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G20_global_banking_system_and_poverty
Last February, a group of G20 ministers met in Australia to evaluate and establish global growth goals for the next five years. In this meeting, they reasserted their countries’ commitment to “carefully calibrated and clearly communicated” monetary policy settings. According to a communique published following the meeting, G20 members will not allow for complacency when it comes to fostering growth measures. While specific plans have yet to be developed, the main goal is to raise the global GDP by 2 percentage points in the next five years, which promises to create millions of new jobs.

Supporting these plans, the International Monetary Fund (IMF) issued a report outlining strategies to raise the global GDP by 2.25 percent.

Accordingly, it states that while this established goal is ambitious, it is not unrealistic. However, as recovery from the 2008 recession remains disappointing, the global economy “remains far from achieving strong, sustainable and balanced growth.” Coupled with issues of demand and high levels of debt, one element of weakness remains the volatility of the financial system.

In another report, the IMF has announced that regulators have not done enough to stabilize the global banking system and protect taxpayers from another “too big to fail” situation. Banks and investment firms remain too big and too intertwined, risking another episode similar to the 2008 crisis. The risk of big banking bailouts using taxpayers’ money remains very much alive.

According to the report, regulations implemented by western governments could be “mutually destructive” and undermine their ability to address future bank failures. Moreover, policymakers have failed to make banks stand on their own. Through implicit subsidies and coordinated rescue plans, big financial institutions remain tethered to the government. In fact, accounting for the various subsidies these institutions perceive, brings the total bill close to the 2008-09 government bailouts. While in the U.S. these implicit subsidies have been limited to 70 billion a year, in the Eurozone they reach 590 billion.

The IMF acknowledges that there is substantial progress towards making the global banking system more secure, especially by forcing them to hold more capital. However, to prevent another crash, this should be coordinated along more structural reforms across countries. If not, the IMF predicts that another financial crisis could cost the Eurozone another 300 billion in bailout and the rest of the world much more in a weakening economy.

In a world where state economies are highly interconnected and interdependent, this translates in funds being diverted away from foreign assistance. While governments have to be ready to spend billions of dollars to remedy a failure in the financial system, foreign aid funding is in constant danger of being reduced. Indeed, the U.S. foreign aid budget has been reduced by almost 20 percent in the last 15 years.

To put things in perspective, between 2008 and 2009, bailouts of various banks and investment firms reached a total of 204 billion dollars, out of which only 90 billion has been repaid. This is equivalent to the annual budget of the Gates Foundation, USAID, UNICEF, PEPFAR, UNDP, World Food Program, UNCHR and the Millennium Challenge Corporation all together.

G20 member countries remain committed to creating a climate of economic stability. In preparation for the Brisbane summit next November, they aim to specifically map out reforms in response to the 2008 global financial crisis. This would entail more resilient financial institutions, ending “too big to fail,” and making the world of derivatives safer.

– Sahar Abi Hassan

Sources: The Guardian (1), The Guardian (2), CNN Money
Photo: Modernize Aid

Greek_financial_crisis_Zeus_economy
In 2013, Greece faced its sixth consecutive year of a devastating recession. In order to secure $325 billion in rescue funds from the European Union and the International Monetary Fund, the Greek government resorted to cutting jobs and wages, actions that consequentially incited mass protests and unrest.

As a result, according to statistics released by the Hellenic Statistical Authority (HSA,) nearly a quarter of Greece’s population is susceptible to poverty. In a nation composed of 11 million residents, 2.75 million of whom are at risk of poverty, Greece has the highest poverty risk in the E.U. Among those at risk, the most susceptible individuals are single parents and unemployed men. Approximately half of jobless men in Greece are at risk of poverty, while single-parent households are also in a vulnerable position.

A factor contributing to the anticipated poverty of Greece’s population are the projected social welfare budget cuts for 2014. Between 2012 to 2013, the welfare budget had been cut by almost seven percent. However, the projected budget reduction for social welfare in 2014 is a staggering 18%, or $406 billion.

Furthermore, according to the Public Policy Analysis Group at the Athens University of Economics and Business (AUEB) discovered that within the last year, approximately 14% of Greeks had earned an income that was less than the living standard. In contrast, in 2004, only two percent of the population had earned an income below the standard of living.

Since 2008, the crisis in Greece had steadily increased in volatility. According to ESYE statistics agency, an increase in material deprivation in at least four of the nine basic categories of goods and services for human survival occurred during the past five years. To clarify, basic needs include the ability to endure unforeseen financial expenses, eat meat every two days, and heat one’s home. However, due to the economic crisis, approximately 76.3% of poor Greeks were directly affected, while 30.8 percent of the non-poor population suffered as well.

Without adequate government intervention, a substantial portion of the Greek population will remain at risk of poverty throughout 2014. With poverty and struggle in sight, internal social conflict in Greece will continue to rise as well. However, with aid from the E.U. and gradual stabilization, the nation can begin to recover.

