An initiative led by the Atlantic Council’s Adrienne Arsht Latin America Center in partnership with the US Department of State continues to focus on facilitating greater constructive exchange among multisectoral thought leaders and government leaders as they work to implement commitments made at the ninth Summit of the Americas. This readout was informed by a private, information-gathering roundtable and several one-on-one conversations with leading experts in the digital space.

Executive summary

At the ninth Summit of the Americas, regional leaders agreed on the adoption of a Regional Agenda for Digital Transformation that reaffirmed the need for a dynamic and resilient digital ecosystem that promotes digital inclusion for all peoples. The COVID-19 pandemic exacerbated the digital divide globally, but these gaps were shown to be deeper in developing countries, disproportionately affecting women, children, persons with disabilities, and other vulnerable and/or marginalized individuals. Through this agenda, inclusive workforce development remains a key theme as an avenue to help bridge the digital divide and skills gap across the Americas.

As part of the Atlantic Council’s consultative process, thought leaders and practitioners evaluated progress made in the implementation of the Regional Agenda for Digital Transformation agreed on at the Summit of Americas, resulting in three concrete recommendations: (1) leverage regional alliances and intraregional cooperation mechanisms to accelerate implementation of the agenda; (2) strengthen public-private partnerships and multisectoral coordination to ensure adequate financing for tailored capacity-building programs, the expansion of digital infrastructure, and internet access; and (3) prioritize the involvement of local youth groups and civil society organizations, given their on-the-ground knowledge and role as critical indicators of implementation.

Recommendations for advancing digitalization and workforce development in the Americas:

Report

May 31, 2024

PACC 2030 objectives: The road to implementation

By Wazim Mowla, Charlene Aguilera

The Atlantic Council organized a PACC 2030 Working Group and worked closely with governments, the business community, and civil society organizations to support the implementation of PACC 2030’s objectives.

Caribbean Climate Change & Climate Action

Report

Apr 16, 2024

Advancing health and resilience policies in Latin America and the Caribbean

By Isabel Chiriboga, Martin Cassinelli, Diego Area

During an off-the-record private roundtable, thought leaders and practitioners from across the Americas discussed how to further enhance access to and finance for health services and products in the region.

Coronavirus Latin America

Summit of the Americas

Amid global uncertainties and new challenges, the ninth Summit of the Americas is a renewed opportunity to bring about hemispheric cooperation and consensus to reach regional prosperity and security.

Staff

Isabel Chiriboga

Assistant Director

Adrienne Arsht Latin America Center

Colombia Corruption

Staff

Maite Gonzalez Latorre

Program Assistant

Adrienne Arsht Latin America Center

Americas Education

Staff

Diego Area

Deputy Director, Strategic Development

Adrienne Arsht Latin America Center

Crisis Management Democratic Transitions

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

Learn more

The post The future of digital transformation and workforce development in Latin America and the Caribbean appeared first on Atlantic Council.

While African athletes that year had won thirty-seven medals, including eleven golds, it is expected that they will rake in much more—about fifty—in Paris. There is a lot expected of several stars, including Kenyan marathon runner Eliud Kipchoge (considered the greatest marathoner of all time), Botswanan sprinter Letsile Tebogo, Burkinabé triple jumper Hugues Fabrice Zango, Senegalese tae kwon do champion Cheick Cissé Sallah, and Moroccan breakdancer Fatima El-Mamouny (who competes as Elmamouny). Some athletes are already meeting these expectations, with South African swimmer Tatjana Smith having already won a gold medal and Tunisian fencer Fares Ferjani having earned the silver. Beyond individual athletes, there is also optimism about various teams: For example, the Bright Stars of South Sudan were the object of great attention after giving the US team a wake-up call in a shockingly close exhibition game earlier this month (but on Wednesday, they lost to the United States).

There are also athletes who, in search of better training conditions, have migrated from Africa to countries in the West and will compete under those countries’ flags.

It is a challenge to be a high-level athlete in Africa. The International Olympic Committee’s (IOC’s) initiatives in Africa, which fund projects to support sports on the continent, do not solve the structural problems that push African athletes to leave the continent. Usually, these expatriates blame the lack of African infrastructure and mentoring programs, in addition to the costs of training and other professional challenges. While some of the African athletes who train in the United States are still competing under the flags of African countries—such as Ivoirian sprinter Marie-Josée Ta Lou or world-record-holding Nigerian hurdler Oluwatobiloba “Tobi” Amusan—time away from the African continent can easily turn into a permanent departure and end with a change of citizenship.

With that being the case, the Olympic performances of African countries don’t fully reflect the true power of the continent in sport.

As a former French deputy minister of sports, I see a paradox in Africa’s sports sector: the youngest continent in the world (70 percent of Sub-Saharan Africa’s population is under thirty years old) is a place where people aren’t engaging as much in physical activity such as sports. Plus, a recent survey highlighted that the sports sector is “underdeveloped” with key deficits in data, public strategy, and private investments.

Sports are much more than hobbies for personal fulfillment or ways to improve health. They are also powerful tools for development, major business opportunities, and pivotal ways to exercise soft power.

The opportunity at hand

According to the United Nations (UN), sports play a role in achieving many of the seventeen Sustainable Development Goals, including goals such as eradicating poverty and famine, securing education for all, supporting victims of disasters or emergency situations, and fighting diseases. Sports can also help promote gender equality, as taking part in sports is associated with getting married later in life. The UN Educational, Scientific, and Cultural Organization runs a flagship initiative called Fit for Life, which uses sports to not only improve youth wellbeing and empowerment but also support more inclusive policymaking. The African Union (AU) has recognized the role that sports can play, as a driver of the cultural renaissance outlined in its Agenda 2063; the AU proposed a Sports Council to coordinate an African sports movement.

But the international recognition of the role sports play in development has come late—and there are issues that have yet to be sorted out. Olympic Agenda 2020, adopted by the IOC in 2014, outlines recommendations for countries to make the most of sports’ impact on society, encouraging them to align sports with economic and human development, build climate-friendly infrastructure, promote gender equality, protect the rights of children and laborers, acquire land ethically and without causing displacement, improve security, and protect the freedom of the press.

At previous global sport gatherings (notably the 2008 Beijing Olympics and the 2022 FIFA World Cup in Qatar) human-rights communities have raised these issues. Their voice over many years has pushed organizations, such as FIFA and the IOC, to adopt various human-rights policies and frameworks. In considering the host nation for the 2026 World Cup, FIFA for the first time required bidding countries and cities to commit to human-rights obligations. Such requirements could have an impact in Africa, although that remains to be seen; an African country has only once hosted a global sport gathering (South Africa hosted the 2010 FIFA World Cup), while Egypt currently has its eye on the 2036 Summer Olympics, over a decade from now.

Beyond development, sports are major business opportunities. South Africa has continued to argue that hosting the World Cup was worth it, as the billions it spent went toward much-needed infrastructure that has supported an increase in tourism—and thus, economic activity—that lasted for more than a decade. The global sports industry was worth $512 billion in 2023 and is projected to grow to $624 billion in 2027. 

In Africa, the contribution of sports to the continent’s gross domestic product is more limited (0.5 percent) than it is for the world at large (3 percent). And while North America has the largest share of the sports market, Africa’s share is growing at a rate of 8 percent each year. The National Basketball Association’s investment in the Basketball Africa League is a signal to other investors of the positive outlook for African sports and the new ecosystem of opportunities. With Africa’s middle class estimated to reach 1.1 billion by 2060, and with the continent urbanizing and growing more connected, Africa is a premier market for ventures in the sports industry.

If this business opportunity is harnessed, there is reason to be optimistic that African talent will no longer have to seek earnings abroad and that African markets will see added value, including in the form of new infrastructure, hospitality offerings, merchandising, and content/media. Upcoming major sports events on the continent are slated to generate such growth, with Senegal organizing the 2026 Youth Olympic Games and Morocco co-hosting the 2030 FIFA World Cup.

Well-structured and adequately supported sports are also tools of soft power, and countries around the world, notably Saudi Arabia, are investing in them. In Africa, the Olympic Games have always been an opportunity for African countries to speak more loudly than in the UN fora. For example, African countries boycotted the 1976 Montreal Olympics, protesting New Zealand’s participation after the country’s national rugby team played several matches in South Africa (which had been banned from the Olympics because of its apartheid policy). At the 1992 Barcelona Olympics, as apartheid came to an end, the finalists of the ten-thousand-meter race—Derartu Tulu, a Black athlete from Ethiopia, and Elana Meyer, a white athlete from South Africa—hugged each other to celebrate South Africa’s return.

A new sports agenda

Africa had a late introduction to global sport competition. No African country has ever hosted the Olympic Games. The first Black African athletes—South African runners Len Taunyane and Jan Mashiani—didn’t get the opportunity to compete until 1904, eight years after the first modern Olympic Games were held. It wasn’t until the 1960 Olympic Games in Rome that the first Black African athlete took the gold: Ethiopian Abebe Bikila won the marathon running barefoot. Since then, Kenya, Ethiopia, and South Africa have been the leading Olympic teams from Africa.

To be able to compete with the best teams today and to hold onto its talents, Africa needs a more robust agenda that covers all dimensions of sports.

First, it is essential to address youth education. Governments should include sports in education systems, and sports federations should organize regular competitions within local leagues for youth. Governments should also consider making their funding of training centers contingent on the number of enrolled athletes; it has been shown that sports help improve enrollment and attendance at school, and thus sporting excellence can lead to academic excellence. Of course, in addition to investing in sports facilities at schools, it is crucial to also invest in infrastructure that helps underserved populations access these facilities, thus easing regional inequalities.

However, the financing of African sports cannot be too dependent on governments’ budgets (as it currently is) seeing as national budgets are limited. African governments should provide a fiscal and regulatory framework that supports the work of the private sector. Rather than abandoning the athletes to themselves, governments should consider creating national centers of excellence or institutes for training—similar to France’s National Institute of Sport, Expertise, and Performance—which would allow athletes to access better training conditions on the continent, hopefully keeping them in Africa.

Governments should also ensure that foreign clubs and teams that continue to host the greatest African athletes financially support the development of the African sports industry, which would not only help cultivate more star talent but also foster job creation in advertising, sports medicine, journalism, and fitness.

Sports have much greater geopolitical significance than many decision makers realize. Moving forward, they should integrate sports into their foreign policy, both bilaterally and multilaterally.

For Africa, the surge in athletic talent is evidence that its people are committed to a new era for the continent. Leaders should harness this opportunity to supercharge Africa’s transformative sports movement.

Rama Yade is the senior director of the Atlantic Council’s Africa Center. She was formerly the French deputy minister of sports and also served as the ambassador of France to the United Nations Educational, Scientific, and Cultural Organization.

The post Dispatch from the Paris Olympics: The African sports movement is about to take off, if leaders help fuel it appeared first on Atlantic Council.

Since their inception in July 1944, they have played central roles in global finance and built the world’s economic architecture as the norm-setters, knowledge-producers, convenors, and actors in the international development and finance landscape.

In 2024, the BWIs are facing multi-faceted existential challenges, posing serious risks for their relevance and effectiveness. The rapidly changing nature of the global economy, commerce, and finance and the increasing challenges triggered by the emergence of new players, technologies, and crises—especially in the past two decades—are forcing these institutions to take a renewed look at their governance structure and mandates. This is not the first time they have had to do so.

A reformed Bretton Woods system already emerged nearly five decades ago in 1976 through the Jamaica Accords. In 1971, the Nixon administration created a shock when it canceled the direct convertibility of the US dollar to gold and rendered the old Bretton Woods system inoperative as currency exchange rates became more volatile. The new rules stabilized the international monetary system by permitting floating exchange rates and formally abolishing the gold standard, which the United States was already no longer underpinning.

This time, meaningful reform for the BWIs will require a genuine acknowledgment of the following developments in the global political economy:

1. Economies that are not part of the high-income club are playing an increasingly large role in global trade and finance. However, the BWIs’ voting, leadership, and governance structures do not reflect this shift in the global economy and the IMF and WBG remain US-, Group of Seven (G7)-, and European Union (EU)-centric institutions. Together, the EU and the United States still maintain about 40 percent of votes in the World Bank and the IMF even as their relative prominence in the global economy has eroded.
   
   
   
   
2. The global economy is facing a growing number of challenges that have stretched the resources of BWIs and tested their effectiveness in bringing together the right stakeholders. One can point to unsustainable levels of sovereign debt, weather-related extreme events, increasing risk of pandemics, and aging populations as only some of these multifaceted challenges. Moreover, tariffs, subsidies, currency wars, protectionism, industrial policies, sanctions, geoeconomic fragmentation, and decoupling have become commonplace hurdles to globalized trade. The emergence of heightened geopolitical tensions between some of the world’s largest economies has undermined global financial stability and has also introduced significant difficulties for the BWIs to adhere effectively to their mandates of effective global governance, shared prosperity, and international monetary cooperation. This is eroding gains made through globalization in the past few decades.
3. The emergence of state-led development finance institutions and the growing number and influence of regional multilateral development banks and financial institutions, sovereign wealth funds, and pension funds have drastically altered the global landscape of development finance, calling for a more active collaboration between BWIs and the following parallel institutions:
   • Nearly 160 countries are signatories to China’s Belt and Road Initiative (BRI) and/or the G7’s Partnership for Global Infrastructure and Investment.
   • More than forty multilateral development banks and financial institutions—such as the Asian Development Bank, the Inter-American Development Bank, the African Development Bank, the Islamic Development Bank, and the Asian Infrastructure Investment Bank—are active in the global development finance landscape.
   • More than fifty national development banks such as Qatar Development Bank, Korea Development Bank, and Development Bank of Nigeria are offering a wide range of financing products to international public and private entities.
   • More than 130 sovereign wealth funds boast around $12 trillion in assets globally.
   • Public and private pension funds have over $24 trillion and $42 trillion in global assets, respectively.
4. Several multinational corporations (MNCs) command economic and technological might larger than many countries and are increasingly shaping the future of global economy through innovation and by influencing policy debates. MNCs are estimated to account for nearly one-third of global gross domestic product (GDP) and a quarter of global employment, and the revenue of Walmart alone was larger than the GDP of more than 170 countries in 2023. Environmental, social, and governance standards have been put in place to create a framework where MNC activities are not detrimental to environmental and social objectives but are based on best governance practices. However, the BWIs have played too minor a role and influence in these conversations. 
5. The emergence of digital currencies and assets and the increasing role of technology (artificial intelligence, machine learning, and fintech) in economic and monetary policy offers challenges and opportunities for the efficiency and stability of the global economy. Alternative finance championed by non-state actors has moved faster than international and domestic supervisory and regulatory bodies, including the BWIs, which have not kept up with the rapid pace of change. For example, the IMF in collaboration with the Bank for International Settlements could play a significant role in coordinating the global efforts in standard-setting for central bank digital currencies and new cross-border payment systems.
6. New debates and policies are altering global economic, monetary, and trade policies. Modern monetary theory, universal basic income, quantitative easing and tightening, modern central banking, global minimum taxation, fair trade, and human rights considerations in global supply chains are some of the issues BWIs need to be more proactive about.

Acknowledging the gravity of the risks facing effectiveness and relevance of BWIs, our Bretton Woods 2.0 Project has conducted in-depth policy research on the rising challenges facing BWIs’ governance and operations and has put forth feasible policy recommendations for their consideration in their reform journey. Substantive reforms are never easy, especially for multilateral organizations with such long and complex histories and intractable geopolitical rifts between their members. Difficult decisions, especially regarding the governance and leadership structure of these institutions, must be made, however. As Axel van Trotsenburg, senior managing director at the WBG recently acknowledged, for the IMF and WBG to remain true to their mandates and still relevant at their one hundredth anniversary in twenty years, they must embark on reforms that heed the issues highlighted above.  

Amin Mohseni-Cheraghlou is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington, DC. Follow him on X (formerly known as Twitter) at @AMohseniC.

The post The Bretton Woods institutions need revitalizing. Luckily, they are no strangers to reform. appeared first on Atlantic Council.

Women and civil society are indispensable as first responders in the ongoing war. They must also be central to the planning, distribution, and oversight of funds in reconstruction efforts. As the German and Ukrainian governments recognized, the physical reconstruction of Ukraine needs to be paired with a comprehensive social, human-centered recovery. Women, who represent the majority of the highly educated and skilled workforce in Ukraine, are well-positioned to strengthen anti-corruption measures, modernize the energy sector, and drive Ukraine’s reform agenda. All of these components are essential for an effective recovery. In addition, these efforts can help Ukraine meet the conditions for its accession to the European Union (EU).

The record to date for women’s inclusion in recovery efforts has not been what it needs to be. Policymakers must continue to ensure that Ukrainian women leaders will have the opportunity to meaningfully and fully participate in Ukraine’s recovery. Ukraine can only recover if women and civil society are fully involved in its reconstruction.

Where do women fit in the Ukraine recovery agenda?

Held in Lugano, Switzerland, in July 2022, the first recovery conference resulted in the adoption of the “Lugano Declaration,” which includes guiding principles for Ukraine’s recovery process. At the 2023 conference in London, the EU announced the creation of a new Ukrainian facility that would provide a total of fifty billion euros to Ukraine over four years. From this total amount, thirty-nine billion euros will be allocated to the state budget to support macroeconomic stability. Another eight billion euros will go toward a special investment instrument that will cover risks in priority sectors. This year’s conference in Berlin aimed to attract private-sector investment in Ukraine, including in human capital. The agenda included the explicit goal of investing in women and youth. This was a positive development and should encourage international financial institutions and private donors to continue to invest in women-owned and -led businesses in Ukraine, as well as to train Ukrainian women to take on jobs in Ukraine’s critical sectors.

How to unleash Ukrainian women’s economic potential

Invest, train, and enable Ukrainian women. Women in Ukraine and elsewhere have traditionally had limited access to credit, markets, and training opportunities. They have also struggled to balance responsibilities in the workplace and their primary caregiver responsibilities. These challenges must be overcome if women are to fulfill their economic potential.

The World Economic Forum notes that one solution for improving women’s access to credit is to not necessarily demand collateral, because women often do not own private property. Moreover, many women (as well as men) in Ukraine have lost their homes and properties to the war, so providing property as collateral is not likely to be an option for them. Therefore, adopting alternative ways to determine women’s creditworthiness could encourage more women to apply for business loans.

Ukrainian women, with the support of Western companies and institutions, have already stepped up to launch their own startups. These should be scaled up. Since the start of Russia’s invasion, an increasing number of Ukrainian women have founded tech startups, benefitting from improved access to investors outside Ukraine, as well as programs sponsored by the EU, international organizations, and private companies. For example, VISA launched its “She’s Next” program in Ukraine in 2020, and it has since hosted gatherings where Ukrainian women presented their business proposals and received funding and training at business schools. More Western companies should team up with women-led Ukrainian nonprofits to create opportunities for funding female-led startups and give them access to education and training.

Train Ukrainian women to fill workforce gaps in critical sectors. Now is an important time to train Ukrainian women in two critical sectors that will play a key role in rebuilding Ukraine’s economy: finance and cybersecurity. Ukraine has consistently ranked as one of the most corrupt countries in Europe in Transparency International’s global Corruption Perceptions Index. Although Ukraine has made significant progress in the fight against corruption since 2014, it remains a problem and a concern for the United States and other foreign partners. The cost of complete reconstruction is currently estimated to be around $750 billion, but international donors are concerned about the potential misappropriation of funds put toward reconstruction.

Reform of its financial sector is essential for Ukraine to secure financial aid for reconstruction, as well as to meet the requirements for joining the EU. The urgent need for financial system reform coincides with women playing a much larger role in the financial system, both within the government and private sector. By transferring the knowledge of, for example, the best anti-money laundering (AML) practices to Ukrainian women, the West would create a generation of AML experts in Ukraine who are capable of detecting suspicious money flows and preventing corruption and money laundering within the Ukrainian financial system.

At the same time, equipping Ukrainian women with cybersecurity skills would help them defend Ukrainian banks and the financial system from Russian intrusions. Ukrainian banks were one of the primary targets of the cyberattacks that Russia initiated right before launching its full-scale invasion of Ukraine in February 2022. More recently, at the end of 2023, Monobank, one of the largest Ukrainian banks, reported a massive hacker attack. While the bank has not publicly attributed this attack to any specific threat actor, Russia has been suspected due to its history of backing cybercrime groups attacking Ukraine. The persistent threat of Russian cyberattacks against Ukrainian banks should be countered by training Ukrainian women in cybersecurity and digital forensics.

Ukraine’s partners and allies can learn from and build on existing work to train Ukrainian women in cybersecurity. For example, the United Nations Institute for Training and Research organized a project that trained Ukrainian women evacuees in Poland in cybersecurity and data analytics. The project was held from October 2023 to March 2024 and was funded by the government and people of Japan. Private companies have also launched similar initiatives. For example, Microsoft is working with nonprofit organizations in Poland to train Ukrainian women refugees to enter the workforce in cybersecurity. Such projects need to expand to include more partners and reach more Ukrainian women.

Investing in Ukrainian women is smart economics

Leveraging Ukraine recovery conferences and other global convenings to encourage Western investment in Ukrainian women corresponds with the United States’ existing strategy of providing economic incentives to allies—also known as positive economic statecraft. The EU, United Kingdom, and other Group of Seven (G7) members are already heavily invested in Ukraine’s success. Directing investment toward the female workforce will strengthen an already existing strategy of ensuring Ukraine has the resources to minimize economic dependence on Russia. Investment in Ukrainian women will create a multiplier effect for the economy. It is well-known that women often spend their income on education, healthcare, and nutrition—all of which raise the standard of living. This is a force that moves economies forward but is often sidelined.

Finally, Ukrainian women can fill in global workforce gaps, too. Training Ukrainian women in cybersecurity would help address the global cybersecurity skills crisis. Private companies and policymakers often note that the world does not have enough cybersecurity professionals. Meanwhile, Ukraine has a highly educated population, especially in technical subjects. Cyber-trained Ukrainian women could defend not only Ukrainian banks but also businesses and governments around the world.

As policymakers and private sector actors adopt strategies for Ukraine’s reconstruction, it is crucial that they fully leverage the potential of Ukrainian women and help establish the groundwork for an inclusive and sustainable recovery.

Melanne Verveer is the executive director of the Georgetown Institute for Women, Peace and Security and a former United States ambassador-at-large for global women’s issues at the US Department of State.

Kimberly Donovan is the director of the Economic Statecraft Initiative at the Atlantic Council’s GeoEconomics Center and a former senior US Treasury official.

The post Women should play a central role in rebuilding Ukraine’s economy appeared first on Atlantic Council.

Since Modi became prime minister in 2014, the Indian economy has grown by an average annual real rate of 6 percent to the latest fiscal year ending in March 2024—quite impressive against the backdrop of a slowing down of many major economies, especially China’s, since the COVID-19 pandemic. With annual GDP at around four trillion dollars, the Indian economy has become the fifth largest in the world, poised to overtake Japan and Germany in the foreseeable future to rank third after the United States and China. That growth has been attributed to the Modi economic model—heavy promotion of the information and communications technology (ICT) sector, in particular IT services and other service exports, and the “Make in India” campaign to encourage more manufacturing activity by streamlining administrative tasks, building up infrastructure, and improving banking and payment services.

However, it is important to keep in mind that the 2014-2024 period experienced a slowdown from the previous decade under Prime Minister Manmohan Singh, which had enjoyed an average annual real growth rate of almost 7 percent. The slight slowdown under Modi has preserved the basic features but exacerbated the fundamental weaknesses of the Indian economy. For several decades, the ICT industry has been the most dynamic. But although this sector represents 13 percent of India’s GDP, it relies on a very small number of highly skilled workers—accounting for less than 1 percent of India’s labor force of 594 million (according to the World Bank). And even within this privileged group, slow salary increases have been a cause of frustration for more junior workers.

Under the “Make in India” plan and its recent $24 billion of subsidies to chosen sectors, manufacturing employs 35.6 million workers, or about 6 percent of the labor force—even less than the United States. More importantly, the ratio of foreign direct investment to GDP has fallen to the lowest level in sixteen years. Private sector investment has also declined from more than 25 percent of GDP in the mid-2000s to less than 20 percent. Those declines have contributed to the fact that the share of manufacturing value added in Indian GDP has decreased from 17 percent in 2010 to 13 percent in 2022.

Essentially, even including the impact of consumption spending by workers in the ICT and manufacturing sectors on consumer-related businesses, the contribution of these two sectors to overall employment is relatively small. This could become even smaller if the declining trend in the manufacturing-to-GDP ratio cannot be reversed soon.

The Modi economic model has clearly spurred GDP growth. But its fruits have tended to accrue to a small percentage of the population, raising the number of billionaires to 271 in the process. Income inequality is considered worse than under British colonial rule, according to a new report from the World Inequality Lab. The pace of non-farm job creation has fallen from an average of 7.5 million new jobs a year in the decade prior to Modi’s premiership to about half of that during his time in office. Perversely, employment in the agricultural sector has risen by 56 million workers in the past five years—driven by COVID-related distress. This poor employment performance has thus failed to absorb nearly 12 million new entrants to the labor market each year. As a result, the unemployment rate remains high at more than 8 percent—and much higher at 17.8 percent for young workers compared with the world average of 14.3 percent. The economic and social ramifications for India are even worse than those unfavorable numbers appear to suggest.

India faces a double-edged sword of being the most populous country on earth with more than 1.4 billion inhabitants—75 percent of whom are of working age (15 to 64 years)— but with a labor force participation rate at 51 percent. The Asian average is 63 percent and China’s is 76 percent. Furthermore, only 23 percent of the workforce are salaried workers. The rest work in agricultural and informal sectors. This has made the goal of strong and inclusive growth intractable and difficult to achieve.

India’s huge working-age population can fuel strong growth if adequately and properly employed. However, if job creation cannot keep pace with labor force growth, what could have been a tremendous demographic dividend will turn into an economic and social crisis. The challenge to Modi in the next five years is to carry out a balancing act between maintaining the recent growth momentum and making it more inclusive by providing regular employment, especially for the millions of young entrants to the labor force. This probably means switching government priorities from supporting a few conglomerate national champions to helping the multitude of micro-, small-, and medium-sized enterprises, which provide the bulk of employment in India. Furthermore, government attention should be widened from a focus on advanced technological areas such as semiconductors and artificial intelligence to basic manufacturing and processing, which can create many jobs. Policy announcements in the weeks ahead will tell us how Modi intends to deal with this challenge.

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 a 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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Online Event Mon, June 3, 2024 • 1:00 pm ET

US Trade Representative Katherine Tai on the future for US-EU trade

An #ACFRONTPAGE Event—US Trade Representative Katherine Tai discusses how the United States and European Union should adapt the transatlantic trade relationship at the eightieth anniversary of the Bretton Woods system.

Economy & Business Europe & Eurasia European Union International Financial Institutions

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Katherine Tai
United States Trade Representative

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introductory Remarks

Mark Gitenstein
US Ambassador to the European Union

MARK GITENSTEIN: Katherine, Fred, ladies and gentlemen, to those here in the room and those joining online, thank you for being with us today. 

This week, we mark the eightieth anniversary of what General Eisenhower called, quote, “the great and noble undertaking,” unquote—the allied invasions at Normandy. D-Day marked the beginning of the end for fascism and the victory of transatlantic democracies. The men and women fighting against autocracy in Europe were fighting for values that continue to cement the transatlantic relationship today. These values were outlined by President Franklin Roosevelt and Winston Churchill in the Atlantic Charter in 1941, which laid out allied war goals and hopes for the postwar world. 

Roosevelt and Churchill proclaimed the ultimate allied goal was that, quote, “all people in all lands may live out their lives in freedom from fear and want, and with the object of securing for all improved labor standards, economic advancement, and social security,” close quote. The Atlantic Charter was a powerful vision of transformation, a postwar world free from authoritarian tyranny and secure in peaceful economic prosperity. It was also a powerful recognition that economic security is inseparable from the health of our democracies. 

Today, eighty years later, the United States and Europe sit at a similar moment of transformation. Transformation in our economic security, as Russia’s full-scale invasion of Ukraine threatens the peace of Europe. Transformation in our economy as a new generation of green technologies, and manufacturing, and computing set a new standard for our economies. And perhaps most important, a transformation in our society as anger and economic inequality, and hollowed out industrial bases, fuel rising cynicism and disillusion with our democracies. 

On both sides of the Atlantic, populist leaders with easy answers to hard problems promote a new ideology hostile to democracy, aided by authoritarian leaders eager to weaken our societies. As European Commission President Ursula von der Leyen put it, quote, “a new league of authoritarians is working in concert to tear up the international rule-based order, to redraw maps across different continents, and to stretch our democracies to the breaking point,” close quote. As US Ambassador to the EU, I’ve seen the growing resolve of leaders in the US and the EU—the two largest democratic free market systems in the world—to respond to this new challenge. 

In this context, people in Brussels and here in Washington have told me the old orthodoxy about free trade and free markets must change. Our current policies show the old system is not working for ordinary citizens on both sides of the Atlantic. 

Indeed, discontent with that system is fueling populist anger and enabling authoritarians to influence and disrupt our societies. As Jake Sullivan pointed out in his speech at Brookings last year, quote, “This moment demands that we forge a new consensus,” close quote. If we are to strengthen our democracies we must change our oldest assumptions about trade policy. We do not have a choice. 

As Katherine has said many times, trade policy is not siloed from national security. It is a key part of ensuring not just prosperity for our citizens but the health of our democracy. As Jake said, this is about making long-term investments in sectors vital to our national well-being. 

This administration has outlined bold new steps for a twenty-first century economy that broadly benefits our citizens, strengthens our democracy, and works with our partners to do the same. 

In so doing we look back to a tradition outlined by FDR and Churchill four generations ago, a recognition that by ensuring economic prosperity we inoculate our societies from the temptations of authoritarian populism that then, as now, threaten to undermine democratic societies.

It is up to us to finish the work that FDR and Churchill started to create a new vision for a transformational world, one that leads us to renew strength for democracies on both sides of the Atlantic. 

That is what Katherine and I are hard at work on together in the European Union and in reshaping and modernizing the transatlantic bond, especially as it relates to trade policy. She is my sister in arms. 

FREDERICK KEMPE: Ambassador Gitenstein, thank you so much for that. 

The great noble undertaking a similar moment of transformation, a new league of authoritarianism. 

This is really rich material, Ambassador Tai, and thank you for being with us today. Ambassador Gitenstein’s remarks underscored what we’ve been trying to say at the Atlantic Council for a long time. We had Brian Deese here from the White House introducing the new industrial policy. We had, you know, Secretary Janet Yellen here from Treasury where she introduced the term friendshoring.

And a lot of this conversation is taking place here because from the very beginning we’ve seen geoeconomics and geopolitics as inseparable. They are two sides of the same coin. 

I want to greet some people who are here from our board: Kostas Pantazopoulos, George Lund, Ankit Desai, and Chris Fetzer. We have the Swedish and the Austrian and the Greek ambassadors here.

If I’ve missed any of you it is not meant to be a slight of your country or your board membership. But thank you for being here. 

Before I dive in I want to endeavor to get as many questions from the audience as possible both from our in-person group—and you’ll see a microphone over there. When I start calling for questions you can line up there on your left side of the—my right side of the room.

And from the audience online I’ve got that in front of me and you can put your question at AskAC.org. So AskAC.org.

And so my first question—let’s anchor this in history—we, the Atlantic Council, have been calling this a fourth inflection point period—at the end of World War I period, end of World War II, end of the Cold War and now, hopefully, at some point at the end of the war in Ukraine, et cetera.

We all know that we got a lot of things tragically wrong at the end of World War I. Ended up with fascism, millions of dead, the Holocaust, World War II. And at the end of World War II we got things more right than wrong building the institutions that serve us today, staying in places where we might have come home at a different time in history, working with our previous adversaries Japan and Germany to build a new world order.

So let’s start there. You wrote about that connection last week, and if you haven’t read this piece in the Financial Times it’s really—a really remarkable, powerful piece that invoked the Atlantic Charter. I think some were surprised by that connection. Some might be surprised why we’re talking to you a few days ahead of D-Day, I guess less surprising a few days ahead of the eightieth anniversary of Bretton Woods. But how does trade fit in with national security? And when you look at these other inflection points in history, how in your mind does trade tie with our shared history with our allies, which we didn’t get so perfectly after World War I, better after World War II, and right now up for grabs?

KATHERINE TAI: Well, thank you so much, Fred, and it’s wonderful to be here with you. And I want to thank Ambassador Gitenstein, my very good friend Mark, my brother in arms. That’s really a compliment. We have been working hard together on the transatlantic relationship.

I couldn’t be more pleased to be here with you, Fred, at the Atlantic Council. And the way that you’ve set up this question really reflects what a wonderful organization you run here and with the history, but provide context for this particular conversation and where we are today in the history that’s unfolding and being written every single day.

I am the trade representative. And to your point, it may be odd to be having this particular conversation on the eve of the D-Day eightieth anniversary and Bretton Woods, but I think that your introduction really does a better job than I could in making the case that as history unfolds, that everything is connected—that economics is connected to politics, which is connected to national security, which is connected to the relationship between countries, which is connected to the relationship between people and citizens with their governments.

