Factors will depend, however, on evolving political circumstances coupled with the effects of a continuing shift toward more fragmented policy making across borders. This issue has long been on the minds of government and industry alike, but it may become more complicated in the near to medium term. It is timely to examine these trends to better understand the direction of travel between the UK, European Union (EU), and United States, and how this will impact markets and economies globally.

First, in the UK, the government’s Financial Services Growth and Competitiveness Strategy will be published this July. It will focus on five priority growth opportunities—sustainable finance, asset management, fintech, insurance, and capital markets. The Prudential Regulation Authority and the Financial Conduct Authority will be at pains to continue emphasizing that the primary objectives of consumer protection and systemic stability will not be compromised through any changes. However, it will be important to reflect on how issues such as the Basel III Endgame implementation will be addressed in light of these priorities, considering the approach of other jurisdictions (especially the United States) to the future of this global prudential package.

Second, in the EU, the European Commission has similarly affirmed that it will increasingly focus on growing financial market activity and ensuring the bloc can adequately compete with other world actors in financial services. This will likely lead to further discussions on, inter alia, sustainability standards, financial risk rules, and closer market integration. Though there is consensus on the need to make the EU more competitive, concerns have already been raised, for example, by Frank Elderson, vice-chair of the European Central Bank supervisory board that increasing competitiveness should not be pretext for watering down regulation and potentially increasing instability.

Further complicating matters is the issue of how, or if, the bloc will respond to any escalation of punitory trade measures by the US administration. Though the pace of recent trade talks has accelerated, questions remain in the near term about the potential application of the EU Anti-Coercion Instrument if negotiations fail, and what that may mean for the imposition of restrictions on financial services activity from third countries.

Third, in the United States, a more complex picture is emerging. The economic implications of White House trade policy will have to be weighed against the general deregulatory bent of the administration, but a few themes have come to light. There is a clear indication that the US Treasury will play a greater role in financial services regulation. Treasury Secretary Scott Bessent is on record stating that lending policies should better match the risk of financial firms, and that bank regulation has not taken economic growth into account. Federal banking agency rulemaking will also likely shift. Federal Reserve (Fed) vice chair for supervision, Governor Michelle Bowman, has indicated that supervisory reform, the promotion of innovation, and a pragmatic approach to regulation will be prioritized. The objective of cost-benefit analysis being applied toward regulation will affect how the Fed addresses the outstanding issue of the Basel III Endgame implementation, alongside an expected review of the supplementary leverage ratio and its impact on the US Treasury market.

Lastly, how the United States approaches international regulatory initiatives is also expected to be gauged by how they align with updated US regulatory policy objectives and the America First approach of the administration. SEC Commissioner Hester Peirce recently questioned the agendas of the international standard setters in light of calls for increased domestic control over policy. Secretary Bessent has also raised the issue of US reliance on these bodies. Such interventions will be important to monitor considering the wider gap between national and international rhetoric on cooperation geopolitically.

This is certainly a non-exhaustive snapshot of trends across three major economies, but it raises the question of where the rest of the world stands. How will international cooperation on financial stability evolve with this more domestic-minded focus on growth and competitiveness? This question is coupled with potential disputes on international trade in goods spilling into reciprocal action against the services sector.

On the first point, cooperation will likely continue around topics of consistent mutual concern at the Basel Committee, the Financial Stability Board, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions. Areas of focus will include oversight of the non-bank financial institution sector, modernizing cross-border payments, and addressing issues for operational resilience and cyber security. In his April letter to the Group of Twenty finance ministers and central bank governors, outgoing Financial Stability Board Chair Klaas Knot emphasized the importance of vigilance and international cooperation to address emerging risks and ensure the continued resilience of the financial system. Bilateral and multilateral regulatory collaboration is also continuing in the crypto currency space. The United States and the UK, in particular, are working together to support the responsible growth of digital assets.

However, the prospect is significant for increased fragmentation in regulatory approaches to capital, liquidity, and financial risks related to climate, among other issues. Cross-border financial institutions will potentially have to navigate a much more complicated and disparate set of requirements, which ultimately may impact systemic safety and soundness.

On the second point, the Bank for International Settlements recently warned that geopolitical tensions between countries reduce cross-border bank lending between them. The specter of retaliatory responses in reaction to punitive trade policies seeping into the regulation of financial services can exacerbate this concern. This is particularly acute in the regulation and supervision of foreign banks. Trapping capital and liquidity can have a specific negative impact on the provision of domestic financial services products, hurting the very objectives of growth and competitiveness that appear the ubiquitous watchwords of national policymakers.

There is still a strong case to be made for an interconnected global financial services system where regulatory authorities collaborate on the best means to ensure stability and security across borders. Doing so is not mutually exclusive with objectives for increased domestic growth and competitiveness. It can, in the case of cross-border capital flows, contribute to achieving those goals. An important area of reflection for both the public and private sectors in the coming months is how cooperation can be activated to prioritize economic development while maintaining stability with consistent global standards.

Matthew L. Ekberg is a contributor at the Atlantic Council and former Senior Advisor and Head of the London Office for the Institute of International Finance (IIF).

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Reauthorizing the DFC is vital to ensuring the United States is not outcompeted by China in its hemisphere. It is essential for supporting US jobs, creating markets for US exports, advancing energy independence, and linking foreign policy outcomes directly to economic benefits for American workers. Congress must act decisively to secure America’s economic interests and leadership in the Western Hemisphere.

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Created in 2018 under the BUILD Act, the DFC merged the Overseas Private Investment Corporation (OPIC) with USAID’s Development Credit Authority. This restructuring introduced a more agile and powerful tool for advancing US development objectives while strategically countering rivals, especially China.

As Congress prepares to revisit the DFC’s authorizing legislation, it should prioritize ensuring that the agency can effectively mobilize private capital for high-impact investments in infrastructure, minerals, energy, technology, and healthcare. These sectors are essential to strengthening the United States domestically—a key criterion set by the current administration for all agencies pursuing foreign policy initiatives. For example, investments in rare earth mineral exploration in the region not only secure preferential access for the US to the resource but can also generate US jobs in areas such as classification, storage, distribution, and processing.

The DFC must also reposition itself with enhanced tools, such as capital financing and technical assistance, so it can lead strategic investments. These investments should prioritize relocating supply chains for critical minerals, semiconductors, pharmaceutical inputs, and digital connectivity throughout Latin America and the Caribbean. Strengthening strategic alliances with like-minded countries and the private sector is essential to expand the DFC’s role in sectors vital to US economic and national security.

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• Geopolitical competition: The DFC can and should act as a strategic counter to the rising global competition for influence across the world, and particularly, in many of the developing nations that have continued to join China’s Belt and Road Initiative. The DFC offers a transparent, market-based alternative to opaque, state-driven financing models that come with political strings attached.
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A vague “Japanese model” comes up in many conversations about industrial strategy in the United States. It is common knowledge that, in the second half of the twentieth century, Japan found new export destinations for its industrial output while working its way up the manufacturing value chain. Japan’s powerful (though now defunct) Ministry of International Trade and Industry (MITI) almost always receives credit for managing this success. In short, the casual evaluator of economic security policies might answer that Japan has known what it is doing for longer than the United States.

Self-critical Japanese specialists would find such a portrait saccharine and outdated.

From the 1970s onward, Japan gradually opened its current account and its economy to investment. By the 1980s, when US public opinion was turning against Japanese imports, MITI’s power had already greatly diminished. Alongside the rest of the Japanese government and the Bank of Japan, it struggled to recreate favorable conditions during the lost decade that started in the early 1990s. There has since been increasing alarm regarding China’s rise and its many consequences for the Japanese economy, including Japan’s dependence on Chinese imports and investment.

While these concerns had been building for some time, the spark that started a legislative bureaucratic overhaul to extend the government’s authority and centralize the chain of command came during the second term of late Prime Minister Shinzo Abe, from 2012–2020.

The outbreak of the COVID-19 pandemic and the subsequent weaponization of supply chains made Abe’s decisions seem remarkably prescient. Yet the world has changed even faster than he might have expected. Japan has built new policies and teams to deal with economic threats wrought by China and Russia, but these were designed to work in conjunction with partners, primarily the United States. Though suspended, President Donald Trump’s “liberation day” 31-percent reciprocal tariff on Japan casts doubt on whether Washington still considers Japan the United States’ closest partner in Asia.

Japan finds itself in a predicament remarkably similar to that of other US partners. But unlike the European Union, it is wary of threatening to deploy its economic statecraft policies against the United States. Instead, following in Abe’s footsteps, it hopes to rely on deals. This has proven successful in obtaining a green light for Nippon Steel’s purchase of US steel, as Trump lifted Joe Biden’s blocking of the transaction. But the welcoming of Japanese investment by no means guarantees a looser stance on Japanese imports to the United States.

Over three months, we conducted interviews with Japan’s economic security policymakers in Washington and Tokyo, who agreed to meet despite their busy schedules. The goal of this piece is to represent how these teams are organized and how they think about relevant issues. The fallout from Trump’s tariffs was front of mind in every conversation, yet it was still possible to present a comprehensive picture of where Japanese economic statecraft stands now, and how it will continue to prepare for more uncertainty. 

From vision to legislation

Abe left a significant legacy in economic and defense policy. It should be no surprise that he also made a difference in the areas in which they overlap. Economic themes were present in Abe’s 2007 speech on the “free and open Indo-Pacific” during his shorter first term. In front of India’s Lok Sabha (or parliament), he committed Japan to promoting regional connectivity and economic partnerships. Nonetheless, the bureaucratic and legislative overhaul of economic security and economic statecraft came in the later years of Abe’s second term. Before that, security and economics were treated separately and their needs perceived as different.

On the security front, growing threats from China and North Korea helped Abe justify a reinterpretation of Japan’s pacifist constitution to expand the role of its Self-Defense Forces. In 2013, Japan created a National Security Council to centralize decision-making with the support of a National Security Secretariat (NSS). Two years later, the government passed security legislation allowing Japan to exercise collective self-defense, enabling it to aid allies under attack even if Japan itself is not directly threatened.

Concerns about economic security were already present, especially those relating to Chinese intellectual property (IP) theft and overreliance on Chinese manufacturing. However, these were clearly superseded by the need for a revitalization of Japan’s economy, which by then had suffered two decades of subpar growth. Abenomics, the prime minister’s signature economic policy, succeeded in reversing deflation and boosting consumer spending through increased government spending and quantitative easing. Attempts to improve competitiveness through structural reforms, including reform of the labor market, were somewhat less successful.

Abenomics was a net positive for Japan’s economic security, boosting consumption and making Japan (slightly) less reliant on exports. While economic revitalization was the priority, this didn’t prevent the prime minister and the political class from becoming more attuned to the economic security risks Japan faced. China’s decision to withhold exports of critical minerals for several months in 2010 was probably the first significant shock. But when Russia annexed Crimea and destabilized the Donbas region of Ukraine in 2014, Japan surprised observers by joining the United States and the European Union in imposing country-specific sanctions outside a United Nations (UN) mandate. These events were enough to kickstart an overhaul of Japan’s economic security landscape.

In 2015, Abe said in a speech to the US Congress that the United States and Japan “must take the lead to build a market that is fair, dynamic, sustainable, and is also free from the arbitrary intentions of any nation.” The subsequent years were characterized by more focus on economic security. The NSS created a specific economic security team in 2019, and Japan made several updates to legislation.

Before the changes of the late 2010s, Japan’s economic security policies were governed by the still extant Foreign Exchange and Foreign Trade Act (FEFTA) of 1949. This act originally imposed a tight regime of inbound investment screening, which was progressively hollowed out as Japan sought to bring itself in line with Organisation for Economic Co-operation and Development (OECD) and other international standards. Still, the division of labor set out by FEFTA hadn’t changed. The Ministry of Finance remained responsible for investment screening while the Ministry of Economy, Trade and Industry (METI)—the successor to MITI—became the natural decision-maker for export controls and subsidies.

To this day, FEFTA remains the legal basis for the Japanese government’s investment screening and export controls. However, vulnerabilities exposed by the COVID-19 pandemic made it clear that an additional layer of legislation would be needed—one that could build economic resilience by allowing the government and firms to cooperate in a more intensive way. This was the basic rationale of the Economic Security Promotion Act of 2022. This law created the position of minister for economic security, based in the prime minister’s office, although much of the engagement with firms and data collection is still run out of METI.

How the ministries and agencies are responding to new challenges

As the government of Japan has placed greater emphasis on economic security and updated its legislation, its departments haven’t significantly altered their division of labor in terms of economic statecraft. METI continues to lead on export controls, the Ministry of Finance on investment screening, and the Ministry of Foreign Affairs on sanctions. What has changed is how policies are coordinated, with the creation of teams explicitly devoted to economic security.

When it was created in 2014 to support National Security Council meetings, the NSS did not feature an economic security team. Instead, the Ministry of Foreign Affairs played this role by default given that it was already responsible for coordinating policy with other governments. While this ensured that Japan applied the measures to which it agreed in international forums, it was clearly insufficient to implement a holistic strategy of economic self-defense, resilience, and indispensability. 

Since the 2019 creation of an economic security team within the NSS, the balance between internal and external coordination has become clear. The ten-person team is small but powerful. It can convene meetings between large, well-established ministries and bring their preferences in line with a more general sense of Japanese strategy, including Tokyo’s alignment with Washington. This role has become more prominent since the arrival of the first minister of state for economic security—who sits in the cabinet office, not inside METI or another large ministry—and a legislative mandate in the Economic Security Promotion Act for the NSS to coordinate economic security policy. The team’s access to the prime minister’s office also allows it to seek political guidance faster than experts in ministries can.

And yet, while the role of the NSS in economic security has clearly grown, the team’s small size and the long-standing roles of other ministries and agencies make the NSS a partial counterpart to the US National Security Council. The economic security team has a blue-sky thinking role and runs a regular program of cross-departmental tabletop exercises focusing on economic coercion, some of which have included US government specialists.

It’s important to remember that the NSS economic security team is not automatically at the top of the chain of command in the way the National Security Council (NSC) might be. Sensitive decisions on export controls and investment screening can also be settled by METI and the Ministry of Finance, respectively. Therefore, studying the role of each organization remains essential.

Ministry of Foreign Affairs

The Ministry of Foreign Affairs no longer carries out internal coordination on economic security, as this mandate has been moved to the NSS. Despite this shift, the ministry still plays a vital role in Japanese sanctions and helps coordinate international positions on other tools such as export controls. As we’ve found in other countries, such as France, the diplomats have two key qualities: they are present at every international summit and often must stand in for more expert colleagues when a deal is done, and they are good at finding compromises.

While Japan has participated fully in the recent Western sanctions coalition against Russia, this has been made possible by exemptions that Tokyo sought and obtained. The best example is the sanctions exemption for the Japanese-owned Sakhalin-2 oil and gas refinery from the Russian oil price cap and other measures that could stem the flow of liquefied natural gas. The Ministry of Foreign Affairs has also contributed to talks on how to make the sanctions effort work better, such as the Common High Priority Item list for export controls. In December 2023, it also pushed Japan to take the unprecedented step of using the legal basis of its Russia sanctions to sanction third-country entities enabling Russia to circumvent sanctions.

These decisions show that the ministry’s culture still prioritizes coordination with the United States. This worked well under the Biden administration, during which both governments managed to organize two 2+2 Summits of the Economic Security Consultative Committee, with the Ministry of Foreign Affairs and METI on the Japanese side and the Departments of State and Commerce on the US side. There is no clarity regarding whether this will continue under the second Trump administration.

Difficulties coordinating with the United States will be a culture shock for the ministry, but it will try to salvage what it can and keep pushing for unity in the Group of Seven (G7). The ministry is also leading on building understanding with the Global South, especially on economic security. Japan realizes better than some of its close partners that sanctions and economic statecraft can be easily misconstrued in third countries and can have adverse impacts on their economic development. Therefore, the ministry has taken on the task of explaining how its economic security policies do not contradict overarching principles such as the Free and Open Indo-Pacific, while also pushing for overseas development aid to be better coordinated with economic security priorities.

METI

Proponents of industrial policy have a starry-eyed view of the Ministry of Economics Trade and Industry’s predecessor—the Ministry of International Trade and Industry—and its role in steering Japan’s rise as an export powerhouse. The eulogizing is not entirely misplaced, but it perhaps overlooks how the powerful super ministry has needed to adapt, first to the shortcomings of Japan’s export-driven model and now to the era of economic coercion. METI can leverage deep sectoral knowledge on the Japanese economy and its interdependencies with the rest of the world, which other ministries do not have. Yet its officials still tend to downplay their readiness for the new challenges and say Japan has a lot to learn about the tools of economic statecraft.

One sign of this is that METI’s Trade and Economic Security Bureau, though run by long-standing official Hiroshi Ishikawa, is a recent creation and another result of the 2022 Economic Security Promotion Act. The bureau’s role is to implement the new legislation by taking a forensic approach to Japan’s problems and the cards it can still play. In close cooperation with firms, the finance sector, and universities, the bureau’s work is organized into three pillars. These are

• “red” areas of disruptive technological innovation in which Japan needs to cultivate its indispensability but must beware of losing autonomy;
• “blue” areas in which Japan has technological advantages and should maintain its indispensability; and
• “green” areas of external dependence in which de-risking is needed.

So far, the approach has also made it easier to unlock larger subsidies for advanced semiconductors, which fit squarely within the “red” area in which Japan risks being left behind. The best example of this is the 1-trillion yen ($6.9 billion) subsidy for TSMC to build a factory on the island of Kyushu.

The three-pillar framework has been useful in raising awareness with firms. Some small and medium enterprises had been unaware that their intellectual property and production were part of what makes Japan indispensable to the global economy. This is usually good news. The exercises have made clear that Japan is ahead of the curve in synthetic biology. The Japan pavilion at the Osaka World Expo proudly features a human heart made of induced pluripotent stem (iPS) cells. But technological advantages are also bringing constraints, such as the US demand for a trilateral deal with Japan and the Netherlands to control the export of semiconductor manufacturing equipment or Tokyo’s own decision to restrict exports of drone technologies that can have military applications.

Ministry of Finance

Of all the ministries working on Japan’s economic security, the Ministry of Finance has had the most stable area of responsibility. Under the Foreign Exchange and Foreign Trade Act of 1949, the Ministry of Finance carries out investment screening. Policies were initially very strict; however, investment liberalization progressed after Japan joined the OECD in 1964. Since the second Abe administration, attention has shifted to the new challenge of economic security.

Unlike other export controls, which often face skepticism from Japanese members of parliament keen to help firms in their constituencies, inbound investment screening enjoys broad-based political support. In 2020, an amendment supported by politicians and driven by the changing international environment considerably tightened screening by requiring prior notification of any foreign direct investment (FDI) covering 1 percent or more of ownership in a firm in a sensitive sector—down from 10 percent. The measure is country agnostic, but the shift was apparently driven primarily by China.

Prior to a 1978 liberalization, the ministry also practiced outbound investment screening. Since 1998, a simpler post-investment reporting system has become standard practice for Japanese firms, but this does not include screening. Arguably, Japan’s modest venture capital ecosystem relative to that of the United States means it faces fewer dilemmas on outbound investment.

Japan will need to diversify its partnerships to weather the storm

Japan’s recent legislative and bureaucratic reforms were carried out with awareness of US political volatility, though perhaps not an expectation that the second Trump administration would engage in a trade war with its allies. While Tokyo welcomed early signals of US engagement, such as Secretary of State Marco Rubio’s participation in the Quad dialogues, it cannot ignore the reality that Washington is increasingly prone to economic coercion, even against allies.

This is not without precedent. US pressure in the 1980s contributed to Japan’s long economic stagnation. But today’s situation represents a larger shift and comes under more challenging geopolitical circumstances for a country like Japan, which now considers three of its neighbors to be bad actors. Japan must prepare for a strategic divergence from US economic policy, while identifying ways to prevent definitive ruptures wherever possible.

During the Trump presidency, Japan will be on a different course than the United States on green energy technology, as Japan is an export powerhouse in this field. It will also be at odds with the United States on overseas development assistance in regions where US retrenchment is enabling China’s advance. Institutions like the Japan Bank for International Cooperation (JBIC) already quietly prioritize projects with economic security value; this approach should be made more explicit to encourage greater uptake in Asia and Africa.

Deeper coordination with G7 partners and other likeminded countries is essential, including on the most worrying scenarios in the Strait of Taiwan. Japan shares many of the European Union’s concerns about the US tendency to frame every economic issue as a national security threat. Japan also prefers country-agnostic policies, instead of the tier-based or country-specific approaches US administrations have developed.

Tokyo prefers more predictable policies yet—unlike the European Union—it is unencumbered by internal divisions among twenty-seven member states. It has a unique opportunity to serve as an example of what open economies that do not wish to engage in economic coercion, but must be ready to stand up to it, should do. METI’s systematic approach to cultivating indispensability is certainly more advanced than what the rest of the G7 is doing. On the other hand, Japan remains vulnerable to coercion through its supply chains and much more work must be done to build resilient alternatives to China.

Japan is in a geopolitically challenging neighborhood and is witnessing the basic tenets of its foreign policy—from alignment with the United States to fostering a rules-based environment—come under unprecedented stress. Yet its advanced manufacturing base and recently updated legislation on economic security also provide it with more cards to resist economic coercion than most countries hold. Its public and private sectors are now largely aligned on these issues. Business leaders have even expressed support for former Economic Security Minister Sanae Takaichi becoming the next prime minister.

It’s hard to think of a more ringing endorsement from the private sector for prioritizing economic security.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

The report is part of a yearlong series on economic statecraft across the G7 and China supported in part by a grant from MITRE.

The contents of this issue brief have not been approved or disapproved by the Japanese government.

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The Chinese government is steering more and more of its companies away from New York for IPOs; the country’s second-largest car maker, Chery Automobile, is preparing to launch a $1.5 billion share issue in Hong Kong as well. About three-quarters of the largest twenty-five Chinese firms listed on Wall Street have set up parallel listings in Hong Kong in the past few years and already represent 60 percent of the value of shares listed there. The purpose of listing in Hong Kong is to create an escape valve if the United States follows through on its periodic threats to delist all Chinese stocks on Wall Street. The most recent such warning came from US Treasury Secretary Scott Bessent on April 9, when he declared that “everything is on the table” in response to a journalist’s question about the possibility of forced delistings. Chinese stocks in the United States have a total market capitalization of about $1.1 trillion, which, while no small change, is only a tiny portion of the roughly $52 trillion US markets.

American investors with accounts outside the United States can buy Chinese stocks in Hong Kong, and some fund managers have already shifted their holdings to the dual-listed shares there to protect against future disruptions. But many institutional investors whose governance rules do not allow for such foreign trading could not participate in the CATL IPO. The company specifically structured its share issue that way to avoid US regulatory oversight—a response to the Pentagon’s decision to blacklist the firm.

Hong Kong’s emergence as the market of choice for Chinese companies is no accident. Beijing has worked systematically to revive it as a regional financial center after many foreign investors and financial institutions retreated from the city in recent years, especially after the Chinese government’s began cracking down on mass political protests in 2019. The centerpiece of the financial market strategy is to establish Hong Kong as the largest venue for offshore transactions denominated in renminbi. Stocks are also part of the blueprint. While Chinese companies have been listing in Hong Kong for years, the stock market has gained prominence in China’s plans as US-China relations have worsened. A senior Chinese official said late last year that 80 percent of mainland businesses seeking an offshore listing are prioritizing Hong Kong, no doubt with a push from Beijing’s regulators.

The core issue for both Washington and Beijing is the national security implications of Chinese companies’ presence on Wall Street. Each US presidential administration over the past five years has sought to exclude companies regarded as part of China’s military-industrial complex from American financial markets. In 2020, the first Trump administration launched an effort to prohibit US investments in companies with ties to the Chinese government and military. This initiative resulted in the delisting of several large state-owned Chinese companies from US exchanges.

At the same time, Chinese regulators became increasingly concerned about US requirements for financial disclosure that they believed could reveal national secrets. That became a headline issue in the bilateral relationship after China refused, for many years, to allow US government auditors to inspect listed Chinese companies’ books. The US Congress eventually passed a law that mandated mass delisting if Beijing did not cooperate. A 2022 agreement that permitted American oversight defused the standoff, but the remaining Chinese state-owned firms  voluntarily delisted from Wall Street on that accord was finalized. Since 2021, China has stepped up its scrutiny of all Chinese companies seeking to list in the United States.

These issues have often been most visible when they involve publicly listed companies. However, US policymakers have also focused on restricting US venture capital and private equity investments in China, as well as Chinese investments in the United States. American venture capital and private equity investments in China in 2024 fell to $1.62 billion from a peak of $40.81 billion in 2018, and President Donald Trump issued a national security memorandum in February outlining plans to further restrict these capital flows.

There is a domestic political dimension to Beijing’s decision to expand its oversight of public listings: Control of China’s most important private sector companies, including the e-commerce giant Alibaba Group. Chinese leader Xi Jinping’s campaign to bring private conglomerates to heel has been closely tied to the regulation of foreign listings. The squeeze on corporate fundraising on Wall Street began in late 2020 when Beijing blocked a huge, planned IPO for Ant Group, the financial arm of Alibaba, after Alibaba Chairman Jack Ma criticized financial regulators. That action came as the first restrictions on US investments in Chinese companies were imposed.

From that point on, tightening controls over US listings appeared to occur in lockstep with deteriorating US-China ties. As the Biden administration broadened restrictions on Chinese companies by American investors in 2021, Beijing sought to delay a huge IPO by the Chinese ride-hailing giant Didi Chuxing. China then forced the company to delist after it defied the regulators and proceeded with the deal. Beijing followed that sanction with a raft of regulations mandating stricter oversight of all companies applying for foreign listings. Chinese IPOs in the United States have never recovered. According to the US-China Economic and Security Review Commission, forty-eight Chinese companies issued IPOs in the United States between January 2024 and early March 2025, raising a total of $2.1 billion. By contrast, thirty-two companies raised $12.1 billion in 2021.

Even before the CATL listing, IPOs in Hong Kong had risen sharply this year. The number of deals was up 25 percent in the first quarter, and the total value of those listings increased 287 percent to about $2.3 billion. The ten largest IPOs so far have been Chinese companies.

Listing in Hong Kong certainly has its drawbacks compared with Wall Street. It is a more volatile market with trading volumes far below the levels on US exchanges and lower valuations relative to earnings. A Hong Kong listing generally doesn’t command the prestige of the American exchanges; that can mean less favorable terms on other forms of financing than a US-listed company might be offered. Hong Kong’s listing regulations are also stricter than on Wall Street, and an estimated 170 small Chinese companies listed in the United States may not have the option to obtain dual listings there. However, Hong Kong offers access to a largely untapped pool of Chinese investors through an official program that enables mainlanders to buy and sell Hong Kong shares, including stocks like Alibaba that are not listed on Chinese exchanges. As of late February, investors based in China held about 12 percent of Hong Kong shares, compared with 5 percent at the end of 2020. Their trades accounted for about one-quarter of daily turnover, up from 16 percent a year ago.

Ultimately, while the lure of China’s army of retail investors might provide some consolation for companies that might lose access to the US markets, the Chinese government is the real beneficiary Beijing is prepared to exchange the financial advantages of a market it can’t control for the comfort of a city that responds to its every whim. Its actions over the past five years suggest a calculus that the political benefits of an international financial center with Chinese characteristics will outweigh the pain that decoupling inflicts on China’s private sector.

Jeremy Mark is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal.

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That was made clear at this year’s International Monetary Fund and World Bank Spring Meetings, where financial leaders warned about job loss and increasing poverty rates across these countries. 

But there are changes African countries can make to better withstand the economic headwinds they are facing. One such opportunity they should immediately seize lies in strengthening their approaches to combating money laundering and terrorist financing. By addressing deficiencies in legal and regulatory frameworks and by adjusting for developments in financial technology, African countries can bolster financial inclusion and tap economic growth opportunities—while preventing the abuse of the global financial system by nefarious actors. 

Key deficiencies seen across Africa—in the form of weak legal and regulatory frameworks, limited institutional capacity to conduct financial supervisory or enforcement activities, and a high degree of informality of economic activities—make it difficult to combat money laundering, terrorist financing, and other illicit financial flows. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, keeps track of jurisdictions that do not meet global standards to combat money laundering, publicly identifying jurisdictions with weak performance on a “black list” and “grey list.” The black list hosts only three countries (North Korea, Iran, and Myanmar), but on the grey list, fourteen of the twenty-five countries (just over half) are African. Grey listing can result in serious reputational and economic damage, with negative spillover effects on economic growth, borrowing costs, foreign investment flows, and financial inclusion efforts—a particularly concerning impact considering that in Sub-Saharan Africa, less than half the population has a bank account. Given these effects, African countries have worked to make significant improvements to their anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks. Over the past few years, several countries that were once placed on the grey list have been removed, including Zimbabwe, Botswana, Morocco, and Mauritius.

One piece of the regulatory puzzle involves cryptocurrencies. FATF Recommendation 15 for combating money laundering and terrorist financing directs countries to identify and assess “risks emerging from virtual asset activities.” FATF data from March indicates that of the forty-one Sub-Saharan African countries with publicly available data, only seven countries were rated “compliant” with Recommendation 15, indicating that the country successfully met the global standard. For African countries looking to become more compliant, there are positive examples on the continent to draw upon; for example, South Africa was recently upgraded to “largely compliant” with Recommendation 15 and is continuing to make progress towards full compliance. 

