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iMFdirect features views by IMF economists and officials about pressing issues in the global economy. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Articles by iMF direct

Drivers of Declining Labor Share of Income

April 10, 2017

By Mai Chi Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian
Versions in عربي (Arabic), Русский (Russian), and Español (Spanish)
After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s. Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.

Labor’s share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work. The result is that a growing fraction of productivity gains has been going to capital. And since capital tends to be concentrated in the upper ends of the income distribution, falling labor income shares are likely to raise income inequality.
Trending down
In advanced economies, labor income shares began trending down in the 1980s. They reached their lowest level of the past half century just prior to the global financial crisis of 2008, and have not recovered materially since. Labor income shares now are almost 4 percentage points lower than they were in 1970.
Despite more limited data, labor shares have also declined in emerging market and developing economies since the early 1990s. This is especially the case for the larger economies in this group.

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Emerging Markets and Developing Economies: Sustaining Growth in a Less Supportive External Environment

April 10, 2017

By Bertrand Gruss, Malhar Nabar, and Marcos Poplawski-Ribeiro
Versions in عربي (Arabic), Français (French), 日本語 (Japanese), Русский (Russian), and Español (Spanish)
It is quite likely you are reading this on a smartphone or tablet assembled in an emerging market economy. The beverage beside you could well be tea grown in Sri Lanka or Kenya. And there is a chance that you are —or soon will be—on a plane headed for Shanghai, Sao Paulo, or St. Petersburg.
The list could go on. But even from a few examples around us, it is easy to detect the pervasive role of emerging market and developing economies in the global economy these days—a role that has grown more important over time.
Improved policy frameworks and structural reforms in emerging market and developing economies over the past twenty years have been crucial for this transformation. But as our research in Chapter 2 of the April 2017 World Economic Outlook shows, the external environment has also played its part in facilitating their rise.
These economies now face a possibly more complicated external environment than they have grown accustomed to in recent decades. Nevertheless, they can still enhance the growth impulse from less supportive external conditions with the right policy mix and by continuing to strengthen their institutional frameworks.

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Channeling a Voice for Women

April 7, 2017

Muna AbuSulayman is a Saudi Arabian media personality, whose television show, Kalam Nawaem, which means “soft talk” in Arabic, is the longest running and most popular social issues show in the Middle East. In this podcast, AbuSulayman discusses pushing social boundaries, including on topics such as gender equality.
“A utopian day would be for a woman to be able to realize her full potential in the way that she wants it within her capabilities. And I think that’s a human rights issue versus an economic issue.”
AbuSulayman says women’s role in the economy in Saudi Arabia and the Arab world faces entrenched views.
“I think that people believe if a woman comes in, she’s taking a job away from a man. Also, I don’t think they believe inclusiveness actually makes better decisions. This is something that we have to work on to make sure people understand that when women participate in decision-making the outcome will be better.”
AbuSulayman says a change in mentality and narrative will go a long way to changing men’s views about women in the work force.
“I remember somebody telling me that you train and you spend a lot of money on development for a professional woman, and then she gets married, has a baby, and then leaves.

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How an Extended Period of Low Growth Could Reshape the Financial Industry

April 6, 2017

By Gaston Gelos and Jay Surti
Versions in Français (French), Русский (Russian), and Español (Spanish)
What happens if advanced economies remain stuck in a long-lasting funk marked by tepid growth, low interest rates, aging populations and stagnant productivity? Japan offers an example of the impact on banks, and our analysis suggests that there could also be far-reaching consequences for insurance companies, pension funds, and asset-management firms.
You might argue that this scenario of economic malaise has already materialized; after all, interest rates and economic growth have been low since the financial crisis in 2008. The question is whether the post-crisis landscape represents a temporary departure from the pace of growth we’ve come to expect since World War II, or whether it’s the start of a new normal.
Notwithstanding the recent increase in long-term yields in some advanced economies, the Japanese experience suggests that we cannot be sure whether an exit from a low-growth/low interest rate trap is imminent or permanent.
Depressed margins
Chapter 2 of the IMF’s Global Financial Stability Report examines the likely impact of an extended period of stagnation. Some of the fallout is already apparent. The so-called yield curve, or the difference between short-term and long-term interest rates, has flattened.