Phoebe Pradhan

Sources: International Business Times, The Telegraph, Zero Hedge, AFR
Photo: Read My Mind

Hidden Cost of Energy Fuel Subsidies
Nobody wants to pay more for gas.

Fossil fuels account for the vast majority of energy production, and, as non-renewable resources, the price has steadily increased for energy as supply dwindles and demand has surged.  Throughout most of the world, especially the richest nations, the true cost of energy is not seen due to a wide array of fuel subsidies and energy “support.”

There is not much agreement on what exactly constitutes a fuel subsidy but, all seem to agree that a lot of money is being spent on supporting various energy industries by artificially reducing the direct cost of production and consumption. So, while many tactics are employed in reducing energy costs, very few countries accurately report what they spend. Further, assessing the fiscal damage to the environment as well as the lack of funds generated by not imposing taxes (such as those on carbon emissions) become even trickier to estimate.

The International Monetary Fund estimates global fuel subsidies at 1.9 trillion USD, or 8 percent of all governments’ revenue. These estimates are extremely conservative, though, considering the dollar amount they use for the social cost of carbon, $25 per ton, is less than a third of what the UK and independent analysts have found. Also, the estimate does not include the vast majority of energy producer subsidies, only looking at consumer subsidies for oil and coal.

The impact of fuel subsidies is far-ranging. Pre-tax subsidies, or those that are direct cost reductions from the government to consumers, come at a global cost of 480 billion USD according to IMF’s report on 2011’s data. These are funds that are being deprived from social programs for urgencies such as roads, water distribution and poverty alleviation.

Subsidies are often unequally distributed. In developing countries, the IMF found the top fifth of societies in household income reap six times the subsidies of anyone else. The cost of these subsidies is offset by increased prices of other goods and services –resulting in a 6 percent decrease in income for every $0.25 cost decrease per liter.

Artificially increasing demand and consumption for fossil fuels reduces investment and growth in alternative fuel sources as much as the growth of many other markets — especially, exports.

Though developing countries appear to receive the most negative impact, developed nations such as the US and Russia spend the most through post-tax subsidies. Estimates on US subsidies range from $10 billion to $52 billion and do not include any of the associated health or environmental costs.

So, what can be done?

Various countries have successfully phased out tax reduction programs in the coal industry such as Poland, Germany and most developed nations do not offer pre-tax subsidies.  Unfortunately, little progress has been made on oil subsidies, which account for over 2/3 of the total. Developed countries will have to continue to lead the charge in reforming these harmful economic policies.  Transparency to the accurate amounts of what is actually being spent and to whom the money is going to may very well be the first step toward achieving more effective means of viable economic stability and sustainable progress in the use of depleting resources.

– Tyson Watkins

Sources: IMFIEA, Oil Change International, Grist, BBC News, Climate Progress
Photo: Giphy.com

International-Monetary-Fund-report
While 1.2 billion people live in poverty, subsisting on less than $1.25 a day, a recent study published by the International Monetary Fund states that 900 million people are at risk of falling into poverty if another economic crisis occurs.

A significant recession such as the Great Recession that hit the global economy in 2008 could increase the number of people living in poverty by as much as 75 percent.  This would add three times the size of the U.S. population to the world’s poor, greatly increasing the strain on humanitarian and foreign aid organizations.

The IMF report does praise the work that has been done to alleviate global poverty and bolster the world economy, but it cautions against reductions in foreign aid.

While USAID creates new markets and trade partners for the United States, roughly 40 percent of the world’s population remains unemployed. The recent recession exacerbated income inequalities, making it more difficult for the employed to support their families on their existing income.

A subsequent recession could occur if the eurozone, already destabilized by the Cyprus bailout, is further disrupted, so the U.S. government would have to maintain or increase USAID in order to support expansions to its programs.

The number of people currently living in poverty already makes up about 17% of the world’s population, and 900 million more would raise this number to 30 percent.

Katie Bandera

Sources: IMF, The Guardian, The Huffington Post
Photo: Worldwide Center

Sierra_Leone_Conflict_diamonds
The Sierra Leone civil war destroyed the national economy, making it one of the poorest countries in the world. The civil war that ravaged the small west African nation from 1991-2002 was the impetus for a huge displacement of people within Sierra Leone, leading to a downturn in the economy that left almost 75% of the population living in extreme poverty.

Sierra Leone’s main export is diamonds. Diamonds have created a significant wealth gap in Sierra Leone that has benefited the rich and paralyzed the poor for decades. The country’s dependence on this single mineral resource impedes economic growth. In order for Sierra Leone to lift itself out of abject poverty, the economy must diversify. Economic diversification is exceptionally difficult, however, with around 50% of the adult working population working in subsistence agriculture. Luckily, the IMF set up a program in 2010 to deliver $45 million to Sierra Leone through 2013.

