will demand a strategic rethink of what is at stake.

The US economy has much to gain, buoyed by a more prosperous and stable neighboring region. And it has even more to lose in an economically unstable Western Hemisphere, with secondary effects such as migration challenges already impacting US domestic politics.

In terms of nearshoring/friendshoring, LAC offers several valuable advantages that the United States would do well to leverage and reinforce, in an era of global supply chain reshuffling and heightened geopolitical uncertainty:

• geographic proximity;
• competitive wages;
• an overwhelming majority of democratic, peaceful, and friendly states (albeit imperfect);
• a diverse group of governments and companies interested in working with the United States, from the manufacturing powerhouse in Mexico, to dynamic small open economies with proven macroeconomic and sectoral successes such as the Dominican Republic, and South American commodity exporters that are increasingly influencing global food security, energy, and climate transition agendas. ⁶

b. Resources

Another key regional observation regarding US economic engagement concerns the need for more concrete follow-up actions and adequate resource allocation. This is often considered a byproduct of insufficient US policy attention described above. For instance, APEP experienced a perceived hiatus between being announced during the 2022 Summit of the Americas and regaining momentum around the 2023 APEP Leaders’ Summit. Since the Leaders’ Summit, however, countries have quickly ramped up technical work and senior officials’ meetings, with a view to achieve tangible progress ahead of the second APEP Leaders’ Summit, to be held in Costa Rica in 2025.

With respect to resources, members have understandably expressed interest in accessing economic opportunities, US investment, and financial support through APEP. For the time being, a substantial part of such support will likely be mobilized through innovative partnerships, including with different US government agencies, extra-regional allies, APEP members themselves, the Inter-American Development Bank especially its private sector arm IDB Invest, and potential resources from the recently introduced Americas Trade and Investment Act (Americas Act). Going forward, a clearer definition of APEP’s governance structure, membership criteria, and pathways to resources can more effectively unleash opportunities for the benefit of APEP members.

c. Policy continuity

Economic and political relations between the United States and LAC risk becoming more unpredictable amidst electoral cycles across the Americas, including the upcoming 2024 US presidential election. Potential elections-induced policy shifts, if more drastic than normal, could undermine US interests. For instance, as regional partners grapple to navigate and reconcile different US administrations’ flagship LAC policy initiatives, they do not face similar struggles with China and its Belt & Road Initiative.

In this context, the Americas Act recently introduced by Senators Bill Cassidy (R-LA) and Michael Bennet (D-CO) alongside Representatives Maria Elvira Salazar (R-FL), Adriano Espaillat (D-NY), and Mike Gallagher (R-WI) brings about a remarkable opportunity to ensure long-term US policy continuity and coherence in LAC. This bipartisan and bicameral legislative effort proposes a comprehensive vision for US economic partnership with the region, underpinned by trade, investment, and supply chain integration, as well as significant new resources. Moreover, in a rare and much-needed display of legislative-executive coordination, the Americas Act built a bridge to the Biden administration’s efforts by fast-tracking APEP members’ eligibility for Americas Act resources. ⁷

III. Tools and pathways for future enhancements

To bolster economic integration between the United States and LAC with a focus on supply chain integration, it is vital to better utilize, innovate, and explain specific US policy tools to regional partners. At a high level, such tools should play to the unique strengths—and take into account the limits—of the US economy, US government, and their hemispheric ties. Where possible, they should be complemented by targeted capacity building that fosters stronger, self-sustaining local economies in LAC, as well as a more symbiotic economic relationship with the United States. Specifically, such tools may span across three interconnected areas: (a) trade policy; (b) industrial policy; and (c) development policy.

1. Trade policy

Trade policy instruments include both tariff and nontariff measures.

• Tariff: The scope for using traditional trade agreement/tariff instruments is limited, due to ongoing domestic backlash against expanding foreign access to the US market. In the absence of new FTA negotiations, the United States and hemispheric partners are focusing recent efforts on making the most out of the existing US trade toolbox and network. Some examples are legislative measures that aim to surgically insert smaller economies (such as Uruguay, Ecuador, and Costa Rica) through existing preferential trade arrangements, while creating pathways towards eventual bilateral FTAs in some cases.
• Nontariff: More can and should be done in the realm of nontariff measures, such as harmonizing hemispheric regulatory and phytosanitary standards, streamlining customs procedures, and improving connectivity infrastructure. These measures help to reduce the cost and time of intraregional trade flows, thus boosting the efficiency and competitiveness of hemispheric production and exports. Here, the United States can play a leadership role, facilitated by its existing FTAs with twelve countries in the region.

Greater interoperability—tariff and nontariff—among US trade ties with hemispheric partners is a practical way to advance the regional economic integration agenda in LAC, which has stalled in recent decades due to political polarization within and across countries. With intra-regional trade representing only 20 percent of LAC’s total trade (the lowest and slowest-growing of all world regions), nearshoring—or regionalized supply chains—in the Americas cannot meet its full potential. ⁸

• Complementary coordination measures and special considerations may include modernizing policies and regulations to better address digital trade, intellectual property, and labor standards concerns; accumulation of rules of origin for strategic sectors and products; an ambitious plan towards eventual interoperability with FTAs in the region currently not involving the United States; an inclusive focus on integrating smaller, dynamic economies (many of which are strong US allies) that may otherwise face hurdles to enter regional/global supply chains, due not only to price but scale competition vis-à-vis Asia, etc.

2. Industrial policy

Beyond conventional trade tools, enhanced industrial policy is needed to strengthen productive capabilities and integration within the Western Hemisphere. Well-designed tools (US policies, incentives, investments, and signaling) in this area should focus not on creating one-off success stories but inducing self-sustaining and whole-of-ecosystem supply chain enhancements.

• Whole-of-ecosystem: One of the main advantages of China/Asia-based manufacturing today is its complete, sophisticated supply ecosystems, where a wide range of specializations and suppliers are available along entire value chains upstream and downstream. If the ultimate US policy objective is to replicate these ecosystems in the Western Hemisphere, policymakers can extract helpful lessons from Asia’s flying-geese-paradigm industrialization. In this paradigm, Japan as a “leading goose” invested in, shared knowledge about, and induced industrial upgrading in the rest of Asia. By doing so, it made Japanese/Asian exports more cost-competitive, while creating positive spillover effects that led to self-sustaining regional supply chains and additional comparative advantages. The United States—and by extension, the North American free trade area—should serve as a similar leading goose in the Western Hemisphere.

However, the whole-of-ecosystem approach may prove challenging or take considerable time and investment to materialize in certain sectors/products, e.g., when regional partners or the United States itself does not possess the specializations or technologies needed. In these cases, collaboration with trusted extra-regional allies and surgical interventions to tackle skills gaps or supply chain chokeholds can help to accelerate the process.

• Self-sustaining: Public sector investment and assistance through the Inflation Reduction Act (IRA) and the CHIPS Act are a first step in the right direction to push supply chains into the region (“push factors”). Efficient coordination with regional partners is important for financial, capacity, and competitiveness reasons. Many regional governments, while interested, may have limited fiscal space to develop these supply chains independently or have limited technical/industrial capabilities to qualify for US support (or learn how to qualify).

Creating US interagency roadmaps for hemispheric supply chain development, with private sector input, will be vital to building such capabilities in LAC to pull/attract investments (a key “pull factor”) and ensuring long-lasting success. Importantly, the roadmaps must also introduce a healthy degree of domestic competition, possibly through a sunset provision. Some of LAC’s unsuccessful industrialization attempts in the last century—characterized by import-substitution industrialization as opposed to East Asia’s export-oriented industrialization—generated uncompetitive firms and resource misallocation, offering a cautionary tale.

A US strategy designed to advance supply chain push and pull factors should also include local workforce development (a key element of APEP) and infrastructure development (from logistical to energy conditions necessary to ensure export competitiveness); synergy with US-led sector-specific initiatives (such as the Minerals Security Partnership); bilateral high-level dialogue mechanisms (similar to the US-Mexico High-level Dialogue, the US-Guatemala High-Level Dialogue, etc.); US support of regional initiatives such as the Alliance for Development in Democracy (ADD) Business Council’s Supply Chain Working Group, etc.

3. Development policy

Development policy tools increase supply chain competitiveness and broader economic resilience in LAC by nurturing additional pull factors conducive to nearshoring, such as project bankability, macroeconomic stability, physical infrastructure, skills and productivity, and disaster preparedness and response. ⁹ The United States has several unique tools at its disposal, both financial and nonfinancial, to support regional economic development.

• Financial: The most direct financial instruments of the US development toolbox are provided by US agencies such as USAID, DFC, USTDA, and EXIM. With varied priorities and operations, they can offer financing to advance US commercial and foreign policy interests while supporting local development needs. A growing focus and challenge for some of these agencies is to mobilize the private sector. For instance, on the investment side, although US companies have successfully led the United States to overtake the EU as LAC’s number one foreign investor, opportunities exist to unlock additional private sector investment if the agencies are authorized to more easily and substantially mitigate certain country and project risks.

The Washington-based international financial institutions (IFIs) are another distinctive asset for US development and foreign policy in LAC. For example, the COVID-19 pandemic demonstrated once again that these organizations are more willing and capable—than their Chinese policy bank counterparts—to provide counter-cyclical support to LAC countries in need. Such support took place through the IMF’s liquidity or macro stabilization programs, as well as development operations from the IDB or the World Bank that directly boosted governments’ recovery and growth efforts, improved public infrastructure, health services, or skills training, or indirectly freed up additional fiscal resources for development. Though often underappreciated, the IFIs’ close coordination with the US Department of Treasury (their largest shareholder) contributes to hemispheric economic stability and development.

• Nonfinancial: Numerous US agencies drive development in LAC through a wide array of nonfinancial assistance and cooperation, including training programs organized or contracted by the Departments of Commerce, Treasury, State, Energy, and others. These programs build capacity among LAC public sector, private sector, and civil society beneficiaries, covering specific technical issues such as commercial laws, government procurement, independent journalism, illicit finance, etc.

Additional examples include the Department of Defense and US Southern Command (SOUTHCOM)’s security cooperation with countries affected by rising crime and violence, or their operational support for natural disaster preparedness and response in small, disaster-prone Caribbean Island states. While these efforts may not be economically focused by design, they generate immense economic value, by protecting lives, jobs, supply chains, the investment climate, and government balance sheets. They also foster goodwill. The fact that the US remains the region’s partner of choice in these noneconomic areas reflects the multi-dimensional, symbiotic nature of the US-LAC relationship. Hemispheric policymakers would do well to further explore these areas as complementary pathways toward greater economic integration.

IV. Recommendations

In summary, and with the Commission’s mandate in mind, I propose the following nine recommendations to advance US interest and leverage US strengths in topics covered by this testimony on three levels: The policy level, resource level, and strategy level.

Policy level
In coordination with the executive branch, Congress can help innovate and utilize US policy tools across three interconnected areas:

1. Trade Policy: Use tariff, nontariff, and complementary measures to strengthen hemispheric trade and integration under US leadership, without resorting to politically thorny market access issues. A key element here is to leverage the United States’ existing preferential trade agreements with twelve regional partners, as well as their resulting economic linkages and technical interoperability.
2. Industrial Policy: Nurture nearshoring push factors (US policies and incentives) and pull factors (regional competitiveness conditions) to build self-sustaining, whole-of-ecosystem productive capacity in LAC for certain sectors/products/supply chain segments. This includes formulating time-bound, US interagency roadmaps for hemispheric supply chain development, in coordination with regional partners and the private sector.
3. Development Policy: Enhance financial and nonfinancial (technical/operational) assistance from various US government agencies and Washington-based international financial institutions to strengthen economic development, resilience, and nearshoring pull factors in LAC. The goal is to create more competitive regional economies as well as more symbiotic economic partnerships with the United States.
   
   Resource level
   Congress can unlock resources pivotal to implementing and supporting the policy-level recommendations above, for example:
   
4. Increase resources to deploy more foreign service, development, commercial officers in ways that (a) advance US foreign policy and commercial interests in LAC across the trade, industrial, and development policy areas outlined above, including through APEP-related initiatives; (b) supporting regional development needs and capacity building; (c) deepen regionalized China expertise and capability, particularly through the Department of State’s Regional China Officers program.
5. Increase resources for public diplomacy efforts that better specify and highlight the value of positive US economic engagement in LAC. This includes measurable impact of US policy actions recommended above, as well as nongovernmental US accomplishments and facts, e.g., the United States consistently remains by far the region’s largest investor and trading partner in aggregate terms.
6. Optimize budgetary or financing rules for organizations like DFC and EXIM so they can meet the growing and evolving needs of the beneficiaries, expanding progress made in the Better Utilization of Investments Leading to Development Act of 2018 (“BUILD Act”).
7. Approve/Allocate resources to DC-headquartered international financial organizations—including the Inter-American Development Bank Group and the World Bank Group—for future capital increases and replenishments. These organizations are well-positioned to provide high-quality, impact-driven development assistance to LAC. Additionally, they can complement bilateral US efforts, as evidenced by the recently announced IDB Invest-DFC co-financing framework.
   
   Strategic level
   Through its legislative, policy, financial, and oversight authority, Congress can play a key role in guiding the strategic direction of US foreign policy towards LAC, in particular:
   
8. Draw more attention and resources to LAC. The US government including Congress must work to recalibrate regional perceptions of US neglect and advocate for a more active role for the United States in leading hemispheric economic integration. LAC has much to offer as a reliable partner in an evolving global context, and it is in US national interest that this neighboring region realizes its full potential. The recently introduced Americas Trade and Investment Act (“Americas Act”) is a promising endeavor in this regard.
9. Ensure coherence of US economic engagement with LAC. At a time when domestic political polarization across the region and in the United States is making hemispheric relations less stable and effective, Congress can play a key role in informing a high-level, bipartisan, and coherent US strategy towards LAC that better transcends electoral cycles. Recent executive-legislative efforts to connect APEP and the Americas Act are an encouraging signal in this regard.

The post Pepe Zhang provides testimony to the US-China Economic and Security Review Commission appeared first on Atlantic Council.

It is an honor to provide testimony to the US-China Economic and Security Review Commission on the topic of outbound investment from the United States to China, its potential to create national security concerns, and ways in which to address these concerns in a balanced and effective manner. In this testimony, I provide:

• Descriptive data that show the United States is the primary overseas investor in China, mostly through venture capital, though the volume of these flows has declined substantially in recent years.
• An overview of the four key components of the executive order on regulating certain types of US investment to China that I believe are most important to maintain, primarily at the strategic design level.
• A review of three key questions/challenges in implementation that remain after reading the advanced notice of proposed rulemaking (ANPRM) that was released in August 2023, along with recommendations for how to address these challenges.

My core recommendations are as follows:

1. That the Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
2. That the Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list, can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
3. That the US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
4. That Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
5. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
6. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity.
7. That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.

Level-setting the scale of US outbound investment to China

US outbound non-passive investment flows to China have declined substantially in recent years, likely due to policy changes in the United States as well as the Chinese Communist Party (CCP)’s crack down on Chinese tech companies.

Greenfield investment

According to available data, in recent years greenfield investment in China has declined dramatically – both from US investors and the rest of the world. Figure 1 comes from fdiMarkets, the pre-eminent data source for greenfield investment. This chart illustrates that greenfield investment from any foreign source – not just the United States – has declined from a peak in 2018 of roughly $120 billion to under $20 billion in 2022. Note that fdiMarkets uses announcement data rather than realized investment, so many FDI experts believe their numbers are likely to be a bit inflated. Clearly, global investors are avoiding greenfield investment in China, likely due to a mix of push and pull factors. US sources of greenfield investment totaled $8.69 billion in 2020.

Mergers and acquisitions (M&A), private equity (PE), and venture investment (VC)

Pitchbook data can provide more insight into non-greenfield US investment to China. As Figure 2 illustrates, Pitchbook data reports a high watermark of US investment in companies headquartered in mainland China, Hong Kong, or Macau in 2018. Investment volumes have declined every year since 2021; in 2023, US outbound investment to China was 30 percent of its 2021 value. To compare volumes across greenfield and these other forms of investment, US investment through M&A, PE, and VC was about three times as large as global greenfield FDI to China in 2022. A key feature of US investment in China is that a large portion of these flows happen through VC. However, an important caveat is that Pitchbook’s data relies on systematic web crawling and is unable to capture investments that have not been reported in regulatory filings, news articles, or press releases. Because US investors are not currently required to notify outbound investment – at least until E.O. 14105 is implemented – we simply do not know the full universe of US investments into China. Indeed, the reporting component of the E.O. will be very important to better understanding the full scale of US investment to China, and better allow policy makers to scope any regulation appropriately given the true volume of such investments. A costly and burdensome regulatory process to address a tiny concern is not in the long-term interest of the United States.

A deeper dive into the sectors that E.O. 14105 currently contemplates regulating suggests that US participation in these areas is quite small and almost exclusively concentrated in VC, as Figure 3 reports. Furthermore, this investment is almost entirely in the semiconductor industry; in 2020, investments in all other sectors amounted to only about $700 million.

Furthermore, the US is the most important global source of investment to China. Figures 4 and 5 present capital raised in China from investors headquartered in places other than China and the US in all industries (Figure 4) and in key national security technology industries (Figure 5). The United States supplies greater than half of all inward FDI to China and is even more dominant in the relatively small volumes of FDI into national security technology. Moreover, we do not see the United States’ relative position as major supplier of FDI to China diminishing, even as the US government has indicated it will place more restrictions on these kinds of flows.

Taken as a whole, these figures suggest that the size of U.S. investments in Chinese companies of concern is relatively small, but also that the United States is the primary global investor in these sectors. Even small deal values can generate national security concerns if US investors provide capital and expertise to a small set of key entities. However, the available data suggest that the scale of the concern – and particularly outside of the semiconductor industry – is modest. The data also suggest that an effective approach to this potential national security problem needs to address VC, since that is the dominate mode of US investor participation in these core sectors of concern.

Assessing E.O. 14105 – Addressing US investments in certain international security technologies and products in countries of concern – and its proposed rules

The executive order, for which we expect draft rules to be released within the next several weeks, is directionally an appropriate step forward in addressing national security concerns that arise from US investment in sensitive, national security-relevant technology in China. Four of the likely design features outlined in the related ANPRM that are important to maintain are:

1. A notification and prohibition regime rather than a case-by-case review. Initial policy conversations around an outbound regulation envisioned a screening process typically referred to as “reverse CFIUS.” However, the administrability of outbound case-by-case review would be much more complicated than is inbound. This is because The US government has better visibility into the capabilities and national security vulnerabilities of US businesses – which are the targets of inbound investments – than of such capabilities and vulnerabilities of businesses based in China. Additionally, the US government has more leverage over companies that wish to invest in its market – and therefore need its ongoing regulatory approval – than it has over companies that operate in foreign markets over which the US government does not enjoy regulatory authority. In the absence of such investigatory capability or compellence power, a screening mechanism would likely be very challenging to implement effectively. A notification and prohibition regime has the added benefit of providing industry and investors with bright lines about what investments are allowed and which are prohibited, which makes compliance and developing forward-looking business strategies more possible.
   
   Recommendation 1:  The Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
   
   
2. A (narrow) sector-based approach rather than an entity/list-based approach. Some in Congress have suggested that a sector-based approach is inadvisable because, while a sector-based prohibition regime would prevent US persons from investing in Chinese sectors of concern, it would not prevent investors from other countries from doing so. To make restrictions more biting, and to make them apply to investors beyond the United States, some have suggested a list-based approach in which the US government would regularly update a list of Chinese entities that are connected to the Chinese defense and/or surveillance industrial base and impose asset blocks on these entities through the Specially Designated Nationals (SDN) List.
   
   It is my view that this approach creates many problems. First, overuse of the SDN list generates substantial incentives for economic actors to further shift their activities out of the US dollar. While dollar dominance enjoys substantial persistence due to network effects, there is mounting evidence that country governments and related economic actors are increasingly finding ways to avoid US dollars – and thereby the reach of US financial sanctions – through cross border payments systems that do not use the dollar as an intermediary, and by shifting economic activity into other currencies. Dollar avoidance not only erodes the power of financial sanctions more generally, but it also makes it harder for the United States to track patterns in investment flows globally. This, in turn, makes enforcement of existing sanctions and disruption of money laundering activities more challenging. Thus, the unintended negative consequences of a list-based approach are high. Furthermore, the designation process is investigatively burdensome and exposes the US government to litigation. As a civil action, SDN packages need to provide substantial evidence that a designated entity is a national security threat, and designated persons can sue the US government to be removed from listing. Because of this legal structure, an SDN approach would be unable to address risks associated with US investments in Chinese entities working on more speculative but high consequence technologies. This is the exact type of national security concern – that is, early-stage investments and assistance through knowhow in pre-commercialization stages – that the US government identified as a gap in authorities because US export controls are not able to capture these kinds of emerging technologies well.
   
   Recommendation 2: The Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list (more below), can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
   
   
3. A focus on non-passive investments. There has been a flurry of policy entrepreneurship and innovation around addressing national security concerns related to US investments in Chinese military/surveillance technology. The current E.O. develops a regulatory structure around non-passive investment (colloquially, often referred to as “money plus,” meaning money that comes with control, knowhow, or other forms of more active engagement with the Chinese entity obtaining the investment. Others have argued that such an approach does not go far enough, and instead desire to completely remove all US money from the China market, including passive investment through securities. Indeed, proponents of a list-based approach argue that designations would stop flows of all kinds of US investments to listed entities, not just foreign direct investment (FDI) orVC. While preventing any US money from entering the China market may be symbolically satisfying, this kind of divestment is least likely to have an appreciable effect on decreasing China’s capacity for indigenous development and deployment of advanced technology for military and surveillance purposes. This is because money is fungible and the global equity market capitalization outside of the United States is roughly $62.8 trillion. Moreover, US share of global capital markets is projected to decline from about 42.5 percent today to about 27 percent in 2050.
   
   Thus, the bar for preventing such passive investments much be higher than restrictions on non-passive investments since the benefit-cost ratio of such actions is lower. Already, the non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List allows the US government to prevent passive investment in designated entities that are identified as part of China’s military industrial complex, even if they are not state-owned. These authorities exist through E.O. 13959 and amendments. Currently, these restrictions only apply to relevant Chinese companies that are publicly traded.
   
   Recommendation 3: The US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
   
   
4. A focus on national security objectives rather than broader “economic security” or supply chain resilience concerns. Discussions on outbound investment regulations began in earnest after Senators Bob Casey and John Cornyn circulated a preliminary version of their draft legislation – the National Critical Capabilities Defense Act – in 2021. As the name implies, this early version of an outbound regulation concept was rooted not only in national security but also broader objectives around supply chain resilience. Over time, and through substantial and rigorous policy discussions, supply chain resilience components were eliminated from draft legislation on this matter and from the E.O. that was ultimately released. I view this as sound policy.
   
   As discussed in greater detail in a 2022 policy report I co-authored with Emily Kilcrease, supply chain concerns are largely due to features of the domestic and global economy that make supplier diversity and localized production commercially unviable. In that report, we recommended that the US government address supply chain resilience concerns through industrial policy and other actions that could incentivize re-shoring and friend-shoring to trusted suppliers. The Congress’ actions on supporting the semiconductor, EV, infrastructure, and other related industries and supply chains through legislative action such as the CHIPS and Science Act and the Inflation Reduction Act are far better able to address the underlying market challenges that have created supply chain fragilities in the first place.
   
   Moreover, by focusing squarely on national security and related technology, the United States is better able to act in a coordinated fashion with partners and allies. The Summer 2023 G-7 communique on economic resilience and economic security is indicative of the positive returns to such multilateral engagement, as leaders affirmed the legitimacy and importance of targeted outbound investment measures to protect “sensitive technologies from being used in ways that threaten international peace and security.” The European Commission’s January 2024 package on economic security, which includes monitoring and evaluation process for considering outbound controls, further illustrates the benefits of multilateral engagement around narrow, technology-related regulations on outbound investment.
   
   Recommendation 4: Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
   
   Outstanding design issues for an outbound investment regime
   At time of writing, the draft rules for the outbound E.O. have not yet been released. However, the advanced notice of proposed rulemaking surfaced several issues that a final rule will need to address.
   
   
5. Aligning covered investments more closely to the concept of intangible benefits. As discussed above, it is my assessment that it is correct to focus on non-passive investments. To do so well, the final rules will need to differentiate between purely passive investment and capital that confers some form of intangible benefit. Currently, there is no such test. Instead, the draft rules scope jurisdiction to investment that either rise above a control threshold or confer some form of special rights. But this rights-based approach may not be appropriate for a country with weak rule of law and shareholder protection such as China where control and influence are often exercised in more informal and extralegal ways. Such an approach may also lead to rule circumvention as investors interested in maintaining or expanding China presence simply shift their activities in China away from traditional FDI and VC structures and into uncovered forms of participation such as venture debt, business consulting, and/or university-to-university research collaborations. A final rule may better ensure that all relevant forms of intangible benefits are covered by constructing an intangible benefits test, in which a transaction would be covered if any one of the following conditions is met:
   
   • The US investor has a role in “substantive decision making” regarding the invested entity, leveraging this concept as it exists in the CFIUS context (see 31 CFR 800.245);
   • The US investor conducts one of a range of specified activities with respect to the invested entity, including the provision of management expertise;
   • The US investment conveys control of the invested entity to the US investor, with “control” set as a clearly defined percentage threshold; or
   • The US investment conveys a defined set of management or governance rights short of “control.”
     
     Recommendation 5: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
     
     
6. Coverage of growth transactions and operational pivots. Under the current text, it is unclear how the new outbound authorities will apply to follow-on transactions that are made after an initial investment, both in scenarios where the initial investment was made prior to the effective date of the new authorities and those made after the effective date. The ANRPM envisions exempting “routine intracompany actions,” providing an explicit exemption for the “intracompany transfer of funds from a US parent to a subsidiary located in a country of concern.” This text would allow for a US company to sustain an existing operation in a country of concern and to undertake the necessary financial transactions to do so. However, it also appears that this provision allows for a company to expand its investment without constraint if the funds to do so are made available via an intracompany transfer of funds.
   
   Material expansion of existing investments is likely inconsistent with the policy intent of the E.O. If so, the final rule should include clear standards for which intracompany transfers will be considered “routine” and therefore exempt from notifications or prohibitions and which will trigger new obligations under the notification/prohibition regime. The Chips Act guardrails set clear standards around material expansion, with respect to the investments in China of companies receiving Chips Act funding, that could be leveraged for the purposes of this rulemaking as well, at least for covered semiconductor investments.
   
   Similarly, the rule should anticipate scenarios in which a US person invests in a Chinese entity that is not a covered transaction at the time of investment, but, through a change in business strategy, pivots to operate in a covered national security technology or product. This is not a hypothetic exercise: for example, a US person could invest in a Chinese facial recognition software company that plans to develop its products for commercial use, but subsequently the Chinese entity could change its orientation to instead focus on selling its products to the Chinese government for surveillance use. This is of particular concern for cases in which the US person holds a non-controlling interest in the entity, and therefore cannot exert influence to prevent problematic changes to business plans. The final rule should clarify whether US persons are required to notify such investments and/or if the rule would require divestment if entity into which the US person invested subsequently operated in a prohibited national security technology or product.
   
   Recommendation 6: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity. 
   
   
7. Differences in corporate supply chain expansion vs. venture & technology startups. As outlined in the section above on trends in outbound investment from the United States to China, there are two types of investment that the US government is most worried could create national security concerns. First are corporate investments, usually made either to execute a global supply chain strategy or to serve the China market. The second are VCinvestments in early-stage companies operating in emerging technologies that may be used for military or surveillance purposes. E.O. 14105 attempts to address both kinds of investments in the same manner, but the differences in the incentives for and structure of corporate operational versus venture investments are substantial. In particular, venture investments are more speculative in that early-stage investment is made before it is clear what the commercial use for a nascent technology will be. Additionally, divesting from a venture capital position is very challenging as early-stage investment is all but frozen until an eventual liquidity event – usually after fifteen or more years of holding the investment position.
   
   Thus, venture investments present three key challenges to policy makers that are usually absent or less relevant to corporate operational investments:
   
   
   • The speculative nature of their technologies’ capabilities and use make it harder to draw narrow bright line distinctions between permissible and impermissible investments.
   • Funding structure flexibility provides VC investors with more opportunities to design their investments in ways that avoid generating reporting obligations or prohibition requirements.
   • Venture positions are illiquid over the medium term, making divestment more challenging.
   
   
   • Given this, it is advisable for the US government to consider additional ways in which forward guidance can help shape the commercial incentives of VC investors in ways that disincentivize early-stage investment in Chinese entities involved in the development of technology that may not be consider national security technology or products at the time of investment but that have a high likelihood of future national security implications. As outlined in greater detail in a report co-authored with Emily Kilcrease, it is advisable for the US government to undertake a set of actions designed to reshape investor expectations about the long-term financial payout to, and the reputational risks associated with, early-stage investments in technologies that are likely to develop into national security technologies or products.
     
     The goal of such actions is to better align investor incentives such that they are less willing to participate in particularly problematic start-ups, thus reducing the need for the US government to be prohibiting transactions or issuing divestment requirements in a heavy-handed manner. Already, the Congress has made steps in this direction by introducing legislation requiring the disclosure by previously exempted investors of their holdings in China and other adversarial jurisdictions. Additionally, the Congress can codify an expanded version of the NS-CMIC list to commit to preventing US persons from investing – even passively – in a set of designated Chinese entities that operate in a narrow set of particularly concerning national security technology areas. Doing so will communicate to VCs that their early-stage investments will not be rewarded by big payoffs during future liquidity events because US investors will be unable to participate in initial public offerings for these companies or private placements. Thus, the value of this approach is its deterrent effect on shifting the calculus of early-stage investors against participating in Chinese startups with technology that are likely to have use cases of particular concern for national security.
     
     Recommendation 7: That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.
   
   
   

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The ransomware problem is multi-dimensional. Ransomware is both a cyber and a financial crime, exploiting vulnerabilities not only in the security of digital infrastructure but also in the financial system that have enabled the rise of sophisticated Ransomware-as-a-Service (RaaS) economies.  It is also inherently international, involving transnational crime groups operating in highly distributed networks that are targeting victims, leveraging infrastructure, and laundering proceeds without regard for borders.  As with other asymmetric threats, non-state actors can achieve state-level consequences in disruption of critical infrastructure.

With at least $1 billion reported in ransomware payments in 2021 and with incidents targeting critical infrastructure like hospitals, it is not surprising that the debate on ransomware payments is rising again. Ransomware payments themselves are problematic—they are the primary motive for these criminal acts, serving to fuel and incentivize this ecosystem.  Many are also inherently already banned in that payments to sanctioned actors are prohibited. However, taking a hardline position on ransomware payments is also challenging because of its potential impact on victims, visibility and cooperation, and limited resources.

Cryptocurrency’s role in enabling ransomware’s rise

While ransomware has existed in some form since 1989, the emergence of cryptocurrencies as an easy means for nearly-instantaneous, peer-to-peer, cross-border value transfer contributed to the rise of sophisticated RaaS economies. Cryptocurrencies use largely public, traceable ledgers which can certainly benefit investigations and disruption efforts. However, in practice those disruption efforts are hindered by weaknesses in cryptocurrency ecosystems like lagging international and industry compliance with anti-money laundering and countering financing of terrorism (AML/CFT) standards; growth of increasingly sophisticated methods of obfuscation leveraging mixers, anonymity-enhanced cryptocurrencies, chain-hopping, and intermixing with off-chain and traditional finance methods; and insufficient steps taken to enable real-time, scaled detection and timely interdictionof illicit cryptocurrency proceeds.

Despite remarks by some industry and policymaker advocates, RaaS economies would not work at the same level of scale and success without cryptocurrency, at least in its current state of compliance and exploitable features. Massively scaled ransomware campaigns targeting thousands of devices could not work by asking victims to pay using wire transfers and gift cards pointing to common accounts at regulated banks or widely publishing a physical address. Reliance on traditional finance methods would require major, and likely significantly less profitable, evolution in ransomware models.

The attraction of banning ransomware payments

Any strategy to deal with ransomware needs to have multiple elements, and one key aspect is the approach to ransomware payments. The Biden Administration’s multi-pronged counter-ransomware efforts have driven unprecedented coordination of actions combating ransomware, seen in actions like disrupting the ransomware variant infrastructure and actors, OFAC and FinCEN designations of actors and financial institutions facilitating ransomware, pre-ransomware notifications to affected companies by CISA, and a fifty-member International Counter-Ransomware Initiative.

However, ransomware remains a significant threat and is still affecting critical infrastructure. As policymakers in the administration and in Congress consider every tool available, they will have to consider the effectiveness of the existing policy approach to ransomware payments. Some view payment bans as a necessary action to address the risks ransomware presents to Americans and to critical infrastructure. Set against the backdrop of the moral, national security, and economic imperatives to end this destabilizing activity, bans could be the quickest way to diminish incentives for targeting Americans and the significant amounts of money making it into the hands of criminals.

Additionally, banning ransomware payments promotes other Administration policy objectives like driving a greater focus on cybersecurity and resilience. Poor cyber hygiene, and especially often poor identity and access management, are frequently exploited in ransomware. Removing payments as a potential “escape hatch” is seen by some as a way to leverage market forces to incentivize better cyber hygiene, especially in a space where the government has limited and fragmented regulatory authority.

Those who promote bans typically do not come to that position lightly but instead see them as a last resort to try to deter ransomware.  The reality is that we have not yet been able to sufficiently scale disruption to the extent needed to diminish this threat below a national security concern—driven by insufficient resourcing, limits on information sharing and collaboration, timeliness issues for use of certain authorities, and insufficient international capacity and coordination on combating cyber and crypto crime. When policymakers are in search of high-impact initiatives to reduce the high-impact threat of ransomware, many understandably view bans as attractive.

Challenges with banning ransomware payments

However, taking a hardline position on ransomware payments can also present practical and political challenges:

• Messaging and optics of punishing victims:A ban inherently places the focus of the policy burden and messaging on the victims, potentially not stopping them from using this tool but instead raising the costs for them to do so. Blaming victims that decide to pay in order to keep their company intact presents moral and political challenges.

• Limited resources that need to be prioritized against the Bad Guys:  For a ban to be meaningful, it would have to be enforced. Spending enforcement resources against victims to enforce a ban—resources which could have been spent on scaling disruption of the actual perpetrators—could divert critically limited resources from efforts against the ransomware actors.

• Likelihood that payments will still happen as companies weigh the costs against the benefits:  Many feel that companies, if faced between certain demise and the costs of likely discovery and legal or regulatory action by the government, will still end up making ransomware payments.

• Disincentivizing reporting and visibility:  A ban would also make companies less likely to report that they have been hit with ransomware, as they will aim to keep all options open as they decide how to proceed. This disincentivizes transparency and cooperation from companies needed to drive effective implementation of the cyber incident and ransomware payment reporting requirements under the Cybersecurity Incident Reporting for Critical Infrastructure Act (CIRCIA) regulations to the Cybersecurity and Infrastructure Security Agency (CISA). Diminished cooperation and transparency could have a devastating effect on investigations and disruption efforts that rely on timely visibility.

• Asking for permission means the government deciding which companies survive:  Some advocates for bans propose exceptions, such as supplementing a presumptive ban with a licensing or waiver authority, where the government is the arbiter of deciding which companies get to pay or not.  This could enable certain entities like hospitals to use the payment “escape hatch.” However, placing the government in a position to decide which companies live and die is extremely complicated and presents uncomfortable questions.  It is unclear what government body could be capable, or should be endowed with the authority of making that call at all, especially in as timely a fashion as would be required.  Granting approval could also place the government in the uncomfortable position of essentially approving payments to criminals.

Additional policy options that can strike a balance for practical implementation

In light of the large-scale, disruptive threat to critical infrastructure from ransomware, policymakers will have to consider other initiatives along with its ransomware payment approach to strike a balance on enhancing disruption and incentivizing security measures:

• Resource agencies and prioritize counter-ransomware efforts: Government leadership must properly resource through appropriations and prioritize disruption efforts domestically and internationally as part of a sustained pressure campaign against prioritized ransomware networks.

• International cyber and cryptocurrency capacity building and pressure campaign: Agencies should prioritize targeted international engagement, such as capacity building where capability lags and diplomatic pressure where political will lags, toward defined priority jurisdictions.  Capacity building and pressure should drive both cybersecurity and cryptocurrency capacity, such as critical infrastructure controls, regulatory, and law enforcement capabilities. Jurisdictional prioritization could account for elements like top nations where RaaS actors and infrastructure operate and where funds are primarily laundered and cashed out.

• Enhance targeting authorities for use against ransomware actors: Congress should address limitations in existing authorities to enable greater disruptive action against the cyber and financial elements of ransomware networks. For example, Congress could consider fixes to AML/CFT authorities (e.g., 311 and 9714 Bank Secrecy Act designations) for better use against ransomware financial enablers, as well as potential fixes that the defense, national security, and law enforcement communities may need.

• Ensure government and industry visibility for timely interdiction and disruption of ransomware flows: Congressional, law enforcement, and regulatory agencies should work with industry to ensure critical visibility across key ecosystem participants to enable disruption efforts, such as through: Enforcing reporting requirements of ransomware payments under CIRCIA and US Treasury suspicious activity reporting (SAR) requirements; Mandating through law that entities (such as digital forensic and incident response [DFIR] firms) that negotiate or make payments to ransomware criminals on behalf of victims, including in providing decryption services for victims, must be regulated as financial institutions with SAR reporting requirements; Driving the evolution of standards, like those for cyber indicators, to enable real-time information sharing and ingestion of cryptocurrency illicit finance indicators for responsible ecosystem participants to disrupt illicit finance flows.

• Prioritize and scale outcome-driven public-private partnerships (PPPs): Policymakers should prioritize, fund, and scale timely efforts for PPPs across key infrastructure and threat analysis actors (e.g., internet service providers [ISPs], managed service providers [MSPs], cyber threat firms, digital forensic and incident response [DFIR] and negotiation firms, cryptocurrency threat firms, cryptocurrency exchanges, and major crypto administrators and network-layer players [e.g., mining pools and validators]) focused on disruption of key ransomware activities and networks.

• Incentivize and promote better security while making it less attractive to pay ransoms: Policymakers could leverage market and regulatory incentives to drive better security measures adoption to deter ransomware and make it less attractive to pay.  For example, legislation could prohibit cyber insurance reimbursement of ransomware payments. Regulatory action and legislative authority expansion could also drive implementation of high-impact defensive measures against ransomware across critical infrastructure and coordination of international standards on cyber defense.

While attractive for many reasons, banning ransomware payments presents challenges for limiting attacks that demand a broader strategy to address. Only this kind of multi-pronged, whole-of-nation approach will be sufficient to reduce the systemic threats presented by disruptive cybercrime that often targets our most vulnerable.

Carole House is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and the Executive in Residence at Terranet Ventures, Inc. She formerly served as the director for cybersecurity and secure digital innovation for the White House National Security Council.

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Catalyzing climate financing through the Green Climate Fund

Mafalda Duarte, executive director of the Green Climate Fund (GCF), gave a succinct overview of the GCF’s role and its work in mobilizing and implementing climate financing in the Middle East and North Africa (MENA) and across the globe. 

She explained that the GCF functions as the main financial mechanism of the United Nations Framework Convention on Climate Change, bringing some $14 billion in resources to more than 250 adaptation and mitigation projects in 129 developing countries. Under its mandate and the direction of its board, the GCF prioritizes assisting the world’s most climate-vulnerable countries.

Duarte emphasized the inclusivity of the GCF’s work, noting that adequate climate financing requires partnerships with national governments, international organizations, and the global private sector. Partnering with a vast network of organizations, including the IMF and World Bank, gives the GCF access to a large-scale and flexible resource pool. She listed advisory services, project preparation, loans, equity, guarantees, and results-based payments as some tools that the GCF can leverage.

She also mentioned that roughly $1 billion of the fund’s $14 billion is earmarked for projects in the MENA region specifically in this funding cycle. She specifically highlighted the GCF’s work on renewable energy projects, given the region’s potential to harness solar and wind power and the potential cost savings on infrastructure construction offered by economies of scale. 

Duarte concluded with her own hopes for the GCF’s mission, saying that “it’s important to honor what we have been asked to do, but it’s important to take it one step further…with a particular focus on expanding efforts targeting the most vulnerable.”

An optimistic outlook on Egypt’s economic reforms

Rami Aboulnaga, deputy governor of the Central Bank of Egypt, shared an upbeat assessment of his country’s economic reforms. 

To halt further devaluation of the Egyptian pound, which recently reached seventy pounds against the US dollar at black-market rates, Aboulnaga emphasized the importance of restoring investor confidence. “The keyword is confidence,” he said. “I think the issue we are trying to grapple with is shoring up confidence.” Aboulnaga highlighted that speculation drives the parallel market and underscored reforms’ success in addressing this issue.

In terms of diversifying foreign exchange reserves and compensating for lost revenues, Aboulnaga outlined the bank’s efforts to enhance competitiveness and rectify structural imbalances. He also emphasized measures to ensure dollar availability through a flexible exchange rate. Despite regional geopolitical volatility, Aboulnaga noted a resurgence in tourism and an increase in remittances, which he cited as helping mitigate other challenges.

Aboulnaga stressed the importance of maintaining momentum to achieve and sustain stability as the core of government economic reforms. These measures aim to build resilience in the economy rather than generate short-term gains. Addressing inflation and debt reduction, which he described as top priorities for the Central Bank of Egypt, is crucial for protecting vulnerable communities. The bank is actively working to increase transparency in markets to make fluctuations more predictable.

Concerning the private sector, the structural reforms aim to cultivate a neutral environment and 

establish a level playing field for investors, thus enhancing business competitiveness. The market will be closely regulated, but not controlled.

Moving from stabilization to reform in the Egyptian economy

H. E. Rania al-Mashat, Egypt’s minister of international cooperation, led a discussion centered on macroeconomic stabilization, economic reform, and leveraging concessional funding to promote economic growth in Egypt.

She emphasized the significance of the past two months in terms of macroeconomic stabilization. According to her, recent actions toward a flexible exchange rate, fiscal consolidation, and collaboration with the IMF have provided Egypt with the opportunity to address the deeper challenge of structural reform.

This structural reform, as outlined by Mashat, revolves around three main pillars: stabilizing Egypt’s macro-fiscal landscape, enhancing the country’s business environment, and supporting the green transition. She stressed the importance of relationships with multilateral development banks and other partners in facilitating these reform programs, emphasizing that they must be country-led to ensure success.

Furthermore, Mashat highlighted the necessity of building long-standing relationships based on transparency and trust to access additional concessional finance. She emphasized the importance of accountability for every dollar received through concessional finance, ensuring alignment with the national strategy. Egypt has been able to utilize concessional finance to implement assistance programs for the country’s most vulnerable, such as Takaful and Karama, addressing both economic and social needs simultaneously.

Conflict resilience and economic integration in the MENA region

Jihad Azour, IMF director of the Middle East and Central Asia, concluded the MENA portion of the Atlantic Council’s IMF/World Bank Week by providing an evenhanded examination of the region’s economic outlook. Azour emphasized the region’s positive developments, with most inflation returning to historical averages, increased growth from non-oil sectors in the Gulf, and efforts to transition toward renewable energy. At the same time, he said issues regarding geopolitical instability and debt remain persistent challenges for MENA countries.

On geopolitical tensions and their economic impact, Azour said that “the war in Gaza is having a devastating impact on the Palestinian economy and a relatively large impact on neighboring countries” and beyond. Disruptions in the Red Sea have also affected the region. One-third of global container shipping goes through the Suez Canal, and more than one-third of oil and gas come from the region, so the Houthis’ attacks in the Red Sea are creating uncertainty regarding the waterway’s trade. Fortunately, explained Azour, recent shocks like the COVID pandemic and the war in Ukraine have helped the market and supply chain adapt to major disruptions and shifts in oil supply.

Like conflict, Azour said, debt is a major concern in regional growth, citing Jordan and Egypt’s 90-percent debt-to-gross domestic product (GDP) ratios and Lebanon’s ratio surpassing 100 percent. He explained that long-term solutions to the debt crisis require predictable macroeconomic frameworks to restore investors’ confidence in the economy. 

While debt and conflict are continuing challenges for the region, Azour assessed the Gulf as a source of optimism for MENA’s economic prospects. He noted that the Gulf’s policy and reform-driven approach to transformation has been successful in reducing reliance on oil while positioning Gulf Cooperation Council (GCC) countries, including the United Arab Emirates and Saudi Arabia, to seize on the potential of artificial intelligence. Azour explained that this economic success has allowed the GCC to lead the way in both regional and global integration, which could boost all of MENA’s economic potential under a tempered and incremental approach to greater regional integration. With sustainable long-term reforms, this progress could translate to greater economic spillover effects in the broader region.

JP Reppeto and Charles Johnson are Young Global professional in the Atlantic Council’s Middle East programs

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While most attention has so far focused on the military aspects of this new US aid package, the bill passed in Washington DC also includes an important step toward holding Russia financially accountable for the invasion of Ukraine. The Rebuilding Economic Prosperity and Opportunities for Ukrainians Act, or REPO Act, paves the way for seizures of Russian Central Bank holdings that have been frozen in the United States for more than two years, while also setting the stage for a more global approach to confiscating Russian assets.

Western countries froze approximately $300 billion in Russian assets following the onset of Russia’s full-scale invasion of Ukraine in February 2022. The Kremlin has been unable to access these assets ever since, but they still technically belong to Russia. The REPO Act could now make it possible to seize Russian assets and use them for the benefit of Ukraine. Only around $5 billion of the overall $300 billion is located in the US, but the United States is setting an important precedent by taking a leadership position in the confiscation of Russian state funds.

We should not expect any immediate action. The REPO Act obliges the White House and US Treasury Department to identify Russian assets in the US within a 90-day period and report back to Congress in 180 days. After a further month, the president is then authorized to “seize, confiscate, transfer, or vest” any Russian state sovereign assets located within the United States.

The US is unlikely to act unilaterally. Instead, United States officials have indicated they wish to move forward in conjunction with other Western governments. The issue is set to be high on the agenda during the next G7 summit, which is scheduled to take place in Italy in June. “The ideal is that we all move together,” commented US National Security Advisor Jake Sullivan on April 24. This would send a message to Moscow that the democratic world is united in its commitment to make Russia pay for the largest European invasion since World War II.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

In order to appreciate the significance of the REPO Act, it is helpful to track Russia’s reaction. Since the aid bill passed, there has been plenty of outrage in Moscow. Former Russian President Dmitry Medvedev expressed his wish for the United States to be “plunged into a new civil war,” and threatened to seize the assets of US citizens in Russia. Kremlin spokesman Dmitry Peskov warned that Russia would make the United States answer for the confiscation of frozen assets.

Meanwhile, Russian Duma Speaker Vyacheslav Volodin said Russia could now pass “symmetrical” legislation allowing Moscow to confiscate Western assets located inside the Russian Federation. Volodin was one of many Russian officials to claim that the US step was intended to “provoke” the adoption of parallel measures in EU countries. He predicted that this would be “devastating” for the European economy.

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Skeptics in the West have voiced concerns that the seizure of Russian assets could undermine the global financial system and weaken Western economies. European Central Bank President Christine Lagarde is one of numerous senior figures in Europe to express unease over the confiscation of Russian assets, arguing that it could mean “breaking the international legal order that you want to protect, that you would want Russia and all countries around the world to respect.”

This caution ignores the fact that Russian state assets in Western jurisdictions have now been frozen for more than two years without sparking any noticeable negative consequences for the international financial system. If measures against Russian assets were sufficient reason to trigger a loss of confidence in the existing financial system among other authoritarian states, they have already had ample time to react.

The statements coming out of Moscow over the past week underline the sensitivity within the Kremlin to the confiscation of frozen Russian money. While the REPO Act represents a meaningful milestone in the debate over Russian assets, it is not decisive. Nevertheless, this aspect of the aid package has attracted almost as much attention as the very significant additional military support that is now being sent to Ukraine.

It would certainly seem that members of Russia’s ruling elite are more concerned about the security of their own financial resources than the safety of the Russian soldiers fighting in Ukraine. Indeed, many observers have long argued that Putin’s top priority is safeguarding his own ill-gotten wealth and that of his inner circle. If the West is serious about defeating Russia in Ukraine, it should seek to exploit this apparent vulnerability.

Following the adoption of the REPO Act, the next stage in the process should be the promotion of similar draft laws by the European Union and G7 countries. The recent US decision on Russian assets can provide the impetus others have been waiting for. Russia only understands the language of strength, and views hesitation as an invitation to go further. Western leaders can now demonstrate their resolve by acting together to make Russia pay for its criminal invasion of Ukraine.

Kira Rudik is leader of the Golos party, member of the Ukrainian parliament, and Vice President of the Alliance of Liberals and Democrats for Europe (ALDE).

Further reading

UkraineAlert Mar 12, 2024

Mood darkens in Odesa amid Russian bombardment and Western hesitancy

By Michael Bociurkiw

The mood in Ukrainian Black Sea port city Odesa has darkened in recent weeks amid a surge in Russian bombing attacks and growing doubts over the future of Western military aid, writes Michael Bociurkiw.

Conflict Drones

UkraineAlert Apr 25, 2024

New US aid package is not enough to prevent Russian victory in Ukraine

By Peter Dickinson

This week’s US aid package for Ukraine provides the country with a vital lifeline in the fight against Russia but Western leaders must adopt a more long-term approach if they want to stop Putin, writes Peter Dickinson.

Conflict Drones

UkraineAlert Mar 31, 2024

Ukraine urgently needs air defenses as Russia decimates power grid

By Suriya Evans-Pritchard Jayanti

A new Russian air offensive has destroyed much of Ukraine’s civilian energy infrastructure in a matter of days and threatens to spark a humanitarian catastrophe if Ukraine does not urgently receive enhanced air defenses, writes Suriya Evans-Pritchard Jayanti.

Conflict Defense Technologies

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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Below are his prepared remarks.

The Middle East – North Africa (MENA) has emerged as an important strategic region for the People’s Republic of China (PRC), with a significant expansion of its interests and presence across the region. However, at this stage China remains primarily an economic actor there, with growing political and diplomatic engagement and little in the way of a security role. This economics-first approach has contributed to improved public perceptions of China across MENA; public polling data from the Arab Barometer consistently shows positive views of China as an external actor, with respondents from 8 out of 9 countries perceiving China more favorably than the US. At the same time, its modest involvement in regional political and security affairs, evident in its minimal response to Houthi strikes on maritime shipping, underscores its reluctance to play a more meaningful role in MENA, which has no doubt been recognized by governments that expected a more robust response given Beijing’s outsized economic presence.

This highlights an important point about how MENA features in the PRC’s broader strategic objectives. It is first and foremost a region where China buys energy, sells goods, and wins construction infrastructure contracts. These economic interests have not required a corresponding political or security role, and Chinese leaders have not indicated that they will do so; they benefit significantly from the US security architecture that underpins the region’s fragile status quo. China works closely with US allies and partners in MENA, especially the Gulf Cooperation Council states and Egypt, and in many regards Beijing’s interests in the Middle East have been consistent with those of the US.

At the same time, MENA has to be considered as part of a larger global strategy under which US- China interests diverge substantially. China’s more assertive foreign policy since the global financial crisis started under the leadership of Hu Jintao and has intensified under Xi Jinping. The 2017 US National Security Strategy identified China as a great power competitor, and the rivalry is playing out in MENA as elsewhere. Beijing has rolled out new global initiatives – the Global Development Initiative (GDI), Global Security Initiative (GSI), and Global Civilization Initiative (GCI), discussed below – to present itself as a leader of the Global South, using a state-centered alternative to Western liberalism.

In this effort, the MENA is a region where China aims to establish a normative consensus consistent with Beijing’s preferences. As a result, we see several examples of PRC leaders promoting narratives that the US is unreliable, or that its presence in the region exacerbates tensions and conflict. After a January 2022 meeting with MENA officials, for example, Chinese Foreign Minister Wang Yi said the Middle East “is suffering from long-existing unrest and conflicts due to foreign interventions…We believe the people of the Middle East are the masters of the Middle East. There is no ‘power vacuum,’ and there is no need of ‘patriarchy from outside.’” Whereas in the preceding two decades the PRC rarely overtly challenged the US position in MENA, it has become a regular feature as Chinese leaders exploit pressure points between the US and regional actors in order to differentiate itself from the US and to create friction between Washington and its MENA partners and allies. This has been especially present in Chinese messaging since the October 7, 2023 Hamas attack on Israel, as PRC leaders have consistently used the crisis to undermine the US and present itself as a more reliable partner to the Arab world.