At the same time, African governments must also harness the power of digital finance to weather today’s economic headwinds. According to the International Monetary Fund, as of 2022, just 25 percent of countries in Sub-Saharan Africa formally regulated cryptocurrencies, and two-thirds had implemented restrictions, with six countries having outright banned cryptocurrencies. The impact of this approach leaves the investors and entrepreneurs who are interested in Africa’s digital assets sector inclined to hold back investments due to the excessive regulatory uncertainty and possible regulatory swings. Africa is one of the fastest-growing crypto markets in the world, and crypto assets are actively used across the continent. 

Recent reporting from Chainalysis suggests that the cryptocurrency value received by Sub-Saharan Africa was less than three percent of the global share between July 2023 and July 2024. While this is a small global share, there is significant variance in adoption rates across the continent’s fifty-four countries, with a number of countries still rating relatively high in global adoption: Nigeria ranked second worldwide, and Ethiopia, Kenya, and South Africa also ranked in the top thirty countries. From 2022 to 2023, bitcoin was legal tender in the Central African Republic, but finance experts raised concerns about the lack of electricity and infrastructure and the high risk of money laundering and terrorist financing. One thing is certain: digital assets—including cryptocurrencies—are changing the financial landscape of the region. 

That digital finance can transform Africa’s financial landscape should be viewed positively. Africa’s population is set to increase from 1.5 billion in 2024 to 2.5 billion in 2050. This is the moment for African governments to leverage the economic power of their demographics, but to do that, they will need to consider public policies that support greater financial inclusion. Of the eight countries that will account for more than half of the global population growth between now and 2050, five of them are in Africa; two of them are global leaders in crypto adoption rates.  

As populations age and enter the workforce, African governments should consider how best to promote technological innovation in their societies, including in financial technology. Cryptocurrency adoption in African countries can be used for small retail transactions, for sending or receiving remittances, as a hedge against inflation, for business payments, and, potentially, for solving sticky foreign exchange issues in places such as Central Africa, where such issues dramatically reduce foreign investments. Due to its decentralized nature, cryptocurrencies can help people bridge the gap in access to financial services and formal banking systems in many countries across the continent.  

On one hand, governments have tried to use digital assets to boost financial inclusion, tax revenue, and small retail transactions with limited success; and on the other, countries have banned, unbanned, regulated, and deregulated cryptocurrencies, leaving a patchwork of regulatory frameworks across the continent for consumers and business to navigate. With such jurisdictional regulatory arbitrage and limited enforcement mechanisms, nonstate actors, including terrorist groups in Africa, are able to take advantage of the technologies and services that can move money the fastest and cheapest—and in ways that are least likely to be detected or disrupted. That can lead these actors to cryptocurrency.   

While serving as head of delegation to both the Central and West African FATF-style regional bodies, I heard from African government officials repeatedly that there were no digital assets being used in their countries and that their AML/CFT regulatory regimes were sufficient. This is simply not the case. African countries should consider policies to encourage the adoption of emerging financial technologies, including cryptocurrencies and other digital assets, while still exercising great care to avoid creating conditions allowing for regulatory arbitrage between countries or monetary unions that can be exploited by bad actors seeking to launder money or finance terrorism. Beyond policy frameworks, African governments should empower their enforcement agencies with the appropriate resources to ensure that policies, laws, and regulatory frameworks protect the integrity of the global financial system.  

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. 

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The Basel III endgame was born out of the Basel III accord, which was created by a group of countries with strong financial sectors in response to the 2008 crisis and first implemented by US and other regulators in 2013. The accord provides a package of international financial regulatory standards for banks to stabilize them and mitigate the chance of another major financial disaster. The endgame includes the final set of recommendations to implement the Basel III accord, and was scheduled to be fully implemented by January 1, 2023.

However, the Basel III endgame has been disrupted by countries delaying implementation dates and tailoring recommendations to their own national interests. The trend over the last seventeen years toward national competitiveness gaining ground over coordinated regulations—most noticeable in the United States—could fragment the Basel III endgame and the global financial regulatory framework more broadly.

The Basel III endgame in the United States

On July 27, 2023, the US federal banking regulators—including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)—jointly proposed rules to implement the Basel III endgame. The Fed vice chair for banking regulation, Micheal Barr, also issued proposals applicable to banks with more than $100 billion of assets. By changing the calculation of risk-weighted assets, the proposed rules would raise the core equity tier 1 (CET1) capital for large and complex banks by 16 percent, and tier 1 capital by 6 percent. CET1 comprises of a bank’s common equity, retained earnings and other regulatory adjustments, representing the core and highest quality capital of a bank available to absorb losses.

According to the Fed, the average CET1 ratio of large US banks is currently around 13 percent. It already exceeds the minimum required ratio of 4.5 percent, in addition to stress capital buffer requirements and global systemically important banks (GSIBs) surcharges. —ranging from 13.63 percent for Citigroup, 15.68 percent for JPMorgan Chase, and 15.92 percent for Morgan Stanley.

The US banking industry, especially the large banks, objected to the rules proposed in 2023 that would have “gold plated” the Basel III agreed standards and raised the special GSIB surcharge by $250 billion. The fact that the scope of the supplementary liquidity ratio of 3 percent currently includes non- or low-risk assets such as US Treasury securities has drawn particular frustration. Their inclusion boosts the required capital level and makes it costly for banks to commit capital in their broker-dealer activities needed to support a smooth functioning of the US Treasury market. The new rules would also reduce banks’ reliance on their internal models to calculate risk-weighted assets. Opaque internal justifications by US agencies for these new rules, on top of the conduction of the annual bank stress test, have prompted sharp criticism from influential banks.

These objections have persuaded US financial regulators to consider revising the proposed rules, essentially  to half the average increase in required capital for large and complex banks. They may even remove US Treasuries from the calculation of the supplementary liquidity ratio, reduce the GSIB surcharge, and release more information about the regulators’ internal analyses—including for the stress test.

Motivated by the Trump administration’s approach to deregulation, Michael Barr has been replaced as vice chair for supervision by Michelle Bowman, who is more sympathetic to the banks’ views. Under such a supportive regulatory environment, large banks are arguing to fully implement the modified Basel III endgame now, so that the net impact will be capital neutral—meaning there would be no change in the capital requirements for major banks—rather than leaving it open risking a possible future Democratic administration favoring a stricter  regulatory framework. Travis Hill, the acting chair of the FDIC, has revealed his agenda of priorities, aiming to review all FDIC regulations, guidances and manuals, especially to streamline capital and liquidity rules in opposition to the Basel III Endgame—potentially opening more room for banks to seek further relaxation of Basel III standards.

European Banks Pushing for Similar Delay

Uncertainty in the United States has already encouraged European banks to push for delayed implementation of their own new rulebook, the Fundamental Review of the Trading Book (FRTB), to avoid being put at a competitive disadvantage.

The deferral has already been granted in the United Kingdom, where the Prudential Regulation Authority has postponed implementation of new regulations until January 1, 2027. The focus of most large banks in the European Union (EU) has turned to postponing the adoption of the new trading book rules by another year past the already extended target date of 2026—in the context of delays in the US and UK. The delay’s supporters hope to gain the time needed to make adjustments to the trading book regulation and render it capital neutral.

Currently, the aggregate CET1 ratio of EU banks is 15.73%; however the aggregate CET1 ratio of EU GSIBs is lower at 14.30%.

Pressure by large banks has encouraged the European Commission to launch a public consultation on the EU approach to implementing the FRTB, including raising the option of postponing the application date to January 1, 2027. Doing so is part of an effort to ensure a level playing field and keep EU banks competitive as compared to UK banks and US banks, which face unpredictable levels of regulation under the Trump administration.

Canada has implemented Basel III as well. However, its Office of the Superintendent of Financial Institutions has also indefinitely delayed increases to the Basel III capital floor, citing tariff-induced economic uncertainty and slow progress by other countries. Failure to implement the capital floor could seriously dilute Basel III if other countries follow suit.  By comparison, Japan and Switzerland have fully implemented Basel III standards in their domestic regulatory frameworks.

Divergent implementation timelines and an uneven regulatory landscape have raised concerns about global regulatory fragmentation. Widespread fragmentation of trade and investment flows driven by heightened geopolitical tension have undermined international trust and willingness to cooperate across national borders. With the combination of these factors, the overall trend toward global regulatory fragmentation will pose growing risks to international financial stability and should be closely monitored by the financial regulators of major countries.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South. Formerly, he served as a senior official at the International Institute of Finance and International Monetary Fund.

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Public Event Fri, April 25, 2025 • 11:30 am ET

Technology and the future of the financial system with Nasdaq CEO Adena Friedman

AN #ACFRONTPAGE EVENT—Adena Friedman, chief executive officer of Nasdaq, shares her vision for the future of the global financial system.

Economy & Business Financial Crimes & Illicit Trade Financial Regulation International Financial Institutions

According to Nasdaq CEO Adena Friedman, the movement of illicit funds through the financial system “is a global issue, and it requires global solutions.”

Friedman spoke at an Atlantic Council Front Page event on April 25, citing a Nasdaq study from last year that found that more than three trillion dollars had moved through the global financial system illegally in 2023.

Pondering the solutions needed for such a large-scale issue, Friedman said that the public, private, and technology sectors will need to work together. Markets process billions and billions of transactions, and, as she explained, it can be difficult to distinguish between those that are legitimate and those that are not.

“It’s a little bit of looking for a needle in a haystack,” Friedman said.

Below are highlights from the conversation, moderated by Economic Statecraft Initiative Director Kimberly Donovan, which covered technology’s role in the financial system and the impact of global volatility on markets.

When fin meets tech

• For Friedman, artificial intelligence (AI) is an increasingly promising approach to detect and report financial crimes to banks and law enforcement. “We’ve got to be able to unleash the technology to the best of its ability,” Friedman said. 
• “It’s amazing, unfortunately, how sophisticated the criminals can be” as they use more sophisticated tools, including AI and other leading-edge technology, Friedman warned. She said that banks, markets, and law enforcement would need to look to AI, cloud technology, and automation to thwart and disrupt the financial dealings of criminals and criminal networks. 
• Friedman said she has seen a shift among banks in the last decade, as competition among them has been tempered with a sense that collaboration is needed to solve the problem of financial crime. 
• Technology has also helped Nasdaq respond to market shocks, Friedman pointed out. In the first ten days of April, she said, Nasdaq experienced five of the top six trading days in equities ever in the United States and four of the six top options trading days. At the peak, on April 7, “we had 550 billion messages flowing through our systems in that day, just to be able to manage the level of supply and demand that was coming into the markets,” she said. That’s roughly double the previous number of daily messages. 

Responding to recent volatility

• “It’s a very, very dynamic time for investors,” Friedman said, speaking at the end of a month that has been volatile for markets following back-and-forth US tariff announcements. 
• “I always try to put myself the head of an investor when you go through these periods of uncertainty and change,” Friedman said, explaining that in response to greater uncertainty, many investors are pulling back. “There’s a lot of change. There’s a lot that’s unknowable and therefore, they’re taking risk off.”
• But this approach is likely to be followed in short order by investors redeploying their capital, Friedman said. 
• Looking at how investors responded to the COVID-19 pandemic is instructive, she explained. In the early days of the pandemic, when uncertainty was most acute, there were big drawdowns in capital. But as soon as people realized that they could operate in the new environment, investors were able “to bring their capital back in a smart way and redeploy,” Friedman explained.
• But markets have adapted to the shocks and volatility, she added. “I just want you to understand that the plumbing has been working,” Friedman said of markets’ resiliency to respond to recent trading activity and ensure stability. 

John Cookson is editor of the New Atlanticist.

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Over the last decade, economic statecraft has evolved to become an oft used but ill-defined catchall for the levers of economic and financial policy that advance American national security interests. The implicit assumption often articulated is that US economic and foreign policy strength is best served by unifying “sticks and carrots,” relying not just on the reach of US enforcement but also on the strength of the dollar and the centricity of US financial institutions in the global financial system. While the goals have evolved, the institutions and processes have not kept pace. Stovepiped decision-making within the executive branch and an overreliance on a subset of tools—particularly sanctions—have left the Department of the Treasury, and by default the American financial sector, carrying out only half of the Treasury’s national security mission to combat threats and promote US economic interests at home and abroad.

America’s adversaries are not standing idly by. Their expertise and sophistication are growing at an unparalleled rate, whether through the creation of economies of scale for sanctions evasion; alternative non-US dollar, non-SWIFT settlement systems; or the faster-than-government adoption of emerging technology.

As the current administration revisits the functions and mechanics of government, near-term steps can be taken, under existing statutory authorities, to modernize how the United States uses its economic strength to combat national security threats and promote American interests. This function falls neatly within the Treasury’s remit as the steward of the US economy and financial sector.

Establish an interagency coordination function

As US administrations—regardless of the party in power—are increasingly reluctant (if not opposed) to use military power, economic tools are disproportionately the weapons of choice. Despite the reliance on these levers to address every foreign policy challenge, there is no central coordinating body that is tasked with leading the deployment of these actions or even coordinating tools in the US toolbox. Over successive administrations, this has led to fragmentation and duplication between and within departments and agencies; ineffective assessment of policies, tools, and effects; lack of coordination between punitive and positive measures; overuse of certain tools; and development of nearsighted, short-term policies at the expense of broader strategic goals.

To mitigate these challenges, the Treasury should establish an economic statecraft and security committee, with periodic reports to respective principals, to coordinate interagency work and policies. Representatives from relevant departments and agencies would evaluate policy objectives and identify response options, taking into consideration financial sanctions, regulatory actions, export controls, tariffs, and other “offensive” tools as well as the design and review of development financing, commercial engagement, anti-money laundering/countering the financing of terrorism (AML/CFT) technical assistance programs, and other “carrots” or affirmative tools to establish a clear articulation of goals, end states, objectives, key milestones, and specific outcomes for the aforementioned authorities.

A central coordinating body is desperately needed to effectively deploy all economic tools at the US government’s disposal and ensure that actions are properly sequenced and evaluated. The goal is not to outsource the current role of the National Security Council (NSC); instead, it is to preserve NSC-led strategy and decision-making while injecting a technical coordinating element so the agencies can present a well-crafted and coordinated “menu” of options. The current siloing of tools between the departments of Treasury, State, Commerce, Defense, and others has created a moral hazard for enforcement and undervalues the leverage that the United States maintains with its development and technical assistance programming in supporting national security.

This approach is similar to other models that were created to address gaps in interagency coordination including the Directorate of Strategic Operational Planning within the National Counterterrorism Center, the Committee on Foreign Investment in the United States (CFIUS), and the joint interagency task forces (JIATFs) at combatant commands. This proposed interagency body can be created pursuant to Treasury’s existing authorities and staffed with existing Treasury resources from the Office of Terrorism and Financial Intelligence (TFI), with the addition of staff detailed from other departments and agencies in the form of liaison officers, joint duty assignments, and other such agreements. Departments and agencies represented on the committee should include the Treasury (all components of TFI and International Affairs), the Intelligence Community (IC), the departments of State, Justice, Defense, Commerce, and Energy, the Office of the US Trade Representative, and the International Development Finance Corporation. The Department of the Treasury—and specifically, the policy office of Terrorist Financing and Financial Crimes (TFFC)—is best suited to lead such work, as it closely aligns with its existing statutory mission and the Treasury has an established track record of developing and refining tools to support its AML/CFT mandate, while reconciling humanitarian assistance, derisking, and other unintended consequences. Further, this approach is in line with and implements the authorities provided to the secretary of the Treasury in Section 6104 of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act of 2021, which directs the secretary to maintain an interagency rotational program to strengthen the United States’ AML/CFT regime and capabilities.

Rejuvenate Treasury’s Office of Intelligence and Analysis

More than two decades after 9/11, Treasury’s Office of Intelligence and Analysis (OIA) confronts several substantive and structural challenges. Sanctions remain the preferred foreign policy tool for policymakers, which has driven US adversaries such as China, Russia, Iran, and others to develop alternative payments systems and mechanisms to circumvent the US dollar-based financial system and “sanctions-proof” their economies. However, across the US government, including at Treasury, there is often a disconnect between economic security and national security that favors generic analysis of disparate topics over complex financial interdependencies. Given TFI’s mandate to protect the US financial sector, OIA should harness its proximity to practitioners and reestablish itself as an economic security analysis unit that provides both a tools-based analysis of national security challenges and studies critical changes to global settlement and efforts to dedollarize the international financial system. To accomplish this efficiently, OIA should detail individuals with macroeconomics expertise from Treasury’s Office of International Affairs, focusing on geoeconomic threats to US interests. It should avoid duplicative tactical functions, such as those of the Office of Global Targeting in the Office of Foreign Assets Control (OFAC) or of the other sixteen IC agencies, while preserving room for strategic network analysis.

Furthermore, the Treasury’s relative lack of internal senior decision-makers (e.g., the secretary, deputy secretary, and three undersecretaries) has incentivized OIA to focus too heavily on external customers and finished intelligence production (e.g., the President’s Daily Brief) that are largely the domain of other, better-resourced IC agencies. This focus has come at the expense of internal Treasury customers, who would be better placed to use and incorporate timely, actionable OIA analysis. OIA’s signature analysis should instead focus on the needs of the Treasury and the deployment of its economic tools including detailed financial analysis, second- and third-order analysis of sanctions and other economic tools, and strategic monitoring and impact assessments. Like the State Department’s Bureau of Intelligence and Research, OIA enjoys regular access to decision-makers—far greater than other members of the IC—working hand in glove with Treasury’s financial attachés, sanctions experts, financial regulators, policymakers, law enforcement, and deployed intelligence and military teams.

OIA should institutionalize more internal mobility across TFI and Treasury writ large to support the mission of economic statecraft-focused analysis. This will increase staff expertise and combat attrition, and is a practical exigency given how many foreign policy issues are simultaneously macroeconomic and illicit finance challenges.

Empower and formalize its attaché program

Treasury’s attaché program, which has existed in some form for decades, places senior Treasury staff in key posts internationally to support development and implementation of US government policy priorities around countering illicit finance and supporting macroeconomic stability. Attachés serve as the Treasury Department’s official representatives to one or more host countries, working directly with foreign finance ministries, central banks, law enforcement authorities, and local financial services firms to inform, develop, and implement economic security policy. The attaché program is an essential but underresourced tool in US economic statecraft.

The current Treasury attaché program is logistically managed by the Department of the Treasury. As of 2025, there are approximately a dozen Treasury attachés serving around the world, although the posts are not static. Unfortunately, attaché positions open and close on a regular basis, often due to changing resources rather than exigent policy needs. For instance, the Treasury has only had a sporadic attaché presence in some posts with major geopolitical significance—including Ankara, Jerusalem, Kiev, and Moscow—largely due to reallocations in department funding and shifting international priorities from one administration to the next. This inconsistency has major implications for the ability to nurture lasting diplomatic ties to host country economic policymakers and to encourage meaningful policy change over the longer term.

Further, internal logistics for the Treasury attaché program are managed on an ad hoc basis, unlike established foreign service officer programs at peer agencies, including the Agriculture, Commerce, and State departments, each of which has a professional foreign service. This creates friction within the embassy system and within the Treasury itself. Because the attaché program is seen as intermittent, the State Department—which is in charge of managing missions and posts overseas—is often reluctant to empower the attaché role, leading to inefficient, long-standing bureaucratic battles between State Department economic officers, who often lack substantive illicit finance and/or macroeconomic analysis expertise, and Treasury attachés. Internally, there is no career service within the Treasury Department for attachés, even though the role is coveted among senior staff. Attachés have limited support at the end of their tours and are often not considered promotion-eligible while serving overseas. Consequently, the Treasury has struggled to retain attachés over time. There are practical ways, however, to enhance the Treasury attaché program and ensure that it effectively supports economic statecraft initiatives.

First and foremost, Congress should formalize the Treasury attaché program by including Treasury as one of the designated foreign service agencies and formally establishing a Treasury diplomatic service corps. The Anti-Money Laundering Act of 2020, which requires Treasury to maintain an attaché program, falls far short in this regard and should be expanded or amended to formally designate Treasury as a foreign service agency. Benefits of congressional recognition of Treasury as a foreign service agency include better integration of Treasury attachés in embassy interagency country teams and clearer lines of reporting directly to either the ambassador or chief of mission rather than to State Department economic officers. A formalized diplomatic program also mitigates the risk of abrupt opening and closing of posts from administration to administration, ensuring greater durability of Treasury attaché posts overseas and less politicization in making location determinations.

Second, the Treasury should establish a lean but dedicated Treasury attaché management office. At present, posts are informally designated as either IA-owned or TFI-owned, yet nearly all posts require substantive expertise and regular engagement with both Treasury components. A management office would reduce the tendency within the Treasury to create silos between IA and TFI and would promote the implementation of a more holistic economic statecraft policy that represents all the department’s interests with foreign partners. A dedicated attaché office would also support returning attachés following their tours, integrate them back in the department, and ensure that the department is able to retain its highest-performing officers.

Introduce technological improvements so that resources are more effective

As America’s adversaries increasingly rely on sophisticated evasion tools and leverage big data and emerging technology to hack, steal, and obfuscate their trail, TFI cannot afford to lean on legacy systems and heavily manual processes to carry out its monitoring, targeting, and enforcement. Doing so only delays timely action, reduces the efficacy of sanctions efforts, and promotes a generally “reactive” stance toward geopolitical change. Against the wider efficiency-enhancing backdrop, modernizing the information technology (IT) infrastructure will position TFI to move at the “speed of business,” allowing the sophisticated and highly technical expertise of TFI staff to be put to higher-order tasks protecting the financial sector and dollar.

At the base of this pyramid is timely and comprehensive analysis of information from a diverse and variable range of qualitative and quantitative data sets, ranging from suspicious activity reports (SARs) and trade data to bulk financial and classified source material. Advancements in IT systems and the targeted deployment of artificial intelligence (AI) will allow TFI’s staff expertise to shift toward evaluating outcomes rather than inputs and will also reduce time spent manually reviewing data sources. A few targeted examples:

• AI and large learning models (LLMs) should be used to help identify trends and indications of high risk among the millions of SARs and other Bank Secrecy Act (BSA) reporting that the Treasury’s Financial Crimes Enforcement Network (FinCEN) receives annually from covered financial institutions. This would allow FinCEN and law enforcement agencies to more easily review and analyze data that the private sector spends billions of dollars to report per year as part of their BSA compliance requirements while hard-coding in rules-based, rather than user-based, privacy controls. This would also support better partnerships with law enforcement and within Treasury and the broader interagency work supporting sanctions targeting, investigations, regulatory policymaking, and enforcement actions.
• OFAC reviews thousands of licensing requests a year relating to the sanctions programs it administers. While each license request relies on a unique set of circumstances, LLMs should be used to enable better triage and processing of licensing requests while steering thin resources toward escalation and review.
• OFAC should leverage AI to compile information needed for sanctions packages that would then be reviewed by sanctions investigators, allowing for faster and more policy-responsive drafting of packages and limiting what is currently a manual process.
• Treasury should develop more robust and autonomous economic modeling, leveraging the expertise of International Affairs and the Office of the Chief Sanctions Economist to increase the diagnostics available to policymakers and evaluate the second-order and economic effects of statecraft tools.
• Treasury should evaluate and streamline internal TFI technology where inefficiencies currently exist; for instance, TFI has multiple duplicative technology networks between FinCEN and the other TFI offices, which complicate information sharing and cyber security while missing opportunities for economies of scale.
• Treasury should evaluate technical improvements to facilitate how the private sector provides BSA reporting and other financial information, including but not limited to SARs, currency transaction reports (CTRs), and CFIUS submissions to streamline processes and reduce costs for both the private and public sectors.
• Treasury should create a TFI chief innovation officer position that reports to the under secretary and works in collaboration with Treasury’s chief technology officer and chief AI officer. The TFI chief innovation officer must be empowered to procure systems and eliminate duplicate resources across components to marshal and use resources well. Without a TFI-specific technology strategy, the organization will fall into the familiar pattern of tinkering with decades-old systems rather than identifying essential upgrades.

The opportunity to modernize US economic statecraft is now

In a March 6 speech at the Economic Club of New York, Secretary Scott Bessent noted that “economic security and national security are inseparable” and that Treasury’s tools and authorities are a critical component of US foreign policy. While Treasury’s tools and authorities remain strong, the ways in which they are used are antiquated. To meet the economic and national security challenges of today, the administration must improve upon the perceived mistakes of its predecessors by leveraging existing authorities and resources to enhance the effectiveness and efficiency of the US economic statecraft tool kit. Facilitating interagency coordination and collaboration on economic statecraft, improving intelligence analysis that informs these economic statecraft policies, enabling the Treasury attaché program, and enhancing Treasury’s capabilities through technology innovations will modernize how the United States wields its economic strength to more effectively protect our economic and national security and the integrity of the US financial system.

Lesley Chavkin is Global Head of Policy at Paxos and a Nonresident Senior Fellow in the Atlantic Council’s GeoEconomics Center. She previously served in a variety of roles at the US Treasury Department, including as Financial Attaché to Qatar and Kuwait.

Eitan Danon is a content marketing manager at Chainalysis. He previously served in several roles at the US Treasury Department and in the US intelligence community. He is also an adjunct senior fellow at the Center for a New American Security and a security fellow at the Truman National Security Project.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. She previously served in senior roles within the US Intelligence Community, US Treasury Department, and the National Security Council at the White House.

Andrew Gallucci is the Senior Director for Regulatory Strategy at Circle. He previously served in a variety of roles at the US Treasury Department and in the US intelligence community.

Caroline Hill is a Senior Director for Global and Regulatory Strategy at Circle. Caroline’s government time included serving as the Director for Latin America and Africa in the Office of Terrorist Financing and Financial Crimes at the US Treasury Department, as well as Senior Advisor to the Assistant Secretary and Financial Action Task Force President.

Issue Brief Mar 27, 2025

Canada needs an economic statecraft strategy to address its vulnerabilities

By Kimberly Donovan, Maia Nikoladze, Lize de Kruijf

To address threats from Russia and China and reduce trade overdependence on the United States, Canada’s federal government will need to consolidate economic power and devise an economic statecraft strategy that will leverage Canada’s economic tools to mitigate economic threats and vulnerabilities.

China Cybersecurity

Transcript Jan 16, 2025

Daleep Singh outlines five principles to guide—and constrain—the use of economic statecraft tools

By Atlantic Council

Speaking at an Atlantic Council event, Daleep Singh said that the world needs common rules of engagement for why, when, and how to use restrictive economic measures.

Economic Sanctions Economy & Business

Econographics Dec 20, 2024

A policy blueprint for the Trump administration’s outbound investment screening regime

By Kit Conklin

As the Trump administration enters its second term, addressing economic and military threats posed by the People’s Republic of China (PRC) will remain a cornerstone of its foreign policy and legislative agenda. One area primed for action is the expansion of outbound investment restrictions targeting companies and securities associated with the PRC’s military.

Americas China

Housed within the GeoEconomics Center, the Economic Statecraft Initiative (ESI) publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests.

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We have each advised or chaired executive branch agencies involved in digital asset policy and co-authored articles about why and how to regulate stablecoins. One of us testified before Congress in February about the pending legislation. We share concerns about the illicit use of stablecoins and the speculative nature of much of the crypto market. But stablecoin legislation is likely to be enacted this year: the Trump administration prioritized the issue in its digital assets executive order three days after the inauguration; Republican leaders in the Senate and House, together with Sacks, promised to pass stablecoin legislation within the administration’s first one hundred days; and bills have been passed out of both House and Senate committees. Therefore, the focus now should be on how best to regulate stablecoins, not whether to do so. 

Stablecoins, moreover, already exist—the market capitalization is now over $230 billion and growing rapidly, almost all in dollar-pegged stablecoins. If the United States does not create a credible regulatory framework, the risks associated with stablecoins will only increase. In addition, the United States will lose the ability to set standards for liabilities denominated in its own currency because other jurisdictions are rapidly creating frameworks that permit dollar-based stablecoins. 

The two bills under active consideration in Congress—the GENIUS Act in the Senate and the STABLE Act in the House—create some helpful guardrails to ensure that stablecoins are indeed stable. But the bills also contain significant flaws. Here are six ways that the bills must be improved to establish an effective stablecoin regulatory regime.

1. Close the foreign issuer loophole

The biggest weakness in both bills is that they do not adequately regulate offshore stablecoin issuers. This means they both fail to regulate Tether, the largest issuer of dollar-pegged stablecoins. This foreign issuer loophole, or “Tether loophole,” completely undermines the purpose of US stablecoin legislation.  

Both bills require a company that “issues” stablecoins in the United States to be licensed and supervised by a federal or state regulator and comply with a host of prudential requirements. These include ensuring that tokens are fully backed by high-quality reserves and meet capital and other risk management requirements; they also limit issuers’ activities. But if the stablecoins are issued offshore and simply flow back into the country, the GENIUS Act imposes no restrictions on the issuer or on the use of those stablecoins as long as the issuer is able to “seize, freeze, burn or prevent the transfer of” tokens at the direction of law enforcement. These are powers that most stablecoin issuers already wield. 

The foreign issuer loophole in the GENIUS Act puts US stablecoin issuers at a serious regulatory disadvantage, as they will be required to operate under prudential and supervisory requirements that won’t apply to many foreign-issued stablecoins. Indeed, it incentivizes new issuers to incorporate offshore and existing domestic issuers to relocate to jurisdictions with more attractive, less effective regulatory frameworks. Consumers will also face confusing choices, as US prudential standards, bankruptcy provisions, and other consumer protections will apply to some payment stablecoins circulating in the United States but not others.

