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Asia continues to be the world’s growth leader, but the gains from growth are less widely shared than before. Until about 1990, Asia grew rapidly and secured large gains in poverty reduction while simultaneously achieving a fairly equitable society. Since the early 1990s, however, the region has witnessed widening income inequality that has accompanied its robust expansion—a break from its own remarkable past.
This matters because elevated levels of inequality are harmful for the pace and sustainability of growth. What can be done? Our research finds that policies could substantially reverse the trend of rising inequality. In particular, given limited social safety nets, well-designed fiscal policies may be able to alleviate inequality without stifling the region’s wealth-creating growth.
Home to more than half of the world’s population, Asia remains the engine of global growth. It is expected to grow at 5.5 percent in 2016 and account for almost two thirds of global expansion this year and next. After more than two decades of rapid economic development, incomes rose across all segments of Asia’s population. Though millions have been lifted out of poverty thanks to the growth dividend alone, the IMF’s Regional Economic Outlook for the Asia and Pacific shows that economic development has not benefited the region’s populations equally or at the same pace, causing the region’s income disparity to grow.
Indeed, income inequality has risen in most of Asia, in contrast to most regions. In some larger countries, including China and India, spatial disparities, in particular between rural and urban areas, explain much of the increase. Since 1990, China’s economy has recorded the steepest growth but also a large increase in income inequality. In India, the gap between the income share of top and bottom earners also grew significantly (Figure 1).
While global factors, such as technological change that puts a premium on skills, help explain inequality anywhere in the world, regional and country-specific factors influence the growing discrepancies between income levels of different populations in Asia. Asia seems to be unique not just in its pattern of high and sustained economic growth, but also in the distinctive effect of various policy-related inequality drivers. For example, financial deepening, which tends to be associated with higher inequality in other parts of the world, has had an equalizing effect in Asia. In a number of Asian economies, government policies have successfully sought to expand the coverage of financial services, giving low-income households and small and medium-sized enterprises access to credit.
On the other hand, in contrast to other regions, where education and social benefits function as economic equalizers, they have failed to reduce income inequality in Asia and even tend to increase it. Progressive taxation predictably ameliorates income inequality in Asia, just as it does in other parts of world. However, poorly targeted policies are partly to blame for failure of expenditure to alleviate income inequality. Moreover, social safety net spending is relatively low in Asia compared with the rest of the world (Figure 2), and lower revenue collection translates into lower coverage of spending, including, for example, on social insurance.
Let’s put it in a more global, comparative context. At 22 percent, the share of retirees in Asia who receive a pension is among the lowest in the world – about the same as in Sub-Saharan Africa and approximately one-fourth the level in advanced economies or in Emerging Europe (Figure 3). Unemployment benefits are similarly low, and like all other social benefits, distributed unequally. The spotty reach of social-benefits spending, combined with poorly targeted spending that disproportionately benefits the more affluent, puts a strain on the countries’ budgets without meeting the equalizing social purpose of these fiscal policies.
Furthermore, Asia also faces considerable inequality of opportunity (as do other regions), which is of critical importance since it delinks economic outcomes from an individual’s efforts and thus entrenches income disparities that prevent the emergence of a substantial middle class. Lack of access to education and health services can worsen education and health outcomes, hampering productivity and perpetuating income inequality. Also, the inadequate financial services also constrains the ability of people, particularly low-income individuals, to borrow for investment and to finance education spending.
So what can be done to reverse this trend of rising inequality in Asia? Strengthening the redistributional effect of fiscal policy could help without endangering the region’s poverty-reducing growth. On the tax side, broadening the base for income and consumption taxes while making them more progressive is important, but it cannot be achieved without better compliance to support effective tax collection. On the spending side, designing well-targeted transfer programs while avoiding costly universal price-subsidy schemes is essential, as is improving and broadening access to health services and higher education to raise earnings potential and reduce income gaps.