Over the last few years, Sierra Leone has developed its offshore oil resources as another source of income. This, however, does not negate the enormous need for international aid to power the development process and prevent increased in inequalit in Sierra Leone. In order for the economy to stabilize, foreign aid must be delivered on a consistent basis and domestic peace must be preserved at all costs.

– Josh Forgét
Source: BBC News, Rural Poverty Portal, CIA World Factbook
Photo: Human Trafficking Movie Project

Global Economic Growth & Stability Crucial for Fighting Poverty
Rising income inequality around the world is putting anti-poverty efforts at risk by hurting global economic growth and stability, according to International Monetary Fund Managing Director Christine Lagarde.

In a speech to the annual Bretton Woods Committee in Washington, DC on May 15, Lagarde outlined three critical points: economic stability is essential for poverty reduction; growth and equity are mutually reinforcing and important parts of sustainability; and fiscal policies can improve income equity and lower poverty rates.

The theme of the annual Bretton Woods meeting was “ending poverty in a generation.”

Over 35 percent of the world’s wealth is controlled by just the top 0.5 percent of the world’s population Lagarde noted in her speech. The trend is a growing concern for the world’s economy, and one the IMF is starting to examine more closely.

Over the past 25 years, rising income inequality has become an emerging issue for policymakers globally with increases in most advanced and developing countries. The global recession in recent years has created a lot of economic upheaval, she noted, and the IMF has stepped up its efforts to help low-income countries cope with crisis. “For this reason, the first best contribution that the IMF can make to reducing poverty is to help avoid crises.”

Global economic growth must be paired with income equity in order to insure stability, Lagarde said. She called for preservation and expansion of the “total size of the economic pie” available, along with a more equitable distribution of resources.  According to IMF research, societies with more equal income distribution are more likely to achieve lasting growth, which also helps alleviate poverty levels, Lagarde said.

“Equality is good for growth, but is growth good for equality? It may be a necessary condition for reducing poverty, but it has not always reduced inequality,” Lagarde said.

– Liza Casabona
Sources: IMF
Photo:
Le Monde

History of the IMF
The IMF, or International Monetary Fund, was founded in July of 1944 at the International Monetary and Financial Conference, in New Hampshire. The organization was entered into force in 1945, and the laws were adopted in March of 1946. In the months following the organization’s creation, executive directors and the first managing director, Camille Gutt of Belgium, were elected.

The harsh economic circumstances of the 1930’s and 40’s led the founders of the IMF to plan an institution charged with overseeing the international monetary system in order to prevent self-defeating financial policies. The formation of the IMF would ensure that exchange rate stability was maintained and encourage its member countries to eliminate exchange restrictions that could potentially hinder or complicate trade. In March of 1947, France became the first country to borrow from the IMF.

 

The IMF: A Cornerstone of the Global Economy

Between 1945 and 1971, member nations of the IMF agreed to keep their exchange rates at a level that could be adjusted only to correct disequilibrium in the balance of payments and only with the IMF’s consent. This system, known as the Bretton Woods system, remained in place until 1971 when the US suspended the convertibility of USD into gold.

After the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange agreement they wish, other than pegging their currency on gold. Countries are free to allow their currency to float freely, peg it to a different currency, adopt another country’s currency, or other methods.  The IMF’s transition to floating exchange rates made it easier for economies to adjust to external shocks.

The IMF has since been redefined by the major global economic crises around the world. Since the mid-1970s, the IMF has helped many of the world’s poorest countries by providing concessional loan programs. These programs came during the oil crisis of the 1970s. The oil crisis forced many countries to borrow from commercial banks, which led to interest rate increases, and subsequently, an international debt crisis. The soaring interest rates caused poorer, developing, and non-oil-producing countries to pay roughly $22 billion dollars between 1978-81.

The financial crisis continued to worsen into 1982, when the IMF coordinated global response, realizing that nobody would benefit if the country after the country failed to repay its debts. This strategy calmed the initial panic; however, it also highlighted the long road needed to eliminate the problem.

After the fall of the Berlin wall in 1989, the organization witnessed its greatest influx of member states since the 1960s. The IMF was essential in assisting countries from the Soviet Bloc transition from central planning to market-driven policies. After several years of intense reform and IMF guidance, most economies had transitioned to market economy status.

In 1997, the Asian financial crisis taught the IMF several important things. First, they would need to pay a great deal more attention to weaknesses in countries’ banking sectors and to the effects those weaknesses had on their macroeconomic stability.  The IMF also realized that the institutional prerequisites for successful liberalization of international capital flows were more daunting than they had realized. And finally, the IMF realized that they needed to re-evaluate how fiscal policy should be adjusted in a time of economic crisis.