And so to look at where we are today, and to assess the successes and the shortcomings of where we’ve come from, I think one of the successes is, undoubtedly, if you look at the World Bank data on GDP, growth, over these last several decades, you see the numbers going up and up and up around the world. But certainly, as of today, there is a sense of anxiety and insecurity and a lack of confidence that seems to be going through every economy here, in Europe, and around the world. So what’s going on?

To your question about how economics is connected to national security, what I would say is if we go back to, say—let’s just pick a date in the beginning era that you’ve identified—1933, Franklin Delano Roosevelt takes office as president of the United States. And it’s the spring of 1933 when German democracy comes to an end in that post-World War I period and fascism has risen and taken over.

FREDERICK KEMPE: And people forget this. March 1933, Hitler and Roosevelt both come to power within days of each other.

KATHERINE TAI: That’s right.

FREDERICK KEMPE: Yeah.

KATHERINE TAI: That’s right. And FDR has absorbed and has lived through the years of the Great Depression coming into the 1930s, and what is very much on his mind is that connection between economic depravation and the willingness of people in times and circumstances of despair to give up their freedoms and to abandon their democracy. And so you see FDR lead in the establishment of his New Deal policies. Over the course of his terms in office, you see as we go through—we go through the 1930s, we enter into World War II, he takes us out of World War II, that the approach that he’s taken—which is really to address the economic security of working people—that he starts to internationalize that through the Atlantic Charter and through the principles that are then applied to the negotiation of the Bretton Woods institutions. The original vision for trade in the Bretton Woods institutions went above and beyond the General Agreement on Tariffs and Trade, the GATT, which is what ended up making it across the finish line. The original vision to pair with the World Bank and the IMF was an International Trade Organization, the ITO charter, that had tariff pieces that were coupled with enforceable and meaningful worker standards based on a goal of full employment for all members, environmental equities, and also antimonopoly provisions—to address the fact that it’s not just the private sector companies that can behave as monopolies and distort economic opportunity, but entire countries. At the time you will also think about in the 1940s coming out of World War II the creation and the rise of the Soviet Union on the eastern front of Europe. 

So it’s through that lens that we are looking at the particular challenges that we’re facing today, and examining the tools and the means for accomplishing the goals that we need to set out for ourselves. Those goals are actually very similar if not the same goals that we had in the 1930s and the 1940s, that were embodied by the ITO charter combined with the Truman doctrine and the Marshall Plan. And it was based on a partnership and a collaboration between the United States and Europe across the Atlantic to build a world based on economic opportunity, fair competition, and democracy. 

FREDERICK KEMPE: What a rich opening. So, as you wrote in your piece, and I’ll quote this, the stakes are high. Quote: “The stakes are high. As Oxford historian Patricia Clavin has documented, democracies failed to find common ground on international economic issues in the 1930s, with devastating consequences.” To what extent do you think we’ve properly viewed and understood the dangers now? Do you think the dangers are as sharp as they were in the 1930s? And to what extent have we done enough thus far? 

KATHERINE TAI: I think absolutely. Now, I wasn’t around in the 1930s. But I think that this is an intergenerational project. For those who do remember the times of FDR, and the immediate legacy of the New Deal policies, those who remember World War II, those who have come through those years, I think that there is a collective project for us to properly put what we’re experiencing today in this historical context. And to remind ourselves of what helped us to succeed the first time around, where we may have gone off track—because I have a little bit of a diagnosis here to share with you—and how to get ourselves back on track. 

Because I think that for those leaders in the United States and in Europe who experienced the significant trauma and tragedy of the world wars, that what they won through those experiences was a depth of wisdom that even for us, having gone through the years of COVID, going through the Russian invasion of Ukraine, I think would really benefit from tapping into. And I think that it is that more holistic approach to domestic and international economic and security principles that can be very helpful to us on a transatlantic basis for imagining the bringing about of yet another new world order, as you’ve described in your introduction, that can correct for where we went wrong, but also harness the elements where we were successful. 

FREDERICK KEMPE: It’s really interesting. Because you’re really speaking to a danger we have right now, which is a deficit of that kind of memory because, of course, even Joe Biden was two years old at the end of World War II. And so the memory we have of what goes wrong, those who forget history are condemned to repeat it. We all know that. This is a year of elections across the world. You’ve also brought up the connection between trade and democracy. Could you explain that to us? 

And more than 50 percent of humanity is voting this year, representing nearly two-thirds of global GDP. And the ambassador in his opening talked about and quoted Ursula von der Leyen on a new league of authoritarianism. As something of a student of the 1930s, I look at the relationship with Hitler, Mussolini, the Japanese, not nearly as close as the relationship is right now of Putin, Xi, North Korea, Iran, interestingly enough. So talk about what role trade plays in this contest of democracy and autocracy. 

KATHERINE TAI: Wonderful. So here’s where I’ll get into a bit of our diagnosis in terms of where our successes have come up short. And I think that what I would do is go back to that original vision for the ITO charter. Understand that it was more than just the GATT. And imagine what would have happened if the ITO charter had made it across the finish line. Now, one historical note, the ITO charter in full didn’t succeed. And it was one Senator Taft who really put the spoke in the—spoke in the wheel. And was the same Senator Taft who had rolled back a lot of the New Deal worker protections that FDR had put into place. 

Now, what was left on the cutting room floor? The enforceable, meaningful labor standards, the environmental standards, and then also the antimonopoly rules. So instead, what you ended up with was a tariff program and a program of trade liberalization standing on its own, without the safeguards addressing the interests of working people, of the planet, and of ensuring a healthy and vital amount of economic opportunity that could happen within economies and between economies. 

So, over time what you have found is this era and this version of globalization, fueled only by a pursuit of trade liberalization, and the limits of what that trade liberalization has been able to accomplish. Now, I think it’s created a lot of efficiencies. It’s maximized on a lot of revenue, minimized on a lot of costs. But it’s incurred a different set of costs. One, when you look at the geopolitical, geoeconomic perspective—let’s look at supply chains. How incredibly fragile we now realize they are, how much concentration is reflected in certain supply chains in terms of single source, single country, single region supply, the leverage of certain regions, certain countries in dominating entire sectors or entire portions and links in a supply chain, and the kind of geopolitical tension that that’s fueling. So that’s one example. 

Another example is a shortcoming of this version of globalization, that is based only on economic liberalization, tariff liberalization, what we might call as a laissez-faire or neoliberal system, resulting in a competition between countries and jurisdictions that’s built on pitting our workers against each other, pitting our middle classes against each other, creating this kind of a zero-sum competition for economic and industrial growth opportunity. And the real question before us now is how do we move towards a future and a different form of globalization that preserves some of the positives of what we’ve experienced, while correcting for what is turning out to be a very unsustainable pathway on a geopolitical, geostrategic level, as well as on a human and a planetary level?

FREDERICK KEMPE: I’m going to come back to that, because I’m interested in what kind of trade agreements fit into that. But let me come back to that. Let’s shift first to our Bretton Woods 2.0 Project, where we’re thinking about what are the next eighty years going to look like. As you’re talking in really broad strokes about a fascinating, quote/unquote, “new consensus,” are the current institutions fit to purpose, from climate change, supply chain vulnerability that you talked about, nonmarket economy policies, labor rights? And so do the rules of the road, including those at the WTO, need to be changed? Do the institutions need to be changed?

KATHERINE TAI: I think they need to be—they need to be well-loved. And like those that you love a lot, they need to be improved—and supported in growing and realizing their full potential, which may require some revamping and some education and investment.

So, you know, all of the Bretton Woods institutions and the UN itself, they’re all showing their age. The world today versus the world when they were created is very, very different. Now, that doesn’t—

FREDERICK KEMPE: And let’s not forget Bretton Woods was drawn up during the war as the war was unfolding.

KATHERINE TAI: That’s right. That’s right.

FREDERICK KEMPE: This is a very different time, eighty years older. Yeah.

KATHERINE TAI: It is—it is a very different time. And the balance of powers is also very different. And also, the modern era is also different. You know, look at the urgency that we feel around climate and the impacts that we are starting to see on a—on a seasonal basis with respect to what’s happening on the planet. But then, also, the technological change that’s happening—which, by the way, there’s—there have been technological advancements all through history. And I think what we’re going through may echo some of what we’ve experienced before, but the pace of change and the type of change I think is—feels rather unique.

Now, in light of all of this, I think that these institutions still absolutely have an important role to play, if not an even more important role to play today than they did in the past. But certainly in terms of the detail and in terms of the specifics of the architecture of these institutions and the substance of the texts—the legal texts that hold them together, I think they absolutely need a lot of love and revisitation.

FREDERICK KEMPE: I think in the parlance of our day it’s called tough love. But where would you start? What would be your highest priority in taking this on?

KATHERINE TAI: So I’m the trade representative, so it’s—they say if you’ve got a hammer, then everything looks like a nail, sort of. So, you know, as the trade representative, I’m always going to start with the trade conversation.

But again, I think I’ll just bring this back, which is the trade conversation today is really imperiled if we only consider that we can talk about trade. Where I started this conversation was acknowledging, as is implied in your introduction, that everything is connected. And so I think that where you need to start is the breaking out of the siloization of policy, of institutions, so breaking down those silos and connecting the conversation. Which is why, as the trade representative, I’m really so delighted to be sitting here on the stage with you, not being a trade expert but being expert in so many other things.

Where to start? I think that we’ve already started in the Biden administration. And it’s the Biden administration’s approach to economics which is also, if you listen to President Biden talk, very much married up with his vision for America’s role in the world. So we start with a really robust and real program of investing in the United States, whether that’s through infrastructure, where we had mostly been coasting on the significant investments that were made during the Eisenhower administration; investing in ourselves and our infrastructure; investing in our industries, the CHIPS and Science Act; investing in our industrial growth and the industries of the future, the Inflation Reduction Act. Those types of investments, paired up with our trade program—which includes our tariff programs, where we’ve taken actions recently to ensure that the tariffs and the investments can work together to reinvigorate American industrial growth, manufacturing capacity—all right, so that’s one piece.

The second piece, investing in our people—and that’s our people as workers—empowering them, educating them. In trade as well, we talk about building out our middle classes, finding ways not to pit our workers against each other. In the US-Mexico-Canada Agreement, we’ve got a mechanism where that’s exactly what we’re doing. We’re working with Mexico to scrutinize individual facilities where we have reason to believe that worker rights of freedom of association and collective bargaining are being denied, and ensuring that Mexican workers can exercise the rights guaranteed to them by Mexican law and by the agreement itself. To this day, we have directly benefited more than thirty thousand workers in Mexico. By empowering those workers, we are helping to even the playing field with American workers.

And then I’d say the third piece of this is looking at the entire economic ecosystem here at home and also in the world context, and ensuring that there is broad-based, healthy economic competition—that there is economic opportunity that we are creating across the economy; that our commitment to taking on monopolies and recognizing that monopolies don’t just manifest as companies but also as countries. Taking us back to that FDR understanding, that postwar understanding, that one of the major challenges we would be facing is with the Soviet Union and the communist world, with those state-command economies having to compete against entire economies all at once. All of those pieces coming together in our trade policy as well, and understanding that taking on a foreign monopoly is about being consistent. You have to enforce competition here at home while you are also enforcing competition and opportunities around the world.

FREDERICK KEMPE: Fascinating. I’m going to ask—and this is really disciplining myself because I have a hundred questions I’d like to ask—I’m going to ask two more questions: one on digital trade, one on Europe. I’m sure in the Q&A we’ll get to some more on China as well. And then I’m going to turn to the audience. So I’ll look to this and I’ll look to this, and I already see a few coming in here.

So FDR didn’t need to deal with digital trade. Bretton Woods didn’t have to deal with digital trade. You’ve seen some significant shifts in US digital trade policy, including withdrawing proposals for digital trade chapters focusing on things like free flow of data in institutions like the WTO. One of the questions we got in from the audience was: What are you doing on the promote side of the trade agenda, particularly on digital and AI issues, where there is a hunger from many of our trading partners to align with the US? And this partner said that there is a perception of a US withdrawal on digital trade over the last year in Europe, Southeast Asia, Latin America, and Africa, where China continues to announce new projects on cross-border data transfers and AI partnerships. So that’s a big, broad question, but it’s really: What’s your view of where digital trade policy fits in here? And then what’s your answer to these criticisms?

KATHERINE TAI: Great. OK. So when we started negotiating things in this digital arena, we called them e-commerce provisions. And I think that the first e-commerce chapter dates back to Singapore, which we’re just celebrating the twentieth anniversary of the Singapore Free Trade Agreement. Now, if you think back to 2004 and you think back to what e-commerce was, in 2004 I think Amazon was still mostly just an online bookseller. So what we were doing in our trade agreements was—through a very traditional approach to traditional trade transactions of goods moving across borders, we were looking at what could you do in a trade agreement to help to ensure the facilitation of those traditional types of transactions. And that’s really how we thought about data flows—that, you know, the data that flows in an e-commerce transaction is the stuff that helps to facilitate the transaction: the information that needs to be sent from one place, maybe across a border, to another place; the economic information, the payments information; and then how to get it back—how to get the good across the border.

Fast forward twenty years. It’s 2024. When we’re talking about data, it’s not just about the bits and bytes that help to facilitate a traditional goods transaction anymore; data is the game itself. And that couldn’t have been more clear than with the advent of ChatGPT-4 a couple months ago, where suddenly people are wowed by, you know, please—I think there was an exercise for us where we were—we were asked to put prompts into ChatGPT-4. And so there were a number of us in the administration, and I said, oh, I know, I know; how about ask the generative AI to write a poem about Bidenomics in the style of e.e. cummings. And any of you who pay for ChatGPT-4 and the paid service, go ahead and try it. What comes out is kind of amazing and maybe even a little bit beautiful. It’s very, very eerie, right?

And so that started a lot of, I don’t know, just this incredible curiosity about what the heck is this thing and how was it made? And it turns out that it had—it had fed on basically all the data that has been created and was put out there in the internet since the beginning of the internet and maybe even before with, you know, published works, right? That is then processed through incredibly powerful computers that only a couple of companies are powerful and rich enough to have access to. 

And in the context of this awareness about data—and then you can get over to the data brokers and how much of your data you’re generating every day that’s available for others to buy and sell. And for those who are buying it, real questions about what they’re using it for. We start to realize that, wow, as we break out of our trade silo, we’re appreciating that our traditional approach to what we’re now calling digital trade actually has implications for so much more. Isn’t it time for us to hit pause on this, come back, reconnect with all of the other policy silos, break them down, talk to our Congress, talk to our industry, the bigs and also the littles, right? The companies and also the workers. The platforms, and also the creative content producers. And try to get our arms around what is actually happening here, and what is in the public interest?

Because that is not the question that has informed the proposals that we’ve developed over time. So what I would say is for all of those who are yearning for a leadership from the executive branch and USTR to tell everybody else what the answer is, my argument is the real leadership is in stepping back and saying: This is not an answer that is going to come from USTR alone. And that if that’s what you’re looking for, is the USTR-led answer to how we should be regulating tech and data, that is not going to be the right answer. This is, again, a project for our collective wisdom. And it’s only once we’ve achieved that wisdom—first here in the United States, and then with our trading partners—are we actually going to be assured of any kind of success that the world order we’re creating, that has rules for digital trade and technology, is going to support economic opportunity for working people and democracy. 

FREDERICK KEMPE: But, in short, hit pause at the moment on digital trade policy. Is that?

KATHERINE TAI: Pull back provisions that we already know are not fit for the times. And then engage, and learn, and talk to each other—including in forums like this—and put out the question, how should we be approaching this? And I’d say that, number one, it’s a domestic policy issue first. Before we bring it to the international realm, we’ve got to figure out what works for the United States. Also, what works for our democracy? At this moment in time, with all these elections going on and the amount of disinformation and active interference that’s happening through information systems that are being created by data and these distributional platforms, it is a really important time to be asking what is a pro-democracy approach to regulating technology?

FREDERICK KEMPE: So anyone in the audience who would like to see the Atlantic Council’s AI Code of Ethics in the voice of Shakespeare, I can send it to you—which I’ve worked on here. 

So quick, quick question on Europe. And then I’ve got a couple of questions here. And we’ll see if anyone stands up by the microphone. It’s a big question. I’m going to ask for a short answer. Which is, the overall status of US-European trade relationship. There’s tension over the Inflation Reduction Act still. There’s some frictions in US-EU trade left unresolved—steel and aluminum tariffs. One question here is, after an election, would that be something one could move on to? Some criticism of TTC that’s been long on tech but short on trade. What’s happening with the Europe-US relationship, the transatlantic relationship, that you’re happy with? What is you’re looking at and you’re saying, not very happy with that?

KATHERIEN TAI: OK. Great. So I know we’re right on the cusp of the eightieth anniversary of D-Day, which is really incredibly significant. In my service as US trade representative, we’re also coming on the third anniversary of President Biden’s first US-EU summit. So it happened in mid-June of 2021. It was the first summit he engaged in outside of the United States. He stopped in Cornwall for the G7 leaders meeting on his way to Brussels to meet with President von der Leyen and President Michel. And it was in the lead-up to that summit meeting that EVP Valdis Dombrovskis and I sat down and negotiated a truce on Boeing-Airbus. At that time, a seventeen-year-old set of disputes that really contributed to the breakdown of dispute settlement in Geneva, but also just a longstanding, very bitterly fought trade dispute between the United States and the EU. 

And we were gathered together at the summit waiting for the three presidents to emerge from their session, and getting to know each other. And EVP Dombrovskis and I were together with Secretary Raimondo and EVP Vestager. And Dombrovskis and I were feeling very good about what we had accomplished in creating space for the United States and the EU to come together to think about how we can be more strategic on large civil aircraft. And I asked—I remember, I asked that group of four. And I said, it’s really so important that we find a way to turn down the temperature between the United States and the EU, Washington and Brussels, and really focus on the fact that we have shared challenges, and we have a lot of shared and common values and principles. 

So how do we bring those values and principles to bear on working on those shared challenges together? And I said, you know, it’s something that’s really important for us to be able to communicate to everybody else. What do you think—how do we describe what’s at stake? And I think this goes to the conclusion in my FT op-ed also, which is the stakes are high. So what exactly are the stakes? And so, you know, we’re kicking around some ideas in terms of how do you message this, how do you communicate this? And it was Valdis who said, well, I think it’s—I think it’s very simple. What’s at stake is the free world. And I remember at the time having two slightly in tension reactions. 

One of them is, wow, he’s right. That is very simple and direct. It is the free world that’s at stake. But my second reaction was, oh, but, you know, “free world?” There’s such overtones of the Cold War that are baked into that. And I really hope that that’s not where we are. And, of course, many things have happened in the last three years, including the brutal and unjustified invasion of Russia into Ukraine, and so many other things that have happened. So many more complexities introduced into geopolitics. So many increased tensions on democracies here at home and abroad. 

And I look back on that conversation with Valdis Dombrovskis, a Latvian executive vice president of the European Commission, and I just marvel at how apt his suggestion remains today—even more apt than three years ago. That what is at stake is the free world. And so I think that what is going well is that that is where we started our relationship in June of 2021. What could use work is every single day in every engagement that we have in trade and otherwise, reminding ourselves that that is what is at stake.

FREDERICK KEMPE: Thank you. Thank you for that. 

So I’m going to turn to a colleague, David Wessel, formerly of the Wall Street Journal where we worked together, but now you can introduce yourself for the other—

DAVID WESSEL: David Wessel, at Brookings.

Ambassador, I wondered if you could tell us where your views overlap with those of Bob Lighthizer and where your views differ.

KATHERINE TAI: Well, thank you for asking about views, because I think early on I had been asked where he and I differ. And I like to say that I’m younger and better looking. But in terms of—Bob is a very nice-looking guy.

FREDERICK KEMPE: I think there may be a consensus in the audience.

KATHERINE TAI: So I am objectively younger. Where are—where our views are similar and where I find—where I find an alliance with Bob is a commitment to the fact that we have to change our approach to trade, that the world is significantly different, and that the benefits here in the United States are not inclusive enough. Those are my words, and that’s in my—very much my democratic vocabulary.

But I think that one of the really important and not foregone conclusions in the trade community internationally is that we do need to change. From my perspective, it’s that we need to evolve the way we do trade. And you can’t do that by yourself; you have to build that collective and that community to do it together. And I think that basing that community on a community of democracies is really important.

In terms of where our views are different, I hope that that’s obvious. And if it’s not, I would definitely take some feedback on how I can make that more obvious.

FREDERICK KEMPE: You want to throw out one example where it’s different? Maybe deal with China. Where do you think you’re the same or different on China?

KATHERINE TAI: On China, I think we share a lot of the same diagnoses. You know, I think one of the ways where Bob and I are most obviously different, again, is in rhetoric—although, you know, Bob inside the room versus Bob outside the room can be different, just like for all of us.

FREDERICK KEMPE: Yeah.

KATHERINE TAI: But you know, I think that one aspect of the Biden administration’s approach—and this very much reflects President Biden’s just innate internationalism—is this point of view that you have to build partnerships.

FREDERICK KEMPE: Yeah. So I saw a friend up a second ago. I was going to take the last two questions, and do them really quickly, and then come to a quick round. Is that all right with you?

KATHERINE TAI: Yeah. Absolutely.

FREDERICK KEMPE: Let’s do that. Please.

DAVID METZNER: Yes. Thank you, Fred. David Metzner with ACG Analytics.

I’d like to pull on the China string a little bit more. At the end of World War II, of course, China was an ally. China was in all the multinational organizations. Took a different turn in 1949. How do we think about China in the transatlantic context, particularly in trade? Europe will be releasing its report on electric vehicles, I think, in three weeks. We have—we just put tariffs on Chinese vehicles recently, I think, of roughly 95 percent. So how do we effectuate everything we want to do and strengthen the transatlantic relationship with China sort of orbiting outside and operating with capitalism with Chinese characteristics? So how do we—how do we think as transatlanticists on China?

FREDERICK KEMPE: That’s a great question, and we’ll pick up the last question. I think part of the answer to this question is also where do we differ transatlantically with regard to China, but—

FRANCES BURWELL: Fran Burwell, Atlantic Council and McLarty Associates.

You’ve spoken a lot about communities of democracy and shared values. You’ve also spoken a lot about institutions. Even the best of friends don’t always get on and agree on everything. So as you think about how the institutions should be reformed, what’s the role of the dispute resolution mechanism? How do you see that moving forward? What is the role of that in your new world of institutions? Thank you.

KATHERINE TAI: Great. OK. So let me try to distill those.

FREDERICK KEMPE: Please. Over to you.

KATHERINE TAI: So the question of China really I think deserves a whole separate session unto itself.

FREDERICK KEMPE: I know.

KATHERINE TAI: But let me put it this way. I think I—I actually think that the way you put the question about China is incredibly gentle. Capitalism with Chinese characteristics, actually, I’m not—or, I haven’t heard that term used in many, many years. At this point, I think it’s less diplomatic than just sort of ahistorical.

The China that we’re dealing with now, the PRC, is not a democracy. It’s not a capitalist, market-based economy. And so I think what might be useful in terms of shorthand in thinking about how we coexist and how we adapt to a world economy where the PRC has such an incredibly large footprint may go to revisiting how the negotiators and the founders of that post-World War II system and the ITO Charter thought about the possibility that the ITO Charter could have Soviet participation. At the beginning, it was—it was a possibility that the Soviet Union would be a member of the ITO Charter and I think that that’s where the labor standards, the environmental protections, the antimonopoly provisions really come in. 

So a lot more to say there, but let me just highlight that. 

On the second question, you’re absolutely right. I would say, you know, friends, when you’re different economies, different political entities, you’re never going to agree on everything, just like human friends don’t agree on everything. 

But there is a really important basis of mutual respect that you have to start from. I think that that question was really about the dispute settlement reform exercise at the WTO. We are entirely committed to the reform and the tough love that it’s going to take to reinforce the WTO and its role in the in the world economy. 

The dispute settlement system is one part of that. I think what I’d like to reflect on is the dispute settlement system that we had. The status quo ante was the same dispute settlement system that let or incentivized us to continue fighting for almost twenty years about state support for Boeing and Airbus that caused us to fight each other and pick at each other, their enormous cases, while the PRC built up its own civil—large civil aircraft industry under our noses.

And I think that that is really worth reflecting on, again, everything being connected, for us to think about dispute settlement in an organization like the WTO and how it doesn’t just become a giant litigation forum that you throw money and lawyers at to make a point against each other, to levy tariffs on each other, but how it can be a dispute settlement function that actually helps you resolve disputes with your friends and your competitors, who sometimes are the same alike. 

And that is a lot of what is informing our approach to dispute settlements reform at the WTO, which is how can it more effectively facilitate the resolution of disputes between significant trading partners and to prevent this ossification and political entrenchment that we have seen with our friends in the EU have—not just in this case. It had been many cases prevented us from coming together and focusing on things that really matter. 

FREDERICK KEMPE: Thank you so much for that. I think the work of our China Pathfinder Project and the GeoEconomics Center really underscores some of the things you’re saying.

What a rich conversation this has been. Thank you so much. 

I want to salute Josh Lipsky and his GeoEconomics team and the remarkable work they’re doing including the hosting of this event. Ambassador Dan Fried for playing the role that he’s done in bringing you to us, Ambassador Tai.

And I want to thank you for elevating this conversation on trade not just in the context of the anniversary of D-Day and the anniversary of Bretton Woods agreement, but in the context of the contest for the global future. So thank you so much, Ambassador Tai.

KATHERINE TAI: Thank you so much, Fred. Thanks to all of you.

Watch the full event

The post US Trade Representative Katherine Tai on modernizing the transatlantic partnership appeared first on Atlantic Council.

Recent economic data and projections by international institutions, including the World Bank, reveal that the country faces considerable headwinds. Several notable social indicators, too, raise concerns that the country’s success story may be unraveling. Not coincidently, these shifts are taking place under a government that is less and less accountable to its citizens.

The worsening economy: The big picture

Published on April 2, the World Bank’s Bangladesh Development Update forecasted that the country’s gross domestic product (GDP) growth in fiscal year 2024 would be 5.6 percent. Within days of the World Bank’s forecast came a report from the Bangladesh Bureau of Statistics (BBS) that GDP growth in the second quarter of the current fiscal year, between October and December 2023, was 3.78 percent. This is a dramatic decline compared to the previous quarter’s growth, which stood at 6.01 percent. The numbers were far higher in previous years’ second quarters; in fiscal year 2022 it was 9.3 percent and in fiscal year 2023 it was 7.08 percent. The overall GDP growth projection of the World Bank sharply contrasts with the government’s initial projection for fiscal year 2024, which the Bangladeshi government revised down in January from 7.5 percent to 6.5 percent.

Analysts have described the government’s growth target as unachievable. Those who have been following Bangladesh’s economy were not surprised that the World Bank projected a rate below last fiscal year’s growth of 5.8 percent and well below fiscal year 2022’s growth of 7.1 percent. The country’s average GDP growth over the past decade, according to government statistics, was around 6.6 percent. The World Bank forecast suggests that Bangladesh’s economic growth has been on a downward trend for two consecutive years and that the projection for next year is not much different from this year.

The economic crisis in Bangladesh, which has been evident since the middle of 2022, didn’t appear suddenly due to external shocks. It was in the making for quite some time. Two years ago, Bangladesh reached out to the International Monetary Fund (IMF) and other international lenders to avert a meltdown. The government did secure new loans, but these have added to existing external loans. For the first time, external debt surpassed one hundred billion dollars in late 2023. As a result, the cost of servicing the debt is increasing at an unprecedented rate. In the first eight months of the current fiscal year, the country spent $2.03 billion making payments on this debt. The debt servicing, not only the foreign but domestic sources, is forcing the government to borrow to “repay a large part of its PPG [public and publicly guaranteed] debt obligations,” according to economist Mustafizur Rahman.

This is putting a serious dent in Bangladesh’s foreign exchange reserves, which have continued to slip. As of early April 2024, they stood below the IMF’s suggested $19.26 billion. Concurrently, nonperforming bank loans, which are about 10 percent of total outstanding loans, according to the central bank’s statement, are increasing. In the past fifteen years, the amount has increased six and a half fold. In a single year, it increased by more than 20 percent. Faced with pressure from the IMF to reduce the defaulting loans, the Bangladesh Bank has devised a stealthy way to do so—essentially, by cooking the books. The Bangladesh Bank has decided to relax the write-off policy that will wipe out a large amount of loans from the books but will hold nobody accountable—neither those banks which have allowed this to happen nor the businesses which have defaulted.

Instead, a recent amendment to the Bank Company Act will allow the sister companies of the defaulters to continue to borrow. In another controversial move, the Bangladesh Bank has decided to merge “weak banks” with “strong banks”  as part of its banking sector reform program. In April, the World Bank described this move as “counterproductive,” and experts have questioned its prudence. It will force the liabilities of weak banks onto the depositors of stronger banks. Many of the banks identified by the central bank as weak were approved in the past fifteen years for political considerations. The benefits enjoyed by those who established these banks and borrowed from various banks are now being paid by the public at large.

Economic woes of citizens

The broad economic crisis is having serious consequences for Bangladeshis, especially those in the middle class and poorer segments of society. While official statistics from February claim that inflation is below 10 percent, the prices of food and essentials in the market indicate a far greater number. Although food and fuel prices have fallen in the global market, Bangladeshis have not enjoyed the benefits of this. Instead, the government in March once again raised the price of electricity. In 2023 alone, the government raised the price of electricity and gas three times.

The plight of the common people can be gleaned from the data provided by a BBS survey conducted in the middle of 2023, “Food Security Statistics 2023.” The survey revealed that around 37.7 million people experienced moderate to severe food insecurity in the country. The report also noted that more than a quarter of families were taking out loans to cover the cost of daily necessities, including food. A survey by the South Asia Network on Economic Modeling, a think tank, shows that 28 percent of households resorted to borrowing money between April and November of 2023. The share of households borrowing money, largely from informal sources, has been on the rise for the past decade. According to a 2022 BBS survey, the average amount of loans per household in the country nearly doubled between 2016 to 2022, whereas the amount increased just 34 percent in the six-year period between 2010 and 2016. These numbers point to a difficult, perhaps even deteriorating, economic situation for many Bangladeshis.

Social indicators are showing strains

While the economic indicators alone are concerning, there are also disturbing developments in several social development indicators.

Bangladesh had been registering increases in life expectancy for decades. In 2020, it reached 72.8 years, the highest to date. But since then, the pattern of growth has been broken. In 2021, there was a decline, to 72.3 years. In 2022, a modest increase to 72.4 was reported by the BBS. But the Bangladesh Sample Vital Statistics-2023 (BSVS-2023), published by the BBS in March 2024, shows a reversal, to 72.3 years. Combined with the information that food insecurity has increased in the past year, it is worth asking what might be causing this decline.

The decline in life expectancy is in part a result of the increase of the death rate in children. The BSVS-2023 shows that the mortality rate for children under five years of age, newborns, and children under one year has increased. Nor was the increase a one-off incident. Take, for example, the mortality rate for children under one year of age. The number was 21 per 1,000 five years ago, while in 2022 it increased to 25 and in 2023 it reached 27. The death of children below one month has reached 20 per 1,000 live births, up from 16 in 2022. Five years ago, the death rate of this age group was 15. The death rate of children under five years was 33 per 1,000 in the past year, an increase from 31 in 2022 and 28 five years ago. The BVS-2023 identified other troubling trends in social indicators as well. For instance, child marriage has increased significantly in recent years—from 31.3 percent in 2020 to 41.6 percent in 2023.

Two aspects of education and employment are noticeable in the statistics provided in the BSVS-2023 and a survey conducted by the Bangladesh Bureau of Educational Information and Statistics (BANBEIS). First, there has been a drop in students at the secondary-school level and an increase of NETT (not in employment, education, or training) among the youth population. Over the past four years, the number of students at the secondary school level in Bangladesh has decreased by one million, according to the BANBEIS.

According to the BSVS-2023, the share of children between five and twenty-four years not in educational institutions has risen since the COVID-19 pandemic. In 2020, at the onset of the pandemic, 28.46 percent were out of educational institutions, while in 2023, the share reached 40.72 percent. On the other hand, BSVS reveals that 39.88 percent of youth between the age of fifteen and twenty-nine are neither in school nor in employment. The percentage was a little better than 2022, when it was 40.67 percent, but according to the labor force survey of 2016-2017, the NETT was around 30 percent. As such, this increase by almost ten percent in eight years reflects a pattern.

How did it happen?

These economic and societal shifts are happening neither abruptly nor in a vacuum of policy decisions. Instead, they are taking place incrementally and under a system of governance that has repeatedly claimed its legitimacy based on “development,” even at the expense of democracy and an inclusive political system.

The absence of accountable governance is allowing a crony system to flourish, even as it is holding back the economy. The government has created a clientelist network upon which it relies for survival and stability. Recent elections have been neither free nor fair, and they have resulted in an economy that is increasingly beholden to a small group of people who facilitate the victory of the incumbent.