Forecasts of real GDP growth attract a lot of media attention. But what matters more to the person on the street is how growth translates into jobs. Unfortunately, the mediocre growth outlook of recent years may lead to a disturbing outlook for jobs, particularly among fuel-exporting countries and in the Latin America and Caribbean region.
The global picture
Chart 1 provides a measure of the global unemployment rate based on data for 116 countries, of which 37 countries are classified as "advanced" (a term used in the IMF’s World Economic Outlook to refer to high-income countries) and the remaining 79 are emerging and developing economies (for brevity, we refer to the group as "emerging economies").
The unemployment rate in advanced economies has declined over the past couple of years—with sharp declines in the United States and slower progress in the euro area—and this trend is expected to continue.
In contrast, the unemployment rate in emerging economies is expected to increase over the course of this year. Much of this increase is expected to occur in countries where fuel exports are a big share of export earnings. As shown in Chart 2, the unemployment rate in this group is expected to increase to 8.4 percent this year, a full percentage point above the estimate for last year.
A look at Latin America
Looking across regions, Latin America and the Caribbean in particular, face a sharp increase in the unemployment rate (Chart 3). In 2016, unemployment in the region is expected to be nearly 8 percent, over two percentage points higher than it was two years ago. This sharp rise is driven by recessions in large economies in the region, such as Brazil. Elsewhere, many economies are growing modestly, thus limiting the labor market deterioration (see the IMF’s Regional Economic Outlook for the Western Hemisphere).
These increases in the unemployment rate imply job losses for thousands of people across the region. The declines in employment for the cases of Venezuela, Brazil and Argentina are shown in Chart 4. In Brazil, the job loss between 2014 and 2016 is expected at over 2 million people.
Weakening beneath the surface
As the Inter-American Development Bank’s (IDB) 2016 report on the region notes, this cloudy outlook for labor markets comes after a decade of progress during which more than 50 million people in the region escaped poverty, inequality fell, and the share of informal workers declined significantly.
As of last year, labor markets seemed to remain buoyant, despite the slowdown in growth in the region. However, as an IMF blog cautioned at the time, “labor markets are not as strong as they appear” and there was evidence of “weakening beneath the surface”. With the growth outlook marked down further since then, the outlook for the labor market has become much more disturbing.
Both the IDB and IMF note that the extent to which growth and jobs are linked varies considerably across countries in the region. Chart 5 shows the so-called Okun coefficient for countries in the region: this is the estimated historical relationship between unemployment and GDP growth. For the three countries with the biggest increases in unemployment rates—Argentina, Brazil and Venezuela—the link is reasonably strong by the standards of emerging economies. In Brazil and Venezuela, a one percentage point increase in growth lowers the unemployment rate by 0.2 percentage points; in Argentina the impact is about half as strong.
Getting people back to work
Restoring the health of labor markets in the Latin America and Caribbean region will thus require a return to stronger growth as well as more targeted measures to tackle barriers in the creation of private sector jobs, which may vary from country to country. In particular, it would be useful to provide assistance for job seekers through a mix of placement services, retraining and—in some instances—subsidies to encourage formal sector employment.
In the short-run, the presence of large informal sectors may buffer the increase in formal sector unemployment rates. But the transition to the informal sector is likely to be associated with wage losses in the short-run, and a loss of skills and ability to move to the formal sector if it persists. Hence, a more lasting solution is needed to the emerging unemployment problem in the region.
We should have seen a decrease in inequality with globalization, but that's not what has happened in the last 25 years, according to Nobel Laureate and Harvard Professor Eric Maskin. While there are a number of reasons to care about inequality, he says there is a high correlation between high inequality and social and political unrest, with consequences for a country's political and economic stability.
In this podcast interview with Professor Maskin, he explores how and why inequality is a widespread phenomenon that affects rich and poor countries alike.
While it was widely expected that globalization would reduce inequality, income disparities between skilled and unskilled workers has only increased in recent years.
Improving the skill set of those left behind by globalization through education and training could make a significant difference to close the gap.