The STABLE Act provides an eighteen-month grace period after which an offshore issuer must be “subject to” a supervisory regime in another country that is deemed comparable to the US regime, or else its stablecoins cannot be offered or sold by “a custodial intermediary.” But this approach, too, is inadequate. The bill does not impose a prohibition on the use of stablecoins that are offered and sold without the involvement of a custodial intermediary. What’s more, the STABLE Act does not have a clear enforcement mechanism applicable to foreign stablecoins, suffers from material drafting ambiguities that could cause legal uncertainty, and envisions insufficient penalties for noncompliance. 

Legislation that encourages stablecoin issuers to incorporate abroad undermines the goals the administration laid out in its executive order on digital assets, including promoting US leadership in financial technology and protecting the dollar. Moreover, if the stablecoin market continues to grow at anything near its current pace, the scale of dollar-denominated liabilities created offshore could become systemically important, as was the case with Eurodollars. While those offshore dollar deposits started off small, by the early 2000s, they had exceeded the total deposits held by banks in the United States. The US government will ultimately have to reckon with a large offshore stablecoin market, as it had to reckon with Eurodollars. 

A better approach can be found in proposed bipartisan stablecoin legislation negotiated last year by Representative Patrick McHenry, then chairman of the House Financial Services Committee, and Representative Maxine Waters, the ranking member. The McHenry-Waters bill—which was not taken up before the last Congress ended and has been reintroduced by Waters this year—would make it illegal to “engage in the business of issuing a payment stablecoin, directly or indirectly in the United States through any means or instrument of transportation or communication in the United States, or by persons in the United States.” In addition, it would impose stiff civil and criminal penalties on those who offer or sell any unlicensed stablecoin in the United States or to any US person.

Replacing the foreign issuer loophole with a strong extraterritorial provision could still be coupled with provisions under which a foreign issuer, in lieu of registering in the United States, can be licensed and supervised by a jurisdiction that Washington deems to have equivalent rules. But any such “substituted compliance” arrangement should be at least as robust as what is already in place for globally systemically important banks and derivatives clearinghouses—including, for example, joint supervisory arrangements between the United States and foreign regulators for large issuers. 

2. Enhance the Treasury Department’s authority to prevent illicit finance

One strength of the GENIUS Act relative to the STABLE Act is that it requires issuers to implement a variety of measures to prevent illicit activity, including the ability to freeze and seize stablecoins at the request of law enforcement (although the latter is not a substitute for jurisdiction over foreign issuers, as noted above). But a more comprehensive approach is needed because stablecoins can be transferred on decentralized blockchains without any involvement by the issuer. The legislation should provide the Treasury Department with broad authority to address illicit finance concerns. This should include the authority to issue blocking orders with respect to on-chain protocols—such as mixers, tumblers, and other arrangements—that malevolent actors can use to disguise illicit transactions or sanctions evasion and thwart law enforcement efforts. Congress should also provide the Treasury Department’s Office of Foreign Assets Control with the same jurisdiction and authority over US dollar stablecoin transactions that it already has over other dollar-denominated transactions. 

3. Balance state and federal authority

Both bills provide for dual state and federal paths for the chartering, regulation, and supervision of a stablecoin issuer. The STABLE Act requires that a state’s regulatory standards must meet or exceed the federal standards, whereas the GENIUS Act has a weaker “substantially similar” standard. However, the STABLE Act does not provide for adequate joint federal-state supervision of large issuers, thus creating the risk that a systemically important issuer could be supervised only by state authorities. By contrast, the GENIUS Act appears to require joint supervision of issuers with a market capitalization in excess of ten billion dollars (although the drafting is unclear on several critical issues). The strengths of each bill should be combined in the final legislation. 

4. Limit the activities of affiliates of stablecoin issuers

Both bills include relatively tight activity restrictions on stablecoin issuers, but neither imposes any group-level activity or affiliation restrictions. Stablecoin issuers that are subsidiaries of insured depository institutions would presumably still be subject to restrictions under the Bank Holding Company Act (BHCA). However, the affiliates of nonbank stablecoin issuers would be free to carry on other types of business activities, as well as to lend money to, and borrow money from, any affiliated stablecoin issuers. Group or affiliate restrictions help prevent financial distress in a related entity from spreading to the stablecoin issuer and jeopardizing its commitment to maintain a stable nominal value for its stablecoins.

In addition, unlike bank regulation under the BHCA, the absence of such restrictions on nonbank issuers would provide an unobstructed path for large technology platforms to directly enter the market for money and payments—and thereby exploit their enormous network effects, privileged access to customer information, and other comparative advantages to further concentrate and entrench their already significant market power. In contrast, the McHenry-Waters bill combined tight activity restrictions on stablecoin issuers with corresponding group-level activity and affiliation constraints, which should be included in stablecoin legislation going forward.

5. Make a specialized procedure for stablecoin issuer bankruptcy protections

Another area in which the two bills need improvement is bankruptcy protections. As we have noted elsewhere, a specialized resolution procedure for insolvent stablecoin issuers, similar to what the United States has for banks, would be preferable to applying standard Chapter 11 procedures for stablecoin issuers. That would ensure that token holders get repaid quickly and in full, whereas Chapter 11 could force holders to wait until the end of an uncertain, lengthy, and costly process and face a risk of getting back only a fraction of what they are owed. A specialized procedure would also minimize the risk that an issuer’s failure leads to further runs or more widespread contagion. While the McHenry-Waters bill contemplated such a specialized regime, neither bill pending now in Congress takes this approach. Rather, they include provisions designed to improve how stablecoin issuers would be resolved in Chapter 11 bankruptcy.

The GENIUS Act provides a slightly better set of bankruptcy protections than the STABLE Act—including carving stablecoin reserves out from an issuer’s bankruptcy estate, giving holders priority over other claims, creating a procedural right for lifting the automatic stay, and returning reserves to holders. But these protections should be strengthened. First, the applicable regulator should be able to lift the automatic stay and restrict an issuer’s ability to pledge reserves (which could undermine recovery by the holders and thus spark potential destabilizing runs). Second, because most holders acquire stablecoins in the secondary market and not directly from the issuer, the legislation should make clear that all holders have a claim in bankruptcy. 

6. Strengthen consumer protections

Both pending bills are relatively light on consumer protections. Ideally, they should contain some protections relating to the disclosure of terms, settlement procedures, fraudulent and unauthorized transfers, and dispute resolution, rather than leaving those issues to private ordering. But at minimum, there are two areas in which changes to the GENIUS Act introduced just prior to the committee vote made it inferior to the STABLE Act and should be reversed. First, the application of consumer privacy protections under the Gramm-Leach-Bliley Act to stablecoin issuers was deleted. This should be reinstituted, and ideally, privacy protections should be strengthened beyond what is required under that law. The second change to the GENIUS Act concerns custodial arrangements for reserves and stablecoins. Both bills require custodians to meet traditional standards imposed in securities law and other areas, but the GENIUS Act was amended to require those standards only for custody of stablecoins pledged as collateral, not for stablecoins generally as in the STABLE Act. This, too, should be reversed. 

***

Beyond the weaknesses we have noted, the stablecoin bills are also a missed opportunity to modernize the US payment system by creating a technologically neutral federal regulatory framework and expanding access to Federal Reserve master accounts and other core payment infrastructure. The bills also do not address the use of stablecoins by crypto intermediaries or the broader challenges of regulating the crypto market—issues that congressional leaders say they will take up next. While we would ideally like to see all of these and other issues addressed, given the politics of the moment, some version of the pending stablecoin legislation will likely be passed soon. It is therefore vital to make the legislation as strong as it can be. The risks of an unregulated stablecoin market are growing each day. Legislation that helps safeguard consumers and markets from some of these risks is better than no stablecoin legislation at all. 

Timothy Massad is a research fellow and director of the Digital Assets Policy Project at the Kennedy School of Government at Harvard University and a former chairman of the Commodity Futures Trading Commission and assistant secretary of for financial stability at the Treasury Department.

Howell E. Jackson is the James S. Reid, Jr., professor of law at Harvard Law School and served as a senior adviser on digital asset policy for the National Economic Council during the Biden administration. 

Dan Awrey is the Beth and Marc Berg professor of law at Cornell Law School and a senior adviser (detailee) with the US Treasury Department.

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Background to CFIUS reviews of foreign investment

CFIUS reviews strengthen US efforts to maintain national security by ensuring governmental review and national control of essential industries. Established to limit foreign control of US critical infrastructure and emerging technologies, CFIUS has grown to encompass major parts of the US economy.

CFIUS allows the US government to review investments into a wide range of sectors by foreign actors, state-owned companies, or private businesses with majority foreign ownership. These include traditional infrastructure and raw material production such as electricity and steel, as well as sectors essential to the modern economy such as semiconductors and artificial intelligence (AI).

In an attempt to further strengthen US government oversight and limit Chinese investment in US critical infrastructure, the Trump administration has issued the National Security Presidential Memorandum (NSPM). The NSPM relies heavily on updating and expanding CFIUS to include more sectors, strengthen CFIUS reviews, limit mitigation measures, and reshape exemptions.

However, the NSPM does nothing to fix the underlying issues which plague CFIUS and place limitations on cross-border investments into the United States from allies. 

Application of trusted partner exemptions matters

The largest complications surrounding CFIUS center on review of investments from fellow Western democracies and clearance process timelines. The NSPM offers the solution of a white list to expedite and clear investment from like-minded countries more easily, but the list poses more questions than solutions.

CFIUS currently includes specific exemptions, including surrounding investments by those with citizenship from trusted national security allies. The proposed white list would include additional trusted countries with appropriate approaches to China. This would be paired with a “fast-track” process for investments which fit these requirements.

However, in practice, existing exemptions have done little to provide certainty or clearance for investors. Nippon Steel’s proposed investment in US Steel illustrates the difficulty for investments which should be clear cut. This investment is from a critical security partner and longtime Asian ally, yet it continues to face numerous hurdles.  Despite offering a clear alternative to Chinese investment in a critical industry and providing numerous investment opportunities between longtime security partners, political support for the deal is limited. The CFIUS process may have cleared the investment based on the facts, but President Biden blocked completion of the deal through an executive order and President Trump’s support of the deal remains fickle at best.

Expanding reach without clear definitions will hinder investment

CFIUS as it stands offers comprehensive definitions for the sectors it covers. This is problematic for technology investments, when daily advancements are made in both hardware and software. From the development and incorporation of AI into daily life to the exploration of quantum computing solutions, CFIUS oversight touches nearly every part of the digital economy.

Instead of working to define these terms and provide clarity, the NSPM looks to expand CFIUS coverage into even more sectors. The proposed expansion for CFIUS oversight would include greenfields, agriculture, and other sectors outside of technology and infrastructure.

Once again, how these sectors and investments will be defined remains unknown. If the current CFIUS regime is anything to go by, these definitions will be expansive and vague. Investors will face increased uncertainty as they work to assess if any of their potential investments are captured by CFIUS screening.

Voluntary filing regime leaves investments in limbo long after completion

Though mandatory for certain industries and sectors, of which the NSPM proposes wide expansions, most investments fall under the voluntary CFIUS regime.

The voluntary filing process allows a firm to notify CFIUS of their proposed investment and gain approval prior to completion. Businesses can decide to voluntarily file through the regime, inviting CFIUS to review the potential investment and provide their approval. By drawing attention to the potential deal, firms open the investment to the in-depth scrutiny of a CFIUS review. Though time consuming and costly, approval through this system can provide certainty for the investment alongside symbolizing a firm’s commitment to US regulatory oversight.

If a firm decides against making voluntary filing, this does not guarantee a lack of CFIUS oversight. Though the filings are truly voluntary, CFIUS’s increased reach and powers can present a looming threat to investments.

CFIUS has the authority to review any investment, regardless of status. Any potential risk to national security as determined by CFIUS is worthy of review. This includes long-established investment arrangements which are past the point of completion. As industries transform and national security priorities shift, there is every chance that a previously completed deal could come under CFIUS review. When this happens, businesses face the complications of a CFIUS review, as well as the very real possibility of having to unwind their investments long after a deal is done.

This threat is more pronounced than ever as retroactive CFIUS reviews are triggered and approved by executive branch officials. With an administration that is taking an increasingly critical eye and politicized stance to foreign investment in the United States, the risk of a delayed CFIUS review drastically increases.

Presumption of denial is already the norm 

Some investment advisors say the proposed changes will create a “presumption of denial” for investments caught by CFIUS. Yet this is exactly how the current regime works in practice for international investment in critical sectors.

It is unclear which investments trigger a CFIUS review. The process itself is treated as a black box, and even if you are approved there is a possibility for political pressures to reverse any decision. Many firms now view CFIUS reviews as fickle as a magic eightball. Paired with the new outbound investment screening regime, the United States is creating more hurdles than incentives for global investors.

One potential increase in investor confidence could come in the form of clarification on second passports. Confusion about second passports especially hinders investment from British citizens. Though United Kingdom (UK) citizens are provided an exemption for CFIUS review, this exemption no longer applies if they are a dual passport holder. Post-Brexit, there is an uptick in second passport possession by British citizens looking to retain easy access to working and living in the European Union (EU). Obtaining a second passport comes at the cost of losing this CFIUS-based exemption. This is especially true for British citizens who hold Irish passports, writing off Northern Irish residents and investment in one fell swoop. By clarifying and reshaping potential citizenship exemptions, investors can begin to adjust their view of CFIUS.

Geopolitical landscape for investment screening is increasingly complex

CFIUS is not the only game in town when it comes to foreign investment screening. Countries across the globe have increasingly expanded their own regulatory landscapes to include similar structures.

In the UK, the National Security and Investment Act (NSIA) was passed in 2021. It came into force in January 2022 and has resulted in numerous investment reviews since. The reviews have focused mostly on what CFIUS labels emerging technology and operated as support for other domestic policy goals, including arguing for strengthening domestic industrial production.

When creating the NSIA, the UK government openly utilized CFIUS Foreign Investment Risk Review Modernization Act (FIRRMA) as a starting point for shaping the legislation. Yet they took care to learn from business insight when dealing with CFIUS. This resulted in a regime that permits investment screening and final governmental reviews for critical sectors while also providing businesses with clear timelines and definitions, direct communication from government during the process, and annual reports published by the government on NSIA reviews. These improvements could easily be incorporated into the US CIFUS regime, but are not captured by the NSPM changes. 

Following on from the United States and the UK, the EU is exploring and developing its own regime to standardize reviews across the bloc. If successful, doing so will lead to three of the world’s largest services economies implementing foreign investment screening.

In Canada, the Investment Canada Act was amended in 2024 to strengthen Canada’s approach to foreign investment screening. Changes included CFIUS-style requirements such as pre-closing filing requirements, including investment by foreign state-owned enterprises, and a wider catchment of investments. Reviews are judged both on “net benefit” to Canada and national security measures. This sweeping regime goes further than CFIUS and can be utilized by the Canadian government to review nearly any external investment into the country.

The creation and expansion of these regimes unfortunately only complicates investment flows between trusted allies. When each country is investigating and screening investments, capital flows become slower, more uncertain, and inherently limited.

To increase investment, the US must prioritize international collaboration and offer clarity on CFIUS

How can the United States truly work alongside allies to support US industry, innovation, and leadership if it is denying their investment?  Stifling cross-border investment between allies only limits access to capital, stymies innovation and growth, and weakens national security. The United States should be working alongside Western democracies to strengthen global markets and build upon each other’s strengths.

If the administration is looking to drive investment in the sectors of the future, from quantum computing to AI, investors need certainty and clarity. This should be combined with wide access to capital to offer the investment needed to make advancements.

CFIUS reform needs to be structured to drive investment, not complicate it. This means providing more insight into the process, clear evidence guidance for firms from application to completion, structured definitions of sectors covered, and defined timelines. Learning from the application of investment screening in other countries and openly engaging with businesses and investors to understand their concerns is an easy starting point.

Alex Mills is an international trade expert specializing in financial services, maritime law, and ESG. They have nearly a decade of experience across the private and public sector, including in UK and US government.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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For starters, the plan stems from a 2024 proposal by Senator Cynthia Lummis and largely functions as a centralized repository for assets that have already been seized by the federal government—for example, as part of criminal proceedings. That might be “budget neutral,” as the order says, but it is not a reserve in the traditional sense of a gold reserve used by central banks to redeem depositors or pay international debts. As a prominent Bitcoin thinker succinctly put it, “[t]here is no ‘strategic’ value in a crypto reserve.”

The executive order directs the government to simply hold (or later on, perhaps buy and hold) assets like bitcoins. Although the order vaguely criticizes the government’s “premature sales” in the past, “HODL’ing” (as the expression goes) may or may not be fiscally prudent, depending on whether or when to sell the assets. Separately, there are serious questions about if it is prudent for the government to essentially invest in select digital assets, as opposed to generating revenue in other ways. At the very least, the Secretary of the Treasury should develop concrete criteria and an authorization process for periodically selling or buying digital assets, to add transparency and provide an orderly means of decreasing volatility exposure. Senator Lummis’s original proposal, for example, contained some selling thresholds.

Second, the White House crypto czar David Sachs estimated that the federal government’s reserves comprised 200,000 bitcoin worth a staggering $17.5 billion at recent prices. If those numbers are still accurate, that would equal more than the total amount of gold held at almost all Federal Reserve Banks. That cannot be right as a matter of monetary policy. Even putting aside the polarizing debates about the long-term value of bitcoin (or lack thereof), the size of the new strategic reserve seems disproportionate given the risks and functions of the assets involved. Consistent with a transparent sales process, the Treasury should rightsize any digital asset reserve and use the remaining proceeds for other government programs.

Third, the cybersecurity challenges of having a centralized digital asset pool are not trivial, as the Atlantic Council highlighted in a prior report. Yet the executive order says nothing about how to start securing this new stockpile. Sacks tweeted that the pool would be akin to a “digital Fort Knox.” But Fort Knox has legendary security, is operated by 1,700 specialized employees, and adjoins a military base with 26,000 trained personnel. It is unclear what office, if any, at the Treasury could manage such a gargantuan security task for a digital asset reserve. The endeavor would be particularly difficult after the Department of Government Efficiency—or DOGE—unceremoniously disbanded teams of engineers like those in the 18F division, who were renowned for their private sector expertise. By contrast, Senator Lummis’s 2024 proposal highlighted security measures for “state-of-the-art physical and digital security” through inter-agency cooperation.

Perhaps most importantly, the ultimate risk of the executive order is that it embodies a form of crypto boosterism. Namely, it appears to tout an industry that President Trump came to embrace during the later phases of his political campaign, famously including the launch of his own meme coin just days before inauguration. To be fair, the White House revised the president’s earlier announcement that the reserve would include proactive purchases of select “altcoins,” which industry insiders worried “could be a vehicle for corruption and self-dealing.” That was a prudent move. But to many on Wall Street and main street, the order may still seem more like political maneuvering than sober monetary policy.

In a parallel universe, there could have been a thoughtful way for the Federal Reserve and Treasury to gradually study the possibility of holding digital assets on the balance sheet. They could have scrutinized the economic implications and prepared for security contingencies that might have included a bipartisan compromise around stablecoin legislation to specifically promote the strength of the dollar. But in today’s world, this executive order looks more slapdash than strategic. That may have been intended to bolster digital asset markets, but it has fallen flat on most fronts.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Thank you Chairman Hill, Ranking Member Waters, and distinguished members of the committee, for holding this hearing and the honor of the invitation to testify on the digital payments ecosystem. I applaud your leadership in convening the committee on this important issue and continuing the years-long efforts of this committee across several Congresses to evaluate and build legislation for a stablecoin regulatory framework. I hope my testimony will be helpful in considering some of the most important aspects of frameworks needed to drive innovation in a secure, competitive, safe, and sound digital payments ecosystem that reinforces national security interests, defends consumers, and preserves personal liberty.

I have spent my career working at the intersection of national, economic, and technological security. I have had the honor of serving three tours in the White House, including recently departing from my second stint at the National Security Council leading various policy efforts on cybersecurity, emerging technology, and digital assets, to include the US Counter-Ransomware Strategy and the previous administration’s Executive Order on Ensuring Responsible Development of Digital Assets. I previously led digital asset policy initiatives at the US anti-money laundering and countering financing of terrorism (AML/CFT) regulator, the Financial Crimes Enforcement Network (FinCEN) and have served on advisory boards for the US Commodity Futures Trading Commission, the Idaho Department of Finance, and the New York Department of Financial Services (NYDFS). Through my ongoing work as a senior fellow at the Atlantic Council GeoEconomics Center and previous work as a consultant and executive at a venture capital firm, I have advised companies, academia, and policymakers in support of strategy, policy, standards, and product development ranging across areas like cybersecurity, AML/CFT, digital assets, and artificial intelligence and machine learning. The views I share are my own and do not reflect the views of the Atlantic Council.

The most important message I can underscore to this committee is the criticality of ensuring our regulatory frameworks create a foundation for providing trustworthy and affordable access to financial services for consumers while also reinforcing the centrality of the United States in the financial system and as the home for responsible, cutting-edge innovation in emerging technologies and payments. That includes the critical need for timely progress on a comprehensive stablecoin framework that supports these objectives, as well as driving broader experimentation and competitiveness in digital payments. Just as important, any framework demands more than just policy that is clear, strong, and comprehensive, but also that is implemented and enforced timely and scoped to shape the sector.

While timely progress is critical, these frameworks must be deliberate, thoughtful, and comprehensive of the real and present risks, as well as opportunities, that we have observed in the digital asset ecosystem and broader financial system. In the wake of serious national security threats like billion-dollar hacks by rogue nations, growing integration of cryptocurrency as a tool for transnational organized crime, market manipulation and fraud that can threaten system integrity and stability, as well as pressure from adversarial nations seeking to develop and leverage alternative payment systems to weaken and circumvent the dollar, it is clear that strong safeguards, including for US competitiveness, are needed. This framework also demands we ensure policy and enforcement approaches both domestically and internationally create a level playing field for US firms—often the most compliant firms in the world—to be able to compete fairly. Otherwise, the foundation we build these systems on risks faltering, with the potential to not only reap significant harms but also prevent us from harnessing the greatest positive potential that is possible from a secure and innovative digital payments ecosystem.

Background: Exigency for competition, security, and liberty

Stablecoin features, uses, benefits, and risks

Stablecoins, a class of cryptoassets that maintain a stable value in relation to another asset, most predominantly fiat currencies, hold potential to help drive needed innovations in our digital payments ecosystem. Stablecoins with proper protections can help improve efficiency in delivery of financial products and services, promoting greater transparency for monitoring of various risks in financial services, enhancing resiliency within the financial system, dismantling barriers to financial access and inclusion, and promoting innovation and competition that can strengthen US markets and leadership. With the current stablecoin market cap sitting at over $227 billion, use cases are growing across areas like dollar settlement for financial services firms, cross-border remittances, relief efforts like to Ukrainian refugees, and even for inflation hedges in places like Venezuela. However, stablecoins are largely still used as settlement in trading activity on cryptocurrency platforms—wide adoption in exchange for goods and services is not yet a reality, though it’s possible that a clear regulatory framework to enable greater trust and accountability may facilitate higher adoption.

Most of the core features for any cryptocurrencies apply to stablecoins—including their ability to transfer significant value peer-to-peer (i.e., from user to user without the need for a typical custodial role of a third-party financial intermediary), pseudonymously, immutably (or irreversibly), with global reach, with increased speed and cost efficiencies—though we must note that these are all features that are attractive to both licit and illicit actors. Challenges in mitigating risks in cryptocurrency are especially driven by by lagging AML/CFT compliance as well as broader prudential standards across the sector internationally, reinforced by the absence or reduction of financial institution intermediaries and central points of control in more highly decentralized cryptocurrency systems that can obscure clear lines of responsibility and accountability within cryptocurrency ecosystems. While stablecoins are used across more decentralized networks, in most cases stablecoins generally at least central administrators and issuers that can ease establishing lines of responsibility.

Where there is an absence of clear responsible parties, compounded by the immutability or unchangeability of cryptocurrency ledgers, it can be extremely challenging to provide mechanisms for victim recourse as well as timely adaptation to take measures to stop movement of illicit funds or patch security vulnerabilities in networks and smart contracts. However, in contrast to SWIFT, FedWIRE, and cash movements that do not publish transactions to public ledgers, on-chain stablecoin transactions include a lot of public transparency that can be beneficial to market surveillance and crypto investigations. Though ultimately the benefits presented by this transparency can be difficult to leverage with earlier-mentioned challenges with compliance, acceptance of accountability, and expertise across both public and private stakeholders.

Risks that can be presented by stablecoins without proper controls in place generally reflect the same kinds of risks that can exist in traditional finance (or “tradfi”). For example, fraud, market manipulations, and conflicts of interest across stablecoin leaders or public officials can present risks to investors and consumers. Pump-and-dump schemes and front-running capabilities enabled through maximal extractable value (MEV) schemes can endanger market integrity, and complex interconnections, concentration risks, and hardwired procyclicality in stablecoin or any other decentralized finance (“defi”) systems can present risks to financial system stability. Failures like that of Synapse Financial Technologies and of stablecoin Terra underscored the consequences of insufficient oversight of regtech and stablecoin platforms, and the devastating consequences to consumers without access or ability to recover some or all of their funds.

The risks to national security on getting the stablecoin framework wrong—either by being too lax on controls or by overly restricting companies and driving innovation offshore—are also important to evaluate. If stablecoins present the greatest potential for at-scale adoption for cross-border payments in cryptocurrency, then national security concerns of losing sanctions and AML/CFT tool efficacy can present in several ways: either from failing to drive US stablecoin competitiveness compared to other national currency denominated stablecoins or payment systems; or risks that could present from stablecoins and other defi diminishing reliance or need for US correspondent banking relationships in foreign exchange (FX) transactions or other cross-border funds flows.

The need for a framework

The United States does not yet have a comprehensive framework for regulation of stablecoins. Instead, existing authorities are fragmented at the federal level largely only via AML/CFT regulation and then across certain states like New York that cover stablecoins. In the absence of leveraging existing bank and trust charter authorities; using Dodd-Frank payment, clearing, and settlement activity designation authorities; setting up a Federal payments charter; or taking any other action to create a framework, the United States lags behind many other jurisdictions like the European Union, Singapore, Japan, and the United Arab Emirates that have established requirements and most importantly clear pathways to registration and supervision for stablecoins operating within their jurisdictions.

The United States must prioritize establishing a stablecoin framework during this Congress. Similar in many functions and operations to more traditional financial assets, stablecoins and associated deposit and payments activities are things that we understand how to regulate and protect. This framework is achievable, able to build on years of bipartisan efforts working across the aisle to construct a truly comprehensive approach. With Congress and the administration positioned to prioritize this legislation, we are at a critical juncture to get a law passed in 2025.

We need strong prudential and consumer protection regulations to ensure that stablecoins are truly “stable,” allowing any user to trust in its value and avoid losses from the issuer’s default or illiquidity. In this way, a clear regulatory framework that fosters trust can actually help set conditions that could help drive broader adoption and competition. We also need to have strong AML/CFT protections in place for stablecoin ecosystems. These different regimes do not operate in silos, but instead mutually reinforce each other and address vulnerabilities that are being exploited by illicit actors targeting the cryptocurrency sector. For example, in the case of Democratic People’s Republic of Korea (DPRK) hacks of cryptocurrency platforms, like the recent $1.5 billion Bybit hack, are exploiting both cybersecurity weaknesses and vulnerabilities as well as AML/CFT deficiencies in their crypto heists and subsequent laundering activities. In crypto heists, stablecoins have been targets as well as laundering tools exploited by hackers. Only through a comprehensive framework can we ensure that measures across the spectrum of areas like cybersecurity and AML/CFT are holistically addressed in these important ecosystems.

Though also important to note, especially in light of recent changes in enforcement posture—beyond just creating the policy framework, the government and industry must work to apply and enforce the framework. A policy that is not enforced or implemented does nothing to benefit consumers nor US firms with stronger compliance programs that have been operating at higher costs and less competitive advantages than many foreign operating firms.

Proposed stablecoin legislation:Ensuring sufficient protections

There has been a great amount of attention paid to stablecoin legislation in recent years with various stablecoin bills introduced, including the McHenry-Waters bill and Lummis-Gillibrand Payment Stablecoin Act developed last Congress, as well as the STABLE Act and GENIUS Act introduced so far this Congress.

I am very glad to see the level of support within Congress for elevating stablecoin legislation to a priority this year, something I spoke to as essential in my testimony to the Subcommittee on Digital Assets, Financial Technology, and Inclusion last year. I am also pleased to see many elements included in the STABLE Act referenced for this hearing that I support, such as high-quality reserves on at least a 1:1 basis, envisioned roles for both state and Federal regulators, and restrictions on rehypothecating reserve assets as well as stablecoin issuer activities. However, the STABLE Act appears to walk back a lot of the hard work done for years across the aisle to develop the negotiated text between then Chair McHenry and Ranking Member Waters in 2024. It is unclear why some of those critical protections, especially the prudential framework and clear AML/CFT and sanctions applicability to US dollar-denominated stablecoin activity, are absent in the STABLE Act and the GENIUS Act or if the associated risks are otherwise being addressed.