This is not unexpected. The dire warnings that authoritarianism can burst the bubble of growth appear to be coming to pass. As the country’s system of governance has transformed from a hybrid regime to an autocratic system, especially after the 2018 election, social development has received less attention from the government, which relies less and less on a mandate from citizens. Regime survival is not contingent on public support, which tends to judge the incumbent based on performance. If these trends continue, then the optimism that accompanied the fiftieth anniversary of Bangladesh’s independence may soon seem like a distant memory.

Ali Riaz is a nonresident senior fellow at the Atlantic Council South Asia Center and a distinguished professor at Illinois State University.

The post Is the Bangladesh success story unraveling? appeared first on Atlantic Council.

Public Event Wed, April 24, 2024 • 3:00 pm ET

CEO Scott Nathan on DFC’s work on energy security and other strategic priorities

An #ACFRONTPAGE EVENT—Scott Nathan, chief executive officer of the US International Development Finance Corporation, discusses the agency’s role in US efforts to advance global energy security and other strategic US priorities.

Energy & Environment Energy Markets & Governance Geopolitics & Energy Security

The US International Development Finance Corporation (DFC) isn’t “directly competing” with China, according to its chief executive officer Scott Nathan, but it is “offering an alternative.”

Nathan spoke at an Atlantic Council Front Page event hosted by the Council’s Global Energy Center on Wednesday, explaining that the DFC is different from Chinese development banks or Chinese investment initiatives (such as the Global Development Initiative and Belt and Road Initiative) because it supports the private sector directly. The DFC doesn’t lend money to governments for “big and also sometimes bloated” projects that aren’t “appropriate for local laws and conditions,” he said, alluding to China’s investments that have pushed countries into deep debt.

The DFC head recalled how foreign government officials have told him that “they don’t want to be dependent on one country for their source of finance.”

“Good development is good foreign policy,” he explained. “That’s in our national interest.”

Here are more highlights from the conversation, moderated by Amelia Lester, executive editor of Foreign Policy.

Standing out in the marketplace

• How exactly does the DFC differ from China’s investment engines? Nathan said it’s in part because “we maintain the highest standards possible” when it comes to “environmental, social, [and] labor” practices. It is “critical,” he added, not only to support economic development but also to “promote . . . values.”
• One important area is in internet connectivity—in which China is investing heavily, particularly in the Indo-Pacific. The DFC, meanwhile, is supporting projects that push forward secure equipment and networks that protect privacy, Nathan said, highlighting specific DFC-supported projects in Australia and Africa that are offering an alternative to China’s services. “This is critical for growth,” he said, adding that infrastructure is “not just energy, airports, and railways. You need the infrastructure of the twenty-first century for economic development.”
• Nathan explained that the DFC was created by Congress in 2018 due to a “strong sense” among both Republicans and Democrats that the United States needed to improve its economic-diplomacy game. “We needed to show up in the developing world and offer an alternative to what was being offered by authoritarian governments and our strategic competitors,” he said.
• The DFC is due to be reauthorized by Congress in 2025. “There is a strong demand signal for us to do more to show up,” Nathan said. “That requires us being reauthorized; it requires continuous funding.”

Showing up for Ukraine

• Nathan explained that the DFC has provided nearly $500 million in financing to businesses in Ukraine and has offered political risk insurance—which includes coverage for war-related risks—that has catalyzed more investments in Ukraine’s private sector.
• The most critical tool to support Ukraine’s private sector, however, is “solid air defense,” Nathan said. It’s “hard to make decisions around investment and capital expenditure in an environment of such high insecurity.”
• Nathan explained that the United States has had a long history of providing political risk insurance. Since the Overseas Private Investment Corporation (DFC’s predecessor) started offering the insurance, he said, the United States has “done over $50 billion. . . of political risk insurance” and has had “just over a billion dollars of claims.” The institutions have covered 97 percent of those claims, he added. “So it’s not only been very important for economic activity. . . but it’s been very profitable.”
• Working in Ukraine, Nathan said, has shown him how important it is for the DFC to work closely with its peers, including the European Bank for Reconstruction and Development, International Finance Corporation, and European Investment Bank.

A diversified system

• Earlier this year, the DFC provided a $500 million loan to US company First Solar to build a new solar panel manufacturing facility in Tamil Nadu, India. Nathan said that the plant, which will use cadmium telluride sourced from India instead of China, “fits into the [DFC’s] supply chain diversification goals. . . We need to make sure that we’re not dependent on one country or one company for the inputs of the industries of the future.”
• “If we can do this kind of thing elsewhere in the world to make sure that supply chains are broadly diversified, that helps with resilience,” he argued, adding that the United States must not “replace dependency on oil” with dependency on “a couple of nations,” as that would bring “all sorts of strategic vulnerabilities.”
• “Having countries be able to be self-reliant, to have the energy they need for economic development, that promotes stability. . . that’s good for our security,” he said.
• On critical minerals, Nathan highlighted several projects underway in Africa, including one on graphite in Mozambique. And, he added, as the DFC invests in that project, it will also be working with the US Department of Energy, which has loaned a company in Louisiana funds to expand its capacity to produce graphite-based materials for batteries. “It’s critical to start with the sourcing of the minerals,” Nathan said. “But there’s a whole value chain” to support.

Katherine Walla is an associate director on the editorial team at the Atlantic Council.

Watch the event

The post How the US is pitching a development finance ‘alternative’ to China’s initiatives, according to Scott Nathan appeared first on Atlantic Council.

Faye’s impressive first-round win over his main challenger and former Prime Minister Amadou Ba was met with messages of congratulations from international partners such as France, the United States, and the United Kingdom, with French President Emmanuel Macron even tweeting in Wolof, the most prominent of Senegal’s national languages. Macron’s overture was widely seen as an outstretched hand from a country that was often on the receiving end of Faye’s campaign rhetoric.

It is true that some in Faye’s coalition of self-styled left-wing pan-Africanists have called for Senegal to break from its traditional relationship with France. Faye himself has promised to renegotiate oil and gas contracts with foreign operators to reach more favorable terms, which has garnered attention in Western diplomatic circles.

Yet, early indications suggest that fears about Senegal severing its relationship with its foreign partners may have been overblown, as Faye has emphasized the importance of maintaining strong international relationships while focusing on domestic priorities.

In one of his first public appearances as president-elect, Faye called upon the countries that seceded from the Economic Community of West African States (ECOWAS) at the start of the year—Niger, Mali, and Burkina Faso—to return to the regional economic union. In his inaugural speech, Faye promised once more that Senegal would remain a friendly country for international partners rather than a confrontational one.

This complex reality has opened a window for countries in the West to establish more tightly knit relationships with Senegal and the region—but only if they’re willing to create equitable partnerships that foster development and stability.

Embracing change: Senegal’s transformation and Western relations

Faye’s victory clearly reflects frustration among the youth in Senegal, where high unemployment rates have been a pressing issue. According to data from 2023, youth unemployment in Senegal stood at around 4.2 percent. But with 84 percent of employment in the informal sector, many people under age thirty-five live in a precarious situation, with very little access to education, formal employment, or basic necessities.

This is why Faye’s determination to reform the economy, introduce anti-corruption measures, and promote national companies to enhance Senegal’s control over its natural resources has struck a chord with young people in urban areas, the disenfranchised, and older intellectuals who always viewed Senegal’s friendly relationship with the West as problematic. These policy goals address the demands of citizens for a fairer and more transparent system that can provide them with better prospects for economic stability and good governance based on merit, accountability, and integrity.

This represents a golden opportunity for Western countries to redefine their engagement strategy in Senegal and help stem the hostile narrative against them in the region. By supporting the fight for transparency, job creation, and the growth of a strong national private sector through technical and financial cooperation, the West can demonstrate its commitment to a more equitable partnership that benefits both Senegal and the Western countries involved.

Moreover, the windfalls from Senegal’s newly discovered oil and gas reserves will, from this year onward, completely transform the economic and social outlook of the country. Through constructive dialogue on issues such as natural resource management and sustainable development, Western interests can actively support a mutually beneficial partnership with Senegal.

The mining industry serves as a cautionary tale for how Western economic engagement with Senegal can lead to anti-Western backlash when the needs of locals are not considered. The expansion of the mining industry has caused forced evictions and damaged livelihoods. Over the past decade, local communities have led a number of protests, some turning violent and deadly, over the practices of these mining companies. This highlights the importance of ensuring that foreign economic activity respects the rights and livelihoods of local communities if anti-Western sentiment in Senegal is to recede.

Opportunity to reshape alliances in the Sahel

Initially met with apprehension abroad due to his antiestablishment stance, Faye’s presidency gained acceptance as his commitment to transparency, humility, and anti-corruption measures became evident, prompting a shift in the international community’s perception of him.

As further proof of this increased confidence, the price quoted on Senegal’s bonds due in 2048 rose by 1.4 cents to 75.88 cents on the dollar on the day following the election, the best performance for that day among sovereign dollar-debt issuers in emerging markets. This postelection bounce suggests a new cautious optimism from investors about the governance and economic outlook under Faye’s leadership.

This optimism could translate to acceptance of Faye’s positions on regional diplomacy: advocating a sovereigntist ideology; calling for Niger, Burkina Faso, and Mali to return to ECOWAS; promoting African integration; and challenging the use of the CFA franc. These positions starkly contrast with former President Macky Sall’s approach of seeking ECOWAS consensus before defining Senegal’s position on regional issues.

Faye also demonstrated his commitment to regional integration by exclusively inviting key African dignitaries to his inauguration, including Nigerian President Bola Tinubu, Moroccan Prime Minister Aziz Akhannouch, and Guinean Interim President Mamadi Doumbouya.

This shift in diplomatic strategy under Faye’s leadership presents an opportunity for Western countries to collaborate closely with Senegal on issues of African integration to reset and reshape relations with the countries that have distanced themselves from ECOWAS. Such partnerships would improve stability and economic cooperation in a region increasingly marked by great power politics.

Faye’s brand of left-wing pan-Africanism not only aligns with his vision for Senegal’s national sovereignty and economic empowerment but also presents an opportunity for Western countries to engage in a more equitable partnership that fosters development and stability in Senegal and the broader Sahel. As Senegal navigates this transition, the international community has the chance to prove it is serious about meeting this administration halfway. If it does, a new era of cooperation and shared prosperity in the region is a real possibility. If it doesn’t, then the West’s declining popularity in the region is likely to become a permanent trend.

Mayecor Sar was a 2016 Millennium Leadership fellow with the Atlantic Council. He is currently a senior policy advisor in strategy, citizen-centric delivery, and government transformation in Africa. Mayecor is also the founder of a think tank called Initiative pour un développement endogène de l’Afrique (IDEA).

The post Senegal’s new political landscape offers a new start for the West appeared first on Atlantic Council.

In partnership with the Policy Center for the New South, the Africa Center is proud to present a joint report, “The Reform of the Global Financial Architecture: Toward a System that Delivers for the South,” by Otaviano Canuto, Hafez Ghanem, Youssef El Jai, and Stéphane Le Bouder.

This report issues specific and urgent calls for reform, including more representative global governance, increasing the World Bank’s operational and financial capacity, prioritizing programs that would integrate Africa into the global economy, connecting the continent’s critical infrastructure and trade routes, and increasing participation and collaboration with bilateral public and private lenders and investors, such as China, sovereign wealth funds, and multinationals.

2024 marks eighty years of the Bretton Woods system. It is crucial to implement extensive reforms and substantial policies to support African nations’ efforts and maximize their chances to unleash their immense economic potential.

These recommendations presented during the 2024 IMF-World Bank Spring Meetings reflect the urgency of both operational and more inclusive reforms for the African continent.

About the authors

Otaviano Canuto
Senior Fellow
Policy Center for the New South

Biography

Otaviano Canuto is a senior fellow at the Policy Center for the New South, principal at the Center for Macroeconomics and Development and a nonresident fellow at the Brookings Institute. Canuto is also a former vice president and executive director at the World Bank, executive director at the International Monetary Fund and vice president at the Inter-American Development Bank. He was also deputy minister for international affairs at Brazil’s Ministry of Finance, as well as professor of economics at University of São Paulo (USP) and University of Campinas (UNICAMP).

Hafez Ghanem
Senior Fellow
Policy Center for the New South

Biography

Hafez Ghanem holds a PhD in economics from the University of California, Davis and is a senior fellow at the Policy Center for the New South. Ghanem is a development expert with a large number of academic publications, and more than forty years’ experience in policy analysis, project formulation and supervision, and management of multinational institutions.  He has worked in more than forty countries in Africa, Europe and Central Asia, the Middle East and North Africa, and South East Asia.

Youssef El Jai
Economist
Policy Center for the New South

Biography

Youssef El Jai works at the Policy Center for the New South as an economist. He joined the center in 2019 after earning a master’s degree in Analysis and Policy in Economics from the Paris School of Economics and the Magistère d’Economie from the Sorbonne.

Stéphane Le Bouder
Nonresident Senior Fellow
Africa Center

Biography

Stéphane Le Bouder is a nonresident senior fellow at the Atlantic Council’s Africa Center and the chief operating officer of MiDA Advisors, a global advisory firm specializing in facilitating institutional investments and trade in Africa and other emerging markets.

The Africa Center works to promote dynamic geopolitical partnerships with African states and to redirect US and European policy priorities toward strengthening security and bolstering economic growth and prosperity on the continent.

Learn more

Report Apr 3, 2024

The case for African social infrastructure

By Tom Koch

Investment in African social infrastructure can be defined as African real estate that serves an essential societal purpose.

Africa Economy & Business

Report Mar 3, 2023

Critical connectivity: Reducing the price of data in African markets

By Aubrey Hruby

This report analyzes the current state of the digital transformation in Africa and outlines how affordable and accessible data is imperative for further development.

Africa Digital Policy

Issue Brief Oct 9, 2023

Reimagining Africa’s role in revitalizing the global economy

By Amin Mohseni-Cheraghlou

The African continent potential to revitalize the world economy and reverse the downward trend in global growth. However, for this to materialize, it needs substantial investments in its physical and social infrastructure.

Africa China

The post Delivering results for the South: The Bretton Woods system we need appeared first on Atlantic Council.

For well over a year, DPI discussions have simmered in capitals around the world, drawing in policymakers, diplomats, and development experts alike. As a quick primer on DPI, think of it as the digital equivalent of laying down highways and bridges, but for the virtual world. Just as physical infrastructure drives economic growth, investing in DPI can propel inclusive development at a societal scale. Identity, payments, and data exchange platforms are often cited as the core building blocks of DPI, mirroring the multilayered structure of India’s famous homegrown technology stack.

India has been a trailblazer in deploying DPI at home and globalizing the DPI model. With its Group of Twenty (G20) presidency in 2023, New Delhi championed DPI on the world stage, securing political buy-in for the concept at the highest levels. G20 digital ministers endorsed a framework to govern the design, development, and deployment of DPI last August. And with the unanimous endorsement of G20 leaders, the New Delhi Leaders’ Declaration from last November set the stage for accelerated DPI development in 2024.

However, as the G7’s foray into the DPI arena reveals, the conversation is far from over. There are still different views of what DPI is and ought to be, as well as how it should shape the way markets function. Contrasting the G7 and G20 ministerial texts on DPI reveal three important areas of contention.

Differing visions

First, there’s the question of scope and purpose: Should DPI focus on enhancing public service delivery by governments or seek to restructure markets and delivery of private services? The G7 ministerial text opts for a narrower focus, solely emphasizing DPI’s role in enhancing citizen access to public services delivered by governments, while the G20 imagines a more expansive canvas, where DPI serves as a conduit for “equitable access” to both public and private services. This distinction is not merely academic; it gets to the core of what makes DPI novel and contested.

What does it mean to use DPI to enable equitable access to private services at a societal scale? It’s an evolving concept, but the basic thrust is to leverage the design, deployment, and governance of DPI to “dynamically create and shape new markets” and advance policy goals. For example, with a market-shaping DPI in place, a system operator, often the state itself, can define technical standards for private service providers to ensure interoperability. It can cap market share to give force to its vision of competition policy. It can influence pricing and business strategies through system rules and design features, with the DPI operator playing the role of “market orchestrator.” This is a different paradigm for the digital economy than a traditional market-led model—and to DPI champions, that’s precisely the point.

Second, consider the motivations for deploying DPI: Should these include advancing competition policy objectives? When describing the objectives for deploying DPI, G7 ministers borrow from the G20 framework but make a notable omission: There is no reference to “competition” as a core rationale for DPI. This omission is fully consistent with the G7’s vision of DPI, narrowly focused on public service delivery by governments. For the G7, the task of building competitive markets for the private sector is left to national regulators and antitrust authorities, not DPI builders and operators.

By contrast, the G20’s framework invokes the role of DPI in promoting competition twice, and that’s no accident. All governments want competitive digital ecosystems, but some see overexposure to Western tech giants as compounding the risks posed by pure market concentration alone. In this context, deployment of DPI serves two related purposes: disrupting entrenched incumbent positions while increasing state capacity to offer core digital services that reduce reliance on Western tech firms.

Third, what about design principles? Should DPI require open-source tech and open standards? The G7 ministerial statement omits all specific references to open source or open standards; instead, it vigorously defends the role of the private sector in building interoperable elements of DPI, presumably using open or proprietary technologies. In comparison, the G20’s DPI framework pointedly and repeatedly emphasizes the need for open software, open standards, and open application programming interfaces (APIs). Ultimately, however, the G20 statement hedges on this question, stating that DPI can be built on “open source and/or proprietary solutions, as well as a combination of both.”

Nevertheless, speak to DPI theorists shaping G20 and Global South thinking on DPI, and it’s clear they see “openness” as a defining principle of well-built DPI, citing the role open architectures, open-source tech, and open APIs play in enabling transparency, scale, interoperability, and reduced risk of vendor lock-in. Still, fuzziness around the term “openness” and its application in some of the largest DPI systems deployed to date suggests there is much left to unpack.

How will the G7 engage with DPI going forward?

It’s clear that the G7’s vision for DPI differs from the G20’s in at least three important areas. The question that remains is what comes next: How will the G7 (or its member states) assert their point of view?

The G7’s ministerial text offers some early clues. It acknowledges that G7 members will have “different approaches to the development of digital solutions, including DPI” and notes that the upcoming G7 Compendium on Digital Government Services will collect “relevant examples of digital public services from G7 members.” The compendium would also summarize factors that have led to “successful deployment and use of digital government services, such as national strategies, investment, public procurement practices, governance frameworks, and partnerships.”

Developing the compendium is a good start. But looking ahead, G7 members will need to weigh in this year at fast-moving multilateral discussions during Brazil’s G20 presidency, for instance, or within the United Nations’ multiple DPI workstreams. In each case, G7 perspectives on corporate governance, privacy, market disciplines, and regulatory best practices will strengthen discussions and outcomes, just as the G20’s and the Global South’s focus on inclusion, competition, and openness help ground the conversation in public interest concerns. The push and pull of the different visions for DPI could yield a better outcome for all—that’s the optimistic case.

A pessimist may insist that the gaps between the G7 and G20 views on DPI are tough to bridge. And it’s true, there is a real difference between a DPI scoped for public service delivery and one intended to shape the structure of digital markets and digital services offered by the private sector. If the latter view of DPI holds, G7 member states may need to find new ways to constructively participate in global DPI discussions. This could involve promoting individual layers of the DPI stack, as the G7 is already doing with digital ID governance, and emphasizing the need for sustainable public-private partnerships for DPI build-out. 

Ultimately, time will tell how the G7 chooses to lean into the global DPI debate. The only certainty is that the G7’s active engagement isn’t optional anymore—it’s essential.

Anand Raghuraman is a nonresident senior fellow at the Atlantic Council’s South Asia Center, where he leads research initiatives on US-India digital cooperation and publishes expert commentary on Indian data governance and digital policy initiatives. He is also director of global public policy at Mastercard.

Mastercard, through its Policy Center for the Digital Economy, is a financial supporter of an Atlantic Council project on digital public infrastructure.

The views expressed in this article are the author’s and do not necessarily reflect those of Mastercard.

The post What should digital public infrastructure look like? The G7 and G20 offer contrasting visions. appeared first on Atlantic Council.

The second half of the twentieth century experienced significant economic integration. International trade, cross-border migration, capital flows, and technological diffusion increased per capita incomes across countries and reduced global poverty.1 However, events such as the global financial crisis of 2007 to 2009, Brexit, and the COVID-19 pandemic—all against the backdrop of escalating great power rivalry and tensions between the United States and China—have demonstrated the rise of geoeconomic fragmentation (GEF). Since the 2022 Russian invasion of Ukraine, a growing numberof world leaders have addressed the impacts of GEF on global energy and agricultural markets. For one, higher and increasingly volatile food and energy prices have made it increasingly difficult for developing nations to prioritize environmental concerns and implement sustainable development initiatives.

The International Monetary Fund (IMF) describes GEF as a pattern of “policy-driven reversal of global economic integration” that threatens capital flows to low-income countries, hinders innovation in emerging markets, and discourages cooperation on international crises. Stemming from the prioritization of national security objectives, GEF takes the form of policies that reduce reliance on other countries by incentivizing domestic production and employment. In our increasingly fragmented world, nations have focused on reshoring essential goods and supply chains, including minerals crucial for green technologies, semiconductors, and military hardware due to concerns over national security and geopolitical motives. These transformations are in direct opposition to the founding principles of the Bretton Woods institutions (BWIs)—the International Monetary Fund, the World Bank, and the World Trade Organization (WTO)— which collectively seek to promote free trade, globalization, unified and competitive exchange rates, and the reorientation of public expenditures to achieve reductions in global poverty and increased economic prosperity for developing nations.

The costs of GEF are far-reaching and include higher import prices, segmented markets, diminished access to technology and labor, reduced productivity, and lower living standards. A June 2023 article in the IMF’s Finance & Development magazine points to diminished output in a scenario where countries must align with either a US-EU as 2.3 percent of global gross domestic product (GDP). Advanced economies and emerging markets could face permanent losses of between 2 percent and 3 percent, while low-income countries are at risk of losing more than 4 percent of their GDP. These losses could deepen risks of debt crises, exacerbate social instability, and increase food insecurity. The most vulnerable nations, heavily dependent on the imports and exports of key commodities, will find it particularly costly to adapt to new suppliers under fragmented trade conditions. Moreover, a 2023 IMF paper with a comprehensive analysis of GEF and its potential effects on the future of multilateralism found that increasing international trade restrictions could lead to a long-term decline of up to 7 percent in global economic output, or approximately US$7.4 trillion. Building on these findings, an October 2023 IMF blog, titled “Geoeconomic Fragmentation Threatens Food Security and Clean Energy Transition,” argued that disruptions in the global trade of goods induced the spike in inflation experienced globally in 2022, heightened food insecurity in lower-income nations, and contributed to a deceleration in global economic growth. In addition, GEF is posing a threat to food security and the clean energy transition, namely by impacting the trade of essential minerals and agricultural goods, according to the blog co-authors.

GEF also risks short-circuiting the multilateralism needed to coordinate climate change mitigation and sustainable development in the years to come. An IMF policy report, titled “Geo-Economic Fragmentation and the Future of Multilateralism,” noted signs of GEF including:

• Formation of regional economic blocs.
• Declivities in cross-border capital flows.
• Prioritization of resilient supply chains over and above efficiency.
• Growing income inequality.
• Rising geopolitical tensions.
• Increasing discontent associated with a free trade system.

Among the goals of the BWIs is to achieve global net-zero emissions by 2050; however, GEF has limited these organizations’ abilities to work with governments, businesses, civil society organizations, and other stakeholders to mobilize resources and accelerate the transition to a low-carbon economy. Policymakers and scholars have raised growing concerns, suggesting that increased GEF will have implications for sustainable development outcomes. However, there remains a paucity of research on the impact of GEF on net-zero targets specifically. This report builds on previous scholarly work to examine the impacts of GEF on the ability of nation states to attain their net-zero targets to combat climate change.

In conclusion, the paper calls for a democratized governance structure in the BWIs, emphasizing the need for reevaluating quota allocations and diversifying leadership roles. By addressing these foundational challenges, the BWIs can navigate the complexities of today’s global economic landscape more effectively, fostering trust, representation, and robust leadership. The authors also argue persuasively that BWI reform can not only reinforce the legitimacy of the IMF and World Bank but also indirectly help the soft and hard power of the states most hesitant to reform the international monetary system.

Shirin Hakim is a Senior Fellow at the Center for Middle East and Global Order and a former Bretton Woods 2.0 Fellow with the GeoEconomics Center.

Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads GeoEconomics Center’s Bretton Woods 2.0 Project.

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

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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.”

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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.

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Despite the headwinds, Brazil’s non-aligned, cooperative, and practical approach holds out the promise of a constructive outcome for this year’s G20 meetings—especially if progress is not being measured by joint communiques (which have become irrelevant) but by agreements on concrete global initiatives. Under the overarching theme “Building a Just World and a Sustainable Planet”, Brazil has worked with countries in the Global South as well as developed countries to build consensus in launching a variety of global initiatives by the time of the G20 Summit. These initiatives reflect the key concerns of the Global South but have built on previous international agreements and include practical proposals for implementation.

Brazil’s proposed initiatives

First is the push to reform the United Nations system and the Bretton Woods institutions like the IMF, World Bank, and World Trade Organization. Reforms to the UN Security Council—where five permanent members (P5) have veto power—have been on the international agenda for a long time. While widely acknowledged in principle, no specific proposal has gained any traction. Brazil has put forward the idea that a P5 member should not be allowed to use its veto power in cases directly relating to itself—somewhat similar to the Western judiciary practice of reclusion of judges in cases of conflicts of interest. This would have meant that Russia would not have been able to use its veto power when the Security Council discussed the war in Ukraine. Such a proposal will not get the backing of the P5, especially amid the current geopolitical rivalry. But it could gather support from many countries, and not only within the Global South—keeping pressure on P5 members to respond with counter-proposals.

Calls for reform of the IMF and World Bank have been widely shared by the Global South, reiterated most recently by China demanding a redistribution of quota and voting shares to “better reflect the weight a country carries.” The G24, representing developing countries at the IMF and World Bank, has circulated a paper proposing specific reforms. These and other ideas about quota reform are scheduled be discussed by the IMF in the year ahead.

Second, another of Brazil’s linchpins for this year is launching a Global Alliance Against Hunger and Poverty as a tool for reaching the UN Sustainable Development Goals by 2030. That initiative leverages Brazil’s position as the second biggest food-exporting country. Specifically, the alliance will not be about initiating new funds or programs but finding ways to coordinate numerous existing funds and programs to make them more useful to recipient countries and easier to solicit contributions from developed countries. It also will compile a basket of best practices in anti-hunger and anti-poverty policies to help other countries develop their own programs. In this context, Brazil will showcase its acclaimed Bolsa Familia family welfare program, which has helped significantly reduce the country’s poverty rate and has been adapted in almost twenty other nations.

Third, Brazil will launch a Task Force for the Global Mobilization Against Climate Change to spur the G20 to help create a conducive political environment for a new and robust goal on climate finance to be agreed at this year’s COP 29 in Azerbaijan as well as for countries to present their renewed and more ambitious Nationally Determined Commitments (NDCs) to reach net zero emissions at the 2025 COP30 under Brazil’s chairmanship. Brazil will also advance its proposed Global Bioeconomy Initiative to bring together science, technology, and innovation on the use of biodiversity to promote sustainable development. This initiative will also try to expand developing countries’ access to various fragmented climate funds including the Green Climate Fund, the Climate Investment Fund, the Adaptation Fund, and the Global Environment Facility.

Fourth, leveraging the momentum of the global corporate minimum tax (effective at the beginning of this year), Brazil wants to propose a global initiative to impose a minimum tax on the super-rich which France has endorsed. This will help Brazil rally support from Global South countries as well as others to advance the proposal.

Last but not least, in September 2023 Brazil and the United States signed an MOU for a Partnership for Workers’ Rights (in particular in the gig economy). They pledged to pass necessary national legislation to achieve that goal and hope to use it as an example to get other countries to join.

The themes across these initiatives are practicality, leading by example, and a willingness to bypass time-consuming, top-down international negotiations.

While Brazil’s proposals will not all be adopted at the G20 Summit, especially in their original versions, most probably will be with some modifications. This outcome, with or without a joint communique, would represent a serious contribution by a key member of the Global South to the global reform agenda. And it comes after the achievements of India in its Presidency of last year’s G20. If South Africa keeps up this track record when assuming the G20 Presidency in 2025 (when Brazil will chair the BRICS-10 and COP30), an important step forward will be made in establishing the leadership roles of the major countries in the Global South. They are showing the ability to rally their members and to reach out to developed countries to shape global reform efforts. And if those countries, working with their partners, can sustain the implementation of the initiatives they sponsored, that would begin to make meaningful changes in the current international political and economic system. The main risk, of course, is that geopolitical rivalry will derail cooperative efforts to address pressing global problems. It remains to be seen to what extent that will happen.

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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The post Brazil’s approach to the G20: Leading by example appeared first on Atlantic Council.

The issues Yellen raised reflect real concerns in the United States and Europe—in particular about hi-tech and clean energy sectors like electric vehicles (EVs), lithium batteries, and solar panels. However, it is not a straightforward matter pushing back against China on grounds of overcapacity. The EU has initiated anti-dumping investigation of Chinese EVs—imports of which have surged in many European countries threatening domestic producers—but evidence of overcapacity in that sector is weaker than in solar panels and batteries. Measures to restrict import of these products would simply raise their prices, as Western companies are not in a position to replace Chinese products.

More importantly, the West needs to recognize that overcapacity is intrinsic to China’s economic model—and therefore that calls to end it amount to wishful thinking. In other words, while the complaints about overcapacity are justified  from a Western perspective, they will not change the situation any time soon—despite platitudes about US-China relationship being on a “more stable footing” expressed at Yellen’s meeting with China’s Premier Li Qiang.

Chinese EVs pose different challenges than batteries and solar panels

China does have overcapacity problems. Overcapacity is typically measured using utilization rates, the rate of industrial capacity in a sector that is being used for production—low rates imply surplus capacity. Companies with a lot of surplus capacity tend to lower prices to generate demand, hurting the profitability of the whole sector. China has low utilization rates—which have fluctuated around 75 percent, well below the 80 percent considered to be normal. At the end of 2023, China’s capacity utilization rate has recovered to almost 76 percent—a few percentage points higher than the pre-Covid low in 2016 and a few percentage points lower than those of other major countries including the United States (whose utilization rate fell below 80 percent in 2023).

However, behind the aggregate low utilization rate of 76 percent is a very wide dispersion among different sectors. EVs have a high utilization rate, whereas China has very low-capacity utilization rates in low tech sectors such as cement and glass—which are being pulled down by the property construction slump—as well as in lithium batteries and solar panels.

In automobiles, producers of internal combustion engine (ICE) vehicles have suffered from very low capacity utilization rates—in many cases well below 50 percent—as consumers have been shifting from ICE vehicles to EVs. By contrast, EV producers, especially large ones like BYD, SAIC and Li Auto, have high utilization rates, exceeding 80 percent. These companies have increased their production and export of EVs significantly in recent years, arguably because they are quite efficient in terms of prices and quality. Even Elon Musk admitted that Chinese EV companies “are extremely good…and the most competitive in the world.” The smaller and less efficient EV producers have been weeded out relentlessly from the more than 400 companies launched more than a decade ago to about fifty having some degree of recognized name brands. This consolidation process has accelerated after China ended its subsidy program for EVs at the end of 2022—putting huge pressure on less efficient producers. (While past subsidies supported Chinese EV companies, the fact that this subsidy has been ended could be used by China in its defense against the EU investigation.)

Furthermore, China is not as dependent on the export of automobiles including EVs as some other major car manufacturing countries. Specifically, its export rate is quite low, at 15 percent compared with 48 percent in Japan, 72 percent in South Korea, and 79 percent in Germany. As a result, possible EU and US tariffs may blunt China’s EV export growth in those regions but can hardly be expected to alter the overall growth trajectory of the country’s EV sector.

In the first two months of 2024, China experienced an 8 percent increase in total EV export in volume terms, having been able to shift EV sales in the EU (which has declined by 20 percent) to Asia (export to RCEP countries has increased by 36 percent). These two regions account for 30 percent each of China’s EV export. Furthermore, China can boost domestic demand by raising the target for the share of EVs in new car sales from 45 percent by 2027 (rather low relative to the target of 65 percent by 2030 in the EU). Such a move would be helped by the fact that China has rolled out 2.7 million charging stations across the country at the end of 2023–compared with only 64,187 in the United States.

In contrast to the EV sector, lithium battery and solar panel producers have suffered from very low capacity utilization rates—in many cases below 50 percent. In particular, China’s annual production of solar panels is more than twice the global demand. This huge overcapacity has significantly driven down the prices of these products, benefiting all importing countries in their green transition efforts. Raising tariffs on these products will increase their prices to users and delay many countries’ green transition targets, especially as Western companies are not in a position to replace Chinese products. It is instructive to note that President Biden has vetoed a Congressional resolution to reinstate tariffs on cheap solar panel imports from South East Asian countries—for fear of delaying the pace of solar installations necessary to meet his administration’s target of 100 percent clean electricity by 2035.

