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Headquarters of Sberbank, one of the Russian institutions under U.S. sanctions REUTERS/Sergei Karpukhin

Have Sanctions Become the Swiss Army Knife of U.S. Foreign Policy?

by Robert Kahn July 24, 2017

The Congress takes an important, positive step to reinforce Russian sanctions, but are we at risk of overusing the sanctions tool?

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Emerging Markets

Turkey’s Shaky Economy: a Local or Global Concern?

Turkey’s failed coup looks set to deliver a substantial blow to Turkey’s already wobbly economy. It could also renew concerns, post Brexit, about global emerging markets more broadly. Late Friday, f…

Blog Post by Robert Kahn July 17, 2016 Macro and Markets

Europe

Brexit’s Threat to Global Growth

Thursday’s Brexit vote wasn’t a “Lehman moment”, as some have feared. Instead, it was a growth moment. And that may be the greater threat. If policymakers respond effectively, the benefits could be s…

Blog Post by Robert Kahn June 28, 2016 Macro and Markets

G20 (Group of Twenty)

G20 Hopes for a Cure

Five things we learned from this weekend’s G20 meeting of finance ministers and central bankers. A desire for better. The communiqué candidly acknowledges growing threa…

Blog Post by Robert Kahn February 28, 2016 Macro and Markets

Budget, Debt, and Deficits

Venezuela on the Edge

The Venezuelan government has a $2.3 billion debt payment due this Friday. Most believe the government has the resources to make the payment, though it is hard to see a coherent economic reason to do…

Blog Post by Robert Kahn February 23, 2016 Macro and Markets

International Organizations

China’s Symbolic Currency Win

Earlier today, the International Monetary Fund (IMF) Board approved the inclusion of the Chinese renminbi (RMB) as a fifth currency in the special drawing rights (SDR), the IMF’s currency, as of Octo…

Blog Post by Robert Kahn November 30, 2015 Macro and Markets

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Regions

Economics

G8 Economic Scorecard: No Runs, No Errors

While Syria took center stage at the G8 summit, leaders also dealt with a broad range of economic issues including trade, tax harmonization and transparency, and a sluggish global economy. In a substantive sense, there were no deliverables from this meeting--these are tough issues with strongly divergent national interests and any progress will take a long time. Still, leaders had to agree on common principles and first steps, and it appears that they have done so. If the absence of failure is a success, then the summit looks to have succeeded. The summit marked the formal launch of the Transatlantic Trade and Investment Partnership (T-TIP). Failure to do so would have been disasterous, and last minute objections from the French government over the cultural exception threatened to ruin the party. Negotiations now begin in early July with an ambitious timeline of finishing within 18 months, on a "single tank of gas". With tariffs already low within the region, negotiations will focus on harmonizing rules and regulation across a range of sensitive sectors. I remain skeptical that a big deal can be reached, but if I’m wrong the benefits could be substantial. Taxes were the other major economic item on the agenda. It’s easy to be against tax avoidance and tax evasion, harder to agree on what to do about it. Aside from the enormous complexity of the issue, there is the basic question of national interest--at a time of significant fiscal pressure, avoiding tax competition will remain a challenge. Nonetheless, recent disclosures of aggressive tax strategies by multinationals has turned up the heat. In response, The G8 issued the Lough Erne Declaration . It calls for automatic sharing of tax information, harmonization of rules to reduce tax avoidance strategies by multinationals, and an expansion of a U.S. Dodd-Frank rule that extractive companies report payments made to all countries (scheduled to go into effect next year if it survives court challenges). In sum, this is a name and shame strategy, on the assumption that publicity is the best disinfectant. It looks like the next step on taxes will be national registries that require shell companies to disclose ownership (the U.K. idea of a central register of beneficial ownership looks out of reach for now). In addition, the ambition remains for agreement on automatic information exchange by the time of the G20 summit in Russia in September. I suspect that in the next few years we will see increased pressure on tax havens and, consequently, on the multinational companies that use them. Time will tell if this was the turning of the tide.