China’s diplomatic activities in the Middle East

While it has not been widely recognized, China has developed a deep, broad and systematic approach to diplomatic engagement across MENA. It uses a range of bilateral and multilateral diplomatic tools, and these have been complemented in recent years with international organizations where Beijing has significant influence. It also has appointed special envoys for region-specific issues.

At the bilateral level, China has diplomatic relations with all regional countries. Several of these are enhanced by strategic partnerships, which are mechanisms to coordinate on regional and international affairs. Five MENA countries – Algeria, Egypt, Iran, Saudi Arabia, and the UAE – have been elevated to comprehensive strategic partners, the top level in China’s hierarchy of diplomatic relations. This results in the “full pursuit of cooperation and development on regional and international affairs.” To be considered for this level of partnership a country has to be seen as a major regional actor that also provides added value, such as Egypt’s control of Suez, or Saudi’s leadership role in global Islam and energy markets. Therefore, when assessing China’s diplomatic efforts in MENA, these countries (Algeria to a lesser extent) are the load-bearing pillars of Beijing’s approach. They see more official visits, attract more investment, do more contracting, and generally support a wider range of China’s interests in the region. That China has comprehensive strategic partnerships with both Saudi Arabia and Iran means there are more frequent bilateral high-level meetings, no doubt contributing to China’s role in the Saudi-Iran rapprochement.

At the multilateral level, China uses the China Arab States Cooperation Forum, which includes all Arab League members, and the Forum on China Africa Cooperation, which includes nine Arab League members. These forums present China with regular ministerial-level meetings where they map out cooperation priorities. They also have several sub-ministerial level issue-specific working groups. The result is a relatively deep level of diplomatic engagement.

China has appointed special envoys for the Middle East, the Horn of African Affairs, and the Syrian Issue, all of which were designed to present the PRC as an actor with influence and interest in these issues, although the impact of each has been marginal.

Finally, two international organizations where China plays an influential role, BRICS and the Shanghai Cooperation Organization Forum, have admitted Middle Eastern states as members in recent years. BRICS expanded for the first time in 2023 to include Saudi Arabia, Egypt, Iran, the UAE, and Ethiopia, giving the organization a presence in MENA and the Horn. The SCO admitted Iran as a full member in 2023, a position it has coveted since 2005. Other MENA participants in the SCO are Bahrain, Egypt, Kuwait, Qatar, Saudi Arabia, and the UAE, all of which are dialogue partners. This does not make them SCO members; it is a position for countries that wish to participate in discussions with SCO members on specific issues that they have applied to join as dialogue partners. It could eventually result in full membership but that does not appear to be on the horizon for any Middle Eastern dialogue partners for now.

All in all, Chinese diplomacy has been highly active and quite successful laying the groundwork for a deeper presence in the Middle East.

China’s involvement in MENA conflict mediation

China’s efforts to position itself as a conflict mediator is part of a larger strategy, embedded in the GSI, to present the PRC as a leading global actor. As a 2023 report from MERICS cautioned, “China’s current mediation push seems to be largely a reflection of its geopolitical competition with the United States and its ambition to expand its global influence at the expense of the West.” In MENA as elsewhere, the results have been mixed. The Saudi-Iran rapprochement is an example of a low cost ‘win’ for China. It has been well documented that much of the negotiation that led to the March 2023 announcements in Beijing had been done through Iraqi and Omani efforts. China’s involvement appears to be as a great power sponsor that was broached during Xi Jinping’s December 2022 summit in Riyadh and further discussed during President Ebrahim Raisi’s visit to Beijing in February 2023. Given China’s comprehensive strategic partnerships with the Saudis and Iranians, it has significant diplomatic relations with both countries and was therefore the only major power that could play such a role. However, it has to be stressed that most of the groundwork had been laid before China’s involvement, and that the rapprochement itself was the result of domestic political and economic pressures within Saudi and Iran.

Given this highly publicized diplomatic ‘win’, Chinese analysis promoted a narrative of a “wave of reconciliation” in the Middle East as a result of Beijing’s efforts. Ding Long, a Middle East expert at Shanghai International Studies University, described China’s mediation diplomacy, guided by the GSI, as driving events in the Middle East in the wake or the Saudi-Iran deal:

Within a month since then, the Saudi-Iran rapprochement is like a key that opens the door to peace in this region. The warring parties in Yemen took a critical step toward a political solution; Bahrain and other Arab countries have restored diplomatic relations with Iran; Saudi Arabia and other Arab powers are interacting more frequently with Syria. A wave of reconciliation is also encouraging more joint efforts between China and the Middle East in pursuing peace.

Shortly after the Saudi-Iran deal, the PRC announced that it was willing to wade into the Israel- Palestine conflict during a June 2023 visit from Palestinian President Mahmoud Abbas. Immediately following this, Israeli Prime Minister Benjamin Netanyahu announced that he had accepted an invitation to Beijing for October; for obvious reasons the visit did not happen. China’s response to the Hamas attack, discussed below, has negated any prior work towards being a mediator on the issue; its relationship with Israel has been deeply damaged at this point and it is hard to see how Beijing could play a constructive role negotiating between the two. The March 2024 meeting in Doha between Chinese ambassador Wang Kejian and Hamas official Ismail Haniyeh further cements this. Any role China can play would be in support of Palestine and highly partisan.

In any case, just over a year after Beijing’s first successful foray into Middle East diplomacy, the region is less stable that it has been in recent memory, and China’s efforts at mediation have had little tangible impact. It has little influence on Iran or its non-state partners of Hamas, the Houthis, or Hezbollah, and is not seen as credible by Israel. Generally, its response to events since the Hamas attack have made China look very transactional and self-interested in the region, rather than a responsible extra- regional power with substantial Middle East interests.

A point worth considering on this topic is that China is a relative newcomer to Middle East political diplomacy. As described above, it is primarily an economic actor in the region, and despite its special envoys, cooperation forums, and strategic partnerships, it does not have the depth of regional specialization that the US or European countries do, given their longstanding involvement in MENA. As China develops a deeper pool of MENA talent this will change, but it is early days. Its area studies programs in universities and think tanks are not nearly as developed as their US counterparts, making for a much shallower pool of expertise.

China’s response to the Hamas attack on Israel

The Hamas attack on Israel had significant repercussions for China’s approach to the MENA and resulted in a more blatantly realpolitik approach to the Israel-Palestine conflict. China’s ambition to play a role in resolving this conflict was based largely on the ‘peace-through-development’ framework of the GDI/GSI. The attack demonstrated the need for a more robust response, but in the wake of the attack the limits of Beijing’s normative approach were evident. Since then, China has not pursued a mediator role, siding firmly with Palestine while frequently condemning Israel and the US. Pointedly, it did not blame Hamas for the attack and has seemingly made the ‘one man’s terrorist is another man’s freedom fighter’ argument; during International Court of Justice hearings Ma Xinmin, a legal advisor for the Chinese Ministry of Foreign Affairs, argued that Palestinian acts of violence against Israelis are legitimate “use of force to resist foreign oppression and to complete the establishment of the Palestinian state.”

A point worth considering is that within China, the Israel-Palestine conflict resonates differently than it does in the US and other Western liberal democracies. The demographic composition of the West with large immigrant populations means that there are significant Jewish, Muslim, Christian and Arab communities for whom the Israel – Palestine conflict is a major issue that animates voters, NGOs, and lobbyists. Democratic leaders are expected to have positions that represent their constituents, and Middle East policy has to try to thread the needle of interests and values in a manner that balances citizens’ often deeply held convictions. In China, religious minorities – especially of the Abrahamic faiths – are comparatively insignificant in the demography, and the immigrant population from the Middle East is virtually non-existent. The Party has increased repression against Muslims, Jews, and Christians during the Xi Jinping era, making overt political action from them incredibly costly. This, combined with the fact that China has an authoritarian government, means the issue if Israel and Palestine does not mobilize Chinese citizens like it does in the US, and the government is less concerned with being responsive to citizens’ concerns. It is, therefore, a purely geopolitical issue. The CCP can use its policy in the region to advance its own interests while challenging the US and its Western allies without the additional consideration of managing domestic pressures. Its messaging on the war in Gaza is therefore more about China presenting itself as an alternative to the US as a global leader than it is about the war itself.

China’s global initiatives and international order

At this point China’s three global initiatives (GDI, GSI, GCI) are following the same early-stage trajectory of the Belt and Road Initiative (BRI). When it was announced in 2013 there was little understanding or awareness of it outside of China, and within China ministries, agencies and municipalities spent most of 2014 and 2015 incorporating the BRI into their missions. The 2015 white paper on the BRI and the 2017 Belt and Road Forum enhanced its global profile. The GDI, GSI, and GCI have been appearing in joint communiques across MENA and are cited by local actors as useful contributions from China, but they do not appear to be widely understood yet, nor do many local governments seem to be aware of them. It is likely that the GSI first came to a wider audience when then-Foreign Minister Qin Gang described the Saudi -Iran rapprochement as “a case of best practice for promoting the Global Security Initiative.”

However, the normative framework of these initiatives has appeal for regional governments. Whereas liberal norms of global governance focus on democracy, free markets, human rights, and international institutions, China’s trio of initiatives promote sovereignty, territorial integrity, self-determination, and noninterference in the domestic affairs of states. Essentially, it rejects the universalism of liberal norms and promotes a statist vision instead. For governments and societies long frustrated by the inconsistent promotion of liberal values from the west, or by those that reject liberalism altogether, China’s model is attractive.

The impact of China’s global initiative and the BRI should also be considered as a consequence of a global order transition. During the Cold War, bipolarity meant governments in need of development assistance could turn either to the West or the Soviets. The end of the Cold War meant the developing world was limited to Western institutions underpinned by liberal values that imposed conditions, often inconsistent with local norms. The emergence of China and its global initiatives provides alternatives, and that Beijing presents these initiatives in contrast to liberal institutions is appealing to many governments in the Middle East.

The issue of Xinjiang

The CCP identified its ‘core interests’ in a 2011 white paper, “China’s Peaceful Development”. These core interests are state sovereignty, national security, territorial integrity, national reunification, maintenance of its political system and social stability, and maintaining safeguards for sustainable economic and social development. Importantly, all of these are domestic concerns. In practical terms, anything another country does to undermine these – especially including support for independence movements in Xinjiang, Tibet, Hong Kong and Taiwan – will damage the relationship. The CCP faces numerous challenges from issues of domestic governance, and pressure from within is the most significant threat to its continued rule. When foreign governments apply pressure on Beijing on domestic issues there is pushback, typically in the form of coercive economic statecraft.

All of this is to say that Middle Eastern governments have shown no inclination to speak or act on the issue of repression of Uyghurs or other Muslim minorities in China. No regional government wants to jeopardize a bilateral relationship with one of its most important trading partners on an issue that few feel is relevant to their own core interests of building sustainable economies and improving governance in the face of significant domestic pressures. Engagement with China is largely seen as an opportunity for regional governments to address these challenges, and China’s own experience of development since the Reform Era began in 1978 is perceived as a model for this.

Another consideration here is that Beijing frames its repression of Uyghurs as a response to a conservative religious ideology that promotes separatism and has used terrorism in an attempt to establish an independent state. In doing so, it addresses a concern for many Middle Eastern governments, most of which are deeply concerned about the spread of political Islam in their own countries. As such, the issue is less about any notion of pan-Islamic solidarity than it is about challenges to the state from an ideology seen with deep hostility from regional governments.

Policy Recommendations

• Provide explicit support for MENA countries in their development programs.
• Encourage more investment into MENA from private US companies.
• Improved messaging on what the US does in the region beyond the realm of security.
• Improved messaging on how MENA features in US interests and policy.
• Enhance public diplomacy – bring more MENA students to US on training and education programs.
• Draw upon the narratives of other extra-regional allies and partners that have interests in MENA and have also had challenges in dealing with China. They can help with the messaging – what have their experiences with China been? What issues should MENA countries be considering?
• Where possible, align approaches to MENA with US allies to provide a greater range of investment, development, and trade options.

Jonathan Fulton is a nonresident senior fellow with the Atlantic Council. He is also an associate professor of political science at Zayed University in Abu Dhabi. Follow him on Twitter: @jonathandfulton.

The post China’s Strategic Objectives in the Middle East appeared first on Atlantic Council.

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But central bank governors and finance ministers who met in Washington this week grappled with more than the question of when their countries will be “landing” after a period of high inflation: They also looked to manage how their countries recover, aiming for a soft landing that avoids recession.

With so much at stake, we dispatched our experts to IMF and World Bank headquarters in Foggy Bottom to decode the institutions’ plans to navigate the turbulence of the global economy.

• Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

• This week in one word: Clarity

• Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

• The Polish finance minister on his country’s “U-turn” toward European values

• See day five analysis

Watch all our conversations with central bank governors, finance ministers, and experts

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

This week, the world’s finance ministers and central bankers came together in force for the first time since the “Marrakesh miracle,” that was the annual meetings last year—at least in the words of former IMF Managing Director Christine Lagarde—which finally resulted in progress on quota reform and a debt restructuring deal for Zambia.

But I doubt this week will go down in history as the “Washington wonder.” Tepid global growth, difficulty recovering from the pandemic (among developing countries), US-China competition (with Washington’s threat of new tariffs), and war cast a long shadow. Still, the officials were able to make real progress on both sides of 19th Street.

Yesterday, my colleague Martin outlined the IMF’s successes: The Fund adjusted its lending policy, allowing it to step in to support countries in debt distress, and called attention to the risks of large fiscal deficits.

But there are, after all, two sides to 19th Street. And on the World Bank side, countries including the United States, Japan, and the United Kingdom pledged $11 billion for some of the Bank’s guarantee instruments, which make its programs less risky—and more attractive—for private investors. The added firepower complements restructuring within the Bank to streamline the guarantee system. Hopefully, these changes will encourage private investors to fill countries’ funding needs for the green and digital transitions.

The G20 finance ministers and central bank governors also met this week, with Brazil’s Fernando Haddad giving the group homework: Find agreement on a wealth tax by the time the ministers meet again in Rio de Janeiro in July (the Atlantic Council will be there too).

Later today, as officials and their delegations start heading home, the security barriers will come down and 19th Street will open again. For the ministers, the hard work begins when they get home—and we will be watching closely to analyze whether the financial leaders make meaningful progress before the annual meetings in the fall.

This week in one word: Clarity

As the spring meetings drew to a close and leaders made their final statements, a few points became clearer.

Even though the global economy can feel hyper-interdependent at times, it is now becoming clearer just how muddled the economy is by divergence, inequality, and fragmentation. “Winners” and “losers” are seeing the economic gaps between them widen. There’s a heightened sense of uncertainty, with the threat of another political, economic, or natural shock looming.

What some may have seen as mission creep in finance—addressing energy transition challenges, the inclusion of gender and youth, and fragility—has become mission critical as macroeconomic stability and growth have become more dependent on, or disrupted by, these factors.

As a result, the timeframe for analysis—and more importantly action—has shrunk as spillovers, impacts, and risks from debt, inflation, conflict, and climate change have brought more urgency. On top of that, fiscal space has tightened, and capital flows stream away from where they are needed most. New research shows that countries in the Global South are paying out more in debt service than they are bringing in grants or loans—to the tune of fifty billion dollars. The United Nations’ annual Financing for Development report, released just before the spring meetings, reveals a more than four-trillion-dollar annual shortfall in funding to meet the Sustainable Development Goals, as I discussed this week with Assistant Secretary General Navid Hanif. 

While the World Bank and IMF have introduced reforms to optimize balance sheets, quotas, and capital adequacy to increase available financing, those changes are necessary but insufficient; that makes the World Bank announcement on Friday (that eleven countries have pledged eleven billion dollars to support the Bank’s hybrid capital and guarantee instruments) a welcome step.

Another thing that is clear after this week: the role regional multilateral development banks and international financial institutions (beyond the Bretton Woods institutions) play in addressing today’s challenges. This role isn’t new; I wrote about their role in COVID-19 response and recovery a few years ago. But there is again a need for private capital and philanthropic funding in a revamped international architecture that meets the moment.

And while more resources are key, it has become even clearer that more consideration needs to be paid to how funds are actually disbursed and delivered. As UN Undersecretary General and UNOPS Executive Director Jorge Moreira da Silva noted in our conversation, more than half of existing IDA funds have yet to be allocated. Furthermore, while analysis and policies are important, implementation matters and warrants additional attention.

Leaders across the global economy must ensure that even as they drive supply, they don’t forget about demand—from bankable projects to business environments, and from building capacity to domestic resource mobilization. This is the macro- and micro-challenge of the road ahead.

Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

On Thursday, Côte d’Ivoire’s Minister of Economy, Planning, and Development Nialé Kaba sat down with Rama Yade, senior director of the Atlantic Council’s Africa Center, to discuss the country’s economic priorities—among them, fostering sustainable growth. The two, conversing in French, spoke at an event that took place at the Atlantic Council’s IMF broadcast studio.

Côte d’Ivoire’s economy is predicted to rank fifth this year among the fastest-growing economies in Africa. Kaba said that the country would continue to make economic reforms to “enhance competitiveness, attractiveness, and economic performance.”

Kaba touched upon the IMF’s support to Côte d’Ivoire, which includes $3.5 billion under the Extended Fund Facility and Extended Credit Facility, in addition to a newly agreed upon 1.3 billion through the Resilience and Sustainability Facility. The minister also noted the importance of reform efforts at the Bretton Woods institutions, pointing to changes in how the IMF and World Bank select their leaders. “Perhaps one day the World Bank could be led by an African. After all, why not?”

Kaba also discussed topics closer to home. On Côte d’Ivoire’s agricultural sector, the minister said she’ll be looking to focus on the “local transformation of our raw materials.” Côte d’Ivoire is the world’s leading producer of cocoa, and Kaba said there is a need for investors to “settle and employ local labor.”

Touching on more global matters, Yade asked about the relationship between Côte d’Ivoire and China—specifically how a decrease in Chinese investments in Africa would affect the economy. Kaba was clear in her position that while China has been a primary investor, Côte d’Ivoire remains “strongly connected to Europe and also to the United States.”

Watch the event

The Polish finance minister on his country’s “U-turn” toward European values

“Poland is back to Europe… we’ve made a ‘U-turn’ from what I call a ‘Hungarian path,’ which is out of the European values,” Andrzej Domański, minister of finance for Poland, argued at an Atlantic Council event on Friday.

Domański gave his remarks in discussing how Poland’s economy—which has proven resilient after avoiding recession in periods of mounting global economic challenges—fits within the greater European economy.

When analyzing the reasons why Poland’s economy recovered relatively quickly after the pandemic and after the initial wave of impacts from Russia’s full-scale invasion of Ukraine, Domański pointed to Poland’s economic diversification. “We don’t have one sector that would be overwhelming the whole economy. I believe this is one of the factors that is behind our resilience.”

Following that, when discussing Poland’s plan for the energy transition, Domański said that Poland can take “two obvious directions: one of them is renewables, and the second one is nuclear energy.”

Domański also discussed the ongoing priorities of the Polish government in further bolstering the economy. On the topic of security, Domański vowed that Poland “will not cut spending on defense” and that it will “will not stop helping [its] Ukrainian friends.”

Watch the event

• Dispatch from IMF-World Bank Week: What will this week’s legacy be?

• Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

• Is the global financial system fit for climate change?

• The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

• “Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

• See day four analysis

Dispatch from IMF-World Bank Week: What will this week’s legacy be?

There were plenty of reasons for a dour mood to spread across the spring meetings this week.

One such reason is that higher-than-expected inflation readings in the United States dampened expectations of Federal Reserve rate cuts, driving up long-term rates around the world. The Financial Times even spoke of relegating the low-interest period of the 2010s to the dustbin of history. Countries are beginning to realize that they may not have the means to service their debt, support their aging populations, pay for the green transition, help Ukraine, and finance military rearmament all at the same time.

The dour mood was reinforced by the Israel-Iran exchange of direct attacks and Russia’s destructive air campaign in Ukraine. Higher oil prices and further supply-chain disruptions consequently topped the IMF’s downside risks to the forecast. Calls from the Biden administration to triple aluminum and steel tariffs provided a reminder of the risk of future trade conflicts and increasing economic fragmentation.

Less discussed, but similarly mood-souring, was the topic of the stronger dollar, which might have negative consequences for emerging and developing countries with growing fiscal deficits.

The International Monetary and Financial Committee chair released a statement today that was among the most bland in recent history, repeating well-known positions about the IMF’s role in the global economy and committing to the implementation of recent decisions, but falling well short of new initiatives.

But when determining this week’s legacy, there are reasons for a better mood to prevail. The IMF did propose a tweak to its debt policies, allowing the Fund to lend to countries even if they’re still in debt restructuring negotiations with big bilateral creditors (think China). The IMF also, in its World Economic Outlook, finally zeroed in on the “significant risks” that large countries’ fiscal deficits pose to the global economy. And there are signs of momentum ahead: Liechtenstein is on track to join the IMF as member number 191, in a year marking the eightieth anniversary of the Bretton Woods institutions. Whatever mood the delegates are in when they depart Washington, their work will carry on.

Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

In a discussion at the Atlantic Council on Thursday, Paolo Gentiloni, the European Commissioner for Economy, expressed a surprisingly positive outlook about the European economy, as the European Union (EU) continues to face post-pandemic and security challenges. 

In discussing the IMF’s latest World Economic Outlook, which slightly downgraded forecasts for the eurozone, the former Italian prime minister said he sees “the conditions for an acceleration of the economic activity for the second part of this year, and probably more in 2025.” His conviction rests, he said, on “better-than-expected” declining inflation, shared “strong labor markets” across the Atlantic, and an increase in purchasing power in several European countries “not impacting inflation, but consumption, which would trigger a better level of growth.” The EU’s goal was ultimately to “avoid a recession and major energy crises.”  

When assessing Europe’s economic-rebound prospects, Gentiloni urged to not “compare the impact of the Russian invasion in Ukraine, in Europe, with other parts of the world,” highlighting its disproportionate impact on “Europe and the Global South.” Russia’s invasion “disrupted part of the European business model” reliant on “cheap gas” and exports, which particularly affects Europe’s largest economy, Germany. The geopolitical risk remains “the largest risk” threatening Europe, he said, while there is no “substantial risk from a financial stability point of view” or “divergences in level of growth among different European countries.” Gentiloni said he is “quite optimistic that [Europe is] out of the most difficult part” of its “economic situation.” 

Amid the growing debate about Europe’s future competitiveness, Gentiloni said that the topic fits into wider discussions on “how the model we built the European Union [on] in the last decades should be probably transformed.” To achieve its ambitions, Europe must “find common funding” beyond the NextGenerationEU (which is expiring in 2026) to further attract private investments and complete the green transition, “avoiding the idea that slowing down or taking a different direction will solve our problems, because the global competition on clean tech is there,” Gentiloni said.  

Drawing on a quote from former European Commissioner Pascal Lamy, Gentiloni remarked how “the EU cannot be the only herbivore in a world of carnivores” and argued that the “solution is to compensate economically, socially those that are most affected and to win the battle of the cultural narratives.”

Watch the event

Is the global financial system fit for climate change?

We know what the future is set to look like: By 2040, according to the Intergovernmental Panel on Climate Change, we will be living in a 1.5 degrees warmer world, with consequences that are already being predicted by science. That’ll be the case unless extraordinary action is taken.

The private sector is now waking up to this reality. Industry is beginning to recognize that climate risks raise financial risks. Homeowners are finding it harder to insure their houses. Water levels are rising, disrupting ports that play a large role in the global economy. Outdoor workers cannot work safely in heat waves, which are striking with alarming frequency.

The economic costs of inaction cannot be postponed and passed on to future generations.

There must be a new ambition for adaptation and resilience finance. Currently, progress on catalyzing investments in climate solutions is often slow and scattered, and it also often lacks scale. The solution: Redefining the economic and financial order.

To begin imagining what that new order should look like, we sat down with climate finance experts, who helped us spread our Call for Collaboration between the public and private sectors that we launched at COP28 last year. Catch up on that conversation, held on the sidelines of the IMF-World Bank Spring Meetings, below.

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The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

South African Minister of Finance Enoch Godongwana joined the Atlantic Council’s IMF Broadcast studios on Wednesday to outline his country’s economic priorities, including its vision for the Group of Twenty (G20) agenda during its presidency in 2025.

In the conversation with Atlantic Council Africa Center Senior Director Rama Yade, Godongwana said that South Africa is focused on being not the biggest economy but the strongest. “What we must focus on is that we are the most industrialized economy on the African continent, and to what extent we can build on that, to build competencies, that makes us the strongest economy on the African continent,” he said. Sharing his optimism about economic growth on the African continent, Godongwana cautioned that a slowdown in growth in South Africa’s trade partners, such as China, may lead to a spillover effect not only on South Africa’s economy but that of the South African Development Community region.

Regarding South Africa’s upcoming presidency of the G20, the minister said that South Africa is developing an agenda that will include some of Brazil’s current priorities—and others from previous presidencies—and that South Africa “will inject an African perspective into that agenda” after consultation with countries on the African continent.

Turning to South Africa’s membership and ambition within the BRICS group, the G20, and the IMF and World Bank, the minister argued that there is no tension for South Africa within these groupings, but that they have been helpful in addressing challenges that the country faces. Responding to a question about a possible BRICS currency, the minister stated that there “is no document from the BRICS that talks about a BRICS currency in our declarations.” Godongwana stated that there is a push, regionally in Southern Africa and within the BRICS, to accept local currencies and to use alternative payment systems beyond the dollar when conducting international trade. But BRICS, he said, is not about undermining the current system—but changes in the current system are needed.

Speaking during the IMF-World Bank Spring Meetings, Godongwana discussed reforms he’d like to see the Bretton Woods institutions make, including governance and funding changes at the IMF and the World Bank. The minister argued for a change in the selection of heads of the IMF and World Bank and called for non-American and non-European candidates to be considered for the top leadership positions of the organizations. Speaking to investors, Godongwana stated that he welcomed investment into South Africa and the African continent that respected countries’ sovereignty and geopolitical strategies.

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“Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

DRC Finance Minister Nicolas Kazadi joined the Atlantic Council’s IMF broadcast studios on Wednesday to outline his country’s economic priorities, including its intent to create more opportunities for investment.

Kazadi argued that “Congo is open for business” and “the mining sector specifically is driven by foreign investment.” In March this year, the Congolese government began to implement a 2017 law requiring all subcontracting companies to be majority Congolese-owned. The minister explained that while Congo encourages investment, the country wants to ensure that private investors share the prosperity with local partners and build local capacity. “We don’t even need a law for that, it is a matter of principle” to help local Congolese businesses grow, argued Kazadi.

In the mining sector, the finance minister said that Congo is looking for investments along the full energy value chain, “trying to raise awareness in our youth, support them as they invest in the ecosystem that we are trying to build in partnership with the big private sector,” he said. Kazadi said that “Congo is trying to bring more transparency along the value chain to raise the standards” to avoid situations in which products do not meet international environmental, social, or governance standards that can impact the image and business environment of the country. He said that he hoped companies working in the Congo would help charge a “local transformation of critical minerals” that would change the economy “completely,” bringing the gross domestic product “from billions to trillions,” he said.

Speaking during the IMF-World Bank Spring Meetings, Kazadi discussed Congo’s upcoming sixth review of its Extended Credit Facility program and reforms he’d like to see the Bretton Woods Institutions make, including changes to the channeling of Special Drawing Rights. He expressed a readiness to work with international financial institutions on addressing the development challenges facing his country.

Watch the event

• Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

• European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

• “The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

• The Global South’s reform agenda for the IMF and World Bank

• See day three analysis

Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

IMF headquarters was abuzz today following the announcement of Managing Director KristaIina Georgieva’s new global policy agenda, outlining the economic challenges of the day and what the IMF plans to do about them.

The three priorities she chose for the Fund to tackle: rebuilding fiscal buffers, after public debt edged upward to 93 percent of GDP; reviving medium-term growth, which has deteriorated since the global financial crisis; and renewing its commitment to its members, with more quota resources to go around.

All of the above are worthwhile things to do. But, at least from where I was watching in the IMF HQ1 Atrium, Georgieva didn’t seem to mention anything about two of the most pressing issues of the day when she presented the global policy agenda this morning.

The first issue is China’s industrial overcapacity and its global impacts. The EU has launched or is expected to soon launch anti-subsidy investigations looking into Chinese electric vehicles, wind turbines, and medical devices. But the news that really spread like wildfire at the spring meetings was that, just a couple blocks away, the White House announced an investigation into China’s shipbuilding practices. President Joe Biden also called for tripling tariffs on Chinese steel and aluminum products, the starting gun for more protectionist measures to come—and a major risk to global growth.

The second issue is the divergent monetary policies being put forth by the US Federal Reserve and the European Central Bank, pushing up the dollar’s value in foreign-exchange markets. The topic did come up during the G20 press conference following the group’s meeting of finance ministers and central bank governors today. A strong dollar will undermine low-income countries’ growth prospects—something the IMF must pay attention to.

The silence on these risks to global growth shows the Fund should pay more attention to the issues at the core of its mandate to coordinate members’ economic policies as they are being shaped and implemented. Doing so early—rather than reactively helping countries deal with the fallout of poor international cooperation—would avoid negative spillovers on the global economy.

European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

On Thursday, Nadia Calviño—who this year took over as president of the European Investment Bank (EIB)—spoke to the Atlantic Council at the IMF-World Bank Spring Meetings, where she talked about the EIB’s priorities, including encouraging investment in Ukraine for reconstruction, rallying climate financing, and helping the European Union achieve its strategic priorities.

Calviño explained that the EIB is working with other multilateral institutions and with local Ukrainian partners to identify Kyiv’s rebuilding priorities—including infrastructure projects and support to small and medium-sized enterprises—to “make the most of Europe’s money.” She added that the EIB is working with the European Bank for Reconstruction and Development, the World Bank, and the United Nations Development Programme to ensure that “the experts that are on the ground are providing the most efficient service… to all of us.”

Calviño said that the EIB is proud to have garnered a reputation as “the climate bank,” with over 50 percent of its investments being in green projects and having supported the development of innovative technologies. “The green agenda is really ingrained in everything we do, inside and outside the EU,” she said. She argued that the investments being made in less-developed countries were strategic in nature and critical for Europe’s future priorities.

Calviño additionally said that there’s a sense of a “shared responsibility” across the Global North in addressing climate financing needs and deconflicting those efforts. She added that a North-South dialogue is “very important” and “needs to be accompanied by facts, not just words.”

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“The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

In the bustling IMF headquarters on Tuesday, I sat down with Ukrainian Deputy Finance Minister Olga Zykova to talk about the role of digital development in post-war reconstruction.

Ukraine had been busy taking many of its public services digital, even before the outbreak of the war in 2022. Zykova, who became deputy finance minister a few months into the war, told me that Ukrainian citizens have used technologies, such as the Diia app, to do everything from travel to access healthcare to buy war bonds for financing. She told me (and also Candace Kelly from the Stellar Development Foundation and Kay McGowan from Digital Impact Alliance, who also joined the expert panel) that she believes Ukraine’s efforts can be a successful example for other war-torn economies looking to rebuild their digital infrastructure.

The conversation then turned to the importance of open-source infrastructure, as the panelists discussed the collaborative advantages of open-source technological solutions which can provide developers the flexibility to adapt technologies to fit their needs across countries and situations.

We also discussed the need for a robust evaluation and impact assessment of the funding of these programs and the technologies themselves, to ensure that they reach their full potential. This call for robust impact metrics has been a consistent theme of this week, echoed by multilateral development banks, the private sector, and civil society.

Zykova also outlined Ukraine’s priorities for the IMF-World Bank Spring Meetings, calling for the creation of a sustained plan to equip Ukraine with the means to meet its reconstruction demands. She encouraged countries to not lose focus, even with lingering uncertainties about funding in Ukraine, and reiterated the importance of building resilient networks as the EU approaches its elections.

Reconstruction in Ukraine represents many of the existential questions ahead for the World Bank and IMF this decade—how to shore up democratic resilience, build consensus across an increasingly fracturing global order, and use technology to reduce inequality and achieve lasting prosperity.

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The Global South’s reform agenda for the IMF and World Bank

International media has until now paid little attention to statements of the Group of Twenty-Four (G24). The committee represents developing countries within the IMF and World Bank, playing a similar role to the Group of Seventy-Seven, a coalition of developing countries that comes together at UN gatherings. As Global South countries have become more vocal in their demand for reforms of the Bretton Woods institutions, the G24’s statements have become more important. The group should be considered counterparts to the Group of Seven (G7) in discussions about changes, especially in the context of the International Monetary and Financial Committee (IMFC)—an important body in the governance of the IMF.

On April 16, the G24 met and issued a communiqué summarizing the positions of developing countries on many issues on the reform agenda.

Regarding the IMF:

• The G24 welcomed the equi-proportional increase in quota but stressed the need for a quota realignment to reflect involving realities of members. (Developing countries in aggregate have increased their weight in the global economy but feel underrepresented in the Fund’s quota and voting-share distribution.)
• It urged the Fund to eliminate the surcharge on its base lending rate which has resulted in high borrowing costs to members in need of substantial IMF support.
• It proposed considering sales of IMF gold to increase the financial resources of concessional lending facilities such as the Poverty Reduction and Growth Facility.

Regarding the World Bank:

• The G24 acknowledged the Bank’s efforts in implementing the Evolution Roadmap, sponsored by the Group of Twenty to optimize its balance sheets and increase its financing capability and efficiency.
• However, the G24 cautioned that the commitment to allocate 45 percent of annual financing to climate-related projects should not be at the expense of financing for basic development challenges like combating poverty and hunger.
• It called for a capital increase for the World Bank and multilateral development banks in general—especially a strong replenishment of the resources of the International Development Association (providing grants and low-interest loans to low-income countries) in its twenty-first round of funding, which is currently underway.

In the view of many in developed countries, the demands articulated by the G24 may resemble a wish list containing many items difficult to command sufficient agreement to be adopted—for example, the quota reform. Nevertheless, developed countries should take these demands seriously and engage constructively with developing countries to find a reasonable way forward. Failure to do so would undermine the legitimacy and effectiveness of the IMF and World Bank—institutions that should play important roles in sustaining global growth and supporting less-developed countries.

• Dispatch from IMF-World Bank Week: A tale of two headquarters

• Mixed developments on sovereign debt restructuring

• The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

• Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

• Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

• Back to the basics: High turnover rates for central bank governors do not help with inflation

• Spooking the spirit of Bretton Woods

• See day two analysis

Dispatch from IMF-World Bank Week: A tale of two headquarters

In many ways, the story on day three of these spring meetings feels like a tale of two headquarters: Both style and substance differ between the boisterous World Bank on one side of 19th Street and the more buttoned-up IMF on the other.

The Bank’s atrium has been decorated with hundreds of colorful drawings by staff members’ children, depicting a “livable planet”—the newly added objective to the Bank’s vision statement. The Fund’s atrium, on the other hand, hosts an interactive “let’s grow together” board where delegates can affix stickers to the types of training and institutional strengthening they need. Both spaces strive to inspire and provoke thought, but the vibes are quite different.

Substantively, the Bank is abuzz with chatter about its “evolution,” touting progress such as a new guarantee platform, the corporate scorecard, and the series of reforms initiated last year to improve its impact. People at World Bank HQ are also energetically making the case that the Bank’s “money and knowledge” are vitally needed now, as a “great reversal” in development—explained in a new report—has resulted in one in three low-income countries becoming poorer than they were on the eve of the pandemic.

At the Fund, it’s about “resilience amid divergence” (as I discussed this afternoon with my fellow World Economic Outlook ‘decoders’ from the Atlantic Council): cautiously celebrating the fact that better-than-expected resilience in the US economy, coupled with stronger labor markets and cooling inflation in many places, is driving steady global growth. But that celebration doesn’t paper over the fact that debt, higher-for-longer interest rates, and conflict are undermining growth and impeding recovery in many developing countries.

Where Bankers, Funders, delegates, and guests seem to be speaking the same language is around “leverage” (the need to use the Bretton Woods institutions’ funding to crowd in additional financing) and “demographics” (with certain population trends raising macroeconomic and social-development pressures and opportunities, which I’ll be talking about at the IMF on Friday).

PS: If you’re wondering which of the headquarters has the better store for some spring meetings swag, it’s the World Bank’s.

Mixed developments on sovereign debt restructuring

This was a big week for those working to help vulnerable middle- and low-income countries overcome debt crises. For years now, there has been a slow-moving discussion about how to improve the framework for sovereign debt restructuring. And on that front, there has been both good news and bad news in recent days.

First, the good news: Three years or so since Zambia defaulted on its international bonds, it has just reached a restructuring deal with its bondholders which has been accepted by the official bilateral creditors. However, Zambia is not out of the woods yet. It still has to negotiate debt deals with its commercial creditors—basically international banks including many Chinese stated-owned banks such as the China Development Bank, Industrial and Commercial Bank of China, etc. It is not clear if this problem will hold up the actual implementation of the agreed debt restructuring measures—highlighting the complexity of the sovereign debt restructuring process.

The second piece of good news is that the IMF Executive Board has just approved some adjustments to the Fund’s Lending into Official Arrears (LIOA) policy—basically allowing the Fund to lend to a member in distress even though that member is in arrear in servicing its debt to an official bilateral creditor. The just-approved adjustments would give the Fund more flexibility in making use of the LIOA policy when a creditor country (i.e. China) has not been forthcoming in the restructuring process, delaying its timely conclusion. The key outstanding question is whether a low-income debtor country would be prepared to go along with the idea of activating the LIOA vis-à-vis China—especially those who have relied on China for trade and investment via the Belt and Road Initiative.

Then there’s the bad news. A piece of proposed legislation is moving through the New York State Legislature that would amend the state’s creditor and debtor law. Basically, the amendments would unilaterally impose a restructuring regime, for example compelling bondholders to accept a restructuring deal managed by an overseer appointed by the governor of the state of New York. As about half of international sovereign bonds have been issued under New York law, and the other half under English law, this legislation would, if passed and implemented, introduce a huge element of uncertainty to the sovereign bond market. It could potentially disrupt its smooth functioning and raise borrowing costs for emerging market and developing countries. And it could short circuit international efforts, such as the G20-sponsored Common Framework and the Sovereign Debt Roundtable, which are trying to develop international agreements to improve the sovereign debt restructuring framework.

All three stories highlight the complexity of debt restructuring negotiations. But the summary of the week’s news on that front: two steps forward, one step back.

The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

Spain is positioning itself as a “growth engine” in the eurozone, argued Spanish Minister of Economy, Trade, and Business Carlos Cuerpo.

He said that in 2023, Spain “grew five times the euro area average.” That, coupled with his prediction of a 20 percent drop in the country’s debt-to-GDP ratio (with respect to the peak post-pandemic), “[configures] a good way forward” for Spain, Cuerpo said, with sustainable growth likely ahead in the medium term.

Cuerpo said that Spain is hopeful about its economic prospects, as foreign direct investment has grown, indicating “confidence of world investors in the Spanish economy.”

Cuerpo spoke with GeoEconomics Center Senior Director Josh Lipsky at Atlantic Council headquarters during the IMF-World Bank Spring Meetings. They discussed Spain’s path forward utilizing NextGenerationEU funds and its role in the conceptualization of new EU fiscal rules. Cuerpo reflected on the transformation of primary themes of discussion over the EU’s fiscal rules, beginning with the green transition, pivoting to strategic autonomy, and now focusing on economic security. “There is a common denominator [within] those discussions, which is the need for investment,” he said.

Cuerpo pointed to Spanish investment in green hydrogen, semiconductors, and battery-related initiatives through the NextGenEU funds. A midterm evaluation from the European Commission found that the Spanish GDP level increased by 1.9 percentage points in 2022, when compared with a hypothetical Spanish economy without the NextGenEU funds present. “It’s not just an opportunity for the Spanish economy,” Cuerpo said. “The impact of the plan is already a reality.”

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Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

You’ve heard it before. Gross domestic product, or GDP, is not the best indicator to understand Russia’s economic performance under sanctions. Nor is the exchange rate. Yet, the IMF’s decision this week to revise Russia’s growth forecast for this year upwards to 3.2 percent after another upward revision in January is one of the most talked-about findings of the World Economic Outlook. And while the widening fiscal deficit and rapid inflation remind us that the Russian economy is still under strain, it’s important to acknowledge that, at the start of Russia’s full-scale invasion, sanctions policymakers thought they could reasonably hope to plunge Russia into a prolonged recession. And in April last year, when the IMF predicted the Russian economy would grow in 2023, most thought this was wrong, but it did indeed grow by 3 percent.

How are they pulling this off? It’s not just about oil and gas export income, though higher oil prices help. Combined disclosed and undisclosed military and domestic security spending exceeds 30 percent of GDP—and therefore represents a major boon for overall GDP figures. The Ministry of Finance had to reach into its savings more than expected at the end of 2023, taking the liquid part of the National Wealth Fund down from $150 billion to $130 billion. The weak exchange rate and labor shortages are also working together to keep inflation very high, at almost 8 percent.

It’s wrong to say the Russian economy is doing well. The problem is that it has enough resources to keep funding the war.

Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

On Monday, Pakistani Finance Minister Muhammad Aurangzeb emphasized the country’s need for structural reforms over a span of two to three years. In an Atlantic Council conversation with the South Asia Center’s Kapil Sharma, Aurangzeb outlined Pakistan’s strategy, arguing that efforts shouldn’t merely focus on financial stabilization: They should also lend focus to sustainable growth and inclusivity. 

“The crux of our strategy with the IMF involves not just temporary relief but laying the groundwork for enduring stability and economic resilience,” Aurangzeb said. He underlined the importance of understanding and implementing long-term policies that have been on the nation’s agenda for decades. The minister argued that the time for action on these reforms is now, especially with the looming end of Pakistan’s three-billion-dollar Stand-By Arrangement with the IMF, currently set for late April. 

Pakistan reportedly intends to ask for a larger and extended program from the IMF to support its economic reforms. To that end, Aurangzeb argued that when it comes to these economic reforms, Pakistan doesn’t need more policy prescriptions: It needs implementation. 

“Ensuring macroeconomic stability is not merely about stabilization; it’s fundamentally about inclusive growth and addressing climate impacts,” said Aurangzeb. He noted that the financial and structural reforms would help Pakistan mitigate the adverse effects of climate change and promote financial inclusivity, especially among vulnerable groups, including women. 

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Back to the basics: High turnover rates for central bank governors do not help with inflation

Inflation is front and center at the spring meetings. Reducing it is crucial for any inclusive growth and development strategy because, after all, inflation is a regressive tax on the poor, who lack the real assets to effectively hedge against inflation.  

While the global median headline inflation has declined to 2.8 percent in 2024 and many central banks have been successful in their fight against inflation—particularly the Federal Reserve (known as the Fed), Bank of England (BoE), and European Central Bank (ECB)—many developing and emerging economies are still suffering from high inflation rates, sometimes with rates higher than 20 percent. Several factors continue to contribute to these rates: rising energy and food prices; increasing sovereign debts; higher policy rates in the ECB, UK, and Fed (and thus larger capital inflows to these economies); and growing budget deficits—partly because of the higher cost of energy and of servicing debt due to higher interest rates.

An often ignored but equally or even more important factor is the independence and reputation of central banks. While the majority of countries suffering from inflation rates higher than 20 percent claim that their central banks are independent and their policies are not influenced or dictated by their central governments, in practice the so-called “independence” of these central banks is severely undermined by the high turnover rates of their top bosses.

Available data suggests that over the past decade, the median tenure of a central bank governor or president in the twenty economies with the highest inflation rates has been a mere two years. Over the past ten years, a number of central bank governors have come and gone: Seven in Argentina, eight in Turkey, six in Venezuela, and five in Iran. Just to put this in perspective, during the same period, the median tenure of the leadership in the Fed, ECB, BoE, and Bank of Japan has been five years, and these institutions have each changed leadership only once in the past decade.  

Such a high turnover rate for the central bank leadership is a clear sign of its lack of independence. It also severely undermines the most important asset of a central bank: its reputation and credibility. Economic actors, markets, and consumers in an economy look to the central bank and its leadership for direction on the future of the economy and directly equate high turnover in a central bank leadership to policy uncertainty, demolishing the reputation and policy credibility of a central bank. A central bank lacking reputation and credibility is like a chef without a kitchen.

In fighting inflation, it’ll be important to go back to the basics: religiously protecting the reputation and independence of central banks and aggressively rebuilding any losses on these fronts. After all, reputation is extremely hard to build but very easy to lose. And that is the most important tool a central bank has to fight inflation.

Spooking the spirit of Bretton Woods

It was supposed to be a week of multilateralism, breaking down barriers between borders, and preventing “fragmentation” (as the IMF often likes to say). But the United States had different ideas.

Following US Treasury Secretary Janet Yellen’s recent trip to China where she hammered home the risk of Chinese manufacturing overcapacity, the Biden administration today called for a tripling of tariffs on Chinese steel and aluminum. As if that wasn’t enough, the Office of the United States Trade Representative is beginning an investigation into Chinese unfair trade practices on shipbuilding and maritime logistics, per a White House announcement this morning.

Couple this with the European Union’s ongoing anti-dumping investigation on Chinese electric vehicles (as we’ll discuss with EU Commissioner for the Economy Paolo Gentiloni tomorrow), and suddenly the spirit of Bretton Woods is looking a little spooked. That’s one reason why the understated warning in the IMF’s World Economic Outlook yesterday about downside risks may already feel out of date.

• What the World Economic Outlook left out

• What should be done with Russia’s blocked reserves?

• Dispatch from IMF-World Bank Week: IMF report launches keep it dull

• The IMF warns the United States to get its fiscal house in order

• How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

• When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

• Read day one analysis

What the World Economic Outlook left out

The just-released World Economic Outlook (WEO) has a nice subtitle that sums up very well its key messages—”steady but slow: resilience and divergence.” Resilient because economic activity in advanced countries has been solid and precipitated a 0.2 percentage point upgrade in the IMF’s growth forecast, to 1.7 percent this year. Divergent because low-income countries (LICs) have had their growth estimates cut by 0.2 percentage points to 4.7 percent this year. They have absorbed most of the $3.3 trillion loss in global economic output relative to the pre-COVID trend. They’ve also built up onerous levels of debt so that many are in debt distress and now have to use more than 14 percent of their government budget to pay interest, crowding out other important and necessary expenditures.

Unfortunately, the outlook for the LICs looks to be even worse than the WEO’s forecast, thanks to the Iranian attack on Israel over the weekend, as well as recent upticks in US inflation data.

Going forward, the heightened risk of war following Iran’s direct attack on Israel will likely keep oil prices elevated, having risen by some 12 percent since the beginning of the year. Meanwhile, higher-than-expected inflation will delay any easing by the Federal Reserve. That has caused a renewed uptick for the dollar. The combination of elevated oil prices and a strong dollar is bad for many countries, but it is particularly devastating for LICs because most LICs have to import oil—so high oil prices coupled with a depreciating currency against the dollar represent a double whammy, undermining growth. Also hurting LICs is the fact that a strong dollar increases their debt and debt servicing burdens, and it also tends to trigger capital outflow exacerbating the stress.

These two news events will push LICs even further behind in the convergence process. In short, global economic disparities will likely increase with unfavorable social implications for the world. The WEO has not paid sufficient attention to this risk.

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What should be done with Russia’s blocked reserves?

Since February 2022, Western sanctions have blocked roughly $300 billion in Russian reserves. Thanks to high interest rates, these reserves have been generating income for their custodians, the largest of which is Belgium-based company Euroclear. The question Group of Seven (G7) members will be discussing this week is how to use that interest income.

Bloomberg’s Viktoria Dendrinou and the Council on Foreign Relations’ Brad Setser joined the Atlantic Council GeoEconomics Center’s Charles Lichfield to compare the two primary proposals: 1) Tax almost all the interest income and use the windfall as a funding source for Ukraine or 2) pull forward some of the interest income stream to provide funding more quickly, maximizing its value through financial engineering.

Although the United States wants to come to an agreement by June, Dendrinou explained that things are moving more slowly on the European side due to the greater risks posed by Russian retaliation, as Europe has more assets in Russia. This adds to fears of knock-on effects on the euro’s role as a reserve currency.

Still, Setser came back with ambitious plans to generate even more interest income by actively managing the funds. “If you put this in deposit accounts and you had access to the full $300 billion,” he said, a reasonable estimate “is nine to ten billion dollars per year.”

Dendrinou and Lichfield expressed skepticism about the feasibility of doing this from a legal perspective, as it may require changing the ownership of the assets. Looking to the future, Dendrinou tentatively suggested that there’s “probably going to be some kind of financial engineering in place” by next year’s spring meetings.

Setser, on the other hand, boldly predicted that by June, the G7 will “agree to a facility that pulls forward some, not all, future interest income so that the current sum that flows to Ukraine this year is more than the three to four billion that is currently being discussed.” G7 outcomes from this week may provide some early signs about a realistic timeline for using the interest income.

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Dispatch from IMF-World Bank Week: IMF report launches keep it dull

Each year at the spring and annual meetings, participants like me count down to the launch of the IMF’s most important flagship publications—the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). The launches are typically the high point of the week, often receiving more media attention than pronouncements from the finance ministers and central bank governors that come later on.

The GFSR unveiling has always been a jargon-laden affair. While the WEO press conferences have become increasingly staid over the years, they were once known for public debate and even sarcasm.

The most memorable launch happened in the aftermath of the 1997 Asian financial crisis, when the IMF came under fire for its tough policy prescriptions. Then IMF Chief Economist Michael Mussa had firmly defended the Fund against the attacks—which especially rankled when they came from then World Bank Chief Economist Joseph Stiglitz. At the September 1998 WEO launch, Mussa declared that “those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal.”

But today’s launch events at IMF headquarters hewed to the new status quo. IMF Economic Counsellor Pierre-Olivier Gourinchas, who heads the Fund’s Research Department, offered the WEO’s case for optimism—with global growth forecast at 3.2 percent in 2024 and 2025—arguing that “the global economy remains remarkably resilient” although progress to reduce inflation has “stalled.” Notably, he called on China to address its property downturn and “lackluster” consumer demand. IMF Financial Counsellor Tobias Adrian then elaborated on the financial sector risks hanging over China at the GFSR press conference.

Mentioned only in passing were global geopolitical fragmentation, the divergence of fortune between advanced and low-income countries—the latter an important theme of this WEO—and the stalled progress in restructuring developing country debt. These uncomfortable issues were left to another day.

The IMF warns the United States to get its fiscal house in order

Unlike last year, the IMF’s World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) were not derailed by events happening a few days before publication. Last October, the Hamas terrorist attack on Israel the weekend before the Marrakesh meetings rendered the Fund’s forecasts outdated by the time they appeared.

Iran’s large-scale attack on Israel, by contrast, has not yet led markets to a fundamental reassessment of geopolitical developments, although the situation remains extremely fragile. The IMF’s spring reports therefore deliver a timely message about the factors behind a more somber medium-term outlook. With the inflation shock gradually diminishing, the Fund’s forecasters are on more solid ground assessing the challenges facing the IMF’s member countries, with fiscal pressures front and center in this year’s reports.

These are also depicted in an excellent article by Pierre-Olivier Gourinchas, the IMF’s chief economist. The degree of fiscal adjustment needed to stabilize medium-term debt ratios for many countries is striking, including the United States. The US fiscal stance is raising “short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” as Gourinchas put it. In other words, US fiscal policy poses a risk both to US disinflation and to global long-term interest rates unless the United States gets its fiscal house in order.

“Something will have to give,” concludes Gourinchas, an ominous reference to a long list of downside risks that are listed in the two reports. However, the good news is that the GFSR is less alarmist about financial sector developments this time, focusing instead on how to manage the “last mile of disinflation,” a considerable change in tone compared to the discussions only a year ago when the United States was on the verge of a major banking crisis.

As always, the IMF as a multilateral institution needs to be careful how it depicts geopolitical events, and there are well-calibrated references to commodity price developments and supply chain disruptions caused by ongoing conflicts. The reports, however, cannot elaborate on the precarious situation caused by Russia’s war in Ukraine and the ongoing conflict in the Middle East.