Overcapacity is intrinsic to China’s economic system

The West should focus its complaints on the sectors where Chinese overcapacity is most egregious—for example in wind power turbines on which the European Commission has just launched an anti-subsidy probe. As it does so, it must also recognize that the long cycle of overcapacity build-up and correction is generic to China’s economic system of state capitalism. Strategic decisions by leaders the Communist Party of China (CCP) will mobilize resources to invest in chosen sectors. That leads to overcapacity, which comes with unfavorable side effects, which eventually cause the leadership to undertake corrections. This process usually takes far longer than the prompt market-driven resolution of inefficient and unprofitable companies in the West. In China, grossly inefficient companies have been liquidated or absorbed by more efficient units, but in a managed and gradual consolidation process to minimize undesirable social impacts such as rising unemployment or hollowing out manufacturing communities.

A clear example of China’s overcapacity cycle can be found in the huge stimulus program unleashed by Beijing in response to the 2008 Global Financial Crisis—offering abundant and cheap credit to spur construction in infrastructure and housing. The resulting overcapacity in coal, steel, and other construction materials was quite severe, depressing producer price inflation, keeping it in negative territory for more than fifty consecutive months. In addition, overcapacity in the steel industry caused bitter complaints by other steel producing countries. By 2015, China launched a wide-ranging Supply Side Structural Reform to reduce overcapacity  by encouraging a consolidation process in those sectors, cushioned by measures to boost demand. China’s Belt and Road Initiative (BRI), launched in 2013, could have been designed partly with the goal of exporting the country’s surplus capacity in construction in mind. These measures were able to bring the overcapacity problem under some degree of control.

In another example, China has had significant overcapacity in the shipbuilding sector, which is 232 times greater than that of the United States, posing a threat to competitors like South Korea and Japan. China has addressed that problem in a strategic way by using its abundant capacity to build modern warships to catch up with the US Navy.

At present, CCP leadership seems to be aware of the industrial overcapacity problem which has caused producer price inflation to be negative continuously since late 2022. In presenting the government work program at the National People’s Congress meeting last month, Premier Li Qiang said that “China wanted to reduce industrial overcapacity” but flagged more resources for tech innovation and advanced manufacturing to develop “new productive forces.” It appears that, like in the 2015 episode, China will spur the consolidation of the sectors having significant surplus capacity. However, the result could be more efficient and competitive enterprises, continuing to pose a challenge to producers in the West and a few developing countries aspiring to develop their manufacturing industry.

A realistic path forward

The United States and EU, together with other manufacturing nations, have wrestled for some time with the overcapacity problem in various industries, caused by China’s economic system of state support to its enterprises. So far, the major remedy to this challenge has been countervailing duties on China, either sanctioned by the World Trade Organization (WTO) after a lengthy and difficult process or imposed unilaterally by former President Trump and maintained by President Biden. However, raising tariffs has not been a totally satisfactory solution. It has given some protection to impacted sectors in importing countries at the cost of higher prices to consumers. But it has not been a game changer in terms of ensuring a level playing field for all countries.

Based on historical experience, it’s safe to say the current phase of China’s overcapacity in hi-tech and green industries like lithium batteries and solar panels will be impacting the rest of the world for some time to come. It is reasonable to criticize and complain to China, but policymakers should remember that an end to overcapacity would mean a major shift in China’s economic model, which is exceedingly unlikely. They must therefore be prepared for a sustained period of heightened trade tension during which Beijing will eventually take some measures to reduce industrial overcapacity when its domestic impact becomes unacceptably negative—but in China’s own way and on its own timeline.

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

The post Breaking down Janet Yellen’s comments on Chinese overcapacity appeared first on Atlantic Council.

Africa is in urgent need of social infrastructure to support its rapidly growing population. As the demand for education, housing, hospitals, and public facilities continues to grow, investment is needed now more than ever. With emerging challenges ranging from pandemics, climate change disasters, food insecurity, and conflict, sustainable infrastructure is critical to averting the exacerbation of existing issues facing the continent. However, recognizing this growing demand presents a unique opportunity for investors, DFIs, and stakeholders from both public and private sectors to intervene in this emerging market.

Investment in African social infrastructure–simply put–can be defined as African real estate that serves an essential societal purpose, according to the author. Despite the existing barriers to investing in this sector, including limited data, the lack of proper regulatory and urban planning frameworks and limited financing options that hinder the development, investors who are willing to make risk-conscious investments would reap the long-term benefits of higher relative yields and the portfolio diversification that the African real estate market provides. This report argues that African social infrastructure can provide attractive investment opportunities that offer profitability and mutually beneficial impact across the continent.

About the author

Tom Koch is a nonresident fellow at the Atlantic Council’s Africa Center and is an emerging markets investment professional. He was previously director of global capital and strategy at FCA Corp, the advisor to a multi-sector Africa focused private equity fund. Prior to that, he worked within Deloitte Consulting’s mergers and acquisitions group.

The Africa Center works to promote dynamic geopolitical partnerships with African states and to redirect US and European policy priorities toward strengthening security and bolstering economic growth and prosperity on the continent.

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Executive Summary Jul 11, 2023

In brief: The future of US-Africa trade and investment

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The EU global investment initiative that could close Africa’s infrastructure gap

By Emilie Bel

The initiative could provide the African continent with the billions needed to close the infrastructure gap. But for it to be a success, several conditions must be met.

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Critical connectivity: Reducing the price of data in African markets

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The post The case for African social infrastructure appeared first on Atlantic Council.

The Governors left unresolved the more challenging problem of changes in the relative distribution of quotas, and thus voting shares, in favor of emerging market and developing countries (EMDCs). Instead, Governors requested the Fund to develop and propose a new quota formula by June 2025.

Starting with the Spring 2024 meetings, the debate will focus on quota reform to better reflect the changing weights and roles of member countries in the global economy and financial system. There are two related issues to be addressed: changing the quota formula used to produce the so-called Calculated Quota Shares (CQS); and the political negotiations to determine the Actual Quota Shares (AQS). The current AQSs were set at the end of the 14th Quota Review in 2010 and are not aligned with the CQSs as last updated in 2021 by the IMF staff.

Changing the quota formula: More complicated than it looks

The IMF quota formula has been specified as follows.

CQS = (0.50 GDP + 0.30 Openness + 0.15 Variability + 0.05 Reserves)*k

GDP is a blend of 60 percent GDP at market rates and 40 percent at PPP exchange rates. Openness is the sum of annual current payments and current receipts on goods, services, income, and transfers. Variability is the standard deviation of current receipts and net capital flows. Reserves are twelve-month running averages of FX and gold reserves.

And k is a compression factor set to be 0.95 to reduce the dispersion of the results.

Quota is the basis to calculate members’ capital contributions to the Fund; to specify their access to Fund resources (borrowing up to 200 percent of a member’s quota annually, 600 percent cumulatively, and more in exceptional cases); and to help determine their voting shares. Specifically, each member has 250 basic votes (all together set at 5.502 percent of total votes). The rest of the voting shares are determined based on the actual quota shares (AQSs) and denominated in the IMF’s Special Drawing Rights (SDR): one vote per SDR 100,000 of quota. This arrangement with basic votes leads to a mathematical adjustment whereby big members’ voting shares are adjusted to be slightly less than their AQSs while the opposite is true for small members.

As mentioned above, the current AQSs are mis-aligned with the 2021 CQSs for important countries—basically China’s AQSs are significantly less than its CQSs, the US CQSs are substantially under-represented relative to its GDP, while Europe’s AQSs are way over-represented compared to its GDP.  But a simple reform changing members’ AQSs to match their CQSs would lead to outcomes not necessarily welcomed by many countries.

Specifically, China is quite under-represented with AQS of only 6.389 percent compared with its CQS of 13.715 percent. However, boosting China’s AQS to its CQS means reducing the AQSs of many other countries towards their CQSs. For example, the United States would have to go from 17.395 to 14.942 percent (thus losing its veto power over important decisions requiring 85 percent support); the EU from 25.3 to 23.4 percent (its over-representation is more pronounced when compared to its blended GDP ranking of 17.29); Japan from 6.46 to 4.91 percent; Latin America from 8.1 to 6.55 percent and Africa from 5.25 to 3.93 percent. Except for China, this outcome is hardly what many EMDCs have in mind. Moreover, many in the United States could object to the fact that both its CQS and AQS significantly underweight its share of the global economy—at 21 percent on a blended basis and even more at 24.4 percent at market rates.

As a consequence, there will be intense debate on changing the quota formula itself to produce CQSs more favorable to different groups of members.

First of all, emerging market and developing countries, represented by the G24, have been pushing for only using purchase power parity (PPP) exchange rates in calculating GDP shares. This would increase their weight in the global economy from 42.7 percent at current market rates to 58.9 percent on a PPP basis—helping to boost their IMF quota shares. However, since the PPP methodology is designed to compare the purchasing power of people living in different countries, favoring those with low levels of prices of non-tradable goods and services, it is questionable if that is the right metric to compare the relative weight of countries in international economic interactions which are conducted at market rates.

Secondly, the importance given to the openness of the current account reflects the 1950-1970 era when trade dominated international economic interactions. Since the 1980s, capital flows— and with them, the size, liquidity, and sophistication of capital markets and the currencies most used in denominating international assets and liabilities—are becoming much more important in affecting global financial stability. Taking these developments into consideration would rank the United States higher than focusing only on current account transactions. By contrast, China would rank lower in such a comprehensive approach.

Finally, the emphasis on reserves is overstating their usefulness in contributing to global financial stability. Under the current dollar-based financial system, it is the US Federal Reserve (Fed) that can act as a lender of last resort to supply dollars to stabilize global financial crises—like in 2008 and subsequent dollar funding crises. To give the United States very low ranking on this variable (1.164 versus China’s 28.125) because it hardly needs to hold FX reserves—being the country issuing the reserve currency—doesn’t make a lot of sense.

What else should be included in quota calculations? Addressing efforts to deal with climate change, the Center for Economic and Policy Research (CEPR) has proposed adding a new variable in the formula to reflect members’ shares of cumulative CO2 emission since 1944. This approach would significantly reduce the voting shares of large CO2 emitters and increase those of low emitters. Consequently, the US voting share would fall from 16.5 percent to 5.65 percent, China from 6.08 percent to 5.26 percent, while the share of the Global South collectively would rise from 37 percent to 56.4 percent at the expense of advanced countries. The problem with this idea is that countries’ contributions to CO2 emission do not correspond to their relative capacity to support the IMF mandate of maintaining global economic and financial stability.

Further fragmentation is the path of least resistance

At the end of the day, the direction of any changes in the quota formula and relative distribution depends on political negotiation among members. Basically, there exists a gap between aspirations in the Global South for a “fairer and more just” distribution of voting power at the IMF and the reality of countries’ contributions to helping the Fund carry out its mandate. Africa vividly illustrates this gap: many have complained of the fact that the continent accounts for almost 18 percent of the world population but commands only 6.5 percent of the voting share at the IMF—however, its share of the global economy is only 2.7 percent.

But any aspiration for reform needs to account for the reality of political negotiation. In an international negotiation, positive outcomes depend on a sufficient degree of mutual trust among negotiating partners. Given the current geopolitical rivalry, trust has been replaced by mutual distrust and antagonism, making it extremely difficult to reach agreement among major countries to change the quota formula and relative distribution.

As a result, the path of least resistance for the international community is to continue the recent trend of fragmentation, particularly in global financial safety net arrangements. Countries have strengthened self-insurance by accumulating FX reserves—worth almost $12 trillion at last count, more than $7.5 trillion of which held by EMDCs. More efforts have been made to develop regional rescue facilities. These include the European Stability Mechanism (with maximum lending capacity of €500 billion or $540 billion), the Chiang Mai Initiative Multinationalization (with $240 billion of pooled reserves) and the BRICS Contingent Reserves Arrangements (worth $100 billion now but will be increased by contributions from new members such as Saudi Arabia and the UAE). More important has been the growth of major central banks’ currency swap and liquidity provision arrangements—such as the Fed’s unlimited swap lines with five major Western central banks, made permanent in 2013; and its standing repurchase agreement (repo) facility with foreign and international monetary authorities (FIMA repo facility) launched in 2021. China’s PBOC has concluded currency swap agreements with more than forty counterparties totaling more than $550 billion.

Naturally such a fragmented global financial safety net would be cumbersome and difficult to coordinate to reach a forceful and timely response to crises—let alone coping with the possibility of some of these facilities working at cross purposes—thus imposing a cost on the global economy in terms of lost efficiency. But as Walter Cronkite used to say: “That’s the way it is!”.

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

The post Understanding the debate over IMF quota reform appeared first on Atlantic Council.

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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The post Housing costs are slowing down the US climate transition appeared first on Atlantic Council.

Africa’s growth potential

Over the past four decades, extreme poverty rates in the world, measured as share of population living with less than $2.15 a day (2017 PPP), declined from around 44 percent to less than 10 percent. However, as of 2019, the share in Sub-Saharan Africa was around 35 percent—and is expected to have risen to 45-50 percent in the past five years because of the back-to-back shocks of the pandemic, debt and inflation crises, and increasing food and energy prices caused in part by the Russia-Ukraine war. Clearly, Sub-Saharan Africa has missed the benefits of globalization in the past four decades which lifted billions out of poverty around the world through trade and an integrated global supply chain.

At the same time, Africa has tremendous potential which, if unleashed, can lead to rapid growth in the continent and higher aggregate demand for globally produced goods and services. Africa’s growth could revitalize global growth, which has been decelerating for various structural reasons over the past two decades. With deeper engagement of BWIs and other Multilateral Development Banks (MDBs) and International Financial Institutions (IFIs), African economies can seize the moment and become the engine of global growth.

Promoting public-private partnerships

As the World Bank’s and other MDBs’ financial and technical resources are becoming increasingly limited, they need to shift their focus from merely providing loans and various forms of financial assistance to actively catalyzing the flow of other quasi-public and private resources into the development of Africa’s human capital and social and physical infrastructure. Therefore, BWIs and other MDBs should prioritize strengthening financial governance and legal structures of African economies which would encourage private investment in the continent. The establishment of the Global Infrastructure Facility (GIF) by the World Bank marks a significant stride in this direction. However, much more needs to be done to establish infrastructure as a new asset class in global capital markets and the BWIs, engaging with more than forty other MDBs and IFIs, have a unique position to lead the global discussion on this front. The case of quasi-state institutional investors is of particular importance. With more than $70 trillion of assets under management (AuM) and long-term investment horizons, SWFs, public and private pension funds, and various retirement saving vehicles are uniquely positioned to bridge Africa’s growing infrastructure financing gap.

Accelerating Africa’s regional integration

BWIs including the World Trade Organization (WTO) can play crucial roles in promoting regional integration in Africa through various mechanisms and initiatives. First and foremost, the MDBs, with the World Bank leading the efforts, can provide financial support for regional infrastructure projects, such as transportation networks, energy grids, and communication systems. These projects can facilitate the movement of goods, services, and workers between countries in the region, promoting economic cooperation and development. Trans-Saharan Highway and Trans-African Railway are two examples of such projects that could facilitate intra-continental trade in Africa. Second, the IMF can help countries in the region manage their monetary and exchange rate policies to facilitate cross-border financial flows and reduce currency volatility. This can enhance economic stability and create a conducive and fairer environment for regional trade and investment. Third, the MDBs with WTO leading the efforts, can support the negotiation and implementation of regional trade agreements or customs unions, which aim to reduce trade barriers and increase market access among participating countries. Efforts such as African Continental Free Trade Area (AfCFTA) must be enhanced and supported with relevant regulatory and infrastructure development project.

Prioritizing Africa’s integration into global supply chains

Given its triple advantages—vast natural resources, growing and young population, and its geo-strategic location and access to open seas—Africa can play a central role in the global economy and supply chain. However, Africa is currently responsible for only about 5 percent of global trade. BWIs, and other MDBs and IFIs should therefore prioritize programs and projects that would leverage Africa’s triple advantages in the global economy, making Africa an essential and indispensable part of the global supply chains, energy, and labor and consumer markets for decades to come.

Programs that could speed Africa’s inclusion in global supply chains include:

• Vocational training programs would provide African youth with the skills in highest demand in today’s globalized economy.
• Construction of ports and linking them via railways and roads would reduce the cost of trade with and inside Africa and help accelerate Africa’s integration.
• Development of solar, wind, and green hydrogen energy production could make Africa the global hub of renewable energy with massive export potential, especially to Europe and Middle East.
• Agricultural development would help Africa benefit from its massive agricultural potential and potentially allow it to become the world’s major supplier of food and agricultural products.
• Developing Africa’s tourism industry should be a priority since Africa is home to some of the world’s magnificent natural and historical attractions. Given that tourism industry makes up more than 10 percent of global GDP, MDBs should prioritize developing Africa’s tourism industry, which can contribute significantly to the continent’s development and long-term employment.

Multilateralism is the key

Africa’s needs go beyond debt restructuring. The continent has tremendous potential and a “big push” from BWIs, other MDBs and IFIs, and global private sector and institutional investors, mixed with meaningful steps by Africa’s leaders to improve their governance structure, can unleash an economic renaissance in Africa. The revival of multilateralism, with Africa having more voice and representation in BWIs and other institutions of global economic governance, is a necessary first step.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington DC. Follow him on X at @AMohseniC.

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 Making Africa a top priority for Bretton Woods Institutions appeared first on Atlantic Council.

The divergences caused by fragility, conflict, and violence (FCV) situations are particularly stark, as the incidence of conflict events has increased 40 percent since 2020, to the highest number of events since World War II. Half of the world’s poor live in FCV-affected countries and that number is expected to rise to 60 percent by 2030, in part as the duration of conflicts extends—to now an average of twenty years. In addition to the death, destruction, and disruptions they cause, conflict and fragility are disincentives to investment and further undermine economic growth. One-fifth of International Monetary Fund member countries are considered fragile and conflict-affected situations (FCS) and twenty of the most climate-vulnerable economies are also on the World Bank’s FCS list.

According to the most recent Women, Peace, and Security Index: “In 2022, approximately six hundred million women—15 percent of women in the world—lived within fifty kilometers of armed conflict, more than double the levels in the 1990s.” These numbers don’t lie, but they also don’t necessarily tell the whole truth. And the truth is that women and girls are disproportionately impacted by fragility and conflict economically, socially, and politically. The impacts are well-documented. The data show, for example, that women and girls are more likely to see their educations disrupted, are more vulnerable to gender-based violence, and are more likely to be displaced or become refugees.

Women often face much greater economic hardships than men in conflict-affected areas, as well. Notably, six out of ten of the World Bank’s FCS countries are in the lower quartile on the “Economic Participation and Opportunity” subindex on the World Economic Forum’s Global Gender Gap Index, indicating wider gender gaps and more challenges facing women in conflict contexts. Similarly, a majority of FCV countries can be found in the bottom of the latest Women Business and the Law rankings released on March 4. These impacts also further undermine economies: The World Bank estimates that gender-based violence costs some countries up to 3.7 percent of gross domestic product (GDP), and a 1 percent increase in violence against women lowers economic activity by 9 percent.

The roles women hold during conflict and reconstruction

But there can be opportunities for women’s economic empowerment in conflict and reconstruction, as well. Women are experiencing these outcomes despite the important role they play in economies during conflict, in post-conflict reconstruction, and in efforts to sustain peace.

Most of today’s FCV economies are characterized by low female labor force participation. For example, in 2022, the United Nations estimated that closing gender gaps in women’s labor force participation in Yemen would increase the country’s GDP by 27 percent. War has historically created windows of opportunity for women to fulfill workforce shortages—including in male-dominated fields—since men make up a majority of combatants. War—often coupled with crippling inflation—makes finding paid work more acceptable and, importantly, this openness tends to continue as income generation changes women’s economic value and power in society. In the United States, for example, women took to manufacturing and government administration for the war industry and beyond during World War II, with nineteen million women entering the US workforce during this period. Today, women continue to join or rejoin the workforce—including in the informal sector—at higher rates amid conflict and take on more culturally nontraditional jobs. For instance, Ukrainian women have joined the mining workforce, filling the gaps left by conscription after Russia’s invasion.

Like most economies worldwide, micro, small, and medium-sized enterprises dominate the market landscape of fragile and conflict-torn countries.

Even though these smaller businesses face more start-up and operational constraints, they provide a key pathway for women’s economic participation during conflict and on the road to recovery. A study in Syria estimated that the proportion of female entrepreneurs increased from a low base of 4.4 percent in 2009 to 22.4 percent by 2017. This includes women-owned and -led businesses engaging in supply chains; including in the logistics, information, and communication technology, infrastructure, and public works sectors, all of which are critical to reconstruction.

And as women workers and their businesses earn more, especially in the formal economy, they can mitigate the otherwise dampening domestic resource mobilization associated with reduced economic activity, investment, and government administration during conflict or destabilization. Women’s greater participation in the economy during conflict and reconstruction can also increase consumption and income utilization (including from cash transfers or other social protection mechanisms) as women recirculate their earnings with spending on their families.

How to wield prosperity and peace dividends with and for women

Gender inclusion cannot be an afterthought. Policymakers must address the immediate economic security and income needs of women during conflict, while empowering them to contribute to and benefit from recovery, reconstruction, and growth. This means providing context-specific, targeted social protections and addressing the issues that undermine women’s economic participation. It requires mitigating and responding to gender-based violence, as well as improving accessibility and affordability of child and elder care. It also means supporting women entrepreneurs and women-led small businesses, closing education or skill gaps, and addressing social and cultural norms that limit career choices or workforce participation with conflict or fragility-sensitive knowledge, design, and delivery mechanisms.

Depending on the type, level, and stage of FCV, as well as the economic landscape, certain FCV-specific interventions can also make a difference in women’s economic empowerment. These include, for example, enabling women’s earning, employment, and entrepreneurship by expanding opportunities in gig and home-based economies and increasing safe and reliable transportation to and from work or school. Policymakers should also take steps to improve access to education and training with attention to language, as well as the demand for and portability of skills and certifications. In addition to addressing persistent systemic and policy hurdles, women business owners and entrepreneurs need targeted support with more risk financing, knowhow, and market entry and development.

This includes leveraging sizable development and humanitarian assistance and procurement. The United Nations Office for Project Services (UNOPS), for example, bought over $1.8 billion worth of goods and services in 2022 from suppliers worldwide, with 56 percent local spending. Aligned with system-wide UN gender-responsive procurement initiatives, UNOPS is piloting and beginning to scale programs to train and prepare women business owners to successfully bid and execute their tenders. These women can then use the investment, experience, and credibility gained from working with UNOPS to obtain other public and private sector contracts and optimize supply chain opportunities.

Increasing digital inclusion can be transformative for women’s financial inclusion and economic participation, as well; including by training women for information and communication technology jobs in the digital economy, like the World Bank-Rockefeller Foundation’s Click-On Kaduna project in Nigeria. Policymakers should prioritize increasing women’s access to and utilization of digital tools and platforms, including digital money and financial services, as well as remote learning and government technology. Digital mechanisms can also serve as useful aspects of larger initiatives that empower women’s participation and leadership, which is critical for conflict mitigation and durable peacebuilding. 

The evidence that expanding economic opportunities for women is intertwined with building inclusive and sustainable growth, as well as peace and social progress, is only accruing with time, experience, and data. On this International Women’s Day, aptly themed “Invest in Women: Accelerate Progress,” it is incumbent upon all leaders, investors, and policymakers to heed this call. Public and private sector actors would do well to invest and enable increased women’s economic participation to catalyze prosperity and peace.

Nicole Goldin is a nonresident senior fellow at the GeoEconomics Center.

The post Investing in women accelerates prosperity and peace appeared first on Atlantic Council.

On February 21st, the Atlantic Council’s WIn Fellowship, in collaboration with United States Embassy to the United Arab Emirates (UAE) and ADGM, held a workshop exploring how women entrepreneurs in the UAE can integrate innovations in artificial intelligence (AI) to their small and medium enterprises (SMEs).  

The panel, which was moderated by Sarah Saddouk, Director of Innovation at Entrepreneur Middle East IMPACT, featured three successful executives with backgrounds in finance, healthcare, and tech; all have harnessed cutting-edge AI and digital advances to drive their companies forward. Speakers included Abir Habbal, Chief Data and AI Officer at Accenture Middle East; Amnah Ajmal, Executive Vice President for market development for EEMEA at Mastercard; and Salim Chemlal, Director of Product at AI71. Tanya Cole, Senior Commercial Officer at the United States Embassy to the UAE, provided the opening remarks. 

Tanya Cole opened the event with welcome remarks, noting that partnerships like the WIn Fellowship encourage innovation and sustainable growth and undergird the rich commercial exchange between the United States and UAE. She observed that one of AI’s principal benefits for SMEs is enhancing operational efficiency, allowing small teams to allocate time and resources to higher-level work like business strategy. Cole acknowledged initiatives by the United States government to promote greater global representation of women in tech but noted that stronger efforts were needed to promote gender equality in the AI sector. She concluded by encouraging the audience to continue breaking down barriers to women in STEM fields and ensuring that women continue to steer and benefit from the growth of AI. 

The panelists leveraged their experience working with AI to cover several areas of concern for entrepreneurs, such as risk, regulation, scalability, and equity. They identified key trends in its uses across the private sector and provided guidance for SMEs hoping to improve their workflow with AI. The speakers also emphasized the need for women to shape the future of the field. 

Main Takeaways

Amnah Ajmal pushed back on skepticism that recent advances in AI are overestimated, asserting that the increasing accessibility and efficiency of computing power make the technology commercially viable. She highlighted the relevant challenge posed by AI adoption in the private sector: the burden of unlearning and relearning technologies as they evolve and integrate into new fields. Ajmal spotlighted two trends in AI usage she observed among SMEs: risk management centered on combatting scams and fraud, and personalized marketing communications. She stated that the critical edge provided by AI is best understood in terms of scalability and speed, freeing up human capital for other tasks.  

Abir Habbal explained that by keeping abreast of AI advances and integration, actors can actively shape the future of policy and governance around the technology. She distinguished between “narrow AI” capable of single tasks versus “generative AI” capable of multiple tasks at once. The latter is expected to be heavily disruptive; research conducted by her firm indicated that most professions can expect 40 percent of their working hours to be affected by AI. Habbal added that financial services have particularly high potential for AI automation, but opportunities exist in every sector. 

Salim Chemlal mentioned that AI innovation should be propelled forward alongside regulation, rather than waiting for regulation before research continues, as experts have proposed. However, he also advocated for stronger international coordination to ensure AI safety, with a special emphasis on adaptability given the many variables in the field. Amnah Ajmal also offered her thoughts on regulation, proposing that businesses should gather industry stakeholders and experts, define the problem they wish to solve, and build the regulation themselves rather than waiting for a regulator to act. She added that regulators perform a service to society and governments will often embrace the suggested frameworks. Ajmal concluded by noting that traditional financial institutions have failed to uplift SMEs and women entrepreneurs, with all-women teams receiving a maximum of 2.7 percent of global VC funding. 

Abir Habbal turned to the risks of AI and how regulation can help mitigate them. She explained that risks in the field include both structural issues, such as systemic biases and inaccurate results, as well as intentional misuses. With fast-evolving technologies such as AI, regulation may stifle innovation, creating a need for “sandboxes” for advanced testing. The industry’s appetite for regulation stems from a desire to effectively govern AI to manage these risks— and fear of financial and reputational harm if they are not mitigated. Salim Chemlal added that different societies should have their own AI systems, arguing that AI deployed outside of the context it was trained in (such as Western products now used in the Middle East) lack context to adequately serve their current users.  

Amnah Ajmal emphasized that women must challenge the status quo in the AI field. She suggested that women are sometimes apprehensive about engaging deeply with new technologies, and she consequently urges other women in the field to be confident in their abilities. AI is trained on old data, which inherently introduces biases against women. Ajmal gave the example of office thermostats, which when adopted in the 1960s were calibrated for men; women, who radiate 35 percent less body heat, are now often left—literally—in the cold. Women should feel empowered to confidently steer the future of AI to prevent further inequity. Abir Habbal highlighted the coalescence of different skillsets in the AI field, which requires expertise in data science, engineering, business, and design. AI democratization is also on the rise, allowing users from outside the field to access and experiment with AI tools. Ajmal urged novices to utilize publicly available tools to experiment and learn more about AI.  

The Way Forward

There has never been a better time for entrepreneurs in the Emirates to integrate AI into their businesses, owing to the UAE’s growing role as a global hub for AI and the country’s booming SME sector. AI adoption will remain a powerful force in the national economy in the near future, with some forecasts expecting close to 14 percent of Emirati GDP to stem from AI by 2030. Meanwhile, government initiatives continue to promote the growth of small and medium enterprises, with a set target of 1 million SMEs in the country by 2030.  

AI has huge transformational power across sectors, particularly in facilitating speed and scalability. Technology may best serve entrepreneurs by freeing up human input otherwise spent on labor-intensive tasks, such as customer service or targeted marketing. However, adopters should ensure that they have defined a problem that AI can solve, as not all facets of business require automation. The risks inherent to AI, such as biases, malfunctions, and privacy concerns should also be evaluated when considering integration.  

Large scale adoption of AI could worsen global gaps in digital skills between men and women, creating an imperative for women to steer the future of the technology in their country and abroad. Currently only 25 percent of AI specialists and 14 percent of cloud computing specialists are women, demonstrating that much work remains to be done to create a more inclusive field. However, the democratization of AI and the UAE’s SME boom represent an opportunity for women entrepreneurs to both capitalize on the business potential of AI and gain expertise that could positively shape the field. Since AI reflects the input and biases of its maker, better systems will require both diverse architects and inclusive design principles. Women at the helm of successful AI-augmented enterprises will be well positioned to advocate for these changes, resulting in a more equitable future for all.  

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Table of contents

Evolution of freedom

The change in Pakistan’s Freedom Index during the last twenty-five years suggests a positive association between freedom and civilian democratic rule. The Index was at its lowest level during the period of authoritarian rule between 1999 and 2008. It fell below the South and Central Asian average at the beginning of this period and remained below it for the greater part of this century, recently recovering and rising above the regional average due to a sharp increase in 2021. This steep rise in the Index runs counter to the established narrative among political scientists and journalists, that highlights a deterioration in freedom in the country during this period. This dissonance can be partly reconciled by taking a closer look at the different indicators of the Freedom Index, though it also underscores the need for better measurement.

Pakistan’s above-average performance on the Freedom Index relative to its regional comparators is an artifact of the sharp rise in the economic and political freedom subindices in the recent past. The steep rise in the country’s Freedom Index is in large part due to a 10-point increase in economic freedom since 2014. Although Pakistan’s level of trade openness has been high since the turn of the century, its investment freedom deteriorated between 1999 and 2014. The sharp rebound in the country’s investment freedom since 2014 appears to capture the introduction of the 2013 Investment Policy, which liberalized the foreign investment regime. This policy increased the freedom to invest by opening sectors and activities for foreign investment, strengthening protection against both indirect and direct forms of expropriation, and by allowing for the full repatriation of profits.

However, a closer analysis of the indicators of the economic freedom subindex shows that the country is a regional laggard on property rights protection. On this indicator, Pakistan’s scores have been among the lowest in the region this century, and remained well below the regional average in 2022. The dearth of property rights protections is manifest in Pakistan’s high perceived risk of expropriation in the country risk rankings published by international credit insurance groups.¹ The country does particularly badly on currency inconvertibility and transfer restriction risks, and has moderate to high expropriation risks. In addition, investor surveys in Pakistan report an environment of weak contract enforcement with long (three- to five-year) delays in the resolution of commercial disputes.² Therefore, Pakistan’s steady rise in economic freedom is largely due to the liberalization of investment policy, which was, however, underpinned by weak property rights protection and ineffective contract enforcement.

The rise in political freedom is the other trend behind the improvement in the country’s Freedom Index. The main indicator driving this improvement is legislative constraints on the executive, which appears to be measuring the strength of opposition parties in parliament during the period of civilian rule (2008–22). Within this period, the legislative constraints indicator is higher during periods of coalition government (2008–13 and 2018–22) and lower during 2013–18 when the ruling Pakistan Muslim League-Nawaz (PML-N) had an effective majority in parliament. The steep rise in the constraints on the executive post-2021 appears to be capturing the removal of the Pakistan Tehreek-e-Insaf (PTI) government in 2022 through a parliamentary vote of no confidence. However, a different picture emerges if we use an alternative measure of the constraints on the executive: the executive’s ability to bypass parliamentary scrutiny by enacting laws through presidential ordinances. This measure shows that the coalition governments since 2018 passed almost the same number of ordinances as Musharraf’s authoritarian government, which highlights the ease with which minority governments were able to bypass parliament during the period when the constraints on the executive indicator was rising sharply. So it appears that the methodology used by the Freedom Index is overestimating the constraints on the executive: an important component of political freedom. This suggests the need for improved measures of constraints on the executive in contexts where the executive has the ability to use exceptional constitutional measures to bypass parliament at low political cost.