Blog Post by Robert Kahn June 18, 2013 Macro and Markets

Europe

No Break for Periphery Banks

EU ministers apparently made little progress last week on terms under which the European Stability Mechanism (ESM) would recapitalize weak banks, though they still hope for an agreement by end month. That said, if a draft plan circulated by European Commission Secretariat is a guide, we are seeing another step in the disappointing (and risky) retreat from last year’s promise to decisively break the link between troubled periphery banks and their sovereign. This plan looks like more of a bruise, or a slight bend, rather than a break. The good news is that events likely will force a change down the road. One notable element of the document, which reports on features agreed by Euro ministers, is to make a country whose bank was receiving aid put in its own resources alongside the ESM. If a bank is to receive direct support, the country in question must first ensure that the bank’s capital meets the minimum level of 4.5 percent for tier 1 capital, and then must pay in 10 to 20 percent of the amount of the recapitalization. This looks steep. Such burden sharing is justified by the need for the country to address all legacy problems (the ESM only resolving a capital shortfall that occurs once the ECB takes over supervision), but moral hazard concerns look also to be in play. Other ways in which the ESM plan will fail to address the debt sustainability question were already known--banks need to be systemically important and pose a threat to eurozone stability, as well as solvent with the injection of capital; the country needs to be able to issue in markets but at risk of fiscal unsustainability if it fully funds the rescue; and creditors and private shareholders of the bank receiving support will need to have paid up (affirming the precedent set in Cyprus). The recap program is limited to 50 to 70 billion euros from the 500 billion euro fund. As pointed out by the FT, its unclear that many of the banks at the center of the crisis (Anglo-Irish, Bankia and Laiki for example) would have qualified for assistance under this scheme. It is not surprising that policymakers would be wary of announcing more ambitious plans while the German constitutional court is considering the legality of ECB support policies, and ahead of German elections. But what if German elections come and go, and the policy doesn’t change? The best that can be said is that, when faced by the risk of imminent crisis, creditor governments have done the minimum each time to avoid a country collapse. Markets remain untroubled, apparently anchored by its confidence that Europe has shown the flexibility to change in the past, and would do so again. Two problems with that: first, that diminishing popular support for European policies and the rise of non-traditional political parties may make justification of changes harder in the future than it would be now; and of course, having to go to the edge of the cliff to get the policy changed has a corrosive effect on markets. It’s hard to see how this helps.

Blog Post by Robert Kahn June 17, 2013 Macro and Markets

Budget, Debt, and Deficits

Fiscal Malaise

Fiscal policy has moved off the front pages. That’s both good and bad news. The good news is a growing confidence that the next round of fiscal cliffs will be navigated without disruption to the economy. The bad news is a rising pessimism about the prospect for a fiscal grand bargain that addresses the long-term drivers of our deficit. Several factors appear to be at play: 1. A better economic backdrop. The deficit has fallen faster than expected, from 10.1 of GDP in fiscal year 2009 to 4 percent or lower this year. On current policies, it will continue to fall to around 2 percent of GDP in 2015 before it begins to rise again. Meanwhile, despite nearly 2 percent of GDP in fiscal drag this year, the U.S. economy has proven resilient and looks on track for growth of around 2 1/2 to 3 percent in the second half of the year. Together, the sense of near-term economic crisis has receded, and with it the urgency to