But these conflicts may increase pressures on government finances, including from rearmament needs, fiscal spending during an election cycle, and lower tax revenues due to mediocre growth rates. As a result, the advocated fiscal adjustment may remain elusive. Still, the IMF’s staff has done its duty by pointing out the underlying risks.

How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

In redefining its mission as striving for a world without poverty on a livable planet, the World Bank—under President Ajay Banga—has drawn attention to the need to mobilize capital resources to help developing countries close the climate action funding gap: A gap that currently amounts to the difference between the $100 billion committed annually by donor countries and the over $2.4 trillion needed per year by 2030.

It is clear that developed countries and multilateral development banks don’t have the capital resources to meet much of the investment gap. As a consequence, the Bank has put much effort into finding ways to catalyze, or crowd in, private capital by providing risk-sharing and guarantee facilities. With private institutional investors and asset managers holding more than $400 trillion of assets under management, the Bank hopes to draw in multiples of private capital to stretch its project dollars.

However, research by the Institute of International Finance has found that in recent years, multilateral development banks collectively managed to mobilize just fifteen dollars for every one hundred dollars committed—or one-fifteenth, decidedly not significantly multiplying the amount it has put up in its commitments.

While it is truly important and laudable for the Bank to find ways to catalyze private capital, it is better to be realistic about the potential outcome and impact of such efforts, so as not to set the stage for later disappointment. By presenting realizable targets—at least for the foreseeable future—the Bank can focus on the tremendous climate action investment gap that needs to be filled, continuously urging the international community to rise to the occasion to help meet the challenge before it is too late.

Of course, developing countries can help themselves by implementing structural reforms, especially in governance, to make themselves increasingly investable in the eyes of both domestic and international investors, attracting the needed investment flows.

When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

Mexico’s Secretary of Finance Rogelio Ramírez de la O joined the Atlantic Council’s studios on Monday to outline his country’s economic priorities, including its relationship with the United States.

Ramírez de la O argued that Mexico is “one of the most open economies in the world for both trade and capital,” thanks in part to the country’s exports, which are reported at over 35 percent of gross domestic product. The secretary of finance said that the country benefits from its level of openness, which he stated is comparable to certain European countries—but it’s also one that “fewer economies in Latin America have.”

Last year, Mexico surpassed China as the biggest exporter of goods to the United States. Mexico is committed to North American integration because “it’s where the core of our exports activities [lie],” Ramírez de la O argued. “This doesn’t mean that anything else comes secondary, but it comes next.” Looking ahead toward the USMCA renewal in 2026, the secretary of finance reassured members about product traceability—a demand rising from concerns over Chinese products. “We’re trading mainly and foremost North American content,” he said.

Speaking on the first day of the IMF-World Bank Spring Meetings, Ramírez de la O discussed reforms he’d like to see the Bretton Woods Institutions make, including correcting current account imbalances to revisit the world trade rules architecture and advocated for revisiting financial assistance for Latin America. He expressed readiness to engage with the Group of Twenty and multilateral development fora to define a global tax framework.

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• What’s the strategy behind this year’s smaller-scale spring meetings?

• Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

• Geopolitics is eroding the IMF’s relevance

• COVID-19’s economic impact on the poorest countries has just become clearer

• Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure
• Read preview analysis

What’s the strategy behind this year’s smaller-scale spring meetings?

The spring meetings have just gotten underway, but thus far the official events around 19th Street feel somewhat scaled down. The registration and security lines today were certainly shorter than last year. And there are notably fewer headline events, at least as far as the official World Bank side convenings are concerned.  

Perhaps it’s reflective of the Bank’s intent to bring more focus to its work—as President Ajay Banga discussed in his preview press conference. The Bank consolidated its public schedule into three days with just two “flagship events”—one on the energy transition in Africa and one on strengthening health systems. Both are decidedly linked to the International Development Association (the Bank’s concessional fund for low-income countries) whose twenty-first replenishment campaign seems to have more urgency and ambition as debt and other macroeconomic, microeconomic, and geopolitical challenges stymie recovery and growth in deeper ways.

Or perhaps it reflects an interest in putting more time into one-on-one, closed-door, dealmaking meetings—including with the private sector. Leveraging resources and mobilizing private capital is a priority for the Bank, as Anna Bjerde, managing director for operations, reiterated in our conversation this afternoon: “In a world where resources are scarce, ‘leverage’ is the name of the game,” she said.

Or perhaps it reflects the pace and impact of the “unofficial” spring meetings: The increasing number of side events with a broader array of actors around and beyond 19th Street, including our robust dual-sited slate at the Atlantic Council. These convenings are as well, if not better, placed to unpack—and discuss critically—the global geoeconomic, financial, development, and sustainability challenges and opportunities we collectively face, as well as navigate how (after eighty years) the Bretton Woods Institutions and the larger multilateral system should evolve and respond.

Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

With the IMF-World Bank Spring Meetings taking place again in Washington this year, the setting is familiar—but there’s also something strikingly new. As I walked into the World Bank’s headquarters today alongside many of the world’s finance leaders and experts, I was pleasantly surprised to see that the Bank’s mission statement, posted by the entrance, had changed: “Our dream is a world free of poverty,” had smartly been amended to add “on a livable planet.”

The new statement reflects the World Bank’s goal to evolve and to equip itself fully to deliver on its mission, which I discussed today with the Bank’s managing director of operations, Anna Bjerde.

The statement also exposes a hard truth: A world free of poverty cannot be attained or sustained in a world where carbon dioxide (CO2) emissions keep rising and climate challenges keep growing at the expense of the poorest—even as low-income populations contribute a mere 0.5 percent of global CO2 emissions, according to World Bank data.

Addressing global poverty and climate change requires more cooperation among the world’s largest economies and emitters; but the recent rise of geopolitical tensions and geoeconomic fragmentation, as our Bretton Woods 2.0 Project has pointed out, has made such cooperation much harder. This year’s spring meetings are a golden opportunity to make the case for more cooperation on addressing global challenges and reducing the rising temperature—both of the planet and its geopolitics.

This July, the Bretton Woods institutions will celebrate their eightieth anniversary, amid multifaceted perils facing the global economy and the world order. The countries present at the spring meetings must face these threats head on, so that by the time the IMF and World Bank turn one hundred, their member countries can look back with pride at the hard decisions they made to secure a livable and peaceful planet for all.

Geopolitics is eroding the IMF’s relevance

Expectations for this week’s Group of Twenty (G20) and IMF-World Bank Spring Meetings have hit a floor as the geopolitical environment continues to deteriorate. Russia and Iran are intensifying their pressure on Ukraine and Israel respectively, and political divisions in the West on the conflicts are becoming more acute. China is about to trigger another trade scuffle by throwing the (financial) weight of the state behind key industries that compete for global market share. The United States and Europe are on the defensive, fiscally stretched and riven by societal polarization that is also shaped by geopolitical adversaries.

There will be ample diplomatic squabbling over communiqué language concerning the wars in Ukraine and Gaza and the usual appeals to the spirit of multilateral cooperation—but there will also be complaints over excessive subsidies, trade restrictions, and financial sanctions. Discussions over quota reallocations will be doomed by irreconcilable geopolitical differences, and progress toward a more workable global debt architecture is likely to remain gradual, even if important work is proceeding on a technical level.

The one area where some consensus may exist is in raising funds for climate and development finance. Again, Western countries are on the defensive here, given that national development budgets have generally shrunk. Leveraging the funds of multilateral lenders, which the Western countries still dominate, remains an important way to at least partly match the financial resources that China, the Gulf countries, and increasingly India channel into building diplomatic ties with the developing world.

This also explains the selection of Kristalina Georgieva from Bulgaria to serve another term as IMF managing director. Under her leadership, the fund has expanded its toolkit to lend to developing countries, generally with fewer questions asked of loan recipients than under her predecessors, likely spelling financial trouble in the future. Already, there are demands for further reductions in the IMF’s lending rates as well as additional Special Drawing Rights (SDR) issuances.

By contrast, the Fund’s core economic work has generally received less attention. During her first tenure, the institution’s work was tailored to Georgieva’s personal areas of expertise, most of which lie in the mandate of the World Bank. The Fund was largely silent on the run-up in inflation, and its global economic messages have lacked clarity as it generally shies away from calling out countries for bad economic management.

Kenneth Rogoff, a former IMF chief economist, asked in a 2022 article why the IMF has turned into an aid agency. This question has now been answered by the majority of the IMF’s shareholders, who simply seem to prefer it that way. Whatever may be achieved during this year’s spring meetings, the mandate of the once proud institution seems to have shifted from safeguarding global financial stability to becoming a source of cheap funding for climate and development purposes.

COVID-19’s economic impact on the poorest countries has just become clearer

Four years after COVID-19 shook the global economy, the World Bank has released a report that lays out in the starkest possible terms just how devastating the pandemic was for the world’s poorest economies. In a report entitled “The Great Reversal,” the Bank details how much ground many of the world’s seventy-five least-developed countries have lost: One-half of that group is seeing its income gap with advanced economies widening, and one-third is poorer today than on the eve of the pandemic.

A key reason for the failure to regain growth momentum after COVID-19 has been sharply rising debt. In a separate report on developing country debt issued late last year, the World Bank estimated that eleven of the low-income countries were in “debt distress,” and twenty-eight were at “high risk” of distress. In 2022, the year the report analyzed, low- and middle-income countries paid $443.5 billion in debt service and $185 billion in principal repayments.

The countries assessed in “The Great Reversal” are eligible for World Bank low-interest loans and grant aid from the Bank’s International Development Association. They account for 92 percent of the world’s population living without access to affordable, nutritious food and over 70 percent of the world’s extreme poor. At the same time, their economies collectively account for only 3 percent of global output.

As central bank governors and finance ministers gather this week, the question—which they have faced at every spring and annual meeting since early 2020—will be whether they are prepared to work together to address this crisis of deepening poverty and debt. Or, will they leave town having only issued more communiqués expressing their “deep concern”?

Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure

The IMF-World Bank Spring Meetings have officially kicked off, and international financial markets have maintained fragile stability in the immediate aftermath of Iran’s large-scale attack on Israel, which included the launch of more than three hundred missiles and drones. The United States, along with several European and Middle Eastern countries, has emphasized the need to prevent further escalation. Due to the fact that Iran’s attack was less damaging than some anticipated, but with the still lingering risk of war, oil prices have given back some of the risk premiums built up last week in anticipation of Iran’s attacks, with Brent Crude sinking to just below ninety dollars a barrel—after having gained some 12 percent since the beginning of this year. In case of all-out war between Israel and Iran and disruptions of the oil flow through the Strait of Hormuz, oil prices can well exceed one hundred dollars a barrel. About a fifth of the volume of the globe’s oil consumption ships through the strait, with very few alternative routes.

Meanwhile, persistently strong inflation data in the United States has pushed market expectations for the first Fed cut later in the year, keeping the dollar strong—the greenback has appreciated by about 14 percent since the recent low in 2021. The dollar is also underpinned by safe haven flows given heightened geopolitical tension.

The combination of elevated oil prices and a strong dollar has put pressure on many countries, especially low-income countries. In particular, nearly all Group of Twenty (G20) members have seen their currencies weaken against the dollar—led by the Turkish lira and the Japanese yen, which each lost more than 8 percent since the beginning of the year. This has prevented many countries from easing monetary policies to support their economic recoveries. Watch this topic closely: The dollar’s strength, and the potential negative impact of it, could be a main topic of discussion in the G20 meeting of finance ministers and central bank governors scheduled for April 17 and 18.

• Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

• IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

• What to expect from the 2024 IMF-World Bank Spring Meetings

Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

As the world’s finance ministers and central bank governors descend on Washington this week—and snarl the city’s traffic—they seem to just want to be able to stick to the script.

It’s an understandable sentiment. The agenda is daunting, with issues such as sticky inflation, China’s struggling economy, and a rising risk of debt defaults. And, as IMF Managing Director Kristalina Georgieva made clear in her curtain-raiser speech at the Atlantic Council on Thursday, those are just the immediate problems. The medium-term challenges of job disruptions from artificial intelligence and the green energy transition can’t be ignored.

But as Iran’s large-scale attack on Israel this weekend reminded us, the ministers and governors will need to first address something else—the reality that geopolitical tensions and conflict have, as Georgieva said, “changed the playbook for global economic relations.”

Six months ago, on the eve of the IMF-World Bank annual meetings in Marrakesh, Hamas unleashed its brutal terrorist attack on Israel. The ministers spent the next five days being asked about the possible impacts on the regional and global economy, and nearly all of them demurred. As we at the Atlantic Council pointed out at the time, that was a mistake. It was clear from the start that war between Israel and Hamas would have economic repercussions. Sure enough, two months later, Houthi attacks linked to the war began disrupting major shipping routes in the Red Sea.

Now, Iran’s attack has cast a dark shadow over the spring meetings. Once again, many of the ministers will surely try to avoid addressing the potential fallout. Even if geopolitics is the last thing the ministers want to be discussing, they may not have a choice. It’s worth remembering that the Bretton Woods Institutions were created during a war to address the devastating economic toll of conflict. For the last several decades, it was often possible to keep geopolitics and economics separate—but that time is over. The sooner the ministers recognize the new reality, the more effective they can be.

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below, read more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, which touched upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

New Atlanticist

Apr 11, 2024

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

By Katherine Walla

“Making the right policy choices will define the future of the world economy,” International Monetary Fund Managing Director Kristalina Georgieva said at the Atlantic Council.

China Financial Regulation

What to expect from the 2024 IMF-World Bank Spring Meetings

Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center, breaks down the issues at the top of the agenda for the spring meetings.

The post Our experts decode policymakers’ plans for the global economy at the IMF-World Bank Spring Meetings appeared first on Atlantic Council.

Online Event Thu, April 11, 2024 • 9:00 am ET

IMF Managing Director Kristalina Georgieva on the state of the global economy

AN #ACFRONTPAGE EVENT– IMF Managing Director Kristalina Georgieva previews the latest findings on the economic outlook and financial stability.

Digital Policy Economy & Business Fiscal and Structural Reform Future of Work

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below are more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, touching upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Time for reform in China

• The IMF forecasts that China will see 4.6 percent gross domestic product (GDP) growth, just below Beijing’s target of 5 percent. But its productivity remains low, and it has an aging population. “China has to take on a new policy course,” Georgieva said. “What has worked in the past cannot be sustained for the future—and the Chinese leadership is aware of that.”
• Georgieva said that the IMF is slated to have consultations with China soon, where it will discuss what the managing director called three “solvable problems” for China: Low domestic demand, a need to reform its state-owned enterprises, and its real-estate crisis.
• On China’s challenges in the property sector, Georgieva said that while Beijing has taken some measures, it could “be more forceful” to let the market “decide on price,” and that it could also help support construction and “be more decisive” in dealing with failing companies.
• During a recent visit to China, US Treasury Secretary Janet Yellen stated that China is using unfair trade practices, a consequence of overcapacity, that hurt US businesses and workers. Georgieva said that China continues to face overcapacity problems in some sectors, making it “critical to develop domestic demand and shift the economy more towards services.”
• Georgieva estimated that when China drops 1 percentage point in growth, the rest of Asia drops about 0.3 percentage points. “China making good choices would be good for everybody,” she said.

“Expect the unexpected”

• “It is tempting to breathe a [sigh] of relief. We have avoided a global recession and a period of stagflation… but there are still plenty of things to worry about,” Georgieva said.
• She said to expect inflation to decline, albeit with “ups and downs,” and only some countries—mainly advanced economies—will be ready to begin cutting interest rates in the second half of the year. “This monetary pivot will differ from country to country,” she cautioned, as premature easing could lead to new inflation and monetary tightening. “No more [are we] in the place of 2020 when everybody went in the same direction,” she said.
• She added that policymakers will need to “deal decisively” with debt, as fiscal buffers “are exhausted,” and debt levels in many countries are “simply too high.” “For most countries, the prospect of a soft landing and strong labor markets mean there is no better time to act, to reach sustainable debt levels and build stronger buffers to cope with the shocks that will come in the future,” she said. “Delay is simply not an option: Consolidation must start now.”
• Georgieva also urged countries to adopt policies that reinvigorate growth and improve productivity, including policies that speed up the green and digital transformation. “How well we handle them will define the legacy of this decade,” she said.
• And with artificial intelligence (AI) poised to affect almost 40 percent of jobs globally, according to the IMF’s estimates, investing in digital infrastructure and introducing strong social safety nets could determine whether AI will enhance the economy, she said.
• “The pandemic, wars, geopolitical tensions: They have already changed the playbook for global economic relations,” the managing director said. “In a fast-changing and more turbulent world, bringing countries together to tackle challenges and pursue opportunities is more important than it has ever been.”

Watch the full event

The post IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy appeared first on Atlantic Council.

• Introduction
• The call for standards
• Defining standards
• A comprehensive overview of current standards on digital assets
• Lessons learned from standard-setting efforts
• Establishing standards
• Key themes for a CBDC framework
• Conclusion

Abstract

Over the past few years, the global financial landscape has undergone a significant transformation marked by the emergence and integration of digital assets. Looking ahead, the global financial terrain is set to include a spectrum of both sovereign and nonsovereign digital currencies and both centralized and decentralized networks. This future brings the promise of enhanced efficiency, inclusion, transparency, and choice to global payments. To fulfill this promise, the international community must develop interoperability standards that prioritize a fast, highly scalable, and resilient architecture. The flexibility of this architecture to adapt configurability based on policy and economic considerations is critical to its success.

This working paper is a foundational step toward a broader, global dialogue about digital asset standards. The Digital Dollar Project and the Atlantic Council’s GeoEconomics Center hosted a global convening titled “Exploring Central Bank Digital Currency: Evaluating Challenges and Developing International Standards” in November 2023. A version of this paper was released as a working paper to level set the attendees of the conference and provide a call to engage the public and the private sector in standard-setting efforts. This paper was further developed based on feedback from the conference and outreach afterward. The  paper now reflects what we learned from our convening and incorporates the most recent developments in standard-setting efforts globally. The rapid growth of central bank digital currencies (CBDCs) worldwide underscores the importance of aligning approaches to their development, adoption, and implementation across technical, regulatory, and governance levels. Today, there is a patchwork of first steps undertaken by both public-and private-sector entities, aimed at achieving different objectives. These efforts have focused on frameworks, guiding principles, and, in some cases, the development of standards for digital assets broadly, as described below. Some are CBDC-specific and others have general applicability in the payments sector. As governments and stakeholders collaborate to establish consistent benchmarks for CBDC development, it’s crucial to identify, organize, and align standard-setting endeavors. This process involves assessing existing efforts to pinpoint gaps and create a foundation for international standards that remain open and flexible for future development and innovation. Through this paper, we show the crucial element of interoperability, which is needed for the furtherance of standards on CBDCs and digital assets. We attempt to build the pressing themes around which standards will have to be addressed through existing and new efforts.

Introduction

In recent years, the global financial landscape has witnessed a profound transformation characterized by the accelerated rise and integration of digital assets. As a subset of these assets, central bank digital currencies (CBDCs) have captivated the interest of countries worldwide.¹ The CBDC landscape has rapidly evolved with 130 countries, representing 98 percent of the global economy, actively researching and, in some cases, deploying CBDCs. A recent survey by the Bank for International Settlements (BIS) revealed that the number of central banks likely to issue a CBDC within the next three years has grown in the past year from 15 percent to 18 percent for retail CBDCs (rCBDC) and from 8 percent to 15 percent for wholesale CBDCs (wCBDC).²

CBDCs, in their promise and potential, are emblematic of a broader shift—a movement toward a more efficient, frictionless digital infrastructure, shaping the future of international trade, cross-border payments, and global financial integration. However, with transformative potential comes inherent complexity. As fiat currencies become more intertwined with technology there are significant implications for privacy, human rights, cybersecurity, digital financial inclusion, and the movement of money across borders for international trade, aid, investment, and other payments. If designed without a common framework of standards and collaboration, a shortsighted and fragmented approach to CBDC development could lead to the emergence of walled gardens.

At the core of establishing standards lies the concept of interoperability—the ability for diverse systems to interact seamlessly and reduce friction. In this context, interoperability extends beyond technical objectives alone; it requires a broader framework including regulatory and governance standards, paving the way for streamlined cross-border transactions, reduced operational friction, and bolstered trust among participating entities. While not a panacea, technical, regulatory, and governance benchmarks are instrumental in navigating the complexities of the international payments systems. In order to achieve interoperability, CBDC exploration should prioritize a thorough discussion on establishing technical, regulatory, and governance standards. (See Annex 1 for definitions relevant to this discussion.)

This paper is intended as a catalyst to stimulate a broader, global dialogue about CBDC standards. It takes stock of existing activities, begins to define how these efforts may be coordinated and aggregated into a set of globally accepted best practices, and offers a baseline for addressing gaps or deficiencies in defining best practices.

The call for standards

CBDCs are a digital form of a country’s national currency, issued and backed by the country’s central bank. They come in two forms: retail CBDCs (rCBDC), accessible to individual consumers and usable for everyday purchases and peer-to-peer payments, and wholesale CBDCs (wCBDC), utilized by financial institutions or other major entities for interbank settlements and large financial transactions. The motivations behind rCBDCs and wCBDCs are distinct. The deployment of rCBDCs is usually motivated by financial inclusion, payment efficiency, privacy, and safety. Interest in wCBDCs is aimed at addressing cross-border friction to improve international payments—including limited operating hours, long transaction chains, restrictions on legacy technology platforms, data fragmentation, high costs, complex funding, and compliance issues.³

Ultimately, rCBDCs and wCBDCs would operate in conjunction with each other to achieve both the domestic and cross-border needs of a country.⁴ Therefore, the deployment of domestic CBDCs must not be considered in isolation or the result will be walled gardens that stand apart from global commerce and economic trends. Creating a CBDC in a silo is unlikely to achieve the desired outcomes in the short or long term, as it will replicate the friction of the existing payments systems. CBDCs’ potential to provide a simpler and more efficient way to move money can only be realized as long as the CBDCs can interoperate with one another.

If deployed, a CBDC must be able to operate across various transactions, institutions, and users. Many CBDC initiatives and explorations recognize the complex and interconnected ecosystem in which financial activity takes place and the interdependencies of the different participants in transaction settlements. By agreeing on standards upfront—which is by no means a simple task—CBDCs can hopefully escape some of the growing pains that we have seen with the development of new financial technology (such as automated teller machines that could only be used by customers of a specific bank) or new digital technology (such as the challenges posed by the early years of closed-loop email).

Concentrating on developing and implementing clear and accessible global standards can enable greater industry collaboration and competitiveness through interoperability, transferability, consistency, and safety across various industries and economies. With this clarity, countries can direct their efforts toward aligning and promoting key principles such as privacy, free enterprise, the rule of law, and economic liberty within the global financial landscape.⁵

Defining standards

At the heart of this paper is the effort to promote interoperability in payments systems and prevent the creation of walled gardens. We therefore define standards as the technical, regulatory, and governance benchmarks needed to achieve interoperable systems in the long run. It is crucial to recognize that standards do not emerge arbitrarily; instead, they evolve from fundamental principles, embodying intentional consideration and consensus.

Standards specific to CBDCs are not unchanging; they must reflect and be responsive to technological development, market shifts, and experience. Standards are established by technical and governance bodies, often made up of diverse stakeholders, and reflect a consistent floor for pragmatic implementation across jurisdictions. Therefore, they must have built-in flexibility to adjust to changing circumstances across a variety of market structures.

Our use of a narrow definition of standards as a means to achieve interoperable payments systems helps navigate the complex technical, governance, and regulatory environment. In the following section, we catalog existing standards for digital assets and the institutions responsible for setting them.

A comprehensive overview of current standards on digital assets 

International Monetary Fund

As a key institution in international monetary cooperation and exchange rate stability, the IMF is instrumental in assisting its 190 member countries in managing economic change. Its expertise in macrofinancial surveillance can help identify vulnerabilities associated with digital assets and it can offer policy advice to enhance the resilience of economies.

In November 2023, the IMF released a virtual handbook on CBDCs, designed as a comprehensive guide for policymakers and experts in central banks and finance ministries. The plan for this evolving handbook is to offer about twenty chapters by 2026, with periodic updates to reflect the latest findings and viewpoints.⁶ The initial chapters address key topics like the framework for exploring CBDCs, product development, impacts on monetary policy, capital flow management, and financial inclusion.

A publication called IMF Approach to Central Bank Digital Currency Capacity Development, released in April 2023, outlines the IMF’s efforts to facilitate peer learning and develop analytical underpinnings for advising member countries on CBDCs. In addition to research, the IMF provides technical assistance, including the XC platform initiative.⁷ The XC platform, proposes a global centralized ledger to simplify and streamline cross-border payments. This initiative builds on the concept of wholesale CBDCs, but the platform includes commercial banks, payment providers, and central banks within a single, streamlined system. The XC model aims to reduce transaction costs and settlement times, making it an attractive option for countries looking to enhance their cross-border payment systems.

Described as a “digital town square,” the XC platform would build a three-layer architecture: a settlement layer that acts as the primary ledger, a programming layer for executing smart contracts, and an information layer designed to protect personal data while ensuring compliance and facilitating currency controls as needed.⁸ The platform’s architecture is designed to be open and upgradeable, ensuring its longevity and adaptability to future innovations. Instead of adopting CBDCs, central banks can issue certificates of escrow (CE) for use exclusively on the XC platform. CEs enhance financial accessibility by granting more entities, including nonbank financial institutions (NBFIs), payment-system providers (PSPs), and nonresidents, direct access to central bank reserves. These certificates share characteristics with CBDCs and can later be converted into central bank reserves by financial institutions. According to the IMF, a key advantage of using CEs is that it allows countries to prioritize domestic use cases for their CBDC projects, while CEs can be used solely for cross-border transactions.⁹

The XC model is designed for wide-ranging compatibility with existing systems, requiring central banks to make only minor technical updates. The model is a policy and regulatory framework; it encourages countries to adopt consistent and supportive regulations for cross-border payments, potentially incorporating tokens and distributed ledger technologies (DLTs). In order for the model to work, however, it will need compatible legal and regulatory frameworks to effectively manage risks and ensure compliance across various jurisdictions. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, further explained this point at our conference in November 2023.

Bank for International Settlements

The BIS acts as the central bank for central banks, fostering monetary and financial stability globally. It actively explores the impact of digital currencies on the financial system and central bank operations. The BIS Innovation Hub facilitates research and development on digital innovation, helping member countries adapt to the rapidly evolving digital asset landscape. Its membership consists of sixty-three central banks and monetary authorities.¹⁰

Recent significant projects include Project Mariana, which tested cross-border trading using CBDCs and decentralized finance technology, and Project Icebreaker, which focused on using retail CBDCs for international payments through a novel hub-and-spoke model, both completing their testing phase in 2023.¹¹ Most recently, Project Sela, a collaboration between the BIS Innovation Hub Hong Kong Centre, the Bank of Israel, and the Hong Kong Monetary Authority, focused on exploring rCBDC features including accessibility, cyber security, and effective public-private collaboration, with an emphasis on central banks overseeing retail ledgers and private intermediaries managing customer-facing services.¹²

In July 2023, the BIS presented the results of a survey showing that 93 percent of central banks are engaged in CBDC work, with retail CBDC development more advanced than wholesale CBDC.¹³ The survey reveals most central banks recognize the value of having both a retail CBDC and a fast payment system.¹⁴ By 2030, there could be fifteen retail and nine wholesale CBDCs publicly circulating, while stablecoins and crypto assets are rarely used for payments outside the crypto ecosystem.¹⁵ This BIS finding followed its June 2021 report discussing its survey on CBDCs, which found that many central banks had not decided on issuing a CBDC, but had a tentative inclination toward allowing cross-border use by tourists and nonresidents. In March 2021, the BIS explored the potential for multi-CBDC (mCBDC) arrangements to improve cross-border payments by leveraging interoperable central bank digital currencies. Technology could play a role in addressing inefficiencies, and the paper discusses the dimensions of payment system interoperability and the benefits of mCBDC arrangements.¹⁶

The BIS Universal Ledger interoperability model advocates for a shared global ledger that integrates various forms of money—including CBDCs, tokenized deposits, and other digital financial assets—into a single, programmable environment. The BIS aims to address the inefficiencies and silos present in the financial system by enabling safer transactions and atomic settlements within a transparent framework.

The architecture of the unified ledger model is designed to be secure, scalable, and interoperable, with a strong emphasis on privacy and regulatory compliance. At its core, the architecture includes a data environment for securely storing digital asset representations, like CBDCs and tokenized deposits, in organized partitions managed by authoritative entities such as central banks and commercial banks. The execution environment facilitates the automation of complex financial operations and secure, efficient transaction processing. This environment supports atomic settlement, ensuring comprehensive transaction success or complete rollback. In addition, to safeguard sensitive data and transaction privacy, the model implements cryptographic methods like homomorphic encryption and secure multiparty computation. These technologies enable encrypted data computation without exposing the actual data, reinforcing the system’s privacy and security. An important component of the BIS project is the governance framework that establishes operational and regulatory compliance protocols, while also detailing the responsibilities of all involved parties, including central and commercial banks.

Unlike the XC model, which builds on blockchain solutions, the BIS’s unified ledger approach uses application programming interfaces (APIs), creating a more centralized system where transactions have to be processed and validated by authorized entities, such as central banks or designated financial institutions. ¹⁷ Within this system, central bank money can circulate on a platform that is not owned and operated by the central bank, which can present risks. It also raises questions about the security, control, and integrity of central bank money when it is managed outside the traditional central banking systems.

The BIS favors a system grounded in central bank money, offering a sounder basis for innovation, stable and interoperable services across borders, and a virtuous circle of trust through network effects.¹⁸

Basel Committee on Banking Supervision

The BCBS is the global body for setting prudential standards for banking supervision and regulation. With the emergence of digital assets and their potential impact on banking operations and risk management, the BCBS is studying the implications for financial institutions. The committee’s membership includes central banks and banking supervisory authorities from twenty-eight countries.¹⁹

The BCBS standard for prudential treatment of crypto asset exposures integrates crypto assets into the Basel Framework for banks.²⁰ Joint reports by CPMI, BIS, the IMF, and the World Bank on central bank digital currencies for cross-border payments emphasize CBDCs’ potential to enhance cross-border payments through international cooperation and coordination.

Financial Action Task Force

FATF primarily focuses on combating money laundering and terrorist financing and has had less emphasis on specific guidelines for CBDCs. Its recommendations function as guidance on regulating virtual assets and virtual asset service providers (VASPs) to ensure the prevention of illicit financial activities. More than 200 jurisdictions have committed to implementing FATF standards, making the organization a key player in shaping regulatory frameworks to maintain transparency and security in the digital asset sphere.²¹ FATF has thirty-eight member countries, including major economies and financial centers worldwide.²²

FATF has published several papers related to virtual assets and VASPs. The first version of its Guidance for a Risk-Based Approach to Virtual Assets and VASPs, released in June 2019, focused on risk assessment and monitoring, particularly for issues of anti-money laundering and combating the financing of terrorism (AML/CFT).²³ A twelve-month review of the revised FATF standards on virtual assets and VASPs was conducted in July 2020, showing progress in implementing these standards among some jurisdictions, but not yet sufficient progress to create a global AML/CFT regime for virtual assets.²⁴ A second twelve-month review in June 2022 revealed continued progress, but indicated that implementation was still insufficient and certain challenges remained, such as the implementation of the “travel rule.”²⁵ This rule is a legal obligation that requires financial institutions—such as banks and cryptocurrency service providers—to collect and share detailed information about the parties involved in a financial transaction.

To address these challenges and based on the two reviews, FATF published Updated Guidance for a Risk-Based Approach to Virtual Assets and VASPs in October 2021. This guidance includes updates in six key areas, including clarifying the definitions of virtual assets and VASPs, guidance on stablecoins, and additional guidance on peer-to-peer transactions and information-sharing among VASP supervisors.²⁶ However, the latest update on the implementation, published in June 2023, indicated that jurisdictions still struggle with fundamental requirements.²⁷ The report also emphasizes the need for appropriate risk identification and mitigation measures, especially for decentralized finance (or DeFi) and unhosted wallets (e.g., controlled by the owner rather than a platform or exchange manager), which have the potential for misuse. In 2020, FATF has also reported to the Group of Twenty (G20) on stablecoins, outlining its specific views on the application of anti-money laundering and counterterrorist financing requirements.²⁸ There is ongoing work needed to ensure consistent and effective implementation of FATF standards in the digital asset sphere, and some jurisdictions are still struggling with fulfilling the fundamental requirements outlined by FATF.

International Organization of Securities Commissions  

As the leading international standard-setting body for securities regulation, IOSCO plays a critical role in ensuring the stability and efficiency of capital markets. With a growing interest in digital securities, IOSCO’s principles on issuer and investor protection, market integrity, and risk mitigation have significant implications for the global adoption of tokenized assets. IOSCO has more than 120 members, including national securities regulators and exchanges from various jurisdictions.²⁹

While debates on which digital assets count as securities are ongoing in the United States, IOSCO has been actively engaged in providing insights into the realm of digital asset markets through a series of consultation reports and public reports. Policy Recommendations for Crypto and Digital Asset Markets, published in November 2023, stands out as a comprehensive consultation report proposing eighteen recommendations that address six key areas of concern. These areas include conflicts of interest resulting from vertical integration, market manipulation, cross-border risks, custody and client asset protection, operational and technological risks, and retail access, suitability, and distribution.³⁰

In March 2020, IOSCO released Global Stablecoin Initiatives, a public report emphasizing the applicability of principles for financial market infrastructures to stablecoin arrangements with systemically important functions. IOSCO’s work on exchange traded funds and crypto-asset trading platforms may also apply to global stablecoins.³¹ In March 2022, IOSCO presented its public report on decentralized finance, highlighting regulatory concerns like fraud risks, flash loans, cybersecurity, and spillover effects on traditional markets. Additionally, in December 2020, the organization published Investor Education on Crypto-Assets, a report to educate the public and investors on crypto assets and risk mitigation.³²

Committee on Payments and Market Infrastructures  

Under the BIS, the CPMI provides a platform for central banks to promote the safety and efficiency of payment systems worldwide. With digital assets gaining recognition, the CPMI is actively engaging in discussions concerning the potential role of CBDCs and their interplay with private cryptocurrencies. The CPMI has twenty-eight members, representing major central banks and monetary authorities.

A 2018 Markets Committee report titled Central Bank Digital Currencies introduces and defines CBDCs, assessing their potential implications for monetary policy and central bank operations.³³ It recommends further research on various aspects including interest rates, financial stability, and exchange rates. The report also warns against the risks of private digital tokens due to their volatility and lack of protection for investors and consumers, making them unsuitable for widespread use in payments.

Financial Stability Board  

The FSB’s mandate is to oversee and coordinate global financial regulation, identifying and addressing systemic risks to foster stability in the financial system. Recognizing the growing importance of digital assets, the FSB monitors developments and potential risks arising from their use and ensures that the digital asset market operates within established stability parameters.³⁴The FSB is broadly focused on the global regulatory framework for crypto-asset activities, and has not released any specific research or guidelines on CBDC development. The board’s membership includes a combination of G20 economies, other major economies, and international organizations.³⁵

International Organization for Standardization

The ISO fosters agreement on best practices and processes, and publishes standards and technical specifications (TS), including on the security aspects for digital currencies. ISO/TS 23526:2023 focuses on providing a security framework for the issuance and management of digital currencies in general, using cryptographic mechanisms standardized by ISO and other references. The document aims to integrate security aspects into the design of digital currency systems, as opposed to adding them later as an extra layer, to accommodate legacy infrastructures​.​³⁶ ISO does not have any explicit references or guidelines on CBDCs’ technical security, but instead has a broader focus on digital currencies overall.The following organizations below were added after the conference and depict wide-ranging efforts for interoperability occurring both in the private and public sector.

Society for Worldwide Interbank Financial Telecommunication

Building on its legacy in global financial messaging, the Society for Worldwide Interbank Financial Telecommunication (Swift) has introduced a model to enhance its existing infrastructure for cross-border payments, making them faster, more transparent, and cost-effective. Currently in beta testing, this model facilitates the connection of disparate national CBDC networks, enabling them to communicate and transact with one another while leveraging Swift’s existing infrastructure and security protocols—best thought of as a hub-and-spoke arrangement between various central banks with Swift at the center. This initiative is part of a broader Swift effort to prevent the fragmentation of the global payments landscape into “digital islands.”³⁷

The project began in March 2023, with over eighteen participants, including the Monetary Authority of Singapore and the Banque de France. Within a twelve-week period, they were able to process over 5,000 transactions. In September 2023, Swift further broadened the initiative by announcing the participation of three new central banks: the Hong Kong Monetary Authority, the Central Bank of Kazakhstan, and an additional, anonymous central bank.

Following the insights and successes from Phase 1, Swift released the takeaways from the Phase II CBDC sandbox project in March 2024, engaging thirty-eight central banks, commercial banks, and market infrastructures from around the globe. This project was designed to tackle complex use cases and assess solutions within a controlled sandbox environment. The second phase involved over 125 participants, who collectively executed more than 750 transactions. The sandbox was hosted on Kaleido, a Web3 platform for blockchain applications, where central banks were able to simulate CBDC transactions. Swift’s technology stack included a combination of the Corda, Hyperledger Fabric, and Hyperledger Besu platforms.³⁸

Phase II explored four new use cases. First, it demonstrated the automation of trade payments through CBDC networks and smart contracts, aiming to improve trade efficiency and minimize costs. Second, it evaluated two models for foreign exchange trade and settlement: an International Foreign Exchange Marketplace and a Continuous Linked Settlement (CLS) inspired system, both of which underscored the integration of CBDC trade and settlement. Third, the project focused on delivery versus payment (DvP), facilitating atomic DvP for tokenized bonds by ensuring interoperability between tokenization platforms and CBDC networks. Finally, it investigated mechanisms to mitigate liquidity fragmentation across various currencies and platforms, utilizing smart contracts and netting algorithms. The report established three foundational principles for interoperability: linking networks via ISO 20022 messaging, providing a unified point of access through Swift, and ensuring coexistence with traditional market infrastructures.³⁹

This model leverages Swift’s global reach and the existing network effects among financial institutions. It also offers flexibility for countries to maintain their own domestic CBDC infrastructure while ensuring global connectivity.

The Internet Engineering Task Force

The Internet Engineering Task Force (IETF) is deeply involved in the development of standards to enhance blockchain interoperability, focusing on the Secure Asset Transfer Protocol (SATP).⁴⁰ This protocol is designed to enable seamless transfers of digital assets across diverse distributed ledger technologies (DLTs) by leveraging a network of trusted gateways, akin to the role border gateway routers played in the early internet. Such an approach offers a scalable and ledger-agnostic solution for the rapidly evolving digital asset ecosystem.

SATP facilitates asset transfers through a structured process that includes three main stages: Transfer Initiation, Lock-Evidence Verification, and Commitment Establishment. The protocol ensures that digital assets are exclusively valid within one network at any given time, adopting a transfer mechanism that maintains the asset’s integrity and uniqueness.⁴¹ This is achieved through the strategic use of gateway endpoints which manage the transfer process, ensuring secure, transparent, and auditable transactions that adhere to Atomicity, Consistency, Isolation, and Durability (ACID) principles.⁴² The SATP framework comprises a comprehensive set of API endpoints and resources for the initiation and execution of asset transfers. It also aims to facilitate the integration and management of digital asset transactions, contributing to a more efficient and secure digital economy.

Hyperledger, an open-source community focused on blockchain technologies, plays a role in implementing and advancing SATP through projects like Hyperledger Cacti.⁴³ Cacti serves as a blockchain integration framework that enhances interoperability by allowing operations across multiple enterprise-grade blockchain networks. It achieves this through a pluggable architecture that supports Business Logic Plugins (BLP) and Ledger Connectors, enabling seamless interaction with various DLTs.

Global Blockchain Business Council

The GBBC has launched the fourth iteration of the Global Standards Mapping Initiative (GSMI 4.0), a comprehensive project designed to map and analyze the blockchain and digital assets landscape.⁴⁴ This initiative provides an extensive overview of regulatory developments across 230 jurisdictions and six global bodies, compiles a taxonomy of 350 terms and definitions, maps sixty-three technical standards bodies, and identifies more than 2,000 stakeholders in the blockchain ecosystem. Additionally, it offers access to 1,500+ courses from accredited educational institutions and includes four in-depth reports focusing on AI convergence, digital identity, supply chain, and sustainability, with a special spotlight on Brazil. GSMI 4.0, building on the work since 2020, aims to present a holistic view of global industry activity. The initiative’s resources, including an interactive map of blockchain and digital asset regulations and a series of reports, are available on the GSMI site (https://gbbcouncil.org/gsmi/). All materials produced by the GSMI are crowd-sourced and open access, ensuring they serve as a reliable information source for those interested in blockchain and digital assets.

The Internet Governance Forum

The Internet Governance Forum (IGF), primarily serves as a multistakeholder platform for policy dialogue on internet governance issues.⁴⁵ While not directly implementing or proposing specific financial systems, the IGF’s contribution lies in facilitating discussions, building consensus, and sharing best practices among stakeholders to influence the governance frameworks that underpin these technologies. First convened in 2006 by the United Nations secretary-general as a result of the World Summit on the Information Society (WSIS) held in 2003 and 2005, IGF gathers governments, the private sector, civil society, and technical communities to debate and share insights on enhancing internet security, ensuring digital privacy, fostering the digital economy, and expanding internet access.

Security, trust, and privacy are central to the IGF’s discussions on digital financial services. The forum encourages dialogue on how to protect against fraud, ensure the integrity of digital transactions, and safeguard users’ privacy and data in an increasingly digital global economy. Key areas of focus for the IGF also include the development of governance frameworks that protect user data and ensure a secure online environment. The forum also emphasizes the importance of digital inclusion, advocating for equitable access to the internet and digital services across different regions and communities. Through its annual meetings and intersessional work, the IGF indirectly supports the infrastructure and policies that impact the digital economy and financial inclusivity.

As the above section shows, there have been some efforts in creating standards for interoperability of digital assets. From feedback after the conference, we added the work of organizations such as Swift, IETF, GBBC, and IGF in standard creation. All the organizations listed above have led to important standard making efforts as described. However, these efforts are concentrated in specific areas and, as explored below, some crucial gaps exist that must be addressed in any evolving framework for standards.

Lessons learned from standard-setting efforts

As we evaluate the above models of governance, it is important to assess growth opportunities for the next stage of standard developments. In this section, we identify the critical learnings and gaps in standards development for interoperability of digital assets.

First, the rCBDC experimentation space has provided countries with some experience in building CBDCs, largely driven by domestic objectives. These experiments are at very different stages and use a range of private-sector vendors that are not subject to the same regulations due to a slower pace of crypto-asset regulation globally.

Second, within wCBDC experimentation, operating frameworks in technology and regulation have emerged, led by entities like the BIS Innovation Hub, the global financial-messaging cooperative Swift, and other private-sector players. However, they are constrained by the limited number of participating countries, furthering the issue of fragmentation in cross-border CBDCs. Current experimentation should incorporate standards-setting bodies (SSBs) such as FSB, BCBS, CPMI, ISO, and FATF as participants or observers to ensure better collaboration in the development of standards.

The membership structure of SSBs significantly influences the establishment of the goals and priorities of these institutions. Additionally, while emerging market economies often surpass developed economies in the development of digital infrastructure, including CBDCs, they sometimes find themselves underrepresented in setting norms and establishing benchmarks. This underrepresentation can result in an inadequate consideration of their technological advancements within the organization’s priorities.

Moreover, apart from the FATF, there seems to be a shortage of robust frameworks for assessing the global standards’ impact and implementation lags. To address the evolving landscape of financial technologies, it is imperative that new and non-financial SSBs be actively involved in these discussions, leveraging their expertise in technological matters and regulatory concerns.

Finally, some of the above frameworks have actively involved private sector participants in influencing standard development and creation. As intermediaries, the private sector has a crucial role in the entire lifecycle of standards, from actively influencing the creation of standards to ultimately adopting and implementing them.

Towards establishing standards

A transparent and collaborative multi-stakeholder approach is crucial for establishing frameworks for standards related to digital currencies. Standardization is driven by consultation processes with governments, industry specialists, consumers, regulators, and civil society organizations (CSOs). Historically, governments have provided the necessary legal and governance paradigms, in turn creating environments conducive to standard development and assimilation across multi-stakeholder groups. Central banking authorities, driven by the imperative of maintaining financial stability and directing monetary policy, contribute a nuanced perspective essential for shaping these standards. The private sector’s technological advancements and practical exposure play a critical role, not just in ideation, but in the tangible implementation of these standards, ensuring their practical efficacy. Lastly, the participation of CSOs provides reflection and inclusion of key social elements, serving as a check by society on the suitability of resulting standards.

The goal of this collaborative process is the establishment of a guiding framework for standards. To begin this process, we outlined the following themes for CBDC framework creation, which align with the G7 principles proposed in 2021, to identify the key themes necessary to begin building a framework. These key themes are governance; privacy and data protection; competition and consumer protection; global impact and sustainability; and transferability and accessibility. Through conversations at the conference and outreach afterward, we aimed to test the robustness of these themes through a survey (see Annex 2 for survey questions). Within each theme, we describe the areas of framework development needed for the establishment of standards. Conference attendees and survey respondents identified thematic overlaps and largely agreed with these themes, which have allowed us to set policy priorities for CBDC frameworks.

A thematic approach to CBDC and digital asset standard creation

• Governance
  Effective governance of CBDCs requires a nuanced approach, placing a focus on maintaining public policy objectives and central bank mandates including monetary and financial stability. To achieve this, the framework should involve the creation of dynamic mechanisms that not only monitor, but also proactively mitigate potential destabilizing effects. Stress-testing frameworks are essential tools for central banks to assess the comprehensive impact of CBDCs on economic stability. The principle of “do no harm” dictates that economic stability must be safeguarded at every stage of CBDC implementation, through concrete guidelines and risk assessments. In parallel, there is an imperative to establish legal and governance frameworks, offering clear definitions of regulatory benchmarks. Governance is the biggest challenge that emerges as we analyze existing efforts for standard setting, as each of the technical models discussed at the conference envisions an operator of an inherently global system. This is a complex and difficult endeavor, likely to have many challenges and phases.

• Privacy and Data Protection
  The protection of privacy and data involves specifying requirements for user data protection, consent, and disclosures.⁴⁶ Mechanisms for cross-border data transfer should be designed to navigate the complexities of various data protection laws across jurisdictions, ensuring compliance, individual privacy protections, and seamless transactions. Operational resilience and cybersecurity require technology standards for resilience against cyber, fraud, and operational risks, including security measures, encryption standards, and incident response protocols.⁴⁷ There was widespread agreement at the conference that piecemeal privacy protections will not be sufficient for the evolving financial system, and that comprehensive privacy protections will have to be regulated for. Additionally, all models of digital asset interoperability have highlighted the importance of built-in privacy frameworks.

• Competition and Consumer Protection
  CBDCs should coexist with existing means of payment and should operate in an open, secure, resilient, transparent, and competitive environment that promotes choice and diversity in payment options. Promoting fair competition and consumer protection requires the development of international standards for open-access APIs, ensuring competition and interoperability, thereby enhancing the overall efficiency of the CBDC ecosystem. It also is crucial to strike a balance between the demand for faster, more accessible payments and the necessity to combat illicit finance and protect the right to personal privacy. Establishing protocols for collaboration between CBDC operators and regulatory authorities, including law-abiding information sharing, joint investigations, and the development of responsive regulatory frameworks, is vital to address and mitigate potential risks associated with illicit finance.⁴⁸

• Global Impact and Sustainability
  Considering the global impact and sustainability of CBDCs, spillovers can begin to be addressed by establishing technical principles for cross-border transaction reporting and information sharing. Energy and environmental considerations are crucial; hence, international standards for the energy efficiency of CBDC infrastructure should be created, specifying benchmarks for sustainable operations. This has to be built into the next phase of testing and experimentation at the domestic and international levels.

• Transferability and Accessibility
  Ensuring interoperability with existing and future payment solutions is necessary to achieve the goal of transferability and accessibility. Technical standards should be formulated for integrating CBDCs with emerging digital payment solutions, and interoperability protocols should be specified to facilitate seamless transactions between CBDCs and other payment instruments. Additionally, for payments to and from the public sector, protocols for cross-border collaboration among central banks and organizations must be defined, addressing the international dimensions of CBDC design. Technical requirements for cross-jurisdictional compatibility and seamless integration into global financial systems should be established. Additionally, technical reporting requirements should be instituted to ensure transparency in the utilization of CBDCs for international development initiatives. A lot of recent experiments have shown “token agnosticism” or the ability to support a wide variety of tokens, demonstrating that builders do not want to be overly prescriptive and provide consumers with a range of options.

These key themes illuminate the areas of framework development needed to achieve comprehensive standards for CBDCs. These are not an exhaustive list, but provide primary recommendations as the public sector, policymakers, and the private sector engage in CBDC development.

Through conversations at the conference, it was evident that the G20 payments roadmap is used as an industry benchmark by the public and the private sector as they address modernization efforts. The identified themes speak to some of the priorities outlined by the G20, but seek to go beyond the existing priorities. As G20 targets evolve to include leveraging the digital asset ecosystem, the above described themes can provide crucial benchmarks for standards creation. As governments draft regulations and the private sector engages in experimentation, often along with the public sector, they must address these themes. It also is imperative that global standard-setting bodies address the current gaps in their guidance and participate in these discussions—especially in the development of cross-border flows. Through the conference, it also became clear that many of the standard setters in this space are working across overlapping areas of work—which makes the need for communication channels essential going forward. Crucially, as was repeatedly emphasized at the conference, interoperability is imperative as any standards for CBDCs or digital assets broadly are developed, so that future systems of money do not increase friction in the global payments landscape.

Conclusion

As countries worldwide explore CBDCs’ potential for an advanced and seamless digital infrastructure, a unified standard framework will become necessary to foster harmony, quality, and trustworthiness worldwide. Our working paper served as a call to action for both public and private stakeholders to actively engage in standard-setting efforts with the goal of ensuring interoperability and efficiency, as well as embedding democratic norms, values, and rules of law in CBDCs.  It also set some common definitions and understanding of the current state of international standards for those seeking to understand the current state of international standards and existing gaps and areas for improvement. As previously noted, standards ensuring consistency and seamless functionality are not static; they must be flexible enough to accommodate advancements in digital currency technology, shifts in economic priorities, and changing societal perspectives on digital assets.

To further global dialogue on these topics, The Digital Dollar Project and the Atlantic Council GeoEconomics Center hosted a first-of-its-kind convening, “Exploring Central Bank Digital Currency: Evaluating Challenges & Developing International Standards,” on November 27-29, 2023. This event brought together international policymakers, technologists, financial services providers, innovators, and consumer and privacy advocates to discuss the ongoing impact of emerging technologies on the future of money, its infrastructure, and global payment systems. The convening explored the complexities around digital currency, focusing on key technology and policy considerations, outlining areas for future public-private cooperation, and identifying potential pathways to standards that embed privacy protections, democratic values, and interoperability. Following the conference, this paper was revised to reflect what we learned from the conference, incorporate recent developments in international standard setting, and build on the framework offered in the working paper in consideration of future global interoperability standards efforts.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center.

Jennifer Lassiter is the executive director of The Digital Dollar Project, working to shape the future of money through collaboration with stakeholders. Her experience includes roles at the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau.

Katherine Haar is the strategy director of The Digital Dollar Project and a digital currency specialist within Accenture’s Innovation Group.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Digital Dollar Project

The Digital Dollar Project (DDP) encourages research and public discussion on the potential advantages and challenges of a digital dollar. DDP identifies options for a CBDC solution to help enhance monetary policy effectiveness and financial stability; provide needed scalability, security, and privacy in retail, wholesale, and international payments; and integrate with existing financial infrastructures, including US Federal Reserve-related projects.

Learn more

Issue Brief Nov 2, 2023

Asking the right questions: Can digital currency enable financial inclusion?

By Ananya Kumar

Cryptocurrencies and CBDCs have the potential to enhance financial inclusion. However, the lack of quantitative data makes it challenging to evaluate their impact. To assess their financial inclusion capacity, this paper builds a rubric for policymakers which includes layers of consideration.

Digital Currencies Economy & Business

New Atlanticist May 16, 2023

Not so fast: The case for a new SWIFT

By Josh Lipsky, Ananya Kumar

Imagine a network that combines both messaging and settlement to become a one-stop shop for international payments. It’s time for the US and its allies and partners to make that idea a reality.