The deterioration of political rights—another indicator of political freedom—on this Index after 2012 and its reversal and sharp rise since 2019 also run counter to political events in Pakistan. The period since 2012 saw the emergence of PTI, a major new federal political party in Pakistan that was able to grow its electoral base and form a provincial government in Khyber Pakhtunkhwa (KPK) in 2013. While the results of the 2013 election were politically and legally contested by PTI, the fact that a major new party was able to grow in Pakistan after twenty years of authoritarian and contested politics suggests that rights to political association and expression were robust, and hence it is difficult to understand the measured deterioration in political rights between 2013 and 2018. Furthermore, the increasing rate of arrests and detentions of opposition politicians in Pakistan since 2018 on the grounds of corruption and creating threats to public order is suggestive of a partisan bias in executive-led accountability, and appears to reflect a weakening of political rights during this period. Similarly, the sharp improvement in the civil liberties indicator—another part of the political freedom subindex—in the last few years, runs counter to the steady deterioration in Pakistan’s World Press Freedom Index during the past five years.³ These inconsistencies suggest the need for more thorough indicators to measure the strength of political rights and civil liberties.

An important challenge for Pakistan has been its high levels of perceived political risk. This reflects growing political polarization in Pakistan since 2013, with successive opposition parties raising concerns about the fairness of the electoral process. Political polarization is also manifesting itself in an increasing tendency of political parties to use the superior courts to dispute fundamental constitutional precepts, a trend that is having adverse effects on the country’s perceived risk of political instability. Hence, the Pakistan experience highlights the need to measure and include political polarization and partisan conflicts as components of the political freedom subindex. 

Another challenge for Pakistan is its low score on legal freedom. The U-shape evolution of this subindex seems to be mainly driven by the security indicator, which decreased significantly after the 9/11 attacks of 2001, but has recovered since 2011. Another important change identifiable in the data is the improvement in judicial independence in the aftermath of the lawyers’ movement of 2007–09, which created greater space for the exercise of independent authority by the judiciary. However, the deterioration in judicial independence scores during the last decade is a concerning trend. Along with this, the indicator scores within the legal freedom subindex show that the level of corruption, bureaucratic quality, and state capacity overall rep- resent important drags on Pakistan’s development. 

From freedom to prosperity

Pakistan’s prosperity score lags well behind other economies in the region. The income indicator of the Prosperity Index—which uses gross domestic product (GDP) per capita in constant 2017 US dollars as a measure of income—shows that, after being an above average performer in the region, Pakistan’s economy fell behind and began to diverge from its comparators during the earlier part of the century. Worryingly, there does not seem to be any indication of catch-up: the country’s economy has been growing at a slower rate than its peers during the past decade. The recent literature attributes poor growth performance to weak productivity and an inability to compete in external markets, low rates of investment, slow rates of structural change, and the country’s inability to harness the potential of educated women because of large gender gaps in economic participation.⁴

Pakistan’s low score on the Prosperity Index is also underpinned by poor scores on the education, health, and environmental quality indicators, relative to other countries in the region. The gap in Pakistan’s education performance is particularly staggering, with an education score that is one-third the regional average. The country’s health and environment scores also remained below the regional average in 2022. It is important to note that comparing Pakistan to other countries in the region will underestimate Pakistan’s environmental challenges because the University of Chicago’s Air Quality Life Index shows that northern South Asia has among the poorest air quality scores globally. That is to say, Pakistan is not only underperforming regionally, it is underperforming globally.

The inequality indicator shows that Pakistan is doing much better in terms of equality than the regional average. This seems to reflect the distributive dividends that are accruing due to Pakistan’s high reliance on foreign remittances. However, inclusive development remains an unfulfilled goal because of Pakistan’s poor performance in terms of minority rights and its low score on women’s economic freedom.

There are several ways in which weak performance on the indicators of the Freedom Index inhibits prosperity. Investor surveys identify the high perceived risk of expropriation (reflected in Pakistan’s low property rights protection scores) as an important cause of Pakistan’s low investment rates, which are among the lowest in the region. Challenges of state capacity—captured by the scores on bureaucratic quality and corruption—and relatively low levels of public investment in education, health, and environmental sustainability all contribute to poor environmental and social outcomes. Low levels of public investment are a consequence of a weak fiscal compact, with the country having one of the lowest levels of tax utilization in the East Asia & the Pacific region. Recent studies also show that Pakistan’s relatively poor performance on women’s economic freedom—a consequence of gender inequalities, labor market frictions, and restrictive gender norms—is adversely impacting prosperity.⁵

The future ahead

It is difficult to see how long-run growth rates and prosperity will improve in Pakistan without large-scale economic and institutional reforms. If Pakistan hopes to increase investment rates, it will require a radical reform of the country’s property rights and contract enforcement regimes to lower the perceived risk of expropriation. Pakistan’s path to prosperity also requires higher levels of public investment in education, health, and environment and climate resilience. This will not be possible without strengthening state capacity in the country and introducing radical reforms to improve bureaucratic quality. In addition, Pakistan needs a strong fiscal compact, in which its elites are willing to finance public investments in education, health, and environmental protection through taxation, at levels that bring it in line with its comparators. The country also requires reforms of its tariff, taxation, and subsidy regimes to overcome the bias in the economic structure against the tradeable sectors and high-productivity activities.

Furthermore, inclusive growth will not be possible without stronger protection for minority communities and without introducing interventions that lower women’s risk of harassment and violence, reduce their cost of mobility and connectivity, and incentivize employers to employ women; all of which are important prerequisites for women’s increased economic participation.⁶

However, growing political polarization in the country poses a fundamental challenge as it increases the perceived risk of political instability, which, in turn, shortens the time horizons of the governing elite. The only way to address this challenge is to create a new political settlement that develops a consensus within and between the political and the governing elites, over the basic rules of the game and transitions of power. This is critical because large-scale reforms will take time to institutionalize, and this is not possible unless the political system enables the governing elite to develop sufficiently long time horizons. The political settlement must ensure inclusive power sharing, strong federal- ism, and regular and nondisruptive transitions of power. This is important to engender political stability in a fractured political system like Pakistan, where political party bases are fragmented across regional lines, and to develop sufficiently long time horizons that enable the governing elite to take political risks and introduce structural reforms that can generate increasing levels of income and prosperity. 

Ali Cheema is an associate professor of economics at the Lahore University of Management Sciences. His recent research combines experimental methods with qualitative analysis to study how political and wealth inequality shape representation, fiscal equity, and development the determinants of citizen trust and the role of gender norms and violence as barriers to women’s political and civic participation.

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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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On February 7th, the Atlantic Council’s WIn Fellowship, in collaboration with Bahrain FinTech Bay, held a workshop exploring the best strategies for Bahraini women entrepreneurs to navigate business scalability across the region while attracting investors.  

The panel, which was moderated by Ameera Mohamed, Senior Associate at Bahrain FinTech Bay, featured three successful executives with expertise in scaling businesses and navigating the venture capital landscape: Nawaf Mohamed Alkoheji, Chief Executive Officer at Tenmou; Omar Rifai, Co-Founder and Chief Growth Officer at GrubTech; and Chef Roaya Saleh, President and Founder of Villa Mamas Restaurant Group. To kick off the discussion, Lynn Monzer, Deputy Director of the WIn Fellowship, provided the opening remarks, while Nour Dabboussi, Assistant Director of the WIn Fellowship, concluded the event with some closing remarks. 

Drawing upon their experiences as both founders and investors, the panelists highlighted the best practices for entering a new marketplace, including conducting market research, proactively considering early operations, and preserving a company’s vision and goals while making the shift. Key to the discussion were lessons learned from the panelists’ experiences with scaling projects, wherein opportunities arose as often as challenges. 

Lynn Monzer opened the event by noting the sixteen-fold increase in start-up investment in the Middle East and North Africa (MENA) region since 2015, with $4 billion raised in 2023. The growth that was further augmented by a 30 percent increase in exits through mergers and acquisitions from 2022. This trend underscores the resiliency of the region and its ability to navigate complex economic and political challenges, all while laying a foundation for future entrepreneurs. Monzer concluded by highlighting the importance of scalability in reaching new markets and generating innovation while retaining a business’ core values and mission. 

Main Takeaways 

Chef Roaya Saleh discussed the importance of retaining her business’ distinct identity outside of Bahrain and preserving Bahraini culture as purveyor of local cuisine. She emphasized a shared set of values and common mission among all employees within her restaurants. On expanding beyond the GCC, Saleh recalled overcoming challenges by staying focused on the core vision of the business and learning from inevitable mistakes. Nawaf Mohamed Alkoheji then spoke on his career as an angel investor and listed some of the green flags that his company seeks in prospective partners, such as business models incorporating new technologies. Investors spend much of their due diligence evaluating founders, seeking individuals who can deliver on the visions they propose. Alkoheji also advised entrepreneurs to be mindful of the characteristics of their new markets, as businesses must fit their markets to be successful. 

Alkoheji then emphasized the importance of consolidating control over a home market before launching into another. Roaya Saleh concurred with her colleague, adding that entrepreneurs must also have an exit strategy in mind in case things don’t go as planned. From his experience as an investor, Omar Rifai recounted that a common mistake made by successful founders was expanding too quickly, and advised new entrepreneurs not fall into the same trap. There is a learning curve inherent to scaling, and companies must be ready to adapt to new challenges when they first make the leap.  

As for the challenges and opportunities that come with scaling up, Roaya Saleh recalled the predatory behavior of some investors who have tried to convince founders to expand prematurely. She attributed her success to her ethos and principles as much as good financial breaks. Omar Rifai identified niches in the food and beverage value chain where entrepreneurs have yet to integrate digital infrastructure, illustrating a decision point for companies hoping to scale up; businesses can choose to either capture more of their value chain, or increase their competitive edge through adopting tech innovations. Thus, challenges faced at the entrance of new markets can rapidly become opportunities if entrepreneurs think creatively.  

On policy prescriptions for driving more investment to Bahraini companies, Nawaf Mohamed Alkoheji suggested that the government should incentivize successful Bahrainis to reinvest their capital in other local firms. Attracting more investors to a market is a positive development for all start-ups therein.  

The panelists then delved more into their experiences landing in new markets. Roaya Saleh shared her experience expanding Villa Mamas into Europe. Omar Rifai recounted that GrubTech’s entry into Egypt was initially a failure, as local restaurants did not purchase the company’s software. However, the company still gained from lessons learned in market research and by hiring some forty employees for global administrative operations. Both cases revealed some of the challenges entrepreneurs face when entering new marketplaces, but through these examples, Rifai emphasized the need for entrepreneurs to conduct smart research on new markets, both remotely and by spending time on the ground there.  

Nawaf Mohamed Alkoheji discussed attributes that make Bahrain an attractive market. For example, encouraging foreign entrepreneurs to grow their start-up in the Kingdom is feasible thanks to the cheaper costs of launching there. Roaya Saleh and Ameera Mohamed also highlighted the close nature and welcoming spirit of the country’s start up ecosystem. Saleh also noted a benefit of the tight community in that allows for rapid customer feedback, allowing brands to forge close relationships with customers. 

The Way Forward 

Bahraini support for SMEs continues to deliver remarkable results, with the sector growing 14 percent last year; 39 percent of these enterprises are now woman-owned. The boom is fueled in part by entrepreneurship initiatives launched by the government’s Economic Development Board, such as Fintech hubs and seed fuel programs. The Kingdom is also continuing to position itself as a regional leader in start-up launches, the number of which has grown at a compound annual growth rate of 46.2 percent over the past three years.  

With foreign capital inflows continuing to surge and ever-greater numbers of new businesses entering the country’s markets, the time is right for Bahraini entrepreneurs to consider scaling beyond the Kingdom. Making the leap is made easier by learning from others who came before, and successful founders and investors have much of the same advice to pass along to companies wishing to expand. They stress the importance of picking the right moment to scale up, as overstretching a business too early can doom the whole enterprise. Researching the characteristics of a new market and investing carefully can similarly mitigate risk. Challenges in new markets can be turned into opportunities, so long as founders can strike a balance between adapting their business and retaining their vision. 

It is critical that the Kingdom continues to nourish its startup ecosystem through attracting foreign investment and founders, as well as through facilitating spaces where new entrepreneurs can synergize and learn from one another. 

Explore the WIn Fellowship

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MENASource Sep 20, 2021

‘Investing in women is just good business’: Ways to increase funding for women-led ventures in the Middle East

By Stefanie Hausheer Ali

On September 14, 2021 the Atlantic Council’s empowerME Initiative held a workshop on “Venture Capital Financing: How to Increase Funding for Women-led Ventures.”

Middle East The Gulf

Sponsors & in-country partner

empowerME

empowerME at the Atlantic Council’s Rafik Hariri Center for the Middle East is shaping solutions to empower entrepreneurs, women, and youth and building coalitions of public and private partnerships to drive regional economic integration, prosperity, and job creation.

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Some of the factors in China follow the youth unemployment story we continue to see around the world, including inadequate private sector job creation and skills mismatches. In China, the number of new graduates entering the labor market is also rising—to nearly 12 million in 2024, and there aren’t enough jobs to keep pace, especially as regulatory burdens are dampening growth in industries most likely to employ young people such as technology.

But the youth labor market in China has a few unique characteristics as well. The cultural demands on young Chinese workers are high—they are routinely expected to work “9-9-6”—from 9 am to 9 pm, six days a week. The resulting burnout is a key contributor to the elevated and stubborn youth unemployment. The general economic downturn and collapse of the property and housing market in particular has led to a hiring slowdown, with jobs that might be most suitable to new labor market entrants continuing to be among the hardest hit. Meanwhile, in the face of grueling hours for low pay, young people in China are opting out, choosing instead to “lie flat”—remain idle and not work or engage in any economic activities—or become “professional children,” paid by their parents or grandparents to live with and care for them.

At the same time, with higher deaths and fewer births (even with the end of the one-child policy nearly a decade ago to in part to help mitigate the aging population) younger Chinese women face further constraints to getting or keeping a job as society and employers are averse to hiring them and instead discourage them from joining the workforce versus staying home to have and raise children.

Failing at first to acknowledge the extent or damage of the crisis, the response from the government has been slow. Enforcing labor laws and financial incentives to hire youth and efforts to smooth the school to work transition (especially from university) can help, but macroeconomic risks as well as longer-term structural or societal challenges—including relevance of education, rapid urbanization, and emotional mental health—demand attention with a youth lens, too.

The implications of the situation are stark not only as a drag on Chinese productivity and growth but, given the outsized role of China in the global economy, its weakening has the potential to impact youth labor markets worldwide. That’s especially true in countries—in Africa and Latin America for example—where Chinese development finance, investment, and trade are critical to their own dynamism and job creation amid debt distress.

Nicole Goldin is a nonresident senior fellow with 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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Brazil’s breadbasket to the Global South

Beginning in the 1970s, both the Brazilian government and private entities invested heavily in agricultural innovations, leading to the development of more resilient crop varieties. Along with the expansion of farmland and widespread adoption of double cropping, the investments significantly enhanced agricultural productivity and gave Brazil an edge over other farming nations.

Fast forward to 2022 and Brazil has become the world’s second-largest exporter of agricultural products. It leads the world in soy, meat, coffee and sugar exports and is the second-largest exporter of oilcake and corn. Several large economies, emerging markets in particular, now heavily rely on Brazil to secure their food needs.

The benefits granted by MERCOSUR, a regional trade bloc within South America, make Brazil a prime source of agriculture for Argentina. Many Asian and African countries in the G20 are large consumers of soybeans, corn, and meat—all commodities where Brazil has a large market share. The United States, Mexico, and Canada in turn barely source any agriculture from Brazil as they source the majority of their food imports from one another as a result of the benefits granted by USMCA. Most European countries similarly import the majority of their agriculture from other European countries in the single market. 

Across the G20 economies, China is the most reliant on Brazil for agriculture, buying up a quarter of all Brazilian exports including most of its soy and beef. Brazil’s rise as an agripower since the 1970s aligned neatly with the population boom in China and the growing concern of the Chinese Communist Party over how to secure food for its population. But the real push came in the last decade as Beijing looked for agriculture suppliers other than the United States following intensification of trade tensions. 

To help Brazil increase its capacity and to reduce logistical costs, the state-owned China Oil and Foodstuffs Corporation (COFCO) invested over $2.3 billion, amounting to about 40 percent of its worldwide investments, in Brazil’s agricultural infrastructure since 2014. A key investment is at the Port of Santos, where a terminal expansion will take the company’s own capacity from 3 million to 14 million tonnes. Further cooperation in Brazilian railways, waterways, and farmland restoration is on the agenda.

Lula’s leverage is his history 

By itself, influence in the agriculture sector vis-a-vis emerging markets doesn’t provide a pathway to leadership of the Global South. Agriculture is not like semiconductors; food is an absolutely necessary resource for physical survival. Russia’s sudden blockage of the Black Sea in 2022, for instance, led to massive global grain shortages that created significant price spikes for food around the world. Moreover, the United States remains the world’s largest exporter of agriculture and for several countries in the G20, it remains the largest supplier. Lastly, although Brazil supplies about a fifth of global corn exports, it has relatively little weight in the global market for grains like wheat and rice, two critical food items for developing economies.

But Lula and Brazil nevertheless bring unique credibility with developing and advanced economies on the subject of food security.  

When he first came to office in 2003, Lula launched the ‘Fome Zero’ (Zero Hunger) programme, a series of coordinated large-scale government interventions that resulted in Brazil’s removal from the United Nations’ Hunger Map in 2014. Throughout the 2000s, Lula’s Brazil also mobilized budgetary, legislative, organizational, and narrative channels to orient its foreign policy toward hunger-reduction abroad. 

Since his return to power in 2023, Lula has once again made hunger a domestic priority. He has consistently raised the issue internationally. Now, his moment has come. As President of the G20, he has announced Brasília’s intention to launch a Global Alliance Against Hunger and Poverty at the Leaders Summit in November.

Both Brazil and the global economy have evolved since Lula was last in power. But the country possesses decades of trade and technical assistance relationships with developing economies, the know-how in the sector, and a track-record in hunger-reduction. Chronic hunger and famine remain real prospects for a tenth of the global population and developing countries will likely see Lula’s Brazil to act as a reliable representative in trying to bring together a global consensus on the path forward.

In recent years, China and India have both positioned themselves as leaders of the Global South. Now, the leader of the former is focused on his troubled domestic economy and the leader of the latter has an election on his hands. Meanwhile Lula is about to host the world twice—once for the G20 this year and then again for COP30 in 2025. If Brazil delivers tangible, material, and clearly observable benefits on food security, it will cement its position as a key leader of the Global South.

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

Mrugank Bhusari is assistant director at the Atlantic Council GeoEconomics Center focusing on multilateral institutions and the international role of the dollar.

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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PES was central to the agenda in principle if not in name at last month’s World Economic Forum in Davos, featuring in both official and unofficial conversations and convenings. New announcements and commitments echo this sentiment and especially illustrate how the private sector, in partnership with governments, can and should play a role in advancing PES. For example, more than twenty Ministers and CEOs came together in a WEF alliance to mobilize financing for the clean energy transition in the Global South. The Network to Mobilize Clean Energy Investment for the Global South will amplify the investment needs of developing nations and advance actionable solutions to increase green energy capital flows globally. Comprising Ministers from Colombia, Egypt, India, Japan, Malaysia, Morocco, Namibia, Nigeria, Norway, Kenya, South Africa, and ten other countries, the Network to Mobilize Clean Energy Investment for the Global South “will provide a collaborative space for its members to accelerate clean energy capital solutions in emerging market contexts—through innovative policies, new business models, de-risking tools and finance mechanisms—and exchange best practices for attracting sustainable flows of clean energy capital.”

Also this month, the US Millennium Challenge Corporation marked the 20th anniversary of its founding, bringing to light its two decades of economic growth and poverty alleviation investments whose model and eligibility requirements—including democratic rights and control of corruption ‘hard hurdles’—have unlocked policy reforms, unleashing the “MCC effect” in numerous countries. To date, MCC has invested over $17 billion in infrastructure and policy reforms in health, education, power, agriculture, and transport in forty-seven countries, benefiting over 300 million individuals worldwide. This year, Cabo Verde was selected for development of a new regional compact “as a result of its strong commitment to democracy, its economic development needs and lingering poverty, and the potential opportunities to strengthen regional economic integration and trade in West Africa with a committed and engaged former MCC partner”; while Tanzania and Philippines can begin developing threshold programs to advance the rule of law in support of compact eligibility after selection by the Board in December 2023.

A third illustration, the European Commission and the Africa Development Bank signing of a Financial Framework Partnership Agreement on January 29 to boost energy, digital, transport infrastructure investments across the continent with co-financing. The agreement falls under the EU’s values-driven Global Gateway initiative which prioritizes advancing rule of law, human rights, and international norms and standards alongside inclusive economic growth, health and education in its cooperating countries: its 2021-2027 package with Africa will support investments worth €150 billion.

Where else might we see PES this year? Here’s a few things worth watching.

While PES has been more complicated to enact in multilateral contexts, this year’s G20 has potential beyond the strength in numbers alone. The members of the G20 represent around 85 percent of the world’s GDP, and more than 75 percent of world trade. Brazil took the reins of the G20 Presidency in November 2023, and has put development front and center on the agenda, opening the door to a robust PES orientation: its three key priorities comprise combating hunger, poverty, and inequality; advancing the three dimensions of sustainable development (economic, social, and environmental); and reforming global governance. Indeed, in the run up to the Leader’s summit in November, the Sherpa’s Development Working Group will convene again in March and May to further public policies to reduce inequality, trilateral development cooperation (grants, technical assistance, lending) and more specifically investments in water and sanitation. At the same time, PES will take center stage as the work of the Finance track gets underway next month when Ministers and central Bankers will convene and deliberate how preferential trade and fiscal incentives might be deployed to address fragmentation and debt challenges of lower middle-income countries.

As it relates to conflict response, we see PES as a frame for continued and specific bilateral and multilateral support to Ukraine’s economic recovery as well as EU expansion—with aid and membership contingent on and related to reforms which capacity building, technical, and financial assistance will be targeted to advance. A €50 billion ‘Facility’ from the EU has just gained unanimous approval, and we could see other moves such as extending Ukraine access to the Single Euro Payments Area (SEPA). The United States Agency for international Development (USAID) Ukraine Mission has forecast awarding this year a new flagship trade and competitiveness project to encourage business enabling reforms, support industries and firms, further job creation, and increase exports.

Similarly, as war rages in Israel and Gaza, fomenting humanitarian crisis, we are likely to see PES incentives. Those could include development grants and economic aid to encourage neighboring countries Egypt and Jordan to increase their intake of refugees and facilitate logistical humanitarian support, as well as to Gaza and the West Bank themselves for economic recovery and reconstruction alongside promotion of rule of law and peacebuilding.

On trade, as fragmentation threatens supply chains, including for critical minerals, new and improved preferential trade and finance mechanisms that reduce dependence on China or bolster regional ties will be on the table. The US African Growth and Opportunity Act is up for reauthorization. First passed in 2000, The African Growth and Opportunity Act (AGOA), which makes preferential terms of trade and investment support dependent upon favorable annual reviews of a country’s economic policies, governance, worker rights, human rights, and other conditions, was last reauthorized in 2020 and is set to expire in 2025. With US Senator Coons releasing a discussion draft of reauthorizing legislation in November 2023, that in part incorporates AGOA with the nascent African Continental Free Trade Agreement, we can expect to see robust, and perhaps unusually bipartisan, discussion this year.

Finally, this year marks the 80th anniversary of the Bretton Woods Conference that launched the World Bank (then IBRD) and International Monetary Fund (IMF) as the nature and direction of global economic governance continues to evolve, creating an important entrée for PES. Over the past decade, developing countries’ options for financing have increased as China and others have increased their global footprint giving way to more strategic competition. At the same time, as their fiscal space tightens and liquidity constrained, the case for using positive economic statecraft tools is clear and all signs point toward seeing more of it than before in 2024. It will be important to monitor impact and learn from effectiveness (or not) of these solutions in real time as well as over time as resulting policy reforms and investments take hold and bear fruit.

Nicole Goldin is a nonresident senior fellow with 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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This paper addresses the need for governance reform in the Bretton Woods Institutions (BWIs), namely the International Monetary Fund (IMF) and the World Bank. The report, informed by interviews with former officials, consultants, and think tank experts, provides an analysis of the challenges these institutions face in a rapidly evolving geopolitical climate.

The authors highlight that the most recent reforms in the BWIs, including the IMF’s General Reviews of Quotas and the World Bank’s selective capital increases, have been insufficient in adapting to significant economic and geopolitical shifts. The paper emphasizes the need for a governance reform roadmap, focusing on quota reallocation, diplomatic efforts, and a commitment to diversity and democratic principles.

Key points include the stagnation in quota shares and Special Drawing Rights (SDR) allocations in the IMF, with the Fifteenth General Review of Quotas concluding in 2020 without any alterations. The anticipatedIMF outcomes of the Sixteenth and Seventeenth General Reviews of Quotas suggest a potential shift in the representation of major economies like China and India, but concerns remain about the slow pace of substantial reforms.

The report examines geopolitical challenges, especially the reluctance of the United States and Japan to significantly increase China’s role and influence in the BWIs. This has led to the underrepresentation of certain regions like Southeast Asia and Africa, both in terms of quota shares and on a nominal GDP and per capita basis. The paper underscores the persistent inequalities in representation since the founding of the BWIs in 1944, with fluctuations in power generating grievances for underrepresented states.

The authors propose a four-point approach to governance reforms in the BWIs, emphasizing rules-based, automatic quota reallocation, transparency, and gradual changes. They suggest introducing weighted voting on the executive boards for specific issues, like climate change; creating a joint committee for governance reforms, and addressing the overrepresentation of European nations. They also highlight the critical role of Executive Directors (EDs) in governance reform, advocating for more diverse representation in leadership and staff, and suggesting policy changes to enhance transparency and inclusivity. The authors also advocate for doubling the number of deputy directors and vice presidents at the IMF and World Bank, respectively, and instituting a rotational system for Executive Board leadership to ensure more geographic diversity in the BWIs.

In conclusion, the paper calls for a democratized governance structure in the BWIs, emphasizing the need for reevaluating quota allocations and diversifying leadership roles. By addressing these foundational challenges, the BWIs can navigate the complexities of today’s global economic landscape more effectively, fostering trust, representation, and robust leadership. The authors also argue persuasively that BWI reform can not only reinforce the legitimacy of the IMF and World Bank but also indirectly help the soft and hard power of the states most hesitant to reform the international monetary system.

Sienna Nordquist is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. She is also a PhD student in Social and Political Science at Bocconi University (Milan, Italy).

Joel Christoph is a Bretton Woods 2.0 Fellow with the GeoEconomics Center. He is also a Ph.D. researcher in Economics at the European University Institute (EUI) in Italy.

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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Issue Brief Jan 16, 2024

Navigating subsidy reform at the WTO

By Sona Muzikarova and Sophia Busch

The legitimacy of the World Trade Organization is in question. The United States and its allies, and leaders in the organization, can better wield its potential to address global issues, specifically to reduce inefficiencies from fragmentation caused by subsidies.

Economy & Business Fiscal and Structural Reform

Issue Brief Jan 16, 2024

Developing an agenda for international financial institutions and central bank digital currency

By Greg Brownstein and Utsav Saksena

Is the emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report focuses on three domains: financial stability, development and financial inclusion, and global payment systems.

Digital Currencies Economy & Business

The post Governance reform of the Bretton Woods Institutions appeared first on Atlantic Council.

The World Trade Organization (WTO), founded in 1948, and regulating trade among its 164 member countries, has been a powerful engine for overall economic expansion, at the forefront of the international rules-based system. It has generated economic gains by promoting freer and fairer trade; increasing competition, efficiencies, and innovation; protecting consumers; and providing a platform for rules enforcement and dispute resolution to enhance stability and predictability in the global trading system. It also has supported the integration of developing countries into the world economy by fostering growth, development, and poverty reduction. Since its founding, the global economy has evolved largely in line with the ideals the WTO prescribed, as exports in 2019 were 250 times the level of 1948, reflecting widespread economic growth and interconnected trade.¹

However, the WTO has now become almost infamously ineffective at settling disputes and holding countries accountable for unfair trade practices. Global trade has grown increasingly fragmented since the global financial crisis of 2007–2009, the COVID-19 pandemic, and Russia’s 2022 invasion of Ukraine, all of which accelerated the trend against free trade and globalization. In all major economies, trade policy is increasingly used as a strategic instrument to address geopolitical competition. While US policymakers fixate on China’s unfair trade practices, US export controls against China and the US Inflation Reduction Act are prime examples of trade-distorting policies. The legitimacy and relevance of the WTO is in question, and it faces many challenges. However, the WTO retains unique characteristics that grant it an important role in international trade policy problem-solving: a set of core principles, a forum for negotiating and monitoring, and membership representing 96.7 percent of global gross domestic product (GDP).²

This report aims to provide recommendations for how the United States and its allies, and leaders in the organization, can better wield its potential to address global issues, specifically to reduce inefficiencies from fragmentation caused by subsidies. By first outlining and explaining the obstacles preventing an effective WTO, this report will ultimately provide recommendations for how the organization can provide guidance on subsidies for global public goods by facilitating discussions within multilateral trade agreements. It also provides suggestions for how the WTO can work with other Bretton Woods institutions to ensure that less-developed countries (LDCs) gain access to green financing, technology, and resources.

About the authors

Sona Muzikarova is a political economist, author and policy consultant, with over a decade of experience delivering forward-looking insights on the region of Central and Eastern Europe.

Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center.

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Issue Brief Jan 16, 2024

Governance reform of the Bretton Woods Institutions

By Sienna Nordquist and Joel Christoph

The paper emphasizes the need for a governance reform roadmap at the IMF and World Bank focusing on quota reallocation, diplomatic efforts, and a commitment to diversity and democratic principles.

Economy & Business European Union

Issue Brief Jan 16, 2024

Developing an agenda for international financial institutions and central bank digital currency

By Greg Brownstein and Utsav Saksena

Is the emerging architecture appropriate, effective, and sufficient to manage the global transition to digital money? This report focuses on three domains: financial stability, development and financial inclusion, and global payment systems.

Digital Currencies Economy & Business

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

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The World Bank’s 2023 document Evolving the World Bank Group’s Mission, Operations, and Resources: A Roadmap, otherwise known as the “evolution roadmap,” sets a laudable goal to shift more focus and action onto climate change in low-income and developing countries (LIDCs). The language used throughout the report clearly reflects the Bank’s shifting priorities. The word “climate” was mentioned forty times in the evolution roadmap document, “poverty” was mentioned forty-two times, and prosperity was mentioned only twenty-one times. This shows a clear paradigm shift that is expanding from the World Bank’s “Twin Goals” of ending extreme poverty and boosting shared prosperity to also include issues related to climate change and financing.

In the evolution roadmap report, the World Bank Group (WBG) rightly identifies that the world has not only stalled, but regressed in achieving the prosperity and development goals set for this decade. Further, the WBG identifies that LIDCs are not prepared to face the development challenges of the modern world. One of the key development issues the WBG identifies is climate change, which has an outsized impact on LIDCs. In this regard, the WBG has already created frameworks to engage climate issues in LIDCs. The WBG’s Country Climate and Development Reports (CCDR) offer a comprehensive resource to support development and climate objectives at the country level. These public reports empower governments, private sector investors, and citizens to prioritize resilience and adaptation and reduce emissions without compromising broader development objectives. These goals can be achieved, the WBG estimates, with an investment averaging 1.4 percent of a given country’s gross domestic product (GDP)— though in some low-income countries that number can be between 5 percent and 10 percent.

While the CCDR gives nations the tools to achieve climate objectives without significantly compromising development, it does not bridge the gap between the increasing focus of the WBG and the developed world on climate change and the real priorities of LIDCs.

People in LIDCs do not place climate change among their top development priorities, despite the outsized impact of climate change on LIDCs. This is not to say that LIDCs are not concerned about combatting climate change, or uninterested in adaptation strategies. Rather, citizens of LIDCs typically prioritize other development goals ahead of climate change— particularly when working with multilateral development institutions such as WBG. Across forty-three WBG client countries surveyed, climate emerged as a top development priority for less than 6 percent of the respondents on average. It only ranked among the top two development priorities in Vietnam. It only broke into the top three priorities for six countries, none of which are International Development Association (IDA) borrowers. Clearly climate change —particularly among the poorest countries— is not a pressing development priority.

LIDCs are instead more focused on securing funding for development projects with more immediate results. Overwhelmingly, education and health (human capital) are most widely identified as top development priorities. Other areas of focus identified in this survey include:

• Economic growth, agricultural and rural development, job creation and employment, and poverty reduction, which can be broadly categorized as economic development.
• Natural resources, infrastructure and transportation, and energy, which can be broadly categorized as natural and physical capital.
• Security, stability, and governance reform, which can be broadly categorized as governance related issues.

