Future of Asia, Canada’s carbon pollution pricing system, COVID-19 in the Caribbean, rising market power, and more
The Sydney Opera resumed live performances and the city of Melbourne recently hosted the Australian Open tennis tournament with fans (mostly) in attendance. Japan is back to planning the delayed 2020 Summer Olympics, while China focuses on the Beijing 2022 Winter Games. Having been hit by COVID-19 first, Asia is also recovering first. At the pandemic’s first anniversary, is the region back to full health?
The best answer is that it is too early to know for sure. The pandemic exacerbated existing long-term issues: slowing productivity growth, growing indebtedness, aging population, rising inequality, and managing climate change. A new IMF staff paper looks into how the region can navigate these multiple challenges.
In a new blog by Chang Yong Rhee and Katsiaryna Svirydzenka, they write that if past experience is any guide, this pandemic will have long-lasting effects. A look at past recessions in advanced economies reveals that on average, five years after the start of a recession, output is still almost 5 percent below its pre-crisis trend and unlikely to ever catch up.
The COVID-19 pandemic has been a perfect storm, destroying jobs, worsening poverty and inequality, and creating a public and private debt problem—especially for countries and firms already in fragile financial health beforehand. This unprecedented economic disruption has the potential to leave lasting scars for years to come, arising from persistent declines in the capital stock, employment, and productivity.
Asia’s labor markets suffered, with unemployment surging, labor force participation plunging, and job losses concentrated in industries with lower wages and among women and youth. The poorest and most vulnerable were disproportionately hit, exposing severe gaps in social protection and exacerbating already high inequality in advanced and emerging Asia.
To address this vulnerability, countries would need to reinforce private debt resolution frameworks, ensure the availability of adequate financing, and facilitate access to risk capital to speed up the reallocation of resources towards growing sectors.
Interested to dig a little deeper? Click here to read the full blog.
IS RISING MARKET POWER A THREAT TO RECOVERY?
The crisis has hit small and medium enterprises especially hard, causing massive job losses and other economic scars. Among these—less noticeable, but also serious—is rising market power among dominant firms as they emerge even stronger while smaller rivals fall away.
We know from experience and IMF research that excessive market power in the hands of a few firms can be a drag on medium-term growth, stifling innovation and holding back investment. Such an outcome could undermine the recovery from the COVID-19 crisis, and it would block the rise of many emerging firms at a time when their dynamism is desperately needed.
In a new blog by Kristalina Georgieva, Federico J. Díez, Romain Duval, and Daniel Schwarz, they write that creating a more level playing field is now more important than ever. And governments will need to achieve it across a wide range of sectors—from brewing through hospitals to digital.
New IMF research shows that key indicators of market power are on the rise—such as the markup of prices over marginal cost, or the concentration of revenues among the four biggest players in a sector. Due to the pandemic, we estimate that this concentration could now increase in advanced economies by at least as much as it did in the fifteen years to end of 2015. Even in those industries that benefited from the crisis, such as the digital sector, dominant players are among the biggest winners.
A pandemic-driven rise in market power across multiple industries would exacerbate a trend that goes back over four decades. For example, global price markups have risen by more than 30 percent, on average, across listed firms in advanced economies since 1980. And in the past 20 years, markup increases in the digital sector have been twice as steep as economy-wide increases.
What should policymakers do?
Competition authorities should be increasingly vigilant when enforcing merger control, more actively enforce prohibitions on the abuse of dominant positions and make greater use of market investigations to uncover harmful behavior, and be empowered to keep pace with the digital economy, where the rise of big data and artificial intelligence is multiplying incumbent firms’ advantage. Greater efforts are also needed to ensure competition in input markets, including labor markets.
And finally, resources matter. In the United States, for example, the combined budget of the Federal Trade Commission and the Department of Justice’s Antitrust Division is roughly half of what it was four decades ago, as a share of GDP. Across many jurisdictions, investments may be needed to further boost sector-specific expertise amid rapid technological change. The United Kingdom recently announced a new Digital Markets Unit that will govern the behavior of dominant platforms, such as Google and Facebook.
️ Have your headphones? Listen to a new podcast with lead author Romain Duval.
CANADA’S CARBON POLLUTION PRICING SYSTEM
With a federal price on carbon now written into law, Canada is fighting climate change. The country’s enhanced carbon pricing measures put it on track to meet its Paris Agreement targets, providing a model for other large-emitting countries to follow. Canada has pledged to cut greenhouse gases by about 30 percent below current levels by 2030 and to achieve emissions neutrality by 2050.