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With Global Financial Markets, How Much Control Do Countries Have Over Economic Policies?

April 6, 2017

By Selim Ali Elekdag and Gaston Gelos
Versions in Français (French), Русский (Russian), and Español (Spanish)
The outlook for further interest-rate increases by the US Federal Reserve revives interest in a compelling question: In an increasingly integrated global financial system, how much control do countries outside of the US retain over their economic policies? 
For policymakers around the world, the question is more than academic. Their concern:
Global events have such a large impact on financial markets that there’s little scope left to pursue their own objectives, such as full employment or low inflation.
Unwelcome development
Here’s a simple example of why that’s the case. A decision by the Fed to raise interest rates increases yields on US assets, attracting capital from other countries. As a result, interest rates in those countries may go up, making it harder for consumers and companies to obtain the credit they need to buy more goods or invest in new machinery. That could be an unwelcome development in a country that is trying to keep borrowing costs low to combat unemployment, for example, or sustain economic growth.

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Services Exports Open a New Path to Prosperity

April 5, 2017

By Prakash Loungani, Chris Papageorgiou, and Ke Wang
Services, which already account for 50 percent of world income and 70 percent of employment, are also becoming an important part of international trade. Services exports—accounting for nearly one fourth of total exports—have come to play a central role in the global economy, thanks in large part to advances in technology.
Rapidly declining telecommunication costs, increasing internet adoption around the world, and proliferation of broadband internet services have made it possible to deliver services across long distances. While a haircut still requires a trip to the local barbershop, many other services, such as insurance or medical diagnoses, no longer require the provider to be close to the customer.
In our new paper, we track this development with a rich detailed dataset on global trade in services. We make the case that such virtual trade in services are not only catching up with exports of goods in many countries, but it can offer opportunities for new sources of growth, that could help raise productivity and jobs, especially in emerging and developing economies.

New source of growth for developing economies
Since many countries can take advantage of these technological advances, the rise in services exports is not confined to advanced economies.

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Chart of the Week: Slowing Productivity: Why It Matters and What To Do

April 3, 2017

By IMFBlog
Output per worker and total factor productivity have slowed sharply over the past decade in most advanced economies and many emerging and developing countries.
Even before the global financial crisis, productivity growth showed signs of slowing in many advanced economies. But in the aftermath of the crisis, there was a further, abrupt deceleration.
Unlike normal economic slowdowns, deep recessions leave long-lasting scars on total factor productivity, as this chart shows. The global financial crisis was no different.

Consider, for example, the impact of the credit crunch on advanced economy firms that had entered the crisis with high levels of debt. These companies were often forced into fire sales of assets and deep cuts in investment, including in innovation—with lasting effects on their own and aggregate productivity.
Subdued productivity is a cause for concern, according to a new IMF paper. Another decade of weak productivity growth could seriously threaten progress in raising global living standards. Slower growth would also make it more difficult to sustain existing private and public debt levels in some countries—which could jeopardize their financial stability.
Moving the productivity needle should be a policy priority.

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Union of Labor and Growth

March 31, 2017

By IMFBlog
John Evans is Head of the Trade Union Advisory Committee to the Organisation for Economic Cooperation and Development, which represents some 65 million organized workers worldwide. In this podcast, he says that the labor market works much like any other market, driven by supply and demand, and the latter is very dependent on how well the economy is doing. 
“On the demand side, the labor markets globally haven’t fully recovered from the Great Recession after the [U.S. investment bank] Lehman Brothers crash in 2008. We still have 200 million people unemployed. We still have very sluggish growth. On the income side, what we’ve seen globally, but particularly in certain countries, is a generalized rise to greater inequality of labor incomes in the last 30 to 35 years.”
Is this only a problem for developing countries?
“I think it affects everyone,” says Evans. “The Gini coefficient increased very significantly in some of the industrialized countries. The post-World War II years was a period of falling income inequality, whereas now we’ve seen a jump back to some of the levels that existed in the 1920s.”
Evans says the IMF’s analysis of advanced economies shows that half the increase in inequality between the top decile and bottom decile is due to weaker unions and declining unionization.