Digital Currencies Economy & Business

Econographics Mar 14, 2024

CBDCs will need to work across borders. Here are the models exploring how to do it

By Ananya Kumar, Alisha Chhangani

These innovative models reflect a clear realization in the both the public and private sector— as CBDCs become a part of the financial landscape, there needs to be a mechanism to interchange them across borders.

Digital Currencies Economy & Business

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California, New York, and other states should move heaven and earth to authorize and construct new housing rapidly, especially in dense urban areas. If these states and others prioritize building houses, emissions and interest rates could fall substantially, providing a major economic and climatological boost to the United States.

The US housing shortage

Like all prices, elevated housing costs are a symptom of supply and demand.

Housing demand surged amid the pandemic and shifting office routines. With Covid-19 constraining mobility, individuals working from home upsized into larger dwellings suitable for full-time remote work.

The housing problem is on the supply side: the United States is not building enough housing.

From 2012 and 2022, the gap between household formations exceeded national home constructions by 2.3 million homes.

While many places have underbuilt housing, it’s worth highlighting the abject failure of two large and important states: California and New York. The nation’s largest and fourth largest states by population have failed to match the housing construction pace of Texas and Florida, the nation’s second-largest and third-largest states, respectively. In 2023, Florida and Texas together authorized three times more housing than California and New York combined.

The situation is even more stark after normalizing for population. California and New York’s per capita homebuilding rate actually declined from 2019, while Florida and Texas’ rose slightly despite a much less favorable interest rate environment.

Why have California and New York failed to build housing? As John Burn-Murdoch identified in a trenchant analysis for the Financial Times, these states’ planning systems place artificial restrictions on supply.

California and New York’s permitting processes are in shambles, largely due to state and local dysfunction. In San Francisco’s infamously restrictive housebuilding environment, it usually takes two years to fully approve a housing development, without even taking construction time into account. New York state legislators, meanwhile, blocked tax and zoning changes that would have allowed for more new large apartment buildings.

Due to insufficient housing supply, California and New York are, unsurprisingly, deeply unaffordable compared to other markets that are constructing housing. The burden of these failed policies disproportionately affects the young and individuals of color.

Housing accounts for about one-third of a median household’s budget. But costs are even higher for younger individuals: in 2022, half of all householders aged 15-24 spent 35 percent or more of their annual household income on rental costs.

Similarly, individuals of color are particularly impacted by higher rental prices. Black and Hispanic Americans have home ownership rates of 44 percent and 51 percent, respectively, while white Americans have home ownership rates of 72.7 percent.

How housing prices affect inflation—and the cost of clean energy

Rental prices rose 22 percent from December 2019 to December 2023, higher than the 18.4 percent rate of inflation if shelter is excluded. Consequently, renters have experienced higher rates of inflation. Expanding housing supply could therefore have a positive impact on renters.

US inflation today is largely a housing phenomenon, as shelter now accounts for over two thirds of the rise in the US core consumer price index (CPI), which excludes volatile food and energy prices and is a useful proxy for tracking consumers’ out-of-pocket spending and inflation-adjusted wages. Moreover, real-time measures of shelter costs, such as Zillow’s Home Value Index, show that prices rose 3.6 percent year-over-year in February 2024. (Housing represents a smaller share of the Fed’s preferred inflation measure, the Personal Consumption Expenditures Index, but even there it’s a major chunk of the total.)

With housing shortages contributing to inflation, the Federal Reserve has been forced to impose higher interest rates. High interest rates are disastrous for US climate goals, as capital-intensive clean energy projects benefit from lower financing costs and are penalized by higher rates. If interest rates rise to 7 percent from 3 percent, the cost of offshore wind and solar farms rises by about one-third, nuclear energy costs grow by even more, but natural gas plant prices barely budge. Unsurprisingly several US clean energy projects, from nuclear to renewables, have faced cancellations due to higher-than-expected interest rates.

As inflation abates, central banks will be freer to lower interest rates, reducing financing costs for clean energy projects. Expanding housing would therefore not only provide a sizable economic boon to the United States, producing a virtuous cycle of lower interest rates for longer, but also deliver progress on climate.

Dense housing is good for climate mitigation

Insufficient housing, especially dense urban housing sited near transit, also carries huge climate consequences. Per-capita greenhouse emissions are much lower in urban neighborhoods than other areas.

New York and California are not only failing to build a sufficient quantity of housing stock, but also to build sufficiently dense units. In California, dense housing stock is facing an array of challenges, especially at the local level. Although New York’s home building is very dense, owing to the prominence of New York City, the share of dense housing structures as a percentage of all units has fallen sharply since 2019.

In sum, greater housing—especially in urban areas—would provide reduce inflation and interest rates while lowering emissions. Expanding dense, urban housing options should be a top policy priority.

There are several ways to accelerate housing construction.

The most important step is to identify the problem and mobilize actors across all levels of government—national, state, and local—to build housing as quickly as possible.

Legalizing apartment units, including same-lot units, and eliminating parking requirements are also important steps for cities. Additionally, lowering or eliminating tariffs for some housing inputs, such as softwood lumber imports from Canada, would incentivize housing construction. Incredibly, the US Commerce Department is considering raising duties on Canadian lumber imports. This action would raise consumer prices and disincentivize new housing. It would constitute a profound error with grave inflationary and climate consequences. Instead of raising tariffs on what is arguably the United States’ closest ally, Washington should vigorously pursue policies that decrease shelter costs as quickly as possible.

Reducing shelter costs should be considered a primary priority for US policymakers. While apartment rental price increases have recently abated, and even begun to decline in some markets, these benefits have often yet to pass through to consumers on year-long leases. Rental prices may decline further if action is taken at all levels of government. If housing prices continue to lift inflation, however, the consequences could be profound.

Joseph Webster is a senior fellow at the Atlantic Council. This article represents his personal opinion.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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This past October, the US Treasury sanctioned a network of financial facilitators managing a complex global investment portfolio for Hamas, with assets estimated to be worth hundreds of millions of dollars. These designations and subsequent actions likely disrupted Hamas’ finances and investments, but more importantly shed light on a persistent challenge: A heavily sanctioned entity, designated as a terrorist organization across multiple jurisdictions, was able to take advantage of the international financial system to raise, use, and move significant amounts of funds for its terrorist operations.

In this edition of the Global Sanctions Dashboard, we explore Hamas as a case study to illustrate how designated terrorist groups abuse the global financial system. We will walk you through:

• How Hamas raises, uses, and moves money;
• How sanctions are used to counter Hamas and combat the financing of terrorism; and
• Where governments align and diverge in their approaches to combat this activity.

How Hamas raises and moves money despite sanctions

Hamas has been designated as a foreign terrorist organization by the United States since 1997 and the group is now sanctioned by the European Union (EU) and Group of Seven (G7) allies to varying degrees. Governments have further sanctioned hundreds of individuals and entities associated with Hamas, and thousands more with ties to Iran, Hamas’ primary benefactor. Nevertheless, the group has been able to access the global financial system to amass a diverse stream of income from multiple sources.

In addition to extorting money from the civilian population of Gaza and receiving varying amounts of annual financial support from Iran, estimated to be as much as $100 million, Hamas has created a global investment portfolio valued between $500 million and $1 billion. This portfolio is invested in companies in countries including the United Arab Emirates (UAE), Turkey, and Qatar. Hamas has also effectively exploited the charitable sector and solicited donations from witting and unwitting donors using crowdfunding websites. The US Treasury recently noted that while Hamas and other terrorist groups prefer fiat currencies, there is a risk that they will turn to virtual assets as they lose access to traditional financial services.

Terrorist groups, such as Hamas, and other illicit actors use increasingly sophisticated money laundering techniques including smuggling cash and using shell companies to avoid detection and hide their involvement in financial transactions.

Who has sanctioned Hamas

Terrorist designation gaps across jurisdictions create vulnerabilities for the global financial system and may be one explanation as to how Hamas and its financial facilitators were able to operate within the system and with impunity.

Hamas is not designated as a terrorist group by the United Nations (UN). . . UN member states follow and implement UN designations of terrorist groups, including entities like al-Qaeda and the Islamic State of Iraq and al-Sham (ISIS or ISIL), among several others. However, the UN has not designated Hamas as a terrorist organization. Most countries do not have an autonomous terrorism sanction regime and rely on the UN terrorist designations to inform and justify their counterterrorism efforts.

. . .or sanctioned by the West’s partners. Treasury’s October tranche of designations included individuals and entities in Turkey, Sudan, and Qatar—jurisdictions that have not sanctioned Hamas and thus do not have legal restrictions that would prevent Hamas and its facilitators from accessing their financial systems.

There are gaps in sanctions designations among Western jurisdictions. Over the past thirty years, Hamas, in part or in its entirety, has been designated as a terrorist group by various countries in response to its terrorist activity and efforts to destabilize peace operations in the Middle East. Several governments originally only designated Hamas’ “military wing,” the Izz al-Din al-Qassam Brigades, and later began designating the entirety of the organization as a terrorist group.

The lack of a common narrative of what constitutes terrorism and the lack of a coordinated and unified multilateral effort on terrorist designations provide Hamas and other terrorist groups more freedom to operate and abuse sanction loopholes between jurisdictions.

Closing sanctions gaps

Following the October attacks and subsequent war between Israel and Hamas, international partners have come together to close gaps and improve multilateral coordination and enforcement of their sanctions regimes related to Hamas and other groups undermining peace and security in the region.

Engagement with partners in the Middle East. Treasury’s outreach to countries in the Middle East included convening an emergency meeting of the Terrorist Financing Targeting Center (TFTC), which was created in 2017 to enhance information sharing and collaboration on efforts to counter the financing of terrorism. TFTC is focused on the Middle East and includes the United States and the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, and the UAE). Engagement with partners in the Middle East is critical to effectively disrupt and address terrorist financing by Hamas and other groups in the region, while working together to prevent further escalation of the Israel-Hamas conflict. It is important to note, however, that these countries have not explicitly designated Hamas as a terrorist organization, and based on recent sanctions, we know Hamas has used their financial systems to raise and move funds. The GCC countries need to take action to secure their financial systems, and thereby the global financial system from abuse by Hamas. There are political challenges at play, but the GCC should consider a Council-wide terrorist designation of Hamas, similar to the action it took against Lebanese Hezbollah in 2016.

Information sharing with the private sector. The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert for financial institutions providing guidance and red flags to help identify and subsequently report suspicious activities related to Hamas financing. Such suspicious activities include but are not limited to a customer that is:

• Transacting with an Office of Foreign Assets Control-designated counterparty,
• Transacting with a Money Services Business or other financial institutions located in high-risk jurisdictions of Hamas activity, or
• A charitable or nonprofit organization soliciting donations but not seeming to be providing any charitable services.

Alerts often help financial institutions understand what types of information FinCEN and other countries’ financial intelligence units (FIUs) are most interested in. This information is used to inform law enforcement investigations or national security actions, including financial sanctions. It is reasonable to estimate that the Hamas alert generated additional suspicious activity reporting from financial institutions within the US jurisdiction, which can help FinCEN and its partners identify potential terrorism financing activity related to Hamas.

Information sharing with foreign partners. Information sharing and coordination among FIUs is critical for disrupting terrorist financing. FIUs are national centers responsible for receiving and analyzing suspicious activity reports from financial institutions and publishing red flags and alerts to help them identify suspicious activity and protect their systems. The need to share information and develop a common understanding of the terrorist financing threat was acknowledged after the October 7 attack, when FIUs from Australia, Canada, Estonia, France, Germany, the United Kingdom, the United States, and other like-minded states created the Counter Terrorist Financing Task Force–Israel. In a public statement, this task force committed to expediting and increasing the sharing of financial intelligence in terrorist financing-related issues.

Designation of the Hamas network. In response to Hamas’ October attack, the United States and United Kingdom took coordinated action to designate individuals and entities involved in financing Hamas. The EU and other partners took action to shore up their existing sanctions regimes targeting the group and its facilitators. This is a needed step to counter Hamas and deny the group access to funds to finance its terrorist operations. However, allies need to go beyond Hamas and these specific designations. The terrorism threat is on the rise as a result of escalating tensions in the region. Lebanese Hezbollah is increasing rocket attacks in northern Israel, the Houthis continue to attack shipping vessels in the Red Sea, and other Iranian-backed groups have attacked US forces in Iraq, Jordan, and Syria, killing US soldiers. Allied nations must consistently prioritize counterterrorism and countering the financing of terrorism by aligning their sanctions, sharing information, and coordinating designations. Multilateral coordinated action will prevent terrorist groups from taking advantage of jurisdictional gaps between sanction regimes and will create clarity that helps financial institutions identify and report suspicious terrorist financing activity, which in turn can help governments take appropriate action.

Consider secondary sanctions. When partners do not align on terrorist financing risks, the United States should consider leveraging its secondary sanctions authority (pursuant to Executive Order 13224 as amended) to target the foreign financial institutions that continue to facilitate terrorist financing within the global financial system. The use of secondary sanctions sends a strong message that may deter third parties from providing material or financial support to US-designated terrorist groups and will unilaterally shore up gaps in international sanctions regimes that pose a threat to the US financial system.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a program assistant at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Alessandra Magazzino is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @alesmagaz.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

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Central banks and international financial institutions are realizing that uneven and dispersed technological advancements in digital currencies could actually create further fragmentation of the financial system, deepen digital divides, and create systemic risks. This would undercut the premise of digital currencies, which are supposed to create more efficiency in the existing system. Fortunately, there are some new models of interoperability across borders. A range of policymakers are trying to solve this looming problem, here are the current options:

IMF’s XC Model 

The International Monetary Fund (IMF) interoperability model, known as the XC platform, proposes a global centralized ledger to simplify and streamline cross-border payments. It was released in November 2022 as a theoretical project which extends the concept of wholesale CBDCs by integrating commercial banks, payment providers, and central banks into a unified, streamlined platform. The model’s goal is to reduce transaction costs and settlement times.

The platform proposes a three-layer architecture: a settlement layer that acts as the primary ledger, a programming layer for executing smart contracts, and an information layer designed to protect personal data while ensuring compliance and facilitating currency controls as needed. Instead of adopting CBDCs, central banks can issue Certificates of Escrow (CE) for use exclusively on the XC platform. These certificates share characteristics with CBDCs and can later be converted into central bank reserves by financial institutions. According to the IMF, a key advantage of using CEs is that it allows countries to prioritize domestic use cases for their CBDC projects.
Importantly, the XC model is built to be broadly compatible with legacy systems, demanding relatively minimal technological adjustments from central banks. The XC model is a policy and regulatory framework, not a technical solution. It encourages countries to adopt consistent and supportive regulations for cross-border payments, potentially incorporating tokens and distributed ledger technologies (DLTs). However, in order for the model to work, it will need compatible legal and regulatory frameworks to effectively manage risks and ensure compliance across various jurisdictions. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, further explained this point at our conference in November 2023.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

BIS Unified Ledger

The BIS Universal Ledger interoperability model advocates for a shared global ledger that supports the issuance and transaction of both CBDCs and tokenized assets. Released just a day after the IMF updated its single ledger XC model, the BIS also aims to address the inefficiencies and silos present in the financial system by enabling safer transactions and atomic settlements within a transparent framework. In the report, the BIS emphasizes the role of trust in central bank digital currency projects in overcoming the limitations and fragmentation observed in current tokenization efforts.

Unlike the XC model which builds on blockchain solutions, the BIS’s unified ledger approach uses APIs (application programming interfaces) creating a more centralized system where transactions have to be processed and validated by authorized entities, such as central banks or designated financial institutions. Within this system, central bank money can circulate on a platform that is not owned and operated by the central bank, which can present risks. It also raises questions about the security, control, and integrity of central bank money when it is managed outside the traditional central banking systems.

The unified ledger model is already being piloted. In October 2023, South Korea launched a wholesale CBDC pilot project exploring BIS’ unified ledger concept. With technical support from the BIS, commercial banks in South Korea utilize a wholesale CBDC for interbank funds transfers and final settlements. These banks will then issue tokenized deposits as payment instruments accessible to the general public within the CBDC network, which is jointly managed by the Bank of Korea (BOK) and other financial institutions in the country. BOK has also joined forces with the BIS Innovation Hub’s Singapore center on “Project Mandala”, which aims to integrate jurisdiction-specific policies and regulatory requirements into a universal protocol for international transactions like foreign investments and payments. This initiative seeks to develop a compliance-by-design architecture for more efficient cross-border transfers for CBDCs and tokenized deposits.

SWIFT’s New Cross-Border Project

Building on its central role in global financial messaging, SWIFT’s innovation hub has introduced a model to enhance its existing infrastructure for cross-border payments, making them faster, more transparent, and cost-effective. Currently in beta testing, this model facilitates the connection of disparate domestic CBDC networks, enabling them to communicate and transact with one another while leveraging SWIFT’s existing infrastructure and security protocols. The current project is running out of the innovation hub and would require a big operational shift to be expanded to the whole SWIFT ecosystem. 

In September 2023, SWIFT announced the participation of three central banks—including the Hong Kong Monetary Authority, the Central Bank of Kazakhstan, and one anonymous central bank—in the next beta phase of its CBDC interoperability project. The project, which initially began in March 2023 with over eighteen participants including MAS and the Banque de France, has now expanded to include more than thirty entities and has already processed over 5,000 transactions in a twelve-week period. This solution leverages SWIFT’s global reach and the existing network effects among financial institutions. It also offers flexibility for countries to maintain their own domestic CBDC infrastructure, while ensuring global connectivity. The model is best thought of as a hub-and-spoke arrangement between various central banks with SWIFT at the center. 

Comparing the models 

The IMF’s XC Model, BIS Unified Ledger, and SWIFT’s New Cross-Border Project each propose innovative approaches to enhancing cross-border payments, especially focused on addressing fragmentation in the payments system. The models themselves are in various stages of development and reflect a spectrum of solutions which envision varied new architectures, novel tokens, and different roles for the private sector and the public sector. These models do not exist in a vacuum, and are accompanied by parallel efforts by central banks (such as Project CedarX Ubin + and Project Mariana) and private companies (such as the Regulated Liabilities Network) to address similar issues of cross-border fragmentation.

The XC Model and BIS Unified Ledger emphasize centralized architectures that focus on integrating existing financial structures with new technology. In contrast, SWIFT’s initiative seeks to adapt its role in traditional messaging infrastructure to connect CBDC networks, prioritizing interoperability and the reliability of established systems. All three frameworks are being designed to support both CBDCs and tokenized assets—creating one platform to exchange them all rather than separate networks. This “token agnosticism” reveals that these projects do not want to be overly prescriptive of the future financial system, and are in the early stages of development and testing. 

Each of these initiatives reflects a different aspect of the evolving landscape of global finance, geared towards a push towards greater efficiency, reduced costs, and enhanced security in cross-border transactions. A central question across these models is that of governance, as each of the proposed models envisions an operator of an inherently global system, a concept that is as blue-sky as it gets. This is going to prove difficult due to geopolitical disagreements, since the countries exploring CBDCs are neither aligned on the role of the existing global institutions at the center of the project, nor do they agree on a specific technological model. While these three models seem unified in their ultimate objective, these projects will have to get more specific about who governs, enforces, and creates the rules of the future of cross-border payments. The alternative is a replication of the existing frictions in our system—leading to less efficiency, higher cost, and a loss in trust in money. 

Despite differences, these models reflect a clear realization in the public and private sector that as CBDCs become a part of the financial landscape, there needs to be a mechanism to interchange them across borders. As our research shows, the solution set is varied, and leaves observers with looming questions related to the required standards of governance, regulatory frameworks, and consumer protection. There are no compelling answers yet, but as the cross-border models evolve to include proofs of concept and testing, they will have to find the balance between what is technologically feasible while being practically applicable across the globe.

Ananya Kumar is the associate director for digital currencies at the GeoEconomics Center. She leads the Center’s work on the future of money and does research on payments systems, central bank digital currencies, stablecoins, cryptocurrencies, and other digital assets.

Alisha Chhangani is a program assistant for the Atlantic Council GeoEconomics Center where she supports the center’s future of money work.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post CBDCs will need to work across borders. Here are the models exploring how to do it appeared first on Atlantic Council.

In July, the United States formally released its proposal on how to implement the final elements of an international regulatory framework for banks. The proposal immediately generated criticism and has created a semblance of bipartisanship in the House Financial Services Committee. Republicans unanimously called for the proposal to be scrapped as Fed Chair Powell testified this week, while Democrats worried about a lending squeeze. But the effect the rules might have on US banks’ central role in the global financial system also deserves scrutiny. 

Since the Global Financial Crisis (GFC), the Basel Committee on Banking Supervision has been working to establish a newly agreed set of measures to strengthen the regulation, supervision, and risk management of banks globally. Built on two previous accords, many of the “Basel III” additions to the Basel Framework are already in effect. The recent controversy concerns the final set of rules, known as the “Basel III Endgame” (or B3E), which focuses on the capital and leverage ratios banks will need to implement to cover the risk that their assets lose value in another market downturn.

Why are they needed in the first place? The B3E framework is a response to the large government bailouts of “too big to fail” banks during the GFC. It expects clear domestic rules on how banks calculate the capital they are meant to hold. Capital is what is left over when a bank subtracts its liabilities from its assets. In case too many of a bank’s assets lose value, its capital—and therefore future profits and shareholders—is meant to take the hit before depositors do. But during the GFC, low capital ratios meant governments had to step in to protect deposits.

The new proposed rules, released in July by the Fed, Office of The Comptroller of The Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have been heavily criticized by the financial industry. The argument is that this is a classic example of “gold plating,” whereby the US rules as currently proposed would create regulatory burdens beyond what the international framework requires and put eight Global Systemically Important Banks (G-SIBs) based in the United States and over thirty-five banks with assets worth over $100 billion at a competitive disadvantage.

It’s true the new rules venture into new territory. The risk-weighted approach brought in by previous Basel Frameworks focused on assets like loans and mortgages. However, the new rules expand the range of items on a bank’s balance sheet that factor into capital adequacy ratios.  Now, derivatives covering interest rate risk and counterparty credit risk (among others) will be included. B3E also introduces leverage ratios preventing banks from borrowing more than a certain ratio to their earnings.

So, what’s the problem? The rules could prevent US banks from using their own internal models to work out how much capital they need to hold against their loan books. Instead, banks will have to rely on standardized measurements of risk using credit ratings from agencies, even if derivatives carry little to no risk to a bank acting in an agent capacity. They also lay on additional capital requirements to account for the complexity and interconnectedness of G-SIBs, in addition to their size.

By the Fed’s own estimation, the overall capital increase required by the new rules is 16 percent but it readily acknowledges this will be higher for the largest and most complex banks as a larger share of their assets will become risk-weighted assets requiring capital buffers. Contrary to what Europe-watchers may expect, the EU’s interpretation of B3E is less stringent. Its version is estimated to increase RWA by less than the Fed’s 16 percent estimation, because the EU will allow for the use of internal models and include other opt-outs from assets being included in capital ratio calculations when the risks to banks are small to non-existent.

Yes, the technical side is daunting, but B3E matters for everyone in the United States. The foreign policy community should care whether these rules improve or hinder the GeoEconomic position of the United States by potentially creating a combination of higher lending rates and due to banks exiting markets associated with higher risk weighting. That could be a problem if it leaves these markets open to rivals and adversaries.

US regulators including US Federal Reserve Vice Chair Michael Barr argue the rules are appropriate given that government has had to shoulder risks taken by banks in the past. Moreover, supporters argue better-capitalized banks tend to lend more in downturns—providing a much-needed stimulus—and avoid lending irresponsibly when times are good. This domestic reasoning needs to be squared with the geopolitical challenges the United States faces at the moment.

If US banks do exit certain derivatives markets, to be unevenly replaced by Non-Bank Financial Institutions (NBFIs) and foreign, mainly European, competitors, will the US financial system remain as central to providing dollar liquidity to corporations? Currently, the depth and reach of US capital markets is connected to the world by globally active US banks. This is one of the factors which has kept the dollar as the pre-eminent currency for trade invoicing but alternatives like the Euro and the Yuan have been rising. A retreat by US banks from their global role could also make it more challenging for the US government to implement sanctions and other economic statecraft policies against adversaries. Washington should consider if the new rules could eventually hamper the implementation of financial sanctions.

These are the tests which the foreign policy community should apply to the B3E rules. There’s no need for alarmist scenarios. The rules proposed last July would not challenge the dollar’s dominant position in international finance. Treasury bills are considered risk-free under the framework and owning them will not force banks to hold any additional capital. And there is no doubt following the GFC, and more recently the collapse of Silicon Valley Bank, the Basel process and other regulatory changes are needed and useful.

But the challenge going forward is to think about B3E beyond the impact on the banks and into the realm of foreign policy and geoeconomics. In the hearings this week Chair Powell recognized the rules need to be looked at and even revised before they are final. Hopefully the Fed will consider the foreign policy implications of their decision, too.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Table of contents

Evolution of freedom

The evolution of the aggregate Freedom Index in Brazil is clearly hump-shaped. During the first half of the period of analysis, from 1995 to 2013, the freedom score either increased or was relatively stable, driven mainly by improvements in just two indicators of the economic freedom subindex.

The first of these is the women’s economic freedom, which shows a clear step-change in 2002, although the reasons for this are not clear. During that year, there was a change in government, and the Worker’s Party (Partido dos Trabalhadores) took office. They were very much committed, at least in rhetoric, to increasing women’s economic freedom. In 2003, some parts of the civil code were reformed, which did lead to an improvement in women’s rights. However, it seems unlikely that this one legislative change can explain the 17-point increase in this indicator. Around the same time though, married women’s property rights improved, and punishments for sexual harassment—especially in the workplace—increased.

The second positive trend began in 1996, an important year for the stabilization of the economy. The liberalizing reforms introduced by the government of President Fernando Henrique Cardoso led to significant improvements on the trade freedom indicator. Sectors such as telecommunications and energy were opened to competition. There were also proposals for trade liberalization, even if some of these did not pass into law. Even the early years of Lula’s (Luiz Inácio Lula da Silva’s) government were very favorable to trade freedom, and the data seem to suggest that trade freedom did not decrease until after 2018, with the election of President Jair Bolsonaro. Bolsonaro did not create any barriers to trade, but very soon it became apparent that European countries did not want to continue negotiations on a trade deal with Bolsonaro.

In terms of political freedom, elections in Brazil are superb, and this is well captured by the elections indicator. They are fast, efficient, transparent, and the system is very secure. Even in locations where the electoral process is computerized, it is completely offline, decreasing the security risk. There is a slight fall on this indicator, starting in 2015, which is possibly attributable to polarization: when society is very politically polarized, you will always hear claims about the “unclean” electoral process. This is something we have seen recently in the United States and other countries.

Similarly, the political rights indicator shows a decline in recent years that is hard to identify in reality. It may be that, when the level of polarization is high, there are always segments of the population that can feel disenfranchised. And perhaps the indicator is capturing the repression of protests against President Dilma Rousseff’s government in 2015–16, or President Bolsonaro’s rhetoric regarding the Supreme Court, both of which may have caused anxiety about political freedoms. But there has been no obvious objective fall in political rights. The same applies to civil liberties. For example, when President Bolsonaro was elected, he publicly attacked journalists and other groups, but he took no concrete action against them. So, the feeling that political and civil rights have been reduced is understandable, but there have been no substantive changes that would allow us to say that people in Brazil were less free—and certainly not enough to justify a 33-point fall in the score.

Legislative constraints on the executive increased in the last few years, and here the indicator score is an accurate reflection of reality. However, while progress on this indicator is generally intended to be read as a positive shift, in Brazil’s case there are reasons to see greater legislative power as problematic. In 2016, President Rousseff was impeached. People connected to the Worker’s Party would say it was a “legislative coup,” a common accusation in many Latin American countries when similar situations arise. I am not of that opinion, but it is clear that a nontrivial share of the population is. During the President Bolsonaro years, a group of legislators, mostly interested in pork-barrel projects, gained a lot of power, to the point that the Supreme Court had to intervene to shut down their “secret budget”—effectively a slush fund for paying off supporters. The same group of legislators has continued to hold power after Lula’s election. This situation may have increased the impression that political rights were deteriorating, because presidents elected by the people seem, in reality, to be constrained by Congress.

The evolution of legal freedom, especially concerning judicial independence, is easier to agree with. The judicial system has been affected by executive interventions, justifying a deterioration of judicial independence scores. Moreover, the same indicator also measures judicial effectiveness, and here too the worsening situation has been very evident since 2014. Even before this, Brazil’s scores—of between 85 and 90—seem unjustifiably high because the country has long suffered from an ineffective judicial system. Only 10 percent of murders in Rio de Janeiro end up with a trial, and the numbers have been bad since at least the 1990s, when I was looking at crime and social interactions in the city. The fact that the accused do not receive any punishment until the appeals process has been exhausted means that some court decisions are only implemented ten years (or more) after they are handed down.

On top of this structural problem, in the last decade the judicial system in Brazil has become very influenced by politics. As a result, we see the Supreme Court making a decision, only to completely reverse it two or three years later, with essentially the same set of judges. This appears to be captured by the clarity of the law indicator. Laws in Brazil are very badly written—a lawyer’s dream. To give just one statistic, the value of all the unresolved tax claims in Brazil’s judicial system equates to 75 percent of Brazil’s gross domestic product (GDP). The macroeconomic impact of the low level of clarity in the law is serious, but there are always those interested in the obscurity of the law.

From freedom to prosperity

The evolution of the Prosperity Index, and in particular the fall in Brazil’s score in the last decade, seems to be driven by the minority rights indicator, which is proxied by religious freedom. Brazil has been experiencing fast growth in the percentage of its population identifying as evangelicals and, in particular, neo-Pentecostals. This has created at least two sources of friction. Neo-Pentecostals complain about persecution from the Catholic establishment, liberal legislators, mainstream media, and tax authorities. For example, even though there is no income tax on the profits of religious organizations in Brazil, nonprofit organizations are not exempt from paying social security or taxes imposed on purchases. Neo-Pentecostals feel they should enjoy full exemption from tax and regulations such as city codes. Second, Catholicism and Afro-Brazilian religions are often thought to be connected to “progressive” politics in Brazil, while evangelicals are usually more right wing, so the increase in political polarization may also partly explain the evolution of this indicator. As evidence of this tension, there have been attacks on followers of African-rooted religions by some neo-Pentecostal groups, occasionally allied to local drug gangs.

There is no question that income in Brazil stagnated in the last decade. But Brazil’s economic performance has been mediocre for the last fifty years. In the early 1980s, labor productivity was around 55 percent of the US rate. Now it is less than 25 percent. An exception is the agricultural sector, which has experienced remarkable productivity growth. Development means catching up with the technology frontier, and that is something Brazil has been unable to do. Japan, South Korea, Spain, and many others were able to do so. India and China are doing it now. But not Brazil; we can say the country is, in fact, un-developing.

President Cardoso’s government (1994–98) implemented programs to help the poorest in the country. The effort was amplified during President Lula’s administration (2002–06), which explains the overall positive trend in equality. The problem is that Brazil started from a very high initial level of inequality. Short-run fluctuations are likely to be explained by the fact that inequality is counter-
cyclical: when the economy goes down, inequality goes up. Since the COVID-19 crisis, there has been some temporary expansion of social programs, which has helped decrease inequality, but the long-run fiscal sustainability of these programs is by no means clear.

There has been an improvement in health in Brazil since 1995, mainly due to programs aimed at ensuring that the very poorest have access to regular check-ups and vaccinations. These efforts bore obvious fruit during the rollout of COVID-19 vaccines, because the whole system was already in place, so the vaccine program was relatively effective and fast. Health often requires a small marginal investment to generate large benefits, as was the case here.

Finally, it is undeniable that there have been some improvement in terms of years of education and enrollment in Brazil, and these are the metrics captured by the education indicator in the Prosperity Index. However, with the exception of very few states, there has been very little improvement in educational achievement—something that is not captured in the indicator. Progress is even lower in terms of preparing youth for the labor market. This explains why labor productivity is falling despite years of schooling increasing, which may otherwise seem a puzzle. It is worth highlighting one state in particular, Ceará, which clearly outperforms all the others in terms of educational spending effectiveness, despite its relative poverty. My advice to everyone involved in education in Brazil would be to simply copy whatever Ceará is doing, because the results are encouraging. The current minister of education was the governor of Ceará, so we may see some improvements across the country. However, there is reason to remain skeptical because education leaders usually prefer to reinvent the wheel instead of just replicating whatever is working in other places. This seems to be a universal law of decentralized public systems of education.

The future ahead

Labor productivity in Brazil is a clear signal of the economic prospects for the country—though I think it is a symptom of those prospects rather than a cause. Businesses in Brazil face a huge number of hurdles: We have very high and inefficient taxes. Firms are more worried about paying less tax than producing in a more efficient way. Regulations in Brazil are also especially inefficient, and there are important difficulties regarding long-term financing, related to the legal risks and fiscal deficits in the country. The labor market is very rigid, and even if President Temer and President Bolsonaro tried to remove some of these frictions, President Lula has announced plans to impose more labor regulations. These regulations would hurt firms and the overall economic prospects for Brazil.

A second important challenge for Brazil is security. A special concern is the relatively new route for drug trafficking from producers in Colombia, Peru, or Bolivia to Europe, which goes through Brazil. It is similar to a negative technological shock. Gangs fight with each other for control of the new routes, and this increases crime. Some paramilitary groups are also gaining strength, and these are more organized than the gangs and often affect legal businesses. For example, Rio de Janeiro’s largest electricity company, Light SA, may go bankrupt due to the amount of electric supply that is stolen and then resold to consumers and firms. These groups also control the transportation and construction sectors in some urban areas. All these things have large economic effects. And many states in Brazil lack an efficient police force. The police in the states of Rio de Janeiro and Bahia are particularly violent and inefficient. Unless the security situation improves, it is hard to foresee improvements in other dimensions.

What is going to happen with Brazil? Well, some things will help, like the proposed tax reform, which hopefully will simplify the tax code and curb exceptions, loopholes, and litigation. The finance minister is also committed to tackling the fiscal deficit. It is not clear how he will do it, but an improvement of the fiscal situation inherited from President Bolsonaro would greatly help the country.

Top firms in Brazil are excellent and, if the cost of doing business in the country was smaller, they could truly contribute to growth. Brazil has the cleanest energy mix of any country, and should be able to deal effectively with the illegal deforestation in the Amazon. Reforestation of the Amazon forest could be a source of cheap carbon capture at scale. This could make Brazil a big exporter of goods that have an excellent climate footprint—an exceptional opportunity for the country. Brazil missed an opportunity in the 1980s, when they could have educated their growing labor force, and now it is presented with a similar opportunity again. But the country needs to deal with all of the challenges discussed here.

José A. Scheinkman is Charles and Lynn Zhang Professor of Economics at Columbia, professor of economics (emeritus) at Princeton, and research associate at NBER. Scheinkman is a member of the National Academy of Sciences, recipient of a Guggenheim Fellowship, docteur honoris causa from Université Paris-Dauphine, and board member of Cosan S.A. Scheinkman’s current research focuses on the economics of forest preservation in the Amazon.

Trackers and Data Visualizations

Jun 15, 2023

Freedom and Prosperity Indexes

The indexes rank 164 countries around the world according to their levels of freedom and prosperity. Use our site to explore twenty-eight years of data, compare countries and regions, and examine the sub-indexes and indicators that comprise our indexes.

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The architects of the initial sanctions package were focused on the immediate concern and less on the long term. And yet, ahead of the grim two-year anniversary, what to do with the blocked reserves has been one of the key issues that Group of Seven (G7) members and like-minded capitals are debating. All the governments involved originally took a cautious approach, believing the immobilization was already a risk with consequences that could not then be fully appreciated. This changed as the Biden administration began struggling to convince Congress to pass additional funding for Ukraine in September 2023.

Since then, without officially backing seizure, the United States has discreetly pushed for the G7 to find a legal path forward with Russia’s assets. The United Kingdom’s new foreign secretary, David Cameron, has been an especially vocal supporter and oddly dismissive (for a former Conservative prime minister) of the counterarguments based on precedential risk. The exposure of the United Kingdom and of its pound sterling is far from zero, so some allies may be wondering whether London is just trying to hide behind Paris, Berlin, and the European Central Bank, or perhaps even kill seizure by incompetently arguing in its favor. This author would never engage in such conspiracy theories.

Despite this flurry of activity ahead of the second anniversary and opposition leader Alexei Navalny’s death, the US, UK, and EU statements on new sanctions this week don’t suggest any progress toward the seizure of Russia’s blocked reserves. Instead, the language being used by all sides as the anniversary approaches is instead aligning around “unlocking the value” of immobilized sovereign assets. Progress is indeed being made on the very innovative alternatives that could bring more funding to Ukraine much faster.

The European Commission’s plan to use the interest income from the immobilized assets has advanced despite the European Central Bank’s initial opposition. On February 12, the Council of the European Union (EU) released conclusions that prevent Euroclear and other central securities depositories from disposing the extraordinary profits made on immobilized Russian assets from now on. Though some details still need to be worked out, these profits could next be added to the EU’s financial support for Ukraine’s recovery and reconstruction. The EU would be taking a risk by doing this. Depending on each security contract, Russia’s central bank has a more-or-less strong legal claim to the interest income of the immobilized asset, and given the amount of money at stake, it will no doubt test this in courts.

There have also been high-level consultations involving top teams at the European Commission and US Treasury on how to utilize the principal without seizing it. The G7 leaders’ statement last year guaranteeing that the money will not become available to Russia unless and until it leaves Ukraine and pays compensation (worth more than the $300 billion immobilized in the West) now offers an opportunity to tell the markets that the principal will never return to Russia and will be transferred to Ukraine with Moscow’s consent someday.

This soft guarantee could reassure markets and help Ukraine borrow or at least roll the significant portion of its debt that is due in September. It doesn’t amount to using the principal as collateral, which would imply the principal changing hands without Russia’s consent and create the same risks as outright seizure. But, given the immobilized reserves won’t become Ukraine’s collateral, the teams working on this are also considering sovereign guarantees against the measure not working, even several decades in the future when Russia hopefully has a new leader and a new regime. While more than two-thirds of the immobilized assets are currently in the EU, Brussels is more likely to support sovereign guarantees if the risk is shared fifty-fifty between Europe and North America.

Washington may view such a plan as acceptable, given that it has pushed behind the scenes for the more radical option of seizing Russia’s immobilized reserves. It is also possible that UK gilts and US Treasury bonds were bought by Russia’s central bank using Euroclear’s platform and, once paid on maturity, have also accumulated with Euroclear in Belgium. This would explain the mismatch between the Russian central bank’s November 2021 database, which suggested that $38 billion of its reserves were kept in the United States, and consistent reports since the invasion saying that only $8 billion are in the United States. If Moscow did purchase US Treasuries through Euroclear, then leaders in Washington might be more willing to accept a split of sovereign guarantees with the EU that is closer to fifty-fifty than to two-thirds or more covered by Europeans.

There haven’t been any substantial hints at this “non-collateral collateral” work stream in the new sanctions packages announced by the sanctions-wielding coalition on Friday. Expect more to surface soon. Seizing Russia’s immobilized reserves is a step the main custodians of the money are just not prepared to take for now. But everyone involved wants to get more funding to Ukraine as soon as possible.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of the Atlantic Council’s GeoEconomics Center.

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On November 28th, the Atlantic Council’s empowerME Initiative, held a workshop titled “Women in finance: Building a more sustainable and inclusive finance system.” The panel focused on the contributions and impact of women in developing sustainable finance in the UAE.

The conversation was moderated by Abeer Abu Omar, government and economics reporter for Bloomberg. The panel included Shaikha Nasser Al Nowais, corporate vice president of owner relationship management at Rotana Hotel Management Corporation; Patricia Gomes, managing director and regional head of commercial banking for MENAT at HSBC; Linda Fitz-Alan, registrar and chief executive at Abu Dhabi Global Market Courts; and Thereshini Peter, chief financial officer for the GCC at Visa Inc.

Drawing upon their experiences as women working in finance, the panelists focused on the challenges to promoting greater representation in the sector as well as potential remedies. They identified common obstacles that hinder women from advancing in their careers, and suggested policy changes to promote inclusion and empowerment in the workplace. The speakers’ contributions provided an attainable vision for a more diverse and equitable financial sector.

The U.S. Ambassador to the UAE, Martina Strong, inaugurated the event with a reminder that economically empowered women invest in their families, communities, and businesses, leading to a more stable and prosperous future. She highlighted the growing visibility of women in leadership roles in regional start-ups and acknowledged the WIn Fellows in the audience for their accomplishments and future potential. The ambassador also expressed her enthusiasm for the climate-tech field, noting that many regional start-ups in the sector are run by women. She concluded her remarks by emphasizing the long-standing partnership between the United States and the United Arab Emirates.

Main Takeaways

Shaikha Nasser Al Nowais highlighted sustainability as a crucial element of the hospitality industry and a foundational principle of her company. She provided three examples of Rotana’s commitment: a new facility powered exclusively by solar power, sourcing foodstuffs from local farms, and a hotel designed with consideration for the natural landscape surrounding it.

Linda Fitz-Alan shared her perspective as a lawyer working in finance and emphasized that systems of power responsible for upholding the rule of law have a duty to model diversity and inclusion, especially regarding gender. Abeer Abu Omar concurred and cited a recent UAE law mandating that every listed company in the country appoint at least one woman to its board of directors. Thereshini Peter began by stating that without diversity and inclusion, a company can’t drive innovation, resilience, thought leadership, or economies of scale. She also discussed the programs and policies at Visa aimed at empowering its female staff, such as addressing the wage gap and facilitating the return of women to the office after taking a career break.

Omar noted that despite the UAE’s high gender equality ranking by the World Economic Forum, women still occupy less than 10 percent of board positions in the country. Al Nowais pointed to Rotana’s efforts to identify and attract talent by emphasizing work/life balance and providing ample opportunities for professional growth. She also underscored the importance of enabling women to advance within the company, highlighting the need for better long-term retention of female staff. Fitz-Alan highlighted other strategies such as expanding the range of roles available to women and finding mentorship and advocacy to support them. Sheaffirmed that women would seize opportunities when they are presented.

Gomes asserted that organizations often lack the discipline and conviction to implement known solutions to the problem. She pointed to policies at Bloomberg, such as requiring at least one woman as a source for an article and forbidding all-male media panels, as examples of conviction. Gomes stressed to the need for gender-diverse interview boards, sponsorship of female employees beyond mere mentorship, and encouraging women to apply for roles that they may feel unqualified for. She concluded by questioning why the consequences for a salesperson failing to meet their target are not the same for leaders failing to meet their gender diversity targets. Peter agreed with the other panelists, drawing a comparison to the dismantling of apartheid in South Africa. In order to enact major reform in a society or organization, deliberate action must be paired with accountability measures to ensure follow-through.

Al Nowais spoke on efforts to recruit a new generation of women to the workforce and addressed the initial challenges encountered in the recruitment of talent from universities. She highlighted the success of NAFIS, a government program offering salary support to Emiratis aiming to work in the private sector, thereby making corporate work more attractive and competitive.

Fitz-Alan addressedthe role of technology in addressing the challenge of visibility. She believesthatdigitization can help women overcome obstacles which have traditionally limited their visibility in the workplace. Technologies such as video chatting enable connectivity and global outreach for women to showcase their capabilities. Fitz-Alan pointed to the challenge of creating a highly diverse panel of mediators at her firm. Seeking the right candidates required an international search for more women, who often were not actively promoting themselves but were nevertheless making substantial contributions in their field.

Gomes agreed with Fitz-Alan’s view of technology as a positive force for gender diversity. She highlighted its transformative potential in reshaping the landscape for women’s participation and ensuring a level playing field. Technology offers flexibility, allowing individuals to work at their own pace, which Gomes sees as a great equalizer benefiting both women and men. She points to how Zoom equalizes opportunities in meetings by providing the same space and voice for everyone.

Moreover, Gomes noted the role technology plays in addressing financial literacy. She mentioned the ‘Noor’ app launched in HSBC’s wealth business, designed to provide financial education to females. Gomes considers this initiative imperative, especially considering the increasing financial decision-making role of women in the UAE across generations.

Peter outlined three key obstacles faced by small and micro-businesses. First, adopting new technology can present significant challenges, particularly in terms of quickly accessing new platforms. The solution lies in SMEs digitalizing as rapidly as possible to keep pace. Second, there is a need for financial inclusion and training for entrepreneurs, especially in an era of heighted cybersecurity. Lastly, green financing is essential, considering many entrepreneurs invest personal savings in their businesses.

The UAE’s Gender Balance Council reported a 70 percent female majority among university graduates, urging the financial sector to capitalize on this talent pool. Al Nowais emphasized the importance of early exposure to industry-specific knowledge through a relevant curriculum. She advocated for increased awareness and guidance from the outset of education. Fitz-Alan suggested widening opportunities across various sectors and holding organizations accountable for creating and publicizing career opportunities.

Gomes acknowledged the robust talent pipeline created by the 70 percent graduation rate and suggested a focus on graduate programs. Using HSBC as an example, she emphasized the global opportunities available and stressed the significance of execution in career development. Peter agreed with the emphasis on execution but stressed the need for flexibility. She claimed allowing graduates to explore different roles within the finance industry would help them discover their preferences, emphasizing the importance of adapting traditional approaches to foster career exploration

The Way Forward

The World Economic Forum’s 2023 Global Gender Gap Report ranked the UAE as the second-most gender-equal nation in the MENA region, topping the region in financial inclusion, women’s share of Parliament seats, and equal legal status. Government-led initiatives and policies, such as the mandate for at least one woman on publicly listed companies’ board of directors, have sought to transfer these gains into the workforce as well. However, a significant gender gap remains in the country’s private sector. Women comprised only about 18 percent of the total labor force, sidelining a considerable pool of untapped talent. In spite of the board of directors mandate, women still hold just 8.9 percent of board positions.

Realizing a more sustainable and inclusive financial sector in the UAE requires stronger measures by businesses to promote gender parity. These efforts must start with better recruitment practices to attract top talent, whether through proactive exposure to students and recent graduates or by leveraging government initiatives to ensure competitive pay. Equally as important is retaining women within companies and giving them the time, space, and support to grow into leaders. To that end, employers must recognize the need for better work/life balance for female employees, as well as offering substantial opportunities for coaching and mentorship. Companies must also take steps to protect women returning from maternity leave and eliminate the ‘motherhood penalty.’

Breaking through the glass ceiling will also require women in leadership to extend a hand to help others up behind them. Increasing female representation up to the C-suite level ensures that challenges faced by women in the workplace are addressed at a systemic level. Enacting policies such as an insuring female representation on interview panels is an excellent start, as is encouraging women to apply to positions from which they may discount themselves.

Explore the WIn Fellowship

Jun 14, 2023

The WIn Fellowship 2023-2024 cohort

Building on the success of its inaugural cohort, the Women Innovators Fellowship (WIn) is expanding to Bahrain and the UAE, in addition to Saudi Arabia, as it continues to empower more women entrepreneurs from the Middle East. The program is thrilled to announce this year’s eighty-six recipients of its 2023 WIn Fellowship. The participants will receive a year-long program of executive education, mentoring, and networking opportunities in collaboration with Georgetown McDonough School of Business and with the support of the United States embassies in the three target countries and PepsiCo.

Feb 24, 2023

2023 WIn Fellowship Roadshow

The WIn Fellowship roadshow is led by the Atlantic Council’s empowerME Initiative in cooperation with Georgetown University’s McDonough School of Business with support from US Embassy Riyadh, UPS, and PepsiCo. The WIn Fellowship Roadshow participants, chosen from a highly competitive cohort of more than thirty applicants, receive a fully sponsored trip to the United States for leadership training at Georgetown and meetings with US business and government leaders.

Jun 14, 2023

WIn Fellowship 2023-2024 KSA

Meet our 2023-2024 WIn fellows from Saudi Arabia: a group of dynamic women entrepreneurs poised to expand their leadership and executive skills. They are on a mission to scale their startups to new heights, setting new benchmarks for success.

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The hit to share prices in Shanghai, Shenzhen, Hong Kong, and New York has reached some $7  trillion since early 2021 (over $6 trillion on the Chinese markets and hundreds of billions more from Chinese companies listed on Wall Street). While share prices have bounced back a bit in recent days as Beijing has taken steps to put a floor under the market, investors’ deep disenchantment remains.

The market downturn comes on top of the real estate debacle that caused developers to default on bonds and saddled China’s local governments with $13 trillion of debts. The stock downturn has specifically shaken technology companies that Beijing regulators had favored with fast-track access to initial public offerings of shares. While China led the world in IPOs during the first eight months of 2023, those issues subsequently dried up, and many startups are starving for cash.

All of this adds up to ever-deepening disenchantment for foreign institutional investors, many of whom made big bets on China a year ago in expectation of a post-COVID economic boom. As last year’s rally evaporated, an estimated 90 percent of those once-bullish foreign investors headed for the exits; some of them were also nursing their wounds from the property companies’ defaults on high-yielding, dollar-denominated bonds. The reversal of capital flows was amplified by foreign manufacturers moving factories away from China, producing an unprecedented decline in foreign direct investment last year.

The institutional exodus from China’s markets has been dominated by “passive funds” who buy stock index contracts and their component stocks, and long-term growth funds who buy and hold shares. While some money continues to come in—especially investors targeting China’s government bond market—net foreign inflows to China’s stock markets last year—at $6.1 billion— were the lowest they’ve been in recent years.

Every index tracking China share prices had a terrible 2023, with the declines continuing through last month. That includes indexes in China’s markets, Hong Kong, and those tracking Chinese companies on Wall Street. At the same time, markets from Tokyo to Mumbai to New York enjoyed solid gains, with the Asian markets especially benefiting from money pulled out of China.

A January 2024 Bloomberg analysis of 271 US pension funds with assets larger than $500 million showed only fourteen held in Chinese shares listed on Wall Street. Institutional investors are now favoring other emerging markets with better economic prospects and less political risk than China, as reflected in the performance of two Morgan Stanley Capital Index (MSCI) benchmarks.

The roots of the market’s downturn rest with government policies that have undermined consumer confidence and drained private sector dynamism. The authorities sought to deflate a property market bubble in 2020, but were slow to react when developers collapsed. Meanwhile leading e-commerce conglomerates had their wings clipped by an ideologically charged regulatory assault on what Beijing regards as corporate excesses—at the cost of lost job opportunities for millions of college graduates and anemic business investment.

US-China tensions also have loomed over the market and made many foreign investors more cautious about Chinese shares. Washington has declared various listed Chinese companies— largely technology and state-owned firms—off limits to US investors, and some of those firms have been forced to delist from American exchanges. In addition, US threats to impose wholesale delisting on all Chinese firms listed on Wall Street in a dispute over Securities and Exchange Commission access to their books contributed to the early stage of Chinese shares’ decline in 2021. But that threat receded after a bilateral agreement was reached in 2022.

Beijing recently has taken steps to support the stock market and address the underlying economic issues. It has sought to put a floor under the share prices by pushing state-controlled funds to buy stocks, restricting short-selling, and talking up the market. It also has promised more fiscal stimulus, which some analysts see boosting growth this year. But a stock market recovery will require evidence of a more forceful response to the property crisis and a sustained effort to stimulate the economy, especially household demand. (The market collapse also has hit China’s 220 million stock investors, many of whom also are homeowners.)

In Xi Jinping’s China there is always a need to keep a weather eye on the political winds. Even if the economy and property market bottom out in 2024, there are worrying signals about the government’s intentions for stock investors. Over the past few months, there have been various pronouncements directed at financial markets that suggest less tolerance for business as usual. For example, at a Chinese Communist Party Central Committee “study session” last month, Xi called for “the combination of the rule of law and the rule of virtue to cultivate a financial culture with Chinese characteristics” that would avoid “a single-minded focus on profit.”

It is worth recalling that the first shot in the campaign to rein in online companies was fired at the stock market in 2020, when regulators sank Alibaba Group’s plans to launch an IPO for its Ant Financial subsidiary after Alibaba founder Jack Ma publicly criticized regulators. What followed was a campaign under the banner of Xi’s 2021 call for “common prosperity”—a slogan associated with wealth redistribution that ultimately was directed at various unwelcome capitalist practices. The campaign was muted after it was seen to be undermining business confidence, but the latest broadsides from Beijing may prove unsettling to the markets.