Here I outline some areas for the Committee’s consideration in hopes that the legislation for stablecoins issued this year can be truly comprehensive:

• Ensuring federal line-of-sight for supervision on issues of systemic importance: The STABLE Act, in some ways similar to the existing banking regime, provides for both federal and state authorities to charter stablecoin issuers. However, the STABLE Act does not include any coordination between the federal and state regulators. Rather, the current draft permits a system where a trillion-dollar nonbank stablecoin issuer, engaging in globally reaching payments activity that would typically place an institution under the oversight of federal authorities, without any sufficient line of sight by the Federal Reserve of activities and risks that rise to systemic importance. Unclearly defined “exigent” circumstances, especially in the way of Loper-Bright, as the only context for certain additional regulatory authorities severely restrict a regulator’s ability to monitor for and intervene to mitigate risks for assets that operate 24/7 around the world and with no concerns for borders.

I agree with many others who have testified before you all that state authorities provide an important chartering and oversight capability, including agility and expertise that can help scale appropriate supervision. State regulators with strong prudential, AML/CFT, and consumer protection frameworks are critical partners on the front lines of regulating the cryptocurrency industry, and I am sympathetic to the desire to preserve the states’ regulatory authorities. Though, it stands to reason that when these issuers are operating systems, especially large platforms, that are administering a substitute for the US dollar in international payments, some federal regulator—like the Federal Reserve Board, with its responsibility for monetary policy and financial stability, or the Office of the Comptroller of the Currency (OCC) with its chartering and supervision authority—should have the ability to monitor for their critical risks and have a say in the standards that stablecoin issuers need to meet, at a minimum when they are of a large enough size. The STABLE Act, as it currently stands, raises serious questions around the ability of federal authorities to have visibility of and ability to respond timely to moments of financial crisis and address systemic risks that may arise.

• Scope of risk coverage and enforcement regime: The STABLE Act references risks to mitigate around operational and cybersecurity risks, but otherwise is severely lacking in reference to credit risk, market risk, concentration risk, and even limitations on additional management of capital and liquidity risk beyond the 1:1 reserve collateralization requirement. There is no clear articulation of responsibility for rules or implementation of requirements under privacy regimes like Gramm-Leach-Bliley Act or the AML/CFT framework of the Bank Secrecy Act (e.g., if Treasury/FinCEN would have sole AML/CFT rulemaking authority for payment stablecoin issuers or if they would be issued jointly). Additionally, the enforcement framework is unclear, with no references to specific penalties or enforcement provisions, including no clarity on extraterritorial operations of US dollar-denominated stablecoins.
  
• Affiliate controls and application of the Bank Holding Company Act and Bank Services Company Act: The STABLE Act does not address affiliate relationships and restrictions for nonbank payment stablecoin issuers to preserve separation of activities like banking and commerce. In this new bill, it is unclear to what extent controls like from the Bank Holding Company Act as well as authorities for oversight and delegation of functions as delineated under the Bank Services Company Act apply to payment stablecoin issuers.
  
• AML/CFT and sanctions: While the STABLE Act and GENIUS Act delineate that payment stablecoin issuers are financial institutions under the Bank Secrecy Act, it is not clear (especially to the degree needed in the wake of Loper-Bright) to what degree rulemaking can cover different parts of stablecoin ecosystems and which agency would be responsible for the rulemaking and oversight. Stablecoins have been exploited by illicit actors ranging from cartels to sanctions evaders to terrorism financiers, especially leveraging the absence of sufficient compliance across international operations and defi platforms. The United States Treasury has underscored the benefit for Congress to clarify that any US-dollar denominated stablecoin must comply with US sanctions policy, including extraterritorial applicability, and also make clear the expectation to maintain and assert freeze and recovery capability for illicit proceeds across the stablecoin. We should not find it acceptable for a US dollar stablecoin to be leveraged in transactions to designated actors and jurisdictions that present threats to US national security.

While unlikely in this round of legislation, Congress should start solidifying its views and drafting legislation to expand the regulatory perimeter to help mitigate risks across more decentralized applications of the assets. Expanding such a perimeter would generally involve considering what other entities would be of greatest utility to cover due to visibility and control of the assets, and ensuring that a risk-based approach properly scopes the obligations and does so in full understanding of what is technologically and operationally possible. While there are many differing views on how to approach defi controls, it is encouraging to see that within the defi community there are actors who are trying to implement responsible innovative fixes, even if they are not yet successful, as we saw recently in the unsuccessful attempt by several THORChain developers to try to stop DPRK money laundering on their platform.

• Bankruptcy and resolution measures: Bankruptcy protections are one of the last lines of defense for fostering consumer trust in a product—building comfort for the customer that they will be able to get access to or redeem their assets held by the platform or issuer at any time on demand. The US Bankruptcy code, if applied to stablecoins in the wake of a failure, could be disastrous for token holders who would be treated equivalently to all other unsecured creditors. The McHenry-Waters bill outlined a potential alternative resolution process to help expedite recovery of assets for token holders that could work across federal and state levels and provide critical recourse for consumers.
  
• Fed master accounts and broader payments framework: There is no reference in the STABLE Act or GENIUS Act to the authority of the Federal Reserve to grant access for stablecoin issuers to a master account, something that likely will continue to be sought especially as stablecoins get more regulated and attain higher assurance of their safety and soundness. With this legislation aiming to serve as the comprehensive construct of guardrails and authorities to enable innovation and protect payments, it should include provisions like this to ensure the capability exists with the Federal Reserve for any issuer it deems to be appropriate to grant access.
  

More broadly, stablecoin legislation would optimally be pursued as part of a holistic approach to regulation and supervision of all payments platforms, which are growing enough in complexity and adoption. Many of the risks for stablecoins are similar to those for broader payments, and given the desire to ensure critical protections for consumers regardless of the denomination of their asset or which app they happen to be using, Congress should keep an eye toward how to evolve regulatory frameworks to capture any of these activities regardless on if it is blockchain-based or not.

Again, I applaud the committee’s work on this issue and the continued leadership on these issues by key leaders like Chair Hill and Ranking Member Waster. I encourage the Committee to consider working from the previously negotiated McHenry-Waters bill, which includes bipartisan-vetted provisions that address many of the outstanding issues for the desired comprehensive stablecoin framework. I hope that my views on key missing elements will be helpful to the Committee in its thoughtful efforts to build out and implement a competitive, comprehensive stablecoin framework that addresses risks while promoting responsible innovation.

Proposed CBDC legislation: Privacy as paramount in retail CBDC

The new proposed CBDC Anti-Surveillance State Act bans CBDC experimentation. Innovations in digital payments and across digital forms of both public and private money can also take many forms—whether wholesale or retail CBDCs, stablecoins, tokenized deposits, digital payment applications, etc.—each of which carry a spectrum of diverse implementations and associated risks. Ultimately, it is likely that a mix of modernizations of public and privately-administered rails, such as with the current financial system, will be needed to achieve a future of vision like global instantaneous reach and accessibility of the dollar.

This legislation is pointed specifically at addressing concerns around privacy specific to CBDCs, which is a greater point of concern around retail CBDC implementations rather than wholesale payments that are not associated with specific consumers and related sensitive personal data. The bill proposes to address the privacy concerns by banning even experimentation to even assess if there are technological and governance implementations that could achieve desired privacy outcomes, whether in the US or even just for templates that partner nations could implement. The bill also does not address privacy issues presented by private cryptocurrencies, such as privacy concerns exacerbated by public unobscured records of financial transactions and challenged cybersecurity practices across the sector.

An apparent improvement on this bill from earlier versions appears to be amending the prohibition to only retail CBDCs. Concerns around privacy for a retail CBDC are understandable and very important, especially in the United States given sentiments of Americans around making information available to the government and even challenges that have existed in trying to adopt digital identity infrastructure. Many feel that given such concerns in the United States, focus on wholesale CBDCs as an initial area for innovation in cross-border settlement could be ripe for nearer-term exploration.

The kinds of building blocks that could enable privacy preservation and security in technologies like CBDCs—innovative technologies like digital identity infrastructure and privacy enhancing technologies like homomorphic encryption, multiparty computation, and zero-knowledge proofs—are also building blocks that can enable privacy and security in private cryptocurrency implementations as well. Even if specific development of a US retail CBDC is not likely, broader research and development and experimentation across the more nascent and underlying technologies and components can be helpful to identify mechanisms to achieve desired objectives across a variety of future forms of public and private money innovations.

This bill could further exacerbate a growing gap for the United States in digital payments innovation, as over one hundred countries representing 98 percent of global GDP continue to explore CBDCs and conduct cross-border pilots. The United States remains the only member of the G20 to not be in advanced stages of CBDC exploration. CBDC experimentation is at the heart of significant research and development across the international community trying to shape what the future of the financial system looks like, experimentation that without a major US leadership presence is in some ways both a symptom and a driver towards interest of potential rails less reliant on the dollar, and something in which we cannot idly forsake leadership.

In the interests of safeguarding capabilities for experimentation and ensuring that the United States remains at the forefront of digital payments innovation, I outline here some areas for consideration for this proposed anti-CBDC legislation:

• Narrowing the prohibition to retail CBDCs: Recent updates to the proposed CBDC Anti-Surveillance State Act appears to narrow the prohibition of research and development, testing, or issuance to retail CBDCs only with the addition of the feature “widely available to the general public” into the definition of CBDC. If that is the intent, this avoids several significant challenges presented by the previous House-passed version of the bill, as well as that referenced in the recent executive order prohibition, that even the Congressional Budget Office (CBO) noted included such broad definitions that it was unclear if they could be interpreted to ban existing digital forms of central bank reserves and impact the ability to conduct monetary policy. However, if this bill is aimed at prohibiting wholesale digital payments innovation, or other forms of digital payments innovations like tiered or intermediated innovations like in certain implementations of stablecoins or tokenized deposits, additional concerns would remain related to stifling the ability to modernize the US financial system.
  
• Legal necessity unclear: The necessity of this legislation to prohibit any experimentation and research and development in CBDCs appears unnecessary if the ultimate concern is to ensure against the issuance of a retail CBDC without Congressional approval. The Federal Reserve already published its own analysis highlighting that the Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals. Both the Fed and Treasury have also voiced that they would only move forward with issuance of a CBDC with clear support from both Congress and the executive branch. With Congressional approval already assessed as a precondition to issuance of at least retail CBDCs, and supported as necessary by the lead executive authorities, this prohibition appears unnecessary to achieve the policy outcome when Congress could just withhold authorization. If the refocus of this updated proposed legislation is only prohibiting retail CBDCs, research and development as well as operations to optimize and conduct of digital wholesale payments and settlement activities by central banks would hopefully not affected by this legislation as the Congressional Budget Office assessed could have been impacted by previously proposed versions.
  
• Adjusting framing: The US government fully supports privacy in any democratic CBDC: This bill’s title and corresponding messaging unfortunately present an inaccurate picture that CBDCs must inherently intimate an authoritarian “surveillance state.” CBDCs do not have to mean “Big Brother” just as cryptocurrencies do not have to mean anarchy. The implications for privacy are vastly different for wholesale versus retail CBDCs. Just as with privately administered cryptocurrencies, inherent features like privacy and discoverability are completely dependent upon the specific design of the systems. The Federal Reserve, the US Treasury and prior Administrations have been extremely consistent in messaging, including alongside the G7, that “rigorous standards of privacy” and accountability for that privacy are critical for any retail CBDC implementation. The CBDC discussion warrants nuance, just as the cryptocurrency discussion does.
  
• Refocusing on impactful privacy measures: Rather than this legislation barring pilots and experimentation of implementations and building blocks to preserve privacy for some future possible CBDCs likely at least a decade away (research that could also help provide building blocks for other digital assets like stablecoins), Congressional action could instead pivot to focus on long-existing challenges presented by the absence of comprehensive consumer data privacy legislation. Especially given the low likelihood and far-off reality of cross-US government and public interest in a US retail CBDC (which the Federal Reserve, US Treasury, and potentially Congress have all agreed would require Congressional approval to issue if there ever were such an interest), Congressional focus on privacy legislation would be a more impactful area for focus.
  
• Needed clarity on the protections meant for private stablecoins: It is unclear exactly what protections are being offered under section 4, which defends from prohibition only “any dollar-denominated currency that is open, permissionless, and private, and fully preserves the privacy protections of United States coins and physical currency.” This is oddly framed and could place significant prohibitions on industry cryptocurrency implementations, if this intimates that there are intended to be restrictions here placed on certain industry cryptocurrency implementation, such as private stablecoins that aim to get a master account with the Federal Reserve. It is unclear if this intimates that permissioned stablecoin implementations may be barred from direct or indirect relationship with the Fed. It is also unclear what fully preserved privacy protections means in this context, given that the privacy features of cash (e.g., can move value without a third party, is not posted to any ledgers) do not exactly equate to the privacy features of any existent cryptocurrency (e.g., value movements generally require certain types of third parties—even if unregulated intermediaries—such as miners and validators, and transactions post on public ledgers). It would be important to clarify which privacy features of cash they desire, or what the specific balance of discoverability versus obfuscation is desired in the cryptocurrency system, as part of broader clarity on what this section is intended to achieve.

In closing, I would like to again underscore my gratitude for the honor of the opportunity to speak with you all today. It is critical that the United States make timely progress on establishing and implementing a comprehensive stablecoin regulatory framework that leverages years of effort on defining critical holistic protections that also reinforce the central role in the financial system and as a leader in technological innovation.

Thank you.

Fellow

Carole House

Nonresident Senior Fellow

GeoEconomics Center

Cybersecurity Digital Currencies

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report paints a dire picture of the possibility of avoiding the 1.5 degrees Celsius (°C) rise in global surface temperature. According to this report, “global warming is more likely than not to reach 1.5°C even under the very low [greenhouse gas] emission scenario” and it will be “harder to limit warming below 2°C.” The report provides strong evidence that, based on the current trends of greenhouse gas (GHG) emissions around the world, 1.5°C will be reached before 2040, which is a bit more optimistic than a 2023 article published in the journal Nature, which estimated the world will reach 1.5°C by 2029, leaving the global community with a mere five-year runway. Yet, a recent report by the European Commission warns that we already passed the 1.5°C-mark in 2024. The IPCC report also highlights the fact that there is a massive shortfall in the level of financial flows needed to achieve climate targets in different countries and sectors.

The link between social and physical infrastructure and economic growth and stability is un-disputable. However, the scale of financing required to meet the Sustainable Development Goals (SDGs) and establish climate-resilient infrastructure for the future global economy is the subject of widespread estimation and debate. These projections differ significantly based on various factors, such as the target year (2030, 2040, or 2050), the specific areas of focus (whether traditional infrastructure, SDG priorities, or the energy transition), and the underlying assumptions shaping the analyses. Despite these variations, one undeniable truth emerges: the financing gap is projected to reach trillions of dollars annually over the next ten to thirty years. This gap has been growing wider with the rising population (and, hence, growing needs for new infrastructure and maintaining the existing ones) and the increasing frequency of severe climate, destroying current critical infrastructure in many countries and negatively impacting their operations in others. Hence, the world not only needs to bridge the financing gap for building and maintaining basic infrastructure—between 1–4 billion people lack dependable access to electricity, water, internet, and sanitation—but old infrastructure must be climate proofed and new infrastructure must be built with climate resiliency in mind. Without bridging this massive and growing SDG and infrastructure financing gap, global growth will come to an eventual halt in just a few decades. 

This presents the global economy with the enormous challenge of funding its sustainable development and infrastructure needs. Given the magnitude of these gaps, it is evident that states, multilateral development banks (MDBs), and international financial institutions (IFIs) alone cannot bridge them. Therefore, there is an urgent need for innovative alternative financing solutions, namely from private sources. 

This report aims to provide a nuanced analysis on this very topic. Section 2 provides a holistic review of the investment gaps in global infrastructure, energy transition, and achieving SDGs. Section 3 highlights several challenges as they relate to de-risking, leveraging ratios, and potential sources of financing. Section 4 presents the case for making infrastructure an asset class that would attract private investment. Section 5 concludes the report. 

Amin Mohseni-Cheraghlou is a Senior Lecturer at American University and a former Senior Advisor at IMF’s Office of Executive Directors.

Nisha Narayanan is a senior fellow at the Atlantic Council’s GeoEconomics Center and is the head of country risk at a global financial institution.

Hung Tran is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and and senior fellow at the Policy Center for the New South.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Financing the future: Unlocking private capital for global infrastructure and climate goals appeared first on Atlantic Council.

The limitations of the Group of Twenty (G20) “Common Framework” have been extensively discussed and actionable solutions have been put forward. Tackling those limitations of the Common Framework is crucial for countries currently in debt distress, which experienced “significant delays” in the obtention of debt relief. As stressed by Kristalina Georgieva, managing director of the International Monetary Fund, “The framework can and must deliver more quickly.”

What’s hampering progress? Coordination issues, for one thing, but numerous voices also point to China’s role in hindering progress toward resolving the global debt crisis. The People’s Republic of China—a member of the IMF—has not only lent significant sums to borrower nations but also has the capacity to slow down processes because of the preferential terms in its lending agreements.

Overall, 147 countries—representing two-thirds of the global population and 40 percent of the world’s gross domestic product (GDP)—have either benefited from China’s Belt and Road Initiative (BRI) projects or shown interest in joining the program. By 2023, Chinese investment had begun to rebound since China’s zero-COVID policies, but China’s resistance to debt relief for its low-income borrowers will fuel sovereign defaults for years to come. China has spent an estimated $1 trillion through the BRI, thereby considerably strengthening its influence across Asia, Africa, and Latin America. Laos, for instance, owes almost half of its external debt (65 percent of its GDP) and is struggling to repay the debt that financed infrastructure like the high-speed Laos-China railway. China’s ownership of around 17.6 percent of Zambia’s external debt also slowed down Zambia’s debt restructuring negotiations significantly, contributing to a lengthy negotiation of two and a half years.

This piece outlines how China’s lending practices harm low-income borrowers and hinder debt restructuring negotiations through the use of debt clauses giving it de facto seniority. It further outlines ways for the Bretton Woods institutions to collaborate to change these dynamics and improve financing prospects of borrower countries and a more level field for lenders.

Lili Vessereau is a Research Scholar, Teaching Fellow and Fulbright Scholar at Harvard University, where she focuses on sovereign debt and macroeconomic impact of climate change.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Issue Brief Oct 9, 2023

How the IMF can navigate great power rivalry

By Hung Tran

Fragmentation resulting from geopolitical competition between large economies is posing a serious challenge to the fulfillment of IMF’s core missions. Here’s how it can respond.

China Economy & Business

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Geoeconomic fragmentation and net-zero targets

By Shirin Hakim and Amin Mohseni-Cheraghlou

This report outlines how the Bretton Woods Institutions can mitigate the effects of growing geoeconomic fragmentation on global net-zero targets.

China Climate Change & Climate Action

The post Toward equitable debt contracts: Preventing de facto seniority-clause escalation in the sovereign lending space appeared first on Atlantic Council.

The global economy and international financial system have evolved dramatically since the founding of the Bretton Woods system in 1944. A trend toward greater trade openness defined the decades following the establishment of the system. And while the Bretton Woods arrangement of fixed exchange rates was abandoned in 1973, this new international economic order continued to facilitate global economic integration and financial liberalization. Yet the trend of ever-more globalization, which has largely defined the past fifty years, appears to have stalled. Trade openness has remained effectively flat since the global financial crisis (GFC) (figure 1a), while cross-border assets have trended down or sideways since the COVID-19 pandemic and Russia’s 2022 invasion of Ukraine (figure 1b).

By fostering financial stability and supporting economic growth, the International Monetary Fund (IMF) provided a stable foundation which supported this trend of increased cross-border trade and investment. The IMF, through its surveillance and lending operations, was established to act as an impartial referee to ensure that member countries pursued sound economic and financial policies. It also expanded the global financial safety net (GFSN) – which acts as an insurance mechanism to provide liquidity to countries facing economic crises. The IMF, as the lender of last resort to the global economy, acted as the primary provider of crisis support up until the GFC.

This postwar system, of which the IMF was a core component, supported decades of economic prosperity, broad-based increases in living standards, and a marked decline in global poverty rates. However, the global economy had no shortage of crises in the intervening years. Experiences ranging from the Latin American debt crisis to the Asian financial crisis have incrementally eroded the IMF’s credibility and led member countries to seek alternative insurance mechanisms that do not come with “strings attached” (e.g., IMF program conditionality), thereby reducing member countries’ reliance on the IMF.

The onset of the GFC led countries to double down on self-insurance mechanisms. It also led to a substantial diversification of the GFSN, as bilateral swap lines (BSL) and regional financing arrangements (RFA) overtook the size of IMF resources in the safety net. To safeguard economic stability and protect against external shocks in the wake of the GFC, country authorities enacted capital controls, referred to as capital flow management measures (CFMs) in IMF parlance, in addition to accumulating foreign exchange reserves. This use of CFMs and international reserves as a self-insurance mechanism was further amplified by the COVID-19 pandemic and its associated financial distress. 

Now, following the economic and financial disruptions stemming from Russia’s invasion of Ukraine and rising geopolitical tensions, countries are increasingly utilizing industrial policies and current account restrictions to direct and manage trade flows as well – a trend that is best illustrated by the broad threat (and imposition) of tariffs that President Trump has made during the first month of his second term. These restrictions on capital and trade flows have contributed to the stalling of global integration and will likely result in greater volatility across the global economy in the coming years. Moreover, the displacement of the IMF as the anchor of the GFSN calls into question whether the GFSN can and will provide equitable support to all countries facing economic crises. As the global economy and international financial system enter a new era—characterized by increasing fragmentation rather than integration—ensuring that the international system has an effective insurance mechanism is more important than ever. 

This report is organized as follows. In Section II, I document the rise in fragmentation across capital and trade flows. Section III discusses how the emergence of these fragmentary forces has coincided with changes in the size and composition of the GFSN. Section IV explores how these forces of fragmentation could affect global development prospects and financial stability at the country- and system-level. Section V concludes with policy recommendations to revitalize the IMF and preserve the core insurance mechanism which underpins global development and financial stability. 

Patrick Ryan is a Bretton Woods 2.0 Fellow with the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Issue Brief Oct 9, 2023

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By Hung Tran

Fragmentation resulting from geopolitical competition between large economies is posing a serious challenge to the fulfillment of IMF’s core missions. Here’s how it can respond.

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By Shirin Hakim and Amin Mohseni-Cheraghlou

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China Climate Change & Climate Action

The post Fragmentation and the role of the IMF appeared first on Atlantic Council.

Evolution of freedom

Since 2000, Ethiopia has achieved remarkable economic growth, driven by public investment in infrastructure and industrial expansion, positioning itself as one of Africa’s fastest-growing economies. Coupled with extensive construction projects, the service and agricultural sectors also made modest contributions. However, since 2020, the country has faced significant setbacks, including internal conflicts that disrupted production and trade, alongside the global COVID-19 pandemic, which exacerbated supply chain disruptions and weakened demand for exports. These challenges were further compounded by rising inflation, which strained household incomes and increased the cost of living, and a severe shortage of international reserves, making it difficult to stabilize its currency. The recent decision to float the Ethiopian birr has added to the volatility, causing currency fluctuations that have increased uncertainty in trade and investment flows. These converging shocks have placed immense pressure on Ethiopia’s economic stability, underscoring the need for carefully managed reforms and international support to restore macroeconomic balance. 

The Freedom Index portrays a realistic picture of the politico-economic development of Ethiopia in the past three decades. The rapid improvement on the economic subindex around the turn of the century illustrates the country’s sustained strong economic growth in that period. More recently, this subindex reflects the euphoric momentum that came with a new administration in 2018, promising additional economic liberalization in trade and investment. I think the rise observed in the property rights component starting in the early 2000s is also a product of an effort to better protect foreign investment.  

Unfortunately, these improvements were not very long-lived, with scores on the investment freedom component dropping first, followed by declines in the trade and property rights components a few years later. 2020 appears to be a clear inflection point, with the expansion of internal conflicts in the country—starting with war in Tigray—that have been devastating for the economic climate. Along with the war, the COVID-19 pandemic lockdown and supply chain disruption exacerbated the economic development challenges. Some of the industrial zones in areas of conflict are now difficult to access, and the lack of stability makes it harder to retain and attract foreign investors. A dramatic example of the effects of these protracted conflicts since November 2020 is the fact that Ethiopia lost its beneficiary status under the African Growth and Opportunity Act in 2022. This dented the country’s ability to propel its economic development via export growth. 

The women’s economic freedom component shows an optimistic view of the situation for women in Ethiopia. In terms of legislation, especially at a federal level, it is true that the economic rights of women have come closer to that of males since 1995. Raising the legal marriage age to eighteen since 2000 has helped reduce child marriage rates, ensuring that young people have more time to complete their education and achieve better economic outcomes. The strict enforcement of the legal marriage age legislation is essential to tackle child marriage problems in some regions, such as Amhara, where the incidence of child marriage was persistently high in the past. Enforcement across all regions in the country contributes to improved health, educational attainment, labor market outcomes, and well-being for young women by allowing them to marry at a more mature age, thereby decreasing the risks and complications associated with early pregnancies. So, the improvement in the legal framework for women, particularly around economic issues, is probably what is being captured in this component, and it is also true that we now see a larger share of women in top government positions, including ministerial posts. 

Nonetheless, the implementation of gender equality more generally and at all levels of society is probably a much harder task. There is still significant cultural resistance in some regions and ethnic groups; for example, some impose informal limits on the assets that women can inherit. My own research on the topic shows that the school-to-work transition remains very challenging for many women, especially when they turn eighteen and the pressure to marry is intense, particularly in rural and remote areas. 

The political subindex clearly captures the excitement of the country when the current administration came to power. However, the regressive nature of the new government—responding both to internal and external factors—became immediately clear, in terms of civil liberties and political rights. In recent years, the country has been going through civil conflicts, a cost-of-living crisis, high levels of indebtedness, and tight monetary policy. These, combined with global factors such as the COVID-19 pandemic and the Ukraine-Russia war, have been detrimental for Ethiopia and the welfare of its population. If the current trajectory continues, the near future is worrisome.  

The unexpectedly high score on the election component may stem from a limited interpretation of this variable. While elections do take place, the system does not yet fully embody a completely democratic political structure with guaranteed political and civil liberties and a robust system of checks and balances on the executive. Ethiopia has no history of a meaningful political opposition. The legislative constraints on the government are very low, which explains, in part, the developments of the past thirty years.  

The low level of the legal subindex components accurately shows the poor state of the rule of law in Ethiopia—a common problem in many African countries. I am somewhat surprised by the relatively good and rising performance of informality, which is probably due to the obvious difficulties in measuring the size of the informal economy and the share of the informal sector in employment. My own research, using the harmonized World Bank Enterprise Surveys, shows a persistently high level of informality in the enterprise sector. Another potential problem with this component is that informality is not a binary phenomenon, but a continuum, as firms navigate the formal and informal sectors simultaneously, making the actual share of the informal economy—and the number of individuals engaged in it—even harder to measure.  

The sharp drop in security starting from 2020 is explained by the proliferation of internal conflicts and fighting between the federal government and various groups in regions such as Tigray, Amhara, and Oromia. The Pretoria Agreement of November 2022 may have slightly improved the situation by stopping the war in Tigray, but the ongoing conflicts in Amhara, Oromia, and elsewhere could jeopardize those security improvements, and the overall future stability of the country.

Evolution of prosperity

The significant rise in the Prosperity Index since 1995 is noteworthy, but it is important to consider the very low initial levels in areas like income, education, and health. While the country remains one of the least prosperous globally and has yet to reach the average level for Sub-Saharan Africa, the substantial progress, especially since 2000, is undeniable.  

The rise in income starting around the turn of the century is substantial. When initial conditions are at a very low level of economic development, any form of growth and stability favors the reallocation of resources to more productive uses and rapidly shows up in gross domestic product (GDP) measures. Sectors like construction and infrastructure clearly benefit from a more stable macroeconomic framework, boosting income growth. For the first two decades of the twenty-first century, growth was propelled mainly by strong public investment. However, the most important question is whether the increase in GDP has been adequately and fairly distributed. The inequality component for Ethiopia, based on the Gini coefficient, is in line with other aggregate measures of inequality. Nonetheless, when you focus on the lower end of the income distribution, the bottom 20 percent, the situation is not so optimistic, and is probably worsening, pointing to the lack of inclusion and progressive redistribution. There are also important disparities across Ethiopia’s regions that are usually not well captured by data, as these are mainly collected in the larger cities. 

The extraordinary increase in Ethiopia’s health component can be attributed to the extensive work of grassroots service providers, expanding healthcare and coverage in line with policies since 2000 (e.g., the use of health extension workers). Broadly speaking, the country focused on improving primary and preventive healthcare, which produced a sharp drop in child mortality and adult morbidity over the past three decades, though maternal mortality remains a significant problem. The small dip on this component since 2019 is not only due to the COVID-19 pandemic, which was not so severe in health terms as in Europe, but also to the deaths related to armed conflicts.  

In any case, while Ethiopia has been meeting the Millennium Development Goals and is even ahead of schedule for indicators such as child mortality, there is a long way to go if the country is to achieve the 2030 Sustainable Development Goals. Despite progress in terms of GDP growth, Ethiopia still faces complex economic challenges including the prevalence of poverty, inequality, malnutrition, and destitution.  