After being low for decades, inflation in India trended higher from the mid-2000s. It reached 10–11 percent by 2008, and remained elevated at double digits for several years. Even though inflation fell by almost half in 2014, inflation expectations have remained high.
High and persistent inflation in recent years has presented serious macroeconomic challenges in India, increasing the country’s domestic and external vulnerabilities. As Reserve Bank of India Governor Raghuram Rajan pointed out at the 8th R.N. Kao Memorial Lecture in 2014, “inflation is a destructive disease … we can’t push inflation under the carpet as a central banker. We have to deal with it.”
Hence, this book—which grew out of the IMF staff’s ongoing policy dialogue with the Indian authorities—analyzes various facets of Indian inflation, particularly food inflation, and their implications for the conduct of monetary policy.
The book (Parts 1 and II) looks at the causes and consequences of inflation in India and concludes:
Unlike advanced economies, food inflation in emerging markets (including India) is more volatile and persistent. Food inflation developments in India over the past decade appear to largely reflect demand pressures (driven by strong private consumption growth), which have often outpaced supply of key food commodities.
Inflation has costs—it hurts growth and worsens inequality. There is an inflation-growth threshold effect in the Indian states with persistently elevated consumer price index inflation rates of over 5½ percent. Higher non-food inflation is also associated with worsening income inequality in both urban and rural areas.
Inflation dynamics in both Nepal and Bhutan are closely linked to those in India.
These finding have important policy implications, which are covered in Part III of the book:
Food inflation developments matter. The share of food expenditure is high in total household expenditure, and food inflation informs inflation expectations and wages. In fact, as the second-round effects of food inflation are large in India, monetary policy will need to respond to rather large and persistent food price shocks. Analysis suggests that responding to headline inflation rather than core inflation is welfare superior, and is often better to mitigate consumption and output fluctuations.
Sustaining the long-term inflation target of 4 percent under India’s recently adopted flexible inflation targeting framework will depends on enhancing food supply, agricultural market-based pricing, and reducing price distortions. In the absence of a stronger food supply growth response, food inflation may exceed nonfood inflation by 2½–3 percentage points per year.
Given high costs of inflation, the Reserve Bank of India needs to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently high inflation.
Chapter 4 of the book is a particularly interesting read, where micro level data (household survey data) has been used to investigate the demand and supply factors underpinning relative food price inflation. Further, it analyzes non-monetary factors responsible for relative food price inflation. The chapter also offers policy advice for achieving inflation targets under India’s recently adopted flexible inflation targeting framework.
This book can be ordered at: http://www.imfbookstore.org/ProdDetails.asp?ID=TIIEA&PG=1&Type=BL
International Women’s Day—March 8—is one of my favorite days. It is a time to celebrate the impressive progress women at all levels of the career ladder have made in recent decades. More women in the labor force, and in more senior positions is good news for women, for their companies, and for their countries’ economies.
A new IMF staff study finds that in Europe, national policies, even taking account of personal preferences, can boost women’s participation in the workforce and enhance their chances for advancement.
The research, which looked at 2 million firms in 34 countries in Europe, also finds that the more women in senior managerial positions and in corporate boards, the more profitable firms are. One more woman in senior management or on a corporate board is associated with 8–13 basis points higher return on assets. High corporate profitability could support investment and productivity—another channel through which more women in the workforce can help mitigate Europe’s potential growth slowdown.
The results are clear: increasing female participation improves the bottom line.
More working women
In regions like Europe, where populations are aging, the working-age population is being squeezed, and productivity growth is declining, there is more incentive than ever to level the playing field for women to work full-time and climb higher up the ladder.
Over the past three decades, millions of women in Europe have joined the labor force. Countries such as Spain and Ireland have seen the share of women who work outside the household double since the 1980s—from under 40 percent to more than 80 percent in the case of Spain. In several Nordic and Eastern European countries, women today are almost as likely to work for pay as men are. At the same time, legal requirements for gender diversity in corporate boardrooms have helped boost women’s representation in top decision-making positions—women now hold almost a quarter of senior management or board positions in the corporate sector.
