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February 2012

A State of Hope in a State of Uncertainty

Submitted by Otaviano Canuto on Wed, 02/29/2012 - 12:04

Photo: Dmitry Kirillov / World BankIn a world in economic turmoil, calls for greater fiscal austerity, leaner social entitlements, and smaller government expenditures are seemingly ubiquitous. From the United States to the Euro Zone, the size and role of government are being questioned. Yet, at the same time, the recent financial crisis has highlighted the importance of the state as a regulator of the financial system. Just think about who was needed to step in to protect “too big to fail” financial institutions, extend social protections to the most vulnerable, and preserve the stability of the financial system at a time when no one else could?

Beyond these fluctuations in public opinion about the role of government, there is more the state can do to help drive post-crisis growth. In addition to its role in regulating financial systems, the state can play a very vital role as an investor in the knowledge economy by supporting policies and making investments that catalyze both market and firm growth. For example, government intervention in higher education is a primary area for enhancing growth, as a laissez-faire economy will tend to generate too few of these investments. Another example is in climate-change policy, where government can have a role in redirecting technical change to support green growth.

Another key area in which the state can intervene in the post crisis world is to serve as a guarantor of the social contract at a time when coping with the social costs of the crisis and creating jobs must go in tandem with reducing indebtedness. In the context of weakening public finances, tightening credit, and surging global imbalances, this pact must allow the state to manage the public deficit, while ensuring social peace and avoiding strikes and protests.

How to Ascend after Declining?

Submitted by Otaviano Canuto on Wed, 02/22/2012 - 13:08

growthThe state of the global economy is now more troubled than what most pundits had predicted. The great recession of 2007-09 has left permanent scars and the global recovery has lost steam. In the industrialized world, the Eurozone is struggling to save its common currency and avert an even larger debt crisis. Across the Atlantic, although things are looking slightly better, the United States still faces damaged household balance sheets, depressed consumption, and persistent unemployment.  In the developing world, the remarkable role that emerging markets have played as alternate engines of global growth is no longer certain. And this is truly worrisome because in the years that followed the recession, developing countries came to the global economy’s partial rescue, helping advanced economies from slipping into an even deeper recession.


In 2010 and 2011, developing countries grew 7.3 and 6 percent respectively, compared to the 3 and 1.6 percent growth of high-income countries, according to the World Bank’s latest Global Economic Prospects. Nevertheless, growth in several major developing countries like Brazil, China and India is significantly slower than earlier in the recovery, mainly reflecting a tightening of monetary policy to combat rising inflationary pressures but also the low-growth path in advanced economies. As a result, developing countries are now expected to grow only 5.4 percent this year.

Is the landscape of innovation changing?

Submitted by Justine White on Thu, 02/16/2012 - 01:00

Is the landscape of innovation, traditionally concentrated in a handful of OECD countries, shifting worldwide? To what extent has the recent economic crisis affected this change? And what may be the implications of this shift for global growth?

It was to tackle some of these pressing questions that a high-level symposium, bringing together policymakers from developing and developed countries including from Vietnam, Brazil and China; leading academics including Harvard University’s Philippe Aghion; and experts met in Paris in January 2012 at the invitation of the OECD and the Growth Dialogue, in partnership with the World Bank Institute.

Innovation has long been identified as central to sustained economic growth. With 2012 real GDP growth forecast globally at

Capital Account Liberalization: Are there Lessons to be Learned?

Submitted by Otaviano Canuto on Wed, 02/15/2012 - 11:15

Photo: WikiCommons User, CopyLeftAfter the Second World War, advanced economies began an ambitious process toward capital account liberalization, which prioritized the liberalization of trade, the maintenance of fixed exchange rates, and a commitment to current account convertibility. Full capital account liberalization took over 30 years for advanced economies to achieve.

In the past, the pursuit of capital account liberalization—that is, the ability to freely undertake transactions such as foreign direct investment and the purchase of foreign securities—was motivated by different reasons in different countries. In the case of the US and UK, liberalization of capital accounts was motivated largely by their status as global currency reserve issuers and as international financial centers. For Europe, liberalization was driven primarily by the pursuit of European integration and a desire to create a common market.

That was then, this is now. Do these experiences bear any lessons for developing countries that want to pursue capital account liberalization today? Do these models provide a template for countries seeking to internationalize their currencies? Certainly, in an increasingly multipolar world, where the US dollar now shares the stage with the Euro, Yen, and Pound, such questions need to be asked. This is especially true for emerging economies, such as the economic powerhouse of China whose currency, the Renminbi, is taking on ever greater importance in international markets. The Chinese authorities have manifested their desire to see their currency become a major global reserve currency over the longer term, for which China’s capital account would have to be liberalized.

Yet, China’s path to capital account liberalization—should it choose to pursue such a policy—is fundamentally different.