Regarding education, the graph clearly captures the significant improvement in schooling rates, which have increased in all levels of the educational system, for both males and females. However, quality has been an issue, and our graduates are not as well prepared as these data suggest. As an example, think of the investments carried out by the Chinese government in the last two decades. The Chinese investors came to Ethiopia because labor is relatively cheap, but they have realized that the skills and human capital of many of the workers they hired are very poor, to the extent that they have even needed to send them to Beijing to train. To make headway in education, the country needs to “invest in learning” and development of cognitive and other skills for better employability of graduates. This necessitates a paradigm shift away from the usual culture of “spending on schooling” which simply focuses on completing a given schooling cycle, with little attention paid to acquiring employable skills and other practical outcomes for learners. 

The very low level of the minorities component reflects a recurrent problem of the Ethiopian institutional environment: the close alignment of political power and access to services and opportunities. That is, economic growth has failed to be inclusive of all societal groups. The current administration must reverse this tendency so that the proceeds of economic growth reach the wider population. Children, youth, women, the disabled, and the elderly should not be neglected, and the economic management should give utmost priority to have a social protection angle in the ongoing reforms and policy measures. 

The path forward

The current and future challenges for Ethiopia are enormous. First and foremost, the various armed conflicts around the country are the biggest impediment to movement of labor, traded goods, and execution of productive activities. If peace and security are not restored in all regions of the country, there will be further deterioration of the socioeconomic situation nationwide. Agricultural and industrial production, and other employment-generating economic activities such as trade and investment, continue to suffer.  

It will be difficult to attract domestic and foreign investors, who are critical to revive the ailing economy in a situation of insecurity and uncertainty. Economic growth will not be able to maintain the pace of the first two decades of the twenty-first century. The debt problem in the country dented the confidence of investors and the country’s credit rating and/or worthiness suffer consequently. Macroeconomic management will be a major challenge in the context of very limited international reserves, devalued currency, and high levels of debt repayments with high cost of capital. The relatively easy access Ethiopia has enjoyed to international capital markets and bilateral lending from countries like China can suddenly become a problem. China, with its aid (e.g., lending for road and other infrastructure projects), might offer benefits in the present but at a very high cost in the future. But the debt problem Ethiopia faces is not only the making of China; it has been a problem for several years and borrowing from other sources such as the International Monetary Fund and the World Bank contribute to current debt levels.  

Another big challenge that Ethiopia faces is the alarming demographic trend. Even if there has not been a census in the country since 2007, some global estimates put the population at around 120 million and growing. This demographic situation poses a major challenge for attaining food security and creating enough jobs for the growing young and educated population. Each year, two to three million young Ethiopians enter the labor force, and it is clear that the labor market cannot absorb such a huge number of workers. Any hope of transforming the economy—or even of gaining a meaningful grip on it—is an elusive dream in a country where there are high levels of unemployment, poverty, inequality, destitution, internal conflicts, food insecurity, and an ever-growing and underskilled youth population.  

Addressing the challenges facing Ethiopia requires more than just external assistance; it demands the implementation of robust public policies that focus on aiding the poor, youth, and women, all within a framework that fosters inclusive economic growth. While Ethiopia’s strategic importance to global powers, including the United States, might influence the flow of foreign aid from organizations like the International Monetary Fund, the impact of such aid (in the form of grants and/or loans) will depend heavily on the conditions attached to it and how Ethiopia uses the aid for growth enhancing, productive, and poverty-reducing activities. If strict fiscal consolidation is enforced, it could exacerbate inequality and worsen conditions for the most vulnerable populations, potentially leading to increased poverty and destitution. My concern for Ethiopia is profound, and I hope that an end to conflicts will soon allow the country to return to the better economic path it was on before 2020. 

Abbi Kedir is the director of research at the African Economic Research Consortium based in Nairobi, Kenya. Kedir was an associate professor in international business at the University of Sheffield, UK, from 2016 to 2023. Kedir has authored more than fifty journal articles and is an editorial board member of the Journal of Development Studies, International Journal of Entrepreneurial Behaviour & Research, Economies, and Frontiers in Environmental Science.

The Atlantic Council and its staff, fellows, and directors generate their own ideas and programming, consistent with the Council’s mission, their related body of work, and the independent records of the participating team members. The Council as an organization does not adopt or advocate positions on particular matters. The Council’s publications always represent the views of the author(s) rather than those of the institution.

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But the campaign to tame the market’s animal spirits—call it financial market regulation with Leninist characteristics—has so far fallen short. That’s largely because of investors’ disappointment with Xi Jinping’s efforts to revive an economy beset by weak growth and deflation. And like markets around the world, Chinese equities face the growing uncertainty of US-China trade tensions.

The end result is essentially two stocks markets. Shares listed in the mainland hovered on the brink of a bear market in January after a rally sparked by the government’s supposed turn last year to economic stimulus ran out of steam. Shares of Chinese companies listed in Hong Kong and New York also suffered. However, technology stocks in Hong Kong have soared after the Chinese startup DeepSeek shook the world with its entry into the artificial intelligence competition.

Such volatility is par for the course for a country with some two hundred million retail investors—many of whom have suffered heavy losses in recent years. That’s exactly what Beijing doesn’t want. With the economy still struggling, all eyes will be on next month’s meeting of China’s National People’s Congress, which rubberstamps the government’s budget plans. If the spending taps are finally opened, the stock market could rally. But it will take much more than optimistic pronouncements to restore confidence after months of undelivered promises.

This uncertainty does not sit well with the foreign institutional investors that Beijing has courted for years. Those who pursue strategies built on long-term investments had largely abandoned the Shanghai and Shenzhen markets by late 2023, putting their money in places like Tokyo and Mumbai. Some investors with a higher tolerance for risk—especially hedge funds—stuck it out. However, once last year’s rally ran its course, many of those fund managers took profits—although some bulls continue to place heavy bets on Chinese shares. Net capital outflows from China hit a record $182 billion in 2024, with foreigners joined by Chinese investors who have been shifting money to Hong Kong and elsewhere. A Bank of America survey of 182 institutional fund managers published in late January showed that only 10 percent were optimistic about the outlook for China’s economic growth compared with 61 percent in October. However, the latest tech stock rally appears to have made some fund managers more bullish.

An added incentive to shift investments out of China has come from the currency market, where Beijing allowed the renminbi to depreciate during the autumn, further undercutting the value of foreign investments.

All of this has given Chinese officialdom greater incentive to pursue a tightly regulated, less volatile stock market—one in which the likes of insurance companies, pension funds, and other government-run behemoths hold sway over individual investors. The order of the day will be to encourage long-term investments in large companies by offering bigger dividends, share buybacks, and—ideally—steady profit growth. A recent article by Wu Qing, the chairman of the China Securities Regulatory Commission (CSRC), outlined the government’s mandate to develop  institutional investment as a response to “the problems of unstable funds and short-term investment behavior.” Or as one market analyst told Chinese media, “More long money, longer long money, and better returns.”

Share buybacks have been part of the government’s blueprint to boost the stock market from the beginning of its effort to stimulate the economy. In September, the Peoples Bank of China established a 500 billion yuan ($68.6 billion) swap facility and an 300 billion yuan relending facility to encourage institutional investors and listed companies to buy—and buy back—shares. Chinese media reported that there were over $40 billion of buybacks in 2024, with more than three hundred companies taking advantage of the easier money to finance the transactions.

In essence, the push to strengthen institutional investment expands the roster of what’s known as China’s “national team”—the large, state-controlled funds that Beijing has used over the years to intervene in the stock market. The government will now have more muscle to move the market in its desired direction. As to foreign funds, senior government officials have emphasized in meetings with Wall Street executives since President Trump’s reelection that the welcome mat remains in place. However, the flow of money out of China has continued this year as trade tensions build, and Beijing is clearly giving greater emphasis to domestic fund managers.

A directive issued in late January by the Chinese Communist Party’s Central Financial Work Commission and five government bodies provided the regulatory framework for state-owned insurance companies, the national social security fund, and other government entities to step up. The guidelines call for them to increase their presence in the market by buying shares, participating in share placements as “strategic investors,” and, where relevant, launching buybacks. The state entities will be directly assessed on their efforts to boost medium- to long-term investment. According to the People’s Daily, the market value of A-shares (stocks listed on the Shanghai and Shenzhen markets) held by public funds will be expected to increase 10 percent a year for the next three years, and insurers will invest 30 percent of their new premiums in stocks. Fund performance will be assessed over a time frame of “more than three years.” That presumably relieves the pressure for short-term returns that most private fund managers face, but such a public discussion of performance standards suggests that that they ultimately will be held to inflexible guideposts.

Apparently unwilling to leave any bureaucratic stone unturned, the CSRC also released an “action plan” in late January to promote investments in products related to the stock index. These products include dividend-rich stocks that are components of the Chinese market indexes and exchange-traded funds (ETFs) that buy those shares and related derivatives. The index ETFs are popular speculative targets for retail investors, partly because of their returns and partly because they have been among the primary destinations for national team market interventions in recent months. The action plan contains dozens of measures intended to increase the flow of money into those products. The plan also seeks to attract foreign funds to the ETFs, presumably because foreign fund managers who pursued a passive, index-focused strategy over the past year significantly outperformed managers who actively picked stocks. Many of the foreign index investments track the Morgan Stanley Capital Index for China shares, which, along with A-shares, also includes companies listed in Hong Kong and New York.

All these initiatives emphasize the carrots of the campaign to promote appropriate institutional behavior. But there are also sticks. The recent Wu Qing article called for a crackdown on various “malicious illegal activities” and called for supervisors to “catch early, catch small…but also hit big, hit evil.” The CSRC chairman may simply be reminding the market of the government’s recent detention of investment bankers and financial regulators as part of a widespread crackdown on corruption, but there could be a more sweeping threat.

The boundaries of Chinese government regulation and enforcement are never clearly defined. Witness some of the actions taken to rein in trading during a year of extreme volatility. Last February, the CSRC, as well as the Shanghai and Shenzhen exchanges, began scrutinizing the activities of computer-driven quant funds and requiring new funds to report their strategies before beginning trading. In August, the authorities ended the release of daily data on foreign fund flows into the mainland markets because some local investors were tailoring their trading to foreigners’ activities. That data is now only available on a quarterly basis. And early this year, as share prices fell sharply, the exchanges “asked” big mutual funds to sell less than they bought. Given the government’s response to this volatility, institutional investors certainly have reason to be concerned about future opaque actions.

Perhaps it is possible to mandate stability in a market known for its gyrations. Indeed, some foreign strategists now recommend buying Chinese shares based on the expectation of high dividends, share buybacks and stronger corporate earnings in the coming year. But intrusive market regulation can come at the cost of lost dynamism and damaged confidence. Witness what Beijing’s heavy hand has done to the country’s once high-flying online conglomerates over the past four years. Ultimately, a healthy stock market reflects a healthy economy. Institutional and individual investors have been skeptical about Beijing’s ability to return the economy to an even keel, and they could remain skittish until there is an effective economic stimulus—without the disruptions of US-China tensions. Whatever the short-term ups and downs, it will take more than reams of rules and action plans to change China’s market psychology.

Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

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Evolution of freedom

The Freedom Index shows two important features of the institutional development process that Kazakhstan has followed in the last three decades. On the one hand, the overall positive trend reflects the goal, maintained throughout the period, to integrate into the global community both politically and economically in order to foster the young country’s security and prosperity. All the strategies the country has adopted over the past thirty years consistently reflect its aspiration to have an open competitive economy and be a respected international actor. The latter implied becoming a functional democracy and complying with international human rights norms. On the other hand, while the government’s commitment to economic liberalization has been fairly consistent and genuine, its record in the areas of good governance, democratization, and human rights could be characterized as patchy at best. The divergent paths of the three freedom subindexes underscore the difference in commitment.  

Fluctuations observed in the Freedom Index can be explained by changes in circumstances and policies. Kazakhstan received a strong initial impulse toward liberalization thanks to the late Soviet perestroika reforms and the Washington Consensus. However, by the end of the 1990s, this impulse was subdued by the consolidation of an authoritarian regime under the country’s first president, Nursultan Nazarbayev. It was also challenged by the Asian financial crisis, which generated serious doubts about the benefits of unconstrained openness to financial and trade markets. In the early 2000s, oil revenues started to increase, and the government was clearly tempted to use the windfall to pursue interventionist and protectionist economic policies. Tensions between state-led development and free market orientations have been present ever since. Economic growth also allowed an enhancement of the social welfare system, which had been damaged by the economic crisis and neoliberal policies of the 1990s. Nazarbayev’s resignation in 2019 and comprehensive reforms laid out by president Kassym-Jomart Tokayev in the wake of the dramatic unrest and crackdown in January 2022 created a positive dynamic reflected in the upward trend of the Index.  

Looking at the three freedom subindexes gives a more detailed view of developments in Kazakhstan. The economic subindex is the main contributor to the overall positive trajectory of the aggregate Index. It has been on the ascent and above the region’s average, with the exception of a sudden ten-point decrease in the 2000–04 period. Trade and investment freedom plummeted at that point due to the adoption of new legislation regulating investment, taxes, and environmental requirements. The government grew more assertive in its relations with foreign investors, introduced local content requirements, and renegotiated contracts. But the subindex quickly recovered, and since then has shown a very clear positive trend, which was helped by Kazakhstan’s accession to the World Trade Organization in 2015.  

The relatively high score on women’s economic freedom is both a legacy of the Soviet modernization project and its emphasis on recruiting women into the labor force and a product of current circumstances. For many families, two incomes are needed to support a decent standard of living. A positive long-term consequence of the dramatic economic collapse of the late Soviet and early independence years is the high number of women entrepreneurs in Kazakhstan. At the time, many women quit their non-paying jobs and became shuttle traders, importing goods from China and Turkey and selling them in bazaars and small markets. This experience served as an incubator for women entrepreneurs in the country. The trend has been supported by the government and international donors, and nowadays, there is a relatively high share of female entrepreneurs running their own businesses.  

The political subindex shows a sustained deterioration between 1999 and 2019, with a temporary improvement in 2006–10, and a steep rise since 2019. The relatively higher scores of the 1990s represent the ebbing of the liberalization wave started by Mikhail Gorbachev’s reforms in the mid-1980s. The super-presidential Constitution adopted in 1995 set Kazakhstan on the path of authoritarian consolidation. The trend is illustrated by the twenty-point fall in political rights of expression and association up until 2019. The situation with civil liberties during that period was better and more complex, as indicated by fluctuations on that component. The 2003, 2012, and 2016 dips are all linked to the adoption of new legislation (a 2003 law on extremism, a 2011 law on religious activities, and several legislative and legal amendments in 2016 targeting “extremism and terrorism”) which limited freedom of conscience in the name of security. However, unlike the almost linear deterioration of the political subindex, each dip was followed by a partial recovery, reflecting a certain degree of internalization of liberal values by the political elites.  

The power transition in Kazakhstan, which started with Nazarbayev’s resignation in 2019 and ended with the “Bloody January” events in 2022, produced a critical juncture for the country. The first event did not change the balance of power— Nazarbayev, his family and associates remained in control, with Nazarbayev still designated “Leader of the Nation”—but it changed the mood in society. People felt that change was possible, and started demanding reforms. Tokayev and his team perceived and tried to respond to this growing demand. They developed policies around the concept of the “hearing state” and experimented with more open local elections. However, under the Nazarbayev/Tokayev duumvirate, the system—long used to a clear and rigid vertical of power—grew confused and ineffective. The citizens’ urge for change led to protests at the beginning of 2022 which, combined with what many observers see as an unsuccessful attempted coup by Nazarbayev loyalists, resulted in the “de-Nazarbayevization” of the system. Unexpectedly, President Tokayev transformed from an appointed successor into a reformist president. While the official goals of the political reforms he has been undertaking are democratization and liberalization, they seem to be primarily aimed at removing the excesses of the super-presidential political system and improving governance. The geopolitical context is a factor affecting the direction and depth of reforms. On the one hand, deepening relations with the West is even more important under the new circumstances, and therefore Western perceptions of the human rights situation in Kazakhstan matter. On the other, there are fears that political liberalization could destabilize and weaken the country, making it more vulnerable to external meddling.  

The legal subindex reflects a very complex situation around the implementation of the rule of law in Kazakhstan. First, the improving quality and responsiveness of the bureaucratic apparatus is well captured by the data. The growing budget in the 2000s allowed the regime to invest in good governance, drawing on the understanding that the best way to reduce contestation and protests is to efficiently provide the population with public services through a well-functioning state. The focus has been on better training of civil servants and digitalization to improve efficiency and accountability (in line with the “hearing state” concept). Every public agency has social media accounts, and its performance assessment takes into account the public communication aspect.  

Second, there is a clear lack of improvement— and even deterioration—in the judicial independence and effectiveness score. The subservience of the judicial branch to the president, introduced by the 1995 Constitution, and the systemic corruption, greatly hindered the development of the rule of law in Kazakhstan. Realizing that this reduces the country’s attractiveness to foreign investors, the government created a legal enclave, the Astana International Financial Center, in 2018. It features its own court and international arbitration center, providing a common law system and employing foreign judges. While this arrangement serves as a quick fix for investor-related issues, it makes the injustices facing the general citizenry even more apparent.  

It is worth noting that President Tokayev initiated a judicial reform aimed at raising the qualifications of judges and legal personnel, “cleaning” the system of corruption, and improving processes and procedures. Over the next five years it will be possible to assess the implementation of that reform. One important positive development is the restoration of the Constitutional Court (the previous body was turned into a “toothless” Constitutional Council by the 1995 Constitution) and inviting highly professional and credible people to serve as judges. 

Evolution of prosperity

Kazakhstan is a large exporter of crude oil, gold, iron ore, copper, aluminum, zinc, uranium, and other metals, bringing substantial revenues to the country. It also produces and sells high-quality durum wheat, an important commodity in international markets. Therefore, it is not surprising that its overall Prosperity Index score has been above the regional average. In addition, the government’s efforts to improve social welfare, drawing on the norms and experiences of the Soviet welfare state, also help Kazakhstan to score better in the education and minorities components of the Index.  

Fluctuations of the inequality component show that economic growth does not necessarily translate into reductions in poverty and inequality, and that positive trends can be reversible. There are substantial spatial disparities in wealth and access to services between the regions and along the rural-urban divide. The two largest cities, Almaty and Astana, are better off, while the oil-producing regions of western Kazakhstan have both high income and high poverty rates and the agricultural and largely rural south ranks poorly on both counts. The government is trying to mend these regional inequalities by investing in infrastructure and changing budget allocations to incentivize regions to generate their own revenues through economic activities.  

The education component of the Index places Kazakhstan within the best performers in the world. It can boast nearly universal enrollment in elementary and secondary education, and high enrollment in tertiary education. The scores, however, do not show the patchy quality of the education provided. The neoliberal reforms of the 1990s responsible for underfunding the sector and “streamlining” schools in rural areas, and the gradual dissipation of the Soviet education system, accompanied by the retirement of Soviet-trained teachers, resulted in growing inequality of access and decreasing quality of instruction in public schools. Standardized tests such as PISA show serious deficiencies in the education of Kazakhstani pupils compared to those of Western Europe or other Organisation for Economic Co-operation and Development (OECD) countries. During the Nazarbayev period, the government tried to improve education, which it viewed as a crucial component of economic growth and development, through internationalization and creation of “pockets of excellence,” most importantly the newly established Nazarbayev University and a cluster of Nazarbayev Intellectual Schools, attracting the most talented students with fully funded grants. Tokayev’s government has been working on improving the quality of public, and especially rural, education, by allocating more funding, raising the status and salary of teachers, and reforming teacher training institutions. It also promotes partnerships between established foreign universities and regional universities in Kazakhstan.  

Kazakhstan’s health component has fluctuated above and below the regional average. A steep increase in life expectancy in the 2000s reflects the improvement of the socioeconomic situation and bigger investments in the healthcare system, which enabled Kazakhstan to achieve a substantial decline in infant and maternal mortality, approaching the OECD average. As with the rest of the region, Kazakhstan experienced a decline in life expectancy as a result of the COVID-19 pandemic. The stronger negative effect of the pandemic in Kazakhstan compared to the rest of the region might be the outcome of better and more honest statistics. The country’s government was very active in handling the healthcare crisis during the pandemic and carried out a mass vaccination campaign once vaccines became available. The national Healthy Nation project currently being implemented aims to increase life expectancy from the current seventy-five years to seventy-seven within five years. 

Kazakhstan has scored high in the minorities component. Its Constitution outlaws any discrimination “on the grounds of origin, social, official, or property status, sex, race, nationality, language, attitude to religion, convictions, place of residence or any other circumstance.” Managing interethnic relations has been the biggest challenge. In the early days of independence, the country’s leadership crafted an approach carefully balancing the interests of its multiple ethnic groups (especially  Russians) with the need to develop a nation state around the Kazakh identity. Representatives of different ethnic groups compose the Assembly of the People of Kazakhstan, a special political body, chaired by the president of the country. Five members of the Assembly are elected to the Senate.  

Finally, Kazakhstan scores above the regional average in the environment component. It is not a big carbon emitter, but this is largely due to the country’s small population of 20 million people, dwarfed by its large neighbors in the broader Eurasia region. Kazakhstan’s carbon intensity, that is the amount of carbon dioxide emitted per unit of energy, is high (0.33 kg per kilowatt-hour) and exceeds those of China (0.26 kg/kWh) and India (0.28 kg/kWh). The government has an ambitious decarbonization program, aiming to reach net zero by 2060. 

The path forward

Kazakhstan finds itself at an inflection point. The January 2022 events put a sudden end to the Nazarbayev era, and Russia’s full-scale invasion of Ukraine undermined the post-Soviet political and security order. The combined domestic and geopolitical shocks are causing concerns, fears, and anxieties about the present and the future. At the same time, they are creating space for change and new beginnings. Whether Kazakhstan can move toward more freedom and prosperity will be determined by choices made today and tomorrow, and shaped by the domestic dynamic of state-society relations and external incentives and pressures.  

At present, Tokayev’s reform agenda points to further liberalization of the system. We can expect an improvement in the political subindex: modest improvements on the elections, political rights, and legislative constraints on the executive components; and more substantial improvements on the civil liberties component. The situation with religious freedoms might not improve, but will probably not deteriorate either, despite growing concerns about radical Islamism and terrorism. The legal subindex scores are likely to grow, particularly the judicial independence and effectiveness and bureaucracy and corruption components. There will also be improvement of prosperity scores due to active policies on women’s empowerment, inclusion of people with disabilities, and decarbonization efforts.  

For the gradual liberalization agenda to work, on the domestic side, the state needs to maintain the will for reforms and capacity to implement them with a substantial degree of success, and society needs to be interested in reforms and exercise consistent pressure. If the relations between the two grow conflictual (fueled by inequalities and grievances), there is a risk that the reforms will be curtailed. There will be more clarity about the trajectory of Kazakhstan’s development by 2029, the year when president Tokayev’s single term comes to an end. It is important to keep in mind that there are anti-liberal as well as pro-liberal forces in Kazakhstan’s society. Growing social conservatism that accompanies Islamic revival could become a formidable challenge over the next ten years.  

On the geopolitical side, the liberalization agenda needs to be incentivized and supported by the West. Such a partnership would be useful for both parties—but not easy for either. Kazakhstan wants deeper relations with the West in order to develop and not be overwhelmed by its giant neighbors, Russia and China. However, it needs to build those relationships gently, to avoid angering Moscow and annoying Beijing too much. For the United States, European countries, and others, the challenge is to engage in an effective manner, providing the right incentives. Unlike in the 1990s, the supremacy of the West is now being challenged, and new approaches and ways of dealing with countries like Kazakhstan are needed.  

Taking into account internal and external factors, I can envisage three scenarios. The first, optimistic, scenario, “More freedom and prosperity,” hinges on the success of liberalization reforms and a benign external environment. Under this scenario, President Tokayev and his team are able to successfully implement some reforms, giving them more legitimacy, and Kazakhstani society keeps pushing for more liberalization. Tokayev ends his term in 2029, as defined by the Constitutional amendment, and there is a peaceful power transfer. Relations with the West are strong, Russia accepts the new situation, and China finds it useful for managing relations with Europe. Kazakhstan is not a liberal democracy, but it is on a promising path, gradually internalizing liberal values and norms.  

The second scenario, “Prosperity at the expense of freedom,” implies limited reforms, skewed in favor of professional state and socioeconomic goals. The leadership decides that tightening control over society with the help of traditional and new (digital) surveillance means is a must, and there is no need to pay too much attention to what Western actors think and say on the matter. The aspiration is to be a functional authoritarian state, and that means accepting being a political and economic satellite of China, the new superpower.  

The third scenario, “No freedom and no prosperity,” is a sad story of Kazakhstan imploding from internal tensions and/or destabilized from outside. The January 2022 events provided a glimpse of such destabilization. Transformation of a consolidated, personalized and corrupt authoritarian regime into a softer and better governed one is a way to prevent conflicts and improve the development trajectory of the country, but as with all modernizations, it can be unsettling and pregnant with risks. Russia, unhappy with Kazakhstan “drifting away,” decides to “bring it to heel” using hybrid war methods. 

Nargis Kassenova is a senior fellow and director of the Program on Central Asia at the Davis Center for Russian and Eurasian Studies, Harvard University. Kassenova’s research focuses on Central Asian politics and security, Eurasian geopolitics, China’s Belt and Road Initiative, governance in Central Asia, and the history of state-making in Central Asia.

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Importantly, the goal of increasing EU competitiveness as outlined in the report is not at odds with the need to strengthen transatlantic economic cooperation. In fact, a common thread in several of the report’s recommendations—increasing investment in high-tech sectors, creating a Capital Markets Union, standardizing EU foreign direct investment rules—is that they would provide opportunities for enhancing the EU-US economic partnership.

The four-hundred-page report identifies three areas on which to focus. First, the report argues, the EU should focus on technological investments to close the innovation gap, especially with the United States. As strange as it may seem, the overall amount of EU gross fixed capital formation (investment) over gross domestic product (GDP) is as large as in the United States, if not larger. However, if construction is excluded, there is an investment gap of about 2 percent of GDP (roughly 1.5 percent private and 0.5 percent public). At the same time, the productivity of those assets in the EU is similar to that in the United States, but with one exception—high-tech industries. The EU makes major investments in mid-tech sectors, such as the auto industry, but it invests much less in intangibles, such as software and research and development. When it comes to supporting new technologies, for example, the European Innovation Council’s Pathfinder instrument has a budget of only €256 million for 2024, compared to more than fifteen times that amount for the US Defense Advanced Research Projects Agency, known as DARPA. As a result of this investment shortfall, the return on EU investments is lower, diverting the bulk of venture capital and private equity funds away from the bloc. This creates a “middle technology trap.”

To break out of this trap, Draghi’s report calls for a number of regulatory policy interventions. First, the report argues, Brussels should take steps to better integrate the EU common market in the fields of new technologies, venture capital, and private equity by removing national obstacles to cross-European activities. This would mostly entail removing barriers caused by differing authorization procedures and the large number of reporting authorities across the EU. Second, the report recommends that the EU accelerate the creation of the Capital Markets Union, which would create a pan-European space for the financing of high-tech investments that typically require equity rather than credit as a source of funding. Third, the Draghi report argues that the EU needs to adapt competition rules to help foster the scaling up of firms in strategic industries, such as advanced manufacturing and robotics.

All of those proposals would open up opportunities for US private investments in the nascent European digital market. At the same time, transatlantic cooperation in science and research and development—for example, through joint US-EU initiatives in sectors such as artificial intelligence, semiconductors, biotechnology, and aerospace—would enhance both economic resilience and security.

As a second main focus, Draghi’s report recommends that the EU pursue the necessary objective of decarbonization with economic competitiveness in mind. The European Green Deal, aimed at achieving carbon neutrality in terms of emissions by 2050 and a reduction of 55 percent of emissions (compared to 1990 levels) by 2030, has been largely laid out in terms of regulations over the past five years. However, its implementation is complicated by a number of factors: fragmented national standards, the differing speed of implementation across member states, unnecessary regulatory burdens, bottlenecks in the provisioning of key inputs, and a lack of coordination across policies.

The result is that the European car industry, historically one of the cornerstones of EU competitiveness, is ailing. Investments in EU power grids are uncoordinated, causing negative spillovers across countries. Moreover, the cost of energy in the EU varies widely and is on average three or more times higher than for competitors in the United States and China. At the same time, the EU remains a technological leader in green industries, which can be leveraged to implement a competitiveness turnaround of the industry. And investment in renewables will be vital to enabling the EU to achieve more strategic autonomy on the energy front. Once again, the report calls for greater policy coordination and market integration in those areas. In particular, harmonizing transatlantic regulatory frameworks for carbon pricing, emissions standards, and renewable energy integration would be essential for companies to operate on both sides of the Atlantic and infuse much-needed investment into the market.

Third, the report underlines the need to enhance security—especially economic security—while reducing external dependencies. One of the main recommendations is to look beyond trade, highlighting the role of foreign investment. Currently, the EU’s investment screening mechanism is in the hands of EU member states, with only a reporting requirement. The report calls for strengthening the investment screening mechanism and creating a common foreign direct investment policy that could leverage the overall size of the single market and prevent rival countries from extracting concessions or posing security threats.

Foreign direct investment is a major area of transatlantic cooperation. Transatlantic trade in goods, valued at more than one trillion dollars annually, surpasses by far EU and US trade flows with China. But the most important aspect of the transatlantic economy is mutual foreign direct investment, with more than $7.4 trillion (roughly equally split with $3.95 trillion of US investment in the EU and $3.46 trillion of European investment in the US) of capital invested. Harmonizing investment rules between the EU and the United States, improving regulatory frameworks, eliminating nontariff barriers, and increasing mutual access to services, procurement opportunities, and digital markets, would thus be a great source of economic growth for both the US and EU economies.