Still, there is scope to bring more women into the labor force. In almost all European countries, women are significantly less active in the labor market than men. Even those women who are employed often work less than full-time. Although women today make up almost half the European labor force aged 25-54, their representation on the top rungs of the corporate ladder is significantly below that of men.
Clearly, women’s personal preferences and attitudes toward working are important determinants of their decision to join the labor force, as our staff’s research confirms. This is especially true in Europe, where women today face no legal restrictions to employment, are just as educated as men, and have fewer children—and social norms have changed.
But the study finds that policies also have an important influence on women’s employment decisions, even after accounting for individual characteristics, choices, and preferences about working. Removing tax disincentives for the second earner in a family, providing sufficient childcare services, and allowing parental leave can broaden the opportunity for women to work as much as they want.
The whole economy benefits
It is not only women who may benefit economically from working. Bringing more women into the labor force benefits a country’s economy in two important ways:
First, more women in the labor force will expand labor supply. If women choose to participate in the labor market as much as men do, Europe’s workforce could increase by 6 percent. If they also choose to work as many hours as men, the workforce could grow by as much as 15 percent.
Second, the prevalence of full-time female employment is a strong predictor of the share of senior corporate positions held by women. And more women in senior managerial positions and in corporate boardrooms, the IMF staff study confirms, is associated with stronger firm financial performance, which would help support corporate investment and productivity, further mitigating the slowdown in potential growth in Europe.
The positive relationship between more women high on the corporate ladder and firms’ profitability is more pronounced, the study finds, in sectors where women form a larger share of the labor force—highlighting the importance of bridging gender gaps between senior executives and the general workforce. This positive association is also more evident in knowledge-intensive services and high-tech manufacturing sectors—where diversity, including gender diversity, can help meet the high demand for creativity and innovative capacity.
As we celebrate women’s achievements in Europe’s labor force, we must also acknowledge that the journey is still in train. The potential benefits can be large. We must not miss this opportunity.
World leaders are meeting in Paris to forge a new climate deal. We interviewed two leading thinkers on climate, Nick Stern and Christiana Figueres.
In this podcast, Nick Stern, Professor of Economics and Government at the London School of Economics, says the world is not yet on the two degree path as carbon emissions continue to rise. Stern is author of “The Low-Carbon Road” in the December issue of Finance & Development.
Back in October, we caught up with Christiana Figueres, head of the United Nations framework convention on climate change, when she was in Lima, Peru for the IMF's Annual Meetings. In this podcast, Figueres talks about the priorities and obstacles as world leaders prepared to present their plans to reduce carbon emissions.
Devaluation is often part of the remedy for a country in financial trouble. Devaluation boosts the competitiveness of a country’s exports and curtails imports by making them more costly. Together, the higher exports and the reduced imports generate some of the financial resources needed to help the country get out of trouble.
For countries that belong to—and want to stay in—a currency union, however, devaluation is not an option. This was the situation facing several euro area economies at the onset of the global financial crisis: capital had been flowing into these countries before the crisis but much of it fled when the crisis hit.
A remedy for these economies that has generated a lot of debate is so-called internal devaluation. This is a boost to competitiveness not through an (external) devaluation of the currency but by internal means, such as wage cuts or wage moderation.
Can such internal devaluations work? Our recent paper provides an answer. The main take-away from the paper is that, if undertaken by several crisis-hit countries at the same time, wage moderation can only work well if supported by accommodative monetary policies. In the absence of such policies, wage moderation does not deliver much of a boost to output in the countries that are undertaking it, and also ends up lowering output in the euro area as a whole.
The start of an answer
The specific policy considered for simulations purposes in our paper is a 2 percent reduction in wage (and price) inflation. While wage moderation does boost competitiveness and exports, its overall effect on output in the short run is uncertain. The reason is lower nominal wage growth and lower inflation—or possibly deflation—can suppress domestic demand and increase the real burden of debt. So the competitiveness and aggregate demand effects work in opposite directions.