Foreign investors tend to avoid commenting on Chinese political developments. But Lazard Asset Management offered a glimpse of their thinking last year when it wrote, “Factoring political risk into investment decisions will likely also be critical in the months and years ahead, given the scale of uncertainties—including the potential consequences of Common Prosperity.”

Nonetheless, some fund managers inevitably will return to China if the economy and markets show signs of a sustained recovery. But investing in China likely will become the domain of foreign bargain hunters and hedge funds, some of whom already are actively trading in the market (though apparently making more money in commodities-related securities). China’s markets will be a destination where investors will be able to make fast profits, but also risk losing their shirts—as occurred last month when the Singapore-based hedge fund Asia Genesis was forced to close after losing a bet that Chinese equities would rally.

All of which must be considered ironic since one of the original purposes of China’s policy of opening its markets to foreigners was to attract stable, long-term institutional investment. Instead, most of those coveted investors will be elsewhere, and the fund managers who remain could end up contributing to the volatile swings in fortune that are everyday life in China’s markets. That will hardly be an outcome conducive to Xi’s “rule of virtue.”

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems, and an unprecedented drop in foreign direct investment was stark. The China Pathfinder framework scans for evidence of market policy reorientation to fix these problems. But in this coverage period (July through December 2023), Beijing’s response was limited. Officials redoubled efforts and incentives to encourage foreign investment and trade, pledged to loosen cross-border data transfer rules, and increased deficit spending limits to stoke anemic demand. Beijing also simultaneously threatened economists with consequences for even talking about bearish signals and discontinued unflattering economic data, severely aggravating credibility concerns. Policymakers did next to nothing to tackle the real structural problems. Though we expect the severity of 2022–23 declines to set China up for a modest cyclical rebound in 2024, long-term growth potential will disappoint until fundamentals are addressed.

Here are five things to watch for in 2024:

1. In the quarters to come, property will shift from a massive drag to a modest boost to GDP growth—though from a much lower base.
2. There is a reasonable likelihood that policymakers will try to use this breathing room to get more reforms on track, rather than defer them further as in recent years.
3. While cyclical conditions will stabilize this year, Beijing must soon acknowledge that slower growth, in the 3 percent or 4 percent range, is here to stay. This may lead to more modest geoeconomic ambitions, but will also bring spillovers to trading partners due to lower domestic demand.
4. China will continue to face weak exchange rate conditions, and capital outflows are expected to continue.
5. Beijing’s capacity to influence growth via government spending will remain constrained by local fiscal stress and an already burdened monetary policy.

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The post Lipsky and Kumar quoted in Bitcoin.com on Fed development of CBDCs appeared first on Atlantic Council.

Over the past twelve months, some of the largest central banks in the world have all made significant strides forward in their development of central bank digital currencies (CBDC) and fast payment systems. This includes the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Reserve Bank of India, and the People’s Bank of China.

The Atlantic Council’s GeoEconomics Center’s research shows that in India, for example, testing on the digital rupee project is scaling up, reaching the milestone of more than one million transactions per day processed by commercial banks throughout the country. In the eurozone, the ECB is now in the preparation phase for its CBDC. On January 1, the bank laid out a detailed roadmap and benchmarks for the year ahead, including testing of a digital euro and working with a variety of private sector companies on key design features including offline payments and fraud prevention. Already, conversations among the central bankers in Germany, France, and Italy are centered around how high to set the limit on individual wallets and which commercial banks will work with the ECB. The reality is that central banks and legislatures across the Group of Twenty (G20) have moved past debating the theoretical merits and concerns with CBDCs, and instead are actually testing and piloting the technology to see what works and what doesn’t.

Interestingly, these new pilot programs are not limited to wholesale (bank-to-bank) or retail (everyday usage) CBDCs. In addition, central banks are investing in new forms of technology in an attempt to “future-proof” their currencies for the rise of blockchain, artificial intelligence, and quantum computing—all innovations that could impact how people use money for both legal and illicit purposes.

Unfortunately, the US Federal Reserve doesn’t seem to be on the same page. Right now, technological payments innovation inside the Eccles building is lagging behind its peers and competitors. One way to assess this is by the resources available within the organization for research and development. The People’s Bank of China, for example, has more than three hundred people dedicated to working on digital currency. Across the entire US Federal Reserve system, there are fewer than twenty. The Bank of England has an official joint task force between His Majesty’s Treasury and Parliament and a dedicated website to answer common questions. The innovation gap is not just on CBDCs. FedNow, the long-awaited interbank settlement system, has taken years longer than comparable systems in Europe, and take-up is limited in the early days.

Vice Chair of the Federal Reserve Michael Barr, speaking recently on Bloomberg’s Odd Lots podcast, said that it could take years to know if the FedNow system is working. But the future of money is not going to wait. Think of cross-border payments—an area clearly in need of an upgrade. The average cost of sending remittances internationally in 2022 was more than 6 percent, with major differences depending on the region. (It’s especially costly to send remittances to countries in sub-Saharan Africa, for example.) Meanwhile commercial banks often have to wait hours, and sometimes days, to settle large-scale transactions. In the end, many of these costs get passed on to consumers. So the idea that the system now is fine doesn’t align with reality—the financial payments architecture is old, creaky, and in need of a major upgrade.

Fed officials often have ready answers for why these innovations are slow going. Typically their answers include not seeing a strong use case at present and wariness about unknown consequences of changing the current system. It makes sense to not want to disrupt the currency that underpins the global economy. But the apparent belief of some inside the Fed and on Capitol Hill is that the dollar does not need to innovate. That is a miscalculation.

Instead of thinking about innovation defensively, the US government should drive payment innovation from a position of strength. As the issuer of the world’s reserve currency, the Fed has a unique opportunity to set standards and influence constructive developments on the future of payments. By using its influence at the International Monetary Fund, the G20, and the Committee on Payments and Markets Infrastructures, the United States can help set these standards. But the Fed, working with the US Treasury and other parts of the government, has to bring options and technological solutions to the table in order to influence the trajectory. Without its leadership, others will fill the vacuum.

As the GeoEconomics Center’s new dollar dominance monitor shows, there are new alternative financial plumbing systems—including China’s own version—expanding all over the world. Think of these systems like pipes being built. The pipes take a long time to construct, but once the water is turned on, change happens very quickly. If these cross-border systems are built without the United States—and the dollar—the way the dollar is used in trade, reserves, and especially sanctions enforcement could shift significantly.

While many are stepping in to fill the innovation gap, including the Bank for International Settlements, the ECB, and the Reserve Bank of India, none can substitute for the issuer of the world’s reserve currency.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

What’s concerning about this approach from the Fed is that central bankers around the world are asking for the Fed’s help. Central bankers often privately ask some version of: “Where is the Fed on this?” On a range of issues from privacy to cybersecurity, the Fed’s leadership would be welcome and its guidance and technological expertise listened to, even if the United States doesn’t determine there’s a need for a specific kind of payments innovation in its own domestic system.

The United States could make progress quickly, if it wanted to. Researchers and universities across the country, including at the digital currency labs at the Massachusetts Institute of Technology and Stanford University, are doing fascinating work on how to build CBDCs safely and effectively. Major companies in the United States are similarly developing their own CBDC models. The United States is helping other countries build CBDCs with the talent of academia and the private sector—but the US central bank is not an active part of the collaboration. Meanwhile, the regional Feds, including the Federal Reserve Bank of New York, are doing important exploration on wholesale CBDCs, including Project Cedar, an experiment between the New York Fed and the Monetary Authority of Singapore. But it’s been close to a year since there has been a substantial update on the initiative. 

An explanation might be that the Fed is working on this, but it is doing so quietly. That would be welcome, but it’s not enough. In a politically polarized environment, the Fed’s lack of public communication has led to misinformation on what a possible digital dollar would do—just turn on the news to see it.

What will the future look like if nothing changes? In the absence of more US technological models and standards, a fractured system will be constructed with different designs, cybersecurity standards, and varied messaging systems. Instead of faster, cheaper, and safer, money will be more siloed but less secure. In 2024, the digital euro will have an enormous standard-setting effect as other countries adopt European solutions on the challenges of anonymity and offline payments. But even the euro will not be able to create a new international standard—the Fed is the one actor that could unify a fractured payments landscape.

Critics of CBDCs have been quick to say these tools don’t work or will not be effective. But how can anyone know this without pilot projects designed precisely to test and answer these kinds of questions? Obviously, some of the Fed’s peers are coming to a different conclusion after investing resources, time, and talent into exploring the future of money. Imagine passing judgment that artificial intelligence won’t impact the future of work before ever using ChatGPT. Once people get their hands on the innovation, their perception of what is and isn’t possible changes rapidly.

The thinking in Washington right now on payments innovation is to wait until after the November election. But the United States doesn’t have a year to waste. A year is an eternity in technology. The gap between the Fed and other major central banks is likely to widen through 2024, and the Fed will have to play catch-up. Between now and next January, Fed officials should do more to accelerate exploration efforts on all of their payment projects, including faster cross-border transfers and CBDCs.

If they don’t, the future of money may quickly pass them by.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former IMF advisor.

Ananya Kumar is the associate director of digital currencies at the Atlantic Council’s GeoEconomics Center.

The post The Fed is falling behind as other central banks leap ahead on digital currencies appeared first on Atlantic Council.

Those shaky finances have come into focus as the Chinese economy slows amid a property crisis, depressed business and consumer confidence, and soaring youth unemployment. Governments from modern mega-cities like Tianjin and Chongqing to the backwater provinces of Guangxi and Guizhou have saddled themselves with debt obligations that an International Monetary Fund (IMF) research paper last year called China’s “Achilles heel.” Small wonder then that Moody’s Investors Service cut its credit rating for China last month to negative from stable.

The pain is already being felt across China as local governments struggle to repay those debts and Beijing accelerates an effort begun last year to restructure them. As one Chinese hedge fund advisor writes, “the depletion of local governments’ credit capacity has not only crowded out the rising demand for social security, but also undermined the financial health and confidence of Chinese households.”

That suggests little relief in the coming year for businesses and families whom Chinese leader Xi Jinping, in his New Year’s message to the country, uncharacteristically acknowledged are facing a “tough time” and “remain at the forefront of my mind.”

The fixed-income investment giant PIMCO wrote in September that uncertainty about China’s local government debt is unlikely to pose “systemic risk” to China’s financial institutions, but so-called “idiosyncratic credit events could occur over the next six to twelve months.” Translation: fasten your seatbelts. The Rhodium Group has estimated that four-fifths of more than 2,000 corporate entities called “local government financing vehicles” (LGFVs), which local authorities have set up to borrow from banks and issue bonds, are unable to cover the cost of interest payments. A big chunk of that borrowing was incurred after COVID-19 hit in 2020 and local authorities were required to implement strict “zero Covid” measures. One Chinese academic calculates that the resulting  “Covid-induced deficit” totaled approximately 4.2 trillion yuan ($600 billion)!

Chinese banks and other government-linked institutions are the primary purchasers—and often the underwriters—of the LGFV bonds. But some private Chinese institutional investors and individual investors also have them in their portfolios because of the high yields, which have averaged 5-8 percent per year until recent restructurings. According to Fidelity International, LGFVs represent between 40 and 50 percent of China’s corporate bond market, while PIMCO estimates that Chinese banks’ loan exposure to the local government entities represents about 24 percent of corporate loans and 15 percent of total bank loans. Foreigners have largely steered clear of LGFV bonds, as their issuers are justifiably regarded as too risky.

The repercussions of all that borrowing are about to hit full force: LGFVs must repay (or refinance) $651 billion of renminbi-denominated bonds in 2024 alone. Yet that is only 7 percent of the total 66 trillion yuan ($9.292 trillion) of debt that the LGFVs were projected to have accumulated by the end of 2023, according to the IMF. And that does not include an additional 40 trillion yuan of debt that the IMF says is directly owed by the local governments.

However, Professor David Daokui Li of Tsinghua University insists that IMF estimates have underestimated debt because there is a need to include LGFVs practice using borrowed money as paid-in capital to fund subsidiaries, which then repeat the same practice with their own subsidiaries. This “pyramid structure,” he says, ends up disguising the true extent of LGFV obligations.

Nonetheless, the combination of the IMF’s estimate of LGFV and local government debt in 2022 (94 trillion yuan, or $13.429 trillion) equaled about three-quarters of China’s GDP ($17.96 trillion). That was far larger than the combined GDP that year of Japan ($4.23 trillion), Germany ($4.08 trillion), and France ($2.78 trillion).

Of course, debt in and of itself is not a sign of weakness. For example, US government debt in September 2023 was about 120 percent of GDP. The real issue is the ability to repay obligations, and China’s have become increasingly unsustainable at the local level.

Much of the LGFV borrowing has gone to fund infrastructure and other projects that cannot generate adequate revenue flows to service the debt. The Rhodium Group estimates that the median return on LGFV assets in 2022 was 1 percent, but the average interest rate on the associated debt was 5.36 percent. Of course, there are many reports of waste and corruption involving local investments.

To make matters worse, as China’s property market fell into crisis in 2021, local governments lost a major source of revenue from sales of land rights to developers. As developers collapsed under the weight of their own debts, local governments turned to LGFVs to buy the land. More than one-half of residential land purchased at auctions in 2022 went to LGFVs in transactions that totaled more than $324 billion. With residential and commercial construction unlikely to return to the record levels and prices of recent years, these purchases may prove unprofitable and the loans behind them unpayable.

The looming debt debacle places Beijing in a complicated policy bind. The central government relies on local governments—especially the country’s 2,850 counties—to provide a level of services unmatched by any other country, according to a 2018 IMF study. In the pre-COVID-19 period, local governments accounted for 85 percent of general government spending (89 percent with LGFV spending). That includes public pensions, unemployment benefits, and health programs. While Beijing transfers funds to local governments for these programs, local governments have been loaded down with considerable unfunded mandates over the years. David Daokui Li’s breakdown of 2020 local government debt shows that about 14 percent of obligations were incurred because of social spending.

In addition, Rhodium calculates that local government subsidies and tax incentives account for two-thirds of government funding for research and investment in science and technology at universities, research institutes, and state-owned and private companies.

Beijing is loath to see local governments default on their debts, but it also has shown no inclination to shift those vast sums en masse onto the central government’s books. Instead, over the past year it has announced programs to refinance, roll over, restructure, and reshuffle the local debt. Some bank loans have been extended for twenty-five years at lower interest rates, and provincial governments are accessing nearly 2.5 trillion yuan of unused central government funding for bonds to reduce funding pressures in cities and counties under their authority (with more bond financing expected to be announced when the National Peoples Congress meets in March). While the new bond issues have proved popular with some investors, the refinancings have faced some resistance from holders of the older, higher-yielding issues that are being replaced; only 59 percent of 2023 “redemptions” were approved by investors.

The government’s efforts to relieve the pressures building on LGFV debt so far pale in comparison with the total obligations that have built up in recent years across China, and however Beijing kicks the repayment can down the road, grassroots governments will remain on the hook for massive debts.

This could not come at a worse time for an economy shifting into lower gear and a population—more than 950 million of whom, by one recent estimate, live on less than $300 a month—already tightening its belts. With Xi Jinping’s government giving top priority to building a “modern industrial system” at the expense of spurring domestic demand, increasingly cash-strapped local governments will be hard pressed to meet the needs of their citizens.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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So, what are the reasons they might be wrong again this time? Think of the global economy like a Jenga tower. If you look from above, the tower seems tall and sturdy. That’s indeed what’s forecasted for next year—modest but consistent global growth. But if you pan the camera down and look at the sides of the Jenga tower, you see all the missing pieces. Each one is hollowing out the structure and you never know just how much instability the tower can take before it topples over. 

2024 starts with several missing pieces: China’s sputtering growth, the world’s major shipping companies stopping transit in the Red Sea, and the second largest economy in South America at serious risk of default. And that’s just scratching the surface. 

The most significant stories are often the ones economists overlook. With that in mind, we’ve picked five underappreciated trends that will matter for the global economy in 2024. With each one you’ll see where the shaky pieces are in the global economy—but also the stabilizing forces that may help throughout the year. 

1. A crack in the BRICS

Russia needs the BRICS a lot more than the BRICS need Russia. That’s the conclusion when you stack up projected GDP growth for both the original and new BRICS members in 2024:

This may make for an awkward summit when Putin hosts his colleagues in Kazan on the banks of the Volga River in October. The plan is to highlight Russia’s cultural treasures (Tolstoy studied in Kazan after all, and the Kazan Kremlin is a World Heritage Site).

But Putin has a problem: No fancy pageantry is going to hide the reality that economic stagnation is facing the Russian people in 2024. There’s a reason the BRICS’ own bank has stopped funding any new Russian infrastructure projects—even his friends know Putin can’t pay his debts.

2. China’s new bubble

Try to fix one problem, create another. That’s the story of China’s economy in 2024. For the first time since the People’s Bank of China began providing data in the early 2000s, Chinese banks are showing a year-over-year net decline in lending to the property sector. But look at what has risen to take its place:

If China pumps hundreds of billions into its manufacturing sector, Beijing is going to need someone to buy up all those goods. And with its own domestic consumption sitting near all-time lows, China will have to look back to the West. Get ready for a wave of electric vehicles, car batteries, and wind turbines headed our way.

Of course, the United States and Europe are not going to take well to a scale up in Chinese exports, especially in an election year. The EU anti-dumping investigation is just the beginning. 2024 is likely going to be a year of new trade fights.

3. Braking bad

The world’s #1 and #4 economies have self-imposed fiscal rules that tie the hands of their governments, even as they deal with crises. To see just how out-of-place these rules are compared to other major economies, check out the table below:

Germany’s most recent problem started back in November with the constitutional court’s ruling that the government couldn’t repurpose unspent COVID-19 funding to help with the green transition. The ruling will force future governments to go back to parliament and ask for further exemptions if they have not spent the extra money within the first one or two fiscal years. But that’s tomorrow’s problem.

Right now Berlin has to redo its entire 2023 and 2024 budgets to fit within the debt brake rules. Late in December it appeared the coalition reached a deal but the compromises have put the entire Scholz coalition at risk.

Combine Germany’s situation with the US debt limit hitting January 1, 2025 and you can see why next December is a looming fiscal cliff for some of the key pillars of the global economy.

4. The year of the governor

The world is facing a historic year of elections—seventy-eight countries will see voters go to the polls in 2024. That includes seven of the G20 members (more than any year in decades) and three of the world’s five largest economies (United States, EU, and India). But the under-the-radar story is how many central bank governors in these same countries are staying put:

In a year full of political instability and possible fiscal dysfunction, the world is going to look to its central bankers more than ever. With Fed Chair Jay Powell, ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Japan Governor Kazou Ueda all in the middle of their terms, the big central banks will have the independence to do what needs to be done, even if unpopular in the short-term. If fiscal authorities deadlock over debt, it’s the monetary policymakers who will be asked to steer the world’s largest economies to safe harbor.

If there’s one trend that will matter the most for your pocketbook—and the health of the global economy in 2024—it’s this one.

5. Forecasting rollercoaster

Up, up, up… that’s the trend for uncertainty in forecasting ever since COVID-19. If you needed one more reason to question the perfect landing scenario, here you go. Take a look below at how the world’s top economic prognosticators have been predicting very different realities in recent years:

The blue line in this graph goes up when the IMF and Goldman Sachs (leading public and private forecasters) disagree on how much the global economy will grow in the year. The difference in the predictions for 2022 was nearly a trillion dollars—or the entire economy of the Netherlands. 

Before you look at 2024 and think we’re returning to a pre-COVID normal, just remember that we’re still way above the pre-pandemic level of consensus. Bottom line? It’s always a good idea to take the average.

Niels Graham, Alisha Chhangani, Mrugank Bhusari, Phillip Meng, Shahjahan Bakhtiyar, and Harry Yueng all contributed research to this article.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director for the Atlantic Council GeoEconomics Center where she supports the center’s work on trade.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Signs of ordinary everyday life in wartime Ukraine are a reflection of the remarkable resilience demonstrated by Ukrainians since the onset of Russia’s full-scale invasion almost two years ago. This normality is also due to the little-noticed fact that the Ukrainian economy did surprisingly well in 2023.

Ukraine’s strong economic performance is reflected in recent EU and IMF assessments. These traditionally harsh reviews now read like love letters. “Despite the war, the country has benefited from a stronger-than-expected recovery and steadfast reform momentum,” noted the IMF in an entirely typical December 2023 summary.

The Russian invasion drove Ukraine’s GDP down by 29 percent in 2022, but in 2023 the economy grew by 19.5 percent year-on-year in the second quarter and by 9.5 percent in the third quarter. Rather than an expected stabilization, Ukraine is likely to achieve annual economic growth of nearly 6 percent in 2023. Admittedly, that still means a decline of around 25 percent from the prewar level in 2021. However, given the scale of the destruction caused by the Russian invasion and the fact that Russia still occupies around 17 percent of Ukraine’s territory, these figures are nevertheless impressive.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

In the fall of 2022, many were concerned by the threat of rising inflation in Ukraine due to the EU’s failure to meet its commitments. Ukraine was forced to print money, and inflation rose to 27 percent in December 2022. The European Commission took heed and secured $20 billion in financing for 2023, covering around half of Ukraine’s budget requirements. The United States contributed another $10.9 billion, with the IMF providing $4.5 billion. In the end, Ukraine’s budget deficit of some $40 billion was more than financed. As a consequence, inflation plummeted to just five percent by October 2023.

Ukraine had budgeted for foreign financing of $41 billion in 2024, but as foreign funds may fall short, the country’s finance minister has suggested a revision down to $37 billion, not least because of greater than expected tax revenues. This revised figure may be realistic. The IMF noted that tax collections were up by 23 percent year-on-year in January-September 2023.

Usually, a country with an IMF program fails on some accounts, but that was not true of Ukraine in 2023. The IMF confirmed that Ukraine had met all quantitative performance criteria as well as all indicative targets by the end of September, and had done so with big margins, having collected much more in taxes than anticipated, while social spending continued as planned. Despite wartime conditions, Ukraine has not yet suffered from any arrears in state sector wages or pensions.

Ukraine’s National Bank has done particularly well since the start of Russia’s invasion. While inflation in Russia is currently around 7.5 percent, Ukraine’s rate has fallen to five percent. Ukraine recently cut its interest rate from 16 percent to 15 percent, while the Central Bank of Russia did the opposite.

Ukraine is maintaining a relatively open currency market with a floating exchange rate that held relatively stable throughout 2023. Ukraine’s international currency reserves are currently higher than they have ever been, at around $40 billion. The country’s banking system functions surprisingly normally. According to a recent IMF report, Ukraine’s total banking system assets and client deposits increased by 36 percent and 51 percent respectively between the start of Russia’s full-scale invasion and August 2023. Ukraine’s banks are flush with money and offer ample and cheap credits.

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Remarkably, Ukraine has carried out more systemic reforms than ever during the war. These reforms have been driven by the EU and the IMF, with keen support from the United States and the G7 group of nations.

On December 14, 2023, the EU decided to open membership negotiations with Ukraine. This landmark decision was based on Ukraine having fulfilled seven vital conditions set by the EU in June 2022. Four concerned the rule of law, while three were political. The most important conditions were the cleansing of the notoriously corrupt Constitutional Court and the similarly deficient Supreme Council of Justice, which appoints Ukraine’s judges. These steps are among the most important rule of law reforms ever implemented in Ukraine.

The EU appears to have learned from its excessively lenient earlier policies toward Bulgaria and Romania. Brussels now demands specific changes and details them. Ukraine has complied with all its demands, with President Zelenskyy signing off on the last three laws the week before the EU convened in December 2023.

In its most recent assessment, the IMF stated that the Ukrainian authorities had demonstrated “a strong commitment to reforms.” It noted that the authorities met seven of the 12 structural benchmarks for June-October 2023 on time, while four benchmarks were implemented with delays under very difficult circumstances. These were significant reforms related to corporate governance and anti-corruption measures. The law restoring asset declarations for public officials was enacted in October and public access to asset declarations was reinstated. Meanwhile, money-laundering legislation was tightened. The IMF’s key remaining demand is to render the special anti-corruption prosecutor truly independent from the prosecutor general.

Despite wartime conditions, the Ukrainian authorities are performing better than expected, both in terms of daily financial administration and advancing the country’s reform agenda. Higher than anticipated tax revenues are being collected, with pensions and wages so far paid on time. The nation’s currency reserves are larger than ever, and inflation has been brought down to five percent. Quietly, Ukraine has finally carried out important and politically challenging rule of law reforms. The Ukrainian government is to be congratulated for its considerable accomplishments on the economic front while defending itself against Europe’s largest invasion since World War II.

Anders Åslund is the author of “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.”

Further reading

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Recent indications of growing Russian confidence in victory over Ukraine owe much more to Western weakness than to the Kremlin’s own military might, writes Peter Dickinson.

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Ukrainian telecoms hack highlights cyber dangers of Russia’s invasion

By Mercedes Sapuppo

An unprecedented December 12 cyber attack on Ukraine’s largest telecoms operator Kyivstar left tens of millions of Ukrainians without mobile services and underlined the cyber warfare potential of Russia’s ongoing invasion, writes Mercedes Sapuppo.

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Ukraine’s EU accession process faces bureaucratic and political hurdles

By James Batchik

The European Council’s recent decision to open accession negotiations with Ukraine was a momentous moment both for Kyiv and the European Union. Now the serious work begins, writes James Batchik.

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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But what the markets are missing about Israel—and many other countries around the world—is how swift and assertive central banks have become in recent years. Look at what happened to the value of the Israeli shekel after investors began selling off the currency following Hamas’s brutal terrorist attacks on October 7. Only two days after the attacks, the Bank of Israel committed thirty billion dollars in reserves (and signaled its willingness to spend up to forty-five billion dollars). The move worked: The shekel has recovered all of its losses, posting the world’s highest gains against the dollar in November.

Starting with a series of economic crises in emerging markets in the 1990s, and especially after the 2008 Global Financial Crisis, central banks all over the world have expanded their crisis-management toolboxes. They have responded to the accelerating speed at which money can flow in—or out—of a country and have operated with new alacrity. One recent example in the United States is how the Federal Reserve sprang into action when Silicon Valley Bank collapsed in March 2023. In Russia, Central Bank Governor Elvira Nabiullina more than doubled interest rates and imposed capital controls only four days after the 2022 invasion of Ukraine, stabilizing the financial system at a time when many thought there would be a run on the banking system. The move gave the government more time, and when record oil and gas revenues came into its coffers in March of 2022, the ruble began to strengthen again.

Financial firefighters

Put yourself for a moment in the role of a central banker contending with the outbreak of war. People and companies are scrambling to move capital out of the country, weakening your country’s currency. A significant proportion of the country’s labor force is being called up in the war effort (at least 8 percent of Israel’s workforce has been mobilized), while others may leave to escape the war. This almost guarantees the economy that you, as the central banker, help oversee is about to go into recession (in Israel, investors now expect the economy to contract roughly 5 percent in the fourth quarter). And to make matters worse, the economic models that you normally rely on are suddenly meaningless in the face of wartime shocks.

So, you need money to prop up your economy at the same time that your government needs money to finance its war. But borrowing money—as Israel is now, with its bond-issuing spree—is increasingly expensive. Spooked international investors may avoid your country’s bonds: Ukraine’s bonds lost roughly three-quarters of their value following Russia’s invasion. Meanwhile, your efforts to stem capital flight, such as hiking interest rates, may raise domestic borrowing costs. Of course, you could print more money, but that would contribute to higher inflation. Wartime expenses will nearly always introduce more inflation down the road: Case in point, inflation was nearly 12 percent in Russia last year. Consider yourself fortunate if your country has built up foreign exchange reserves, which you can use to support your currency. That’s the situation Israel’s central bank finds itself in, having built enormous buffers since the 2014 Gaza War.

The Bank of Israel’s exceptionally large reserves mean that it has options if the crisis persists. Countries without such substantial reserves are more dependent on wartime bonds, domestic tax hikes, and foreign aid for capital. In Ukraine’s case, it has turned to US and European aid to help accumulate $41.7 billion in reserves.

Entering the geopolitical fray

The interplay between central banks and governments—and tensions between the two during wartime—is not new.

During World Wars I and II, the Federal Reserve held interest rates low to make the government’s borrowing cheaper, confident that the price control regime would keep inflation low during wartime (it did) and that inflation would naturally plummet at the end of the war (it did not).

But in the post-World War II era, which has seen a rise of central bank independence and inflation-targeting regimes, many central banks have tried to keep themselves at arm’s length from their fiscal counterparts and their political bosses. Even during times of war in the twentieth century, central banks sometimes refused to take measures when their governors believed such actions could undermine the long-term health of the economy. During the Vietnam War, for example, then-Federal Reserve Chair William McChesney Martin Jr. infuriated President Lyndon B. Johnson by hiking interest rates when lowering them would have made funding the war and Johnson’s Great Society programs cheaper.

In this new era of economic statecraft, however, the lines are increasingly blurred. Some central banks are becoming geopolitical actors in their own right; if a country’s reserve assets (like Russia’s three hundred billion dollars) are an acceptable target to block, then central banks will naturally start playing a more active role in war. In one of the most striking examples of weakening boundaries between central banks and the governments they serve, a top military officer has been appointed as a deputy governor of Russia’s central bank.

As central banks take on this increasingly geopolitical role, their decisions can indicate what kind of future their leaders are preparing for. Perhaps the most telling balance sheet to look at is China’s. While the official foreign exchange reserves of the People’s Bank of China have not grown significantly, state banks and other closely associated enterprises have accumulated substantial “shadow reserves.” This does not mean that China is gearing up for war, but growth in Beijing’s cash pile (and the ways it is accounted for) is one of the most important financial metrics to watch in the years ahead.

Central banks’ decisions are consequential in ordinary times. The stakes are even higher in wartime, as central banks, if effective, support the ability of their countries to carry on military campaigns and maintain the stability of their societies under wartime stress.

In recent years, governments have asked more and more of central banks: to provide economic stimulus when their fiscal counterparts cannot agree (as in quantitative easing), to manage the consequences of vast economic and supply chain decisions beyond their control (as in the post-COVID pandemic inflationary environment), and even, as the conversations at the United Nations Climate Conference last week demonstrated, to help combat climate change.

Now, central bankers are being asked to move with the speed, creativity, and geopolitical awareness usually only asked of diplomats and the military. It’s a brave new world for central bankers—and how they handle it may dictate the relationship between banks and their governments for years to come.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser at the International Monetary Fund.

Phillip Meng contributed research and data visualization to this piece.

The post Inside a central bank at war appeared first on Atlantic Council.

The pandemic emergency fund was set up in 2021 when the Merkel administration, with support from Parliament, invoked the emergency exception clause, allowing it to borrow well beyond the constitutional debt brake limits (of 0.35 percent of GDP). But the unspent money cannot be reallocated to unrelated government programs in another year, according to the ruling. This has forced the government to remove the €60 billion from the CTF, freezing payments from the fund which had been scheduled to spend €177 billion over the next three years to speed up Germany’s green transition. The ruling has also thrown into doubt commitments already made by the fund and blown a double-digit-billions hole in the 2024 draft budget. As Finance Minister Christian Lindner said in a moment of political understatement, “this judgment has potentially far reaching implications for government practice and the budgetary policy”.

More importantly, the budget crisis has further undermined the credibility of the ruling coalition and in particular the Free Democrats Party (FDP), which embraces the debt brake and sound fiscal policy. This comes at a bad moment for the government, already losing in the polls due mainly to immigration, energy policy, and inflation. Indeed, popular support for the government has fallen to 34 percent—or 18 percentage points less than in the 2021 federal elections—with the SPD scoring 16 percent, the Greens 12 percent and FDP 6 percent. By contrast, the opposition CDU/CSU received the highest support of 30 percent, followed by the far-right AfD at 22 percent. These developments will likely intensify bickering within the coalition government over budget priorities to close the fiscal gap, further weakening its ability to deal with the multi-faceted challenges facing Germany—which is also currently mired in a possible double-dip recession.

Beyond creating immediate problems for the German government, the fiscal crisis has brought to the fore two important issues with international relevance. The fiscal brake does not work and only further erodes trust in economic policymakers. And it subverts much-needed public discussion about fiscal realities in democracies around the world.

Legal constraints on fiscal deficits are not a silver bullet

In 2009, under Chancellor Angela Merkel, the debt brake was enshrined in Germany’s Basic Law (i.e. Constitution) as reflected in Article 109, paragraph three: “The budgets of the Federal and State governments shall, in principle, be balanced without revenue from credits.” However, the federal government is allowed to borrow up to 0.35 percent of GDP (on a net basis) and can be exempt from the debt brake all together if Parliament declares “an extraordinary emergency situation”—which it did for 2020, 2021, and 2022. The debt brake has been promoted as an effective way to restrain politicians from fiscal profligacy, putting unfair burden on future generations.

To opponents, the debt brake idea has been seen as unduly constraining government’s ability to deal with cyclical downturns or unexpected difficult developments. In fact, efforts to close the budget gap caused by the court ruling could make Germany’s fiscal policy pro-cyclical, exacerbating an already bad economic situation. Faced with economic difficulties but constrained by the debt brake, a government may have to let an adverse situation deteriorate (to its political disadvantage) or resort to creative accounting to meet budgetary demands dictated by circumstances. These efforts would further undermine trust in the government’s integrity and competence.

The debt brake is not evidence of fiscal discipline but more a reflection of voters’ lack of trust in elected officials’ ability to conduct responsible fiscal policies. And it does not provide a solution to budgetary challenges facing governments. As such, the debt brake is not a good framework for fiscal policy making. These lessons should be seriously considered when Euro Area members debate the restoration of the Stability and Growth Pact suspended in 2020 (which originally limits members’ budget deficits to 3 percent of GDP, and public debt to 60 percent, over time). And they should be top of mind when countries such as the United States are toying with a balanced budget constitutional amendment.

Budgetary priorities and commitments need to be debated and supported by the electorate

At present, governments around the world find themselves in a very serious fiscal situation. Coming out of the Covid-19 pandemic and with the war in Ukraine still going on, governments everywhere are running large budget deficits of more than 5 percent of GDP, with near record levels of public debt—of 112 percent in advanced economies and 68 percent in emerging market and developing countries (EMDCs). From such a weakened fiscal position, they are faced with urgent demands for government spending in many competing domestic areas—ranging from basic infrastructure, social and healthcare, education and training, investment in high-tech activities, as well as defense and national security due to geopolitical tension. In addition, all have to devote more resources to fund climate mitigation and transition projects.

According to the IMF, for the world to reach the goal of net zero carbon emission by 2050, low-carbon investments need to increase from $900 billion in 2020 to $5 trillion per year by 2030. In particular, emerging market and developing countries (EMDCs) need $2 trillion a year, a five-fold increase from 2020. While private sector investments will need to be mobilized by appropriate policies in both developed countries and EMDCs, governments will have to significantly increase their expenditures for climate mitigation and transition—acting as catalysts for private sector involvement.

Moreover developed countries will have to respond to growing calls by EMDCs for financial transfers to help them make progress toward net zero—as evident in COP28 in Dubai. It is becoming obvious that, given their fiscal constraints, developed countries will not be able to meet climate financing demands from EMDCs. Instead of engaging in wishful thinking—especially about unlocking private sector climate investment—it is much better for the world community to recognize the hash fiscal reality and brings their discussions about climate financing transfers down to realistic and implementable levels.

Generally speaking, to better deal with difficult challenges ahead, governments should present a coherent medium-term fiscal plan with clearly defined priorities and required resources—and engage in serious discussions with voters to get them to support the fiscal plan. That is the only way to mobilize necessary fiscal resources on a sustainable basis to meet all the important challenges facing many countries. A debt brake would make such discussions difficult if not impossible. Without social consensus behind a well-articulated medium-term fiscal plan, the risk is high that politicians will make promises, especially in election campaigns, which they will not be able to implement. This will set the stage for popular disappointment, disillusionment, and deeper distrust of governments—making the situation worse off than it already is.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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We are therefore in uncharted territory. The threat of financial crisis at a time when governments are ill-equipped to respond is probably the greatest risk currently facing the global economy.

Financial deregulation and innovation—growth interrupted by financial crises

The process of financialization started in the 1980s, influenced by the economic thoughts of, among others, Milton Friedman (laissez faire capitalism with minimal role of government) and Eugene Fama (maximizing shareholder value). Waves of financial deregulation were implemented in the United States (under Ronald Reagan) and the UK (under Margaret Thatcher), allowing banks and other financial institutions to engage in more activities and markets. Corporate managers were increasingly incentivized by stock options, to align their incentives with shareholders. Financial innovation flourished—with many new financial instruments, especially derivatives, which facilitated active trading and hedging by market participants.

Debt increased over the same period while the credit quality of both public and private borrowers steadily deteriorated, weakening their abilities to service those debts. For example, there are only two S&P rated corporations with an AAA rating now compared to sixty in 1980; and the United States is about to lose its AAA status. Of particular concern has been the pattern of volatile capital flows to emerging markets and low-income countries, leading to debt buildup and subsequent crises—disrupting and retarding their growth.

Financial deregulation and innovation were supposed to improve the allocation of capital, promoting economic growth—which did occur, albeit unevenly, over the past four decades. However, global economic growth has been slowing down from 4-5 percent in the post-war decades prior to the 1980s to 3 percent or less at present. Moreover, growth has been interrupted by financial crises, requiring increasing government intervention and support.

In the 1980s, financial activities contributed to a sustained bull market in the United States and elsewhere, leading to the Black Monday market crash on October 19, 1987—accentuated by the pro-cyclical nature of new portfolio insurance techniques. Then market enthusiasm over the internet spurred the dot-com market bubble which burst in 2000. Lower inflation during the so-called Great Moderation allowed central banks to be accommodative in their policies which together with new instruments like credit default swaps and collateralized mortgages/loans obligations contributed to the Great Financial Crisis (GFC) in 2008. The GFC forced major central banks (including the Fed, ECB, BoJ and PBOC) to inject a huge amount of liquidity into their economies through quantitative easing—ballooning the size of their balance sheets, from $5 trillion in 2007 to $20 trillion in 2018. When the Covid-19 pandemic hit, causing market turmoil in early 2020, those central banks again came to the rescue, increasing their combined assets again to $31 trillion—or more than 30 percent of global GDP—in 2022 (Source: www.yardeni.com).

It is important to realize that central banks’ actions have reinforced expectations among market participants that their downside risks would be protected by the so-called “Greenspan put”—whereby the Fed cuts interest rates when markets wobble. While this stems market turmoil in the short term, the resulting expectation encourages risk-taking and is a clear example of moral hazard at work.

Furthermore, new sources of market turmoil are arising. Panic has been transmitted increasingly quickly through social media and online banking—as demonstrated by the 2023 US regional banking crisis. This has rendered obsolete some financial regulatory safeguards such as banks’ liquidity coverage ratio (requiring them to maintain adequate high quality liquid assets to meet unexpected deposit withdrawal).

The widening gap between finance and the economy

Over the years, the gap between the volume of financial transactions and the value of financial assets relative to the underlying economy has widened substantially. According to the Bank for International Settlements, the global foreign exchange trading volume has reached $7.5 trillion per day—far outstripping any notion of the FX transactions needed for international trade or direct and portfolio investment activities. The annual value of US equities turnover has amounted to $85 trillion, or 370 percent of GDP—about 60-75 percent of which has been executed by algorithmic and high-frequency trading, buying and selling securities in matters of seconds. It is not clear how such activities may have helped raise funds for companies to do business.

Most noticeable has been the growth of all kinds of financial derivatives whose notional value has exceeded $600 trillion—or more than twenty-seven times global GDP! Even though the gross market value of those derivatives contracts (summing positive and negative values) amounted to only $20.7 trillion in 2022, that estimate depends on the ability of counterparties in derivatives contracts to perform as expected. But during financial crises, counterparties often failed—leaving many market participants exposed to the full notional value of their derivatives positions.

Concurrently, according to the UBS 2023 Global Wealth Report, the value of global assets or wealth amounted to $454 trillion or 450 percent of global GDP at the end of 2022. That value is very unequally distributed: the top 1 percent of the population holds a big chunk of total wealth—for example, around one-third in the United States. On the other side of the coin, global debt has risen to $307 trillion in Q3 2023, according to the Institute of International Finance.

More important has been the role of the United States and the US dollar in financialization. In terms of value added to the US GDP, the financial sector, including banking, securities, insurance, real estate leasing, and rental activities, accounts for more than 20 percent, compared to 11 percent contributed by manufacturing activities. In terms of non-farm corporate profits, the financial sector accounts for around 50 percent of the total, rising significantly from 10 percent in 1947. Many industrial corporations have to rely on revenues and profits from financial activities to supplement those from manufacturing operations. For example, GE Capital accounted for 42 percent of GE’s total revenue in 2008, and much more in terms of profit, just when the GFC struck (GE sold GE Capital in 2015). At present, GM derives one-third of its pre-tax profit from financing the sales and leases of its cars.

Moreover, while the United States accounts for less than 25 percent of the world economy, the USD has taken the lion’s share of global financial transactions—88 percent in FX trading, 70 percent in foreign currency debt issuance, 58.3 percent of globally active banks’ international claims and 61.6 percent of their liabilities, and 58.4 percent of reserves holdings (down from a peak of 71.5 percent in 2001).

The economy depends on financial activities

Economies have become dependent on financial activities and the growth of asset values. That has made them more susceptible to financial instability and crises, which in turn require rescues by governments. In particular, the dominant role of the USD in global financial markets means that a dollar funding crisis has always featured in any global financial crisis. Consequently, the Fed has assumed a key role in stabilizing major global financial crises by supplying dollar liquidity to the international financial system when needed. However, after several rounds of fiscal supports and injections of central bank liquidity since the GFC, government resources have been significantly stretched—by high government debt (127.8 percent of GDP of the G7 countries) and massive central bank balance sheets (almost 30 percent of global GDP). Adding to government debts and central bank balance sheets would risk unleashing major inflationary episodes and economic dislocations. Furthermore, such interventions could be less effective in dealing with crises over time as the potential losses in asset values have skyrocketed.

Those factors will likely constrain governments’ ability to provide adequate support to stabilize future crises, especially those on the scale of the GFC of 2008. In other words, financial and economic activities are taking place around the world with a much overstretched and weakened financial safety net underneath. Nobody knows when the next major crisis will materialize and whether governments will be in a position to stabilize it like they did in 2008. That uncertainty is probably the greatest risk to the global economy at present.

This piece has been updated to chart annual FX turnover rather than daily. The text has been updated to match that calculation.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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As the year comes to a close, we are taking stock of the progress on CBDCs around the world since our last check in, in March.

The single biggest news since then concerns the Eurosystem: The European Central Bank (ECB), one of the largest central banks in the world, took a significant step toward CBDC exploration, announcing a new “preparation phase” for a digital euro in October. The digital euro is intended to be a digital form of cash that provides offline services, high levels of privacy, and instant settlements in central bank money. The ECB spent the last two years in its “investigative phase” where the bank explored potential design and distribution models for a CBDC. The new “preparation phase” will begin in November 2023, and will last for at least two years. This critical phase will lay the foundations for a digital euro, focusing on finalizing a rulebook, selecting providers for platform and infrastructure development, and conducting extensive testing and experimentation. 

One of the key features in the investigative phase is implementing a compensation model. This model aims to create incentives for banks and payment service providers (PSPs) to distribute digital euro and to ensure that these payments will be free of charge and widely accepted across the euro area. Although this phase will not include a decision on whether to issue a digital euro, it signals a commitment to preparing and innovating for the future of digital currency in the Eurozone. The ECB’s approach emphasizes the significance of comprehensive research and collaboration with industry stakeholders. As the preparation phase progresses, it is expected to generate valuable insights that may play a pivotal role in shaping the introduction of a digital euro, and potentially influencing the border financial landscape. 

The ECB is not the only central bank making progress in CBDC development: Here’s a tour of how CBDCs have developed over the past eight months.

Country updates

Argentina

Juan Agustín D’Attellis Noguera, Director of the Central Bank of Argentina, announced that the bank is working on the legal framework for the CBDC project in pesos. Argentina is considering introducing a CBDC to primarily address economic issues and inflation.

Australia

In October, Mastercard successfully concluded a CBDC blockchain pilot with the Reserve Bank of Australia (RBA), demonstrating the potential for CBDCs to interoperate with various blockchains. However, as of November 2023, the RBA suggests that the development of a full-scale CBDC is still a few years away. 

Brazil

The Central Bank of Brazil is addressing issues of privacy and infrastructure as it develops the digital real (DREX). The first-phase launch is planned for May 2024, aiming to expand their CBDC across all financial services. 

China

PetroChina, a Chinese oil and gas company, has completed the first international crude oil trade using China, the e-CNY. The transaction involved the purchase of 1 million barrels of crude oil settled in e-CNY at the Shanghai Petroleum and Natural Gas Exchange. The deal was part of the efforts to address the Shanghai municipal government’s requirements to use the e-CNY in cross-border trade. 

India

The Reserve Bank of India intends to launch its CBDC in the interbank borrowing market, particularly the call money market, using CBDCs as tokens for call money settlement. India’s CBDC is currently undergoing a pilot phase, with the central bank aiming for one million daily transactions by the end of 2023.

Japan

The Bank of Japan launched a forum in partnership with 60 companies for the pilot program on a digital yen. The discussions will focus on various aspects of retail settlements with CBDCs. 

Nepal

Nepal Rastra Bank announced plans to develop a CBDC. However, this will be challenging with ongoing bans on cryptocurrency and stablecoin activity. 

Philippines

The Philippines is moving forward with plans for a wholesale CBDC, partnering with Hyperledger Fabric for its first digital peso pilot, Project Agila. The pilot program aims to enhance large cross-border foreign currency transfers and mitigate settlement risks by using a wholesale CBDC.

Russia

Russia is pushing forward with its plans for a digital ruble, aiming for mass adoption among its citizens by 2027. This follows the Russian Parliament passing a digital ruble bill in August.

South Korea

The Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service are jointly planning a pilot test for a CBDC to assess its potential use in both retail and wholesale payments. Wholesale testing will begin this month and retail testing will begin at the end of 2024.

Switzerland

The Swiss National Bank is partnering with six commercial banks and the SIX Swiss Exchange to pilot a wholesale central bank digital currency (CBDC) named the Swiss franc wCBDC. The pilot, known as Helvetia Phase III, will test the use of the Swiss franc wCBDC for settling digital securities transactions from December 2023 to June 2024.

United States

Congressman Stephen Lynch (D-MA) reintroduced legislation to develop a US CBDC in September. This move followed the announcement of the Congressional Digital Dollar Caucus, a group that will focus on advancing the development and understanding of a digital dollar.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Cross-border projects

Project Mariana

The Bank for International Settlements (BIS) concluded Project Mariana, a wholesale CBDC experiment in collaboration with central banks from France, Singapore, and Switzerland, focusing on cross-border trading and settlement using automatic market makers. The project aimed to enhance efficiency and mitigate credit and settlement risks, while highlighting the importance of international cooperation and  interoperability of digital currencies.

Project Sela

The BIS, alongside the central banks of Hong Kong and Israel, successfully completed a retail CBDC test, Project Sela. Their proof-of-concept retail CBDC combined cash-like features with digital infrastructure while emphasizing privacy and accessibility. 

Looking ahead

The GeoEconomics Center will continue to track CBDC exploration around the world, as governments and central banks continue to adopt efficient, resilient, and inclusive digital solutions. To stay updated on these developments, follow our CBDC tracker and our Future of Money work. As we enter 2024, we can expect much more from the digital currency world.

Join the GeoEconomics Center on November 28th for an upcoming conference: “Exploring central bank digital currency: Evaluating challenges & developing international standards.” This first-of-its-kind convening of leaders from international financial institutions, central banks, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

November 28, 2023

Exploring central bank digital currency: Evaluating challenges & developing international standards

This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Register Here

Alisha Chhangani is a program assistant with the GeoEconomics Center focusing on digital currencies. Follow her on Twitter @alisha_chh.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Central bank digital currency evolution in 2023: From investigation to preparation appeared first on Atlantic Council.

Introduction

Central bank narratives on financial inclusion

Industry narratives on financial inclusion

Expanding definitions: Financial inclusion and beyond

Towards a financial inclusion rubric for policymakers

Policy lessons

Introduction

The story of cryptocurrencies is also the story of alternatives to the existing financial infrastructure—which, at the time of crypto’s birth in 2009–2010, was facing severe challenges. Bitcoin was a response to the loss of trust in banks and financial institutions, the first of its kind and an alternative way of sending and receiving value without touching the traditional financial infrastructure. In the decade since its birth, cryptocurrencies have shed their alternative or outsider status, and have entered the mainstream discussion about the future of money. Today, they are not only regularly used by traditional banks and financial institutions, but are also held by one in five Americans looking to invest and transact in bitcoin, ether, USD Coin, tether, and many others.¹ The technology behind them, decentralized ledger technology (DLT), has garnered the interest of governments, technology companies, and investors. However, along with their claims of technological disruption and next-generation products, the proponents of digital currencies often talk of their potential in terms of broadening inclusion and access. The popular term Web 3.0 reflects a suite of these potential applications of DLT, including the products, the technological and operational use cases, and the vision of the industry.

Concurrently, more than one hundred governments around the world are pursuing central bank digital currencies (CBDC), which are meant to provide a digital form of respective fiat currencies.² While the motivations of CBDC development differ across countries, financial inclusion is an oft-cited goal, along with reducing transaction costs and improving resilience and competition in the payments markets. Eleven CBDC projects are fully launched, and another eighteen are in the pilot stage.³

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

However, despite the growth of these CBDC projects in the last two years, adoption remains limited in the countries that launched them, and early data are inconclusive on whether the objectives set out have been achieved. Similarly, despite industry narratives about financial inclusion, most data on crypto’s use have little to do with its successes or failures in broadening financial access, and many projects that aim to expand financial access are in their infancy. Therefore, the claim of financial inclusion for digital currencies is difficult to prove quantitatively at the moment.

The absence of these data, from both the public and private sectors, has led to a gap in the research on financial inclusion motivations of DLT-based products. As the industry grows and CBDCs proliferate, policymakers must gain a deeper understanding of what financial inclusion means for a new generation of products, whether the definitions themselves are robust, and must undertake a goal-setting exercise and assessment of the claims against reality. Of course, this requires valuable data from the existing projects to evaluate these claims, but effectively evaluating and learning from the data also requires developing a benchmark for assessing the impacts on financial inclusion that these products can have. Put simply, we need to ask the right questions. Therefore, the central question of this issue brief is: what questions must be asked to assess the financial inclusion impacts of these products? In order to do so, this issue brief explores the narratives on financial inclusion provided by the proponents of digital currency—central banks that issue CBDCs and the Web 3.0 industry. It compares this set of claims against the conventional concepts of financial inclusion, and address where they fall short or expand existing understanding. It then seeks to develop a model of “asking the right questions”—that is, how to evaluate the financial inclusion benefits of these products across the stack.

Central bank narratives on financial inclusion

Financial inclusion is core to the functioning of central banks, which aim to provide equitable access to financial products, including fiat currencies. More than one hundred governments around the world are pursuing CBDCs, often by building upon decentralized ledger technologies, including blockchain.⁴ While countries pursue retail CBDC projects for a variety of reasons, many of the motivations relate to furthering financial inclusion. The International Monetary Fund (IMF) notes: “CBDC could potentially facilitate financial inclusion by increasing access to digital payments and thus serving as a gateway to wider access to financial services.”⁵ The US Treasury Department, in its “Future of Money and Payments Report,” says: “A CBDC could serve the unbanked and underbanked by providing a low-cost, easily accessible alternative to existing private sector payment services.”⁶

A Bank for International Settlements survey on CBDCs and financial inclusion found that while some central banks view CBDCs as the “catalyst for innovation and economic development,” others view them as complementary to their other financial inclusion initiatives. ⁷ Of the four largest central banks in the world, three have explicitly stated the potential for CBDCs to help with financial inclusion goals.⁸ Thus, while the models vary, most countries embarking on CBDC research do so with an explicit or implicit aim of broadening financial inclusion.