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Two Things That Keep Central Banks’ Reserve Managers Awake at Night

March 29, 2017

By Veronica Bacalu, Vincent Fleuriet, and Asad Qureshi
One of the central bank’s roles is to manage a country’s international reserves. But, central bank reserve managers have been losing sleep over two main issues: low interest rates, and how best to communicate the choices they make. 
Central banks’ reserve managers decide on how to invest central banks’ international reserves, what to invest in, and when. The overarching investment objective is to help preserve the external value of the domestic currency. They base this objective on three main pillars: preserving the capital of the investments, ensuring the liquidity of assets—how tradable they are—and earning a return.
Even though many countries’ economies are recovering after the global financial crisis, many reserve managers are still fretting. We wanted to know why. So we asked 63 central banks from advanced, emerging, and low-income countries about the reasons behind their worries. Their answers revealed a lot and were quite similar. We pulled together the results and here are the top two things reserve managers worry about.
Low interest rates
Low interest rates are their main concern, as you can see in the figure below. Returns on central banks’ international reserves are low, and in some cases even turned negative. Reserve managers are struggling to find sources of income without taking unacceptable risks.

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Chart of the Week: Global House Prices—Where is the Boom?

March 27, 2017

By IMFBlog
While house prices around the world have rebounded over the last four years, a closer look reveals that this uptick is dependent on three things: location, location, location.
The IMF’s Global House Price Index—an average of real house prices across countries—has been rising for the past four years. However, house prices are not rising in every country. As noted in our November 2016 Quarterly Update, house price developments in the countries that make up the index fall into three clusters: gloom, bust and boom, and boom. 
The first cluster—gloom—consists of countries in which house prices fell substantially at the onset of the Great Recession, and have remained on a downward path.
The second cluster—bust and boom—consists of countries in which housing markets have rebounded since 2013 after falling sharply during 2007–12.
The third cluster—boom—consists of countries in which the drop in house prices in 2007–12 was quite modest, and was followed by a quick rebound.
This chart shows that house prices varies within a cluster and within a country. Recent IMF assessments provide a more nuanced view of the within-country house price developments.

For example, in Australia, the strongest house price increases continue to be recorded in Sydney and Melbourne, where underlying demand for housing remains strong.

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Make Women a Priority

March 24, 2017

By IMFBlog
Women the world over often find themselves on the bottom rung of the employment ladder looking up.  In low-income countries, the obstacles can be enormous.
In this podcast, Hilma Mote of the African Region’s International Trade Union Confederation talks about the challenges African women and youth face given the continent’s rapidly growing labor force.
Africa has a very young population compared to other regions in the world.  The continent has the largest number of people between the ages of 15 and 29, and the challenge for African governments is to provide opportunities to young people, particularly young women.
“If we don’t do anything to structurally transform African economies, to make sure jobs remain on the continent, it means that we are bringing up young people for labor on other continents.”
How to create the kinds of economies that support women is a key question this week in Washington.  The IMF is hosting a conference on gender and macroeconomics to discuss innovative empirical and theoretical research on gender and macroeconomics, and the policy implications, with a focus on the challenges of low-income and developing countries.
“African governments have to make Africa women their priority,” says Mote.  “We can no longer walk ahead with 50 percent of the population left behind.