To determine which effect prevails in the short run, our paper uses a large-scale model of the world economy. The model contains individual blocks for 11 euro area economies, including the five economies that suffered large capital flight, which we refer to as the ‘crisis-hit’ economies.
The model simulations show that whether the competitiveness or demand effects dominate in the short run depends on two important factors:
the number of countries that are undertaking wage moderation
the actions taken by the central bank.
These two factors also play a key role in determining the spillovers from wage moderation, namely, the impact that wage moderation by a country (or a set of countries) has on other countries, in particular on the rest of the euro area.
Specifically, the model simulations provide the following results:
If a single euro area crisis-hit economy undertakes wage moderation, the net effect on output is positive both for that economy as well as for the entire euro area.
If all crisis-hit economies, which account for some 30 percent of the euro area total GDP, undertake wage moderation together, their output still expands, albeit to a lesser degree. If the central bank is able to cut policy interest rates, output also expands in the entire euro area. This is because the central bank is able to offset the adverse impact of wage moderation by some countries on the output of other countries by lowering policy interest rates. This in turn lowers long term interest rates in these countries, boosting investment and consumption of durables.
The rest of the answer
Things change when policy interest rates are lowered to zero, that is, they hit the zero lower bound. When this happens, the negative impact of wage moderation in the crisis-hit economies on output in the other economies cannot be offset by a cut in interest rates. Unless other actions are taken to lower long term interest rates, euro area-wide output contracts in the short run.
The central bank, however, is not out of ammunition when policy interest rates hit zero. It can take actions to directly lower long term interest rates, a policy known as quantitative easing. The model simulations confirm that if the central bank takes actions that result in a 50 basis point reduction in long term interest rates, output in the crisis-hit economies as well as the euro area as a whole rises modestly in response to wage moderation.
But wait, there’s more. If, additionally, the European Union economies implement the structural reforms they committed to under the Group of Twenty initiative launched by Australia in 2014, output increases further. Importantly, structural reforms that boost productivity have a stronger, supportive effect on consumption and investment in the short run than reforms that boost labor supply.
How does IMF advice stack up?
The IMF has always advocated a comprehensive package that addresses both aggregate demand and aggregate supply. On the supply side, IMF advice has emphasized structural labor market reforms, with a view to lowering natural unemployment or raising labor force participation. IMF staff advice has also underscored the benefits of structural reforms. On the demand side, the IMF was one of the early advocates of supportive monetary policies, including quantitative easing, to boost aggregate demand in the euro area.
An explicit incomes policy to engineer an internal devaluation has not been part of any IMF-supported program for euro area countries. Our results emphasize that if such policies are considered in a set of euro area crisis-hit countries, the adverse spillover effects on output in the rest of the euro area should be kept in mind.
Rising inequality is both a moral and economic issue that has implications for the general health of the global economy, and impacts prosperity and growth.
So it’s not surprising that reducing inequality is an integral part of the Sustainable Development Goals adopted by world leaders at the United Nations summit in September. I often discuss with my colleagues where sub-Saharan Africa stands with respect to these objectives. Unfortunately, the region remains one of the most unequal in the world, on par with Latin America (see Chart 1). In fact, inequality seems markedly higher at all levels of income in the region than elsewhere (see Chart 2).
While the last 15 years of high growth in sub-Saharan Africa has pushed up per capita incomes, disappointingly, income inequality within countries has not followed suit and has instead remained broadly stable. And gender inequality has declined more slowly than in other regions.
Reducing inequality also increases growth
My colleagues in the IMF’s African Department sought to shed some light on this issue in our latest economic outlook report for the region. We all have our personal views as to why inequality is an issue, but we were particularly interested to see whether high inequality was detrimental to economic prosperity in the region, building on earlier work done for more advanced economies.