In a new Country Focus, Ian Parry explains Canada’s carbon pollution pricing system. To begin, Canada’s mitigation strategy is built around a federal carbon pricing backstop system—the Pan-Canadian Framework. Without this, Canada would be the tenth largest emitter in absolute terms in 2030. To meet its goal of being carbon neutral, emissions would need to be cut by one-third below current levels by 2030, and by two-thirds by 2040.
The backstop gives provinces and territories flexibility to develop their own systems, but also establishes a carbon price “floor.” The price will progressively rise from CAN$40 per ton in 2021 to CAN$170 per ton by 2030, helping to cut nationwide carbon dioxide (CO2) emissions about 33 percent below business-as-usual levels, in line with the country’s targets.
Curious to learn more? Click here to read the full article, full of compelling charts.
CAN THE CARIBBEAN AVOID BECOMING A COVID-19 LONG-HAULER?
Many Caribbean countries risk becoming COVID-19 economic long-haulers. Much the same as some patients could suffer from lingering illnesses long after the coronavirus infection has passed, the pandemic’s economic fallout might be felt in the region long after the health emergency is controlled.
In a new Country Focus, Krishna Srinivasan, Sònia Muñoz, and Ding Ding hone in on the heavy reliance on tourism and write that due to their small size and limited room for maneuver, Caribbean economies were among the most affected by the pandemic. With annual hotel stays plummeting by 70 percent and cruise ship travel completely halted, tourism-dependent countries contracted by 9.8 percent in 2020. Commodity exporters in the region (Trinidad & Tobago, Suriname, and Guyana) were less affected and saw a mild contraction of 0.2 percent.
Most Caribbean countries managed to contain the virus’ spread initially, and reopened to international travelers in the second half of 2020. But renewed waves of infections and travel restrictions in the countries where most visitors normally come from (US, UK, and Canada) have put a much hoped-for tourism rebound in check. This could lead to significant long-term scarring: loss of jobs hitting mostly youth, women, and less educated workers; increases in poverty and inequality; potential closings and bankruptcies of hotels, resorts and associated tourism services (restaurants, shops and tour operators); fewer flights to and within the region as airlines struggle to recover; and loss of global ‘market share’ if cruise operators permanently reroute ships to other destinations.
BLOWING HOT AND COLD
When it’s cold we reach for the heater, and when it’s hot we turn on the air conditioning. A warming globe could reduce the need for heating in cold seasons and increase the demand for cooling when it’s hot. In principle, there is a sweet spot where it is neither too cold nor too hot to demand much electricity. The question is: where are we now relative to this sweet spot, and what are the implications?
In a new IMF staff working paper, Jiaxiong Yao uses satellite data to examine the relationship between electricity demand and temperature. The study compares changes in electricity usage—approximated by nighttime lights recorded by satellites, which are highly correlated with electricity usage—with changes in temperature over time at subnational levels. Since electricity is often used more for cooling than it is for heating, Yao focused on places not extremely cold where the annual average temperature is above 0 degrees Celsius (32 degrees Fahrenheit).
The study finds that the relationship between electricity demand and temperature is generally U-shaped. At both low and high temperatures, electricity demand is high. The sweet spot is about 14.6 degrees Celsius (58.3 degrees Fahrenheit) for the annual average temperature. For much of the world, however, the average temperature has already increased beyond that sweet spot, and further temperature rises are set to increase electricity demand further.
Sub-Saharan Africa, being one of the hottest regions in the world, is most vulnerable to climate change. Its average temperature is already well beyond the sweet spot. We estimate that a 1 degree Celsius (1.8 degree Fahrenheit) increase in temperature will raise Sub-Saharan Africa’s electricity consumption by about 7 percent. Population growth and economic expansion will increase electricity demand even further, thereby compounding this challenge.
THE GLOBAL CYBER THREAT
In our Spring 2021 issue of F&D on the digital future, Tim Maurer, former director of the Cyber Policy Initiative at the Carnegie Endowment for International Peace, and Arthur Nelson, current research analyst at the Cyber Policy Initiative, write that cyber threats to the financial system are growing, and the global community must cooperate to protect it.
In February 2016, hackers targeted the central bank of Bangladesh and exploited vulnerabilities in SWIFT, the global financial system’s main electronic payment messaging system, trying to steal $1 billion. While most transactions were blocked, $101 million still disappeared. The heist was a wake-up call for the finance world that systemic cyber risks in the financial system had been severely underestimated.
Today, the assessment that a major cyberattack poses a threat to financial stability is axiomatic— not a question of if, but when.