These areas of focus are confirmed by other surveys, such as the 2021 “Listening to Leaders” survey published by Aid Data, where climate change landed in the bottom quartile of responses.

The lack of emphasis on climate change makes sense for LIDCs. Climate change mitigation is a global endeavor, and thus far the richest economies have done little to commit to it despite being the largest per capita contributors to climate change. Given the negligible per-capita contribution of LIDCs to climate change— and the fact that they will not be major contributors in the near future— it makes sense for LIDCs to direct attention elsewhere. Second, development and poverty reduction are excellent resilience strategies for LIDCs. Impoverished communities are much more vulnerable to climate change than richer communities. Under the assumption that climate change will continue regardless of LIDCs’ mitigation and adaptation efforts, due to their limited impact; it makes sense for these countries to focus on lifting their populations out of poverty and developing resilient infrastructure, governance, and economies instead of allocating their dwindling resources to fight climate change.

Because environmental concerns are not among the top three priorities for the majority of WBG’s clients in LIDCs, the WBG needs to demonstrate the immediate and long-term benefits of climate adaptation and mitigation for these economies. This is especially true if the WBG aims to convince LIDCs to allocate over 5 percent of their GDP toward addressing climate issues while they contribute the least to climate change. Additionally, the WBG must persuade major contributors to climate change to drastically decrease their emissions and assist LIDCs with their direly needed adaptation efforts. Otherwise, LIDCs will have little to no incentive to reduce their emissions, as they will perceive such measures as having a negligible impact on reversing global warming and climate change.

This policy brief examines the impact of climate change on other development priorities, specifically education and health, that are among the top two in the WBG’s 2020-2021 Country Opinion Survey. One or more of these priorities ranks higher than climate change for the governments, aid agencies, media, academics, private sector, and civil societies of the countries in the survey, yet both of these are intrinsically linked to climate change. The remainder of the report goes through each of these priorities outlined by LIDCs in the World Bank survey and highlights the impact of climate change on each one of them.

Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads GeoEconomics Center’s Bretton Woods 2.0 Project.

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 tennis tournament was not the first time that Mubadala—the United Arab Emirates’ sovereign wealth and investment fund, with a portfolio valued at $276 billion under management—had sponsored a sporting event. But it was the first time it had done so in the Beltway, where Abu Dhabi probably views these sponsorships as fruitful business investments that yield meaningful political and reputational benefits. (In the interest of disclosure: The Emirati government is a donor to the Atlantic Council.) 

The United Arab Emirates (UAE) joins Saudi Arabia and Qatar in their race to position their countries as global sporting leaders. In June 2023, Qatar’s sovereign wealth fund became the first foreign sovereign fund to invest in a major US sports franchise. Saudi Arabia is now set to host the 2034 World Cup.

Other countries have invested in US sports teams as well. Norway’s sovereign fund, valued at $1.3 trillion, has reduced its sports investments since 2020, but it still owns a small equity share of 1.07 percent in Madison Square Garden Sports, which manages the National Basketball Association (NBA) team the New York Knicks, National Hockey League (NHL) team the New York Rangers, and some of the latter’s minor league affiliates.

Since 2022, the NBA and Women’s NBA have allowed such foreign investments so long as they consist of no more than a 20 percent stake and do not include ownership control. However, it remains an open question how long these investments will be restricted to non-controlling interests. Currently, Major League Baseball (MLB) does not prohibit sovereign investment fund investments in its clubs, nor does the NHL. For now, the National Football League (NFL) prohibits sovereign wealth funds’ investments in its franchises. According to NFL commissioner Roger Goodell, such investments are something the league will “contemplate at some point in time.” The commissioner of Major League Soccer also said in July that the league was considering allowing such investments.

More than just oil

Starting around 2040, revenues from oil are expected to decline because of reductions in global demand driven by a higher need for renewable energy. Amid rising interest in international sports, as well as broadcasting and merchandising opportunities, sports clubs offer an opportunity for Gulf investment funds to generate returns. Gulf leaders also want to remodel their countries’ oil-focused images into ones that attract investment and people who want to work and live there. They want to show that they can impact and contribute to world powers—not vice versa.

The Mubadala Citi DC Open happened shortly after the announcement that the Qatar Investment Authority had bought a 5 percent stake in Monumental Sports and Entertainment. Monumental owns NBC Sports Washington, the NBA’s Washington Wizards, and the NHL’s Washington Capitals—a successful franchise that won the league championship in 2018. Monumental’s founder and CEO Ted Leonsis has also been in negotiations to buy the MLB’s Washington Nationals.

Saudi Arabia probably made the most significant move in this realm in 2023; the Saudi LIV Golf-PGA Tour merger—now being investigated by Congress and the US Department of Justice to determine whether it violates federal antitrust statutes amid suspicion regarding the Saudis’ widening role in US sports—marked the $650 billion Saudi Public Investment Fund’s first foray into the US sports market.

US sports franchises are arguably more multifaceted businesses than those in Europe, where Gulf investments in sports are not new. And US sports franchises offer no risk of relegation—unlike European football clubs in the Union of European Football Associations leagues—which makes the valuation of US teams exceedingly high. From 2012 to 2021, the average value of an NBA team increased by 387 percent while the average value of an NHL team increased by 207 percent. As a result, US sports franchises are viewed as “recession-proof,” outpacing the growth of the S&P 500—a US stock market index made up of 500 of the largest public companies—from 2004 to 2012.

Given these political and economic benefits, Gulf investments in US sports are likely to rise. US sports franchises offer a limited investment risk with known recurring revenue, eye-popping valuations, and a loyal fan and customer base. Such investments provide Gulf states media attention and a means of influencing public opinion and molding their countries’ brands.

A new field competition

One big question is whether US regulators will scrutinize these deals more, especially controlling stakes in US teams if and when they happen. The Committee on Foreign Investment in the United States (CFIUS)—the interagency committee that examines the national security implications of foreign acquisitions of US companies—could have jurisdiction if there are national security concerns related to the data collected by these teams. But such a review would not adequately examine these deals based on reputational risk to the teams. Given that, the US government should consider whether it wants to give CFIUS those powers or create a new review mechanism.

Gulf investments in US teams could pose reputational challenges to those teams as a result of Western concerns about the state of political, social, and labor rights in Gulf countries. Additionally, the increased attention that comes along with growing investments will also bring potential challenges for Arab Gulf governments. The scrutiny on the 2022 FIFA World Cup in Qatar is likely to be repeated for World Cup 2034 host Saudi Arabia, especially as it seeks to get more involved in US sports franchises and become a global sports hub. 

But these investments aren’t going away. Any resistance in US sports leagues to controlling stakes and foreign ownership will likely dissipate in the next decade or two if such investments prove effective and productive and ownership rules continue to change, albeit slowly. Expect Gulf countries to increase their investments in US sports teams while trying to play up the economic benefits of those investments and their impact on the community, as they have done in the United Kingdom.

In the United Kingdom, research conducted by New Economy Manchester, a local governmental entity, showed a return on investment of £1.63 per pound invested in Abu Dhabi United Group-owned Manchester City’s City in the Community, a program that benefits individuals with disabilities. The same study reported a return on investment of £1.98 per pound invested in Manchester City’s Kicks program, which helps reduce anti-social behavior and crime among youth. Nevertheless, others, including Amnesty International, argue that Manchester City is being used as part of an exercise in “sportswashing”—allowing a nation with a record of human rights abuses to project a positive image of itself on the world stage given the immense international advertising platform that the Premier League provides. They posit that, by investing in the emotional power of football clubs and East Manchester, Abu Dhabi is instrumentalizing sports to win hearts and minds.

In the contest among Gulf states for stakes in US sports franchises and tournaments, the next front in the United States could be the MLB—especially if Leonsis and Monumental Sports buy the Nationals. Such a sale would put three major Washington sports teams (the NBA, NHL, and MLB squads) and NBC Washington Sports under Monumental, providing the Qatar Investment Fund a huge platform and opportunities for growth and partnerships in the nation’s capital. In November 2023, Muriel Bowser, the mayor of Washington, DC, departed for Qatar “to engage with leaders on the issues of infrastructure, sports and education, as well as promote Washington, DC as a destination for investment and tourism,” signaling interest from a top Beltway official in allowing these investments to move forward.

One thing is certain: There will be more competition among Gulf countries to become the biggest shapers of global sports, with each vying to have the most popular US team in their portfolio. Fans will care most about their teams winning, but they will—perhaps unwittingly—be taking part in another rivalry half a world away.

Joze Pelayo is an associate director at the Scowcroft Middle East Security Initiative. Follow him on Twitter: @jozemrpelayo.

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The post Goldin quoted by Axios on higher interest rates and global debt costs appeared first on Atlantic Council.

Majid Jafar is the CEO of Crescent Petroleum and a member of the Atlantic Council’s International Advisory Board. Crescent Petroleum is a sponsor of the 2023 Atlantic Council Global Energy Forum. This essay is part of the Global Energy Agenda.

As COP28 kicks off in the United Arab Emirates, the divide between Western countries and the developing world over cutting global carbon emissions has never been deeper. As Western activists and policymakers focus on cutting oil and gas production and wrangle over whether to phase out or phase down the use of hydrocarbons, those in the developing world increasingly see their future coming down to reducing emissions at the cost of economic progress. 

Bridging this divide will be critical for any real, lasting climate progress. The developing world is where the entire climate change battle will be won or lost; it is where all the net growth in emissions will come from, because it is where the most rapid economic and population growth is taking place. These nations must progress toward a lower-emissions pathway to development, but policymakers must disabuse themselves of the idea that progress can be accomplished by reducing access to energy supply or simply cutting consumption.

Policymakers must disabuse themselves of the idea that progress can be accomplished by reducing access to energy supply or simply cutting consumption.

Unintended consequences

Every nation has been grappling with the energy trilemma of affordability, availability, and sustainability as energy crises began in 2022. Every leg of this trilemma is critical to maintaining equilibrium and ensuring that energy security is met while emissions fall. But while European countries realized the importance of the trilemma when the energy crisis began, the developing world has faced the challenge for decades. 

The West’s choices and policies have had significant unintended consequences on the developing world, which often bears the brunt of climate change impacts despite contributing minimally to the problem. Western policies that seek to dampen investment in oil and gas only darken the picture by raising energy costs and creating shortages for those who can least afford them. 

European policymakers, for example, proudly heralded their ability to prevent energy shortages at home amid the energy crisis of 2022 by amassing liquefied natural gas (LNG) supplies from around the world. But the triumphalism ignored the impact of their deep pockets on energy costs and supply going to developing countries such as Pakistan, Bangladesh, and others. The result in these emerging markets was skyrocketing LNG costs, energy shortages, inflation, and ultimately greater use of dirtier fuels. 

Adoption of natural gas with renewables by the developing world promises to be the most effective means of cutting carbon emissions quickly and affordably. Enabling the developing world to begin the downward march of carbon emissions now is crucial to this goal. Yet when investment in gas is starved to discourage its development and use, or the cost of capital is too high to enable the shift, the Global South is forced to resort to cheaper but higher-emitting fuels, namely coal. 

License to operate

The oil and gas industry is also making tangible progress to be part of the climate solution. Most companies have pledged to reduce their carbon intensity and prevent methane leaks ahead of COP28, further reinforcing the reductions possible with natural gas and other cleaner sources of fuel. Substituting diesel and fuel oil with natural gas is one way the industry can decrease CO₂ emissions. Additionally, process improvements to lower carbon intensity along with offsets can enable the industry to achieve carbon neutrality across operations.  

Efforts like these can create a virtuous circle of emissions reductions while ensuring affordable and reliable energy supply for developing economies. In time, the energy mix will include natural gas and other clean fuels such as hydrogen, in addition to intermittent renewables and other forms of new energy. 

Financing the change 

Ultimately, change on the order required to reduce emissions is only possible with global cooperation. Lasting change requires genuine efforts from the West to respect and address the needs of developing nations by fulfilling climate funding commitments and providing finance as well as technical support and assistance. 

One promising solution would be a new global institution, such as a World Carbon Bank, to channel technical assistance and climate aid to developing countries. Another powerful solution would be to establish a global system of carbon pricing to create economic incentives for reducing greenhouse gas emissions by incorporating the true cost of carbon into market decisions.  

Clearly, the inherent distrust developing countries feel toward the West remains a major stumbling block to achieving global net-zero ambitions. It is therefore crucial to have a neutral space to host these conversations where all countries’ views will be welcomed and provided an equal platform.

COP is such a platform, and the UAE as the COP28 convener offers a model for action. As an early and major investor in all forms of energy, the UAE has the resources, both in terms of finance and low-cost solar energy supply, to advance the technologies of the future such as hydrogen. It plans to invest $54 billion in renewables over the next seven years as part of efforts to reach net-zero emissions by 2050.

The UAE’s geographical location also makes it a strategic meeting point between the Global South and North, serving as a hub for trade, finance, and diplomacy, with strong ties to both developed and developing nations. 

The fight against climate change requires global solidarity, collaboration, and systematic thinking. Climate policies must be revised to reflect the needs and views of developing nations as well as those of the West. Undermining poorer countries’ growth in order to cut emissions is not a viable path to change; only by respecting those countries’ needs can we make a lasting impact. That is why we can all look forward to real and lasting action at COP28 in Dubai this year. 

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Flagship Event Tue, November 28, 2023 • 9:00 am ET

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.

Digital Currencies Economy & Business International Financial Institutions

Over the past few years, the number of central bank digital currencies and other digital assets has grown exponentially. This growth speaks to the confidence that many people have in the interplay of technology finance and money that can offer cutting-edge transparency, speed and efficiency. But it has also resulted in new concerns, including how standards can be developed to create an even playing field for new entrants into the financial system, maintain privacy and security, and ensure that new systems are compatible with existing ones. This problem of “interoperability” needs to be solved, or else what may emerge is a world of digital asset “silos.”

The emerging and disparate marketplace of digital ledger technologies (DLTs) “is going to challenge our ability for a harmonized global solution,” explained Jennifer O’Rourke, executive director of innovation strategy at the Depository Trust and Clearing Corporation. “But the answer to that is going to be interoperability,” she added at a panel session of the Atlantic Council’s conference on central bank digital currency on November 28.

When it comes to the future of digital currencies, interoperability, which O’Rourke defined as “the sharing and the coordination of disparate data across multiple participants,” is top of mind for governments, financial institutions, and international organizations.

To examine the many technical, legal, and regulatory issues surrounding digital currency interoperability, O’Rourke was joined by Federico Grinberg, senior economist for the International Monetary Fund; Tony McLaughlin, head of emerging payments and business development at Citi; Tom Zschach, chief innovation officer at SWIFT; and Jordan Bleicher, senior advisor to the under secretary for domestic finance at the US Treasury Department.

Below are highlights from this discussion about the crucial role that interoperability will need to play in the future of digital currency, which was moderated by Ananya Kumar, an associate director of the Atlantic Council’s GeoEconomics Center.

Why is interoperability so important?

• Bleicher illustrated the importance of interoperability by outlining some of the alternatives. “One alternative would be a world of proliferating silos that can’t speak to each other. This would be a world of high transaction costs and limited gains from trade,” he said. On the other end of the spectrum, he said, is a “world of monopoly rents, limited competition, and general stagnation.” Interoperability, he said, “is a kind of middle path between these extremes.”
• Zschach spoke about how crucial interoperability is for new networks. “If you’re creating a new network and new digital asset” but have “no way to connect to what’s there already, then you’re going to build a digital island,” he said. “And you won’t drive adoption and you create even more fragmentation.”
• Grinberg warned that “if we let bridges and interlinking systems proliferate, that’s going to create a lot of inefficiencies,” as well as “create operational risks, and increase the attack surface of bridges and systems.”

Why is achieving interoperability so challenging?

• “We have to remember that DLT was created as the antithesis of regulated financial services and not in order to augment it,” said McLaughlin. “The first thing that you have to do if you want to apply DLT to the regulated spaces,” he said, is “to put a number of fundamental blockchain constructs into the garbage.”
• “The marketplace has already created distinct networks that right now are predominantly single asset networks,” said O’Rourke, “and we’ve got to figure out how we can connect those together.” She added that banks’ and market participants’ incentives cause them to find “localized solutions that are creating this fragmented marketplace.”
• “Where there are regulatory gaps or new standards that have to be developed,” said Bleicher, “we have existing institutions that we can leverage to make progress,” including the Group of Seven (G7), the Group of Twenty (G20), and the Financial Stability Board. “There’s much that needs to be done,” he said, “but we do have venues in place that we can use to advance some of this work.”

What should the approach toward interoperability look like?

• McLaughlin cautioned against allowing technology to lead the conversation on regulatory frameworks. “What really should be leading,” he said, “is a consensus about what kind of settlement venues we want to build.” Then, he said, “we can go and build something new.”
• O’Rourke emphasized the need for industry to address the outstanding problems surrounding interoperability and access standards “sooner rather than later,” because “there already are organizations and governments that are moving forward quickly,” and are “creating their own solutions without having these conversations.”
• “I think it’s very important to avoid the digital divide across countries,” said Grinberg. New technologies may be “difficult to set up from a legal regulatory standpoint” and will “require a lot of political capital to be adopted and to be aligned,” he said. “But we need to strive to make this work for the countries that are excluded or have more costly access to cross-border systems.”

Daniel Hojnacki is an assistant editor of editorial at the Atlantic Council.

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The post The future of digital currencies depends on interoperability. How can it be achieved? appeared first on Atlantic Council.

Flagship Event Tue, November 28, 2023 • 9:00 am ET

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.

Digital Currencies Economy & Business International Financial Institutions

With debt crises unfolding all over the world, a new effort is underway to deploy technology to improve lending to developing countries.

The project, announced Tuesday by Bank for International Settlements (BIS) Innovation Hub head Cecilia Skingsley at an Atlantic Council conference, will bring together the International Monetary Fund, World Bank, and BIS in an effort to “tokenize”—or apply blockchain technology to—World Bank development aid. The aim is for the technology to help speed up cross-border settlements and make development aid safer, protecting secure information.

The project may also make it easier to guarantee that the aid is fully compliant with regulations against money laundering and the financing of terrorism.

“Will [it] save a lot of money? Will it revolutionize the world? No, probably not,” Skingsley said at the conference on central bank digital currencies (CBDCs) hosted by the Atlantic Council’s GeoEconomics Center. “But I think it’s a very tangible way to actually put the technology to work.”

Below are more highlights from the conversation, moderated by Alice Fulwood of the Economist, which touched upon shaping the financial system for the public interest and rebutting arguments against CBDCs.

Meeting new demand

• Skingsley explained that global technological progress has increased the appetite for cross-border financial transactions that settle instantly, a solution offered by CBDCs. “It’s critical to get the right infrastructures in place” to facilitate that, she explained.
• With technological change happening “so fast,” driven largely by the private sector, central banks “need to pay attention,” Skingsley argued.
• “There are many technological ideas out there that have… potential,” she added. “If this is left unchecked, these technologies may develop into services used in our societies in a way that may not have the public interest as the first priority.”
• Designing a financial system for a digitized future will require grappling with questions around the protection of privacy, financial stability, geopolitics, and financial inclusion, Skingsley added. She also said that a new financial system should protect people’s right to choose how they spend money. “Cash should continue to play a role. People should have the option to use it if they want,” she argued.

Defying the doubters

• Skingsley pointed to the criticism that retail CBDCs—intended for use by households or companies—designed for domestic use don’t address any immediate needs, as they don’t tackle cross-border payments. But “if we dismiss CBDCs,” she argued, “we might be foregoing opportunities to improve the previous public good, which is money; and we could miss opportunities to provide better and cheaper services to people.”
• In response to those who argue that CBDCs present a threat to privacy and a risk that a country could institute social controls, Skingsley explained that privacy is “not something that we have that comes by chance” and that most countries already have legal protections in place that would cover financial privacy. “These mechanisms,” she said, “should be preserved.”
• She also noted that because privacy relates to the development and strength of democratic institutions, government officials—beyond central banks—should help ensure strong privacy regulations around CBDCs.
• When CBDC skeptics argue that the currency presents a risk to financial stability, Skingsley said she replies that the “train has already left the station” as digital bank runs already happen. She also argued that CBDCs wouldn’t make the problem worse, as—according to central banks—countries have the tools to counter bank runs.

Setting the standards

• Skingsley said that other, private-sector-led crypto projects are a “sort of wake-up call” that central banks cannot “just sit on their hands” anymore. “But that is not necessarily the same thing [as] to say that we need to rush things,” she said, adding that she thinks many countries are exploring CBDCs “at a good pace” and the paces of their transitions should vary.
• Looking back on many other historical innovations, she noted that the private sector led first, and then the public sector stepped in with needed laws, regulations, and foundations. “We need to think about the regulations and the international standards,” she argued.
• The Swedish banker put these efforts into three categories: The first is principles for financial market infrastructures; she explained there are already such legal and regulatory standards in place through the Basel Committee on Banking Supervision and the Financial Action Task Force.
• But moving forward, Skingsley added, countries should work together on two other categories: Setting standards related to payment-specific technologies—and how to operate them—as well as establishing cross-cutting technology standards.
• “It’s a really collective responsibility to make sure technology ultimately [serves] economically meaningful activities,” Skingsley concluded.

Katherine Walla is an associate director of editorial at the Atlantic Council.

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The post A newly announced blockchain-backed system could transform development lending appeared first on Atlantic Council.

Flagship Event Tue, November 28, 2023 • 9:00 am ET

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.

Digital Currencies Economy & Business International Financial Institutions

With the current cross-border payments system, “we could end up in a fragmented world,” warned Tobias Adrian.

To avoid that future, which would pose a variety of financial risks, the world needs a “basic set of rules and governance that is truly multilateral and inclusive,” explained Adrian, director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF).

Speaking Tuesday at an Atlantic Council conference on central bank digital currencies hosted by the Council’s GeoEconomics Center, Adrian explained that the current cross-border payments system—which manages financial transactions taking place across countries’ borders—is one of the “key pillars” of the international monetary system. But, he added, the system has an array of flaws. There are shortcomings in facilitating messaging and trust between countries, swiftly moving funds, and conducting quick regulatory checks such as those regarding anti-money laundering and countering the financing of terrorism (AML/CFT), or know your customer (KYC) policies.

And with “very rapid changes” taking place in cross-border payments, Adrian warned, countries are facing “macro-critical threats,” for example possibly losing their monetary sovereignty—or their ability to control their currencies—as more cross-border payments take place outside of regular banking systems.

But there are ways to connect payment activity, Adrian explained. One such way is the IMF’s proposed XC platform, which would create a global, unified ledger for cross-border payments. The platform would not only ensure that “payments get end to end, from entity to entity,” Adrian said in conversation with Bloomberg’s Allyson Versprill. It would also essentially make the movement of money “programmable” and help ensure that countries participating in the ledger have “high bars” for AML/CFT and KYC requirements.

A world of fragmentation

• Adrian noted that while the IMF can develop a concept like the XC platform, it is really up to its 190 member countries and the private sector to “actually build such things.”
• “Our ambition would be to have platforms that are truly multilateral” to ensure that messaging is done in a “fully inclusive way” around the world, Adrian said. Thus, the IMF is looking to ensure that countries can “come together on the standards” so that every country can be “at ease to settle on the platform together.”
• “There’s really an opportunity to have a more ambitious approach to cross-border payments,” Adrian said.
• Currently, there are projects among smaller groups of countries to establish faster cross-border payments including Project mBridge (between Thailand, Hong Kong, China, and the United Arab Emirates). In response to concerns that such projects contribute to fragmentation, Adrian said that they are actually “very important” for understanding what works to make cross-border payments easier. “The global community has really benefited from seeing those projects being rolled out,” he said.
• “Still, I do hope that we can get to a more ambitious, more multilateral approach,” he said. “Given the level of geopolitical fragmentation that we have seen around the world, that is certainly difficult, but I do think there’s an opportunity to… come together.”

The IMF’s role

• The IMF and other international financial institutions are looking to harness various technologies—including encryption, programmability, and tokenization—in improving cross-border payments.
• “Technology can help,” Adrian added, “but it goes beyond technology,” to helping build trust and set up legal systems or regulations to govern the international payments system.
• Adrian explained that the IMF is also assessing countries’ AML/CFT capacities and providing technical assistance to improve that capacity and their financial integrity—and thus help support the creation of a multilateral cross-border payments system.
• The IMF is also providing technical assistance to central banks, regulators, and finance ministries globally to help countries “think through policy questions” about central bank digital currencies, Adrian explained. Currently, the IMF is working on a handbook on CBDCs that gathers shared knowledge, lessons, and findings on CBDC projects.
• These measures are part of the IMF’s “role as a guardian of the international monetary system,” Adrian added, helping countries think through trade-offs and make well-measured policy choices.

Katherine Walla is an associate director of editorial at the Atlantic Council.

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The post The IMF’s multilateral, multipronged proposal to stop cross-border payments from fragmenting appeared first on Atlantic Council.

Introduction  

 On October 26, 2023, the Atlantic Council’s Iraq Initiative hosted its Second Annual Conference titled, “Balancing global engagement and domestic growth: Iraq’s future in and evolving landscape,” with an array of American and Iraqi experts, including former and current senior-level government officials and scholars. The event featured welcome remarks by Abbas Kadhim, Director of the Iraq Initiative at the Atlantic Council, and opening remarks by Olin Wethington, Founder and Chairman of Wethington International LLC. 

• This hybrid conference featured three panels: The first panel focused on creating a climate-resilient Iraq. It was moderated by Ahmed Al Qabany, Senior Climate Change Specialist, Climate Change Group at the World Bank, and included the following as speakers: Majid Jafar, Chief Executive Officer of Crescent Petroleum; Mishkat Al Moumin, Executive Director of Envirolution and Former Iraqi Minister of Environment; H.E. Fareed Yaseen, Climate Envoy of the Republic of Iraq; and Elfatih Eltahir, Professor at H.M. King Bhumibol.  

• The second panel focused on highlighting the youth’s perspectives on shaping a modern Iraq. It was moderated by Hezha Barzani, Assistant Director of empowerME at the Atlantic Council, and included the following speakers: Marsin Alshamary, Assistant Professor at Boston College, and Hamzeh Hadad, Adjunct Fellow at Middle East Security Program at the Center for a New American Security.  

• The final panel highlighted Iraq’s growing role in regional affairs. It was moderated by Abbas Kadhim, and included the following speakers: H.E. Nazar Al-Khirullah, Iraqi Ambassador to the United States; David Mack, Nonresident Senior Fellow at the Atlantic Council, and former Deputy Assistant Secretary of State for Near East Affairs & US Ambassador to the United Arab Emirates; and Douglas Silliman, President of the Arab Gulf States Institute in Washington, and Former US Ambassador to Iraq.  

Opening remarks  

Iraq is acknowledged for its crucial role in regional stability, combating extremism, and the potential of its energy resources to fuel prosperity within and beyond its borders. Notably, Iraq has successfully conducted five rounds of open parliamentary elections since 2004, each culminating in a peaceful transfer of power- a significant achievement that underscores its democratic progress.  

In light of recent regional challenges, specifically the conflict between Hamas and Israel, Wethington affirmed that the United States remains committed to a partnership with Iraq to contain the conflict and address long term issues. He emphasized that while Iraq still faces foreign interference and security threats, it stands as a voice for moderation and democracy in the region.  Wethington closed with three distinct observations from his September visit to Baghdad, highlighting Iraq as a functioning sovereign state with aims of addressing the practical needs of its people, needs for leveraging its substantial economic resources for future development beyond the oil sector, and emphasizing a focus on economic fundamentals, job creation, governance, service delivery, and social priorities such as education and health.  

Panel Takeaways  

I. Climate-Resilient Iraq 

Iraq’s environmental challenges arise from a mix of global climate change effects and specific issues rooted in the nation’s unique geographical circumstances. Climate change acts as a threat multiplier, and when combined with conflict, the impacts intensify. Jafar mentioned that the war against Daesh alone resulted in the destruction of numerous towns and villages, producing over 50 million tons of debris. Iraq is particularly vulnerable due to its water scarcity and external control over its water sources. However, Yaseen reckoned Iraq is resilient and there is a growing national interest in climate change now.  

Yaseen indicated that Iraq faces two main threats from climate change: direct impacts like increasing temperatures and indirect impacts from global economic shifts. Eltahir noted that Iraq, positioned northwest of the Persian Gulf and east of the Mediterranean Sea, faces the threat of extreme heat waves due to its geography. When looking at the Gulf area, Iraq stands out as one of the area’s most susceptible to heat stress that combine temperature and humidity. Particularly, the southern region around Basra will likely endure significant heat stress. In contrast, the northern and central desert regions of Iraq are most at risk of experiencing dry, extreme heat. According to Eltahir, agriculture is the primary sector impacted by climate change, as outdoor activities will be challenged by heat and water stress. Thus, there will be a need for major adjustments in Iraq’s economic activities, particularly when it comes to investing in green agriculture, given the water scarcity.  

Iraq contends with significant water, land, and air pollution. Every day, the country discharges 5 million cubic meters of sewage into the Tigris and Euphrates rivers. Jafar stated that air pollution significantly affects citizens, as Iraq stands as one of the world’s top methane emitters, with substantial flaring evident in the South. In the Middle East, the primary issue isn’t coal but liquid fuels, but gas can still play a vital role in displacing these dirtier fuels. Jafar highlighted that Crescent Petroleum provides gas in the Kurdistan region that powers 85% of the area, benefiting 6 million citizens while avoiding over 5 million tons of CO2 emissions annually – notably, this is equivalent to the carbon emissions saved by all Tesla cars globally. 

Al Moumin underscored the deep connections between climate change, education, security, and stability in Iraq. Approaching climate change solely as an environmental issue neglects the crucial areas of security and public education. She highlighted one environmental organization in Iraq, the Women and the Environment Organization, which successfully engaged and empowered rural women in Southern Iraq. Through educational sessions, these women realized their role in the environmental decision-making process. 

II. Youth Perspectives on Sociopolitical Realities  

Iraqi youth share significant similarities with youth in other Middle Eastern countries, indicating that Iraq is transitioning from being a unique case to facing more common regional challenges. Alshamary highlighted a notable shift in political terminology, in particular with the term “madani” (meaning civil). It represents a form of secularism without the western-associated non-conservative undertones that secularism tends to have in the Middle East. Many Islamist parties in the region are now portraying themselves with a conservative democratic image, emphasizing their appeal to a conservative society without a strict foundation in Islam. She explained that this shift signifies the active role and influence of youth in societal transformations.  

Historical challenges have also shaped the perspectives of Iraqi youth, notably when it comes to the failure of ISIS in destabilizing the 2003 state. Hadad noted a significant political shift within the Kurdistan Regional Government (KRG). The KRG, which once held more power than the weaker federal government in Baghdad, now finds itself in a reversed dynamic, with Baghdad gaining strength and the KRG weakening. However, he highlighted that this shift may not be permanent, given the 20-year history of both governments not adhering to constitutional mandates and focusing on power dynamics instead. 

Baghdad’s does not want to eliminate the KRG, rather, it wants to debilitate it because a takeover would be overly intricate. This approach stipulates the potential for a more balanced relationship between Baghdad and the KRG. Hadad underscored that achieving a realistic equilibrium between the two governments will be a time-consuming process. The KDP and the Patriotic Union of Kurdistan (PUK) are undergoing internal changes. Hadad asserted that an explicit understanding of their leadership is preliminary for a stable, rules-based federalist state. As the country moves towards greater stability, Hadad remains hopeful for the youth to constructively tackle issues like federalism, public employment, and constitutional debates. 

Hadad and Alshamary acknowledged the significant role of social media. Hadad criticized Iraqi politicians for their overreliance on social media and urged a shift back to more traditional forms of dialogue to mitigate the rising tribalism and creation of echo chambers, akin to Western trends. Hadad stresses that while social media brings benefits, the challenges it presents in Iraq mirror those in other countries, with a nuanced difference in freedom of speech, especially post-Tishreen, where individuals face risks for their online expressions. Alshamary added concerns about the alarming levels of misinformation on Iraqi social media and the decline of traditional media. She pointed out that the Iraqi state news channel remains the lone credible source, with other channels viewed skeptically due to perceived party affiliations and biases. Notably while Twitter is popular for showing trends, it is not the preferred platform for most Iraqis.

III. Foreign Policy and Economic Trajectory  

Over the years, Iraq has worked on building an independent foreign policy as part of refraining from partaking in regional divisions. Al Khirullah pointed out that Iraq recognizes that cooperation within the region is currently underdeveloped compared to other continents due to the challenge of building and maintaining trust among the region’s governments. This led to the fruition of the Baghdad conference to address challenges facing the region as a whole including terrorism, climate change, and energy cooperation, as noted by Al-Khirullah.