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Why International Financial Cooperation Remains Essential

March 23, 2017

By Tobias Adrian and Maurice Obstfeld
Economic growth appears to be strengthening across the large economies, but that does not mean financial-sector regulation can now be relaxed. On the contrary, it remains more necessary than ever, as does international cooperation to ensure the safety and resilience of global capital markets. That is why the Group of Twenty (G20) finance ministers and central bank governors reiterated their support for continuing financial-sector reform at their meeting in Baden-Baden last week.
The 2008 global financial crisis was exceptionally severe in the magnitude, breadth, and persistence of its effects, but it is one in a long series of financial crises stretching back centuries. Not only do crises cause financial losses for professional investors; more importantly, they impose high human costs for those who lose their jobs, homes, and savings. To protect their citizens, governments generally adopt an array of financial regulations designed to reduce the risk of a failure that could reverberate across the economy. These include balance-sheet standards, insider trading rules, broader conflict-of-interest laws, and consumer protections.
Too far?
Some argue that such existing regulations go too far and mostly hurt the economy by reducing financial institutions’ profits and thereby their ability to provide essential services.

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Fintech—A Brave New World for the Financial Sector?

March 21, 2017

By Christine Lagarde
From smartphones to cloud computing, technology is rapidly changing virtually every facet of society, including communications, business and government. The financial world is no exception.
As a result, the financial world stands at a critical juncture. Yes, the widespread adoption of new technologies, such as blockchain-based systems, offers many potential benefits. But it also gives rise to new risks, including risks to financial stability. That causes challenges for financial regulators, a subject I addressed at the 2017 World Government Summit in Dubai.

For example, we need to define the legal status of a virtual currency, or digital token. We need to combat money laundering and terrorist financing by figuring out how best to perform customer due diligence on virtual currency transfers. Fintech also has macroeconomic implications that need to be better understood as we develop policies to help the Fund’s member countries navigate this rapidly changing environment.
Soaring investment
Financial technology, or fintech—a term that encompasses products, developers and operators of alternative financial systems—is challenging traditional business models. And it is growing rapidly. According to one recent estimate, fintech investment quadrupled from 2010 to 2015, to $19 billion annually.

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Chart of the Week: Inequality and the Decline in Labor Share of Income

March 20, 2017

By IMFBlog
As discussed in the IMF’s G20 Note, and a blog last week by IMF Managing Director Christine Lagarde, a forthcoming chapter of the World Economic Outlook seeks to understand the decline in the labor share of income (that is, the share of national income paid in wages, including benefits, to workers) in many countries around the world. These downward trends can have potentially large and complex social implications, including a rise in income inequality. 
This chart shows that advanced economies that experienced a larger decline in their price of investment goods (such as computers, and other information and communications technologies), relative to consumption goods, saw a larger decline in their labor share of income. Declines in the relative price of investment goods across countries were, to a large extent, driven by rapid advances in technology. But these declines varied across countries depending on their investment and consumption patterns, including their reliance on commodity trade.

For example, the decline was larger in countries with a higher share of machinery and equipment in their overall investment (e.g., US and Germany), while it was smaller in countries reliant on service industries, particularly tourism and finance, such as Cyprus, Belgium, and Sweden, or on commodity exports, such as Canada and Norway.

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Invest in Africa

March 17, 2017

By IMFBlog
As the Group of Twenty finance ministers and central bank governors meet in Germany this week, policymakers are looking to increase investment in Africa.
Jamie Drummond is co-founder of ONE Campaign, and in this podcast he says it’s no surprise Africa is on the agenda.
“The German finance ministry realizes that if we do not invest heavily now in the education, employment and empowerment of this generation of Africans, the international community—above all—European neighbors to Africa, will profoundly regret it.”
Drummond says there have been several moments in recent history when the world has come together in response to what’s both the opportunity and jeopardy of the situation of the continent, but it’s unclear which one of those situations is going to win.
“Is it that there’s a massive opportunity to invest in this generation of youth, in order to harness a demographic dividend? That is usually an opportunity for an economy to grow rapidly, but only if that youth boom has had adequate nutrition, healthcare, access to education, and in turn access to employment and opportunity.”
Absent those things, Drummond says African youth will be profoundly frustrated and angry, and we could see a very grim couple of decades on the continent.
“Instead of seeing a demographic dividend, we’ll have a period of demographic destabilization and mass displacement.