We found that inequality indeed has an adverse effect on growth in the region. More specifically, our research finds that real per capita GDP growth in sub-Saharan African countries could be higher by close to one percentage point per year if inequalities—both income and gender—were reduced to the levels observed in the fast-growing economies of Southeast Asia, such as Indonesia, Malaysia, the Philippines, Thailand and Vietnam. That’s as much as half of the growth gap between those countries and sub-Saharan Africa.
Of course this finding does not apply uniformly to all 45 countries in Sub-Saharan Africa:
In the region’s low-income and fragile countries such as Niger and Mali, the drag on growth is stronger from infrastructure and human capital gaps and, to a lesser degree, from the prevailing gender Hence, addressing infrastructure and human capital gaps should remain the policy priority to raise growth.
In the region’s middle-income countries such as South Africa, on the other hand, there could be a growth dividend for policies directly aimed at reducing inequality. There, the growth payoff from reducing income and gender inequalities to the Asian countries’ level appears higher than that of closing the infrastructure gap.
For oil exporters such as Angola and Cameroon legal restrictions on women’s participation in economic activities combines with the infrastructure gap as the most important factors explaining the growth differential with the Asian countries.
At a time when the growth outlook in the region is getting cloudier, these findings make it all the more important for governments to prioritize policy actions and target those measures that could best unleash the growth potential AND lift inequality. I see three main avenues to follow:
First, fiscal policy actions have an important role to play. Many tax systems in the region depend on exemptions and reduced rates for basic goods that weaken the potential yield of the Value Added Tax, while at the same time most revenues foregone accrue to the better off. Even though the poor spend a large proportion of their income on basic goods, the rich are likely to spend more in absolute terms. That’s why the IMF has argued for phasing out VAT exemptions while transforming expenditure policy into a sharper tool for addressing inequalities. Abolishing fuel subsidies, which mainly benefit middle and higher income households, and replacing them with transfer schemes targeted at poor households would also go a long way toward reducing inequality.
Second, better access to financial services can also help address inequalities. For example, establishing credit bureaus that centralize information can encourage banks to lend to new customers, because information about these potential customers becomes easily available. Meanwhile, some African countries, in particular Kenya where nearly 60 percent of the adult population has access to mobile money, have demonstrated how the use of mobile banking can help disseminate access to financial services to remote regions.
Third, abolishing legal restrictions for women would provide quick gains for countries that need to strengthen growth. For example, eight countries in Sub-Saharan Africa still have ten or more such restrictions, including women not being able to open a bank account or start a new job without the consent of their husband. Removing these restrictions where they exist is a low hanging fruit to support growth, especially at a time when many countries are being hard hit by slumping commodity prices. They should take solace in the experience of countries like Namibia where the removal of restrictions resulted in an increase in participation in the labor force and hence stronger growth.
More inclusive and better-distributed growth also has implications for sustainable growth. Sub-Saharan Africa’s growth record over the last decade or so has been impressive, but less so its record on the inclusiveness front. I believe our work shows how countries can reverse these premises: With growth slowing down in the region, it is more than ever time to make more progress on inequality.
As the Group of Twenty leaders gather in Turkey this weekend, they will have on their minds heartbreaking images of displaced people fleeing countries gripped by armed conflict and economic distress. The surge of refugees in the last few years has reached levels not seen in decades. And these numbers could increase further in the near future.
The immediate priority must be to help the refugees—who bear the heaviest burden, and too often tragically—with better access to shelter, health care and quality education.
Many of the countries neighboring conflict zones—which have welcomed most of the refugees—have stretched their capacity to absorb people to the limit. To support additional public services for refugees, they will require more financial resources. The international community must play its part. With the IMF’s support, for example, Jordan has been able to adjust its fiscal targets to help meet this need.
Those countries that have done most to welcome displaced people are to be commended. Some countries have been willing to receive large flows of refugees and done their utmost to provide them with food and shelter. Others, especially among advanced countries, should look at how they might increase their scope for admitting more refugees.
Ultimately, however, one thing is very clear: no country can manage the refugee issue on their own. We need global cooperation.