When it comes to financial inclusion, the main proposition of central banks is to provide a method of improved and expanded access to fiat currency. However, there is little proof to substantiate this motivation in existing CBDC projects. Take the example of e-Naira, which was launched in Nigeria in October 2021. As with other central banks, financial inclusion is a top claim on the Central Bank of Nigeria’s website: “eNaira provides financial inclusion by making financial services available to people or communities that do not have (enough) banking opportunity.”⁹ Despite this, access to eNaira is currently limited to those with existing bank accounts, though there is an ongoing effort to provide access to those without accounts in the future. This is a critical problem for a country in which 55 percent of its total population is unbanked.¹⁰ Therefore, the eNaira rollout has left out the majority of Nigerians. It has also proved to be unpopular among them: early numbers indicate that only one in two hundred Nigerians, or 0.5 percent, actively use it.¹¹

Research from the Massachusetts Institute of Technology (MIT) Digital Currency Institute has found a similar lack of practical examples of financial inclusion in CBDC rollouts. The paper’s claim that “CBDC is not a specific payments instrument with common attributes across countries but rather reflects a broad range of instruments that could differ significantly in features and functions,” is largely true.¹² That comes with a caveat, as (many specific differences aside) most CBDC projects are looking at two-tier intermediation solutions, which include interaction with a bank account for CBDC access, as in the case of eNaira.¹³ However, the paper found that emerging digital-currency technology can offer alternatives to the two-tier intermediation model, thereby expanding access to CBDCs. Meanwhile, other findings on barriers to financial inclusion—such as lack of digital identification, connectivity, and interoperability—illustrate the specific financial inclusion concerns for central banks. Increasingly, central banks are experimenting with offline transactions, incorporating digital-ID frameworks and even providing different custodial models, getting to central banks’ fundamental goal of improving and expanding access to fiat.

Industry narratives on financial inclusion

Private companies that issue, store, enable transfers, and build infrastructure for cryptocurrencies and stablecoins (which are fiat-pegged cryptocurrencies) are collectively referred to as the Web 3.0 industry. The industry narratives about how their products can enable financial inclusion are centered around two main claims. First, companies argue that the decentralized nature of their products offers advantages when compared to centralized financial institutions like banks, primarily because it reduces the often-higher intermediation costs of the legacy-payments architecture.¹⁴ Companies claim that decentralization allows for the free and open flow of money globally. The claim of decentralization is used as more than a proxy for technological differences; it also substitutes for claims of an anti-competitive marketplace in financial and technology services.¹⁵ Companies thereby also claim that their products and services improve markets by inducing competition and improving consumer welfare. In sum, cost reduction is a major financial inclusion benefit offered by digital currencies.

Second, companies claim that their products offer a lower barrier of entry than traditional financial products.¹⁶ This can include the ability to transact without bank accounts or to access credit without financial history. This, again, goes to the goal of improving and expanding access, which is shared by central banks. Both CBDCs and other DLT-enabled products offer other implicit financial inclusion benefits. First, the products that use DLT can significantly improve the speed of transactions, allowing for instant settlement times, which can reduce lag times in making payments. Second, factors such as reduced cash usage and increased customer preference for holding money in different forms have led to the need for digital options for traditional fiat, which can be achieved through CBDCs and DLT-enabled products. Thirdly, in many economies, economic volatility has created the need to establish alternative payment channels and stores of value, leading to the proliferation of Web 3.0-enabled products and services. This includes economies like Lebanon, where citizens are using cryptocurrency to protect their wealth against falling fiat and crumbling financial markets, and Ukraine, where Russia’s invasion has led to aid programs that send hundreds of millions in cryptocurrencies.¹⁷

The explicit inclusion claims of centrals banks and industry include improving access through incorporating the financially excluded—that is, including the unbanked and underbanked population through different custody arrangements and reducing costs—and their implicit inclusion claims include, for example, improving transaction speed, providing optionality, and alternative financial channels. Consequently, it is easy to understand why these products are targeted to those marginalized from the existing financial system: those without bank accounts or access to traditional credit and payments systems, those reliant on remittances, and those underserved by banks and other financial institutions. However, there is a need to evaluate these claims against the concept of financial inclusion as a whole, in order to provide appropriate comparisons for substantiation. The next section explores how these narratives by central banks and industry stack up against conventional understanding of financial inclusion.

Expanding definitions: Financial inclusion and beyond

Since 2011, the World Bank’s Global Findex Database has measured financial inclusion, and its data are used to track progress toward the Sustainable Development Goals. Its primary measurement is access to accounts, whether at a bank, credit union, or through a mobile-money provider.¹⁸ Indeed, account ownership can potentially provide a gateway into other kinds of financial services, such as loan provision. Over the years, account ownership has been impacted by a parallel technological development—mobile money—creating exponential growth in account ownership, especially in emerging economies in sub-Saharan Africa. Mobile-money accounts have also led to a new category of savings for many households, especially in sub-Saharan Africa, where adults have reported saving alongside or solely in their mobile-money accounts. In addition to mobile money, digital bank transfers are increasingly becoming the norm for public- and private-sector wage payments, government transfers, and cross-border remittances.¹⁹

Despite account ownership with financial institutions and mobile-money providers steadily rising since 2011, barriers such as lacks of liquid savings and credit access have persisted. Only 55 percent of adults in developing countries can access extra funds within thirty days, and more than 66 percent of adults in developing economies are worried about paying for emergencies.²⁰ Savings rates widely differ between developed and developing economies but, on average, only 28 percent of adults save using liquid accounts.²¹. A majority of those adults save solely for short-term needs.

The latest Global Findex Database report focuses on digital payments, but it uses “mobile money” and “digital payments” as overly broad categories that contain a variety of products and services within them. Mobile-money accounts using M-PESA, a Kenyan provider, use retailers to convert cash into digital credits, which can be transferred using mobile-phone personal-identification number (PIN) confirmation.²² This looks very different from a Venmo account in the United States, which is often connected to a debit card or bank account. Another key difference is the architecture that enables these payments to go through. For example, India and Brazil have both popularized digital wallets using instant-payment networks for peer-to-peer payments, but a Venmo payment still relies on the automated clearinghouse (ACH) to complete settlements. ²³

These differences across payment platforms, on both the front and back ends, create differential functions and costs, which can impact user behavior and interaction with these products. Similarly, factors such as access to internet connectivity or a mobile phone can also lead to different inclusion outcomes. Therefore, what a mobile-money account looks like, what services it can provide, and how it achieves those functions will determine how useful it can be in achieving financial inclusion goals. Many of these lessons are also integral to designing and assessing the impact of digital currencies.

Experts have argued that the financial inclusion goals of digital currencies must go beyond the current forms of money. Comprehensive values such as financial inclusion are difficult to measure and validate, and measuring benchmarks such as account ownership—even with its positive correlation with better outcomes—can provide a narrow perspective on inclusion. As we have seen, these data in isolation can fall short of explaining trends in consumer behavior and do not capture the complexity of an increasingly digitizing infrastructure. That is why some have called for a broader perspective on inclusion, informed by behavioral outcomes such as savings, credit use and access, and opportunities for investment and financial planning. A financial health, or FinHealth, score is one such measure that considers indicators such as responsible use of income (e.g., spending less than income and paying bills on time); sufficient liquid and long-term savings; credit access and manageability (e.g., having manageable debt and a prime credit score); and financial planning (including appropriate insurance and planning ahead).²⁴

Others have called for a better understanding of customer needs through user surveys, in order to ascertain the functions of future-generation financial products. These surveys have found some aspects of digital currencies to be desirable—such as self-custody funds (e.g., noncustodial wallets), the ability to hold them oneself instead of relying on a third party, cost reduction, transparency and trustworthiness, and the ability to “build” several kinds of functions into a wallet.²⁵ They have also found that a lack of enabling infrastructure, trust, and financial illiteracy can actually deepen digital divides between those who are financially included and those who are not.²⁶

So what do these expanded definitions of financial inclusion mean for the fate of digital currencies seeking to bridge gaps? The good news is that because many of these projects are in their infancy, there is an opportunity to address the technical and policy aspects best suited to make them financially inclusive. The section below creates a rubric for policymakers designing these projects and assessing their impact.

Towards a financial inclusion rubric for policymakers

The last twenty years of mobile-money developments and the expanded definitions of financial inclusion can offer insights into what to consider while designing the next generation of financial products in order to achieve financial inclusion. There are several components that enable interaction between human beings and digital currencies, and the model below illustrates the layers of this interaction and the choices that designers must make across them in order to achieve financial inclusion. Each layer is accompanied by an inexhaustive list of considerations, which serve as a rubric for those involved in the creation of these projects as well as those interested in studying their impact.

Human layer: Although users are not a technical consideration, they often function as enablers in any mobile-money ecosystem. This applies across scenarios in which users seek each other’s help to successfully use an application and as they onboard their community to these networks, often functioning as vectors of trustworthiness. Issues such as lack of information or trust reside in the human layer. So do considerations across social differences, such as gender, class, or geography.

Considerations: How do we enable better financial literacy and education? How do women and men differ in their use of payments applications? How do people of different generations interact with digital currencies? Who do people go to when they have a question about their mobile-money applications? How much time do people spend learning how to use an application?

Hardware layer: Every digital currency will ultimately require a device, whether mobile phones, laptops, computers, or hardware wallets (usually in the form of microchip-enabled cards). Issues of access to hardware reside in this layer.

Considerations: What kind of a device does the digital currency run through: a phone, card, smartphone, or laptop? What kind of function does a device need in order to be usable: does it have a camera to scan QR codes or a text-messaging service? How many people have access to it? Can it work through a shared device? Is it accepted by all merchants in an area?

Application layer: Once people connect to their accounts through a phone, they will look for an application to interface between their money and how they would use it. This can be for something as simple as looking at account balances or something as complicated as a wallet that allows for government payments like Social Security or tax refunds.

Considerations: How can the user be onboarded to the application? Does it require a digital identification? How easy is the application to use? How much time will the customer spend to file a complaint, if needed? What functions does it provide? Can it track users’ savings? Can it enable automatic payments? Can it determine credit scores? Can it track debt payments? 

Network layer: This layer determines how the application communicates with the rest of the infrastructure. This can use the internet in the form of broadband connection or telephone connectivity.

Considerations: How many people have access to broadband networks? Do networks need to be expanded to achieve the benefits? How reliable is the connectivity to phone networks? Can hard-to-reach areas be covered through the application? If not, is there an offline version that can work reliably?

Infrastructure layer: This refers to the back-end technology of the application. As discussed previously, depending on the technology choice, products can be made faster, cheaper, or safer, which will impact user behavior. Some of these technology choices are informed by the private sector, while others—such as national payments infrastructure—can be a public-sector endeavor.

Consideration: Does the application use distributed-ledger technology? Can it handle large volumes and scale of payments? Does it rely on fast-payments infrastructure, which can settle payments in less than twenty-four hours? Can it offer better transparency into the flows of money? Does it eliminate or lower costs?

While these considerations can provide a blueprint for better-designed products that account for expansive definitions of financial inclusion, the success of financial products ultimately depends on local factors and policy. The lesson from the success of M-PESA or Alipay is that some kinds of digital currencies will be more successful because they address specific user needs in certain geographies. Introducing internet-enabled digital currency in a country or region with low levels of access to the internet will not provide the best results. Similarly, requiring digital IDs for “know your client” (KYC) rules in countries with low levels of ID infrastructure will be counterproductive. Therefore, considerations need to be adjusted for local needs, and the resulting products will look different from one place to another.

Secondly, national and regional policies can actually bridge the gaps when it comes to access. For example, policies that enable more access to mobile phones can yield beneficial financial inclusion results. So can public education programs that address financial fraud and provide basic financial literacy. Similarly, economic policies that can control for volatility and inflation can enable trust and ensure sustainable, liquid avenues of income, spending, and borrowing. By themselves, products can do very little if national and regional policies aren’t working in tandem toward the goal of financial inclusion. Sound policy and local perspectives are, therefore, significant steps toward the goal of financial inclusion.

Policy lessons

One challenge in creating this paper was the limited amount of quantitative data proving the claim of financial inclusion underlying the developments in private and central bank digital currencies. There is an acute need for the private and public sectors to provide credible data in order to assess the impact of digital currencies on financial inclusion, so more experimentation and testing for CBDCs and private digital currencies are a valuable first step. The second consideration is how to assess these experiments. We have discussed the industry and public-sector narratives claiming potential benefits, and compared these claims to conventional understanding of financial inclusion. In doing so, we found the definitions of financial inclusion to be too narrowly focused on benchmarks such as account ownership.

We find that digital currencies can be desirable in expanding the definition of financial inclusion to include user behavior and outcomes. Given that most of these projects are in the research, development, or pilot stages, there is an opportunity to build them in a way that enables financial inclusion. The resulting rubric for financial inclusion addresses the central question of this paper: what questions must we ask in order to assess products’ financial inclusion impacts? By separating the components of the digital currency ecosystem, we provide financial inclusion considerations across the stack, which can serve as a checklist for those designing and those studying the impact of these products. Finally, policymakers must consider the local factors at play, as well as broad national and regional policies, in order to fully realize the financial inclusion potential of these products. The runway on digital currency development is long, but central banks and private companies considering these products must ensure they are designed to achieve gains in financial inclusion and, ultimately, drive adoption and impact.

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This first-of-its-kind convening of leaders from international financial institutions, central banks, businesses, technology providers, and governments aims to establish an understanding of the issues before a country decides to develop a CBDC.

Dec 14, 2021

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

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Staff

Ananya Kumar

Deputy Director, Future of Money

GeoEconomics Center

Arabic Digital Currencies

The post Asking the right questions: Can digital currency enable financial inclusion? appeared first on Atlantic Council.

The US Treasury has designated nearly one thousand individuals and entities to date connected to terrorism and terrorist financing by the Iranian regime and its proxies. Despite being heavily sanctioned, Tehran has continued to provide more than $700 million annually to support terrorist groups, including Lebanese Hezbollah, and up to $100 million annually to Hamas and other Palestinian terrorist groups. It has also transferred artillery rockets to Palestinian groups. More importantly, Iran has transferred the know-how and equipment to give Palestinian terrorist groups the capability to build rockets and missiles locally. Given Tehran’s long-standing support of Hamas, the United States and Qatar on October 12 agreed to block Iran’s access to six billion in funds from South Korea that were transferred to Qatari accounts last month as part of a deal to release American hostages in Iran.

In support of Russia’s war with Ukraine, Iran has been supplying Russia with Shahed-136 unmanned aerial vehicles (UAVs). Even though the Treasury Department has issued nine rounds of designations targeting Iran’s UAV program, Iranian drones still continue to be a key tool in Russia’s hands.

Iran has managed to advance Hamas’s goals in Israel, and Russia’s in Ukraine, while being designated as a State Sponsor of Terrorism, designated across multiple jurisdictions and by the United Nations (UN) for a range of issues including, but not limited to, terrorism, proliferation, cybercrime, and human rights abuses. It has also been identified as a jurisdiction of primary money laundering concern by the United States and has been effectively shut off from the global banking system under the powerful Section 311 of the USA PATRIOT ACT. How does Iran manage to facilitate cross-border transactions and receive payments for oil exports despite being heavily sanctioned? Who is involved in Iran’s evasion network? Finding answers to these questions will be key in truly degrading Iran’s financial capabilities for bolstering state and non-state threat actors who wage wars and spread instability in the Middle East and beyond. 

United Arab Emirates: Global financial hub or global evasion hub?

As a countermeasure to US, Western, and UN sanctions, the Iranian regime has set up an illicit global network of shell companies, banks, and exchange houses that facilitate transactions on its behalf. This shadow network has been a target of the Treasury Department’s recent tranche of designations of facilitators of Iran sanctions evasion. A significant number of entities in Iran’s now-sanctioned “shadow banking network” are based in the United Arab Emirates (UAE), one of the world’s leading financial hubs. UAE-based foreign exchange houses have enabled sanctioned Persian Gulf Petrochemical Industry Commercial Co. (PGPICC) to facilitate sales of billions of dollars worth of petrochemicals from Iranian petrochemical companies to foreign buyers. Dubai-based front companies have also processed payments from foreign customers to PGPICC, all while hiding PGPICC’s involvement in these transactions.

The UAE has become a haven for evasion for sanctioned Russians as well. The US Treasury recently took action against several Russia-based financial services companies that have been laundering Russian money through the UAE financial system. For example, Huriya, a now-sanctioned Russia-based private equity company, moved Russian assets into UAE institutions where they would not be sanctioned right after Russia’s invasion of Ukraine began.

The UAE’s favorable, low-tax business environment, vibrant gold trade, and strategic location attract investors from around the world. Unfortunately, the UAE also attracts nefarious Iranian, Russian, and other actors who are taking advantage of loopholes in its financial system to evade sanctions. Western sanctioning authorities are running out of patience with the UAE and are pushing for the Emirati government to implement more robust controls and enforcement mechanisms. Earlier in March, the Financial Action Task Force (FATF), an international coordinating body combating money laundering, gray-listed the UAE. This listing requires UAE financial institutions to enhance their anti-money-laundering (AML) and counter-terrorist financing (CFT) regulatory regimes, and also warns non-UAE financial institutions to increase scrutiny of their transactions with the UAE. Given its aspirations of becoming a global financial hub next to New York and London (which would be challenging as a gray-listed country), the UAE took action on FATF’s recommendations, after which FATF improved the UAE’s rating but still left the country in the gray list.

The UAE is a valuable trading partner of the United States and a major financial hub of the Middle East and the world. The country has so far maintained a multi-vector foreign policy, one that enables the UAE to keep business ties with both the sanctioning and sanctioned parties. However, with the United States and European Union desperate to enforce sanctions to ensure that Iran-supplied Russia doesn’t outgun Ukraine on the battlefield and Iran is not able to fund its network of proxies and terrorist groups, neutrality on sanctions enforcement is not an option: Either the UAE stands with its Western partners and enforces sanctions, or it undermines Western sanctions, which will have implications for the UAE’s status as a global financial hub.

Western allies have so far refrained from sanctioning large financial institutions based in the UAE. However, if the UAE turns into a global evasion hub, Western allies will have no other option but to start sanctioning the UAE, however painful and undesirable that might be. Western allies have demonstrated a shared understanding and strong will in countering sanctions evasion, and have already set up channels for coordinating the sanctions designation process against Russia. Such channels can be leveraged to counter Iran’s evasion efforts. To this point, US Deputy Secretary of the Treasury Wally Adeyemo is traveling to Europe this week to work with European counterparts on degrading Hamas’s ability to raise and move money.

UN restrictions on Iran’s ballistic missile program have been lifted

Iran’s nuclear program is viewed by Israel as an existential threat and by the United States and most Western allies as an untenable threat to global peace and security. Since the early 2000s, the United Nations and Western allies have all maintained sanctions on Iran in an effort to thwart its nuclear proliferation capabilities. In 2015, Iran, China, France, Germany, Iran, Russia, the United Kingdom, the United States, and the European Union signed the Joint Comprehensive Plan of Action (JCPOA). The JCPOA required Iran to implement agreed-upon restrictions on its nuclear program and accept specific monitoring and reporting requirements in exchange for the gradual lifting of these sanctions.

The United States, however, exited the JCPOA in 2018 and snapped back sanctions, leaving the other signatories, mainly the European Union (EU), to pick up the pieces. Considering oil sales are generally settled in US dollars, US sanctions severely limited Iran’s ability to export its oil. Iran saw its oil sales decrease by more than double after the United States left JCPOA. Iran, in response, stopped implementing many of the agreement’s requirements, including the required International Atomic Energy Agency (IAEA) monitoring. Since 2019, Iran’s nuclear weapons development has exceeded JCPOA-mandated limits, reaching as high as 83.7 percent purity of enriched uranium earlier this year, far closer to the 90 percent threshold for weapons grade enriched uranium than ever before. 

Further, despite Iran’s nuclear development outside of the terms of the JCPOA, UN restrictions on Iran’s trade of missile-related technology expired on October 18, 2023. This could allow for supplies and ballistic missile components to move more freely to and from Iran and no longer require approval by the UN Security Council. The United States, United Kingdom, EU, and others have issued new sanctions on Iran to continue the prohibitions on missile and UAV technology, but without the UN restrictions in place it will remain to be seen how countries like China and Russia respond.

Any of the signatories can trigger the UN snapback mechanism, a clause in the agreement that would allow it to reimpose all sanctions—including those from China and Russia. The United States attempted such a trigger in 2020, but the maneuver failed due to the US exit from the JCPOA in 2018. The E3—Germany, France, and Britain—still has the authority to initiate the snapback but has yet to make such a decision.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a project assistant at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Yulia Bychkovska is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @_YuliaB_.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

Global Sanctions Dashboard

The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.

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At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Global Sanctions Dashboard: How Iran evades sanctions and finances terrorist organizations like Hamas appeared first on Atlantic Council.

This week, leaders are meeting at IMF-World Bank Week in Marrakesh, Morocco, to get the world’s economic engine back on track. But with so many global crises putting countries (especially emerging markets) in a bind, audiences worldwide will be watching to see whether the IMF and World Bank can help countries respond to debt distress, climate change, and the economic impact of conflict.

With so much happening behind closed doors, we’ve dispatched our experts to Marrakesh; on the ground and in conversation with finance ministers, central bank governors, and other top leaders, they are evaluating the IMF and World Bank’s response to today’s biggest financial challenges. Below are their takeaways and insights from behind the scenes as the week unfolds.

• As the meetings wrap, macroeconomic and gender equality agendas remain tightly linked

• The final verdict: The IMF and World Bank are struggling to see how geopolitics and economics intertwine

• As IMF-World Bank Week wraps, we wonder: Is that all there is to say?

• See day five analysis

Watch all our conversations with central bank governors and finance ministers

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Watch key moments with ministers

As the meetings wrap, macroeconomic and gender equality agendas remain tightly linked

A month ago, on the margins of the United Nations General Assembly in New York, I discussed top risks and opportunities in the year and near years ahead with foresight experts from the Atlantic Council. On the risk side, I talked about debt and geopolitical fragmentation—and the resulting drop in investment (especially in the Global South) that undermines productivity and growth. On the opportunity side, I talked about women’s economic and labor force participation driven in part by policy reforms and investments taking root that enable women to work, start, or grow businesses; including through care.

These risks and opportunities appear to be bearing out—at least if the conversations and reports this week at the World Bank-IMF Annual Meetings are to be believed.

The World Economic Outlook (WEO) projects that global growth will slow to historically low levels—from 3.5 percent in 2022 to 3 percent this year and 2.9 percent next year—driven down by risks associated with weakened Chinese growth, persistent inflation and debt distress, and the geopolitical fragmentation of commodity markets. These factors are also contributing to a widening divergence in growth across countries; and though not routinely discussed in the WEO, we are also seeing widening inequality, worsening food insecurity, and increasing poverty as a result—including higher numbers of poor people in wealthy countries—as macroeconomic challenges bear disproportionate impacts for already marginalized or disadvantaged economic groups, youth, women, and rural communities.

At the same time, the dialogue this week put women’s economic participation front and center as a solution to challenges, including those that are macroeconomic in nature, such as debt: More women in the labor force increases the tax base. In a conversation on mobilizing domestic resources to boost growth, Canadian Deputy Prime Minister and Minister of Finance Chrystia Freeland touted investing in early learning and childcare as her government’s “best bang for the buck” for increasing prime age women’s labor force participation to record highs of over 85 percent (and 8 percent higher than the US record high) and increasing productivity, tax revenues, and household consumption in return. It’s a theme echoed across campus this week, including in my conversation with Hana Brixi, global gender director at the World Bank. At the same time, discussions of increasing women’s economic activity through improved financial inclusion and digital access were widespread—including in my Brixi conversation and in a conversation on digital financial inclusion with Josh Lipsky, Jesse McWaters, and Raj Kumar. In these risks and opportunities, we see the impact of the choices that policymakers make—and, increasingly, the impact of the choices that private sector leaders make.

The final verdict: The IMF and World Bank are struggling to see how geopolitics and economics intertwine

The IMF-World Bank Annual Meetings in Marrakesh actually delivered concrete outcomes—and more than many expected going into the week. But the dark clouds of war loomed over the Meetings, and all the quota deals and debt agreements in the world couldn’t hide the fact the biggest risk to the global economy was staring the ministers right in the face—and they weren’t sure what to do or say about it. 

The IMFC couldn’t agree to a joint communique, likely because of debates over how to characterize the ongoing war in Ukraine. And the Group of Twenty finance ministers’ statement surprisingly avoided mentioning anything about the Israel-Hamas war directly. 

But the IMF’s steering committee did broker an agreement on quotas—the money all members pay to the IMF, and in return, they receive a share of voting power at the Fund. The United States got what it wanted: an “equi-proportional” increase, which means more money from everyone but no change in how the votes are allocated. China, India, and Brazil stay with their current percentages. When I interviewed Indian Finance Minister Nirmala Sitharaman yesterday, she told me this was going to happen: “This solution that came from the US has been accepted.” But she also said next time around, things will have to be different. 

For the agreement on this solution, credit is due to the range of emerging countries that put the stability of the IMF ahead of the understandable desire to have the size of their economies more accurately reflected in voting share. And credit is also due to the United States for brokering an agreement that many thought wasn’t possible. 

That success would have been enough for everyone to hang their hats on. But the Zambia debt memorandum of understanding was the “will they, won’t they” question of the meetings. Early in the week, when I spoke to Zambian Finance Minister Situmbeko Musokotwane, he confirmed it was happening. Then IMF Managing Director Kristalina Georgieva announced it was a done deal. And then, it wasn’t. After a few days of carefully crafted press releases and hedging, the deal was officially done. The question is whether doing debt restructuring with China is going to be like developing a new pharmaceutical drug—it takes years to do the first one but then easily replicated—or if each process is going to be as torturous as Zambia’s was. 

Looking at the Marrakesh meetings by themselves, they were a success. The problem for the finance ministers and central bank governors is that the world around them is on fire. Brune Le Maire, France’s finance minister, probably said it best when he said geopolitics is the biggest risk to global growth. 

For peace and stability, the world needs geoeconomics, Spain’s Nadia Calviño said earlier today. But the best the IMF and World Bank could offer was that it was too early to tell when it comes to the economic fallout from the war in Israel. It’s an understandable but insufficient position from the world’s leading financial institutions. How many crises can the world handle at once? It seems we are at the tipping point. That was the sense of urgency that was missing in some of the language and events during the Meetings. 

So the final verdict? There was strong progress on the economics, but a missed moment on geopolitics. Geoeconomics is ultimately the lesson—hard-learned during World War II when the IMF and World Bank were created—that the two can actually never truly be separated.

As IMF-World Bank Week wraps, we wonder: Is that all there is to say?

Amid the (welcome) fundraising and quota-raising progress reports, today’s IMFC Chair Statement missed an opportunity to reassure a concerned public by providing a strong response to the extraordinary uncertainty around the global economic outlook.

The IMF’s flagship reports released this week were already in need of an update, given that their timing did not allow for a full analysis of the rise in long-term interest rates, appreciation of the US dollar, and increase in oil prices following the attack on Israel. With the Global Financial Stability Report warning particularly about the risks in the global banking system, it would have been important to emphasize a willingness to closely collaborate on economic policies to avoid further increases in volatility.

This is not to downplay the agreement to increase IMF quotas, an important step to strengthen the global safety net, but especially with a rudderless US Congress and a sharp slowing of the Chinese economy, a better understanding of how global policymakers intend to preserve global stability would have been welcome.

The lack of a policy message from the IMF-World Bank meetings further adds to the policy vacuum left after the Group of Twenty (G20) communique similarly avoided specific policy commitments. Both documents echoed the language agreed upon at the Delhi summit, leaving the impression that ministers and central bank governors were too distracted by the need to negotiate geopolitical language and secure agreement on fundraising and quota issues to focus on their most important task at hand.

Moreover, the failure to change the relative voting shares at the IMF has been criticized by the Group of Twenty-four (G24) (comprised of developing countries) as setting a bad precedent in perpetuating an unequal governance structure, which in their view continues to undermine the IMF’s legitimacy and effectiveness. This will remain a bone of contention between developing and developed member countries going forward, even if tempered by the permanent inclusion of the African Union in the G20 and the creation of a twenty-fifth seat at the IMF Executive Board, to be allocated to Sub-Saharan Africa.

• A G20 communique is turning heads in Morocco

• Equi-proportional IMF quota increase has been accepted—for now, says Indian finance minister

• Your guide to IMF Special Drawing Rights

• The EU’s plans to bolster its resilience against climate change, trade dependency, and an array of other crises

• Regional multilateral banks are having their moment in Marrakesh

• Decoding the Marrakesh G20 communique: Progress, but no inspiration

• How are IMF stakeholder countries working to mitigate climate change? The case of Morocco and renewable energy

• Inside Turkey’s plans to bounce back from economic shocks and policy challenges

• Staring into the gap between Africa as a global leader and a development challenge

• Georgieva’s emphasis on the positive is a reminder of the power of global collaboration

• See day four analysis

A G20 communique is turning heads in Morocco

This morning, the IMF-World Bank Annual Meetings Plenary took place, with thousands of participants filling up the biggest hall on campus to watch remarks from Ukraine’s finance minister, the World Bank president, and the IMF managing director.

But don’t count me among those thousands: I was also hurriedly scrolling through the Group of Twenty (G20) communique that had just been released following yesterday’s meeting of G20 ministers and governors. While the group isn’t organizationally related to the IMF and World Bank, its member countries account for 85 percent of global gross domestic product and most of the votes at the Bretton Woods institutions. Thus, their decisions will translate into the IMF and World Bank’s new actions and policies.

So, where is the “new”? The communique released today basically repeats the one from the New Delhi Summit in September. It encourages the World Bank and all the multilateral development banks to implement the recommendations in the G20’s capital advocacy framework (over a year old now) to optimize their balance sheets and free up more lending power. However, the communique fails to mourn the tragic loss of life in Israel and Gaza—or even acknowledge the unfolding Israel-Hamas war at all.

In addition, the communique doesn’t say anything about the proposed equi-proportional IMF quota increase—indicating that the increase is less likely to come to fruition than we, on the ground, originally thought. However today, we spoke with Indian Finance Minister Nirmala Sitharaman who told us that the equi-proportional quota increase has, in fact, been approved. However, we may not know for certain until the International Monetary and Financial Committee meeting tomorrow—or even until the end of the IMF’s sixteenth quota review (to determine whether it is necessary to increase the quota and revise the distribution formula), scheduled to wrap in December this year.

Equi-proportional IMF quota increase has been accepted—for now, says Indian finance minister

The equi-proportional IMF quota increase proposed by the United States “has been accepted,” Indian Minister of Finance Nirmala Sitharaman said at Atlantic Council studios in Marrakesh. 

She said that it is a “temporary” solution, in that it is “a solution for now,” but during the next IMF four-year review cycle, “some discussions will happen” to map out how IMF stakeholder countries address the issue moving forward.

“The equi-proportional quota seems to be the less contentious way… for now” to address the IMF’s capital needs, Sitharaman argued, “because it doesn’t alter the… proportions and therefore it’s at least some more money without upsetting the balance.” However, the concerns of the countries “who are otherwise not adequately represented” still remain, she noted. 

Sitharaman spoke with GeoEconomics Center Senior Director Josh Lipsky on the ground at IMF-World Bank Week. The IMF World Economic Outlook forecast India’s 2023-2024 growth at 6.3 percent. Sitharaman chalked up that strong growth projection to the country’s agricultural industry, services sector, and manufacturing—among other aspects. But, she said, global challenges present risks to India’s growth. 

The finance minister reflected on India’s presidency of the G20, noting that New Delhi originally set out to highlight voices of the Global South throughout the year. The African Union’s joining the group “gives us immense satisfaction, Sitharaman said.  

Focusing on the Global South is important because, while they are a varied bunch of countries, “the problems which they face are fundamentally the same,” the finance minister said.  

Your guide to IMF Special Drawing Rights

The EU’s plans to bolster its resilience against climate change, trade dependency, and an array of other crises

European Commission Vice President Valdis Dombrovskis is keeping a closer eye on the EU’s relationship with China since Russia’s full-scale invasion of Ukraine. 

“We need to engage with China in areas like climate change” (with China being the biggest emitter of carbon dioxide) and “on current geopolitical challenges” including the war in Ukraine. But “at the same time,” he cautioned at an Atlantic Council event at IMF-World Bank Week, the EU should be careful not to establish “strategic dependencies” on China as it had on Russia for its fossil fuel supplies. “We need diversified and resilient supply chains, and we cannot be dependent on a single supplier [for] a number of critical inputs.”  

The EU recently initiated an anti-subsidy investigation into imports of electric vehicles from China, which will determine whether electric vehicle supply chains in China benefit from subsidies in a way that breaches World Trade Organization rules—and whether those subsidies inflict injury on the European electric vehicle industry. “WTO members have a right to use these tools,” Dombrovskis said. “We are going to conduct this investigation in a facts-based manner, fully in line with applicable EU and WTO rules and principles.” 

He added that as the investigation proceeds, it’ll be “important that also Chinese companies… are cooperating.” 

On trade, the EU and its biggest trade partner, the United States, are approaching a deadline for negotiating an agreement on steel and aluminum trade that (if the EU gets its way) would address global steel overcapacity, encourage a “greening” of the industry, and put an end to tariffs imposed during the Trump administration. “We are making progress,” he said, adding that he is “optimistic” any remaining gaps will be filled soon. 

In responding to this decade’s polycrisis, the EU is employing the Recovery and Resilience Facility to ensure that the bloc emerges stronger. The fund has thus far disbursed 153 million euros to eighteen member countries.  

While it was originally aimed at mitigating the economic impacts of the pandemic—through investments such as digitizing public services and boosting sustainable transport—“Russia’s aggression has brought some corrections,” Dombrovskis said. One such correction is the creation of REPowerEU Plan to roll back Europe’s dependency on Russian fossil fuels—and roll out more renewable energy sources. 

Dombrovskis also discussed EU macro-financial assistance to Ukraine, saying that the bloc is “committed to [supporting] Ukraine for as long as it’s necessary.” He explained that once this assistance program wraps (there are still about 4.5 billion euros left to be paid this year) the EU will unleash a fifty-billion-euro package of assistance to Ukraine, to last from 2024 to 2027, through the EU Multiannual Financial Framework. The “EU is definitely doing its part,” he said. “It’s important that also other major players, including [the] United States, are playing their part.” 

Regional multilateral banks are having their moment in Marrakesh

In October 2020, at the peak of the pandemic, I wrote about why and how regional development banks play a critical role in COVID-19 response and recovery, arguing that the banks and the nature of their lending and operational practices have been, and remain, especially important for the agility, complementarity, and continuity of pandemic response.

It’s clear from conversations this week—on stage, in studio, and off the record—that this is perhaps even truer today than it was then as we grapple with how to respond to polycrises: COVID-19, conflict, and climate, and the inflation, debt, food insecurity, and rising inequality and poverty that result.

The European Bank for Reconstruction and Development, with its long history in Ukraine, is at the forefront of responding to Russia’s 2022 invasion—leading from the onset in investment, advisory, and technical assistance, as well as research, planning, and coordination. Among its response measures, it has been leveraging its distinct expertise and experience working with and through the private sector. While the Asian Development Bank, with large numbers of small island developing states as well as fragile and geopolitically tense areas, is leading on climate and resilience finance and innovation, stretching its balance sheet by adjusting its disposition toward risk and expanding lending by nearly 40 percent to about $36 billion annually. To that end, the Inter-American Development Bank and World Bank are collaborating to catalyze green finance across Latin America and the Caribbean. Given the dynamics of debt and demographics on the African continent—which have been a prominent theme this week no matter the subject—the African Development Bank is uniquely positioned to lend in a way that can support policy reform and advance inclusive growth and reduce inequality with its investments. At the same time, given the scale of what’s required, more than ever it’s about coordination and leverage between regional development banks and with the World Bank and IMF.

Given this, the importance and value of regional development banks is arguably missing from the (somewhat overlooked) “Marrakech Principles for Global Cooperation” released this week, which call for enhanced collaboration between the IMF and the World Bank “and with partners.” It is a miss to skip explicitly referencing these key international financial institutions which are clearly ready to meet the moment.

Decoding the Marrakesh G20 communique: Progress, but no inspiration

The last Group of Twenty (G20) communique under India’s leadership did not break any new ground. Notwithstanding the recognition that “the G20 is not the platform to resolve geopolitical and security issues,” most of the energy spent during the negotiations seemed to have been focused on the categorization of recent geopolitical tensions.

On that front, a general expression of deep concern for “the immense human suffering and the adverse impact of wars and conflicts around the world” seemed to be an attempt to compensate for the fact that one or several participants remained opposed to condemning the Hamas attack on Israel. The communique also rehashed previously used language on the war in Ukraine and expressed concerns about attacks on food and energy infrastructure given the potentially global consequences.

On the global economy, one paragraph of the communique repeated the IMF’s World Economic Outlook and referred to the macroeconomic policy section of September’s G20 New Delhi Leaders’ Declaration. The onus is now on the IMFC’s communique, which is due tomorrow, to react to a weakening medium-term economic outlook, as well as the rise in long-term interest rates and the strong dollar. The G20 also did not use the opportunity to push for an IMF quota increase, which could indicate that important issues have yet to be resolved behind closed doors.

The remainder of the document was similarly underwhelming. One full page on the topic of strengthening multilateral development banks mostly dealt with process issues, with words like “remain,” “reiterate,” or “reemphasize” abounding. The IMF and World Bank were asked to provide a report on domestic revenue mobilization (i.e., tax measures), most likely a concession to those G20 members that emphasize the need for responsible economic management from developing countries themselves.

Reflecting the political attention paid to individual debt restructuring cases, the communique provided a cautious welcome of progress in the cases of Zambia and Ghana, and called for a swift debt treatment for Ethiopia as well as Sri Lanka (the latter being outside the G20 Common Framework).

There is no doubt that the G20 process will be reenergized by the start of Brazil’s G20 presidency on December 1, but it is hard to escape the impression that the G20 has been diminished by the political divergences within its membership. While it still appears possible to reach consensus in some important areas, the G20 is clearly no longer the dynamic forum it was several years ago.

How are IMF stakeholder countries working to mitigate climate change? The case of Morocco and renewable energy

Inside Turkey’s plans to bounce back from economic shocks and policy challenges

After a string of “policy distortions” and economic shocks, “Turkey is back,” Turkish Finance Minister Mehmet Şimşek said.

Şimşek’s gave his remarks at Atlantic Council studios in Marrakesh, on-site at the IMF-World Bank Annual Meetings. There, he outlined the three new Turkish economic programs to help the country bounce back, which included measures on disinflation, fiscal discipline, and structural reforms.

The finance minister explained that he wants to see inflation down to single digits over the next three years—inflation was still at 61 percent year-on-year this September. “It’s a challenging global backdrop, but we believe it is doable.”

As for the structural reforms: Şimşek pointed to several policies meant to improve the business climate, boost savings, deepen capital markets, and enhance labor market flexibility and human capital stock. He also said that Turkey is focusing on the green transition and investing in digital infrastructure.

Throughout these reforms, Şimşek said that it’ll be important to communicate with citizens so that they understand that “there are no quick fixes [and] that there are no shortcuts,” and that the reforms are designed for the medium term. “There will be trade offs,” he cautioned, adding that “for the sake of the country, sometimes you have to take harsh measures.”

At the Annual Meetings, Şimşek said that his delegation is meeting with various counterparts to boost Turkey’s economic relations. In meetings with European counterparts, he said that the discussions tend to focus on how to retighten EU-Turkey ties. “We would like to be re-anchored to [the] EU,” he said. “Europe is a source of inspiration for us… but we want Europeans also to treat Turkey with respect and as an equal partner.”

According to Şimşek, one way for the EU to show Turkey that it is an equal partner is by upgrading the EU-Turkey Customs Union, which was put into place in 1996. “The world was very different at that time,” he said, adding that “today’s enhanced free trade agreements are ahead of [the] Customs Union.” Şimşek explained that he’d like to see the customs union “expanded” to include services, agriculture, and more. “We’re not asking for any favor from our European friends; we’re asking [for]… mutually beneficial dialogue.”

Şimşek argued that the EU and Turkey should cooperate in another way: on reconstruction in Ukraine. “Peace and stability in our region is the most important global public good,” he said, so “we would like to play a constructive role, a significant role in helping rebuild the country.” He explained that combining European long-term funding with Turkish contractors could “create a great synergy.”

Regarding global governance, Şimşek said that he has been encouraged this week by discussions at the Group of Twenty about reforming multilateral development banks and equipping them with more resources to assist the Global South. And as for the IMF quota, Şimşek said that emerging markets are increasingly playing a bigger role on the world stage and their economies are increasing in size. “I think it’s important that there is better representation, better voice for everyone… We should not ignore the Global South.”

Staring into the gap between Africa as a global leader and a development challenge

Governance remains the trend line in my meetings here in Morocco. It has made an appearance in everything from my senior-level conversations with the Cameroonian delegation to discussions about the World Bank’s new president and his mandate, to more technical discussions about central bank digital currencies and new payments systems.

Thinking through these issues, I’m struck that on one hand, Africa is on the leading edge of emerging fintech like virtual currencies including CBDCs and stablecoins, while on the other, the continent is still struggling with basic representation in global institutions like the World Bank. If you’re a pessimist, you could say that many countries are still only on the lonely and winding path to the long and bumpy road of development.

But it is important to see the hope for change as I did yesterday. I sat for a conversation between one of Africa’s biggest philanthropists, Mo Ibrahim, and World Bank President Ajay Banga. Ibrahim seemed to take pleasure in pointing out the contradictions in the governance and actions of the World Bank in Africa, often comparing the Bank’s solutions for low-income countries’ problems to the better, faster, and more robust solutions deployed for Western and European countries. The crowd seemed to laugh anxiously—but it is this upfront calling to attention of the World Bank’s shortcomings that will push the Bank to change tack.

Looking forward, African countries must build a strong coalition of reform minded countries to maximize their power and voice. This coalition could more effectively push for badly needed updates to governance structures of the global economic and financial architecture—even as many Group of Seven countries seem to prefer the status quo. Africa needs these changes urgently to meet its current and future challenges.

Georgieva’s emphasis on the positive is a reminder of the power of global collaboration

There is reason for gloom at the Annual Meetings, with war still raging in Ukraine, the Israel-Hamas war newly under way, and the effects of natural disasters still reeling in countries like Morocco and Turkey. Against that backdrop, the economists meeting here are focusing on finding solutions to crises involving interest rates, equity, and slow economic growth—providing reason to have some optimism for the future.

Yesterday, IMF Managing Director Kristalina Georgieva focused on the positive of the World Economic Outlook—even though the forecast, to the dismay of many participants, forecasted slow recovery from the crises of the last few years. The positive: There is still time to bolster global resilience and tackle collective action problems like climate change. However, to do that, the world has to work together, build bridges, and invest in multilateral institutions and frameworks. And while time is running out to keep the global average temperature rise below 1.5 degrees Celsius, Georgieva stressed that doing so may be feasible if the world adopts some form of carbon pricing—which is something the IMF is working on with the Organisation for Economic Co-operation and Development.

Georgieva’s second point of positivity: Low-income countries, especially those in Africa, have great potential to foster a more prosperous, inclusive future. With her characteristic “we all have a role to play” remarks, Georgieva made clear that the IMF sees itself as a steward for attracting more sustainable investment to low-income countries to create that future. The type of lending and investment the Bretton Woods institutions have in mind, however, will require more capital and increased quota investments in the institutions. This would align with new World Bank President Ajay Banga’s calls for a bigger and better bank, but also requires resolutions of debates and disagreements over quota shares held by high-, middle-, and low-income economies.  

And while Georgieva was more serious on the topic of high bond yields and above-average yield spread across countries, she pointed out that this market response is due to rising interest rates, which are a sign that central banks are waking up to the necessity to respond to inflationary pressures.

In these positive points lie the solutions that will empower countries as they look to recover more quickly from the last few years’ economic shocks.

• There’s still time to show that global collaboration is possible

• Ukraine’s finance minister on Russia’s blocked assets and why he’s reaching out to the Middle East

• How the MENA region is facing up to today’s biggest economic crises

• The numbers aren’t adding up on financing investment for climate change mitigation projects

• Where will the coalition of African countries take its message for reform next?

• See day three analysis

There’s still time to show that global collaboration is possible

From hallway conversations to heated debates in closed-door meetings, the inescapable topic this week in Marrakesh has been global governance.

The power structure of Bretton Woods institutions—despite the fact that they function reasonably well, even in the midst of growing geopolitical tension—is under increasing scrutiny.

The United States has been pushing for an increase in the capital that countries contribute to the IMF (their quotas) without proposing an increase in votes for China and other emerging markets who feel undervalued with their growing economies and stagnant vote shares. As I wrote in a new issue brief this week, the governance arrangements of the Bretton Woods institutions are fundamentally out of touch with economic reality.

Despite that, there are signs on the ground that the quota increase may be approved, which would provide an important boost for the world’s official lender of last resort—and show that global collaboration is still possible.

Across the IMF-World Bank Meeting campus, I’m also seeing global collaboration in another form: Widespread support for Ukraine among many of the IMF’s major shareholders. The IMF’s Ukraine program is largely successful because it is focused and because the Fund’s shareholders are stepping up to ensure that the program reaches its intended objectives—putting Ukraine’s war economy on a more solid footing and making further progress on improving economic governance. Today, we also sat down with Ukrainian Finance Minister Serhiy Marchenko to map out the next steps for coordinated international support for Kyiv, including its war-risk insurance needs.

Ukraine’s finance minister on Russia’s blocked assets and why he’s reaching out to the Middle East

“A gear is shifting” among Group of Seven (G7) countries, said Ukrainian Finance Minister Serhiy Marchenko in conversation with the Atlantic Council’s Charles Lichfield. 

On the ground in Marrakesh, Marchenko is noticing that G7 countries are ready to discuss seizing Russian assets and repurposing them to fund Ukraine’s reconstruction efforts. But if the G7 can’t come together on the Russian assets, he said he hopes that they can quickly agree on deploying the interest earned on these blocked assets for reconstruction efforts. 

Marchenko gave his remarks at an Atlantic Council event at IMF-World Bank Week. Marchenko told Lichfield, the deputy director of the GeoEconomics Center, that Ukraine’s economic situation has improved—with lower inflation rates—”due to the resilience of [the] Ukrainian people as well as support from our partners.” 

The IMF’s World Economic Outlook—released earlier this week—forecasts Ukrainian gross domestic product growth at 4 to 5 percent through 2024. Marchenko noted that the section on Ukraine was drafted at the beginning of the year, but now, Kyiv is fighting “a totally different war.” That means “it’s a modern war: We’re using drones, using a high level of munition.” Marchenko said the IMF was pessimistic about the Ukrainian forecast to account for uncertainty about the course of the war. “That’s why they predicted that Ukraine’s economy will be in… slow growth for [a] longer period of time,” he explained.

This week, Marchenko said the Ukrainian delegation has been having bilateral discussions not only with European countries to try to preserve their support but also with other countries, such as those in the Middle East, to “try to convince them to be more supportive of Ukraine.” In those discussions, he said that Ukraine also tried to “show [a] good example” of how to govern a country during war and invasion.  

But “it’s quite necessary to preserve… support for [the] next year,” he warned, because the next year will be “much [more] stressful,” with much more “uncertainty.” So while Ukraine’s economy is more stable, he said, international partners can’t “forget about Ukraine” now. 

How the MENA region is facing up to today’s biggest economic crises

As the crowds of IMF-World Bank Week participants get larger in Marrakesh, the Atlantic Council empowerME Initiative’s Racha Helwa got together with Moroccan Economy and Finance Minister Nadia Fettah Alaoui and Citi Head of Middle East and Africa Ebru Pakcan to talk about how the MENA region is facing up to today’s biggest economic crises.

Morocco is focusing on building a strong macroeconomic foundation and on its resilience, the finance minister said, explaining that the Moroccan government launched a reform program recently to diversify the economy and create a strong social state. But it won’t be a “peaceful” journey to implement these reforms, she argued, because at the same time, “we have also to deal with multiple crises that we have been going through.”

Pakcan said that private-public relationships may help MENA countries manage the risks they face. With these partnerships, there are “a lot more creative solutions that can be… devised,” she argued. Those solutions, she added, are needed to help MENA countries “actually ride the storm” of today’s crises so that it can “focus on what really matters in the future,” like climate change and digitalization.

The numbers aren’t adding up on financing investment for climate change mitigation projects

Here in Marrakesh, many speakers have emphasized the urgent need to mobilize substantial amounts of money to finance climate change mitigation and green transition projects. Reportedly, to achieve net zero emissions by 2050 and to prevent world average temperatures from rising by more than 1.5 degrees Celsius this century, global investment in such climate-related projects will need to total $2.7 trillion a year. Developing and low-income countries in particular would need to receive significant financial assistance from the international community to be able to cope with the challenges.

At the same time, both the IMF and World Bank have pointed out that in many countries, fiscal deficits are high, with government debt rising to record levels—faster than the pre-pandemic pace. Both of these institutions have emphasized that fiscal restraints are much needed to safeguard sustainability and rebuild fiscal buffers to be able to deal with future shocks. The IMF’s “Fiscal Monitor” has also recognized that citizens in many countries are averse to increased taxes by their governments.

Consequently, it should be clear that governments, including those of developed countries, will not be in a position to raise huge sums of money for climate-related investments, especially in support of developing and low-income countries.

That has led the World Bank and IMF to push for using public money to catalyze private sector climate investments in developing and low-income countries by offering various risk-sharing schemes to improve the risk-return profiles of those investment projects. However, officials looking to use public money to catalyze significant private sector investment—often at a rate of five times or more—are likely to see their hopes dashed: According to GlobalMarkets magazine, $1 of public sector lending can generate only $0.7 of private investment.

In short, while climate investment needs are huge, the numbers in terms of plausible financing sources from the public and private sectors simply don’t add up. Anyone concerned about climate change would have to be more realistic about to how to get the needed funding.

Where will the coalition of African countries take its message for reform next?

Kristalina Georgieva said it best: “A prosperous twenty-first century is only possible with a prosperous Africa.”

Here in Marrakesh, the IMF-World Bank Annual Meetings are clearly underscoring African priorities, the urgency of climate action, and the need for increasing global coordination for policy solutions. Africa is front and center—fitting considering these are the first Annual Meetings to take place on the African continent since the Nairobi Meetings in 1973.

On the ground—just as they did in 1973—policymakers, central bankers, and international economists are looking for ways to alleviate global poverty, boost economic activity, and reinforce programs that can support sustainable development solutions. As decision makers hopping from pavilion to pavilion debate how to address growing public debt, elevated interest rates, and rising geopolitical tensions between the world’s largest economies, it is important to look at the changing trends across the African continent.

It is becoming clearer how African countries are a part of the solution to global issues, whether it is on matters of war and peace, economic development, or global governance. In regard to governance, African countries are asserting their agency in multilateral fora. A great example of this effort is the posture African countries present on Bretton Woods reform, consistently driving their message at global convenings such as recent Group of Twenty meetings in India, the UN General Assembly in New York, and here at the IMF-World Bank Meetings in Marrakesh. Against this backdrop, African countries are facing new and emerging challenges from the shocks of the COVID-19 pandemic; the spike in food, fuel, and fertilizer products due to the Russian invasion of Ukraine; and natural disasters aggravated by a changing global climate, among others. 

Despite the growing impetus for pan-African positions on things like World Bank reform, more needs to be done. Changing the political calculus of traditional powers such as the United States, France, Germany, and other Group of Seven countries (and beyond) will be important to bring reform efforts into reality. African leaders should continue to look for ways to highlight the urgent need for reforming these institutions, specifically with audiences that may be unfamiliar with the need for reforms, while continuing to drive a coalition for change. The challenges facing African countries are no longer theoretical or in the future, and the Bretton Woods institutions and multilateral development banks must take steps to meet the changing, complex, and interconnected development needs of African countries without delay.

• Signs of inspiration in dark times

• What’s next for monetary policy and Europe’s fiscal rules, according to Spain’s Nadia Calviño

• The finance world braces for impact from the Israel-Hamas war

• Africa’s demographics matter—but they’re not the only ones that do

• With the Bank abuzz, Banga begins…

• A tale of two sovereign debt restructuring processes: Why Zambia and Sri Lanka differ

• See day two analysis

Signs of inspiration in dark times

As day three wraps at the World Bank-IMF Annual Meetings, the buzz is building as all quarters of campus kick into high gear—and seats are becoming harder to find in the “town square” where I’m enjoying local musicians giving melody and voice to the storied history, warmth, and resilience of the Moroccan people, who are hosting this event just weeks after a devastating earthquake.