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OPEC’s Rebalancing Act

March 15, 2017

By Rabah Arezki and Akito Matsumoto
In November 2014, the Organization of Petroleum Exporting Countries (OPEC) decided to maintain output despite a perceived global glut of oil. The result was a steep decline in price.
Two years later, on November 30, 2016, the organization took a different tack and committed to a six-month, 1.2 million barrel a day (3.5 percent) reduction in OPEC crude oil output to 32.5 million barrels per day, effective in January 2017. The result was a small price increase and some price stability.
But the respite may be temporary, because the price increase is likely to stimulate other oil production that can come on line quickly. A recent sharp decline in prices because of higher than expected oil inventories in the United States underlines the temporary nature of the respite the OPEC agreement provides.
The OPEC agreement
Saudi Arabia, Iraq, the United Arab Emirates, and Kuwait are bearing the brunt of the OPEC cuts, which could be extended another six months, while some member countries such as Nigeria and Libya have been exempted. Moreover, non-OPEC producers joined in and agreed to cut about 600,000 barrels a day.  Russia committed to cut 300,000 barrels, and 10 other non-OPEC oil producing countries agreed to cut the remaining 300,00 barrels a day.

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Maintaining the Positive Momentum of the Global Economy

March 14, 2017

By Christine Lagarde
Versions in: عربي (Arabic), Français (French), and Deutsch (German)
Baden-Baden, the German spa town built on ancient thermal springs, is a fitting venue to discuss the health of the global economy during this week’s meeting of the Group of Twenty finance ministers and central bank governors.
Policymakers will likely share a sense of growing optimism, because the recent strengthening of activity suggests that the world economy may finally snap out of its multi-year convalescence. 
Economic prescriptions have played an important part in the recovery, and will continue to do so for some time. Maintaining the positive growth momentum continues to require supportive macroeconomic policies. And the participants at the meetings will need to take action, individually and collectively, to make growth more inclusive and resilient.
Have we reached a turning point? The short answer is yes—at least for now. Growth outturns in the second half of last year were generally solid. Manufacturing and confidence indicators are picking up, and there are signs that global trade volumes are rising along with them.

That is why the International Monetary Fund in January projected a pickup in global growth this year and next—to 3.4 and 3.6 percent—compared to 3.1 percent in 2016.

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Chart of the Week: The Productivity Puzzle

March 13, 2017

By iMFdirect
Technological change seems to be happening faster than ever. The prospect of driverless cars, robot lawyers, and 3D-printed human organs becoming commonplace suggests a new wave of technological progress. 
These advances should raise our standard of living by producing more goods and services with less capital and fewer hours of work—that is, by being more productive. But, to paraphrase Nobel laureate Robert Solow, we can see it everywhere but in the productivity statistics.
The vexing truth is that output per worker and total factor productivity—which measures the overall productivity of both labor and capital, and reflects such elements as technology—have slowed sharply over the past decade.
What is going on? Some believe that aging populations in advanced economies has gradually become a drag on productivity. Others blame a fading information and communications technology boom. And the global financial crisis has played a decisive role, say the authors of Gone with the Headwinds: Global Productivity, an IMF paper due out on April 3.

Read more about why productivity is falling and what can be done about it in the March issue of Finance and Development:
Stuck in a Rut by Gustavo Adler and Romain Duval
Also watch this space for the April release of their IMF Staff Discussion Note.

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The Case for Fiscal Policy to Support Structural Reforms

March 13, 2017

By Angana Banerji, Era Dabla-Norris, Romain Duval, and Davide Furceri
Version in Deutsch (German)
Many advanced countries need  structural reforms to make their economies more productive and raise long-term living standards.  Our new research shows that provided countries can afford it, fiscal policy, through spending or tax incentives, can help governments overcome some obstacles to the reforms, particularly in the early stages.  
Structural reforms help boost employment, encourage business start-ups, and raise productivity. For example, reforms to product markets, such as deregulation in industries like energy and transportation, can boost competition among firms. Reforms to labor markets, such as lower employment taxes and changes to unemployment benefits can help workers join the labor force and find jobs.
At the same time, some of these reforms can entail short-term economic costs, and often face strong political opposition from vested interests.
Our analysis shows that:

Reforms do not just grow the economy, they also reduce public debt burdens over time. Implementing reforms will therefore help cash-strapped governments.