As EU officials seek to turn last year’s most influential policy report into this year’s policy, they should keep in mind that enhancing the bloc’s competitiveness is compatible with strengthening economic relations with the United States. The United States and the EU enjoy a deep economic linkage driven by innovation and rules-based market institutions, making the transatlantic economy the most successful trading bloc in the world, comprising up to 44 percent of the global economy. The approach the EU takes to enhance its global economic competitiveness in 2025 should preserve the mutual gains that stem from strong transatlantic relations.

Carlo Altomonte is an associate professor of European economic policy at Bocconi University and vice president of ISPI.

Valbona Zeneli is a nonresident senior fellow at the Atlantic Council’s Europe Center and at the Scowcroft Center for Strategy and Security. 

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The successes of the past twenty-five years are undeniable—since 2000, poverty has been cut in half and global gross domestic product (GDP) growth has more than tripled. However, the failures are real as well. The internet, for all the incredible ways it has reshaped trade and innovation, has also fueled long-simmering divisions within countries.

The world is searching for a new “Wright Brothers moment”—a transformational invention that not only enhances productivity but simultaneously inspires people to imagine what comes next. The internet made us look down at our phones; the Wright Brothers made us look up to the sky.

The question is, will the United States and its allies be able to reap the benefits of this century’s Wright Brothers moment? It will likely depend on the economics. From 1900 to 1925, the pound sterling lost its global reserve currency status, industrialization fueled the greatest period of globalization the world had known, and the United States emerged as an economic superpower.

Fast forward to 2025 and the United States has the strongest gross domestic product (GDP) growth of any advanced economy, its startups set the standards across the world, and its geopolitical rivals, including China, have shown since the COVID-19 pandemic that they are not, in fact, ten feet tall.

But the difference between success and failure will be decided in unexpected places. Below are five pressing questions about the global economy in the year ahead. The answers to each of these questions will help determine whether the next twenty-five years mark a supercharged quarter century or push the United States off its economic flight path. 

1. Will Trump try to fire the Federal Reserve chair?

For all the concerns about the future of the US dollar, one of the only real near-term threats would come from a lack of confidence in the Federal Reserve’s independence. What could trigger such a crisis? Check out our breakdown of how Group of Twenty (G20) countries handle the dismissal of their central bank chiefs: 

The good news is that President-elect Donald Trump has said he isn’t going to try to fire Federal Reserve Chair Jerome Powell before his term is up in 2026. The bad news is that he might be able to do it if he changes his mind. The closest the United States has come to testing the idea is probably President Lyndon Johnson asking his Justice Department if he could fire then Federal Reserve Chair William McChesney Martin in 1965.

If the US president proposes this idea, then expect markets to send a ferocious signal not to cross that line. A more likely outcome is that Trump will appoint a new Federal Reserve chair very early in his term, which will cause some confusion but not an outright crisis. 

2. What effects will new US tariffs on China have?

New year, new tariffs? New US tariffs on China are coming—that much is already clear. But to understand how they will impact the US economy, take a deeper look at the tariffs that Trump put on Chinese goods during his first administration. The chart shows how Mexico and Canada have now overtaken China as the top sources of goods covered under the previous Section 301 China tariffs (which included a range of agricultural and manufacturing products). 

If the goal of higher tariffs is friendshoring, or diversifying import sources to trusted partners, the data show that maybe there’s something to this whole strategy—even if it takes time. And it’s not just Mexico and Canada stepping up to replace Chinese exports—the next twenty top US trade partners have nearly all increased their exports to the United States regardless of geography, from South Korea to Germany, and from Vietnam to Brazil.

While the first wave of tariffs had to wait out a pandemic, the next wave may hit China faster and harder, and the rest of the world is ready to take advantage. 

3. Is China’s Belt and Road Initiative back in business?

It certainly looks that way. New data from 2023 show that it was the first year since 2016 that China’s loans to Africa increased compared to the year before. The analysis below shows how China’s economic slowdown, and the COVID-19 pandemic, conspired to curb spending over the past few years.

But now it appears that Chinese leader Xi Jinping is ramping the Belt and Road Initiative back up. And this time, the money that is being spent is in yuan, not US dollars. The focus has shifted to smaller projects and lower financing levels to avoid some of the defaults seen in earlier projects.

The question now is whether Trump tries to counter the Belt and Road Initiative with bilateral US spending or by organizing a Group of Seven (G7) alternative to Beijing. 

4. Will the Global South get more voting power in the IMF?

When the Atlantic Council hosted India’s finance minister, Nirmala Sitharaman, in Marrakesh in 2023, she said that India and the Global South would not accept another unfair arrangement at the Bretton Woods institutions on voting power. This year, her ultimatum will be put to the test. How would the distribution of power change if votes were finally reallocated in the International Monetary Fund? It’s not as clear as you might think: 

The United States would gain votes, as would China, if votes were distributed simply based on a country’s share of global GDP. The real formula is more complicated, but the chart above does help show how things could shift. India would gain a little, and most of the G7 would lose. Of course, Europe losing also costs the United States, as it would have fewer friends at the board.

There is, however, no clear path forward, and it’s hard to see Trump agreeing to anything that benefits China. But don’t expect Indian Prime Minister Narendra Modi or Xi to capitulate either. A new battle of Bretton Woods may be brewing.

5. What’s next for US dollar–backed stablecoins?

In 1971, US Treasury Secretary John Connally famously told a group of European finance ministers that the dollar was “our currency, but your problem.” Europe in particular is going to be thinking about that notion quite a bit in 2025. To understand why, see how dollar stablecoins are increasingly popular around the world: 

Last year was a big year for cryptocurrency; Bitcoin’s price reached one hundred thousand dollars in December, and the industry played a significant role in the US elections. But the focus in 2025 will shift to stablecoins. Today, $170 billion worth of stablecoins are in circulation worldwide, with 98 percent of those pegged to the dollar. 

But as the chart shows, about 80 percent of the flow of US dollar-backed stablecoins happens outside the United States. This is driven mainly by adoption in Europe (with Russia in the lead), in India, and in Southeast Asian countries, such as Vietnam, Singapore, and Indonesia, which are using stablecoins for remittance payments and as a way to access dollars. 

The result is that while the United States finally created a regulatory framework for these assets, other central banks and finance ministers are going to ask the incoming Trump Treasury department exactly what the plan is for all these new dollars floating around in their economies. 

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center.

Research and data visualizations provided by Jessie Yin, Mrugank Bhusari, and Alisha Chhanganni.

This article is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in receiving this newsletter, email
SBusch@atlanticcouncil.org

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Much has changed a year on from Milei’s inaugural—and memorable—assertion that “no hay plata!” (there is no more money [for public spending]). As Milei made front-page news, catching the attention of the Financial Times and the Economist, he has also earned the praise of world leaders such as Trump and members of the president-elect’s inner circle, such as tech mogul Elon Musk. Meanwhile, financial markets have continued to celebrate as Argentina’s stocks have roared upward, providing the highest yearly returns of any other economy and doubling those of the second-best performing markets (as expressed through country exchange-traded funds).

The government has doubtless made much progress in areas in which it was expected to struggle, restoring significant levels of confidence to an embattled economy that just a few days ago was officially announced to be out of a severe recession. As Argentina heads into a critical year for the government’s economic strategy, Milei will need to maintain voters’ buy-in and market confidence for his policies while pursuing further economic reforms.

2024: A triumphant first quarter of a four-year term

As Guido Sandleris, former president of the Central Bank of Argentina (2018-2019), argued in our 2024 Atlas, before Milei’s inauguration the Argentine president had correctly identified the country’s “real problems”: inflation, high and inefficient public spending, political capture, and endemic corruption, among others. For Sandleris, the challenges for the Milei administration were clear: The country was on the verge of hyperinflation, the central bank had negative net foreign exchange reserves, the fiscal deficit was out of control, and utilities and prices were long outdated, forcefully frozen in place by the previous administration. Milei had also come into office with a limited political toolbox, holding a minority in congress that was not even impeachment-proof and relying on a small party structure.

Considering this initial outlook, the results of the past year are noteworthy. The government instituted aggressive budget cuts, spending freezes, and a deregulation campaign. It also passed significant legislation (which revealed the government’s ability to negotiate with the opposition) and successfully implemented a tax amnesty scheme to attract undeclared banking deposits. In the wake of these policies, Argentina’s economy has gained a more solid footing and is on track for normalization. Inflation has come down to pre-2023 crisis levels, the economy is showing signs of recovery, consumer and investor confidence are on the rise, and government bonds have regained much of their value.

Two figures illustrate this success: the drop in Argentina’s emerging markets bond index spreads, which is a key measure of sovereign risk, and the rise of projected investment as a share of gross domestic product, both of which we have analyzed. But perhaps the most notorious achievement has been its commitment to fiscal responsibility, a laudable effort in the context of Argentina’s chronic tendency to incur unsustainable public spending.

Optimism is perhaps the best way to describe the current moment in Argentina, and recent opinion polls illustrate this. Milei has succeeded even in outperforming President Mauricio Macri, his most ideologically proximate predecessor, in his approval rating at the end of his first year in office across social sectors, according to Gallup. As Milei put it in an interview with the Financial Times in October, “I have a 50 percent approval rating after carrying out the biggest austerity program in our history. It’s a miracle, isn’t it?”

How can Milei finish out a strong first half in 2025?

Milei, who played goalie in soccer in his youth, understands that it’s critical to finish out a strong first half to win a match, and restoring Argentina’s macroeconomic stability was never going to be accomplished overnight. The question now is whether the administration will be able to maintain support for its policies while deepening its reform agenda. Next year’s midterm elections in October, in which the government aims to strengthen its vulnerable position in congress, will play a large role in setting the agenda for Milei’s second year in office.

Although the outlook is much brighter than it was a year ago, challenges still loom in 2025. The main objective will be to deliver growth, estimated at 5 percent by the International Monetary Fund (IMF), following two years of consecutive drops (1.6 percent in 2023 and an estimated 3.5 percent in 2024) while continuing to reduce inflation. And the latter is far from over: Banks estimate that prices will rise over 30 percent in 2025, while the government’s own more optimistic estimates in the 2025 budget proposal predict that prices will rise by 18 percent (annualized inflation in the United States this past November was 2.7 percent). Markets will also be watching the elections closely. If the economy fails to deliver much-needed growth and inflation remains stubborn, it could cause a sudden deterioration in market confidence. However, the opposition’s fragmentation, itself the result of the 2023 economic crisis and the disruptive victory of an outsider like Milei, may ease the administration’s path to make significant gains.

Nevertheless, the government has taken steps to mitigate risks and open new opportunities to strengthen the country’s economic recovery in the new year—nowhere more prominently than on the world stage. Milei scored several major foreign policy wins, including the beginning of its Organisation for Economic Co-operation and Development accession process. And the South American economic bloc Mercosur, of which Argentina is a member, signed a historic trade deal with the European Union earlier this month.

Argentina’s stocks reacted positively to Trump’s election in November, a clear sign of the market’s belief that the next administration will yield net positive effects for Argentina. Milei has developed a close relationship with Trump. The Argentine president has openly stated that he thinks Trump will play a decisive role within the IMF’s board to push for a favorable renegotiation of Argentina’s outstanding program with the IMF. This could include the disbursement of new funds and a rollover of repayment deadlines, as Argentina owes the IMF over forty billion dollars at a time when its net international reserves stand at negative three billion dollars). Indeed, US Senator Marco Rubio, Trump’s nominee for secretary of state, has argued that the United States should use its influence at the IMF to help restructure Argentina’s debt, which he said would “create breathing room for Milei to enact much-needed reforms.” One of the major sticking points in Argentina’s negotiations with the IMF is the Fund’s belief that Argentina should end its outdated system of currency controls (the “cepo”). Ending the cepo would likely spur growth and drive investment but may also put pressure on the peso—and thus reaccelerate inflation—something that the government will likely avoid until after the midterm elections in October.

At the same time, Argentina has reached a new moment in its relationship with China, a key trading partner, following months of tensions triggered by the president’s earlier critical rhetoric. Illustrating this case, in June, China renewed its currency swap with Argentina, saving the country from a sudden loss of much-needed foreign reserves. Chinese leader Xi Jinping and Milei then met for the first time on the margins of the Group of Twenty (G20) summit in November.

Domestically, important announcements such as the end of the recession and recent investments announced under the government’s investment promotion regime, including $2.5 billion from Rio Tinto for lithium mining and a multicompany investment of three billion dollars for a new oil pipeline, both of which happened just this month, indicates that rising investor confidence will begin to fuel the revitalization of Argentina’s historically low investment levels. This year was also significant for the country’s energy independence, and rapidly rising shale oil and gas production has saved the country billions in energy imports while boosting exports, a trend that will only deepen in coming years. Argentina has even started negotiations with Brazil, despite public tensions between President Luiz Inácio Lula da Silva and Milei, to explore the possibility of exporting Argentina’s booming natural gas production there.

Milei’s economic policies have exceeded expectations in the administration’s first year. But given its precarious starting point, Argentina is still vulnerable to external economic shocks and sudden losses of investor confidence. As such, the administration should consider moving forward with a series of key steps that may drive growth beyond post-crisis recovery values and further cement the market’s confidence in the economy. Such measures could include accelerating the end of the cepo and allowing the peso to float freely (and thus making Argentina less vulnerable to the ongoing devaluation of the Brazilian real). The government should take steps to reassure markets of its ongoing commitment to fiscal responsibility and healing its credit rating. These measures could include the negotiation of a new and sustainable IMF program, the passing of the long-delayed 2025 budget, and the continued elimination of special protections that for decades successive governments have awarded to uncompetitive segments of the economy.

The first year of Milei’s administration will be remembered as a surprisingly strong start to an ambitious reform agenda. For that agenda to be fully realized, Milei will need to continue to pursue bold reforms while maintaining public support and market confidence in 2025.

Ignacio Albe is a program assistant with the Atlantic Council’s Adrienne Arsht Latin America Center.

Jason Marczak is vice president and senior director at the Atlantic Council’s Adrienne Arsht Latin America Center.

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In May, US President Joe Biden announced a 100 percent tariff on all electric vehicles (EVs) imported from China. The administration had two main objectives: 1) Protect and stimulate US clean energy industries and supply chains, and 2) counter a flood of Chinese goods as Beijing turns to exports to compensate for its weak internal demand. For the United States, these tariffs are largely preventative and symbolic, as Chinese EVs make up only around 2 percent of total EV imports. For other Group of Seven (G7) countries, it’s too late for prevention, as Chinese EVs already dominate.

The Biden administration coordinated with concerned allies and, in August, Canada also announced it would levy a 100 percent tariff on EV imports from China. The European Union (EU) later imposed up to 45.3 percent tariffs on Chinese EVs. Economic stress due to Chinese dumping increasingly reaches beyond the United States––and even beyond the G7. Since 2023, Argentina, Brazil, India, and Vietnam have all begun anti-dumping or anti-subsidy investigations into Beijing’s practices. 

The incoming Trump administration will now have a choice. It can revert to President-elect Donald Trump’s previous preference for bilateral negotiations, or it can continue to restrict China’s access in step with allies and partners, possibly by creating a “buyers club” to regulate standards and open markets to a select few.

—Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center. 

In October 2024, the US Department of the Treasury issued final regulations implementing the Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. Once it comes into effect on January 2, 2025, the Outbound Investment Security Program (OISP) regulations will prohibit or subject to notification requirements certain transactions involving Americans and persons affiliated with designated countries of concern (presently, China, including Hong Kong and Macau) operating in the semiconductor and microelectronics, quantum information technology, or artificial intelligence (AI) sectors (“covered foreign persons”). 

With respect to AI, the OISP will generally prohibit US persons from investing in a covered foreign person that develops any AI system trained using a quantity of computing power greater than ten septillion (10^25) computational operations (integer or floating-point operations). In addition, the OISP sets forth other computational thresholds implicating investment prohibitions (i.e., greater than 10^24 computational operations using primarily biological sequence data) or notification requirements (i.e., greater than 10^23 computational operations). Notably, regardless of computing power, covered transactions involving AI systems designed or intended for military, government intelligence, mass surveillance, cybersecurity, digital forensics, penetration testing tools, or the control of robotic systems end uses are also subject to prohibitions or notification requirements.

Absent practical guidance or enforcement history, exactly what these computing power thresholds mean in practice, as well as how they reasonably can be determined, remain to be seen. However, given its breadth, complexity, and enforceability, the OISP seems likely to have a significant effect—most notably with respect to US persons, but also in connection with the activities of certain foreign persons controlled by US persons or for which US persons serve in key roles. Such persons have until the new year to start making sense of what may be about 10^25 questions regarding their exposure under the OISP.

—Annie Froehlich is a nonresident senior fellow at the GeoEconomics Center and partner at Cooley LLP.

The 2024 meeting of the BRICS+ gathered the representatives of forty countries on October 22-24 in Kazan, Russia. This number is about four times the size of the BRICS+ (named for members Brazil, Russia, India, China, and South Africa), which expanded in 2023 to include Argentina, Egypt, Ethiopia, Iran, the United Arab Emirates, and Saudi Arabia.

While the creation of a BRICS currency still appears unlikely, the bloc announced a substitute for Western payment systems called BRICS Clear. Circumventing sanctions or the extraterritoriality of US banks and, more generally, becoming less dependent on the US dollar are clear motivations behind such endeavors, as well as a growing interest in making bilateral arrangements to use China’s e-yuan.

Some notable leaders, such as Argentine President Javier Milei and Brazilian President Luiz Inácio Lula da Silva, were absent. But the attendees were a large and heterogeneous group, including both Turkey and North Korea. But without being officially opposed to the United States, the US dollar, or even the G7, the summit in Kazan visibly illustrated increasing global fragmentation. True, it took two world wars for the British pound to be dethroned by the dollar, and the latter remains dominant, representing about 60 percent of central banks’ official reserves, international debt, and credit. But in a multipolar world, could too much hegemony be its own undoing?

—Marc-Olivier Strauss Kahn is a nonresident senior fellow at the Atlantic Council and honorary director general at Banque de France.

Russia’s invasion of Ukraine laid bare a vulnerability in Europe’s energy strategy: an overreliance on a single supplier for critical resources. The EU is determined to avoid repeating the same mistake with lithium, a critical mineral often referred to as “white gold” for its indispensable role in the decarbonization race. However, the EU faces an uphill battle to reduce its near-total dependence on China, which currently supplies 97 percent of the bloc’s raw lithium.

With its ability to produce lithium at low cost thanks to cheaper labor, state-controlled financing, and energy subsidies, Beijing has flooded global markets and produced much more lithium “than the world needs today, by far,” according to Jose Fernandez, under secretary for economic growth, energy, and the environment at the US Treasury Department. To mitigate this monopoly, the EU has set ambitious targets, including producing at least 10 percent of its annual lithium consumption within the bloc by 2030. However, the region’s lithium mining projects are not expected to begin production until the end of 2026, leaving a significant gap in the interim.

As the world transitions to green technologies, lithium will remain a cornerstone of the global energy transition. For the EU, building a resilient, diversified supply chain is a strategic necessity.

—Grace Kim is a young global professional with the GeoEconomics Center.

Almost half of the world held elections in 2024. In Western democracies, opposition parties have won six out of fifteen decisive elections. Globally, more than half of incumbents or ruling coalitions managed to stay in power. However, unstable coalitions prompted multiple collapsed governments in Europe, including Germany and France.

Meanwhile, Russia’s efforts to interfere in Eastern European and Eurasian countries’ elections were a prominent but not unexpected problem. Russia’s direct and indirect interference in the Georgian parliamentary elections has been thoroughly researched and documented. Like in Georgia, the Moldovan elections were fraught with Russian disinformation and meddling, although pro-Western incumbent President Maia Sandu emerged victorious. Meanwhile, Romanian intelligence services declassified documents showing that the country’s elections have become the target of “aggressive hybrid Russian action,” including 85,000 cyberattacks on Romanian election websites. 

These instances of interference throughout 2024 demonstrated that Russia and other adversaries are invested in undermining elections as a fundamental principle of democracy. This is an opportunity for the United States and the EU to leverage positive economic statecraft tools to equip countries in Eastern Europe and Eurasia with secure election technologies and provide financial assistance to educate populations in identifying and thwarting Russian propaganda and disinformation. 

—Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

—Maia Nikoladze is the associate director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

—Mikael Pir-Budagyan is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Since the start of the year, the cryptocurrency market capitalization nearly doubled from $1.65 trillion to $3.65 trillion. This year, the digital asset industry made significant inroads into the global economy, especially bitcoin and stablecoins. 

Bitcoin continues to dominate the digital asset market, accounting for more than 50 percent of the total market capitalization as the asset crossed $100,000 on December 4. On January 10, the US Securities and Exchange Commission approved the bitcoin spot exchange-traded funds, giving retail and institutional investors greater access to the asset—in November, a group of US bitcoin exchange-traded funds recorded $6.2 billion of inflow. Stablecoins also saw significant, use accounting for trillions of dollars of transaction volume every month. In October, Stripe acquired stablecoin platform Bridge for $1.1 billion, demonstrating what may be fintech firms’ bigger push into digital assets. 

Digital assets should be expected to see more mainstream adoption under the Trump administration and a Republican-led House and Senate, which have expressed a pro-crypto stance. This will likely result in more open-source developers in the United States and greater exploration by financial institutions. 

—Nikhil Raghuveera is a nonresident senior fellow at the GeoEconomics Center and co-founder of Predicate.

As interest rates hit twenty-year highs, developing countries paid out a staggering sum of $1.4 trillion to service their foreign debts. The details behind that headline are equally stark and troublesome. Interest payments alone amounted to more than $400 billion as rates surged. And, as with most shocks, the poorest countries and most economically insecure people have been hit the hardest as governments are forced to make tradeoffs between development and growth, and as spending is diverted from critical health, education, and infrastructure investments. Low-income economies eligible for the International Development Association (IDA) paid $96 billion in debt service; and their interest payments now amount to nearly 6 percent of the export earnings of IDA-eligible countries—a level that hasn’t been seen in more than twenty-five years. For some countries, the payments run as high as 38 percent of export earnings. And more money is flowing out than in. Since 2022, foreign private creditors took in almost $13 billion more in debt-service payments from public sector borrowers in IDA-eligible economies than they doled out in new financing. Multilateral banks have been playing a larger role, even as service payments, interest rates, fees, charges, and surcharges have come under scrutiny. 

For its part, the World Bank announced in advance of the Annual Meetings in October that it was lowering the minimum equity-to-loan ratio from 19 percent to 18 percent, freeing up $30 billion more in financing, removing certain fees, and lowering the price of loans for smaller economies. Meanwhile, the International Monetary Fund (IMF) announced a package of reforms to its General Resources Account lending that will significantly reduce the cost of IMF borrowing, which has compounded the crisis for many countries. The principal changes include a reduction of the margin over the Special Drawing Rights interest rate, an increase in the threshold at which surcharges apply, a lower rate for time-based surcharges, and a higher threshold for commitment fees. More than a third of General Resources Account (GRA) borrowers are currently subject to surcharges. By fiscal year 2026, the number of nations subject to surcharges is projected to drop from twenty to thirteen. Hefty savings for GRA borrowers are expected––$1.2 billion annually, or 36 percent.

––Nicole Goldin, PhD, is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center.

Nothing encapsulates China’s economic crisis better than the steep fall in government revenue from “land use” sales. Since peaking in 2021, the country’s booming real estate sector has fallen into a deep depression, with construction grinding to a halt in many cities and falling prices adding to deflationary pressures in the Chinese economy. That has proven devastating to China’s heavily indebted local governments, which have relied on the sale of “land use” rights for much of their operating income. The IMF estimated in 2023 that the debt of local governments and financing vehicles they’ve set up over the years to raise (and spend) money totaled more than 100 trillion yuan ($13.7 trillion). With an estimated fifty million residences sitting empty nationwide, many property developers having defaulted on debts, and local governments unable to pay their bills, Beijing is struggling to sustain economic growth.

—Jeremy Mark is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center.

In 2024, the US Department of the Treasury took the final steps to implement Biden’s Executive Order 14105 to create a targeted Outbound Investment Security Program. During the rulemaking process, Treasury initially estimated that 212 transactions per year could fall within the program’s jurisdiction. The public comment period apparently caused Treasury to raise their estimates to 318 to “account for the likely underrepresentation of potentially relevant transactions,” but the private markets are famously opaque and Treasury went on to concede that “precise data that matches the scope of potential covered transactions is not available.” Treasury’s revised estimate should still only implicate less than 1 percent of deal activity (by deal count, vice value). The question for 2025 is whether this small percentage is an accurate reflection of the program’s impact on US outbound investments and the costs of compliance.

—Jesse Sucher is a nonresident senior fellow at the Atlantic Council’s Economic Statecraft Initiative in the GeoEconomics Center. 

There is nothing like large, unilateral, and across-the-board tariff proposals from the United States to get tongues wagging and economic models churning. The latest tariff proposals from the president-elect are no exception. But maybe more important than the impact of such tariffs is the question of whether the EU should view these tariff proposals as weapons and threats directed against trading partners, or as tools of US domestic policy that result in collateral damage to the EU. Each characterization is credible, but the difference is huge in terms of the direction of transatlantic relations.  And once EU policymakers start to publicly own one narrative or the other, it is hard to go back. 

If the tariff proposals are viewed as weapons and threats, a reasonable EU response—and maybe the only one—is retaliatory tariffs, and to refuse to negotiate “with a gun to our heads” (in well-worn EU parlance). This would likely lead to tit-for-tat retaliation or even a trade war. If, by contrast, the EU views the tariff proposals as tools of US domestic policy that inflict collateral damage on the EU, then a reasonable response is an early bilateral discussion on other ways to achieve US domestic policy objectives, but with less or no collateral damage to the EU. 

Among the policy objectives for these and previous proposed tariffs are: addressing persistent goods trade imbalances, encouraging domestic manufacturing, raising revenue, and protecting against and disincentivizing nonmarket excess capacity. These are policy goals that the EU and other trading partners can understand (and even arguably share), even if they disagree that tariffs are always a good way to achieve them. Indeed, some of these goals—like addressing the challenges posed by nonmarket economies—are better achieved in coordination with like-minded allies, which provides a clear opening and opportunity for collaboration.  

The current moment is ripe for early US-EU engagement on achieving the United States’ policy objectives while minimizing collateral tariff damage (including to the US economy itself). Engagement could, indeed, drive the percentage numbers in the header above closer to zero, at least for the EU.

––L. Dan Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center.

That’s the amount of money generated by pulling forward future interest earnings on Russia’s blocked sovereign assets. For nearly three years, the G7 debated how to handle the $300 billion in Russian foreign exchange reserves being held in Western central banks. While some advocated for a total seizure of the full amount, others worried about the legality of such a move and the backlash it would create across the Global South. 

So the G7 reached a game-changing compromise. Creatively, and drawing in part on Atlantic Council GeoEconomics Center research (see our simple annuity formula below), the G7 calculated the interest these assets would earn over the next twenty years and deliver that total—$50 billion—to Ukraine in this calendar year. When you consider that Ukraine’s total budget in 2023 was around $80 billion, you understand that this solution is more than just a temporary fix—it’s a surge of resources delivered at a critical moment. And the number also represents what can happen when allies work together and think outside the box during an unprecedented situation.

––Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center.

Digital ID presents massive opportunities for governments and the private sector to interact with people more efficiently; well-known examples include India’s Aadhar system and Estonia’s e-ID. As governments digitize services and interfaces with constituents, digital ID is expected to play a significant role in resource allocation, access control, and data collection. At the same time, digital ID poses a number of challenges. Prior research (including from me and my colleagues at Carnegie Mellon University) has shown that ID requirements can pose significant barriers—particularly to marginalized populations—due to procedural challenges and/or limited resources for onboarding, identity-proofing, and authenticating individuals. Another prominent challenge is privacy and security. Digital ID systems typically collect and process sensitive data such as biometrics; ensuring proper privacy and security protections for this data is far from trivial. Moreover, not all countries with digital ID systems even have data protection laws in place—or the means to enforce them. 

As governments around the world increasingly embrace digitization and adopt digital ID, they will face a challenging balancing act between providing useful, usable services while also providing safeguards against many potential pitfalls that can have disastrous outcomes for constituents.

—Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an Angel Jordan associate professor of electrical and computer engineering at Carnegie Mellon University.

Through May of 2024, Russia supplied approximately 35 percent of US imports for nuclear fuel. Biden imposed a ban on the importation of uranium products from Russia, which went into effect in August. This was a significant move for the US energy sector transitioning away from resources that had been a critical part of the US nuclear energy regime. It’s important to note that a waiver process exists to allow some importation of enriched uranium to continue for a limited time. 

This very narrow resource that continued to be purchased from Russia by a country that had imposed crippling sanctions on the Russian economy is an important reminder that Russia was still very much part of global supply chains this year. 

—Daniel Tannebaum is a partner at Oliver Wyman, where he leads the Global Anti-Financial Crime Practice, and a nonresident senior fellow within the Atlantic Council’s GeoEconomics Center.

In October, the Associated Press reported that Microsoft and Google would invest in small nuclear reactors to support “surging demand [for carbon-free electricity] from data centers and artificial intelligence.” Amazon also announced plans to invest in small nuclear reactors as dedicated sources of zero-carbon energy to support its data centers and server infrastructure.

These investments occur as technological innovation sparks sharp increases in demand for electricity, as seen in data released by the US Energy Information Administration.