Though the hot sun continues to shine, the mood has been darkened for some following the release of the IMF’s flagship World Economic Outlook, which forecast a more subdued recovery, and following reality checks about the extent of global debt distress. For those in the World Bank conversations, me included, talk of resilience and growth felt more uplifting.

Still there’s a sense of urgency on the ground, as participants quickly realize there is too much work to be done and plenty of opportunity at hand.

On that note, there was extra pep in my step today as it’s October 11, which means it’s International Day of the Girl—a chance to recognize the rights, celebrate the achievements, and amplify the opportunity of the world’s one billion girls and young women. And where better to mark the occasion than in Africa—the youngest continent where, if empowered and enabled, girls can help communities and countries realize a double demographic dividend through increased youth economic participation and closing gender gaps. I was reminded of this in a conversation I had with the World Bank’s Global Director for Gender and in my behind-the-scenes conversations with the inspirational generational leaders comprising the IMF youth fellows.

So heading into the remaining days of deliberation and debate, I’m hoping for meaningful movements and commitments to accelerate development, address debt, and accentuate inclusive growth on a livable planet.

What’s next for monetary policy and Europe’s fiscal rules, according to Spain’s Nadia Calviño

Just a day after the IMF released its World Economic Outlook—which forecast that Spain, among other countries, would have strong growth in 2023 and 2024—Spanish Economy Minister Nadia Calviño joined GeoEconomics Senior Director Josh Lipsky for a conversation on the ground at IMF-World Bank Week.

Calviño chalked up Spain’s good forecast in part to its “diversified energy mix.” “A high penetration of renewables and a very diversified energy mix… has enabled Spain to withstand better than others the blow coming from Russia’s war against Ukraine.”

Seeing Spain’s growth, Calviño said it would be “quite wise” for the European Central Bank to pause interest rate hikes. “You have countries such as Spain with strong growth [and] low inflation. Other countries are very close to a recession and have higher inflation,” she explained. “So we better get it right because we need to ensure that we manage… inflationary expectations.”

Currently, the EU is undergoing a review of its fiscal rules on government spending and taxes to avoid a debt crisis. She signaled the need for commitment to a new framework—one that enables growth, job creation, and the green transition—by the end of this year.

Calviño looked back to the IMF-World Bank Spring Meetings, saying that while “the global economy has shown to be more resilient than many expected,” that “the world has become even more complicated” with conflict on the rise. “That makes it even more important that we gather here” at the Annual Meetings, to “find solutions.”

But Calviño’s stance on China hasn’t changed since the Spring Meetings, where she said that the EU cannot turn its back to China or ignore it. “The EU is a global trade powerhouse, and we need to keep our relations with all the main trading partners,” she said. “At the same time, we need to ensure that the global framework and our trade policies ensure that there is a level playing field and [a] fair trading framework.”

The finance world braces for impact from the Israel-Hamas war

The shockwaves of the Israel-Hamas war have finally reached Marrakesh. It took several days—as it often does in the technocratic world of international economics—for financial leaders gathered here at the Meetings to grasp that the conflict could affect everyone.

Here on the ground, the full scale of the devastating human tragedy and military conflict unleashed by Hamas’s assault on Israel last Saturday is coming into focus—and with it a focus on the war’s economic ramifications. Several conversations are happening at once. 

First and foremost, there is growing horror as reports about the terrorist attacks and fallout in Israel and Gaza play on TV screens and phones inside and outside the official venue for the Meetings.

There is also discussion of the global economic fallout. Energy prices have understandably been a big focus, with memories of the 1973 Yom Kippur War and ensuing oil embargo front of mind for ministers. But as many of the economists milling about the pavilions have noted, the global energy market has shifted dramatically in the fifty years since that war. The world doesn’t solely rely on the Middle East for energy. And—for now—the conflict hasn’t spread through the region.

Then there’s the shekel and Israel’s economy. Israel’s central bank intervened to prop up the currency by selling thirty billion dollars in foreign reserves, but the shekel’s slump continues. There is wider concern that foreign investment in Israel will dry up and create a recession in the Israeli economy.

With regard to Gaza, the question is about reconstruction—whenever that time comes. Will the World Bank and other development banks play a role and step in with aid? A European commissioner initially signaled that the Commission would stop sending some aid to Palestinians, but that decision was quickly reversed by the European Union. There are open questions in Marrakesh right now about 1) what kind of aid will flow to Gaza in the near term and 2) what kind of money will be requested in the long term. Because these are questions for the development banks, the IMF has, so far, been able to sidestep the questions.

But don’t expect avoidance of these issues to continue. By the end of the week, the ministers and governors in Marrakesh will realize what many around the world already see clearly: What is unfolding in Israel and Gaza will have global political and economic impacts.

Africa’s demographics matter—but they’re not the only ones that do

The Moroccan government has been keen to shine a light on its identity as a North African, growing economy. The resilience of Morocco and the Moroccan people, who are hosting a great Annual Meetings week despite a devastating earthquake and previous cancelations due to COVID-19, has also been spotlighted. Africa—a diverse, growing, and bustling continent that is often overlooked at conferences of international organizations—is finally getting the attention and press it deserves.   

Demographic challenges and the threat aging societies pose to the world economy are being brought up at these Annual Meetings almost as frequently as the climate crisis. Demography is the critical area where Africa has the advantage over other regions. While European countries rapidly age, fertility is slowing down in the United States, and even China is entering an era of demographic aging. Africa’s high birthrate and young labor market have the potential to massively boost the continent’s emerging market economies. This will, however, require inclusive political stability, equity investment, and the prioritization of educational and labor market skills funding. For the time being, many African ministers and officials are reveling in the chance to directly pitch for more investment in their region, and IMF and World Bank officials appear interested in highlighting newer funds (like the IMF’s Resilience and Sustainability Trust) that have benefited sustainable investments in the region.  

With the Bank abuzz, Banga begins…

On day 2 of the World Bank-IMF Annual Meetings in Marrakesh, the Bank’s activity got underway in earnest with a number of flagship and civil society events. The mood was arguably more upbeat than “across campus” as the IMF released its latest World Economic Outlook portraying a dim macro picture with slowing growth and widening divergence worldwide. 

On-the-ground conversations—which touched upon everything from resilience to jobs-driven growth to digital inclusion—recognized the compound crises facing the world (although disproportionately impacting the Global South) while recognizing, if not celebrating, the opportunity. Across the conversations between officials and civil society, inclusion, especially of women and youth, was a repeated priority. There were other big themes, too, across these conversations: interconnectedness; jobs and livelihoods, and how they are critical for resilience, climate adaptation, and climate change mitigation; and improved and diffuse digital foundations, which can fuel economic dynamism and increase transparency while also strengthening systems and the provision of public services necessary for responding to shocks.

Capping the day, Ajay Banga—who took the helm as president of the Bank in June—made his formal Meetings debut with a much-anticipated town hall with civil society, where he locked in his newest mission for the Bank: “Ending poverty on a livable planet.” It’s a reflection of the fact that the number of poor people has increased after decades of decline as significant pre-pandemic gains have been lost; it also reflects how responding to climate change goes hand-in-hand with efforts to advance development and end all forms of poverty. Alongside the evolution roadmap, Banga (or Ajay, as he prefers) believes it can be done by “doing what’s right, not convenient” to “first build a better Bank, then build a bigger Bank”: a better Bank that stretches every dollar and leaves no one behind; a bigger bank that “allows what works to scale.” Over the next few days, the Bank and its partners will need to get specific on how this “knowledge and money” Bank will come to fruition.

A tale of two sovereign debt restructuring processes: Why Zambia and Sri Lanka differ

Different developments in the Zambian and Sri Lankan sovereign debt restructuring processes have commanded the attention of participants in the IMF-World Bank Annual Meetings in Marrakesh, highlighting the difficulties still remaining in the international effort to improve the restructuring framework.

Zambia, having defaulted on its external debt of over $32 billion in 2020, reached agreement with its official bilateral creditor committee (including China) in June 2023 on terms to restructure the debt, giving the country a 40 percent reduction in the present value of its bilateral debt of $6.3 billion. However, the country has had to wait until now for the bilateral creditors to develop language on the comparability of treatment in the memorandum of understanding that satisfied China—so that it could be signed, reportedly by the end of the Meetings this week. This has raised the hope that China could participate in the official bilateral creditor committee; the committee could eventually agree on a deal despite delays.

By contrast, Sri Lanka defaulted on its fifty-billion-dollar external debt in April 2022; with the country not being viewed as low-income, it is not eligible for the Common Framework for Debt Treatment. As a result, Sri Lanka has had to negotiate separately with various creditor groups, including the Paris Club, Japan, and India (on $4.8 billion of debt), as well as China’s Export-Import Bank (on $4.3 billion of debt)—but not the China Development Bank (which it owes $3 billion of debt, but the bank is considered to be a commercial creditor). This process has increased the complexity of coordination problems for the restructuring negotiations—leading to delays in the first review of the Sri Lankan program with the IMF needed for additional disbursement to the country. Further complicating the comparability of treatment problem, China has announced that its Export-Import Bank has agreed to restructuring terms with Sri Lanka ahead of scheduled meetings between the Sri Lanka and Paris Club creditors this week in Marrakesh.

This unwieldy process should be improved, basically by extending the Common Framework to include vulnerable, middle-income countries so that official bilateral creditors have to form a committee to negotiate jointly with the debtor country.

• EBRD president: Supporting Ukraine’s reconstruction must happen now

• Why everyone—from participants to officials—should keep in mind Africa’s demographics

• On-the-ground signs that the IMF and client countries are diverging on monetary tightening priorities

• Why a cookie-cutter approach won’t work for debt restructuring

• Inside the IMF’s new approach to China

• A “big push” and a “first step” toward reaching Africa’s potential

• Keep an eye out for small victories

• Zambia may be days away from a debt restructuring plan. Here’s what it wants other countries to know about dealing with creditors.

• With its young and talented population, Africa has great economic potential; but “demographics are not destiny”

• The recent developments that may throw a wrench into global financial stability

• The global growth forecast hasn’t changed—but plenty more has in the World Economic Outlook

• Will the World Economic Outlook’s “soft landing” forecast flame out?

• What the “ups” and “downs” of the World Economic Outlook show about the world’s biggest economies

• See day one analysis

EBRD president: Supporting Ukraine’s reconstruction must happen now

As Ukrainian President Volodymyr Zelenskyy continues to meet with Western leaders in a search for support and military assistance, the Atlantic Council GeoEconomics Center’s Charles Lichfield sat down with Odile Renaud-Basso, president of the European Bank for Reconstruction and Development, to talk about the bank’s support to Kyiv. 

“We are focusing a lot on the private sector… and infrastructure in particular,” she said, explaining that the EBRD is paying particular attention to gas and electricity companies to keep the economy running. 

When asked whether it is time to begin focusing on reconstruction assistance, Renaud-Basso said that there isn’t “a clear sort of separation” between supporting Ukraine in war and in reconstruction. “What is already needed now is to reconstruct what has been destroyed and we don’t know whether there will be further destruction—there probably will be.” 

Recently, EBRD shareholders granted the bank the ability to invest in six Sub-Saharan African countries, expanding its mandate after determining that its approach to investing in the private sector—specifically in small and medium-sized enterprises and green projects—“would add value” and would “bring something different [to] the table.”  

The EBRD currently works in over thirty countries. Renaud-Basso explained that when a country’s democratic values aren’t in line with the EBRD’s, the bank does as much as it can to “ensure progress in this area.” “Helping to develop the private sector independent from government… will help develop a middle class that will help contribute to democratization,” she argued. Currently, with the Israel-Hamas war, the EBRD—which invests in the West Bank—is reviewing its project. 

Why everyone—from participants to officials—should keep in mind Africa’s demographics

Demographics matter—and they matter a lot. IMF Managing Director Kristalina Georgieva also seems to agree; here at the Annual Meetings in Marrakesh, she has repeatedly emphasized that the only region in the world where long-term growth has the potential to accelerate is Africa because of its young population.

But how young is Africa’s population compared to elsewhere? The answer: very young. More than two-thirds of Africa’s population is under the age of thirty, and 40 percent are under the age of fourteen. Only 3 percent of African residents are sixty-five and above. Moreover, within thirty years, Africa’s population is expected to double from 1.4 billion to 2.8 billion. In other words, by the early 2050s more than a quarter of the world’s projected population of 10 billion will be on the continent.

Age breakdown of population

What does this mean for the African economy and the global economy? First, while the rest of the world will be aging at varying rates, Africa is going to be blessed with a young and vibrant labor force for many decades to come. If African countries can get the necessary capital, institutional reforms, and job creation policies, that young labor force can lead to robust growth rates for the continent. This will in turn increase the average African household’s income, leading to higher aggregate demands for consumer goods and services produced both in Africa and globally. The global aggregate demand could skyrocket if the income of a quarter of the world’s population increases by, say, 10, 20, 50, or 100 percent.

Second, over the next few decades, high-income and emerging economies will age rapidly and face severe labor shortages while Africa will have an ample supply. Hence, through effective labor migration policies, the world (especially high-income and emerging economies) can benefit significantly from Africa’s young labor force and keep itsdoors open for business for longer.

Population 65+ as a percentage of the total population

But without sound institutions and policies and investments targeted toward human capital development and job creation, Africa’s young and rapidly growing population—pushed to migrate in search of economic opportunity—could become a source of political and social instability both for the continent and elsewhere in the world. Thus, it is imperative tha­­t delegations discuss these issues at the Annual Meeting in Marrakesh.

On-the-ground signs that the IMF and client countries are diverging on monetary tightening priorities

The launch of an IMF working paper on inflation shocks over the past fifty years wound up showcasing conflicting priorities between the IMF and the academics, central bankers, and ministry officials in attendance—many of whom are from IMF client countries.

At the heart of the disagreement is not whether countries need to undertake monetary tightening to reduce inflation, but when it is appropriate to change course and lower interest rates in a way that public spending and investment become less costly. The IMF wants inflation to come back firmly to its target before easing is considered; the IMF official behind the working paper pointed to several “success” stories that actually resulted in hard, not soft, landings.

At the event, ministry and central bank officials pushed back that the current and persistent episode of inflation is not comparable to previous shocks, as the macroeconomic situation today is compounded by geopolitical, demographic, and climate risks. But for the IMF, economic orthodoxy pays off in the medium term. Given the wording and phrasing of attendees’ questions, macroeconomic officials from client countries and those facing other monetary pressures (such as pegging to the dollar) seem to be more concerned about delivering short-term economic prosperity and growth and hedging against external risks.

Why a cookie-cutter approach won’t work for debt restructuring

Over the past six months, progress has been made in taking the sovereign debt restructuring framework forward.

That was the consensus of panelists in a discussion, hosted by the GeoEconomics Center at IMF-World Bank Week in Marrakesh. The progress is important as more low-income countries face debt distress—with the sovereign bonds of twenty-one countries trading above a one thousand basis point spread over US Treasuries. These countries urgently need a speedy restructuring process to help them get back on their feet.

Progress, however, really means the ability of various stakeholders in sovereign debt—debtor countries, bilateral official creditors, multilateral development banks, private-sector creditors, and civil society organizations—to be in a room (the Global Sovereign Debt Roundtable, launched in April 2023) and discuss issues. A better understanding has been reached among the participants especially when it comes to difficult issues like the cut-off points for calculating the amount of debt to be restructured, the role of multilateral development banks in sovereign debt restructuring, the treatment of domestic debt in restructuring, the principle of comparability of treatment between various classes of creditors, and the discount rate to be used to calculate the extent of debt reliefs granted to debtor countries.

But concrete agreements of terms still depend on case-by-case country applications. For example, in the case of Zambia, there has been agreement about using a discount rate of 5 percent, but the agreement is not universal—many private creditors think that is too low and unrealistic.

On the comparability of treatment—an issue that has held up the signing of a debt restructuring memorandum of understanding for Zambia after the announcement of agreed terms in Paris in June—agreement on concrete language has been achieved that paves the way for a deal between Zambia and its official bilateral creditors to be signed soon, reportedly by the end of the annual meetings. However, these terms cannot simply be replicated in other countries’ cases.

Participants and observers of the annual meetings should keep this in mind as they follow developments on the sovereign debt restructuring front in the next few days.

Inside the IMF’s new approach to China

While the World Economic Outlook (WEO) made small downgrades in its forecast for China, the Fund’s view is even bleaker than the numbers suggest. Back in April, the WEO highlighted China’s rebound after its harsh zero-COVID shutdowns and confined its worries about the country’s property crisis to a single paragraph. This time, by IMF standards, both the WEO and Global Financial Stability Report take off the gloves and delve into the downsides, making clear that they see China as a potential risk to the global economy.

The WEO gives considerable attention to China in its opening chapter, highlighting the linked problems of the real estate downturn, soaring youth unemployment (each getting a chart), “subdued” consumer confidence, declining industrial output and business investment, and “weakening” exports. It even presciently singles out the debt issues at giant developer Country Garden, which today signaled a default on its international obligations. China is listed as a risk to the global economy, with the WEO’s “downside scenario” lowering China’s growth “as much as -1.6 percent in 2025.”

The GFSR builds a case for “financial stability concerns” in China. Its economic analysis closely tracks the WEO, but it adds on by addressing the financial vulnerabilities of some provincial governments (with a chart), the deep problems of local government financing vehicles exposed by the property crisis (three charts), and the recent worries about the country’s wealth management and trust industries. The report recommends to Beijing that “contingency planning should be developed to manage potential contagion” in the financial sector. Interestingly, both reports call for fiscal policy to be shifted toward supporting households—a step that the government has resisted—with the WEO suggesting such a policy would be preferable to “increasingly ineffective expensive investment in infrastructure.”

A “big push” and a “first step” toward reaching Africa’s potential

If you keep up with our Bretton Woods 2.0 Project, you know that I’m a numbers guy. Here are a couple of the numbers from my latest issue brief that I’m keeping in mind as I talk with finance ministers and central bank governors on the ground in Marrakesh:

• Severe poverty rates globally declined drastically over the past five decades, from 45 percent to 10 percent. Yet, one-third of the African population still lives in severe poverty.
• Keeping in mind that the fifty-four African economies are heterogeneous, 44 percent of the African population doesn’t have access to electricity. Put into perspective: 80 percent of the total 750 million people who don’t have access to electricity in the world are in Africa.
• And finally, the continent leads in lack of access to other forms of basic infrastructure; 73 percent lack access to safely managed drinking water and sanitation services.

Because of its young and growing population, its massive natural resources, and its strategic location, Africa has tremendous potential that (if unleashed) could move hundreds of millions out of poverty and propel growth in the global economy. For this to happen, Africa needs a big push and deeper engagement from the Bretton Woods institutions and the global investment community. However, African leaders need to take the first step by instituting good governance practices that would attract investors to the continent. The combination of the “big push” and this “first step” can be transformative.

Keep an eye out for small victories

Morocco has spared no effort to make feel delegates and guests welcome in Marrakesh. The conference venue has been constructed especially for this occasion, reminiscent of Bedouin tents, with ample outdoor features that remind delegates of the hot (and harsh) climate conditions that Moroccans and a large part of humanity face in their everyday lives.

In staying with the theme, as is usual for such meetings, there are lofty proclamations about how the world’s problems could be solved if everyone found a way to work together. Expectations abound that the ongoing revamp of the multilateral development banks’s business model and the proposed quota (or capital) increase for the IMF could provide urgently needed resources for climate change mitigation and poverty reduction in developing countries. Observing delegates from all corners of the world engaged in earnest conversations, one could be tempted to believe that larger solutions are in the realm of the possible.

Alas, like a Fata Morgana in the Sahara desert, appearances can be deceiving. Delegates were only given so much room to negotiate by leaders back home. And here the signs are not good, even beyond geopolitical tensions. Climate targets are not being met, and development assistance has been shrinking relative to what is needed. Increasing the capital base for multilateral lending (if agreed) will certainly help, but it is unlikely to be the game changer that many had hoped for.

Nevertheless, the Group of Twenty and Bretton Woods meetings still provide an important room for dialogue in troubled times. Behind the slogans and polished communiques, small victories are often won in private conversations, one country or issue at a time. The value of these meetings sometimes lies more in personal relationships that are established, a fact that was brought home during COVID-19 when professional networks ensured continuity in international dealings until in-person meetings became possible again.

With darker geopolitical and conjunctural clouds on the horizon, the sunny days of Marrakesh may soon fade from memory. But the hospitality of the Moroccan hosts will no doubt carry over to the next time the delegations meet to live up to almost impossible expectations yet again.

Zambia may be days away from a debt restructuring plan. Here’s what it wants other countries to know about dealing with creditors.

With Zambia’s debt restructuring process capturing attention here on the ground in Marrakesh, Atlantic Council Senior Directors Josh Lipsky and Rama Yade pulled aside Zambian Finance Minister Situmbeko Musokotwane to get a sense of what is happening behind the closed doors of negotiations. 

Musokotwane told them that the problems it has encountered in debt restructuring negotiations “to a large extent, [have] been resolved” and that his team is “hoping that [it] will sign the memorandum of understanding soon.” Such a deal is expected this week at the IMF-World Bank Annual Meetings. 

“We’ve moved very far ahead” on it, he added. 

With many countries around the world facing debt distress—after a series of economic crises shocked the world over the past few years—the Zambian finance minister provided advice for other countries gearing up to face their creditors in negotiations. “The most important thing is to recognize and accept you have a problem,” he said. “This sounds easy, but it’s not always the case, especially for governments that created a problem.” He added that properly recognizing debt problems will help a country “reach towards a solution.”  

In addition, the finance minister advised that countries solidify their partnerships with Bretton Woods institutions because “they are the ones that are bridges between you and the creditors” and vouch for a country’s credibility and willingness to undertake reforms. But “it is not enough to have the IMF and World Bank speak for you,” he said. “You yourselves must demonstrate that you’re serious about correcting the situation. You must undertake the reforms.” 

With its young and talented population, Africa has great economic potential; but “demographics are not destiny”

For the first time in fifty years, the Annual Meetings of the World Bank-IMF are taking place in Africa. It’s good timing: The meetings come as the African Union begins its membership in the Group of Twenty, elevating its voice and influence in the global economic order. The fact that the Meetings are being held in Africa is also quite fitting: The continent and its citizens often disproportionately experience the effects of the world’s biggest challenges; but Africa is also home to remarkable opportunity.

In addition, the location of these Meetings is a testament to the resilience of the African continent’s people and the dynamism of its economies and cultures. That was a big theme echoed through the packed “tent” during an IMF opening session yesterday that was kicked off by Managing Director Kristalina Georgieva. At that same event, Moroccan Minister of Economy and Finance Nadia Fettah Alaoui emphasized the important contribution women are making to the dynamism of Morocco’s economy, pointing to a few of the government’s policies that aim to advance women’s economic empowerment and participation. Women trailblazers in African business and finance discussed how—through corporate leadership, investment innovation, and risk taking (along with effective policy)—countries on the continent can capitalize on the energy and talents of their young and entrepreneurial populations in order to foster inclusive growth.

However, as the panelists also noted, demographics are not destiny: Inclusive growth is going to take scale; it’s going to take financing and resources (and dealing with debt); it’s going to take technology, including artificial intelligence; it’s going to take investing in human capital; and it’s going to take effective governance and public trust.

Despite that tall order, there is optimism and inspiration on the ground in Marrakesh. Africa’s promise is clearly palpable.

The recent developments that may throw a wrench into global financial stability

It was telling that the Global Financial Stability Report (GFSR) presentation started not with the usual presentation by the IMF’s financial counselor but went directly into a Q&A session, starting with a discussion of the sharp rise in government bond yields in recent weeks. The IMF’s Tobias Adrian put a brave face on this development, which came too late to be assessed for the GFSR, characterizing it as being in line with monetary tightening and adding that it is not being accompanied by disorderly market conditions.

On second look, however, the risks appear more concerning. The GFSR’s second chapter carries the explicit warning that, in an adverse scenario, a wide set of banks could experience significant capital losses, including several systemically important institutions in China, Europe, and the United States. Adrian’s concluding message, that policymakers could certainly prevent bad outcomes, sounds less reassuring in this context, given that the bond market sell-off was in part driven by political developments in some large countries.

The global growth forecast hasn’t changed—but plenty more has in the World Economic Outlook

The latest World Economic Outlook released in Marrakesh today predicts unchanged global growth of 3 percent this year. Behind that unchanged forecast: The United States and China’s fluctuating growth essentially net out, with the United States receiving a 0.3 percentage-point upgrade and China receiving a 0.2 percentage-point downward revision.

But these forecasts are vulnerable to change courtesy of risks in both countries. The United States’ upward revision may not fully incorporate the impact of a longer period of 5 percent bond yields and 8 percent mortgage rates which have become more likely since late summer; while China’s 5 percent predicted growth is at the top of the current range of estimates of 2 to 5 percent. Both predictions may be optimistic.

What is clearer is the lower global growth trajectory over the next five years—down to 3.1 percent compared with the five-year rate of 3.6 percent estimated before the COVID-19 pandemic. The world economy is not expected to recover the pre-COVID growth trajectory—reflecting the enduring scarring caused by the past few years of global shocks.

Will the World Economic Outlook’s “soft landing” forecast flame out?

The IMF’s World Economic Outlook foresees a soft landing for the global economy, but it also paints a distressing picture for emerging and developing countries and a pessimistic medium-term outlook. The IMF is right to point out the imbalances in the global outlook, but it overlooks how domestic inequality in advanced economies could throw the global economy off kilter. Pent-up anger at the rise in living costs will make it more difficult to conduct fiscal policy, exemplified by political dysfunction in the US Congress and the growing support for radical parties in some countries.

The recent sell-off in bond markets is at least in part a reflection of political uncertainty. The World Economic Outlook has again had the misfortune of coming out too soon after major market developments, but the IMF would do well to address the implications of higher long-term interest rates for the macro outlook and financial stability during the coming days in Marrakesh.

What the “ups” and “downs” of the World Economic Outlook show about the world’s biggest economies

It finally happened. The IMF revised down China’s projected GDP growth for both 2023 and 2024. Many thought this would happen in July, and when it didn’t, all eyes were on today’s release of the World Economic Outlook. But is it revised down enough? Five percent for this year is still very optimistic. Our new report released last week, “Running out of Road: China Pathfinder 2023 Annual Scorecard,” shows just how much China is slowing post-COVID.

What’s interesting is that the US forecast was revised up (to 2.1 percent in 2023 and 1.5 percent in 2024). So this means that on the whole, global growth remains nearly unchanged from the previous forecasts, but the composition has shifted.

But remember: The World Economic Outlook was “put to bed” several weeks ago—so none of this takes into account the impact of the war in Israel. The IMF’s chief economist addressed the issue a few minutes ago saying there could be energy impacts, specifically when it comes to higher oil prices, but it’s just too early to say. The IMF seems to think the impact on energy prices is transitory, but the situation could escalate or expand and suddenly create another energy shock for the global economy. That’s an especially problematic situation for Europe, as it gears up to face the winter and tries to adapt to the lack of Russian energy.

On the bright side, India is forecasted to be the fastest-growing major economy—revised up to 6.3 percent in 2023. I’ll ask their finance minister, Nirmala Sitharaman, about this when I interview her in Marrakesh on Friday.

• Six themes to watch as the Meetings kick off

• Fragmentation is threatening developing economies in many ways. Climate is one of them.

• Two conflicting moods prevail as financial leaders gather

• The pressure is rising on the IMF and World Bank to increase climate financing and restructure debt

• Take calls for international cooperation on commodities markets seriously

• The private sector has a tall order to fill on climate investment

• The world needs realistic fiscal solutions now—before it’s too late

Six themes to watch as the Meetings kick off

As the IMF-World Bank Annual Meetings get underway, our experts put their heads together on the biggest themes to expect from the week. Below are their takes: 

Martin said that the “accumulation of risks” and whether the world can achieve a soft landing after multiple economic shocks will dominate minds across the Meetings.  

On debt restructuring conversations, Martin was skeptical that much would happen beyond “the usual kind of global sparring between China and the rest,” seeing as China has blocked attempts to restructure sovereign debt in the past. Hung said that “the international community here really should put the spotlight on China and put pressure on them to cooperate.” 

Nicole listed climate adaptation and poverty reduction as key themes. Martin pointed specifically to financing for development and climate adaptation, reporting that there are “huge expectations” that there’s going to be agreement on financing multilateral development banks. Hung said to also keep an eye on new World Bank President Ajay Banga to see whether he can convince governments to increase their contributions to the Bank to facilitate climate- and development-related grants and loans to low-income countries. 

Nicole called the Meetings “Banga’s first big show,” explaining that attendees will be watching to see what messages he raises. “But also, the expectations are really high in terms of what he will do with the private sector to really leverage and mobilize private finance,” given his experience in the sector, she said. 

Martin pointed to arguments for restoring a division of labor between the IMF and World Bank, essentially letting the Bank focus on issues such as climate change and the IMF focus on macroeconomic issues. “I would expect this to make some waves,” Martin said. Nicole said that “the concern about mission creep… is real,” but there is still some “role for the IMF to play in development [and] in climate.” Hung agreed, saying that the IMF’s role in the climate-change issue lies in “advising governments of the risks they have to be prepared to deal with, the policy to mitigate the risks,” but “not financing.” 

Each of the experts raised the topic of the proposed “equi-proportional” increase in the IMF’s quota resources, which will require countries to contribute more capital yet maintain the same voting shares—drawing criticism from members who feel as though they are undervalued, such as China and several emerging-market economies. It “may run into some resistance,” warned Martin. But, Nicole argued, “you can’t have inclusive growth if you don’t have inclusive governance.” 

Fragmentation is threatening developing economies in many ways. Climate is one of them.

This year’s IMF-World Bank Annual meetings—held in Africa for the first time in fifty years—must yield practical solutions and policy decisions that will protect low-income and developing economies against the multifaceted impacts of global geoeconomic fragmentation.

Africa’s fifty-four economies are home to nearly 1.4 billion people or 17.4 percent of the world’s population. However, they account for only about four percent of global carbon dioxide (CO2) emissions. At the same time, twenty-two out of the world’s twenty-six poorest economies and twenty-three out of the world’s fifty-four lower-middle income economies are in Africa. Compared to others, these economies are heavily dependent on agriculture, forestry, and fishing for their economies, which is directly and negatively impacted by climate change.

To protect the livelihoods of billions in Africa and elsewhere, large CO2 emitters such as China, the United States, the European Union (EU), and other Group of Seven (G7) economies—together responsible for more than half of global CO2 emissions—must take serious steps to reduce their emissions and speed up their green transitions.

However, the global green transition is facing a headwind that has been gaining strength. Geoeconomic fragmentation between the world’s largest economies and increasing trade barriers worldwide are poised to threaten the global economy; for example, in relation to the trade of environmental goods—which are central to green transition—China and the countries that are part of the G7 and EU are highly dependent on each other. Geoeconomic fragmentation has the potential to massively interrupt that trade and, by extension, the energy transition.

The IMF hit on this topic in its World Economic Outlook this year, in a chapter dedicated to the impact of geoeconomic fragmentation on food security and the green transition. It estimates that with geoeconomic fragmentation, investments in renewable energy and electric vehicles may potentially decrease by up to 30 percent by the year 2030, in contrast to an unfragmented global supply chain. Such a decline would severely slow down the green transition, with significant negative impacts on the climate, especially for the low-income economies that bear disproportionate climate-change effects. This is in addition to the mushrooming economic costs of geoeconomic fragmentation for the continent in terms of higher food and energy prices as well as deadlocks in debt restructuring. Realistic solutions that will protect low-income and developing economies are needed.

Two conflicting moods prevail as financial leaders gather

Flying into Marrakesh this weekend, I could see clearly how the city is split in two. The older part of the city—a medina originating from the eleventh century—is nestled within red clay walls that separate it from the newer parts of the city, where gleaming hotels line the roads and nearly every international brand is represented.

Finance ministers and central bank governors from over 180 countries are gathering right now in Marrakesh for the IMF-World Bank Annual Meetings, the first time the Meetings are being held on the African continent in fifty years. And the mood—just like the city—is split in two.

There’s optimism: The IMF is hinting that tomorrow it will revise its projections upwards and that there is now an increased chance of a “soft landing” not just for the United States, but for the entire global economy. But there’s also worry: War in Europe, and now in Israel, has reminded the fourteen thousand participants at these Meetings how quickly geopolitics can change their calculations.

It is not lost on anyone here that the last time these Meetings happened in Africa was 1973—just days before the start of the Yom Kippur War, which led to an oil embargo that sent the price of gas skyrocketing.

Once again, foreign policy and finance have become intertwined. And that’s why the Atlantic Council has come to the Meetings: to help map how Bretton Woods institutions can navigate this new era of geoeconomics.

The pressure is rising on the IMF and World Bank to increase climate financing and restructure debt

Volatility in global financial markets spiked over the weekend after the Israeli government declared war following an attack from Hamas that killed hundreds of people. Oil prices rose by 5 percent at one point (before snapping back to about 3 percent), stock markets notched down worldwide, and safe haven flows pushed the US dollar and US Treasury bond prices up—adding more pressure on emerging bond markets. On average, sovereign bonds of emerging market countries trade at around eight hundred basis points above US Treasuries—with twenty-one countries facing a spread of around one thousand basis points: Basically, they’re in distress. In particular, Ethiopia is viewed as likely to default next, with spreads approaching five thousand basis points. Sri Lanka and Ghana still languish in their sovereign debt restructuring processes; meanwhile, Zambia seems like it may sign a MOU with official bilateral creditors at the end of this week’s Meetings.

These developments, coupled with escalating geopolitical rivalry, represent a somber backdrop for the opening of the IMF-World Bank Annual Meetings in Marrakesh—making it even more critical for the Bretton Woods Institutions to develop policies that address emerging market countries’ biggest challenges. Those policies should include mobilizing climate financing and speedily restructuring sovereign debt, among others.

Take calls for international cooperation on commodities markets seriously

As the Marrakesh meetings proceed, it will be important not to lose sight of the bleak outlook contained in one of the very first documents released: The third chapter in the IMF’s World Economic Outlook on the potential risks posed by the fragmentation of commodities markets. The analysis (summarized here) warns about the impact of deepening global divisions on commodities trade. This trend—affecting everything from wheat to lithium—could increase inflationary pressures, reduce global growth, and even slow the energy transition.

As the world witnessed after the 2022 Russian invasion of Ukraine, wheat shortages and rising fuel prices hit the poor hardest. As the chapter points out, “the average low-income country imports more than 80 percent of the wheat it consumes,” and over forty percent of those imports come from only three countries. That means that additional shortages caused by “global fragmentation” could sharply increase food insecurity across the developing world. And while the model shows that the overall “global economic costs appear modest” from such disruptions, low-income countries that rely heavily on agricultural imports would be “disproportionately affected.”

Given that in the aftermath of COVID-19 the number of people living in extreme poverty rose for the first time in decades, there should be concern that deepening geopolitical tensions will only increase the plight of low-income communities. In addition, a slower “green transition” will only add to the burden on developing countries as they are among those already feeling the most pain from climate change. It is something to keep in mind as the Meetings this week inevitably produce calls for international cooperation.

The private sector has a tall order to fill on climate investment

Chapter 3 of the IMF’s Global Financial Stability Report emphasizes the need to mobilize private financing and investment to emerging market and developing countries—who would need two trillion dollars annually by 2030 to fight climate change and adapt to its effects, five times more than currently planned $400 billion in climate investments planned for the next seven years. As public investment is limited, private funds will have to make up for 80 percent to 90 percent of the needed climate investment. Private climate investment needs to be scaled up dramatically to fit this tall order; for example, climate investments account for only a portion of the more than $2.5 trillion of assets under the management of environmental, social, and governance mutual funds.

In the chapter, the IMF then proceeded to review a list of oft-repeated measures by emerging market and developing countries to attract private investment—such as strong macroeconomic policies; deepening financial markets; policy predictability within a robust governance framework; better climate data, taxonomy, and disclosure; and risk sharing and guarantees by multilateral development banks. These are good policy ideas, but they’re not easy to implement—and they have not yet been able to generate the level of private climate investment that is needed. Against this backdrop, attention has turned to the World Bank’s Private Sector Investment Lab—comprised of chief executive officers of financial institutions and former officials aiming to bring more private financing to emerging market countries—watching to see whether the investment lab will be able to come up with concrete and actionable ideas.

The world needs realistic fiscal solutions now

In IMF managing director Kristalina Georgieva’s curtain raiser speech last week, she called attention to the estimated global economic loss of $3.6 trillion caused by global shocks since 2020. More distressingly, she pointed out, the losses have been distributed very unequally, falling disproportionately on vulnerable developing and low-income countries while only one country—the United States, with the help of expensive fiscal rescue measures—has seen its gross domestic product rebound over pre-COVID levels. Now, fiscal risks are acute for all countries, and there is an urgent need for governments to rebuild fiscal space to be in a position to react to and rebound from future shocks. Furthermore, deteriorating international cooperation—due to rising geopolitical competition and distrust—has fragmented the global economy, slowing its growth.

While having described very concisely the challenges, Georgieva didn’t fully detail realistic policy measures to help the world rebound from this decade’s shocks and crises. There is an urgent need to raise two trillion dollars (needed annually, according to estimations) to help developing and low-income countries adapt to climate change and meet sustainable development goals. Formulating these policies at this week’s meetings is mission critical for the IMF and World Bank: Their failure to spur change within the next ten years would position the world on a trajectory toward increasing fiscal risks.

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Introduction

The economic and military rise of China presents Western democracies with a challenge unlike any they have faced since the inception of the Bretton Woods system.¹ The Warsaw Pact was too weak to question the West’s economic dominance during the Cold War, but China—with its successful brand of state capitalism—has turned into a formidable competitor. It has become the largest trade partner for many countries, and the Belt and Road Initiative (BRI), despite its shortcomings, has made geopolitical inroads into the Global South that the West has struggled to match.

As the West has begun to respond to the challenge, concerns about economic fragmentation have intensified after Russia’s attack on Ukraine and increasing military tensions in the Taiwan Strait. Both China and Western countries are considering means to shore up critical supply chains and reduce strategic dependencies on each other. Global trade volumes have not yet been affected in a significant way, but a growing web of trade and investment restrictions has had a chilling effect on economic sentiment.

This dynamic also throws a shadow over the work of the International Monetary Fund (IMF) and World Bank, as well as other institutions created to support free markets and open trade. Nations that were once dependent on multilateral institutions for development funding, investment projects, and emergency aid now have the opportunity to secure economic and financial assistance from other creditors with less benign interests. Moreover, a shift toward protectionist trade policies, and the sanctioning of foreign exchange reserves by the United States and its allies, has diminished the West’s standing in many capitals around the world.

On the other hand, the US dollar’s central role in the international monetary system, of which the Bretton Woods institutions are an integral part, still provides the West with a significant advantage. The renminbi may challenge the dollar’s dominance at some point, but China’s efforts to internationalize its currency have so far been met with only modest success.

Nevertheless, the Bretton Woods institutions clearly lost influence in recent years. With many emerging markets enjoying stable market access even during the COVID-19 pandemic, the IMF and World Bank have been left to work mostly with low-income countries and a few larger countries with chronic economic problems. Many of those countries require debt restructuring to allow multilateral loans to resume, but China’s long-delayed debt workouts are effectively blocking the Bretton Woods institutions from fulfilling their mandate. Moreover, program countries question why they should subject themselves to the advice or conditionality of institutions in which they have little say, given that governance arrangements remain strongly in favor of the United States and other Group of Seven (G7) countries.

As a result, both institutions have been in search of a new role for themselves. The World Bank (along with other multilateral development banks) is looking to leverage its capital base to step up climate and development loans, and the IMF has repurposed dormant Special Drawing Rights (SDR) reserves provided by its richer members to increase its concessional loan volume, a model that could be also adopted by other multilateral lenders. Both approaches contain elements of financial engineering, reflecting tighter budgets in member countries and diminishing political support for development aid, even among traditional donor countries.

These efforts are intended to help meet large climate and development financing needs in the Global South. Moreover, multilateral institutions can be instrumental in attracting private capital to the climate fight, provided that loans fulfill their objectives and are being repaid with sufficient return. Recipient countries will, therefore, need to put any additional funding to good use, an issue that has so far attracted less attention than the intricacies of leveraging development banks’ capital base. Bretton Woods shareholders should encourage an effective division of labor among the institutions, insist on sensible loan conditionality, and, where necessary, actively support governments in meeting program targets.

However, stepped-up climate lending will not be enough to win the struggle for hearts and minds in the Global South. Given China’s current resource advantage, Western countries also need to make better use of the IMF and World Bank where doing so is in their interest. For example, to incentivize critical reforms and boost growth prospects in partner countries, multilateral financing should be flanked by co-financing, investment finance, specific trade preferences, or other forms of geopolitical support that increase the chances of program success. Unlike previous efforts, this attempt has to be meaningful and better coordinated between Western shareholders for maximum effect and burden sharing.

The example of Ukraine has set a precedent for how the institutions can be part of a strong allied effort to support a partner country within their multilateral setting. If applied more broadly, this approach could provide incentives for other governments to return to multilateral institutions, instead of China, for support. However, Western shareholders must be careful to stay within the institutions’ rules-based framework and operate on a consensual basis, where possible. The multilateral character of the IMF and World Bank is an international public good that the West would be well advised to preserve.

If and when the political climate were to turn back toward multilateral collaboration, the Bretton Woods institutions could play an important role in helping the global economy to defragment, just as they did in the years after World War II. At that point, voting shares in the institutions should be adjusted to correct the significant underrepresentation of China and other emerging markets. In the meantime, the West should identify other ways to raise the influence of the Global South, including on the two boards and in the selection of management positions.

I. China’s rise and the mulitlateral order

China rose to become the world’s second-largest economy on the back of a mercantilist economic policy that exploited Western countries’ commitment to free trade and open markets. Although a member of the World Trade Organization (WTO) since 2001, it successfully leveraged a comparative advantage in labor-intensive manufacturing through unfair trade practices to become the world’s major exporter.

While benefiting from the existing multilateral international order over several decades, China has also been turning inward for some time to replace its dependence on net exports with domestic sources of growth. Aggressive trade measures by the United States may also have prompted China to double down on domestic demand and support for domestic innovation. In 2021, China’s Communist Party embraced a strategy of “independence and self-reliance” that seeks to both establish global leadership in key technologies and secure access to the raw materials needed to reach this objective. As part of thisstrategy, China has been developing partnerships with countries in the Global South and is building up military strength, challenging US naval dominance in the Western Pacific and elsewhere.

The Belt and Road Initiative

International finance is one area where political tensions between the two camps are playing out. China has turned its BRI into a major strategic initiative to expand its presence and deepen diplomatic relations with a range of countries around the globe, predominantly in Africa. Besides generating diplomatic goodwill and deepening political relations, the initiative has helped China invest parts of its large dollar-denominated reserve holdings, estimated at up to $6 trillion, as well as promote the use of the renminbi abroad.

Although the BRI is nominally a tool to assist global development, China itself has benefited from it in major ways. It has been able to generate employment by exporting construction services to build large-scale infrastructure—including railways, highways, ports, and airports—financed by Chinese financial institutions. In many cases, this infrastructure facilitates the transport of goods destined for Chinese markets, such as oil or raw materials. Indeed, with China being a major energy importer, some analysts have seen the BRI predominantly through the lens of China’s economic and military security benefits.

From the perspective of recipient countries, the BRI has been more controversial. It has been criticized over shoddy project implementation, lack of transparency, onerous financial terms, and a growing debt burden for recipient countries. In some cases, Chinese lenders have financed prestige projects of local political leaders that had few tangible benefits, fostering corruption and debt dependence. In cases where countries encountered difficulties in repaying their loans, China has insisted on having first recourse to export revenues and was slow to restructure excessive debt burdens, which has generated considerable hardship for countries such as Angola, Ethiopia, and Zambia.

More recently, China’s state lenders have reduced their BRI loans, facing increasing pushback, but China’s commercial banks appear to have taken up the slack. China, therefore, remains a key lender for emerging markets and developing economies, rivaling the activities of the Bretton Woods institutions and multilateral development banks in the Global South.

The battle for influence in global institutions

China is using its growing economic and geopolitical clout with the Global South to actively reshape international relations in its favor. On the one hand, China has been seeking greater influence in existing multilateral institutions. While stepping up its donor engagement in the Bretton Woods institutions, it has gained more influence in the United Nations (UN), where it benefits from the “one county, one vote” principle. For example, China currently holds the leadership of four of the UN’s eighteen specialized organizations and agencies. These include agencies that would provide China with platforms to advance its own standards in several key technologies and economic sectors, potentially securing competitive advantages over Western countries. On the other hand, when facing opposition within multilateral institutions, China has sought to use multilateral or bilateral mechanisms to either bypass existing institutions or create new ones, such as the New Development Bank (NDB) or the Asian Infrastructure Investment Bank (AIIB), to increase China’s influence in developing global rules and standards.

China is not the first country to use economic leverage to gain global influence, of course. The United States, as well as the United Kingdom (UK) and France with their historical colonial ties, have followed similar strategies in the past. In principle, the governance arrangements of the Bretton Woods institutions are flexible enough to accommodate shifts in countries’ global economic and financial relevance. However, China’s approach to human rights and political and individual freedoms, and the degree of state control its one-party system exerts on the economy, are fundamentally incompatible with the liberal economic foundation that underlies the Bretton Woods institutions. This incompatibility has become a major stumbling block for governance reform, a major point of contention in the two institutions.

The “fence sitters”

In the shadow of geopolitical tensions between China, Russia, and the West, a number of larger (and mostly wealthier) emerging markets have begun to chart a more independent political course in recent years. As countries like Brazil, India, and Indonesia, along with Saudi Arabia and the Gulf states, have gained in economic weight in recent years, they also became more successful in maintaining macroeconomic stability and reducing the need for official and multilateral assistance. Despite limited room for fiscal policy, most of these countries successfully withstood the COVID crisis and a sharp rise in US interest rates that might have warranted programs with the IMF in earlier years.

Reflecting their economic strength, as well as newfound confidence, these countries have been quietly assuming a larger role in several multilateral organizations. They have also been careful not to become entangled in the battle between major powers, instead keeping their policy options open and making decisions on a case-by-case basis. This independence become strikingly evident in the voting outcome of several UN resolutions that condemned Russia’s invasion of Ukraine in early 2022 (see chart). Although the resolutions were passed with the votes of around 80 percent of UN member countries, the majority was much smaller when measured in terms of global economic weight (between 64 and 72 percent) or world population (43 percent), owing particularly to the abstentions of India and China.

This outcome does not imply that all of these countries share autocratic tendencies or seek to curb relations with the West. Rather, the willingness to deviate from the West stems from long-standing economic and geopolitical relationships with China and Russia that countries are careful not to jeopardize, echoing the Non-Aligned Movement from Cold War days. Moreover, countries now have more room for opportunistic policies that enhance their national interests, as well as their governments’ domestic standing. Some leaders play on what Daron Acemoglu has called the “new nationalism,” building their careers on historical grievances against Western powers and the erosion of long-standing traditions and social norms as a result of globalization.

So far, the rise of these “middle powers” or “fence sitters” has played out largely within the existing UN and Bretton Woods architecture. This could be about to change, however, given the reported interest of more than forty countries in joining the BRICS (Brazil, Russia, India, China, and South Africa) bloc and its affiliated financial institution, the NDB, headquartered in Shanghai. There has also been speculation that the BRICS countries might discuss the potential establishment of a common currency to enable member countries to circumvent US sanctions in their dealings with Russia and China.

Figure 1. UN Resolution ES-11/L.5 Supporting Ukraine’s Territorial Integrity (By share in global GDP and world population)

II. The slow decline of the Bretton Woods Institutions

What do these changing geopolitical circumstances imply for the Bretton Woods institutions? To answer this question, it is best to start from where the institutions stand today, less than two years after the end of the COVID pandemic.

The Bretton Woods twins’ original mandate was to help with reconstruction after World War II and to prevent a repeat of the Great Depression. The IMF, in particular, was to address economic and financial imbalances to preserve the efficient functioning of a gold-based fixed exchange-rate system, enabling the expansion of free trade and higher long-term growth. The system hardly worked as intended, however, and the United States moved the dollar off gold in 1971. Most importantly, the United States and other members were not prepared to subsume sovereign interests under the authority of international institutions, even when they had a controlling influence on their boards.

The IMF and World Bank nevertheless played an important role during the rapid phase of globalization after the collapse of communism. Acting as firefighters during major crises, their programs provided important liquidity support during the Latin American debt and peso crises, the Asian crisis, the global financial and European crises, and, more recently, the COVID crisis.

Retreat from multilateralism

The institutions have not been without controversy, of course. Opposition parties of all colors have always accused the Bretton Woods institutions of pushing for excessive austerity, and the policies of the “Washington Consensus” became synonymous with pictures of street protests and abject poverty in developing countries. Its loans still carry a stigma that countries are trying to avoid at all costs, and calls for market reforms and tight fiscal budgets are undermined by nationalism and protectionist policies moving back on the agenda in industrial countries, too. The World Bank has been subjected to criticism for the environmental consequences of its lending programs, and for not doing enough to help the fight against climate change and bring poverty down on a global scale.

Moreover, the Bretton Woods twins have long ceased to be the towering giants in their respective fields of work. Their staff is still composed of excellent economists, valued as technical advisers to central banks and governments, and their training courses and technical assistance are a global public good that remains in high demand. Nevertheless, compared to even a decade ago, hands-on macroeconomic and development expertise is now in much larger supply, including in central banks, academia, think tanks, and global financial institutions. There have also been concerns about the IMF’s repeated failure to detect and prevent the buildup of large economic imbalances, including the crises in the 1990s and 2000s, as well as the sharp increase in post-COVID inflation.

Many countries did benefit from the work of the two institutions, of course. In fact, most lending programs achieve at least a modicum of success, especially when they are based on a strong societal consensus (as in Jamaica, for example). On the other hand, because emerging markets already knew since the 1997 Asian crisis that they needed larger reserve cushions to protect themselves against capital outflows, Bretton Woods loan volumes have come down significantly in terms of gross domestic product (GDP) in recent decades (see chart).

Figure 2. World Bank and IMF lending (% world GDP)

More broadly, major shareholders’ political support for multilateral institutions and their policy advice has been steadily on the decline. This has been most visible in the area of free trade, especially after the United States shut down the WTO’s Appellate Body in late 2019. As for the IMF, the task of coordinating economic and financial policies for the world economy shifted first to the Group of Seven (G7) and then to the Group of Twenty (G20). In these forums, the world’s largest economies discuss their agendas under the spotlight of a global audience that has long lost interest in the minutiae of board discussions at the Bretton Woods institutions.

Outdated governance arrangements

The rise of the G20 reflects, among other things, that the governance arrangements of the Bretton Woods institutions are fundamentally out of touch with economic reality. Using the IMF as an example, the last agreement to adjust capital and voting shares dates to 2010, aimed at achieving a shift of five percentage points from industrial to emerging markets. This agreement took more than five years to implement, due to a lengthy ratification process in the US Congress, and no further adjustment has taken place since.

The IMF regularly calculates how much current voting arrangements are out of line compared to a formula that has long served as a yardstick for each country’s quota, or capital share. This “calculated quota share” is a weighted average of nominal GDP (50 percent), the sum of receipts and payments in the external current account (30 percent), the variability of current account receipts and net capital flows (15 percent), and official reserve holdings (5 percent).²

The aggregate misalignment between actual and calculated quota shares was about fourteen percentage points in 2020, half of which were accounted for by China (Chart X). As a group, member countries of the Association of Southeast Asian Nations (ASEAN) are also undervalued, reflecting their strong growth in recent years. On the other side, many more countries are overrepresented on the IMF board, with the United States, Japan, and France, along with other European countries, accounting for around 40 percent of the overvaluation.³

Figure 3. IMF quota out-of-lineness (In percentage points)

The difference between quota shares and their formula-derived values is only half the story, however. Historically, the prime beneficiaries of the current quota formula have been small European countries with open economies. They are benefiting from the fact that GDP only accounts for half of the calculated share, with the other half reflecting a country’s participation in international trade and reserve holdings, including intra-European Union (EU) commerce.

This discrepancy becomes evident when comparing the UK and EU countries’ combined voting share (about 30 percent) with that of the United States (17 percent)—although both economies are broadly of the same size and have a similar degree of economic openness. The large influence of Europe is further enshrined by the fact that smaller European countries have formed constituencies with countries in the European periphery that guarantee them a seat on the executive board on a fairly regular basis.