Silliman highlighted that foreign policy is essential for Iraq due to its strategic geopolitical location. Indeed, building effective foreign relations can provide economic, security, and political benefits, and can specifically address domestic issues like energy shortages and water problems, while also stimulating trade and tourism, and generally improving the political and economic prospects of the Iraqi youth. Mack noted that Iraq has been instrumental in fostering regional dialogues, such as the discussions between Riyadh and Tehran. However, Silliman pointed out that Baghdad is perceived to have excessive Iranian influence, complicating Iraq’s role as an impartial mediator. 

Nevertheless, Mack observed Iraq’s growing competence in managing its affairs with historically intrusive neighbors, particularly Turkey and Iran. Iraq’s strategic deepening of relations with the Arabian Peninsula, Jordan, and Egypt holds significant potential for regional transformation. Mack contended that Iraq could emerge as a pivotal transportation and energy nexus, potentially drive economic growth and stability in a historically volatile region. This carries the promise of infrastructural enhancement, greater diplomatic influence, and a more interconnected Middle East.  

Al-Khirullah and Mack both asserted that the relationship between Iraq and the United States has evolved beyond just security and defense. Economic relations have become a primary focus, and there’s an aim to attract American companies back to Iraq. Although there have been challenges on both sides, Al-Khirullahunderscored the ample economic opportunities to be explored since Iraq places significant value on not just large American companies, but also small and medium-sized enterprises. Also, Al-Khirullah recognized Kuwait as a significant supportive partner when it comes to investment opportunities, albeit Kuwait has only expressed interest thus far.  

Recommendations  

Building a climate-resilient Iraq 

• Yaseen suggests establishing climate-smart agricultural villages for arid environments, and to collaborate with countries like the United States and Australia who have expertise in managing water-stressed areas. 
• Al Moumin and Jafar recommend embedding environmental awareness into early stages of academic curriculums and management. Al Moumin also advocates for a scholar-practitioner strategy to harness local knowledge and involve communities in decision-making processes. 
• Eltahir recommends investing in agricultural research and technology for Iraq to be able to navigate water and heat shortages challenges. He also suggests adopting water-saving technologies, along with implementing an appropriate pricing system that could incentivize people to switch to using those systems technologies.  

Changing the youth perspectives on sociopolitical realities  

• Alshamary urges an increase in youth engagement. She highlights that it is essential to actively involve youth in policymaking and implementation processes. She proposes that Iraq should encourage youth to venture into the private sector and entrepreneurial endeavors, leading to diversified economic growth and job creation. 
• Hadad recommends adopting successful economic systems from other countries, leveraging the tried-and-tested strategies to foster economic diversification. This will can enable youth to sidestep common errors, and craft policies suited to Iraq’s needs.  

Foreign Policy and Economic Trajectory  

• Al-Khirullah recommends fostering partnerships between Iraq and foreign private sectors.  
• Silliman recommends adopting a technically driven diplomatic approach to tackle water-sharing issues, especially with Turkey. 
• Silliman and Al-Khirullah urge the need to highlight Iraq’s civilization, culture, and traditions to improve its international standings, and to realize its rich resources and potential for development in various sectors, including education and culture.  
• Mack suggests Iraq continues strengthening its democratic institutions and processes by leveraging its regional relationships. He supports Iraq’s current direction, including its maintenance of electoral democracy amidst regional engagement and internal challenges. 

The post Balancing global engagement and domestic growth: Iraq’s future in and evolving landscape appeared first on Atlantic Council.

As the United States reorients its international economic policy and African countries build new approaches to economic integration and collaboration, the future of US-Africa trade is ready to be defined. While setting the course for a renewed AGOA is important for maintaining business confidence, many of the challenges that African countries, firms, and individuals face will require deeper structural responses. In the push to achieve inclusive growth across the continent, capacity and investment constraints are particularly clear. There are also immense opportunities.

The rise of digital, financial, and creative products and services will shape African economies going forward. The expansion of economic and political links across the continent will provide more unified markets and supply chains, with greater economies of scale. The resources, ideas, and human capital needed to deliver global public goods and the green energy transition are already making Africa central to the future economy. Taking steps to broaden and deepen US-Africa trade and collaboration in these directions will provide the basis for more inclusive, sustainable growth and serve strategic economic and political goals for both sides.

The Africa Center works to promote dynamic geopolitical partnerships with African states and to redirect US and European policy priorities toward strengthening security and bolstering economic growth and prosperity on the continent.

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The fragmentation of the global economy has been on display at two international conferences in recent weeks—and it doesn’t bode well for deeply indebted developing countries beset by inflation and lost access to capital markets.

The fault lines, centered on the divide between the United States and China, are adding new difficulties to efforts to restructure defaulted loans, and that will produce more pain for countries whose limited resources go to creditors instead of their own people. The recent sharp rise of global interest rates will only exacerbate the problem.

The debt issue loomed over ministers from 190 countries at the annual meetings of the International Monetary Fund (IMF) and World Bank in Marrakesh, Morocco, earlier this month. There was one breakthrough: an agreement on restructuring Zambia’s debt to government lenders, of which China is the largest creditor. But that came nearly three years after the country defaulted and then only after nine months of hard negotiations with a creditor committee headed by China and France. Those talks followed a Group of 20 (G20) Common Framework agreement in 2020 to establish a mechanism for restructuring the debt of the world’s poorest nations. The Marrakech meetings also announced progress at a roundtable on “processes and practices” related to restructuring—euphemisms for technical issues (mostly raised by China) that have slowed the provision of debt relief.

Perhaps the most significant development on debt during Marrakech was bad news: Sri Lanka announced an agreement with the Export-Import Bank of China to restructure $4.2 billion of debt. Sri Lanka, a more developed country whose 2020 default is not covered by the G20 framework, has been conducting what one IMF official described at an Atlantic Council panel as “ten parallel discussions.” The agreement underlined China’s willingness to undercut a multilateral workout in pursuit of its own interests. In this case, Beijing cut its deal even as it sat in as an “observer” in talks between Sri Lanka and a creditor committee led by India and Japan. The Ex-Im Bank deal, whose terms have not been released, also got out ahead of Sri Lanka’s negotiations with private sector creditors.

China’s approach took on more meaning when representatives from more than 100 countries, including twenty-two heads of state, gathered last week in Beijing under the patronizing gaze of Chinese leader Xi Jinping to celebrate the 10^th anniversary of the Belt and Road Initiative (BRI). That vast effort has built infrastructure throughout the developing world, but also has saddled countries with over $1 trillion of debt. Unlike Marrakech, discussion of debt was largely absent from the proceedings, outside of remarks from Vice Premier He Lifeng at a side event and a paragraph in the forum’s 16,500 word “white paper.” Xi Jinping’s speech to the forum focused on the BRI’s achievements and criticized “ideological confrontation, geopolitical rivalry, and bloc politics,” a pointed reference to US policies toward China.

The divergence between the two international gatherings underlined the increasing difficulty of sustaining international cooperation on debt issues. In the pre-COVID era, restructurings normally proceeded quickly after a country defaulted, with the defaulter reaching an agreement with the IMF on a loan and reform program, creditor governments providing financing assurances to support restructuring, and subsequent debt talks normally taking about two months.

While the Zambia negotiations were an improvement over the first Common Framework process with Chad, which took eleven months, each restructuring is essentially terra incognita. These days, debtor countries face a complicated creditor landscape—a largely Western group of government lenders called the Paris Club; multilateral financial institutions like the IMF and World Bank; China and other new sovereign lenders like India, which works closely with the Paris Club; and the private sector, which accounts for the largest amount of lending in many countries and has its own conflicting stakeholders (traditional banks vs bondholders).

The Common Framework has sought to incentivize the various creditor groups to act in relative concert and reduce the negative economic impact on low-income countries. But distrust has made this much more difficult to achieve, especially as Beijing and private-sector lenders jostle for the best terms. The disorder is more pronounced in non-Common Framework countries, where there is no agreement on an orderly process. For example, the IMF now lends to Suriname while its government has stopped repaying Chinese loans—a process called lending into arrears—because Beijing has not provided assurances of continued financing during restructuring. Meanwhile, private bondholders forged ahead with a deal that will involve a 25 percent “haircut”—or reduction in principal owed—on two bond issues, with repayment to be funded by future oil revenues.

While it is useful that creditors and debtors meet under the aegis of the IMF and World Bank roundtable to discuss outstanding issues, this is no substitute for real progress. There are still many issues even for Zambia, which still must reach separate agreements with each individual creditor government. While it has reached an agreement in principle with Eurobond holders—with an 18 percent haircut—there is still a long way to go with other private-sector bondholders and banks, which include Chinese state banks that Beijing insisted be excluded from the sovereign portion of the Zambia agreement. There are many issues still to resolve before a final restructuring accord is in place, as Brad Setser and Théo Maret enumerated in September.

Private sector lenders will inevitably insist on similar terms to the sovereign creditors. But this emphasis on “comparability of treatment” may compound future problems because creditors in both Zambia and Sri Lanka are requiring higher interest rates on restructured debt if economic growth recovers. One problem this poses for debtor countries is that the burden of higher interest payments—which will only become heavier with global rates rising—will fall on already strained fiscal resources. An IMF study on debt in sub-Saharan Africa released during the Marrakech meeting detailed the sharp rise in the share of government revenue going to interest payments. It warned about the “difficult policy choices” countries will confront “to remain current on debt.” Those policy choices will hit the most vulnerable citizens hardest in the form of less money for health, education, and economic development.

The principle that a country should repay its obligations when economic conditions have recovered makes sense, at least in theory. However, if creditors insist that borrowers facing severe economic challenges continue to tighten their belts when conditions improve—which is what the growth-linked repayment schedules would entail—there will still be serious social costs. That will be part and parcel of an increasingly unmanageable restructuring process that likely will increase global inequality and fragmentation.

Vasuki Shastry, formerly with the IMF, Monetary Authority of Singapore, and Standard Chartered Bank, is the author of the recently published The Notorious ESG: Business, Climate, and the Race to Save the Planet.

Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF, CNBC Asia, and The Asian Wall Street Journal.

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 Creditors are still not doing enough to relieve developing country debt: A tale of two confabs 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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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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Reimagining Africa’s role in revitalizing the global economy

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Africa China

About the author

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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The post How the IMF can navigate great power rivalry appeared first on Atlantic Council.

Introduction

The world economy now finds itself at a critical juncture, facing a series of extraordinary setbacks that have pushed down growth. Reigniting growth requires a unique combination of targeted policies, robust international cooperation, and a renewed look at the global economy, with a particular focus on Africa. Due to its burgeoning and youthful population, abundant natural resources, and a strategic geographical location that can facilitate global trade, Africa can play a major role in—and should be front and center of—any renewed efforts for revitalizing the global economy. A decade-long robust, inclusive, and green growth in Africa will not only move hundreds of millions living in the continent out of poverty but will also accelerate a global rebound and recovery. However, for this to materialize, Africa needs substantial investments in its failing and inadequate physical and social infrastructure. With access to basic infrastructure, alongside efficient institutions as well as its young population, massive natural endowments, and strategic location Africa can seize its economic potential and act as an engine of growth for the global economy for decades to come. Therefore, it is crucial to support Africa to unleash its immense economic potential, through massive and focused investments in the continent’s human capital and its physical and social infrastructure.

I. The global slowdown: An overview

The global economy has entered a prolonged period of slowdown. According to a 2023 World Bank report, “Nearly all the forces that have powered growth and prosperity since the early 1990s have weakened.” Even before the COVID-19 pandemic, an aging population, slowing productivity, and growing barriers to trade and the free movement of people were slowing global growth. Then came the triple back-to-back shocks: the pandemic, the Ukraine war, and persistently high inflation along with subsequent rapid rate hikes to fight it. Those shocks, combined with preexisting structural factors, have introduced strong headwinds for the global economy and its growth prospects in the next decade. If there is no significant policy intervention to revitalize the global economy, the potential result is a lost decade—not only for certain countries or regions, but for the entire world. According to the World Bank, the global potential gross domestic product (GDP) growth rate is expected to decline to its lowest level in three decades, i.e., 2.2 percent per year between now and 2030.

Figures 1A and 1B demonstrate that the current global slowdown, which has become more pronounced following the pandemic, has been gradually developing over the past two decades. The five-year moving average of the world’s real GDP growth rate has decreased from 3.7 percent in 2000 to 2.4 percent in 2021, as depicted in Figure 1A. Similarly, growth has also decelerated in terms of GDP per capita, as shown in Figure 1B. The five-year moving average of the world’s real GDP per capita growth rate has declined from 2.2 percent in 2000 to 1.4 percent in 2021.

Figure 1. World GDP growthrate (Five-year moving average, 2000-2021)

Figure 2. World GDP per capita growth rate (Five-year moving average, 2000-2021)

The global slowdown can be attributed to various factors, many of which can be reversed through targeted and coordinated policies, including

• Aging labor forces and consumer markets, especially in advanced economies, but also in many emerging markets and developing economies (EMDEs) (Figure 2A);
• declining global productivity;
• the mounting debt burdens that have accumulated over the past decade (Figure 2B);
• the rising energy and food prices over the past three decades, which rose long before the Ukraine war (Figures 2C and 2D);
• the increasing geopolitical fragmentation, protectionism, and friend-shoring, and declining levels of international trade (Figure 2E); and
• the growing frequency and severity of natural disasters with ripple effects of security issues (Figure 2F).

Figure 3. Population 65+ as percentage of total population

Figure 4. Average public debt-to-GDP ratio

Figure 5. Food price index

Figure 6. Energy price index

Figure 7. Growth rate of share of trade in global GDP (Five-year moving average, 1990-2021)

Figure 8. Frequency of climate-related disasters (Annual recorded events in the Emergency Events Databse)

II. Revitalizing global growth: Some coordinated policy responses

Reversing the above trends calls for a globally coordinated and targeted set of policies that would contribute to improvements in labor productivity and mobility, increasing aggregate demand, and promoting sustainable and inclusive growth at the global level. Some of these include the following.

Increasing labor-force participation and facilitating the movement of labor: Globally, only 59 percent of the population above fifteen years of age is in the labor force. This is mainly driven by the lower participation of females and youths in the labor force. As seen in Figure 3A, globally, the female labor-force participation rate (47 percent) is less than two-thirds that for males (72 percent), with some regions—such as the Middle East and South Asia—having very large gender gaps in labor-force participation rates. Moreover, only 40 percent of the world’s youth (those aged 15–24) is in the labor force, with the Middle East again lagging behind the rest of the world—especially in terms of the female youth in the region (Figure 3B). Estimates show that increasing female and youth labor-force participation rates closer to the level of prime-age male workers (around 70 percent) could, on average, raise global potential growth by 0.2 percentage points by 2030.

Figure 9. Labor force participation rate

Figure 10. Youth labor force participation rate

One way to increase the world’s youth labor-force participation rate is to facilitate an easier movement of labor from regions of the world with a growing young labor force to regions where the population and the labor force are aging. This would require governments in aging economies (with the support of international organizations such as the World Bank, International Labor Organization (ILO), and United Nations (UN)), to reform immigration policies and promote certain types of visas to attract the needed skills for various sectors. Enabling greater labor mobility would support the global economy for two main reasons. First, it will allow richer countries with aging populations to capitalize on the demographic advantage of those regions that have a significant youth population. Second, the regions of the world with younger labor forces—Africa, South Asia, and the Middle East—will benefit from the remittances.

Expanding infrastructure investment: As seen in Figure 4, the current trends in infrastructure investments and needs will result in an $11.9-trillion shortage in infrastructure investment by 2040. The bulk of this gap will be in the transportation industry ($7.7 trillion), followed by the energy industry ($2.4 trillion). Moreover, adding the investments needed to achieve the Sustainable Development Goals (SDGs) by 2030, the world’s infrastructure investment gap would increase to $14 trillion by 2040. In other words, over the course of the next seven years, $2.1 trillion of additional infrastructural investment is needed to achieve the SDGs. Boosting global investment to about 2–3 percent of the world’s GDP over this decade, especially in the infrastructure sector, can increase potential growth by about 0.3 percentage points per year.  

Figure 11. Global infrastructure investment gap (Amount needed to achieve SDGs, 2023-2040)

With growing debt levels, the governments in many economies—especially EMDEs—have been facing increasingly limited capacity to invest in physical and social infrastructure. Hence, there is a need for a global push to strengthen and optimize the frameworks of private-public partnerships (PPPs) to foster increased engagement of the private sector in infrastructure initiatives. Moreover, quasi-state actors, such as sovereign wealth funds (SWFs) and public pension funds (PPFs) can also play a crucial role in infrastructure investment. With more than $33 trillion in assets under management (AuM), these institutional investors possess a distinct advantage in bridging the global infrastructure financing gap. This advantage stems mainly from the long-term investment horizons of institutional investors, which align with the secure, yet moderate, return expectations typically associated with large-scale infrastructure projects.

Re-globalization and reducing the costs of and barriers to trade: The ratio of world trade to GDP grew from 25.3 percent in 1972 to 61 percent in 2008, an average annual rate of 2.5 percent (see Figure 5). With the onset of the 2008–2009 global financial crisis (GFC), world trade-to-GDP ratio dropped by more than 8 percentage points and has not yet recovered to the levels seen in 2008. Looking at the five-year moving average of the growth rate of the trade-to-GDP ratio (as seen earlier in Figure 2E), while the decade preceding the GFC was characterized by the rise of global trade and globalization, the post-GFC decade can mainly be seen as one of declining global trade and rising protectionism, especially after 2014.

Figure 12. Trade as share of world GDP

According to the International Monetary Fund (IMF), trade barriers have increased from less than four hundred in 2009 to about 2,500 in 2022. Recent policy decisions, such as reshoring and friend-shoring, could expose individual countries and the global economy to greater fragmentation and vulnerability to shocks. Moreover, according to the World Bank, the expenses related to shipping, logistics, and regulations significantly contribute to trade costs, often resulting in the doubling of prices for internationally traded goods.

Reversing these global protectionism and geoeconomic fragmentation trends could add 0.2 to 7 percent to the global output, depending on how severe the protectionism and geoeconomic fragmentation could get. However, reversing these trends, which have been in the making for more than a decade, will require a momentous effort by all economies around the world—especially the members of the Group of Twenty (G20), among whom geoeconomic fragmentation has been rapidly rising. At the same time, enhancing the trade regulatory and physical infrastructure is another area that needs to be addressed. This is where investment in physical infrastructure (discussed in some detail above) can help reverse declining trends in global trade.

The process of strengthening the role of trade in the global economy necessitates robust reform of the World Trade Organization (WTO). However, reaching a consensus on intricate trade issues remains a challenge due to the WTO’s diverse membership, the growing complexity of trade policies, and heightened geopolitical and geoeconomic tensions. Plurilateral agreements, and creating several regional mini-WTOs among select groups of WTO members, can provide a viable way forward in certain areas.

Reversing climate change and reducing global emissions: As seen earlier in Figure 2F, the severity and frequency of climate-related natural disasters have risen substantially over the past three decades, and experts link this trend to climate change and global warming. The economic cost of these disasters is also on the rise. According to the World Meteorological Organization, out of more than twenty-three thousand recorded disasters since 1970, more than eleven thousand can be directly linked to weather, climate, and water hazards. These devastating events led to a staggering 2.06 million fatalities, and incurred financial losses amounting to $3.64 trillion. Certain countries, particularly smaller states, have experienced significantly greater devastation than what is indicated by the average impact, amounting to approximately 5 percent of their annual GDP.

Reducing the detrimental impacts from climate change calls for a coordinated global response, with the world’s major emitters and the largest emitters per capita in high-income economies taking the lead. As seen in Figures 6 and 7 carbon-dioxide (CO2) emissions per capita in high-income economies are thirty-two  times larger than those in low-income economies.

Figure 13. CO² emissions per capita (Metric tons (2019))

Figure 14. CO² emissions per capita by income level (Metric tons (2019))

According to a report from the World Bank Group, if developing countries invest an average of 1.4 percent of their GDP annually toward adaptation and mitigation strategies, they could potentially achieve a remarkable 70-percent reduction in emissions by the year 2050. Such investments would also enhance their resilience to climate change impacts. The report estimates that, within lower-income countries, the financing requirements can surpass 5 percent of their GDPs, necessitating additional assistance from high-income countries and multilateral development banks (MDBs).

III. Revitalizing global growth: Why Africa matters

Through unlocking its economic potential, Africa can address its developmental needs, contribute significantly to global economic growth, and create a more prosperous and economically stable future for its people and the world. Africa’s role in reversing the global economic slowdown lies in leveraging its young and growing population, natural resources, and strategic location.

Population, consumer markets, and labor forces: As seen in Figure 8, while all regions of the world have been aging—albeit at widely different paces—the share of population sixty-five and above in Africa has remained at a mere 3 percent over the past four decades. With nearly two-thirds of its population under the age of thirty, and 40 percent under the age of fourteen, the continent enjoys having the youngest population structure in the world (see Figure 9). This means that Africa will benefit from a growing young-consumer market (with a high marginal propensity to consume) and an ample supply of young workers for at least the next three to four decades. Nigeria is a case in point, as it will be the third most-populous country in the world in 2050 after India and China.

Figure 15. Population 65+ as percentage of total population

Figure 16. Age breakdown of population

With Africa’s population expected to double by 2050—from its current 1.4 billion to 2.8 billion—Africa’s growing and young consumer market will be the main driver of global demand for consumer, education, health, technological, and infrastructural products and services. For example, the doubling of population will translate to a 50-percent increase in demand for housing and all that is needed to have a modern household, from electricity and water connections to basic appliances and furniture to municipality services. As of 2018, the continent had an estimated housing shortage of fifty-one million units and, at the current lackluster housing-construction rates, this gap is expected to increase to seventy-five million by 2050. Hence, the continent boasts an already enormous demand for housing and consumer goods and services, which is only expected to grow for decades to come. Additionally, the housing sector is well known for its job-creation potential.

According to the International Finance Corporation (IFC), each housing unit will create five full-time jobs in Africa. This means that closing the housing gap by 2050 will lead to the creation of 375 million jobs in Africa, practically absorbing all the informal-sector employment—which currently represents 83 percent of employment in Africa—and the unemployed population, and increasing the number of employed African adults age fifteen and up by more than 80 percent. This, in turn, will boost household income and aggregate demand in the region, igniting a positive loop of higher income and higher aggregate demand and imports into the continent, translating to higher aggregate demand for global consumer and technological goods and services. In other words, closing the housing gap in Africa can contribute significantly to global growth in the next three decades, while also providing the growing young population of the continent with housing and job opportunities.

Considering that the youth labor-force participation rate (LFPR) is around 38 percent in Africa (see Figure 3B above), the continent needs to create  about ten million jobs per year for the next 20–30 years in order to employ every new youth entrant into the labor force. Clearly, jobs created from closing the housing gap will address this growing demand and more. Given this capacity, supportive policies can be devised to increase Africa’s youth LFPR to level to that of North America (51 percent). Such policies will increase the needed volume of new jobs to 13–14 million per year, which can all be absorbed by efforts to close the housing gap on the continent. Moreover, increasing youth LFPR in the world’s youngest continent and creating jobs for them will only add to higher LFPR at the global level, increasing the world’s workforce productivity and employment-to-population ratio. As highlighted earlier, such policies would contribute to global growth.

The same sorts of reasoning and statistics presented above for the housing sector can also be applied to the increasing demand for energy, basic infrastructure, education, entertainment, and healthcare services in Africa over the next few decades. In short, as the continent’s middle class grows and disposable incomes increase, African consumers will play a vital role in driving demand for basic infrastructure and goods and services, both domestically and internationally. This could be a major component of a robust global rebound because, on average, household consumption is responsible for about 60 percent of the world’s GDP.

Natural resources: Africa is home to an incredible amount of diverse natural capital. Nearly 30 percent of the world’s mineral reserves, 12 percent of its oil reserves, and 8 percent of its natural gas are located in Africa. The continent is also home to 40 percent of the world’s gold reserves. Moreover, the continent boasts the largest reserves of cobalt, diamonds, uranium, and platinum in the world. In other words, 30 percent of world’s rare-earth deposits are in Africa. These elements are central to the global economy, and their importance is rising rapidly—especially in various strategic high-tech industries such as semiconductors, batteries, and green energy. Finally, the continent also possesses 65 percent of the world’s arable land, making it central to long-term food production and security.

Given its natural resources, Africa has the potential to play a significant role in the global energy transition and climate mitigation for three main reasons. First, Africa—especially Northern Africa—possesses abundant renewable energy resources. By tapping into these resources, Africa can contribute significantly to global green-energy production and reduce reliance on fossil fuels. For example, equipping a mere 1 percent of the Sahara Desert area with concentrated solar power plants would be more than sufficient to meet the electricity demand of all of Europe, the Middle East, and Africa. Moreover, the Sahara’s strong solar radiation makes it ideal for the generation of green hydrogen (for example, in Morocco) that can be transported to Europe using the current oil and gas pipeline between the two continents. Hence, Africa has the potential to become a major global exporter of green energy.

Second, Africa is home to abundant mineral reserves, including key resources used in battery technologies, such as lithium, cobalt, and nickel. These minerals are essential for the production of batteries for electric vehicles (EVs) and energy-storage systems. Africa’s role in global battery technology lies in responsibly extracting and processing these minerals, potentially becoming a significant supplier to the growing EV and green-energy storage markets.

Third, considering that Africa’s population is expected to double by 2050, meeting this rapidly rising energy demand from renewable sources is crucial in addressing global climate challenges. Many parts of Africa still lack access to electricity. As seen in Figure 10, electricity access is nearly universal in all regions of the world, only 56 percent of Africans have some sort of access to electricity. This means that about 600 million Africans lack access; in other words, 80 percent of the total 750 million people who don’t have access to electricity in the world are in Africa. Africa has the great opportunity to leapfrog the technology in electricity generation and distribution—just as it leapfrogged landlines in many parts of the continent and embraced mobile/digital communication—and tap into its immense potential for renewable electricity generation, alongside off-grid and mini-grid solutions, as the path forward for expanding access to electricity for its rapidly growing population. The same is true for Africa’s transportation industry, as the continent can address its growing demand for private and public transportation through EVs. These will drastically reduce Africa’s greenhouse-gas emissions in the growing electricity and transportation industries, making Africa a global leader in providing its population with access to affordable and renewable energy, which is articulated as Goal 7 of the SDGs. Although Africa’s share of global emissions is projected to increase from around 4 percent in 2023 to 11 percent in 2050, any African contributions to reducing global emissions without significantly harming its growth projections will be welcomed by the global community. Ivory Coast, Senegal, Uganda, Togo, and Cameroon, as well as six cities in South Africa, have already made great strides on this front.

Figure 17. Access to electricity (Share of population by continent)

It is important to highlight here that while Africa is only a small contributor to global emissions, the continent has started taking important initiatives for the green transition. Starting with the 1997 Kyoto Protocol and extending to the 2016 Paris Agreement (COP21), a significant number of African nations have embraced and ratified environmental pacts. The proliferation of consciousness-raising campaigns is evident, and exemplified by initiatives like the African Union’s Agenda 2063, conservation funds such as the Blue Fund, the Desert to Power project by the African Development Bank, and the Great Green Wall endeavor aimed at cultivating vegetation across the Sahel region.

Various countries are actively engaged in this movement. Burkina Faso, for instance, is home to the largest solar-power facility in West Africa, while President Macky Sall’s Green Emerging Senegal Plan is driving eco-friendly strategies in Senegal. In Ethiopia, nearly 100 percent of the nation’s electricity is sourced from renewable resources (96 percent from hydropower).

In short, by leveraging its renewable energy resources, promoting local manufacturing and innovation, and actively participating in global collaborations, Africa can contribute to the advancement of green energy and battery technology worldwide, and position itself as a key player in the global shift toward clean, and renewable energy sources. This will contribute significantly to the global sustainable-development agenda, enhance energy access, and reduce carbon emissions—all of which are key ingredients for a global recovery.

Trade and connectivity: Africa is surrounded by seas and oceans on all sides, making it easy to trade with most of its economies. Of the fifty-four countries in the continent, thirty-eight have access to open waters. The remaining landlocked economies can access open waters through at least one neighboring country. Given Africa’s geographical position and its potential as a trading hub, leveraging its strategic location can enhance its participation in global trade, strengthen economic ties with other regions, and drive overall economic growth and development. Africa’s location holds strategic importance in global trade for several reasons. First, the continent is geographically positioned as a gateway between the Atlantic and Indian Oceans, linking multiple regions, such as the Middle East and Europe. This location allows for efficient trade routes and connectivity between Africa, Europe, the Americas, Asia, and the Middle East.

Second, Africa is home to important maritime trade routes. Its coastal regions, including the Gulf of Guinea, the Red Sea, and the Cape of Good Hope, serve as critical maritime trade routes. These routes are crucial for shipping goods between continents, facilitating international trade and commerce. Also, Africa’s proximity to the Suez Canal is of significant advantage. Annually, 12 percent of the world’s trade is carried through this canal. The Suez Canal, located in Egypt, connects the Mediterranean Sea to the Red Sea, providing a vital shortcut for maritime trade between Europe, Asia, and Africa. This access greatly reduces shipping distances and the cost for goods passing through the region.

Third, and related to the above, is Africa’s abundant natural wealth. As highlighted earlier, Africa is immensely rich in natural resources, and its strategic location facilitates the export of these resources to various markets worldwide, driving economic activities and trade partnerships.

Efforts are under way to establish and expand trade corridors within Africa. Projects like the Trans-Saharan Highway, Trans-African Railway, African Integrated High-Speed Railway Network, Niger-Benin crude pipeline, and other infrastructure developments aim to enhance intra-African trade and improve connectivity, fostering regional integration and expanding Africa’s role in global trade. On the policy front, too, venues for regional integration are being explored. For example, efforts toward regional integration, such as the African Continental Free Trade Area (AfCFTA), aim to establish a single market across the continent. This initiative can enhance intra-African trade, increase investment flows, and create a more favorable business environment, positioning Africa as a key player in global trade.

Conclusion

Vietnam, despite its limited access to natural and energy resources compared to Africa, has experienced an impressive sevenfold increase in its GDP over the past thirty years (from $45 billion in 1990 to $332 billion in 2021). If Africa can achieve similar growth rates in the next three decades, it has the potential to contribute a staggering $20 trillion to the global economy in 2050.

This is not unrealistic. Africa managed to triple its GDP, from $900 billion to $2.7 trillion, between 1990 and 2021. Moreover, during the same period, Ethiopia’s GDP increased by 7.6 times—more than the increase in Vietnam—while the economies of Ghana, Tanzania, and Egypt grew by five, 4.6, and 3.7 times, respectively. By leveraging the heterogeneity among its fifty-four economies,

Africa can build upon this performance through fostering greater regional trade and labor-market integration, increasing climate resilience, and better integrating its labor and commodity markets in the global supply chain. Through such coordinated policies, Africa has the potential to grow at an average annual rate of 5–7 percent in the next three decades—resulting in an African economy that is 4–7 times larger by 2050. This could result in a global economic boom led by a generation of ambitious young Africans ready to innovate, produce, and consume. No other region in the world possesses the same potential for growth. To achieve its potential and contribute to a robust global rebound, Africa needs a concentrated “Big Push” financial and technical investment in its physical and social infrastructure and labor markets. The case of physical infrastructure is of particular importance. Over the past two decades, Africa stands out as the sole region where road density has experienced a notable decline. Approximately 43 percent of the continent’s roads have been paved, but South Africa accounts for 30 percent of the total. Also, as seen in Table 1, 44 percent of Africans lack access to electricity, 73 percent lack access to safely managed drinking water and sanitation services, 58 percent do not use the internet, and 98 percent don’t have access to broadband services.

Table 1. Lack of access to basic infrastructure (2021)

Hence, Africa’s existing infrastructure gap is the main bottleneck for unlocking its immense economic potential. Massive investments in transportation, electricity, water, sanitation, and communication infrastructure are needed for the continent to seize its position in the global economy and act as its engine of growth. According to the African Development Bank, the annual investment gap in Africa’s infrastructure is around $100 billion. Moreover, many African countries need help with developing their governance, financial, and legal institutions. The Bretton Woods Institutions (BWIs) can play a crucial role in supporting Africa to get the “Big Push” it needs. A more active, focused, and multifaceted long-term engagement of the World Bank, IMF, and yes, WTO in Africa’s development will help crowd inthe much-needed institutional and private-sector investment in the region’s physical, social, financial, and legal infrastructure.

Some critically important areas for BWIs to revisit are debt relief/restructuring, assisting with climate adaptation and resilience efforts, supporting overall governance capacity of African economies, promoting private-public-partnerships in physical and social infrastructure investment, accelerating African regional integration, prioritizing Africa’s integration into the global economy and supply chains, and reinforcing multilateralism and international cooperation. It is through such coordinated programs and policies that BWIs can support African economies seize the opportunity to jumpstart their economies and contribute to a sustained economic growth in the continent for decades to come, with of course significant ripple effects on revitalizing global growth.

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About the author

Amin Mohseni-Cheraghlou is the macroeconomist with the GeoEconomics Center and an assistant professor of Economics at the American University in Washington, DC. He leads GeoEconomics Center’s Bretton Woods 2.0 Project.