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Schools, Skills and Economic Growth

March 10, 2017

By  iMFdirect
Eric Hanushek is an expert on the relationship between education and economics, and he says the only thing that matters for a country is the skills of its people.
“Countries that have lots of skills grow faster than countries that have low skills, and that’s an easy way to explain what’s going on in Africa and Latin America, where the skills are very low, and the countries are just not growing in the long run.”

Hanushek is the Paul and Jean Hanna Senior Fellow at the Hoover Institution of Stanford University. In this podcast, he says the methods used for testing skills have been around for decades.
“What we’ve had for the last 50 years is a set of international tests of skills in math and science.  So you take a math problem and walk it around the world and see how different countries do.”
So how does the United States fare in these tests?
“The US comes in about 30th in the world of those countries taking these tests,” says Hanushek.  “That puts it in the lower half of developed countries, and presents quite a challenge.”
People who used to have a good middle-class income with a high school education are in trouble, Hanushek says. The manufacturing industries that offered good jobs for those who could use a wrench or swing a hammer are long gone. Hanushek believes the future is bleak for anyone who is not well prepared for the changing job market.

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Public Spending on Health Care under IMF-Supported Programs

March 9, 2017

By Sanjeev Gupta and Baoping Shang
Government policies matter when it comes to public health. And when a country’s economy is suffering a severe economic crisis, the decisions become even more critical.  Over the past few decades, protecting social programs and spending on health has been a cornerstone of the IMF’s support for countries.

Healthy channels in IMF supported programs
A number of studies have found that IMF support for countries’ reforms, on average, either preserve or increase public health spending (see box). One study finds that the effect of IMF programs is considerable—they increase public health spending by about 1 percent of GDP over a 5-year period. The reforms implemented under the programs are essential to put the economies of these countries on an even keel. Without reforms, a country’s economy could collapse, along with its public healthcare system.
While one recent study suggests a few ways in which IMF support may impede spending on public health, their impact is offset by other important factors through which the IMF’s support for a country positively affects public health spending.
Here is a closer look at the different ways IMF support to a country in crisis can help it get back on its feet, and fund social protection programs like health care:

Higher long-term economic growth.

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Revisiting the Paradox of Capital: The Reversal of Uphill Flows

March 7, 2017

By Emine Boz, Luis Cubeddu, and Maurice Obstfeld
Basic economic theory tells us that capital should flow from slow-growing rich countries to faster-growing poor ones in search of higher returns. A decade ago, our former Research Department colleagues Eswar Prasad, Raghuram Rajan, and Arvind Subramanian examined why the reverse had been true—capital generally flowed “uphill” from poorer to richer countries. Building on the seminal work of Robert Lucas, they argued that certain characteristics of poorer countries, such as weaker institutions and lower levels of education, may reduce the risk-adjusted returns to investing there. 
In this blog, we revisit the uphill flow puzzle and discuss its policy implications. We show that uphill flows, after intensifying ahead of the global financial crisis, have recently reversed direction. These shifts reflect several factors, but the projected normalization of monetary policy in key advanced economies and increased policy uncertainties make a large and persistent reversal of uphill flows unlikely. Going forward, emerging and developing economies should continue to focus on polices that enhance the benefits of inflows, temper capital-flow volatility, and improve the resilience and depth of domestic financial markets.

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Chart of the Week: More Women, More Growth

March 6, 2017

By iMFdirect
International Women’s Day and the United States’ February jobs report are both coming up this week. So, we decided today’s chart should focus on women and work.
Around the world, women seeking employment face barriers—from legal hurdles to disincentives like lower wages. Leveling the playing field could bring significant benefits. 
Investing in girls’ education and easing women’s entry into the labor market supports their economic empowerment. And policies that include the provision of child care, maternity leave benefits, and a fairer tax system all help boost female labor participation.