Unemployment rates are falling—but what about youth and women?

Submitted by Tamar Manuelyan Atinc on Mon, 02/13/2012 - 01:00

Persistently high unemployment rates continue to trouble policymakers in developed and developing countries alike—but the recent Job Trends report brings some good news. After successive years of disappointing labor market performance, several countries in Eastern Europe may finally be turning the corner. These countries suffered most during the financial crisis, so the recovery in job creation is much needed to boost family incomes. In the rest of the developing world, the headlines are positive even while we see some moderation in employment and wage growth in Latin America and East Asia.

I have two concerns at this stage. I suspect most observers of the world economy share my first concern that the incipient recovery is fragile, given the continuing economic turmoil in Europe. But I am also concerned with what’s happening with specific groups, such as youth and women. I have a hunch that the recovery is and will be uneven with youth, women and the less skilled having a harder time finding jobs—even if aggregate numbers show steady gains. The crisis hit young workers hard, particularly young men, and countries are dealing with long-term consequences. Unfortunately, few countries know what’s happening with groups of workers because the data are not collected routinely or if they are, the results are available only with a relatively long lag time.

Where recent data are available, the story is mixed. Although youth unemployment remains alarmingly high at 20-30 percent,

Are Emerging Markets Leading the Way in Job Creation?

Submitted by Otaviano Canuto on Thu, 02/09/2012 - 11:09

Photo: Wiki Commons User_KozuchWith a few exceptions, industrialized nations are still struggling with unemployment, unable to recover completely from the 2008 economic crisis. In the U.S. things seem to be improving as the unemployment rate fell in January to 8.3 percent, its lowest level since early 2009, according to the U.S. Department of Labor’s Bureau of Labor Statistics. But all in all, whether it is lack of job opportunities for young people around the world, or that the global economy is not generating as many jobs as needed to keep up with labor force growth, the global job narrative is one of doom and gloom.


Nevertheless, there are reasons for optimism, particularly in the developing world. While major industrialized nations still struggle with unemployment, emerging markets are certainly doing better.


According to the new edition of Job Trends, released by the World Bank today, emerging economies continued their slow but steady job recovery in the third quarter of 2011. We are talking about countries like Brazil, China, Mexico and Turkey. But they are not the only ones. Across Eastern Europe and Central Asia, as well as in East Asia and Latin America, the employment picture has been improving over the past year in the 23 developing countries included in our global sample.

Why Dwell Time Matters

Submitted by Henry Sandee, co-authors: Julia Oliver, Natalia Cubillos Salcedo on Tue, 02/07/2012 - 01:00

The state-owned operator of Indonesia’s Tanjung Priok Port is taking major steps to decrease congestion at the country’s main gateway. The company, Pelindo II, recently announced it will increase storage fees at the port to discourage shippers from leaving containers there for long periods of time. It has also said it will install a new information technology system to better monitor and direct traffic at the port.

The two initiatives are an effort to boost the performance of a port that handles two-thirds of Indonesia’s international trade. The container traffic at Tanjung Priok has grown at a rate of about 20 percent the last two years and is expected to double by 2015. But containers arriving at the port spend an average of 6 days to obtain clearance and get removed, one of the highest “dwell time” rates in the region and up from 4.9 days in 2010.

Economists and government officials are trying to bring down this number. As a statistic, dwell time is a vital measure of a country’s ease of trade. When dwell time is high,

Should We Still Worry About Food Prices?

Submitted by Otaviano Canuto on Wed, 02/01/2012 - 10:31

Food prices are finally coming down after a year of spikes and high volatility. But we must remain vigilant. Prices of certain foods remain very high, and millions of people around the world are still at risk of suffering from malnutrition and hunger.

Let’s get to the numbers first. According to the World Bank’s latest Food Price Watch quarterly report released this week, global food prices declined 8 percent between September and December of 2011 due to increasing supplies and continuing uncertainty about the global economy. So in December 2011, the World Bank Food Price Index closed 7 percent below the December 2010 levels, and 14 percent lower than its February peak. Yet, the 2011 index average is 24 percent higher than the year before, and domestic prices of key staples remain dangerously high in many countries.

Take the case of maize. In Mexico, for instance, maize was up 106 percent from December 2010 to December 2011, making tortillas more expensive. The price of wheat in Belarus went up 88 percent, and sorghum increased 57 percent in Burkina Faso. No matter where you look, someone somewhere is paying more money to put food on the table, whether it is Mexican quesadillas or Burkinabe “to” (porridge).

It’s true that high food prices are not bad for everybody. While the poor in urban areas and rural net consumers of food are usually threatened the most, farm producers tend to benefit. Yet when there is so much price volatility--as we experienced last year--uncertainty very often gets in the way of reaping any gains.