Maurer and Nelson explain two ongoing trends that exacerbate this risk:
First, the global financial system is going through an unprecedented digital transformation, which is being accelerated by the COVID-19 pandemic. Banks compete with technology companies; technology companies compete with banks. Meanwhile, the pandemic has heightened demand for online financial services and made work-from-home arrangements the norm. Central banks around the globe are considering throwing their weight behind digital currencies and modernizing payment systems. In this time of transformation, when an incident could easily undermine trust and derail such innovations, cybersecurity is more essential than ever.
Second, malicious actors are taking advantage of this digital transformation and pose a growing threat to the global financial system, financial stability, and confidence in the integrity of the system. The pandemic has even supplied fresh targets for hackers. The financial sector is experiencing the second-largest share of COVID-19–related cyberattacks, behind only the health sector, according to the Bank for International Settlements.
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A SECURE AND STABLE WAY TO ACCESS FINANCING
Paychecks for teachers, new hospital equipment, social assistance programs, and other public expenditures all depend to large extent on governments’ ability to fund them. When governments—particularly those in emerging and developing economies—need money to pay these and other goods and services, they often turn to bond markets, where they interact with investors seeking to buy government bonds.
In a new blog by Tobias Adrian, Thor Jonasson, Ayhan Kose, and Anderson Silva, they write that local-currency bond markets have grown in many emerging and developing economies in recent years. Yet considerable potential exists to further deepen these markets. Unfortunately, there is no well-defined “recipe” for developing a local-currency bond market given the varying needs of each country.
Against this background, our new Guidance Note for Developing Local Currency Bond Markets presents a systematic roadmap for policymakers conducting analysis of emerging and developing economies local currency bond markets. The Note identifies six key building blocks of development: (i) money market, (ii) primary market, (iii) investor base, (iv) secondary market, (v) financial market infrastructure, and (vi) the legal and regulatory framework. It also presents enabling conditions, for market development.
Interested in learning more? Read the full blog here.
SUPPORTING ECONOMIC RECOVERY IN KENYA
Kenya’s economy is now picking up speed after the COVID-19 shock, but the pandemic has left deep imprints on the country’s fiscal and debt positions. Earlier in the year, IMF staff and the country’s authorities reached a provisional agreement on a program to support the next phase of the country’s response to the health crisis.
Country Focus spoke to the IMF mission chief for Kenya, Mary Goodman, who explained how the new loan would be used:
In May, the IMF provided $739 million in the form of an interest-free loan under the Rapid Credit Facility to help Kenya weather the initial shock. This helped to cover the cost of additional spending on health, social protection, and speeding up payments to bolster the economy. The new IMF program of $2.4 billion in low-cost financing over the next three years will support the next phase of the government’s COVID-19 response.
While economic activity is picking up, many challenges remain. Public health is still under pressure with the rollout of COVID-19 vaccines just getting started. Higher poverty has set back progress towards Kenya’s development goals. Kenya’s fiscal and debt positions have also worsened, adding to difficulties that existed even before the shock.
IMF AROUND THE WORLD
The IMF Executive Board this week approved a $50 million disbursement to Sierra Leone under the Rapid Credit Facility to help the country address the continuing impact of the COVID-19 pandemic. The Board within the past week also concluded an Article IV economic assessment of Canada, where prudent policymaking and ample buffers have helped respond to the pandemic. In an Article IV consultation of Malaysia, Directors recognized an uneven recovery and urged the country to maintain supportive macroeconomic policies.
IMF staff announced the conclusion of Article IV missions to a number of countries this week. In Belize, a staff concluding statement found the Central American country will experience a protracted recovery from the pandemic. The outlook for Thailand remains challenging even though there are signs of recovery, staff said in a statement concluding an Article IV mission to the Southeast Asian nation. Luxembourg has weathered the pandemic well and staff recommended in a concluding statement continuing and targeted fiscal support. Finally, staff announced the end of a virtual visit to Vanuatu, where a prolonged closure of its border has severely impacted the economy.
Check out our global policy tracker to help our member countries be more aware of the experiences of others in combating COVID-19. We are also regularly updating our lending tracker, which visualizes the latest emergency financial assistance and debt relief to member countries approved by the IMF’s Executive Board.
To date, 80 countries have been approved for emergency financing, totaling over US$32 billion. Looking for our Q&A about the IMF’s response to COVID-19? Click here. We are also continually producing a special series of notes—about 100 to date—by IMF experts to help members address the economic effects of COVID-19 on a range of topics including fiscal, legal, statistical, tax and more.