The current stasis of the quota debate can be roughly described as follows.

• First, as long as the United States remains the issuer of the world’s major reserve currency (and, thus, the main backer of the IMF’s Special Drawing Rights), it will be unlikely to give up its veto power. It would otherwise risk ceding control over at least some aspects of its money supply to the IMF, given that most borrowers use their programs to gain access to US dollars. The United States would, therefore, maintain a voting share above 15 percent.⁴
  Second, a major block of votes would need to shift from industrial countries to emerging-market countries. This would involve a substantial decline in the share of European countries and Japan, which would be subject to enormous political obstacles.
• Third, China is unlikely to agree to any outcome that will not see its voting share increase. This prospect looks remote, however, given the increase in geopolitical tensions. One formidable obstacle in this regard is the need to secure US congressional approval, but ratification would also be an uphill political battle in other countries.
• Fourth, the negotiations are complicated by the fact that many industrial countries, large and small, contribute considerable resources to various borrowing agreements and trust funds that allow the IMF and World Bank to operate as they currently do. These contributions might be politically at risk once countries have a decreasing influence over the institutions.

A related debate concerns the voice of low-income countries at the two institutions—in particular, those in Africa. At the IMF, there are currently two executive directors from the region, broadly representing French- and English-speaking countries. At the World Bank, Angola, Nigeria, and South Africa jointly hold an additional seat. However, African countries have long argued for additional seats at the two boards, which would increase their voice and reduce constituency sizes to a more manageable level.

III. Benign neglect? The role of major shareholders

Debates about the governance of the Bretton Woods institutions would presumably be less intense and bitter if the institutions were seen as fully delivering on their mandate of helping member countries achieve stronger and stable growth, reduce poverty, and promote sustainable development. It is hard to deny, however, that the IMF had some key responsibilities taken out of its remit by the G20, that the World Bank has been left underfunded relative to what it has been expected to achieve, and that China has been blocking lending activities by interfering with orderly debt-restructuring processes. In that sense, major shareholders bear a key responsibility for the gradual decline of the institutions. It was in particular the 2008 global financial crisis that exposed a major shortcoming in the IMF’s role as global lender of last resort. At its core, the crisis originated in the US and European (shadow) banking systems that catalyzed unsustainable booms in the US and European periphery.⁵ As an institution lending to sovereign nations, the IMF had neither the funds nor the tools to provide liquidity injections of sufficient magnitude into the global financial system. Instead, it fell to the US Federal Reserve to keep financial institutions afloat during the crisis, both by increasing money supply in the United States and by extending swap lines to other central banks with large dollar needs. The IMF and World Bank were left to deal with the aftermath, helping countries that had neither access to the major central banks’ swap network nor the reserves to weather the shocks by themselves.

Figure 4. Financial firepower (trillions of USD)

The 2008 crisis also provided a boost to regional initiatives aimed at mitigating the impact of global shocks. Led by the European Stability Mechanism and the Chiang Mai Initiative Multilateralization (CMIM), regional financing arrangements (RFAs) have become an important part of the global financial safety net, relegating the IMF to third place in the hierarchy of global emergency financing (see chart).

This development reflects individual policy choices of large IMF shareholders. Central bank swap lines were set up to meet major central banks’ domestic policy objectives, and large members of the euro area  as well as Japan, China, and South Korea were instrumental in the establishment of their regional safety nets. This was done partly for want of adequate global alternatives, and partly in response to political pressure for larger independence from the United States, which had until then been at the center of global rescue efforts. One could regard this as an early sign of geoeconomic fragmentation, caused not by geopolitical tensions but, rather, by a growing sense of regional identity in the wake of crisis seen as originating in the United States.

Weak oversight of large programs

A similar pattern could also be observed during the COVID crisis. While RFAs on the whole were not activated during the pandemic, the number of central bank swap lines increased, including on the part of the People’s Bank of China, which has increasingly become a lender of last resort in its own right. The IMF and multilateral development banks were called upon to help countries that did not have large-scale access to either source of financing.

Figure 5. IMF credit outstanding by borrower, May 2023

A few of those countries benefited from the IMF’s Flexible Credit Line, receiving sizeable precautionary arrangements that involve no explicit conditionality, but most other countries had to apply for standard IMF and World Bank programs. While many of those have been successful, the lenders are also dealing with a significant number of problem loans.

Troubled programs include several emerging markets that have received fairly sizeable loans, both in absolute terms and relative to their IMF quotas, which is the common yardstick used to ensure equitable access to the IMF’s resources (see chart). These countries have repeatedly asked the IMF for support in recent years, given their lack of durable market access. IMF conditionality should, in principle, have helped countries overcome their political and structural obstacles, but this has demonstrably not been the case.

Argentina, for example, has done little to reform its economy over the years, keeping a large share of its citizens dependent on favorable commodity prices and public handouts. Egypt’s programs have similarly failed to produce the hoped-for impulse to export-led growth, not having reduced the military’s large role in the economy. Pakistan has been caught in a cycle of on-and-off programs with the IMF for decades, but the underlying fiscal and structural problems remain unchanged, with the army frequently interfering in the political process. Ecuador will likely need another IMF program as the repayments from the previous program fall due, with the political future of economic reforms much in doubt.
These developments suggest that support for the principle of “financing against reforms,” supposed to be the bedrock underlying the IMF’s lending operations, is crumbling among IMF’s shareholders. This complicates program negotiations with other countries, who would insist on evenhanded treatment; it creates financial risks for the institution; and, most importantly, it does not help the citizens of program countries who fail to see an improvement in their economic situation. Without the support of major shareholders—both inside the board room and on a bilateral level—IMF staff simply do not have the political heft to convince reluctant authorities of the need for major reforms. This is especially true where political pressures or management interests favor loan disbursements being paid out in time.

Lack of development finance

The Bretton Woods institutions appear similarly unable to help the developing world escape an endless cycle of underinvestment in human and physical capital, trade shocks, rising debt, political instability, and violence. Apart from a few countries—including Nigeria and other so-called “frontier markets”—prospects for other countries continue to look bleak. Out of thirty-nine countries now classified by the IMF and World Bank as “in debt distress” or at a “high risk of overall debt distress,” twenty had received significant debt relief through the Heavily Indebted Poor Countries (HIPC) initiative around the turn of the millennium, indicating the sustained presence of macroeconomic difficulties (see Table 1).

Table 1. LIDCs eligible for concessional Bretton Woods loans, July 2023

This outcome certainly reflects idiosyncratic problems in each country, but a lack of concessional financing has also contributed. According to the Organisation for Economic Co-operation and Development (OECD), official development assistance (ODA) in real terms reached an all-time high in 2022, but humanitarian aid and the domestic cost of absorbing growing numbers of migrants and refugees accounted for much of the increase in recent years. By contrast, bilateral ODA to low-income and developing countries fell slightly in real terms, and for sub-Saharan Africa it declined by 8 percent last year. During COVID, the Bretton Woods institutions’ emergency loans (free of explicit loan conditions) and a $650-billion SDR issuance in 2021 provided some relief, but the small amounts per country demonstrated yet again how far the poorest countries have been left behind by the rest of the world.

Finally, while multilateral institutions have long been the largest source of financing to low-income and developing countries, they are now facing three problems in stepping up their lending volumes. First, the lack of donor financing to pay for interest-rate subsidies has constrained their concessional lending capacity. Second, African countries have also become more reluctant to accept outside policy prescriptions—unsurprising in light of the example set by larger countries—which reinforces concerns about the effective use of financial assistance and hurts fundraising prospects. And third, the high indebtedness of poor countries has placed limits on the amounts of financing that multilateral institutions can provide without more fundamental debt restructuring.

China’s block on debt workouts

The last point puts the spotlight squarely on China’s ambivalentrole as the largest official lender to developing countries. To highlight how much the sovereign debt landscape has shifted, Chart X shows that multilateral institutions and Western countries (organized in the Paris Club of official creditors) accounted for about 85 percent of all loans to low-income countries in 1996.⁶ That share had fallen to 62 percent by 2020, replaced by non-Paris Club creditors (mostly China), bondholders, and other private creditors.

These changes diminish the leverage that multilateral lenders have in promoting sound policies and good governance. First, governments now have the possibility to receive sizable bilateral loans without major policy conditions (even if Chinese lending terms overall are much less concessional and may include unrelated political conditions). Second, once China is a major official creditor, the process of debt restructuring tends to be much slower than under the Paris Club framework.

This is because, by statute, the Bretton Woods institutions are unable to lend if a country’s debt is viewed as unsustainable. Any subsequent debt restructuring used to be a well-defined process under Paris Club rules. With China and other non-Paris Club members involved, however, the process is defined by the 2020 G20 Common Framework, a much less structured exercise that is not binding on participants and leaves significant room for bilateral discussions. After the first cases took several years to move forward, the pace of restructuring may accelerate after creditors reached agreement on Zambia in June 2023. However, China still retains considerable leverage as a key creditor and trade partner to many countries. While the Common Framework may provide some reprieve, there is reason to expect further challenges to the Bretton Woods system. China and Russia already tried to increase their global influence by expanding the BRICS group, and China may step up lending though the NDB, which recently doubled its loan capacity from $50 million to $100 billion.⁷

Even so, there is no evidence that China will be more successful in helping creditor countries achieve higher sustainable growth paths than those under the existing multilateral system. On the contrary, experience with the BRI suggests that advantages accrue mainly to China in the form of exports of construction services, access to raw materials, and deepening security and military ties, often with corrupt government elites at the expense of the broader population.

Figure 6. Creditor base for the PRGT-eligible countries: 1996 vs. 2020 (Percent of total external debt)

A wake-up call

Taken together, these trends do not bode well for the future of the multilateral system. Outdated governance arrangements and underperforming programs with large politically connected member countries are not a recipe for success in a competitive geopolitical environment. Moreover, as China has begun to set up a parallel financial universe with countries in the Global South, the Bretton Woods institutions’ influence on policy decisions has been declining.

The IMF and World Bank, therefore, need to find a new modus operandi if they are to remain relevant in today’s geopolitical environment. It is possible that the G7 and the Western allies may have taken the institutions for granted for too long, deluding themselves that a hands-off approach to problems outside the advanced- and emerging-market universe could be left to technocratic institutions with little oversight. If so, the experience of the past few years should have served as a major wake-up call.

IV. Climate finance as an opportunity

The declining relevance of the Bretton Woods institutions has not gone unnoticed inside the institutions, or by civil society. Under pressure from many corners, they recognized early on that they needed to become more active in the fight against inequality, and—most of all—support global efforts to combat climate change.

The latter has now become a major focus for the institutions to redefine themselves. It starts from the observation that financing needs in the Global South are extraordinarily high. According to World Bank President Ajay Banga, trillions of dollars annually would be needed to meet climate and development goals in the developing world. As this imperative has not yet translated into major funding increases, given tight budgets everywhere, the institutions and their major shareholders are now looking for additional sources of money.

In particular, the G20 has embarked on a discussion to allow multilateral development banks to extend more loans on their existing capital base, subject to preserving high credit ratings that allow loans to be extended at concessional interest rates. Several countries have also donated parts of their SDR holdings to increase the amount of concessional loans that multilateral organizations can provide, while the World Bank is exploring ways to attract private capital to fund additional climate loans.

…But climate finance needs to be sustainable, too

Amid the newfound momentum, however, it must be kept in mind that the IMF and World Bank are financial institutions. This means that they will only be able to serve as effective facilitators, let alone catalysts for attracting private capital, if loans are being repaid and they are able to preserve their own financial standing. This aspect is often neglected in discussions of ever-growing financing envelopes, and one should guard against unrealistic expectations. Ajay Banga, the newly elected World Bank President, summed it up well by saying that it would be important to achieve “a better bank” before asking for a bigger bank.

Some activists might hope that loans could eventually be forgiven or “cancelled,” implicitly transforming official loans into climate or development grants. However, setting up recipient countries for a repeat of the HIPC experience of the late 1990s and early 2000s would be highly detrimental to their development objectives. Instead, shareholders of multilateral institutions should hold their management responsible for proper program design, while asking recipient countries to spend funds appropriately and live up to their policy commitments.

What should be the role of the Bretton Woods Institutions?

Meeting and managing the demand for climate and development finance should, in principle, play to the strengths of the Bretton Woods institutions. They should be able to intermediate additional climate funds by applying their-time tested model of cooperation.

• The project-based nature of climate finance implies that multilateral development banks should be on the frontline assisting countries in project selection, design, and implementation. Funds should be spent in a way that generates the largest possible return for the country’s citizens. This requires a realistic assessment of a country’s implementation capacity and the long-term costs and benefits of projects that could be financed.
• Using its newly developed analytical toolkits, the IMF should help countries manage the macroeconomic effects of a significant pickup in borrowing and project spending (including possible exchange-rate appreciation, wage and price pressures, or a pick-up in rent seeking and corruption). The IMF would also signal to lenders that their funds are well spent and debt remains sustainable even under new climate challenges, helping to unlock more financing. This would be mostly in the context of IMF surveillance, but traditional loans would also remain available.

Governments should have powerful incentives to ask for climate funds. For many countries, mitigating the effects of climate change is of an existential nature, which should help concentrate political support behind any measures that may be needed to qualify for additional loans. And improvements in public expenditure management, governance, or debt transparency, for example, would enhance a country’s capacity to attract private-sector capital as well, possibly kickstarting a virtuous circle that could lift growth prospects and help countries make progress toward their Sustainable Development Goals.

The IMF’s climate facility: Put it back where it belongs

As shareholders of the two institutions contemplate a way forward, however, they would be well advised to correct an earlier decision that conflicts with the optimal division of labor. The first institution to introduce an SDR-backed lending facility for climate purposes was the IMF, an institution normally not engaged in project finance. The fund crossed that line in 2022 by setting up its Resilience and Sustainability Trust (RST) to provide long-term concessional financing with a twenty-year maturity for climate purposes.⁸ The RST gives access to 143 countries, including China and Russia, for example, but also a group of highly indebted small island economies not otherwise eligible for concessional loans. There have been ten recipients so far, with a total loan volume of about $4 billion.

Unfortunately, the setup of the RST is too complex for its own good. RST recipients are required to negotiate a regular IMF program in parallel, which is intended as a financial safeguard for donor countries. This creates an important conflict of interest. On the one hand, there are strong expectations for the RST to be quickly channeled to intended recipients. On the other hand, countries would probably not apply if they were faced with hard policy demands, given relatively modest loan amounts. Especially when tied to a moral cause such as climate reparations, this raises questions about program quality and makes it hard for lenders to halt loan tranches if borrowing countries fail to comply with the terms of a loan.

One important motivation for creating the RST at the IMF came from shareholders’ dissatisfaction with the World Bank’s climate work under its previous president. However, the bank is already heavily involved in defining the scope and conditionality of RST climate objectives, and it is now again under competent leadership. It would, therefore, be sensible to disentangle the link to full-fledged IMF programs and transfer the remaining trust fund resources to the World Bank when the facility is up for a full review in 2025. This would not change the ultimate use of those funds, but it would allow each institution to refocus on its respective strengths, eliminate a bureaucratic nightmare caused by the RST’s dual-program structure, and permit climate-specific project skills to again be concentrated in one institution for maximum synergy.

Good geopolitics, but not enough

Western countries are not only morally obliged to help the Global South advance on its climate transition; it is also a geopolitical necessity. Following the delayed provision of vaccines and other medical supplies during the pandemic, a failure for the West to provide urgently needed climate assistance could badly backfire. On the other hand, hopes for a meteoric increase in available climate funds (and their potential to quickly deliver large-scale climate victories) are likely to be disappointed. Developing countries are also likely to argue that any funds being provided reflect only a small share of the cost their countries have suffered from climate change as a result of historic carbon-dioxide (CO₂) emissions.

Climate finance will, therefore, not solve the Global South’s resentment of overbearing Western countries—but not pursuing it would make things worse. The only option for multilateral development banks is to increase their funding capacity and serve as a catalyst for private investment, based on well-designed programs. Alternative means, such as raiding the capital base of the institutions, liquidating the IMF’s hidden gold reserves, creating an oversupply of SDRs, or watering down lending standards would not be sustainable, and should be firmly resisted. It would compromise the long-term ability of multilateral lenders to both help the global climate effort and fulfill other important tasks under their mandates.

V. The need for plurilateral action

The West has a strategic interest in keeping the Bretton Woods institutions strong, having invested so much financial and intellectual capital in them over the past eight decades. As the global economy is undergoing massive structural change from political, demographic, and technological factors, there is no shortage of areas to analyze, and new crises will continue to lead to requests for financial support. But if advice is not being followed and programs do not succeed, the institutions will continue to shrink in relevance, which would play into the hands of the West’s geopolitical rivals.

A first step would be to reflect on how the institutions could better fulfill their core mandate, from economic truth telling to project financing and macroeconomic adjustment programs. There is considerable room to streamline the work agenda of the institutions, which both suffer from mission creep and procedural requirements that dilute staff resources and affect output quality.

To be useful in a fragmented global environment, policy advice would have to become more pragmatic and flexible, requiring new analytical work to obtain a better understanding of the impact of industrial policies and fragmentation on individual countries and the global economy. Moreover, the two institutions could explore the role of technological and market solutions for the green transition, as well as the growth and distributional consequences of the race for critical minerals. They should also regularly remind their member countries that open markets and a level playing field remain in the long-term interest of all.

Stronger incentives for better programs

Even more important from a geopolitical perspective, Western shareholders need to help the IMF and World Bank make their lending programs work better. This will require a new approach, given the diminishing incentives for governments to heed policy prescriptions as part of their lending programs.

A major problem in programs has been that incentives to adjust are time inconsistent: there is a short-term downside from fiscal and structural reforms, but gratification from higher growth is often delayed until a program has concluded. A game-theoretic view suggests that, once a program has gotten under way, the most stable outcome is for governments to underperform and for lenders to continue to pay out nevertheless. The result can be a series of failed programs that perpetuate high debt and low growth.

To change this vicious cycle, countries require additional support measures (beyond program financing) to have a better chance at using their programs to achieve higher growth. For many low-income countries that already undergo adjustment programs, the availability of significant climate funds could play such a role, as discussed above.

When the geopolitical case for additional support may be particularly strong, the West should consider more far-reaching options. For example, to enhance a country’s growth prospects, the United States or Europe could grant countries preferential access to their domestic markets, large-scale investment financing, or enhanced access to important technologies. Other countries might ask for geopolitical support of some kind—all of which should be tied to the successful program implementation. The point is not to leave the Bretton Woods institutions alone in working with these countries, but to supplement programs with bilateral or plurilateral measures that could have a tangible economic impact.

This approach had some precedents in the euro area crisis, where the IMF played an important role in program design but was supported by the common effort of euro area member countries, involving both financing and peer pressure to move the negotiations forward. In the end, even a reluctant Greek government was convinced that staying inside the euro area was in the best interest of the country, which eventually put the Greece on a sustainable track.

More recently, this approach has been applied in Ukraine, where a G7-centered coalition provided the IMF with assurances that the country would be able to repay its loans to the institution. The program could not have proceeded otherwise because IMF conditionality, focused on economic policies, is not able to mitigate the extraordinary risks from an ongoing military conflict. With these assurances, the IMF has been able to work out a regular macroeconomic program—focused on budget implementation, inflation, and governance—even with significant uncertainty around Ukraine’s macroeconomic parameters.

The Ukraine program led to some complaints about a lack of evenhanded treatment for less connected borrowers because it was preceded by a minor change in the IMF’s lending rules.⁹ This is a sign that Western shareholders need to be careful to stay within the consensual character of the institutions, making it attractive for emerging markets and low-income countries to remain in the multilateral fold. In other words, to support their allies, Western countries need to pursue their geopolitical objectives in a plurilateral way that is compatible with the IMF and World Bank’s multilateral architecture.¹⁰

Tying into the New Washington Consensus

Convincing governments and parliamentarians in Western capitals to step up support for countries or grant preferences of the kind just described will, of course, be difficult. However, if the West is serious about living up to the challenge posed by China, it will need to back up its determination with sufficient resources. Previous G7 initiatives, such as the Blue Dot Network or the Partnership for Global Infrastructure and Investment (PGII), have been fairly ineffective so far, and integrating the Bretton Woods institutions in this strategy will be critical.

As far as the United States is concerned, the seeds for such an approach have already been planted. In recent speeches, Treasury Secretary Janet Yellen called for a friend-shoring approach to secure key supply chains and raw materials from global partners, and National Security Advisor Jake Sullivan outlined the New Washington Consensus, a strategy to form innovative international economic partnerships by “a different brand of US diplomacy” (Box 1).

While not focusing on specific countries, these speeches made clear that the United States, in principle, is willing to extend preferences to countries in which it takes a special geostrategic interest. The EU, Japan, and other large economies should follow the US example, creating a rich pool of resources that could potentially be used to attract and support geopolitical partners.

Even if these efforts would not fully match the speed and volume of Chinese investment lending and project implementation, the West could become a more attractive partner for strategically important countries—based on more favorable lending terms, better governance, a larger push for program quality, and a genuine desire to help countries move to a higher and sustainable growth path. This could have a galvanizing impact on other countries that are accessing China for want of other alternatives. For countries held up in debt-restructuring negotiations with China, targeted support from Western countries may help them to forgo future Chinese lending, opening up an avenue to apply the IMF’s Lending into Official Arrears (LIOA) policy in selected cases.¹¹

Back to the roots of multilateralism

In case of increasing geoeconomic frictions, a more systemic government response to coordinate economic and financial policies may be needed. Meeting Chinese (and Russian) challenges to the West’s liberal economic order could well exceed the capacity of existing ad hoc structures (mainly those run by G7 ministerial staff) to deliver. A broader approach to agree and implement Western policies may be needed, whether in the form of a coalition around the G7 or a Group of Twelve consisting of the United States and its leading allies in Asia, Europe, and North America. In such a case, a small intergovernmental council or secretariat could be set up to coordinate specific elements of Western policies and function as a clearinghouse for allocating common resources, collaborating closely with the staff of the Bretton Woods organizations. Such an approach would not be unique. The current multilateral system has its roots in World War I, when an Allied Maritime Transport Council began to coordinate scarce transportation capacity to both provide war material to the Western front and feed the British population.¹² The idea to overcome sovereign prerogatives through multilateral cooperation was revolutionary at the time, but it eventually led to the creation of the United Nations and the Bretton Woods system.¹³

A century after its creation, a similar approach might again be necessary to coordinate a joint effort against powerful opponents undermining the international order.

Figure 7. UN Resolution ES-11/L.5 supporting Ukraine’s territorial integrity (By financial contribution to the IMF)

Governance shortfalls need to be mitigated

Finally, the lack of adequate governance arrangements will continue to raise questions about the legitimacy of the Bretton Woods institutions. However, in light of China’s attempts to dominate other international bodies, as discussed above, it would be unwise to provide it with a significantly larger voting share as long as its policies are in clear opposition to the ideals under which the institutions were founded. The reason is that it would place China in a position to form coalitions with other countries to block strategic decisions at the two institutions.

As shown in Chart X, the group of countries not supporting last year’s UN resolutions on Ukraine would, in principle, already be able to veto key strategic decisions at the IMF. There is no indication that the UN coalition would carry over to the IMF Board of Governors, of course, but the trend is clear: the next reallocation of votes would likely give a blocking minority to countries not firmly allied with Western countries, which still provide the bulk of IMF resources.

Once China was ready to accept its obligations as a major shareholder, and in the context of reduced geopolitical tensions, discussions about serious quota adjustments will, of course, need to resume. In the meantime, should there be no completion of future quota rounds, it would still be possible to raise the IMF’s lending capacity through multilateral and bilateral borrowing arrangements, if needed. The technical work to prepare for an eventual resumption of quota discussions could, in any case, proceed.

As long as quota discussions are on hold, however, the Bretton Woods institutions should provide emerging-market countries with other avenues to increase their voice.

• The United States and Europe should agree to appoint the World Bank president and IMF managing director on the basis of merit, rather than nationality.
• The number of board chairs for emerging markets should be increased, along with the provision of a third African chair at the IMF board.
• The annual IMF-World Bank meetings could be held in an emerging-market or low-income country every other year.

Lastly, it behooves the institutions to spend more of their intellectual capital on policy questions that are of particular interest to countries in low-income and developing economies. In addition to climate policies, this includes topics such as the Integrated Policy Framework, dealing with unorthodox exchange-rate policies and capital controls, or the subject of Islamic Finance. Policy challenges outside advanced economies tend to be more difficult to understand analytically, given political, institutional, or structural idiosyncrasies, and the institutions should further expand their toolkit to serve all member countries in the best possible way.

Conclusion

This paper argues that the United States and its allies need to adopt a robust approach to marshal sufficient resources in their geoeconomic competition with China. By stepping up climate funding, as well as other financial and institutional support, to incentivize good policies in partner countries, the West can provide the Global South with a viable alternative to Chinese loans and their pernicious political influence.

Making this strategy work would require major Western shareholders to work more closely with the Bretton Woods institutions, ensuring that programs with geopolitical allies reach their intended objectives. In doing so, it will be critical to stay within the existing framework of the current multilateral system, which in itself remains a major strategic asset for the West.

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How the IMF can navigate great power rivalry

By Hung Tran

Fragmentation resulting from geopolitical competition between large economies is posing a serious challenge to the fulfillment of IMF’s core missions. Here’s how it can respond.

China Economy & Business

About the author

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former International Monetary Fund (IMF) official with decades-long experience in economic crisis management and financial diplomacy.

Acknowledgements

The author thanks Josh Lipsky, Charles Lichfield, Jeff Fleischer, and Tam Bayoumi, as well as participants of an informal seminar, for inspiration and insightful comments. All errors remain his own responsibility.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The Bretton Woods institutions under geopolitical fragmentation appeared first on Atlantic Council.

Introduction

The International Monetary Fund (IMF) was launched in 1944, charged by its forty-four founding members with “monitoring the international monetary system (IMS) and global economic developments to identify risks and recommend policies for growth and financial stability,” among other things. As key features of the world economy and its monetary system have changed over time, the IMF has responded and adjusted its functions as well as its analytical and policy framework to remain relevant and useful to its membership, now 190 countries.

There have been several fundamental changes in the IMS, posing different challenges for the IMF. In the first three decades of its existence, the IMF served as an overseer of an international fixed exchange-rate regime—with most other currencies pegged to the US dollar (USD), which in turn was linked to gold (at $35/ounce). The IMF mission was to ensure that exchange rates were fixed at appropriate levels and to identify the need to adjust currency parities from time to time to rectify underlying imbalances—basically to countenance such adjustments and not allow them to be used to gain unfair competitive advantages. After the United States suspended the convertibility of the USD to gold in 1971 and the oil shock of the mid-1970s, the IMF supported a freely floating exchange-rate system, arguing that this would enable countries to absorb shocks to their trade balances and economies caused by external factors—and in the process, expanding the range of policy issues it deals with. In particular, the IMF encouraged a free movement of capital to help developing countries augment their insufficient domestic savings with imported capital to grow their economies. In this context, the IMF advocated liberalization, deregulation, and other structural reforms to reduce rigidities in the economy, enabling markets to function more efficiently, thus attracting capital inflows. As capital flows have increased, debt has accumulated, leading to a series of sovereign debt crises beginning in the 1980s. The IMF has had to require debt restructuring as a condition for restoring financial sustainability before an IMF program can be approved. This task has become more difficult as the composition of creditors to developing countries has become complex and numerous. With the start of the new millennium, climate change has been recognized as posing increasingly tangible threats to financial and economic sustainability, prompting the IMF to adjust its mission to help mitigate climate change risks and support the green transition and sustainable development.

More recently, geopolitical competition and conflict between China and the United States, especially after Russia’s invasion of Ukraine, have fragmented the world on political, economic, trade, and financial fronts. These fragmentations, including of the monetary and financial system, have posed a serious challenge to the fulfillment of IMF core missions in three important dimensions. First, heightened mistrust and even hostility between key countries have undermined their willingness and ability to cooperate to forge common responses to global challenges. This has interfered with the functioning of many international organizations, transforming fora for cooperation into venues of competition. This could eventually threaten the still-normal operation of the IMF—as well as the World Bank.

Second and more concretely, the policies adopted by key countries to promote a broad concept of national security that includes economic security and environmental and social protection—in particular trade/investment controls and industrial policy—have significantly deviated from the IMF’s theoretical model of essentially open market economies and free trade. Such a model has served as a normative template for IMF assessment and recommendations to all members as well as policy conditionality for its assistance programs for members in need. The IMF now faces the challenge of reconciling its free market model with the new concerns of its important members—either by persuading them to refrain from or minimize deviations from its traditional model, or internalizing those concerns in its model and, in the process, changing the orientation of its policy advice.

Finally, given the geopolitically driven fragmentation of the world economy, the IMF has to discharge its core mission of finding ways to promote economic growth and financial stability—now being constrained by loss of economic efficiency.

The rest of the report will analyze each of these three dimensions in details, sketch out the challenges they pose to the IMF, and suggest some ways to deal with them.

I. Great power competition raises mistrust and undermines cooperation

The US-China strategic competition has been in the making for the past decade but accelerated in 2017 when newly elected President Donald Trump criticized China’s unfair trade practices as causing substantial and persistent US trade deficits and hollowing out its manufacturing base. The criticism was followed by the United States unilaterally imposing tariffs on imports from China in an attempt to rectify the trade imbalances. A dispute ensued that has quickly deepened and widened to other fronts of the US-China relationship and relations with their respective allies.

Essentially, the strategic competition is rooted in resentment as China—a growing economic and political power—continues to grapple with the post-World War II global order and institutions essentially established by Washington and its Western allies, and seeks to overturn that world order in favor of a new one aligning with its vision and interests. This overriding goal has been articulated by successive generations of Chinese leaders, most recently by Xi Jinping in October 2022 as “fostering a new type of international relations.” More importantly, many other countries share the desire to replace the US-led order with a multipolar system, in which large emerging market (EM) countries have more of a voice in shaping the rules and decisions in international affairs. Specifically, it has been proclaimed as the common goal of the China-Russia “partnership without limits,” the BRICS grouping (Argentina, Brazil, China, Egypt, Ethiopia, India, Russia, Saudi Arabia, South Africa, and the United Arab Emriates), and other major EM organizations and fora.

Understandably, the United States has declared that it is in its national security interests to defend and preserve the post-WWII order that has helped to engender peace and prosperity in most of the world for many decades, and to push back against China’s efforts to weaken and change that order. This objective has been articulated in US and (more recently) German national security strategies. It also was reflected in the messaging from the latest Group of Seven (G7) summit meeting in Japan—pointing at China as the rival power pushing for change in the status quo.

The two camps’ competition for influence in shaping the global order has impacted the functioning of existing international institutions set up after WWII to facilitate international interactions. Instead of being fora for cooperation as originally intended, these institutions—including the United Nations and its affiliated organizations like the Human Rights Council and Commission, the World Health Organization (WHO), the International Civil Aviation Organization (ICAO), the International Telecommunications Union (ITU), etc.—have become venues for competition. So far at the expense of the United States and Europe—specifically by pulling together a majority of member countries that vote in support of China’s positions. This has been clear in cases of defending China against Western charges of: human rights violations against the Uyghurs in Xinjiang, lack of transparency and cooperation in investigating the origins of COVID-19, and blocking Taiwan from participating in some of these agencies’ work (i.e., the WHO or ICAO).

At the same time, China has launched alternative institutions to provide venues for cooperation among like-minded countries while excluding the United States. In addition to participating and hosting a series of government-to-government groups like BRICS and the Shanghai Cooperation Organization (SCO), China has regular summit meetings between China and the Association of Southeast Asian Nations (ASEAN) and Central Asia, Africa, Middle East, and Latin America groupings. In addition, China created international development banks such as the Asian Infrastructure Investment Bank (AIIB) and, as a BRICS member, is a founding member of the New Development Bank (NDB). The aim is to build up alternative international institutions to facilitate cooperation between China and other countries on China’s terms and not under the tutelage of the United States and Europe—which has contributed to the fragmentation and weakening of the current global order and its institutions.

Specifically, the strategic competition has weakened the UN and many of its affiliated agencies as well as the World Trade Organization (WTO), but so far has not impacted much the functioning of the IMF (or the World Bank). During the coronavirus-related global economic shock, the IMF has made available $250 billion, or 25 percent, of its lending capacity to member countries; initiated and mobilized support for a special drawing right (SDR) to allocate an equivalent of $650 billion to all members. These IMF actions helped many members in need of liquidity support and assisted the G20 to launch the Debt Service Suspension Initiative and then the Common Framework for Debt Treatment to assist low-income countries (LICs) in or near sovereign debt crises. After Russia’s invasion of Ukraine, the IMF was quick to give Ukraine two emergency loans valued at $1.4 billion and $1.3 billion, respectively; and last April, the IMF approved a $15.6 billion four-year program catalyzing $115 billion of financial support for Ukraine from Western donor countries. The IMF also launched a Food Shock Window to help poor members suffering from the war-related shortage and high prices of grains, and a Resilience and Sustainability Trust to provide long-term, affordable financing to low-income and vulnerable middle-income countries to deal with the impact of climate change and invest in a green transition.

Despite those worthy achievements, it is nevertheless reasonable to suggest that without the strategic competition and heightened mistrust among major countries in the background, more could have been done to help LICs and other vulnerable countries during the crises caused by the coronavirus pandemic and Russia’s invasion of Ukraine—amid struggles in dealing with climate change and reducing poverty. It is sobering to look at the gap between what has been done and what is needed for LICs to achieve sustainable development—estimated to be $2.5 trillion per year. With stronger international cooperation and support, the IMF and World Bank could have provided more financial assistance, including risk-sharing facilities to help catalyze private investment as well as facilitating more debt relief to LICs. It also is important to note that the IMF’s ability to continue functioning and responding to crises may owe a lot to its current governance structure: voting power is weighted by members’ capital contributions, as reflected in their quotas and voting shares. Accordingly, the United States commands 16.5 percent of the total votes,¹

and the G7 has 41.25 percent of the voting shares—comfortably putting the West in general in the driver’s seat for most IMF activities and projects: a simple majority is required, but approval by consensus is typical. In other words, the IMF is still essentially a Western-driven institution, which can explain why it has functioned relatively smoothly, including approving potentially controversial programs such as that for Ukraine; the IMF usually carries out programs with countries after a conflict, rather than during a war.

However, it remains an open question how well the IMF can carry out its missions and how long its current governance structure can last if the existing geopolitical conflicts continue to escalate. Going forward, the deepening of the strategic contention could begin to hamper the functioning of the IMF. Fundamentally, the rising level of mistrust and at times hostility between the United States and China would make it very difficult to develop international consensus to reform the governance structure of the IMF to give more voice and representation to emerging markets and developing countries (EMDCs)—so as to be more commensurate with their growing weight in the global economy.

An ongoing reform effort has been negotiated as part of the IMF’s sixteenth quota review, scheduled to be concluded by December 15, 2023. The quota review includes the task of revising the quota formula to support an increase of quotas to augment the permanent financial resources of the IMF. Currently, permanent resources account for less than half of the IMF total lending capacity of SDR 713 billion ($950 billion), with the remainder funded by the New Arrangement to Borrow of SDR 361 billion, which is scheduled to expire in December 2025, and the bilateral Borrowing Agreements for SDR 139 billion, expiring at the end of this year but extendable to year-end 2024 if creditor countries agree to do so. In the past, the borrowing arrangements were extended routinely without much fanfare; in the current global tension, that should not be taken for granted. While the probability of not extending the borrowing arrangements is low, the failure to do so would have a significant impact in sharply curtailing the IMF’s lending capacity and its ability to help countries in need.

More importantly, the quota review will try to reach agreement to distribute quotas in a way that would raise the voting power of the EMDCs. In the current environment of tension and mistrust, it is highly unlikely that a redistribution of voting power in favor of EMDCs—especially China—will be supported by the United States and other Western countries. Consequently, the sixteenth IMF quota review is destined to expire without producing any results. As such, the underlying unequal voting power will continue to fester as a source of discontent in the Global South, posing a threat to the legitimacy of the IMF.

In addition, weakened cooperation has made it more difficult to come up with new and necessary initiatives requiring strong international consensus. For example, it would be difficult to get support for another round of SDR allocation, as has been suggested by countries and civil society organizations. The IMF has recognized the difficulty in building international consensus in multilateral efforts, suggesting that a plurilateral approach involving smaller groups of like-minded countries can be a practical way forward. However, there are limitations to the plurilateral approach, as evident in the recent Paris Summit for a New Global Financing Pact.

More pressing for developing and low-income countries (DLICs) has been the lack of progress in the IMF’s (and World Bank’s) efforts to promote the Common Framework for Debt Treatment to deal with the growing sovereign debt crisis of DLICs. In their latest initiative, the Global Sovereign Debt Roundtable, these institutions have promised information sharing to all creditors including private ones and concessional loans or grants to the LICs in debt crises—hoping to speed up several debt restructuring operations under the Common Framework. Since its launch in 2020 by the G20, only four countries (Zambia, Chad, Ethiopia, and Ghana) have applied to restructure their sovereign debt under this framework, and most have languished in the process without much progress (except for Zambia, which just got its debt restructuring deal). Meanwhile, DLICs have incurred more than $9 trillion of debt, of which a $3.6 trillion portion represents long-term public external debt with 61 percent owed to private creditors. In particular, seventy-five LICs eligible for International Development Association concessional loans are being burdened with almost $1 trillion in debt; with more than half of them already in, or at high risk of being in, debt distress.

One particular policy tool, Lending into Official Arrears (LIOA), has been developed to deal with situations where a debtor country has accepted the conditionality for an IMF program, but cannot get all of its official bilateral creditors to agree to a restructuring deal to help the country meet the Fund’s financial sustainability requirement. In that case, the IMF can lend to the country in question while allowing it to stop servicing its debt to the bilateral creditor which has refused to participate in a restructuring deal. This situation applies to China in several LIC cases, such as Zambia, where the country had reached IMF staff agreement for a program at the end of 2021, but progress toward board approval was held up until late August 2022 and disbursement delayed until late June 2023—by a failure of bilateral creditors to reach a debt restructuring deal. Western countries attributed this failure to China’s reluctance to accept a reduction in the principal amount of debt and its preference to conclude a bilateral deal with debtor countries. Eventually, a restructuring deal for Zambia’s $6.3 billion debt to bilateral creditors was reached consistent with China’s preferences—extending maturities of the debt to 2043 at lower interest rates, with no cut in face value to reduce the present value of the debt by 40 percent. This deal is useful but insufficient to meaningfully reduce Zambia’s debt load, which is estimated to exceed $18 billion. In any event, the IMF has not been able to use the LIOA tool to deliver needed support to Zambia—probably fearing opposition from China as well as facing reluctance by the debtor country to be unfriendly to China.

In short, escalating geopolitical conflicts would make it more difficult for the IMF and World Bank to continue functioning normally in the future.

II. Policies to promote derisking have deviated from the IMF template

The strategic competition so far has taken place mainly in the economic, financial, and high-tech areas—driven by efforts from both sides to reduce the risk of exposure and vulnerability to each other. As reflected in the latest G7 summit communique, the West appears to coalesce around the concept of derisking (rather than decoupling) vis-à-vis China— realizing that it is impractical and quite costly to economically decouple completely from China. The concept of derisking—coming after a string of notions such as reshoring, near-shoring and friend-shoring—is vaguely defined to encompass controlling trade and investment transactions with China concerning high-tech products and know-how in advanced semiconductors, artificial intelligence (AI), quantum computing and other areas, especially those with military applications. It also includes reducing reliance on China for strategic industrial inputs such as critical minerals like rare earths, which are essential for high-capacity batteries and the world’s effort to transition to green energy. 

The motivation behind derisking, however, seems to differ between the United States (wanting to preserve or even widen its lead over China in high-tech and related military capacities) and the European Union (aiming to reduce its dependency on China in a few specific areas). The US approach is more offensive in nature and has been perceived by China as hostile efforts to contain its rise—deepening mistrust and prompting retaliation. The difference in motives has also tempted China to try to prevent Europe from being fully aligned with the United States, giving Beijing more room for maneuver.

Western derisking efforts have been implemented via trade and investment controls and industrial policy to promote national champions in high-tech and other critical areas. The United States—under both President Trump and President Biden—has increasingly controlled the export of advanced chips, along with the hardware and software needed to produce them, to an increasing number of Chinese entities. It’s likely that the range of high-tech items under export control will be expanded in the future, with an aim to delay Chinese progress in critical and dual-use technologies such as AI, quantum computing, and biotech, among many others. The United States has also strengthened its Committee on Foreign Investment in the United States (CFIUS) and significantly increased its screening to restrict Chinese investment in a broad range of US companies. The Biden administration and Congress are finalizing rules to impose outward screening of investment to China, in particular in advanced semiconductors, quantum computing, and AI. Specifically, the US government has invoked national security to ban Huawei’s equipment from being used in the US telecom infrastructure and is in the process of banning ByteDance’s TikTok.

The United States also has embraced industrial policy by passing a series of laws including the Infrastructure Investment and Jobs Act (aka Bipartisan Infrastructure Law), the CHIP and Science Act, and the Inflation Reduction Act—all designed to incentivize high-tech investment and manufacturing in the United States through the use of subsidies, tax incentives, and other favorable regulatory treatments. This, however, has unleashed a subsidies race between the United States and EU countries.

Many US allies in Europe and Japan have adopted similar but milder measures including the screening of inward foreign investment and possible outward investment, and restricting sales of advanced chips and chip-making technologies to China while promoting chip production in the EU (via the European Chips Act). The EU also has launched the Critical Raw Materials Act to reduce its dependencies on countries that are not union members. Some European countries have restricted the use of Huawei equipment in their telecom infrastructures. More generally, trade protectionist measures have been on the rise: as of 2020, the G20 countries—instead of setting examples in trade liberalization—had adopted them.

At the same time, China and its allies have also tried to derisk by reducing their vulnerability to the G7 use of economic and financial sanctions—especially after the unprecedented sanctions on Russia after its 2022 invasion of Ukraine. Of particular concern: the G7’s decision to freeze the foreign reserve assets that the Bank of Russia held in the G7 economies. China and its allies’ derisking mainly involves increasing bilateral trade and investment activities, and developing alternative—essentially bilateral—means of settlement for cross-border transactions to avoid use of the US dollar.

The measures highlighted above, done in the name of protecting national security on both sides, have significantly deviated from the IMF model and norms of an open, rules-based market economy with free trade, and where the role of government is limited to ensuring a free, well-regulated, and competitive marketplace where private firms and consumers determine the supply and demand of goods and services, resulting in an optimal allocation of resources in the economy, both domestically and globally. The essentially open and free market model has been used by the IMF as the normative template to assess the economic performance of member countries and give them advice in its regular Article IV consultations. More importantly the model underpins the conditionality required for IMF assistance programs to countries in crises.

In addition to the national security concerns and subsequent protectionism measures highlighted above, the EU has increasingly used regulatory and tax measures to promote compliance with its strict environmental protection standards (such as the Carbon Border Adjustment Mechanism), while the US government has strengthened its trade regulations to promote labor standards (such as the wage requirements for auto workers in Mexico in the United States-Mexico-Canada Trade Agreement).

To be fair, this “orthodox” model has been tweaked at the margin by the IMF’s evolving policy of maintaining a decent level of social safety net (also to help build public support for IMF programs), and acquiescing to countries imposing temporary capital controls to dampen disorderly capital flows. However, these measures basically involve setting priorities in fiscal policy and using temporary capital control measures, and not fundamentally moving away from the IMF’s model.
As a consequence, the IMF has to find ways to reconcile its free market model with the reality of trade/investment controls and industrial policy practiced by an increasing number of important member countries—contradicting key IMF advice and lending conditions  pushing for deregulation and liberalization of economic and trade activities. In fact, the IMF needs to  rethink its model anyway as more and more members of the economic profession have conducted new research using rigorous empirical methods, finding that industrial policy has been more ubiquitous than thought and can bring economic benefits if implemented properly. As a consequence, the IMF has to either specify well-defined exceptions to its model, where such control measures can be used with minimum distorting and disruptive effects, or modify its model to internalize national security and environmental and social concerns, with more accurate measurements of the costs and benefits of such interventions in the market. Doing so would change the orientation of its policy advice.

Practically, the IMF needs to develop a new economic model, in which the objective function contains multiple goals, not only maximizing output and employment at stable prices, but also securing national security, achieving net zero CO₂ emissions by 2050, and reducing economic and social inequality. Some of these objectives are at odds with each other, making the assessment of tradeoffs very important. The constraints also have increased to reflect all the negative consequences of fragmentation, beyond the traditional financial and technological limits.

Given the difficult challenges of coming up with such a new model, the IMF, at the very least, has to analyze and estimate/quantify the potential benefits of enhanced national security and environmental and social protection, compared with the costs in terms of losses in economic efficiency resulting from those measures. This analytical work can provide some help to member countries in navigating the geopolitically fragmented world—especially in finding ways to limit the downside impacts of derisking policies.

III. Coping with the consequences of fragmentation

The fragmentation of global trade, payment, monetary, and financial systems as well as declining international cooperation for scientific and technological research and development has already had a negative impact on the global economy. The negative effects will accumulate and become more tangible over time. The IMF will need to find ways to help members mitigate against such poor development prospects.

The breakdown of the open rule-based trading system

The geopolitical contention between key countries has weakened the open rules-based trading system anchored by the WTO. Basically, the WTO has not been able to facilitate any multilateral rounds of trade liberalization since its inception in 1995. Instead it has had to settle for several plurilateral agreements among smaller sets of willing countries for specific trade issues. These may be second-best solutions in the absence of multilateral agreements, but they have splintered the global trading system into a growing number of regional and plurilateral trade agreements. As of now, there are more than 350 regional trade agreements (RTAs) between various countries around the world, making it more complex and costly to trade across borders, especially for EMDCs.

Importantly, the US refusal to agree to the appointment of members of the Appellate Body has rendered the appeal process in the important WTO trade dispute-resolution mechanism inoperable—undermining a key function of the WTO.

Partly reflecting geopolitical tension, the annual growth rate of world trade has slowed to 1.9 percent this year, relative to global economic growth of 2 percent; the volume of trade in goods has fallen while that of services (accounting for 22 percent of total trade) has risen. Going forward, world trade is estimated to grow by 2.3 percent per year through 2031, while the global economy is expected to grow by 2.5 percent—a reversal of the traditionally faster growth of world trade stimulating economic growth in most of the postwar decades. The geopolitical pattern of trade has also changed, with China’s exports having clearly shifted from the West to the Global South (including BRICS countries)—reaching $1.6 trillion a year to the Global South, compared with $1.4 trillion to the United States, Europe, and Japan combined.

Fragmented payment system

To reduce the vulnerability to US sanctions that deny banks and financial institutions of targeted countries access to SWIFT and clearing and settlement of USD transactions through the US banking system, other countries have tried to develop ways to settle trade and investment transactions among themselves without using the dollar. So far these efforts have resulted in a network of bilateral deals, mainly between China and another country, making use of bilateral currency swap lines (CSLs) between the renminbi (RMB) and another domestic currency. Since 2009, the People’s Bank of China has arranged CSLs with about forty-one countries, for a combined valuation of $554 billion. The CSLs have been increasingly used to settle cross-border transactions as well as for China to provide emergency liquidity lending and balance of payment support to developing and low-income countries (DLICs) in crisis—estimated to have reached $240 billion, or over 20 percent of total IMF lending over the past decade. The CSLs have been complemented by the various offshore RMB deposit markets, the most important of which is Hong Kong—reported to amount to RMB 833 billion ($115 billion) at the end of April 2023. The cross-border RMB transactions have been facilitated by the maturity of China’s Cross-border Interbank Payment System (CIPS), which was launched in 2015 and cleared transactions valued at $14.1 trillion in 2022 with 1,420 financial institutions in 109 countries.

Those efforts are not really aiming to replace the dollar in the global payment system, which is very difficult to do given the breadth and depth of the well-regulated US financial markets serving the largest economy in the world; they are mainly intended to reduce—or derisk— those countries’ vulnerability to US sanctions to some extent. The fact that the Russian economy has managed to function in the face of US/Western sanctions, including the exclusion of many Russian banks from the SWIFT and CHIPS systems, has motivated other countries vulnerable to Western sanctions to further develop these alternative settlement mechanisms. Those efforts to use local currencies in cross-border payments can be observed in a broad range of countries and regions; from Russia to India, ASEAN to the African Union and BRICS member countries.

As a consequence, the global payment system has been fragmented: the dollar still enjoys the key role in the system, but more and more cross-border transactions are being conducted without using it, and on a bilateral basis using local currencies. This will make global cross-border payment transactions—already cumbersome and costly—even less efficient and transparent, imposing a growing risk and cost on the global economy. This environment also will make it harder for the IMF to meet its mandate and improve the working of the global payment system, as suggested by the G20 roadmap released in 2020.

Moreover, different countries have adopted different approaches to the development of a central bank digital currency (CBDC). China is quite far ahead of other countries in terms of prototyping and testing its digital yuan, or eCNY, while the United States has shown a growing degree of skepticism toward a CBDC, which many conservative US politicians oppose. When CBDCs begin to be rolled out in other countries, that would likely add another dimension of fragmentation in the global payment landscape as the lack of communicability and interoperability among different CBDCs will create serious challenges for global payment system and financial stability.

Fragmented financial system

According to recent IMF reports, fragmentation can be observed in international financial activities. Specifically, foreign direct investment (FDI) and banking and portfolio investment flows have tended to focus on recipient countries perceived to be politically more friendly to originating countries than otherwise. As a result, the IMF has estimated a reduction of about 15 percent in bilateral banking and portfolio flows. This differentiation in investment transactions has reduced the efficiency of capital flows to EM countries, undermining growth rates in many EMDCs.

Moreover, the fact that China has made use of its extensive bilateral currency swap lines to provide emergency liquidity to friendly countries has complicated the IMF’s premier role in coordinating the timely activation of the multitiered global financial safety net.

Recent IMF research has estimated that the cumulative potential losses of output could be substantial—up to 7 percent for the global economy and up to 8 to 10 percent for some countries, given the addition of technological decoupling. Such losses would reinforce the effects of worsening demographics—the aging of society and decline in the labor force—by lowering potential growth rates in the future, which are estimated to slow to 2 percent per year in the next twenty years, compared to growth rates of 2.7 percent per year in the previous two decades. This anticipated slowdown would compound the various headwinds confronting many countries. Furthermore, financial fragmentation could increase the risks to global financial stability by triggering volatile capital flows in reaction to geopolitical tensions, while weakening the global financial safety net.

In this challenging scenario, the IMF would need to find ways to mitigate the negative impacts of financial fragmentation: advising members on how to sustain economic growth and financial stability while the global geopolitical situation continues to deteriorate, reducing potential economic growth rates and limiting available resources including FDI that governments can mobilize to address the challenges facing them. Against this backdrop, the IMF can continue to add value to members by identifying reforms and especially by providing technical assistance to implement changes in administrative processes, including the focused digitalization of government services, which could improve transparency and reduce corruption. These measures may not require significant budgetary resources and can help improve business performance, thereby supporting growth. In any event, the task of finding ways to sustain growth is intellectually challenging since simple economic efficiency is no longer necessarily the shared goal among members, as many now want to pursue multiple objectives through economic policymaking. Several of those objectives may be at cross-purposes and are likely to produce unexpected and unwanted side effects—which the IMF should monitor closely and report promptly.

Conclusion

The IMF and other international organizations are products of international cooperation. The IMF’s mandate, resources, and ability to assist members depends on the willingness and ability of key countries to work together for common solutions to shared global challenges. In that sense, the future of the IMF is not in the institution’s hands, but those of its members. Against that reality, the IMF can still find ways to leverage its practically universal membership to support necessary measures to the extent possible. It can also depend on its formidable institutional strength, especially its staff’s analytical prowess, to be helpful to members. In particular, the IMF should focus on analyzing the cost and benefits of geopolitical contention, and the resulting fragmentation of the world economy and financial system—like it began to do around the time of the spring 2023 meetings. This may not be sufficient to persuade major countries to reverse their geopolitical contention, but the IMF should be able to help those countries adopt the policies that are the least damaging to the global economy, with particular focus on limiting the negative spillovers of their policies on low-income and vulnerable middle-income countries.

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