The economic case for gender equality is clear. Read more about the challenges facing women, as well as the policies that would help foster a more inclusive environment:

Speech by Christine Lagarde, IMF Managing Director

Infographic in “Picture This” in the March 2017 issue of Finance & Development magazine

The IMF’s ongoing gender research

This podcast interview with Action Aid’s Nyaradzayi Gumbonzvanda.

This podcast with Julie Delahanty, Executive Director of Oxfam Canada.

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Have Data—Will Travel

March 3, 2017

By iMFdirect
Author and innovation guru, Alec Ross says that technology is shaping the industries of the future.
“Ninety percent of the world’s data has been produced in the last two years. In fact, if you take the sum of all the information produced by human kind—from paintings on cave walls—to the year 2003, the sum of that data we now produce every two days.” 
Ross has led technology policy for U.S. presidential campaigns, and served as Senior Advisor for Innovation to the U.S. Secretary of State. In this podcast, he talks about his new book that looks at the technological forces he believes will shape the next 20 years. Ross says businesses that capitalize on all this new data will be leading the pack.
“Land was the raw material of the agricultural age, iron was the raw material of the industrial age, and data is the raw material of the information age.”
While the agricultural and industrial ages unfurled over long periods of time, Ross says that for many, the changes brought on by digitization are happening at too fast a pace.
“And this is the trick, because human beings are more difficult to upgrade than software.

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‘Soft’ Infrastructure Is Crucial for Stable and Balanced Growth in China

March 2, 2017

By iMFdirect
Version in 中文 (Chinese)
An important attribute of China’s remarkable record of economic growth has been the creation of an astonishing network of “hard” infrastructure, like roads, power stations, and communication networks. Now, China needs to move toward a new stage of reforms designed to help rebalance its economy. The stakes for global prosperity are high—China is the second largest economy and contributes one-third of the world’s growth. 
As a crucial part of that transition, China’s government should move away from directing and owning resources and instead take on a new role as a facilitator and regulator of private initiative, enterprise, and innovation.
A new IMF book looks at China’s rebalancing from this different angle—the shift in emphasis from “hard” physical investment to “soft” infrastructure investment.
What is soft infrastructure? It covers a broad range of fiscal, monetary, financial policies and statistics. And it relates to the governance and financing of state-owned enterprises and local governments. This is a key issue given current concerns about debt buildup in the state enterprise sector, where many companies exist as “zombie” entities. In essence, it is the collection of institutional frameworks that support sustained economic and social progress.
This infrastructure is built on a foundation of open markets.

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What to Do about Growth

February 28, 2017

By Camilla Lund Andersen
Deep unease about rising inequality and stagnating living standards in advanced economies was at the heart of the 2016 political upheaval. Globalization and trade have been blamed, but entrenched slow growth—what economists call secular stagnation—may be the real culprit. Parents who took for granted that their children would enjoy a brighter future had their dreams dashed by the global financial crisis of 2008. Nine years later, rising populism and a return to nationalist, inward-looking policies threaten to unravel the postwar economic order. 
As Nicholas Crafts of the University of Warwick argues in our overview story, declining productivity growth—the main reason for slow growth and falling incomes—was evident long before the crisis struck. This issue of F&D looks at why and asks whether the world’s advanced economies should resign themselves to secular stagnation or hope that the right policies can revive productivity and lasting economic growth.
Diving into the causes of slow productivity growth, IMF economists Gustavo Adler and Romain Duval find roots in the global financial crisis—tight credit undermined not only firms’ productivity but also the economy’s ability to redirect capital. Other factors were also in play, especially aging populations.