act. 2. Low hanging fruit is gone. Past cliffs have resulted in roughly $3.9 trillion in deficit reduction (or $2.7 trillion without sequestration), meaning any deal is smaller and focused on the hardest issues. Further, given the high political costs for Democrats to agree to any entitlement reform and for Republicans to agree to any revenue increases, the prospect of a politically winning compromise looks more distant. When both sides have "fixed costs" to any compromise on their red lines, a small deal becomes harder than a big one. Looking to the fall, some of the ideas for dealing with the debt limit involve small deals--such as initial steps toward entitlement reform such as indexing entitlements (chain-weighted CPI) or new revenue. Even revenue-neutral corporate tax reform takes a bargaining chip off the table that might be needed for any future grand bargain (the odds of tax reform also appear to be falling). 3. Sequester biting? The Congress has effectively played ’whack-a-mole’, addressing the most visible disruptions associated with the sequester (air traffic controllers, food safety) and taking the steam out of efforts for a bigger fix. Agencies and government suppliers appear to be smoothing the effects on budgets, and furloughs are only now coming into effect and dislocations should increase in the second half of the year. While budget discussions suggest a majority of legislators would like to see the caps eased, my earlier prediction that sequester disruptions would be politically unviable looks wrong, or at least delayed. 4. Medical costs. Medical costs are rising more slowly than expected. Whether this reflects a "bending of the curve" that proponents of health care reform argue, or temporary market considerations remains debated. But the political implications were on clear display last week, when a small revision in the date when the Medicare Hospital Insurance Trust Fund would run out of money (from 2024 to 2026) caused some to question the need for reform. 5. Debt limit fatigue. Treasury Secretary Jack Lew’s statement that he would use the “standard set of extraordinary measures” makes it clear that going to the edge of the cliff has become the norm. With smaller deficits, the debt limit will not become binding until October or November. At the same time, it appears that only a handful of House Republicans are willing to risk default to gain leverage on spending. None of this eliminates the case for a grand bargain that would balance the need for additional longer-term fiscal consolidation with agreement to ease up on fiscal consolidation in the longer term. Larry Summers reminds us that austerity is particularly painful in current conditions and that we have high-return investments that we can make today. But increased spending on infrastructure or education will only be feasible if we can reach consensus on a longer-term path to fiscal sobriety and an enforcement mechanism that is credible with the deficit hawks. What happens next? Current efforts to negotiate a joint Senate-House budget resolution are being blocked by a few Senators worried about a link to the debt limit (notwithstanding that the debt limit can’t be extended through budget resolution) and is likley to fail. It seems increasingly likely that the FY14 budget, needed by end-September, will be funded through a short-term continuing resolution (CR or CR included in a “mini-bus” appropriations package), perhaps through the end of the year (such delays are common). Then, there could be agreement on spending levels in excess of the caps, with the main beneficiary defense spending, but its also quite likely that the failure to agree would lead to a new round of sequester cuts at the start of next year. The debt limit will be extended. There will not be a grand bargain or agreement on corporate tax reform. Still, as of now there is no clear strategy for how we navigate the series of new cliffs facing us this fall, and it’s easy to imagine a down-to-the-wire negotiation at end year. The timeline suggests that the forth quarter of 2013 will be very noisy. Enjoy the summer.