Migration’s economic implications
Cross-border migration, of course, comes in several forms. It includes both refugees who are forced to leave their country and economic migrants who voluntarily leave in search of opportunities. This total number of migrants has risen significantly in recent years, now accounting for over 3 percent of the global population.
Regardless of the motivation, the decision to uproot and leave one’s home is difficult and can be risky. But once people pass through the journey, resettle, and find stability, migration can—with the right policies—have an overall positive economic impact: for migrants, their host country, and their country of origin (as shown in staff analysis).
Migrants can boost a country’s labor force, encourage investment and boost growth. Preliminary IMF calculations show a modest positive impact on growth from migrants in EU countries, for example.
More importantly, migration can also help address the challenges from aging populations in a number of advanced countries. Over the medium term, our research shows that migrants could help reduce pressures on pension and health spending; and in the near term, the net budgetary impact tends to be relatively small.
Brain drain and remittances
What about countries experiencing an outflow of migrants? Certainly, these countries often lose their youngest and brightest, with important implications for growth. This has been the case in Caribbean countries, for instance, which lost over 50 percent of their high-skilled labor between 1965 and 2000.
Remittances help to counterbalance some of these effects. Indeed, they can be a very important source of income—which has been shown to lead to higher education and health spending. In 2014, remittance flows to developing countries amounted to $436 billion, more than half of total net foreign direct investment and well over three times as much as official development assistance.
Moreover, if the transaction costs of remittances could be lowered further, even greater benefits would accrue. Estimates suggest that reducing remittance costs to one percent of the amount transferred could release savings of $30 billion per year, more than the entire bilateral aid budget to sub-Saharan Africa! We should strongly support the G-20’s commitment to reduce remittance transaction costs.
Policies to better integrate migrants
The key challenge is to facilitate the smooth integration of newcomers—whether economic migrants or refugees. No doubt, there will be hardship and difficulties at the outset, whether logistical, fiscal, or political, but these need to be weighed against the benefits that accrue over the medium to longer term. Easier said than done—but it can be done.
What does a well-designed integration policy include?
First, strengthening the ability of labor markets to absorb migrants—by enabling immediate ability to seek work and providing better job matching services.
Second, enhancing access to education and training—by providing affordable education, language and job training.
Third, improving skill recognition—by adopting simple, affordable and transparent procedures to recognize foreign qualifications.
Finally, supporting migrant entrepreneurs—by reducing barriers to start-ups and providing support with legal advice, counseling and training.
In Sweden, for instance, an introduction program for refugees provides employment preparation and language training for up to 24 months, together with financial benefits. The program is beginning to help the latest inflow of refugees to find jobs—even though it will inevitably take time to fully succeed.
A global call
Demographic forces, globalization, and environmental degradation mean that migration pressures across borders will likely increase in the coming decades. And cross-border challenges demand cross-border solutions.
Global policy efforts, therefore, must focus on better cooperation and dialogue among the affected countries. This includes promoting fair burden-sharing, facilitating remittance flows, protecting labor rights, and promoting a safe and secure working environment for migrants.
The IMF will also do its part, including through our financing and capacity building. In addition, over the next few months, our analysis on this issue will feed into our policy advice to countries in Africa, Europe and the Middle East dealing with massive population movements.
Migration is a global issue. We must all work together to address it.
As a result of the oil price plunge, the major oil-exporting countries are facing budget deficits for the first time in years. The growth in the assets of their sovereign wealth funds, which were rising at a rapid rate until recently, is now slowing; some have started drawing on their buffers.
In the short run, this phenomenon is not cause for alarm. Most oil exporters have enough buffers to withstand a temporary drop in oil prices. But what will happen if low oil prices persist, and how will policymakers react?
We explore here the fallout from low oil prices on sovereign wealth funds in oil-exporting countries and find that that they have important domestic implications. The impact on global asset prices will depend on the extent to which the unwinding of oil exporters’ sovereign wealth funds is not compensated by portfolio adjustment in other parts of the world.