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Chart of the Week: For India, Toilets Bring Benefits

February 27, 2017

By iMFdirect
Improving access to sanitation, an important Sustainable Development Goal, is essential for achieving gender equality and economic prosperity. It leads to increased female participation in the workforce, higher literacy and faster economic growth, according to the IMF’s latest research for India. 
Specifically, improving public sanitation in India reduces time spent by women involved in household and childcare work by close to 10 percent and increases labor force participation, or the proportion of women in the workforce, by 1.5 percent. It also contributes to a 1.4 percent increase in real GDP. Comparing data across the country shows that better sanitation also leads to higher female literacy rates.

Since its launch in 2014, the country’s Swachh Bharat (Clean India) initiative, resulted in a 13 percent increase in the number of households with access to toilets. But India has a long way to go: 53 percent of households still lack a toilet. According to IMF research, poor sanitation not only affects the quality and quantity of water, but it can also have detrimental effects on health, education, quality of life, and women and girls’ safety.
To maintain its rapid pace of economic growth, India must continue to improve access to sanitation facilities through infrastructure investments, targeted in rural areas, such as access to clean water.

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Trade, Labor, and Trust

February 24, 2017

By iMFdirect
“If we’re fighting each other because we can’t design a system that actually works for everybody, then working people will again continue to mistrust our institutions, and the threat to democracy is very real; you see it.” — Sharan Burrow
Burrow is General Secretary of the International Trade Union Confederation, and in this podcast she says collective action is needed to help better distribute the benefits of growth.

As head of the world’s largest trade union federation, Burrow lays out—in no uncertain terms, what today’s “stagnating” economy means for the 3 billion people in the global workforce. “It’s certainly not delivering jobs—even where there is growth, particularly for women and young people who are extraordinarily vulnerable.”
While Burrow supports trade and globalization, she says it’s been built on a low wage, labor arbitrage system that has left too many people in insecure and unsafe work.
Burrow also talks about how women’s workforce participation—after having grown significantly in recent years—has come to a near halt, and points out how this is counter-productive.
“The two most significant areas of growth for jobs is investment in infrastructure, and for immediate productivity gains—it’s women’s participation in work,” she added.

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Dealing with Sovereign Debt—The IMF Perspective

February 23, 2017

By Sean Hagan, Maurice Obstfeld, and Poul M. Thomsen
Version in Español (Spanish)
Debt is central to the functioning of a modern economy. Firms can use it to finance investments in future productivity. Households can use it to finance lumpy purchases, such as big consumer durables, or a home. Sometimes, however, firms’ investments do not pan out or a household’s main earner loses his or her job. Countries’ legal systems generally recognize that in these cases, debtors and creditors alike—along with society at large—may be better off if there is an orderly procedure for reorganizing debts. 
Governments borrow too, of course, but there are no courts to direct a restructuring of sovereign debts—debts owed or guaranteed by the national government—nor can entire countries be put into receivership. This is where the IMF comes in. Over the past forty years, sovereign over indebtedness has been at the root of many of the balance-of-payments crises experienced by our member countries.

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The IMF’s Work on Inequality: Bridging Research and Reality

February 22, 2017

By Prakash Loungani and Jonathan D. Ostry
Over the past three decades, income inequality has gone up in most advanced economies and in many developing ones as well. Why? Much of the research on inequality has focused on advances in technology and liberalization of trade as the main drivers. While technology and trade are global trends that are difficult to resist, IMF studies have shown that the design of government policies matters and can help limit increases in inequality.
Another important conclusion of IMF research: rising inequality poses risks to durable economic growth. This puts addressing inequality squarely within the IMF’s mandate to help countries improve economic performance. So, the IMF is now building on years of research into inequality to offer its member countries policy solutions, particularly on equitable ways to tax and spend.
Understanding inequality
A good example is Bolivia, which had one of the highest levels of income inequality in Latin America at the turn of the century. When prices of its commodity exports boomed early in this century, the country saw a big reduction in inequality that put it in the middle of the regional pack. Eager to preserve those gains, the government wanted to understand the causes of the decline, and to develop policies that could keep inequality from creeping back up as a result of the recent drop in commodity prices.

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