Goldman Sachs research this year estimates that AI alone will generate a more than 160 percent surge in demand by 2030 for electric power to cool data centers and maintain operational integrity for the physical servers that support cloud-based AI computing.  

The share of demand for electricity by US data centers is expected to double by 2030, although it will still remain in the single digits relative to other sources of demand.

For decades, energy and national security have had a high degree of overlap with geopolitics due to the unique role that fossil fuels play in the global economy. One consequence of Russia’s aggression in Ukraine since 2014 has been to incentivize the rapid adoption of clean energy in order to minimize geoeconomic vulnerabilities associated with imported fossil fuel energy. 

Many will celebrate the proactive shift toward renewable and nuclear energy by the three largest technology companies on Earth. But the shift will also create national security issues among three critical infrastructures: the electricity grid, nuclear energy, and AI/data centers. Local, renewable, zero-emission energy will transform and potentially complicate the interplay between national security policy, energy policy, and AI policy.

—Barbara C. Matthews is the CEO of BCMstrategy, Inc., a company that generates AI training data from the language of public policy. When in government, she was the first US Treasury Department attaché to the EU and, prior to that, senior counsel to the House Financial Services Committee. She is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center.

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Argentina now confronts an opportunity that it has not seen in decades to reset the financial conditions in its long-troubled economy and achieve some semblance of normalcy. It has an opportunity to break free from the monetization-fueled, public-sector dominated, subsidy- and price control-dependent economic model that has led it into multiple inflationary and stagnation traps.

Through the use of “sole purpose vehicles” incorporated in Argentina, RIGI enables investors both foreign and domestic to be granted legally binding and consistent terms for tax, foreign exchange, capital repatriation and dividends, accelerated amortization, and customs duties, for thirty years. The law applies to investments of more than two hundred million dollars in the forestry, tourism, infrastructure, mining, technology, steel, energy, and oil and gas sectors (except with higher minimum investment requirements for certain oil and gas activities). It also provides additional benefits for investments in excess of one billion dollars.

Specifically, the scheme presents the following provisions:

• Reduction in federal income tax from 35 percent to 25 percent.
• Reduction in the federal dividends tax from 7 percent to 3.5 percent after the eighth year.
• Lifting of the requirement to expatriate capital through sale of export earnings in the official exchange market after the fourth year (after the third year for investments over one billion dollars).
• Elimination of export taxes after the third year (after the second year for investments over one billion dollars).
• Elimination of capital controls imposed on lines of credit, debt servicing, or dividends paid abroad.
• Elimination of trade restrictions on imports or exports for goods that are used or produced by the sole purpose vehicle.

In practical terms, the RIGI is designed to isolate investors from the most pervasive structural risks in the Argentine economy for the term of a major capital investment. It is an instrument designed to provide investor security in an economy notorious for its recurrent boom and bust cycles and bouts of punishing inflation, driven and reinforced by highly unorthodox policies such as restrictive capital and trade controls.

RIGI and macroeconomic stability: The chicken and the egg?

In Argentina, which is presently mired in more than a decade of persistent stagflation and policy volatility, there are two sides to RIGI. On one side, it shields investors from instability in the expectation that large capital projects will curtail the conditions that have led to macroeconomic woes (for example, by diversifying the economy while attracting much-needed capital). On the other side, investors understand that generous incentive carveouts are not enough given the deeply entrenched nature of Argentina’s economic instability and uncertainty over the durability of its current political pact.

Many investors are likely waiting to see how well the Milei administration’s stabilization plan fares and, perhaps even more importantly, concrete evidence that the country has truly changed. For this to work, a sizeable share of the electorate and the political classes need to commit to the cause of fiscal responsibility.

After all, Argentina’s history is full of examples of dramatic policy shifts. The market-friendly conditions of the 1990s were quickly reversed in the early 2000s, following the economic implosion of 2001, and more specifically by the Kirchner governments (2003-2015). The Macri administration’s (2015-2019) disappointing quest to turn Argentina into a beacon for foreign direct investment (FDI) was followed by the economically disastrous Fernandez administration (2019-2023). Provincial policy adds an additional layer of complication. Several provinces, such as the economically hegemonic Buenos Aires and the mineral-rich but business-restrictive province of La Rioja, have denounced RIGI.

It’s a bit like the chicken-or-the-egg problem. Investors need to see strong macroeconomic results and lasting voter adherence to fully buy into RIGI’s promise. However, that economic stabilization agenda in turn requires strong capital flows, which Argentine officials believe can only be attracted by the generous incentives enabled by RIGI itself.

This dilemma lies at the core of the administration’s plans: The government is deeply set against any devaluation of the peso, and it has made clear that it will only lift its strict currency and capital controls (cepo) once certain conditions are met. Chief among these conditions is that enough foreign currency reserves have been accumulated to prevent any wild exchange rate fluctuations that may feed an inflationary spike.

Despite these challenges, however, RIGI has already started to show promise. On October 22, the International Monetary Fund released new investment estimates for the Argentine economy that placed the country’s investment as a share of gross domestic product above the Latin American average for the first time in decades. The clear gap between the April and October outlooks can be explained largely because of policies such as RIGI and the gradual recovery of creditor confidence in Argentina, perhaps best exemplified with the drop in Argentina’s country risk (as measured by the country’s emerging markets bond index). A slight drop in Argentina’s real growth outlook was not significant enough to explain the hike in expected total investment as a share of gross domestic product.

By attracting stronger foreign capital flows, the RIGI is poised to become a powerful tool for Argentina’s stabilization, easing the attraction of the much-needed foreign currency to finally end the cepo, which since 2011 has been a recurrent thorn for Argentina’s growth and a major concern for potential foreign investors. However, the Milei government cannot revoke this capital control scheme without an assurance that doing so will not create a run on the peso. Still, strong FDI flows will not materialize until well after the cepo has ended and investors are convinced that the administration’s policies will outlast the stabilization period’s resulting economic hardship and austerity. It is unclear which will come first, but what is clear is that the economy’s present recession must be converted to sustained growth in a constrained time frame, or risk provoking a rapid decay in the social pact between the Milei administration and its base.

The RIGI presents a momentous opportunity for Argentina—an instrument to help jumpstart the growth it once enjoyed—but its ultimate outcome still hangs in the balance.

The immediate future looks promising for the Milei administration, but it would be wise not to delay its agenda. In Argentina, President Javier Milei remains popular, with a 56 percent approval rating, a year into his presidency. Abroad, he has a strong personal relationship with incoming US President Donald Trump. A potential new deal with the International Monetary Fund, perhaps eased by strong support from the United States, could provide fresh funds that would allow the country to wind down the cepo and strengthen the country’s economic recovery in 2025. Ahead of the October 2025 elections, furthering popular and investor confidence in these reforms will also be top of mind. 

As such, the Milei administration should prioritize ending the cepo as soon as possible, while furthering the reform agenda through the elimination of long-standing and price-distorting subsidies for producers and consumers that represent a sizable cost to the state. While these moves may generate some inflationary movement, they will also help unleash the potential of the Argentine economy and more firmly cement Argentina as an attractive destination for foreign investment in what is shaping up to be a turbulent year for other emerging markets.

Ignacio Albe is a project assistant at the Atlantic Council’s Adrienne Arsht Latin America Center, where he focuses on Argentina, Brazil, and hemispheric affairs.

William Tobin is an assistant director at the Atlantic Council’s Global Energy Center, where he focuses on international energy and climate policy.

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On November 4th, Global China Hub and Indo-Pacific Security Initiative nonresident senior fellow Dexter Tiff Roberts contributed to a ChinaFile article on the expected impacts of Beijing’s latest stimulus measures on China’s long-term economic trajectory.

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On November 10th, 2024, Global China Hub and Indo-Pacific Security Initiative nonresident senior fellow Dexter Tiff Roberts spoke to the Wire China about challenges faced by foreign companies deciding whether the costs of operating in Beijing outweigh the benefits.

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The Economic and Social Costs of the Gaza War

“We’ve had the loss of lives, injuries, and the cessation of economic activity in general in Gaza—as well as the demolition of infrastructure,” economist Perrihan al-Riffai said on Tuesday, October 22^nd, during the launch of her new report, authored in partnership with the Atlantic Council’s empowerME Initiative and GeoEconomics Center.  

The new report, “The economic and social costs of the Gaza War,” uses data to navigate the war’s toll, not only upon the “epicenter countries” directly involved in the conflict but also the broader Middle East. The socioeconomic cost of the war has been overwhelming—but not entirely in the ways economists, at the beginning of the war last October, initially thought.  

Al-Riffai noted that the war had a negative effect on supply chains—especially vis-a-vis Houthi attacks in the Red Sea—but that the increased costs of the diversion had not translated into the expected increase in prices for consumers. Another surprise was the conflict’s apparent lack of immediate impact on oil and energy prices.  

Other socioeconomic impacts, though, were predictably devastating. The war has “helped exacerbate Egypt’s already challenging foreign exchange situation and current account difficulties,” said al-Riffai. Israel faces surging inflation, debt, and military spending, with its labor market hemmed in by militarization. Moreover, “the longer the conflict goes on and the more intense it becomes,” there is potential that risk-shy investors could turn away from investment in the broader Middle East.  

As for the human toll, migration and displacement have shot up. Palestinian refugees fleeing to nearby countries already facing economic challenges, like Jordan and Lebanon, may unfortunately represent “an extra pressure point on public utilities, including the social sector, health, and education. Unfortunately, what ends up happening is the refugees end up suffering in addition to the host country’s citizens.”  

Reshaping Egypt’s fiscal policy with Finance Minister Ahmed Kouchouk

“We still need to keep the course of reforms and to keep monitoring things, but on the fiscal side, we’re seeing good performance,” said Egyptian Finance Minister Ahmed Kouchouk, speaking at an Atlantic Council event on Wednesday, October 23^rd, discussing the future of Egypt’s fiscal policy. His Excellency discussed Egypt’s prosperous relationship with the IMF and spoke on the ongoing program which aims to address fiscal imbalances accrued during the Covid-19 pandemic, as well as public spending at large. 

Discussing current challenges to the Egyptian economy, Minister Kouchouk spoke on the work that the Egyptian Central Bank is doing to bring inflation back to its 2025 target, as well as the importance of social safety programs for Egyptians impacted by rising costs – including a conditional cash transfer program developed in collaboration with the World Bank.  

Minister Kouchouk also noted that Egypt has made climate and sustainability a priority in economic planning. H.E.’s participation in the Coalition of Finance Ministers for Climate Action has allowed Egypt to collaborate with other nations and adopt new strategies to meet the Sustainable Development Goals. Further, Egypt has become the first issuer of green bonds in the region. “We are streamlining climate in our work, in our planning, in the fiscal risk statement.”   

Saudi Arabia’s economic outlook with Minister Faisal F. Alibrahim

“The idea of Vision 2030 was based on optimism for the future,” said H.E. Faisal F. Alibrahim, Saudi Arabian Minister of Economy and Planning on Thursday, October 24^th, at the Atlantic Council. The Minister spoke on the Kingdom’s primary economic goals – namely, to diversify the economy to bring in different sources of growth and to elevate the role of private businesses. “Ultimately, the objective is for the private sector to grow.  We have set an ambitious target of 65% for the private sector, and we’re moving slowly in that direction.” 

As the Saudi economy moves away from oil dependency, the Minister dsicussed the investment diversification effort the Kingdom made in various industries under Saudi Vision 2030, including in technology, artificial intelligence, and tourism. The government has also made sustainability a key priority and has invested heavily in electric vehicles, hydrocarbon energy, solar energy, and carbon removal technology. The Minister stressed the government’s strong commitment to sustainability and the need for the Kingdom to take a regional leadership role on this issue: “A stronger Saudi economy is good for the region.”  

“The heart of all of this is technology and innovation,” said Minister Alibrahim. “Diversification is essentially just doing what you don’t know how to do.” 

Egypt’s sustainable investment and trade growth, with Minister Hassan El Khatib

“I want stable policies, I want predictable policies, and I want to make sure that this location is competitive now and for the next twenty years,” said H.E. Hassan El Khatib, Egypt’s minister of investment and foreign trade. “Egypt has a major advantage and a great opportunity today, especially with the supply chain shift, with onshoring, with our abundance of quality labor.”

On Friday, October 25th, the minister joined the Atlantic Council at the International Monetary Fund to discuss Egypt’s sustainable investment and trade growth with empowerME Initiative Director Racha Helwa. He highlighted Egypt’s empowerment of its private sector and its planned shift away from government-led economic growth: By 2030, H.E. said, the Egyptian government aims for the private sector to contribute 75 percent of investments. These efforts are part of Egypt’s commitment to building an attractive business environment, securing more foreign direct investment, and streamlining existing trade and tax policies.

For example, the minister underscored the need to make the logistics of trade simple and fast, not only by reducing non-tariff barriers but also by pursuing digitization. “Trade is about the ease of getting goods in and out,” His Excellency said. “We want to cut the time taken to release goods by 30 to 50 percent.” Egypt’s trade prospects stand out in a troubled region given the country’s excellent strategic location, clear policies, renewable energy resources, abundant high-quality labor, and stable approach to regional challenges.

Kate Springs and Leila Ouhri are Young Global Professionals in the Atlantic Council’s Middle East Programs.

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It is a mistake for the West to dismiss the power of symbolism and narratives in the geopolitical competition for global influence. The BRICS summit has also produced noteworthy results that the international community should be aware of.

First, Vladimir Putin chaired a successful summit involving thirty-six countries, most of which were represented by heads of state. In doing so, the Russian president showed that he has not been isolated in the international arena by the West following his invasion of Ukraine. Instead, he has deepened relationships with Global South countries through BRICS and other initiatives such as riding the anti-colonial wave to make headways in western Africa. Equally importantly, President Xi Jinping and Prime Minister Narendra Modi met on the sidelines of the summit. They did so mere days after announcing a pact to resolve their border conflicts, which have been a major irritant in their bilateral relationship. Their meeting helped raise the stature of the BRICS summit as a venue where important political discourse can take place.

Last but not least, with many countries reportedly wanting to join, BRICS has invited 13 thirteen nations to be partner countries-they will continue discussions with a view to formal membership. The list of partner countries—confirmed by several senior officials, but not officially specified in the Kazan Declaration—includes Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Vietnam, Uganda, and Uzbekistan. It is unclear which of these countries will eventually decide to become formal members. Saudi Arabia, for example, was invited to join last year but has not yet decided, though its officials have attended BRICS meetings since then. The inclusion of priority countries for the West, such as Turkey (a NATO member) and four important ASEAN countries, should concern policymakers. Many developing countries have found BRICS a useful forum for a variety of reasons, including diversifying international relationships and expanding trade opportunities.

The Kazan Declaration, released at the end of the summit, covers a wide range of issues. The Declaration avoids any direct mention of the United States, hostile or otherwise. Some Western analysts had raised that doing so could make moderate members like India and Brazil uncomfortable, especially given the anti-Western tilt of the group’s expanded membership. The Declaration focuses on promoting multipolarity and a more representative and fairer international system. These goals remain the common denominator attracting many countries to BRICS.

The Declaration supports initiatives and groups developed to coordinate and promote the views of BRICS members and countries in the Global South in international fora, including the United Nations (UN) and the Group of Twenty. These groupings cover issues from sustainable development to climate finance, and call for settling the conflicts in Gaza and Ukraine.

In particular, BRICS will intensify ongoing efforts to promote settlements of cross-border trade and investment transactions in local currencies by establishing BRICS Clear as an independent cross-border settlement and depository infrastructure. Doing so would help facilitate the use of local currencies. It will also launch the BRICS Interbank Cooperation Mechanism to promote innovative financial practices, including financing in local currencies. Many developing countries are interested in using local currencies more frequently given their limited access to US dollar funding.

The group’s decision to form an informal consultative framework on World Trade Organization (WTO) issues to engage more actively in the debates about reforming the WTO is also noteworthy. This section of the Declaration includes opposition to the use of unilateral economic sanctions and discriminatory carbon border adjustment mechanisms. Taking advantage of the fact that BRICS members constitute the largest producers of natural resources in the world, the group also pledges to jointly promote its interests throughout the value chains of mineral production against the backdrop of increased demand for critical minerals for the energy transition. The geopolitics of the energy transition could open an opportunity for mineral-rich developing countries to coordinate their mineral policies and join the superpowers in their search for reliable supply chains of critical minerals.

Overall, BRICS has attracted interest from many developing countries—now boasting nine members and thirteen partner countries. The collective share of its members’ population and gross domestic product has surpassed that of the Group of Seven (G7). However, expansion comes at a cost. Building consensus among more diverse members is increasingly complex, and expansion plans could remain a point of contention within the group. For example, Venezuela had reportedly been kept out of the list of partner countries due to Brazil’s objection.

Despite this challenge, key members of BRICS have successfully developed common positions among Global South countries in international fora in recent years. Their joint effort to demand a loss and damages fund at COP28 in Dubai in 2023 is one example. Additionally, BRICS members have collaborated with Global South countries to work for the adoption of the UN mandate in August 2024 to negotiate a UN tax convention, which covers taxation of multinational corporations and wealthy individuals. BRICS countries also consistently promote governance reform of the Bretton Woods Institutions. The more BRICS can develop and articulate common views among Global South countries, the more it can be regarded as the counterpart of the G7 (representing developed countries) at international fora and in the public domain.

Importantly, BRICS’ flagship project—promoting the use of local currencies to settle cross-border trade and investment transactions—is gradually gathering momentum. China, for example, has increased the share of the renminbi when settling its cross-border transactions from 48 percent (surpassing the US dollar) in mid-2023 to more than 50 percent in mid-2024.

In short, BRICS—or BRICS-plus as some observers and officials have referred to the expanded group—is here to stay. Other countries, including Western ones, need to figure out how to deal with it.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and a former deputy director at the International Monetary Fund.

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Online Event Wed, October 23, 2024 • 10:00 am ET

European Central Bank President Christine Lagarde on Europe’s economic outlook

AN #ACFRONTPAGE EVENT—European Central Bank President Christine Lagarde discusses Europe’s economic challenges and the path forward during IMF-World Bank Week at the Atlantic Council.

Digital Currencies Digital Policy Economy & Business European Union

Speaker

Christine Lagarde
President, European Central Bank

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introduction

Josh Lipsky
Senior Director, GeoEconomics Center, Atlantic Council

Event transcript

Uncorrected transcript: Check against delivery

JOSH LIPSKY: Good morning, and welcome to the Atlantic Council. I’m Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. And it is truly my honor to welcome you today to our AC Front Page conversation with the president of the European Central Bank, Christine Lagarde.

This morning’s event keynotes our series of interviews with leading financial policymakers during the IMF-World Bank annual meetings. Both here at the Council and live from our studios inside the IMF, we are hosting fifty conversations this week on a range of issues, from China’s economy to digital currencies to the future of the Bretton Woods system.

And I wanted to take a moment this morning to explain why we’re doing that. When we launched the GeoEconomics Center nearly four years ago, it was founded on a simple premise: Finance, economics, foreign policy and national security are deeply interconnected. The events of the intervening few years have proved the point. Think of the pandemic and the resulting supply-chain shocks. Think of Russia’s illegal invasion of Ukraine and the way the tools of economic statecraft have been deployed by the G7 to respond.

This center, through our research, our convenings, our fellowships with young economists, has sought to be the place that delivers new solutions for the challenges of our time. In fact, it was on this very stage two years ago that US Treasury Secretary Janet Yellen delivered her friendshoring speech, just before the IMF-World Bank annual meetings.

She called upon all of us to channel the spirit of Bretton Woods, to remember that 44 countries met in New Hampshire not after war but during war, six weeks after D-Day. She said at the time that they sought to build the future they hoped to win.

And so the IMF and the World Bank to us are the quintessential geoeconomic institutions. They are proof that even in crisis, international collaboration works and can deliver something better than what came before. And there is no one who more embodies that principle than our guest today.

Time and again over the past two decades, President Lagarde has been called upon to lead in extraordinarily difficult moments. In 2007 she became French finance minister, the first time a woman was appointed as G7 finance minister. Only months into the job, she helped not just her country but the rest of Europe and her counterparts here in the US navigate the global financial crisis.

In 2011 she became the first woman to lead the International Monetary Fund. Here she was asked to help manage the unfolding eurozone crisis and strengthen and stabilize the IMF after a difficult period.

In 2019 she became the first woman to lead the European Central Bank, just before a global pandemic and a land war in Europe would send shockwaves through every economy in the euro area.

In each of these roles, she demonstrated what true leadership looks like. And on a personal note, for me, the opportunity to work for her at the IMF was an incredible honor, as I know it is for all those who have had the chance to learn from her. And many of them are here in this room.

So it is truly my pleasure today to welcome President Lagarde back to the Atlantic Council as she joins the president and CEO of the Atlantic Council, Fred Kempe, for this special conversation.

Fred, over to you.

FREDERICK KEMPE: Thank you.

So, Madam Lagarde, first of all, you trained Josh really well.

CHRISTINE LAGARDE: He came with high recommendation from you.

FREDERICK KEMPE: So salute to Josh and his remarkable GeoEconomics team; another amazing week you’re putting together. And you’re putting it together as we dismantle our offices here.

Good morning to all of you for this, our last major event at our old headquarters. We’re already moving into our new headquarters at 1400 L. I think you’re going to be amazed at the new convening space.

And good afternoon in Europe. Good evening in Asia. Hello all over the world. We’ve got people tuning in all over the place because they want to hear what you have to say. So if you have questions we’re going to do them online today. All those in the audience live here can send them in through your phone if you like, and it’s AskAC.org. Send it to AskAC.org.

Let me get started with monetary policy, which seems like the right place to start with you, and I’m really interested in a situation where you’re looking at inflation coming down. One point eight percent in September. It was as high as 10.6 percent October 2022.

So that’s the good side. The bad side is growth is slow. In Germany it could be negative this year, probably will be negative this year, and they may be on the edge of a recession.

GDP outgrowth—growth outlook forecast under 1 percent for the euro zone. As you weigh these factors looking at future decisions how do you weigh inflation coming down but growth—which is a good thing, but growth being as slow as it is, which is not a good thing?

CHRISTINE LAGARDE: Thank you, Fred. Thank you, Josh, very much for your way too kind introduction and it’s really a pleasure being here.

I was wondering whether you follow a tradition that is often observed where when you leave a place you allow anybody who is here for the last time to pick up something from the—

FREDERICK KEMPE: That’s the end of our program today.

CHRISTINE LAGARDE: No, but it’s wonderful to be back at the Atlantic Council and congratulations for having expanded so much the scope of your work and your research, bringing together geopolitics, economics, and security under one single roof.

Back to your question, and thank you for starting with monetary policy because this is really my business. So at the European Central Bank we are driven by a mandate which is pretty simple and straightforward, which has a primary objective which says price stability.

It’s upon us to define what it is and we have in our last strategy review defined it as 2 percent medium term symmetric. So we, first of all, look at inflation, at prices. We dissect inflation as much as we can and we try to distinguish what is sort of headline inflation, which is what is felt and resented sometimes by people, from what is permanent, from what is temporary, to really understand where it is heading and how our decisions on interest rates in particular are going to affect inflation.

So that’s what we look at primarily. But, of course—and we are—at this point in time we are rather satisfied with the progress made because, as you just mentioned, we started off back in October two years ago at a reading of 10.6 percent on average and we are now below 2 percent for the moment.

We have reasons to believe that it will move up again above 2 percent in the next few months but it’s really good progress that we have contribute—we have largely contributed to.

Growth. So we are attentive to growth, of course, because it impacts on inflation and it is that impact of growth on inflation that we are attentive to. It’s different from the Fed. The Fed has this dual mandate of price stability but also growth, economic activity, employment. The ECB does not have that. We have a primary mandate which is price stability.

FREDERICK KEMPE: And so let’s get to European competitiveness and growth. Your predecessor Mario Draghi just released a major report on the future of competitiveness. As Josh said in his opening, you’ve not just been in your current job as a central bank governor but you’ve been a minister in France. You’ve been the head of IMF. You were in the private sector for twenty years, and so you know that it all links together in how competitive a place is.

He raised many issues that fall on the fiscal side—not your job—but the ECB does play a role in financial regulation of capital markets. You have urged people to swiftly follow up on Draghi’s plan, I think particularly on capital markets. But I guess the question behind this is, how concerned are you about European competitiveness, and what’s most urgent in the Draghi report?

CHRISTINE LAGARDE: Well, first of all, his report is comprehensive, analytical, documented, and, as I said, a severe but just diagnosis of where Europe is. From my position, as president of the central bank, I’m particularly attentive to three directions that he’s identified. The first one—because they matter for monetary policy.

So the first one is productivity. Europe lags in productivity way behind the United States. Just to give you a number, between 1995 and, say, 2020, US productivity has increased by 50 percent. Europe, productivity has increased by 28 percent. So Europe is lagging behind in terms of productivity. That’s objective number one, improve, catch up, and identify which sectors are going to drive productivity. When you look at the gap between 50 and 28 percent, you see that a lot of that results from the tech sector. Very obvious.

Second item, which he also identifies, is energy costs, and what can Europe do about it. If you look at the price of energy, it’s about two or three times higher in Europe than it is in the US If you look at the price of gas, it’s four to five times higher in Europe than in the United States. So are we suddenly going to find oil, find gas? Do we actually want that? No. What he identifies as the way forward is rapid and smart decarbonization of the economy so that Europe can lead in terms of non-fossil energies, where we are a little bit ahead of the game—with caveats—but which would lead to a much cheaper source of energy once the investments are made, once the transition is completed. And which would also be a good way to adapt—to adapt to the climate change impacts that we are suffering more and more by the day.

The third dimension which he identifies as well is digitalization of our economies. And that is one where the productivity gap is obvious, and where a collective endeavor by the Europeans is called for. What is needed behind it and why does it matter to us, you know, in terms of monetary policy, is the financing. To progress in digitalization, to move into the innovation journey that is needed for that, you need capital. And you need capital that is prepared to take risk. This is not something that we are very good at in Europe. If you look at the volume of venture capital that is raised in Europe, it’s minimal relative to what is raised in the US, or even China.

So he advocates, and I have advocated before that myself, for a capital market union that is common to all, at least, countries of the euro area, if not the whole of the European Union. And for that we need a single, integrated market from a regulatory point of view, from a supervision point of view, with common trade and post-trade infrastructure, where we are completely scattered all over. So those are the three directions where it matters to us—improved productivity, of course it matters to us, especially with an aging population as we have in Europe. Cheaper energy. Of course it matters, because it’s clearly one of the domain that can shock our economies, and has shocked all our economies but Europe in particular recently. And digitalization, because there will be productivity improvement as a result as well.

FREDERICK KEMPE: So, coming back to the core question behind this, how worried are you about it, we’ve known that these things need to be fixed for a long time. And so you look at the Draghi report, and you can’t help but embrace it. But how does one now—what would be different now that one would actually execute on something like capital markets, when one hasn’t before?

CHRISTINE LAGARDE: You remind me of a famous Margaret Thatcher comment. You know, don’t tell me what to do, tell me how to do it. And that’s exactly where I think Europe is. Because, yes, those things have been identified—probably in a more piecemeal way. One of the great values of the excellent Draghi report is that it brings it all together by someone who’s been in all positions. National central bank, so he knows about the territorial aspects of some of the reforms. He has been president of the European Central Bank before me, so he knows how bringing everyone together is necessary and relies also on other unions than just monetary union. And he’s been president of—prime minister of Italy, so he appreciates the politics that is behind it. So value is comprehensive by somebody who has a holistic view of the issues.

He doesn’t go, in my humble view, deeper enough into the action list, what needs to be done. And that’s probably not—you know, it’s—this is now going into the weeds and rolling sleeves up and getting the job done, but this is what the European leadership at all levels of institutions will have to do. How do you go about a capital market union? What do you need to tackle first? Who do you need to bring around the table to say, OK, you have your territory at the moment, it’s not a question of taking it away from you, but bringing it to a level where major operations, major issuance, will be taken at a different level? So all this needs to be done, and the urgency of the matter is now.

FREDERICK KEMPE: Thank you for that very clear, clear statement.

So I won’t—we don’t want to turn this into a press conference; that’s not the purpose of the Atlantic Council. But I do have one follow-up question on your first answer, from Mark Conahan: Is it appropriate for markets to begin pricing in an aggressive rate-reduction path in anticipation for economic data even when the ECB’s forecasts seem more sanguine? And this really gets to the point that if you look only at the inflation data you may go in one direction. It’s not your mandate to look at the economic data, but you’ve said how much it’s linked. I think the real question behind this is: Are you being too sanguine?

CHRISTINE LAGARDE: What we have done since last June on the basis of the data that we had and our baseline, we have gradually cut interest rates once, in June; then we held, in July; then we cut again, in September; and we cut again, in October. So we do not have a linear, systematic sequence that would be, you know, the way to go.

We have reiterated many times—and I’m happy to do it again, because it’s really the way it works—we are data dependent and we look at everything that’s available. And we analyze those data on the basis of three key criterias, which include the inflation outlook, the underlying inflation, and the transmission of monetary policy. And when we last cut, in October, we were confident on the basis of the data that we were receiving and observing that the disinflationary path was underway and that we could continue to dial back the restrictive monetary policy that was in place—that is in place.

But of course, we need to be cautious. We need to be cautious because data will come—will come up and will indicate to use what is the state of the economy, what is the state of inflation, of underlying inflation, and there will be a judgmental aspect to our decisions. But we will, indeed, have to be cautious in doing so.