The rise of sovereign wealth funds
In the early 2000s, high oil prices brought about a massive redistribution of income to oil exporters, resulting in current account surpluses and a rapid buildup of foreign assets. Governments established new sovereign wealth funds or increased the size of existing ones to help manage the larger pool of financial assets.
The total assets of sovereign wealth funds are concentrated in a few countries. As of March 2015, it is estimated at $7.3 trillion, of which $4.2 trillion are oil and gas related. While there are large differences across sovereign wealth funds, available information on their asset allocation points to a significant share in equities and bonds.
Oil prices and the redistribution of global income
With high oil prices throughout the 2000s, the aggregate current account balance of exporters reached about $630 billion in 2011, exceeding that of emerging Asia combined. The current account surpluses of oil exporters are vanishing in 2015, however, and it is unlikely that this decline will reverse soon. On current projections, their combined current account balances could recover to about $200 billion in 2020.
In contrast to the 2000s, the recent oil price drop has been driven mainly by supply factors that may lead to a decoupling of the paths of asset accumulation between these two groups of sovereign wealth funds. The rate of asset accumulation by sovereign wealth funds in emerging Asia—mostly oil importers—is likely to rise but it will likely decline for the funds in oil-exporting countries. Of course, much will depend upon the strategic asset allocation choices made by the largest sovereign wealth funds in the low oil price environment.
Impact on global asset markets
The overall impact of the fall in oil prices on asset prices will depend, among other things, on whether oil importers have a lower marginal propensity to save than oil exporters. The fall in oil prices tends to transfer wealth from oil exporters to high-saving emerging Asian countries—but also to many other countries, including large advanced economies, some of which have a low propensity to save. From a global perspective, this implies lower global saving and higher interest rates.
Precisely how much the savings of the sovereign funds of oil producers decline depends, of course, on changes in their fiscal and external current account balances. Sovereign wealth funds’ market operations will also depend on how much their governments opt to borrow or draw on their fiscal buffers, including those kept with sovereign wealth funds. Saudi Arabia issued its first sovereign bonds since 2007 to local banks to finance its fiscal deficit.
In addition, oil-exporters’ sovereign wealth funds are significant holders of U.S. treasury debt and private equity. Our back-of-the-envelope calculations show that, prior to the oil price decline, countries of the Gulf Cooperation Council (GCC) alone were projected to have a combined fiscal surplus of about $100 billion in 2015 and of about $200 billion between 2015 and 2020, but are now likely to reach a combined deficit of $145 billion in 2015 and over $750 billion in 2015-20. This implies change in net assets available to sovereign wealth funds in the GCC alone of $250 billion in 2015 and $950 billion in 2015-20.
Considering the expected tightening in U.S. monetary policy—especially against the background of concerns about market liquidity, increasing risk aversion, and falling reserve holdings by some emerging markets—a substantial change in the path of asset accumulation by sovereign wealth funds will likely have a direct effect on financial markets.
A study by economists at the Federal Reserve has shown that if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, five-year Treasury rates would rise by about 40 to 60 basis points in the short-run, with a long-run effect of about 20 basis points.
What does all this mean for the accumulation of sovereign wealth in oil-exporting countries, at least in the medium term?
The low price environment is likely to test the relationship between governments in oil-exporting countries and their sovereign wealth funds. Absent cuts in public expenditures, governments will likely be transferring less revenue than before to these funds. At the same time, pressures to draw down on sovereign wealth funds’ assets will probably rise.
Among Middle East oil exporters, only the United Arab Emirates, Qatar, and Kuwait’s fiscal buffers will last for over 25 years on current fiscal plans and oil price projections, according to our estimates. Bahrain and Yemen will exhaust them in the next two years, while most other countries will run out of buffers in four to seven years.
Even though they’ll still be able to borrow to finance their spending, governments of these oil-exporting countries would probably do well to tighten their belts if they hope to achieve the dual objective of sharing oil wealth equitably with future generations and economic stabilization.