The global economic crisis of 2008 was preceded by large imbalances in global capital flows. This financial crisis uncovered fragility in advanced markets. In response to the recognition that the IMF would be strained during this financial crisis, the fund lending capacity was tripled to $750 billion. They implemented a variety of lending policies and flexible credit lines to countries with strong economic fundamentals, while also assisting poorer, less developed nations.

The IMF has been and continues to be a quintessentially important monetary cornerstone of the international global economy. The IMF is responsible for many of the world’s most comprehensive and influential economic decisions of the 20th and 21st centuries. Without the IMF the global economy would be a drastically different place.

– Caitlin Zusy
Source IMF

IMF and World Bank Back Bold Poverty Agenda
On Saturday both the IMF and World Bank backed a bold poverty agenda to eradicate extreme poverty within a generation. The goal comes from the Development Committee – a subcommittee of both the IMF and the World Bank.

This bold poverty agenda serves as a “historic opportunity” to make a difference. World Bank president Jim Yong Kim has called the initiative an important step towards the eradication of world poverty, but one that will require focus, innovation, and commitments from everyone in order to succeed.

The logistics of the Development Committee’s plan include reducing the percentage of people who currently live on less than $1.25 a day to three percent of the global population by 2030. Additionally, the committee would like to work towards raising the incomes of the poorest 40 percent of people in each country.

While this seems to be a noble and necessary goal, the committee did note the obstacles they will need to overcome to be successful. The committee and agenda will need to be supported by strong growth across the developing world, as well as an unmatched translation of growth into poverty reduction in several of the world’s poorest countries.

Among the aforementioned challenges, the committee has also recognized the institutional and governance challenges that will have to be overcome, along with substantial investments in infrastructure and agricultural productivity. All of the above challenges, while difficult to overcome, express the World Bank and IMF’s renewed commitment to eradicate extreme poverty.

The committee’s exuberance for this goal stems from Dr. Kim’s passion for eradicating global poverty. The committee members have supported Dr. Kim’s vision. Committee chairman, Marek Belka, explains that Dr. Kim has been very influential in expressing the World Bank Group as a partner in the fight against extreme poverty.

This announcement aligns closely with the World Bank’s core mission of creating a world free of poverty and follows the recent spring meetings in Washington.

– Caitlin Zusy 

Source: AFP
Photo: Google

IMF Study Shows Possible Consequences of Economic RecessionThe International Monetary Fund (IMF) released the results of a new study, showing that another global economic recession could throw nearly 900 million people back into poverty.

Although global poverty within the last decade has improved, over 1.2 billion people worldwide still live on $1.25 a day, and the IMF warns that the global economy that initially brought millions out of poverty is still extremely unsteady and at risk of failing.

The report cites global unemployment numbers, which are at a 20-year high, that shows unemployment around the world is now at 40 percent. The report goes on to state that an economic event, such as the recession of 2007-2009, could have significant negative effects on the world’s poorest people. Experts are alarmed with the recent economic woes in Cyprus that caused “eurozone chaos,” and also cite that the U.S. and Europe are close to another economic downturn.

Doubts in the U.S. economy have been exacerbated by the recent sequester, in which spending cuts could lead to hundreds of thousands of job furloughs and losses.

Christina Kindlon

Source: Huffington Post

cyprus-protests
After scrapping a potential bailout deal which would have seen money taken directly from citizens’ deposit accounts, Cyprus is struggling to reach a new agreement that can set it on a path to economic prosperity. The European Central Bank (ECB) set Monday as the deadline for Cypriot action if the government wants to receive the proposed €10 billion ($13 million) in funds to keep banks afloat.

If a deal cannot be reached, there is a large danger of a bank run in Cyprus, a phenomenon which occurs when too many depositors try to withdraw their funds from a bank at one time. With fractional-reserve banking, a financial institution does not actually keep everyone’s money, using some of it to lend to customers seeking a loan. In return, depositors are paid interest on the sums in their accounts. When banks are known to be on the verge of collapse, fearful depositors will naturally want to take all their money out to put it somewhere safer. If everyone does this at once, the banks will not have enough money to fulfill all the demand for cash, creating even further complications for their finances. A bank run would devastate the entire Cypriot economy, ruin the confidence of international credit markets, and potentially set the stage for Cyprus to leave the Eurozone.

The group of lenders known as the “troika,” comprised of the European Commission, the International Monetary Fund (IMF), and the ECB, is demanding that €5.8 billion for the Cyprus bailout be funded by the country’s government. The proposed deposit tax that was scrapped is expected by some to return in the final version of the deal, because the alternative would be to dip into pension funds, a much more controversial tactic. Cyprus is allegedly considering implementing capital controls in order to prevent too much money from leaving the country when banks reopen on Tuesday.

Jake Simon

Source: New York Times
Photo: The Guardian