Blog Post by Robert Kahn June 5, 2013 Macro and Markets

Europe

Cyprus and the IMF

The IMF program for Cyprus has been released (here and here). Growth is projected to fall 13 percent over the next two years, though the discussion of risks implicitly acknowledges that a larger decline is likely (many private analysts expect a decline of 15 percent this year alone). Given that the program contains 6.6 percent of fiscal consolidation measures during 2013-14, and a major deleveraging of the financial system is underway, skepticism is warranted. The Fund also acknowledges that should these downside risks materialize, or program implementation slip, government debt (which is forecast to peak at 126 percent of GDP in 2015) becomes unsustainable. The programs have buffers, but financing looks inadequate. Coming after a negotiation where the Troika publicly promoted one financing gap (17 billion euros) knowing that the actual gap was far larger (shortly after agreement on the program, the gap was revised to 23 billion euros) further undermines confidence in these projections. The next review, slated for September 15, likely will have to confront these issues.

Blog Post by Robert Kahn May 17, 2013 Macro and Markets

International Organizations

Doing Business at the World Bank

A showdown is looming at the World Bank over whether to discontinue or water down the Bank’s annual "Doing Business" Report. As reported here, and blogged about here, and here, China is leading the charge against the report, which is one of the Bank’s most controversial and influential projects. The U.S. government has been lobbying in favor of Doing Business, but so far has failed to generate the degree of high-level support from other G-20 countries or thought leaders that will likely be needed to save the report. A committee established by the Bank and headed by South African Planning Minister (and former finance minister) Trevor Manuel to assess the future of Doing Business will report as early as next week. Based on comments from advisors to the Manuel Committee, it looks as if its conclusion will be negative. After the report is received, President Kim will make his recommendation, which could involve eliminating the report or gutting it through presenting its results qualitatively or in buckets that reduce the transparency that is at the core of the exercise. China’s opposition is disappointing. It’s assumed to be linked to its low rating (and a general view that the Bank shouldn’t rank its members)--but they could have spun a positive story around their efforts towards a more market oriented economy and their improvement in the rankings--one would have thought that would be a good argument for them. Another argument made against the report is its bias towards deregulation. That’s fair, but the report positively weights certain regulation required for the proper functioning of markets and the rule of law. My view is pretty simple: the report has flaws, and certainly can be improved, but overall has been a significant force for better policies. As a starting point for the discussion (a benchmark, not a final assessment), its data is informative and highlight important institutional features that matter for economic growth and poverty reduction. As an incentive to liberalize, it works. It’s a public good that should be kept, and a healthy example of a multilateral institution candidly assessing country policies. That’s why I was heartened to receive the email below from supporters of the Report. They deserve our support. ________________________________ From: Daron Acemoglu (Professor at the Massachusetts Institute of Technology), Paul Collier (Professor at Oxford University, former Research Director at the World Bank), Simon Johnson (Professor at the Massachusetts Institute of Technology and former IMF Chief Economist) Michael Klein (former World Bank Group Vice-president and co-founder of Doing Business), and Graeme Wheeler (former Managing Director of the World Bank and now Governor of the Reserve Bank of New Zealand) We are writing to you about the World Bank’s Doing Business report. Published since 2003 the report benchmarks 185 countries annually on key dimensions of the legal and regulatory environment for small businesses. It has supported numerous reforms all over the world helping small businesses and employment. There is currently a serious risk that the report may be abolished or severely curtailed as part of an ongoing review that will be finished in the next few weeks. The report has always been subject to controversy as it highlights shortcomings that countries may not appreciate. The World Bank’s President and its Board of Executive Directors will consider the future of the report in the next few months. We would like to ask you to support an open letter to the World Bank’s President and its Executive Directors supporting the Doing Business project and recommending general directions for the future. The letter (see below) is informed by our review of the arguments about Doing Business (attached). This is our private initiative and without any institutional affiliation. Please, reply by return email, if you agree to support the open letter. If you wish, indicate in which capacity you want to be mentioned. If you want to forward this email to ask others also to support the letter, please, ask them to reply to this email address ([email protected]) so that we can keep an accurate record of support. If you wish to refer to further information about the Doing Business report this link gets you to chapter of the report that describes it in detail: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-Chapters/About-Doing-Business.pdf ------------------------------ Open letter to the President of the World Bank and its Executive Directors The World Bank’s Doing Business Report benchmarks 185 countries on important aspects of the business environment for small and medium sized firms. The spirit of Doing Business is to enable people everywhere to be successful on the basis of sensible rules, not on the basis of special connections or corruption. The data shed light on important institutional features that matter for economic growth and poverty reduction. The data and the rankings provided by Doing Business make for helpful bench-marking tools. They lead countries to consider and tackle important institutional challenges. Precisely due to the power of the data criticism persists. The report has, again, come under scrutiny at the time of its 10th anniversary. The World Bank President has appointed a special commission to review the report and make recommendations. All options are on the table including, at the extreme, abolition of the report. We are concerned about this. We feel the arguments about the Doing Business Report are by now well known. The report itself provides a model of transparency about data sources, methodology, uses of data and limitations of the data. The way forward is not to question the basics of the report, but to move ahead with further improvements and additions. As an input for the deliberations by the World Bank’s Board of Directors and its President, we offer the following view on basic directions to take. The view is informed by the attached review of the Doing Business indicators. The review was agreed by Daron Acemoglu (Professor at the Massachusetts Institute of Technology), Paul Collier (Professor at Oxford University, former Research Director at the World Bank), Simon Johnson (Professor at the Massachusetts Institute of Technology and former IMF Chief Economist), Michael Klein (former World Bank Group Vice-president and co-founder of Doing Business) and Graeme Wheeler (former Managing Director of the World Bank and now Governor of the Reserve Bank of New Zealand). In particular, we believe that - the indicators provide informative measures about institutional arrangements that are useful for the development of all countries, - the indicators are a step forward in the development of measures of institutions - the summary measures, whether the sub-indicators or the overall “ease of doing business” measure, are useful benchmarking tools - policy-makers have typically used the indicators well Going forward, the World Bank should - continue to maintain, update and publish all the existing Doing Business indicators including aggregate ranking - continue to improve the indicators and their collection - continue to explain both the uses and the limitations of the indicators - ensure that policy analysis places the indicators in the relevant country context drawing on complementary data sets - make proposals for further indicators that shed light on important institutional arrangements underpinning economic development

Blog Post by Robert Kahn May 16, 2013 Macro and Markets