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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In the aftermath of the global financial crisis, a combination of low interest rates and abundant liquidity caused public debt in emerging market economies to almost triple from $215 billion in 2010 to $627 billion in 2021. But the Covid-19 pandemic dealt a heavy blow to sovereign financing. A sharp drop in investors’ risk appetite sucked capital from emerging markets, particularly from low-income countries, raising the “rollover” costs for governments carrying already high levels of debt. On top of soaring interest costs, governments issued more short-term debt as they needed additional cash to pay for vaccines and fiscal stimulus, which heightened refinancing risks. As low-income countries’ credit ratings were cut into junk territory, the G20 suspended their debt repayment for over a year and introduced the Common Framework to speed up restructurings. But a lasting solution to debt sustainability in low-income countries requires more dramatic action, in which the IMF will play a critical role.

Sovereign debt restructuring is essentially a zero-sum game of allocating the burden of a haircut among different creditor groups. Under the Common Framework, a debtor country would first request debt relief from official bilateral lenders before seeking treatment at least as favorable from its private creditors. While the Common Framework has looped non-Paris club countries like China (which has been resisting multilateral debt negotiations) into debt relief talks, it fails to help different creditors agree on what a fair burden sharing looks like.

One point of contention is the preferred creditor status of multilateral lenders. Notably, China has insisted that multilateral development banks (MDBs) take losses alongside bilateral and commercial creditors. Since the IMF cannot sign off on bail-outs unless all official creditors commit to writing down loans, China has tried to extract concessions from MDBs by delaying the installment of IMF financing. At the Global Sovereign Debt Roundtable in April, the IMF agreed to provide more grants to indebted countries in exchange for China softening its demand, although there was no guarantee from China that it would provide debt relief in line with other official creditors.

Then there is the matter of coordinating between official and private creditors. The Common Framework delays restructuring by forcing private creditors to wait for and follow the terms set by the official creditors’ committee. This would have worked in the days when official creditors dominated the lending market. But as the number of private creditors multiplied, official and private creditors often clashed over the terms of restructuring. For example, official creditors tend to prefer maturity extensions while private creditors favor haircuts in exchange for early cash flows. Moreover, credit rating agencies duly downgraded countries seeking debt rescheduling and debt relief, even though such treatments would improve countries’ debt sustainability from a development perspective. Consequently, many countries are reluctant to join the Common Framework for fear of losing access to private markets.

As lenders remain in a gridlock, the IMF can play a bigger role in accelerating restructurings and staving off future debt crises. To start, the uncertainty about borrowing countries’ true ability to repay and private creditors’ willingness to grant comparable relief have held up agreement on restructuring terms. Although the IMF does not directly take part in debt negotiations itself, it is the only organization with the political legitimacy to act as a neutral advisor to both debtors and creditors. It can, for example, build on top of the IIF-OECD Debt Transparency Initiative by reconciling the debt data it receives from sovereigns with information reported by private creditors. Collaboration with the World Bank, its sister institution, is equally important as the latter produces long-term growth forecasts that inform debt sustainability analyses. As the world’s crisis lender, the IMF can also design financial incentives that would encourage greater transparency, such as the disbursement of grants or concessional loans that are conditional on borrowing countries meeting a set of disclosure requirements. Greater debt transparency has two benefits. One is that it would encourage private creditor participation in granting debt relief by reducing official creditors’ monopoly on assessing compliance with the “comparability of treatment” principle. The second is that if sovereigns can make public the terms and arrangements that were previously hidden, this would hopefully restore investor confidence and improve their credit ratings.

Moreover, the IMF should make good use of its financial firepower. As a welcome first step, it has advocated the reallocation of covid-era discretionary special drawing rights (SDRs), which amounts to almost $650 billion, to low-income countries. Cash-strapped governments could then swap SDRs with currencies to shore up their reserves and support their economic recovery. At the Summit for a New Global Financing Pact in June, the IMF’s managing director announced that the IMF has successfully rechanneled 20 percent ($100 billion) of the SDRs into trusts that would issue concessional loans to low-income countries. But to achieve a more ambitious 40 percent reallocation, the IMF must convince non-participating countries that the global public goods that arise from more foreign assistance outweigh the domestic budgetary costs. Moreover, the IMF can mobilize external sources of financing. It should work with the OECD to earmark a portion of the revenue from the global minimum corporate tax for development purposes. 

Lastly, the IMF should take advantage of the ongoing restructurings to introduce new financial instruments that better serve the needs of poor countries. Take state-contingent debt instruments, which reduce interest payment during recessions and increase payout in good times. Their popularization would not only help weak economies absorb commodity shocks but also avoid unnecessary credit downgrades due to short-term liquidity problems. Innovations often emerge out of crises. The IMF, with its extraordinary convening power, must take advantage of this opportunity to set up contractual standards that befit today’s increasingly complex debt landscape.

Bruce Shen is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

Euel Kebebew is a former Next Gen Fellow with the GeoEconomics Center’s Bretton Woods 2.0 Project.

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I was in Marrakech, Morocco, walking with my 89-year-old mother, when the earthquake struck Haouz last Friday. After the earth shook, my mother couldn’t stop shaking. I gently carried her out of the family home, which may no longer be the refuge that it once was only seconds earlier. 

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To get out of the current crisis, Pakistan’s policymakers must incentivize the flow of private capital in key sectors of the economy, including infrastructure. Continuing to incentivize informal investments in sectors such as real estate has proven to be a disaster. It is time for Pakistan to create an environment that incentivizes citizens to invest in the country’s long-term development, not just in unproductive and speculative asset classes. This can not only help formalize the economy, but also generate long-term investments critical to sustainable economic and productivity growth.

Pakistan’s untapped informal savings

In Pakistan, investment as a percentage of GDP today stands at only 15.1 percent; the South Asian average is 30.1 percent, while lower-middle-income countries have an investment-to-GDP ratio of 28.5 percent. A significant majority of this investment is driven by public sector expenditure. Recurring economic crises, however, have reduced the government’s ability to fund this investment, primarily because more than 70 percent of available federal fiscal resources are now allocated toward debt servicing; the remainder is mostly utilized to cover the government’s current expenditures.

As a result, Pakistan’s ability to undertake any large-scale infrastructure projects without external borrowing remains severely constrained. Compounding this issue are the disincentives for formal economic activity, which ultimately reduce the capital that can be mobilized across the formal economy, particularly in infrastructure.

It is important to note that a low investment-to-GDP ratio is a function of the low savings rate in the country. Pakistan’s low savings rate is not caused by households’ lack of propensity to save. In fact, this phenomenon exists in Pakistan because most households do not save in the formal financial sector. Given dismal financial inclusion levels, and a rapidly increasing currency in circulation, most savings are in the informal sector, with placements in real estate, gold, livestock, or simply cash stuffed in the mattress. This is a large pool of capital that stays outside the formal financial system, starving it of capital that could be deployed toward more productive uses.

At a time when the capacity of the state to undertake infrastructure projects has been hampered by shrinking fiscal space, there is an opportunity to tap private capital for infrastructure development through multiple structures.

Long-term problems, long-tailed solutions

It is possible to tap this pool of informal capital through long-tailed and project-specific infrastructure bonds. The government already borrows indirectly from the people through treasury bills and bonds, but that is done primarily via banks—and these institutions skim a sweet spread in the middle, not leaving much for the depositor in terms of real savings growth. Furthermore, capital raised in a pooled manner is mostly used to meet current expenditure, often pushing critical infrastructure projects to the back burner. 

Policymakers must think creatively to make it possible for the government to directly borrow from the people and households through infrastructure bonds.

One idea is to have a program in which informal capital, or cash, could be used to buy long-tailed infrastructure bonds. These could unlock the capital that exists outside the formal financial system, while raising much-needed funds for infrastructure projects. Incentivizing a transfer of capital from real estate (mostly vacant plots of land) to infrastructure projects through an optimal mix of penalties and incentives will be critical. Pretending that informal capital does not exist outside the system is not going to help the economy. In fact, ignoring this reality has aggravated the investment challenge facing Pakistan’s economy. By channeling informal capital toward long-tailed infrastructure projects, policymakers can unlock economic growth, improve productivity, and reduce the overall cost of capital in the economy.

With such a system in place, citizens could effectively choose which infrastructure projects to support, making the fund allocation and development process more inclusive as well. Capital moving from the informal to the formal sector could be locked in for a predefined number of years, such that the same can be restricted for reallocation into other non-priority areas. Since the infrastructure bonds would be backed by tangible assets, it would also be possible to structure them as Sharia-compliant instruments—a religious and cultural preference for millions of Pakistanis—thereby unlocking a more expansive pool of capital.

There is also an opportunity to attract long-term stable capital for infrastructure projects by tapping pension funds and other holders of long-term capital. The country’s current debt management structure does not inspire confidence, as all capital raised by the state is pooled together and commingled, disincentivizing any fiscal reforms. By ring-fencing infrastructure projects and enabling more public-private partnership structures, it would be possible to attract long-term debt flows into the country through infrastructure bonds or other similar instruments. Providing a tax exemption on interest earned on such instruments could also act as a sweetener to improve after-tax yields on such instruments, making it more market competitive, even after adjusting for political and exchange rate risk.

Across the border, India has recently announced an exemption on taxes for any income or capital gains earned by Canadian pension funds investing in infrastructure projects, paving the way for greater long-term investments in the economy. This demonstrates a departure from an infrastructure program funded by the budget to a private-public partnership regime, where investors with a long-term horizon and higher risk appetite can participate in infrastructure development. There is no reason why Pakistan cannot follow a similar strategy to meet its growing infrastructure needs, especially at a time when the climate disaster is severely impacting the country.

Pakistan should make policy changes to attract long-tailed funds from pension and sovereign wealth funds looking for a higher yield. These funds also have a longer-term outlook and a relatively higher risk appetite. Distinguishing these from conventional sovereign debt can enable the creation of better governance structures for infrastructure projects that can de-risk overall projects relative to the risk of the state. In an environment where the government is already stretched for liquidity, a public-private partnership structure that raises debt independently of the state, and on the basis of respective project cash flows can provide the necessary fiscal impetus required to build infrastructure, while also generating jobs amid a severe economic crisis.

In a typical environment, a fiscal stimulus would have resulted in the creation of jobs and triggered an economic multiplier. However, given recurring deficits and historically high interest rates, the government must utilize unconventional tools to mobilize local private capital and reallocate it toward infrastructure development. Similarly, encouraging public-private partnerships and creating governance structures that align with the requirements of long-term patient capital, whether in the form of pension funds or sovereign wealth funds, is also possible through tax breaks and other incentives.

Pakistan has a fast-growing population base with a high proportion of youth, relatively low participation in the global trade value chain, and a sporadically developed infrastructure and industrial base. The capital required to trigger investment in infrastructure exists in Pakistan, and it can be redeployed to catalyze an economic multiplier, if policymakers seize this opportunity.

Ammar Habib Khan is a nonresident senior fellow at the Atlantic Council’s South Asia Center as well as the chief executive officer at CreditBook Financial Services, which is the financial services arm of the fintech company CreditBook.

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GCC rifts and support for Cairo in the post-revolutionary era

At the outset of the Arab Spring era in 2011, Saudi Arabia and the United Arab Emirates (UAE) strongly supported the continuation of Hosni Mubarak’s presidency, seeing him as a bulwark against instability and the rise of nonstate political Islamism of the Muslim Brotherhood (MB) type. Qatar, in contrast, had excellent relationships with different political Islamist groups around the region, including the Egyptian MB, having served as a safe haven for many regional exiles from these groups over the early part of the twenty-first century. Doha came out in strong support of the new political dispensation post-2011, which saw the end of the Mubarak regime.

With the end of the 2011-2013 revolutionary period in Egypt, strongly endorsed by Saudi Arabia and the UAE, a new realignment took place. Doha expressed initial rejection of the post- Mohamed Morsi and MB-led authorities in Cairo, and also demanded a return of the Qatari deposits in Egypt’s central bank, which exceeded US$6 billion. The gap was quickly replaced by Saudi Arabia, the UAE, and Kuwait, and the normalization of Egypt’s new political regime by Qatar followed in 2014, with Doha recognizing Abdel Fattah al-Sisi as Egypt’s president, and accepting Saudi mediation to mend relations between Qatar and Egypt,reverting to a more pragmatic foreign policy footing in the region.

Against that backdrop, Egypt became more dependent on foreign financing in the form of long-term deposits and loans from GCC states, due to food insecurity, energy needs, and interest-rate shocks. Between 2014 and 2017, Cairo benefited from GCC states being more or less on the same page vis-à-vis Egypt, with the only relative outlier being Doha, against which Cairo still held a grudge owing to continued criticism of Egypt’s authorities from Al Jazeera’s media network. Nevertheless, despite the underlying tensions, these differences were nothing compared with the 2017-2021 period when the Saudi-UAE-Bahraini-Egyptian boycott of Qatar took place. Any financial investment from the GCC into Egypt during that period naturally saw little to none from Qatar; conversely, the political and economic relationship among Egypt, Saudi Arabia, and the UAEdeepened.

In the aftermath of the boycott, this has all radically changed, with Doha and Cairo agreeing earlier this year, for example, to establish a $1 billion joint investment fund. Cairo’s relations with Doha are on a par with those with other capitals in the GCC, and the rationale of the relationship is similar to that of the UAE and Saudi Arabia—which is to say there has been an overall move, as of late, to be more commercially focused.

Moving from fiscal support to commercially viable investments

When it comes to that relationship, there has been a trend of oil-rich Gulf states generally bailing out Egypt in terms of Cairo’s financial woes, particularly over the past decade. In the first period, these regional GCC powers were essentially donors, providing huge monetary largesse in light of their common concern over the stability of the Arab world’s largest country. Billions of US dollars were deposited into Egyptian banks during that period.

Over time, however, Gulf capitals became more reluctant to directly underwrite Cairo, and preferred to redirect their funds, albeit still aimed at Egypt. In the past, the focus was primarily on what these states considered to be in support of stability. As far as these states are concerned, the security concerns underpinning that direction have subsided, and these GCC countries are far more interested in returns on their investments.

This did not mean the ending of Gulf money to Egypt, but it meant a share of Gulf funds have been repurposed for commercial investments, not exclusively as grants and low interest loans, as was more often seen previously. Saudi Arabia’s Public Investment Fund and Abu Dhabi’s ADQ (the Emirates’ sovereign wealth fund) spent $4 billion in 2022 alone acquiring commercial stakes in various Egyptian companies.

Structural reforms and Egyptian economic woes

Egypt maintained reasonable, if insufficient, macroeconomic growth levels until relatively recently, even against the impacts of the COVID-19 pandemic, despite the microeconomic concerns (including persistent insufficient progress in poverty reduction), and a 2016 substantial devaluation of the Egyptian pound. In more recent years, however, the economy, on both the macro and micro economic levels, has been facing tremendous difficulty.

The official rate of the Egyptian pound in 2016 was around eight pounds to the dollar, and then the first major devaluation saw its value more than halve. Up until March 2022, that rate (approximately fifteen pounds to the dollar) held; one might compare that to today—the pound is now trading at more than thirty-one pounds to the dollar. That has had knock-on effects on inflation and food prices, where we have seen massive upsurges; April 2023 saw 32.7 percent inflation as compared with the previous month, while Egypt’s annual core inflation rate was 38.5 percent.

It has been argued, including by the International Monetary Fund (IMF) itself, that there have been deep structural issues with the Egyptian economy that have made the model rather unsustainable. The repercussions arising from the Russian invasion of Ukraine upon emerging markets exacerbated those issues, and crystalized them. Cairo’s foreign bond investors withdrew around $20 billion out of Egypt’s debt, which the authorities needed to fund its current account deficit, an expression of cynicism that began prior to the Russian invasion altogether. In response, Cairo had to request assistance from the IMF and the Gulf. Egyptian delegations, both officials and from the business community, engaged in Doha, Abu Dhabi, Riyadh, and elsewhere trying to attract investment from the more prosperous Gulf states to mitigate the repercussions from the Russian invasion, which, as noted, exacerbated existing fault lines. As an example, a $5 billion investment deal between Cairo and Doha was signed in March 2022 after the Qatari foreign minister visited Egypt. Egypt’s president put it very clearly as guest of honor of the World Government Summit in Dubai: “The most important point here is support from our brothers.”

GCC-Egyptian expectations mismatch

But unlike previous similar periods, there is now a substantial clash over vision, and it has become particularly stark. There is a complete mismatch between Cairo and the Gulf due to increased concern around Egypt’s economy from within the GCC, and a frustration over expected reforms that have failed to materialize.

Perhaps most controversially, state ownership, including that of the military, of much of the Egyptian economy has become more and more of an issue for international investors, as well as the IMF, which has provided several loans to Egypt over recent years. As far as these GCC states are concerned, Egypt’s macroeconomic policies—including state ownership—are now a matter of interest, as they may impact returns on GCC investments, and the need for the GCC to be financially involved in Egypt in the first place. In this regard, the IMF, and Egypt’s GCC partners, are aligned and united on an ambitious goal: “to press Cairo to undertake structural reforms.” But while such reforms are arguably direly important for the long term, in the short term their impacts are likely to be rather painful for society to bear, posing concerns around political instability.

As Cairo seeks to find ways to ease its foreign currency shortage, and fill an estimated $17 billion financing gap, it has suggested selling different state-owned assets. The most likely purchaser of such assets would be Gulf allies, but little has taken place by way of mass sales, with analysts proposing that Cairo is pushing too hard of a bargain. As one international banker told the Financial Times, “Egypt’s position is to sell things at a massive premium to market prices because the Egyptians argue the current markets are depressed and don’t represent the long-term value.” Irrespective of whether Cairo is correct in this regard, it does not obviate the gap between Egypt and the GCC on such fundamental points, nor the different leverage—to put it bluntly, Egypt needs the financial dividends from the sales, rather more than the GCC needs the purchase.

Beyond the incongruity in expectations in terms of prices, there is also a wider mismatch in terms of structural economic reforms, which the Gulf is increasingly insisting on. As Saudi Arabia’s finance minister said at the World Economic Forum in January 2023, “We used to give direct grants and deposits without strings attached, and we are changing that. We need to see reforms.” That lack of common agreement on fundamental macro issues pertaining to the Egyptian economy has meant that Cairo has lost out on huge investments from the GCC—Saudi Arabia’s Public Investment Fund pulled out of the purchase of the state-owned United Bank earlier this year, and Qatar did the same vis-à-vis a military-owned biscuit manufacturer. Abu Dhabi’s own sovereign fund has halted many of its projects in Egypt, but did come to an agreement with Cairo to purchase 1.9 billion USD of state assets in July, described by one UAE-based analyst as, “It’s still too little in terms of what was promised, but at least it’s a step in the right direction.”

The direction of travel is clear. In 2014, an Emirati interlocutor made clear to the author that Abu Dhabi was loathe to speak of conditions in terms of its support for Cairo; the suggestion would seem uncouth, even if the conditions were in Egypt’s own long-term interest, and not in the spirit of “brotherly Arab relations.” Today, Gulf states want Egypt to reduce the size of the Egyptian military and the state in its economy, float the Egyptian pound, and take further steps to liberalize the Egyptian economy in accordance with IMF recommendations and conditions—and they are not shy to say so.

Future prospects

The mood in Cairo seems to presently be that “Egypt is too big to fail”—and that outside actors will intervene to ensure that Egypt does not default on its debt and go into economic freefall. That may have been the case in the past, but the economic realities of the region and the GCC are no longer what they once were, and growing frustration in the GCC, as evidenced by the substitution of grants and deposits with a clear desire to engage in commercially viable investments, may change that calculation. It might be disastrous for the GCC to let Egypt default, but it may be that the GCC assesses that it would be more disastrous not to. Moreover, it is completely in the GCC’s direct interest that certain steps be taken, such as the further devaluation of the Egyptian pound—it would make its further purchases more economically affordable.

The overall geopolitical positioning of Egypt against this backdrop is also worth considering and watching. Cairo currently continues to be of far more importance on the Palestinian-Israeli file than any other Arab state by far—but that comes fundamentally into play when there is a crisis of some kind in the Palestinian territories under Israeli occupation. Otherwise, the “peace process” between the Israelis and the Palestinians is past being moribund. On other wider files, different Gulf states, particularly Saudi Arabia, have taken pole position in terms of geopolitical power and influence, as evidenced by the reintegration of Syria’s Bashar al-Assad into the Arab League, or the reconciliation between Saudi Arabia and Iran. In both cases, Cairo was not crucially involved. In the Sudanese crisis currently underway, Saudi Arabia’s role in addressing the conflict rivals Egypt’s, whereas this would have been quite different a decade or so ago. Cairo’s economic woes may have unintended consequences in other ways going forward as well.

H.A. Hellyer is a scholar at the Carnegie Endowment for International Peace and senior associate fellow at the Royal United Services Institute.

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There was hope things would go better. Last month’s debt restructuring deal with Zambia, along with the launch of the Global Sovereign Debt Roundtable (GSDR) by the International Monetary Fund (IMF) and World Bank (WB), made it seem like progress was being made toward a new set of sovereign debt restructuring principles. As US Treasury Secretary Janet Yellen stated prior to the meeting, “We should apply the principles we agreed to in Zambia’s case to other cases instead of starting from zero every time… And we must go faster.”

Now, in the wake of a meeting without tangible progress, the Zambia deal looks a little different.

There is more to the Zambia deal than meets the eye

The $6.3 billion debt restructuring agreement with Zambia and its official bilateral creditors—organized in an Official Creditor Committee—was announced at last month’s Paris New Global Finance Summit. It is useful for the country, providing it with some debt servicing relief and unlocking a $188 million disbursement from the $1.3 billion IMF Zambia program. However, the deal largely reflects China’s preferences and is less than optimal for Zambia, for several reasons.

• There is no reduction in the principal amount of the debt, but maturity dates have been extended to 2043, resulting in an average extension of more than twelve years. China has long insisted on re-profiling (of maturities and interest rates) but no principal haircuts. As a result, Zambia’s public debt/GDP ratio is unchanged from 110.8 percent in 2022.
• The interest rate on the restructured debt will be reduced to 1 percent; thereafter the rate will rise to a maximum of 2.5 percent in a base case scenario. If Zambia’s debt carrying capacity is upgraded by the IMF/WB from weak (at present) to medium, the interest rate will increase to a maximum of 4 percent, and the final maturity date brought forward to 2038 (not 2043). In their September 2022 Debt Sustainability Analysis, the IMF/WB have concluded that Zambia was close to the medium threshold. For comparison, the average interest rate on Zambia’s public debt to China is estimated to be 2.9 percent.
• In the base case scenario, with a three-year grace period for principal repayment, the present value (PV) of Zambia’s public debt being restructured has been reduced by 40 percent, assuming a 5 percent discount rate. This is shy of the 49 percent PV reduction sought by Zambia in October 2022 and less than the 50 percent PV haircuts usually granted to low-income countries in debt crisis.
• The $1.75 billion of claims insured by China’s Sinosure (including loans made by China Development Bank) will be re-classified as commercial creditor claims, not official lending as insisted by Western countries until now. This is also in line with China’s long-standing arguments.
• Consistent with the terms outlined above, each creditor country will bilaterally conclude a final restructuring agreement with Zambia—another of China’s preferences. It doesn’t matter much if such bilateral final agreements are transparent. If not, there could be suspicions of side deals beyond those agreed to, serving to erode mutual trust necessary to make progress in other cases.
• The agreement with official bilateral creditors will be contingent upon Zambia securing a comparable deal with its private sector creditors, in particular the holders of $3 billion in international bonds as part of the $6.8 billion private sector external debt. The term “contingent” is ambiguous and it’s not clear how it will be interpreted. This could delay the implementation of the official bilateral deal until a private sector deal is in place. Traditionally, a Paris Club restructuring deal is implemented right away, subject to the requirement that the debtor country seeks to obtain comparable relief from its private sector creditors.

The features mentioned above are consistent with China’s approach to dealing with its debtor countries in crisis—suggesting that Western countries and Zambia have acquiesced to China’s demands to get the deal done.

The problem with agreeing that no one size fits all

Reportedly, the G20 meeting agreed that there is no one-size-fits-all recipe for sovereign debt restructuring. That’s sensible in the sense that the specific circumstances of each debtor country should be taken into account. However, it is also consistent with China’s insistence on a case-by-case approach. This allows China to deal with debtor countries according to their strategic value to Beijing and can be used to delay rather than expedite the negotiating process.

China’s demands were also front and center in the IMF/WB launch of the Global Sovereign Debt Roundtable at their Spring meetings in April 2023. The Roundtable brought together the debtor country with all of its creditors (official bilateral, multilateral development banks and IMF, private sector creditors) to exchange views, which could inform and help actual restructuring negotiations. The IMF/WB agreed to share information more fully and more quickly with all creditors and promise to give more concessional financing, including grants to the low-income countries seeking restructuring.

This is indeed a modest step forward, especially in involving private sector creditors early on and providing them with sufficient information. If the GSDR can bring more transparency to the debt situation of the debtor country—as well as to the confidential contractual clauses in the debt owed to China—all the better! However, this is about process and has not changed the more difficult phase of reaching agreement on the scale and parameters of the debt relief—as well as how to ensure comparable burden sharing among different classes of creditors.

In short, Zambia’s debt restructuring deal and the launch of the Global Sovereign Debt Roundtable can be viewed as modest steps forward in the urgent efforts by the international community to establish a well-defined set of principles and procedures to facilitate the restructuring of sovereign debt of LVMICs—when necessary—in an efficient manner and on a timely basis. However, this goal is still far from being met, and the sovereign debt restructuring process remains unwieldy and time-consuming, deepening the crisis and ravaging the debtor country. In the meantime, the world seems to have acquiesced to China’s approach to dealing with debt crises—which is less than optimal, especially for debtor countries.

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.

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On July 12th, 2023 the Atlantic Council’s empowerME Initiative, in collaboration with the U.S. Embassy in Manama and Bahrain FinTech Bay, held a first workshop in a series of four events for the Win Fellowship’s first cohort launched in Bahrain in June. The event, which took place both in-person at Bahrain FinTech Bay offices and virtually, focused on female leadership in the country.

The opening notes were delivered by empowerME’s chairman Amjad Ahmad. Keynote remarks were provided by H.E. Shaikh Abdulla Bin Rashid Al Khalifa, Ambassador of the Kingdom of Bahrain to the United States, and David Brownstein, Deputy Chief of Mission at the U.S. Embassy in Manama.

The event encompassed a moderated discussion featuring esteemed panelists: Jordana Semaan, Head of Human Resources (Gulf and Asia), Global Head of DEI, Investcorp; Nidal Al-Basha, Head of Public Sector Innovation, Amazon Web Services MENA Region; Hollie Griego, Global Wealth Investments North America Head of Strategy & Platforms, Citi; and Marwa Al Saad, Executive Director at Human Capital, Mumtalakat Bahrain, with Suzy Al Zeerah, Chief Operating Officer, Bahrain FinTech Bay, skillfully moderating the session.

These panelists shared profound insights on the current state of gender equality in Bahrain, the successful initiatives and strategies propelling this progress, the remaining challenges, and the influential role of corporate initiatives in endorsing gender equality and promoting women’s leadership within Bahrain’s business landscape.

Key discussion points

Amjad Ahmad, Chairman of the empowerME initiative at the Atlantic Council kicked-off the event by introducing the remarkable achievements of Bahraini women in education, workforce, and politics. Women in Bahrain make up 83 percent of tertiary school enrollments, 54 percent of the public sector workforce, and 45 percent of leadership positions in official state agencies. In the private sector, women comprise 35 percent of the workforce, hold 17 percent of board seats, and occupy 35 percent of managerial roles. The political landscape is no different, as Bahraini women made major strides. They make up 20 percent of the total members of the Council of Representatives and 25 percent of the Shura Council. Ahmad emphasized that these achievements are the result of a number of factors, including government policies that promote gender equality, the strong educational attainment of Bahraini women, and the increasing participation of women in the workforce.

In his opening remarks, Ambassador H.E. Shaikh Abdullah bin Rashid Al Khalifa expressed his strong support for the WIn Fellowship, noting its role in exposing Bahraini top women entrepreneurs to life-changing networking opportunities, mentorship, and workshops, thereby increasing their economic participation. He also highlighted the significance of the transformation brought about by the Supreme Council for Women (SCW Bahrain), which has been instrumental in implementing legislative and societal safeguards for Bahraini women. As a result of these reforms, Bahraini women account for about 43 percent of the labor force. Continued progress is being made in areas of pay equity, entrepreneurship, pensions, and the enhancement of women’s physical and psychological well-being. Furthermore, His Highness underscored Bahrain’s commitment to digital inclusion, manifested in the government’s initiatives to train women in digital skills and motivate them to pursue STEM fields.

David Brownstein expressed his support for the WIn Fellowship, asserting, “we’re incredibly proud to support the WIn Fellowship here in Bahrain. Bahrain is a place where seeds flourish when planted.” He also pointed to the shared goals between the U.S. Embassy and the Bahraini government, with both parties aiming for a peaceful and prosperous state. “Achieving this requires the active participation of all society’s members”, he noted. He also affirmed the U.S. Embassy’s commitment to supporting Bahrain’s national strategy on gender equity and addressing inequality.

The panelists all agreed on Bahrain’s success in promoting women to all levels of the workforce and representation in government and boards, attributing this to both government reforms and a workforce that acknowledges women’s potential. They also recognized persisting challenges, like widespread biases against women, underscoring the necessity of a robust peer-to-peer network of women advocating for each other.

When asked about the factors that have contributed to Bahrain’s high ranking in gender parity among Arab countries, Nidal Al Basha stated several key aspects. Firstly, he mentioned the role of encouraging women to pursue STEM spatializations, which has been instrumental in promoting gender equality. Additionally, he emphasized on the importance of a supportive work environment that grants women extended maternity leaves, ensuring a balance between their professional and personal lives. Al Basha explained that Bahrain offers additional benefits for women, such as dedicated nursing rooms in the workplace, demonstrating a commitment to meeting their specific needs. The implementation of inclusive hiring and promotional policies also plays a significant role in enabling women to succeed and advance in their careers, according to Al Basha.

Marwa Al Saad emphasized further how Bahrain recognizes the immense value of human potential, considering it as one of the most valuable and inexhaustible resources. She stated that the high gender parity in Bahrain is attributed to various factors. “There is a mindset shift in the country that prioritizes growth and development, fostering an environment where both men and women can flourish,” she explained. Bahrain has also implemented robust policy and program reforms that establish a solid foundation for the advancement of all genders. These initiatives created equal opportunities and a supportive framework for individuals to thrive in various sectors. Al Saad also mentioned an exciting new initiative; the Bahrain Defense Force, which further demonstrates Manama’s commitment to gender parity and inclusivity. This initiative showcases the country’s dedication to providing equal opportunities and encouraging the participation of all genders in defense-related fields.

Jordana Semaan, from her side, mentioned that the one lesson that other countries in the region can learn from Bahrain is the emphasis placed on women and celebrating their success stories. “The importance of representation cannot be understated, as it serves as a significant motivator for other women to enter the workforce and unlock their full potential”, she said. By showcasing accomplished women and their achievements, Bahrain inspires and encourages others to pursue their goals and make significant contributions in their respective fields.

Hollie Griego focused on the importance of allyship among women, highlighting how it empowers and propels them into higher positions within the workplace. “Citi, following a similar approach to Bahrain, recognizes the significance of recruiting, training, and retaining women in its workforce” according to Griego. She pointed to the implementation of mechanisms that create an environment where women can thrive, allowing them to strike a balance between their roles as working mothers and providing the flexibility necessary to forge a successful career path leading to long-term security. These mechanisms serve as valuable examples that any country can adopt to promote gender equality and support women’s advancement.

Additionally, the panelists discussed the changing perception towards women in tech sectors, demonstrated by the increased hiring of female engineers at Amazon Web Services. They gave the example of the vital role supportive mechanisms at the workplace play in facilitating women’s advancement into senior roles, enabling them to balance their roles as working mothers. The importance of role models was also stressed, regardless of gender.

When asked about the challenges faced by Bahraini women, similar to women globally, Semaan referred to a UNDP report stating that 9 out of 10 people hold biases against women. This bias is present in both men and women, and is a significant obstacle to overcome. Semaan  explained the importance of alliances and support networks among women, highlighting their role in addressing these challenges. “In this region, there is still a cultural expectation for women to take on caregiving roles,” she pointed.

Al Saad further emphasized the importance of implementing gender-inclusive solutions to address these challenges, while Al-Basha focused onthe importance of mental health support for both women and men, as well as the significance of programs that help women re-enter the workforce after being on leave.

Griego acknowledged that while Citi is one of the few institutions with a female CEO, there is still much work to be done to address the gender pay gap at senior levels and promote women into those roles. She emphasized the significance of mentorship for women, as it plays a crucial role in guiding them through their professional journey and career growth.

Suzy Al Zeerah additionally pointed to the absence of sufficient female role models and mentors in Bahrain and in the Middle East in general.

Closing remarks