FREDERICK KEMPE: Thank you for that.

So from the immediate to the generational question, you’ve delivered a truly fascinating speech last month at the IMF, and you said central bankers today—and any of you who have not read it, you should go and read the whole thing.

CHRISTINE LAGARDE: Oh, thank you.

FREDERICK KEMPE: As you know, I’m an amateur historian as well as a think tank leader. But you talked about how central bankers today have better tools to manage structural changes than the 1920s, even if some of the headwinds are similar. Here’s your quote: “Two specific parallels between two ‘twenties’, the 1920s and the 2020s,” which I found fascinating. “Then, as now, we’re seeing a setback in global trade integration and a stride toward progress in technological progress.” So AI on the one side and decoupling/derisking. I would add a third element to this that was there in the 1920s, which is a rising geopolitical risk.

So we all know how the 1920s ended, which is the disasters of the 1930s, whether it was the Great Depression or whether in the end it was world war. What makes you more confident of our challenges today? You know, if you’re looking at the 1930s versus the potential 2030s, how do we avoid wrong turns at this point?

CHRISTINE LAGARDE: OK. Well, each one of us has to do what one has to do. So you are the historian and you can do the sort of geopolitical comparative analysis between the 1930s back then and the 2030s now. I will not venture in that area, because I have to focus on what impacts monetary policy. And you would take me into too political direction.

But what gives me more confidence today—maybe it’s twofold. One is, if you look at trade, back in those days, in the 1920s, trade went down significantly. In a couple of decades, trade went down by 20 percent—down. The numbers we have on trade are not downward. They are up. So if you look at the forecast by the IMF for the next couple of years, it’s an increase of trade. I think it’s 3.1 next year and 3.4 the year after.

So we are not in a world where trade stops and trade declines. We are in a world where trade continues. But it continues in a different way. And I think we have to be attentive to the composition and the distribution; so no less trade, but trade with other partners, trade in a different risk distribution, if you will.

It’s the whole, you know, strategies of corporate to have China plus one or to have plus one, but certainly to continue to use the world in order to benefit from elasticity or in order to benefit from larger market outside home base. So I don’t think that trade is here to go on the basis of the information that we have and the analysis that we can conduct.

I think the second reason I’m more optimistic is that central banks in those days, they exacerbated the problems because they were operating within a rigid framework. And I think that we don’t have that rigid framework anymore. I mean, the gold standards and the reference that currencies had vis-à-vis each other with gold as the standard is no longer with us. And we have invented, over the course of the last few decades, a much more flexible system which allows for that room to maneuver in a less brutal and rigid way on the economies.

Second, still in that monetary toolbox that we have and the way that framework is organized, inflation expectations is one of the major compass that is being used in order to make sure that inflation comes back to that target that most of us around the world have of 2 percent, more or less.

So those are two reasons, in my field, that give me hope that those twenties, while there are interesting similarities in terms of decline of trade and massive technology breakthrough, will not give rise, I hope—and I’m sure you do as well, Fred—to the thirties.

FREDERICK KEMPE: Thank you for that, because the saying, those who forget history are condemned to repeat it, I hope you’re right.

I’m going to ask for a visual aid here from our AV team, because I’m going to talk here about central-bank digital currency, which I know is, you know, something of a passion of our GeoEconomics Center here. We’ve studied central-bank digital currencies closely. What you’re seeing right now is one of our most clicked-on and most-viewed webpages of the Atlantic Council, which tells you what geeks follow the Atlantic Council. But the ECB is currently in a two-year preparation phase of the digital euro, so you’re testing it for real-world-use cases.

Two questions from this, really. What are the factors that are going to lead to a decision on whether a digital euro will be deployed at the end of the two years? Aligned with that is you’ve made an argument for digital euros, a European sovereignty issue. So I’d like you to elaborate on this.

So I guess there’s actually three questions, those two questions, and then the third is we’ve been pushing for the US participation and leadership on this issue of digital assets. As a peer central bank, how do you view the role of the US on central bank digital currency? So it’s really a three-part question on digital currencies.

CHRISTINE LAGARDE: So your second—or, it was—sorry—

FREDERICK KEMPE: The first one is, how are you going to make a decision to go? The second is, what is the sovereignty issue? And the third is, how does the US play?

CHRISTINE LAGARDE: OK. You know, I might start with your second question, because—no, I’ll tell you where we are. So we are, as you rightly said, in the—what we call the exploratory phase. And it’s a phase that will finish at the end of 2025. So we have still one year to go. And at the end of 2025, provided that the legislative process is completed, then the governing council of the euro system will decide to launch for real or not.

Why do I say the legislative process? Because in Europe, it follows this two-prong approach that hopefully will work, and do work at the moment, in parallel, where we explore from a technological and practical point of view how the digital euro will work. And the legislator, meaning the European Parliament, will have to pass a law that will define what the digital euro is, what its threshold is, how it will operate, whether it will be fiat—well, whether it will have tender status, rather, with fiat currencies. And those two tracks are working in parallel.

My hope—because a lot of work has already been covered under the previous Belgium presidency—my hope is—and Hungarian presidency, to a certain extent. But we now have a new European Parliament which has, you know, now a lot of work on its—on its plate, and will look at that, I hope, in the not-too-distant future. My hope is that in the course of 2025, the law will be voted by parliament. We will have a legal framework in which our technology efforts and definition will be inserted. But the two are coming together.

Your second question, which is more fundamental, is, you know, why do we do that? I think the reason we do that is that everything is digital. And what is not digital, is gradually—and more rapidly than gradually—becoming digital. You buy digitally. You we speak digitally. There are lots of things that are taking place that way. So why wouldn’t currency also be digital? I’m going to oversimplify it. You have central bank money, which is essentially, let’s say, banknotes. And that central bank money is critically important for the trust that people have in the system.

The fact that you hold a dollar, that I hold a euro, is—you know, in euro we trust. And we know that that bank note is always going to be honored. It is central bank money. Then you have commercial bank money, which is what commercial banks create by activating, granting loans. And it’s a whole different situation. But if you just look at central bank money, why would it not also turn digital? Why would we always and forever rely on banknotes as our basis for the currency?

So I think we owe it to future generations, and to all of us, to build that alternative of digital currency, which is, you know, to—again, to put it—to oversimplify it, it’s digital banknote. With less total anonymity, which is probably right given, you know, the security that we want to give each other, and the respect that we have for both the confidentiality of information, which we’re working hard so that there is as much privacy as possible, but equally the fact that it cannot be totally, totally anonymous and facilitate the likes of money laundering, financing of terrorism, and what have you.

So, number one, everything is digital. Central bank money should be digital as well. And there are countries in Europe where banknotes are hardly ever used. So we need to have that anchor established in digital—in a digital way.

I think the second reason we are doing that is the fact that payment systems are not exactly sovereign, and more to the point they are very fragmented. In Europe, you know, if you want to pay digitally, there are at the moment thirteen countries that are operating in an isolated manner and which are not linked to the rest of the system. Having a digital euro is a way to actually bring that together on the back of whatever infrastructure will be available, but which will essentially facilitate peer-to-peer point of sales off-hours payment between people in the trade, people between themselves in a cheap, fast, transparent manner. That’s the objective that we have. And I think it’s—you know, if you look after your currency, it’s also a way to really establish your sovereignty, which is what we are all doing.

FREDERICK KEMPE: Well, let’s drill down on the sovereignty issue. Ananya Kumar from our team is asking about the parallel conversations happening about undercutting the international role of the dollar and the euro at the BRICS summit this week. How do you view the geoeconomic role of the digital euro within this context? And perhaps we could add the digital dollar to that, but your business is the digital euro.

CHRISTINE LAGARDE: Yeah.

So I think here we’re touching on two different things. One was the digital euro, which I tried to explain and which we are working on, we’ll continue to work, and we’ll hopefully launch at the end of 2025.

I think what is also important is linkages between payments systems, because at the moment we have too fragmented a payments system around the world, as a result of which if, for instance, people want to remit money back home—and it is the case for a lot of migrants who are working away from home and want to send their salary back home—it takes forever, it’s very expensive, it does funny loop-the-loop circuits around the world for some countries. So interlinking payments system so that people can actually transact easily and cheaply and transparently, so that remittances can go back to the Philippines or to Thailand or to Mexico in a smooth and cheap way, that is important.

And it’s the reason why we in Europe, we have a system which is called TARGET Instant Payment system, which applies to retail transactions and which, within Europe, work in that fashion—fast, cheap, transparent. And yesterday or a couple of days ago, we announced that we were prepared to link that TIPS—this instant payment system—with other instant payment systems around the world, and they are blossoming.

And I would like to pay tribute to your CBDC Tracker, which is really elaborate and top quality. But I think it would be interesting to also track the instant payments systems that are blossoming around the world. If you look at India, if you look at Brazil, if you look at Europe, we are heading in that direction. And it’s a system that should not be closed off or restricted to the G7 countries, for instance. It’s a system that has vocation to open up to multi-countries around the world in order to serve consumers and people who transact in the best possible ways, in the cheapest way, and introduce good competition.

FREDERICK KEMPE: Fascinating. And, obviously, you can’t comment or instruct the US what to do on its own digital currency, but we seem to be a little bit behind on that from that the European—

CHRISTINE LAGARDE: Can I say something on that?

FREDERICK KEMPE: Yeah. Yeah.

CHRISTINE LAGARDE: I will not comment on it. But I think we need to be really attentive to developments around the world. We publish annually the International Role of the—of the Euro. That’s an ECB annual publication. And we follow, you know, in which currency people transact, in which currency they keep reserves at the central banks in which currency they do trade finance. And the role of a currency should never be taken for granted.

Now, of course, the dollar has the dominant role, and has had it for a long time. It’s the exorbitant role of the dollar that Giscard d’Estaing, the former president of France, had identified. And the dollar is at around 50 percent of all those transactions, when the euro is just below 20 percent. But we have to be attentive and careful. And there is—there are rising—there are phenomenons of rising movements concerning gold, notably. I mean, China has been buying gold like never before. Russia is supporting gold because it is extracting a lot of gold out of its underground, and there are clearly attempts to push other currencies. The renminbi is neck to neck with the euro on trade finance.

So I think we all need to be attentive to developments. We all need to be attentive to new technologies. We need to listen to our customers and our compatriots to see what will serve them best with the concern of defending the currency, establishing the sovereignty as it should be by legitimate means, but clearly defending finance.

FREDERICK KEMPE: That’s an excellent answer. Thank you.

So let’s talk a bit about Russia and its immobilized reserves. Six months ago at the last IMF World Bank meetings we’d been through several months of negotiations between the US and EU on the use of $300 billion of frozen Russian reserves.

G7 announced in Italy—brought forward interest income into a fifty-billion-dollar payment, though not yet delivered. It seemed like something as a breakthrough. The CFR—the Council on Foreign Relations—I think it was back in April you were talking about how freezing assets is different than confiscating assets and the global legal consequences of that.

How do you view this new idea? What role would the ECB play now in getting the fifty billion dollars plan over the line?

CHRISTINE LAGARDE: OK. Maybe let me describe what the new idea is so that it’s—we all understand what the difference is with the old idea.

So the new idea that is being discussed is to use the interests generated by those frozen—not confiscated, frozen assets. So this interest generated by the frozen assets that actually belong to the CSD—Euroclear—and to use that in order to serve the debt of Ukraine vis-à-vis the European Union, Japan, the US, the UK. And this is—and, of course, Canada. I don’ t want to forget anyone in that game but, yeah, Canada is also part of the proposal.

So it’s very different from confiscating the capital. What I think the analysis is the interest generated do not belong to Russia. They’re generated by the capital. The links between the CSD and Russia did not provide for any attribution or ownership of those interests as a result of which it is in the books and in the accounts of the CSD—Euroclear—and can be used for the purpose that is intended by the lenders.

So that’s really what is at stake and I think it’s vastly different from saying we confiscate your assets. No, there’s no such thing. Assets are frozen. They will remain frozen as long as it’s determined by those who made the decisions and the interest generated that do not belong to Russia but to the CSD are used to serve the debt of—that is, to Ukraine.

FREDERICK KEMPE: So you’re comfortable with that approach it sounds like. We’re at work—Ukraine’s at work. This is ongoing. Why can’t it move faster and what would be the ECB role in this?

CHRISTINE LAGARDE: No. No. It has moved. I think it was two days ago that the European—I think it was the parliament or the three institutions together have actually decided to issue the loan, which the exact amount I can’t remember—I think it’s thirty billion—that is backed—guaranteed, if you will, in terms of debt services—by the interest generated as such. And I know that other G7 countries are moving in that direction. I think the UK is fairly advanced, as well, and I don’t know about the US You’d have to—you’d have to ask Janet.

FREDERICK KEMPE: Let’s go back to US and China and trade. You talked—it’s one of the overwhelming themes of this week. And so on the one hand you have, you know, European-US tariffs, the danger or potential of more. On the other hand you have manufacturing over capacity of China being imposed on the world.

What are the specific long-term risks of what’s going on with this potential decoupling between Western economies and China? How concerned are you about the Chinese manufacturing overcapacity on the one hand and rising tariffs on the other?

CHRISTINE LAGARDE: I’ll start with that. I think that trade, according to the rules that partners have agreed with each other—meaning essentially the WTO rules—is beneficial for innovation. It’s beneficial for the development of the activity. Has proven extremely good for some countries that have managed to reduce poverty as a result of extended activity and development of the economy, as a result of trade being the major driver. And I think that we all stood to benefit from trade in many respects. So trade barriers, whether they are tariff or nontariff barriers, are likely to have a negative impact on that. On growth, certainly. On—I think it would have an impact on inflation as well. And not one that, you know, would be—would be particularly welcome.

There is clearly overcapacity in certain sectors in China. And we have to remind our partners that there are rules by which we trade, which they have consented when they joined the WTO, and that they have to abide by. And that not being the case, then decisions have to be made. But I think that jumping to the conclusion that the economy will fare better at home because we have a big market, simply because we will raise tariffs, I think is a bit of a far-fetched conclusion that I don’t—I don’t see in the history of large economies. Because when you look at that—you’re a historian—when you look at that, it’s pretty clear that periods of restrictions and barriers have not been periods of prosperity and strong leadership around the world.

So whoever in this country is ultimately the president, I think should at least bear that in mind. The times when the United States has been in strong leadership, and when the economy has been prosperous, have most often coincided with periods of trade around the world and engagement of the country. Because the US economy is such a large and powerful economy, and it has to project in the world on the global stage.

FREDERICK KEMPE: Thank you for that. I’m going to call for another visual aid. And this gets to the question of leadership at central banks and finance ministries. And we’d like to show you the disparity here between—this is our own data visualization, so the team is very good at this kind of thing. Twelve percent of the world’s finance ministers are female. Thirteen percent of the central bank governors. This is fact. You can see it on the chart very strongly. But are there implications for the global economy? Is this something we should fix just because it doesn’t seem right, or is there actually implications for the global economy in this—in this visualization?

CHRISTINE LAGARDE: I think it’s abysmally small and does not reflect the availability of talents and merits that many economists, and macroeconomic experts, and financial experts have around the world. So it does not—there’s a whole pool of talent that is not tapped into, and clearly not reflected on this chart. Thank you, by the way, for putting that in in such a colorful way.

FREDERICK KEMPE: And but so the economic impact is we’re not tapping enough—

CHRISTINE LAGARDE: But, going beyond that, it’s talent—a pool of talent that is untapped. But it’s also a lack of diversity as such. And we all know from, you know, having studied that and practiced it, that diversity is a source of better decision, of more stability, of, you know, better outcome altogether. Whether it’s in the financial sector or otherwise. And I think we should just, you know, learn that lesson, and do it. Just do it.

FREDERICK KEMPE: OK. Thank you for that.

CHRISTINE LAGARDE: I know you do here.

FREDERICK KEMPE: Well, look, first of all, you look at the facts. And if the facts don’t seem right, then you start—you change.

The final question. And I don’t expect you to prognosticate what will happen here in November or give a view on that. But we’re the Atlantic Council. You’re one of the most remarkable transatlantists/atlanticists we know. You lived in the US for a long time. You have a great appreciation of this country and the transatlantic alliance. What message would you share with our American audience about how their decision now and through December 5th can impact not just Europe, but the rest of the world? I’ve had ministers of foreign countries complain to me that they don’t get to vote in the US elections, because they have so much at stake. But what do you think the stakes are in our own democratic process and elections?

CHRISTINE LAGARDE: I agree with them that a lot is at stake, actually. And the domestic decision, that belongs only to the American people, will have ramifications around the world in a very significant way. So it’s not just a decision at home, although I understand the concern is much more at home on inflation and the economy and all that. But it has massive implications outside the United States because of what I’ve just said. The United States is leading in multiple ways and has to deploy its leadership for the common good. That’s what we should always keep in mind.

FREDERICK KEMPE: And maybe then let’s put this a little bit of a different way. For Europe and the US to maintain their leadership role in this inflection point in history, where we’re going to be shaping the global future yet again together, from your standpoint, what you’re doing, what do we need to do better together?

CHRISTINE LAGARDE: I think we need to remember what history has forged between us. And, you know, I don’t want to go back to Washington and Lafayette. But reading their letters, reading the letters that these two men exchanged and how they played a role in structuring that history, which led to this extraordinary country, should always be a reminder that in whichever position, in whichever situation, we need to be together. And I think that there are some bounds of history that is seen on the Normandy beaches, that is seen on the East Coast of the United States, that cannot go to waste. So we are together, and we should stay in this together.

FREDERICK KEMPE: I think Washington and Lafayette is probably a good spot to close. So please join me virtually and also here in the audience in thanking Christine Lagarde, president of the European Central Bank, for this fascinating discussion.

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The post Christine Lagarde’s message to the United States: Trade barriers and restrictions hold back prosperity appeared first on Atlantic Council.

But with finance ministers and central bank governors gathering in Washington for the IMF-World Bank Annual Meetings, there may only be time for a crash course in cooperation, as they look to tackle challenges ranging from inflation to slow gross domestic product (GDP) growth to debt crises and beyond.

To gauge whether delegates can revive the spirit of cooperation in this geopolitically fragmented moment, we sent our experts to the center of the action in Foggy Bottom. Below are their insights, in addition to takeaways from our conversations with financial leaders outlining the global economy’s outlook for the coming years.

Dispatch from IMF-World Bank week: A look at the seeds that were planted

The “loop-the-loop circuits” of global remittances need straightening out—and fast

Read our earlier analysis

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IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 21-25

The Atlantic Council hosts a series of special events with finance ministers and central bank governors from around the globe during the 2025 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Dispatch from IMF-World Bank week: A look at the seeds that were planted

Over at the IMF, leaders and delegates can finally wind down, with the final day of the week having fewer meetings, bilats, and events. There are reasons to commend the progress made just before or during the annual meetings, as the IMF reformed its subsidized lending policies and released a new “debt-at-risk” framework that quantifies risks associated with debt projections. In addition, Group of Twenty (G20) ministers officially endorsed a plan outlining next steps for the World Bank’s strategy for reform. However, the fate of the World Bank’s goal to replenish the International Development Association, while supported by some sizable commitments, remains uncertain.

In fact, much felt uncertain this week, with the US election whipping up doubt about Washington’s future commitment to the Bretton Woods institutions. A shock in the United States—the largest shareholder in both institutions—would reverberate across the global economy. The institutions and the ministers were reluctant to give direct public comments on the topic, deeming it to be a purely domestic issue. But, as became clear in private conversations we had on the ground, anxiety about the election behind closed doors was unmistakable.

The tension was also palpable when it came to China’s domestic economy. Europeans are concerned about retaliation after the recent vote on electric-vehicle tariffs, hoping to avoid tit-for-tat escalations. Food and energy exporters in the Middle East, Asia, and South America are worried about the future of their exports if the Chinese economy continues to slow, leading to a drop in demand.

Major announcements were missing this week, which contrasts with what we saw last year in Marrakesh, where leaders were able to achieve significant progress on quota reform and debt restructuring deals. But true change in international economics and finance takes years, and quiet diplomacy could help prevent problems from escalating. Mark your calendars to join us at the Spring Meetings, as we return to see if the seeds planted behind closed doors this week flourish—or wither.

The “loop-the-loop circuits” of global remittances need straightening out—and fast

There’s one phrase I’ll never forget from this year’s IMF-World Bank Annual Meetings: “Funny loop-the-loop circuits.” 

That is how European Central Bank President Christine Lagarde, speaking at the Atlantic Council on Wednesday, characterized the process of sending remittances—money migrants send back home. She explained that sending remittances “takes forever” and “is very expensive,” and the money “does funny loop-the-loop circuits around the world” along the journey. 

Lagarde wasn’t the only one to hone in on the issue, as this week in Washington, the topic of remittance payments—usually confined to technical discussions and policy footnotes—took center stage in several discussions. But Lagarde’s remarks highlight the complex journey remittances often take, in which funds pass through multiple correspondent banks, undergo regulatory compliance checks, and face currency exchange fees, leading to delays and higher costs as the money “loops” through various intermediaries before reaching the final destination. The numbers paint a compelling picture: Last year, global remittance flows (valued at $890 billion) surpassed both foreign direct investment and official development assistance, making them an increasingly vital source of income for emerging markets. Today, the average cost of sending remittances stands at 6.4 percent—more than double the World Bank’s target of 3 percent by 2030. In some corridors, such as Tanzania to South Africa, the cost can be even higher: For example, it can cost nearly one hundred dollars to send two hundred dollars.

Ahead of the meetings, my colleague Ananya Kumar and I outlined a twenty-first-century approach to remittances, advocating for the introduction of more digital solutions in financial systems and enhanced private-sector collaboration and experimentation in digital infrastructure to reduce costs and increase speed.

But technology alone isn’t the answer—the regulatory framework also needs to evolve. Remittances are inherently a global issue: They cross borders, link multiple payment systems, and involve migrants who navigate between different national economies, making it impractical to address their challenges through domestic policies alone. This situation calls for coordinated action from international bodies like the IMF and World Bank, and support from South Africa’s Group of Twenty presidency.

Dispatch from IMF-World Bank week: Slow and steady may no longer suffice

The intensification of war in Lebanon has “flipped” the country’s economic priorities “180 degrees,” says minister of economy and trade

European Commissioner Jutta Urpilainen: Investing in Europe’s security requires investing in international cooperation and partnerships 

An evasive—and elusive—G20 communiqué

Don’t forget about regional development banks. They play a key role in a Bretton Woods 2.0.

There’s plenty of worry—but not much talk—about China’s economy

Read our earlier analysis

Dispatch from IMF-World Bank week: Slow and steady may no longer suffice

Well, the week has nearly come to an end, except for a few talks. The plenary speeches have been delivered, and the IMF’s and World Bank’s ministerial-level forums (the International Monetary and Finance Committee and Development Committee, respectively) have come and gone.

When the dust settles tomorrow after another round of consultations and seminars—despite some important, albeit incremental, policy changes—it’s unlikely that very much will be remembered to distinguish these annual meetings from their recent predecessors.

The most important IMF reform, which actually was agreed upon earlier this month, will provide additional assistance to low-income countries that come to the IMF hat in hand during a crisis. Wealthier countries agreed to contribute additional resources to a fund that finances concessional loans to the poorest countries to the tune of an additional $3.6 billion of lending a year. The IMF is also moving to cut the charges and surcharges imposed on borrowers, which will reduce the repayment burden that countries face.

But on the long-term issues facing the global economy, which is still trying to regain higher levels of growth in the post-COVID era, the messages from the meeting sound too familiar: raise productivity, implement labor market reforms, pursue the “green transition,” and improve people’s lives. Indeed, these goals have been outlined at several previous annual meetings, but progress is slow.

That is one of the basic truths of the multilateral process. Change comes slowly, when it comes at all. But in a world facing a rising tide of geopolitical fragmentation, wars, debt crises, and demographic change, incremental change may no longer suffice. Sometimes slow and steady just means sclerotic.

The intensification of war in Lebanon has “flipped” the country’s economic priorities “180 degrees,” says minister of economy and trade

At the IMF-World Bank Annual Meetings, Lebanese Minister of Economy and Trade Amin Salam has sensed a shift in conversations, and priorities, with the Bretton Woods institutions regarding Lebanon. 

“A few months ago, we were looking at reform and recovery. . . we were looking at a deal with the IMF,” he said in a conversation with senior economist Perrihan Al-Riffai. “Now, everything has changed.” 

That deal, slated to include a three-billion-dollar loan to “kickstart the economy,” was the subject of a staff-level agreement in 2022. (According to the head of the IMF mission to Lebanon, the deal stalled amid Lebanon’s slow implementation of promised reforms). The three-billion-dollar loan, Salam said, was supposed to be a “stamp of approval” or a sign of trust in the Lebanese economy, encouraging investment. But the intensification of Israel’s war against Hezbollah in recent weeks, including airstrikes in Beirut and a ground campaign in southern Lebanon, “really flipped the equation 180 degrees,” with economic conversations focusing on sending aid to Lebanon to help the economy recover—and with investors looking elsewhere. 

Speaking at the Atlantic Council interview studio at IMF headquarters, Salam looked back on the challenges his country has faced before today’s war: a financial crisis in 2018, the COVID-19 pandemic, impacts from the war in Ukraine, and the Beirut port explosion in 2020—which destroyed “half the city,” Salam explained. 

“Lebanon has witnessed a sequence of different challenges . . . that hit the socioeconomic scene,” he said. “There is no economy in the world that can really tolerate or that can handle so many different challenges . . . within such a small amount of time.” 

Salam said that the tourism and agriculture sectors, which were the “oxygen of the economy,” have been particularly impacted. That raises fears, he said, that if the war continues and if Lebanon keeps “spending without income,” it will have to tap into its reserves. “That is unhealthy for the economy,” he explained. 

The country needs $250 million monthly “just to handle the emergency situation,” Salam explained, pointing to the rising costs required to support displaced people, provide food, and maintain health services. That would amount to $3 billion a year. Yesterday, international partners at a conference for Lebanon in Paris pledged $1 billion in aid, including $200 million for Lebanon’s security forces. 

Salam praised the Paris conference for filling the needs gap, as once the war became more intense this year, countries that began helping Lebanon were only able to meet a small fraction of the needs. He said that the funds geared toward security forces will help the country comply with United Nations Security Council Resolution 1701, which is intended to prevent conflict along the country’s border with Israel. That, he said, requires sending the army to “create a safe and peaceful zone.” 

While his country is pushing for humanitarian aid, it “is not the solution,” Salam said. “The solution is the ceasefire.” 

“The more we extend this war, the wider the scope gets . . . the more the needs are, the more the billions will accumulate that we will need in emergency help,” he said.

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European Commissioner Jutta Urpilainen: Investing in Europe’s security requires investing in international cooperation and partnerships 

European Commissioner Jutta Urpilainen argued Friday that while the European Union (EU) focuses on boosting its security and competitiveness, it must not fail to invest in its international cooperation and partnerships. 

“We are living in a very interconnected and intertwined world,” she told Atlantic Council Europe Center Senior Director Jörn Fleck. While the European Union bolsters its “hard security,” she said, it must also address other security threats, such as terrorism and even climate change. “And that means,” she added, “that we have to also invest in our international cooperation and international partnerships.” 

Urpilainen explained that over her five-year term, the COVID-19 pandemic and the increasing size of the youth population across the Global South has changed Europe’s “playbook” when it comes to development. The pandemic, she said, showed Europe how it needs to “coordinate our efforts with set common objectives” and collaborate in more ways, such as pooling resources; meanwhile, the rising number of young people in partner countries has taught Europe it needs to “invest in youth” and work to empower them. 

The commissioner also said that she saw a new dynamic form, in which partner countries in the Global South no longer wanted to be the “subject of aid,” but rather wanted to work with the EU on reforms and improving their resilience. That, she added, is the model behind the European Union’s Global Gateway strategy to invest in infrastructure projects worldwide. 

There are several reasons behind the 300-billion-euro plan, Urpilainen explained. One is the “huge gap of investments” across the EU’s partner countries. Achieving the United Nations Sustainable Development Goals, she noted, would take trillions of dollars in additional investment each year. But another reason is that, amid intensifying geopolitical competition, competitors such as the EU are engaged in a “battle of offers,” she explained. “We need to have our own European offer to our partner countries.” 

She noted that, for the EU, “it’s very important to respect very [high] standards in terms of environment and social standards,” she said. “We don’t want to create new dependencies. Instead, we really want to strengthen the resilience of our partner countries.” 

Urpilainen also said that development actors and leaders aren’t working closely enough to exchange ideas and information—and thus to achieve better results. “We work too much in silos as an international community. I think we very much share common objectives when it comes to sustainable development goals,” she said. “We should get out of these silos.”

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An evasive—and elusive—G20 communiqué

The gathering of Group of Twenty (G20) finance ministers at the IMF-World Bank meetings used to make news. Reporters would devote megabytes of copy to the communiqués, which often overshadowed the Fund’s own pronouncements. But this year, the document has been harder to track down than tickets to a Taylor Swift concert. The website of the G20’s 2024 “rotating presidency” (Brazil), has been silent on the topic so far, and most news organizations have given it a miss.

I finally found the communiqué thanks to Japan’s Ministry of Finance, and it’s understandable that it isn’t grabbing headlines. The thirty-five dense paragraphs do contain discussion of a multitude of important issues—from the ten downside risks facing the global economy to inequality and climate change to a “Roadmap towards Bigger, Better, and More Effective” multilateral development banks. But concrete proposals are a bit lacking. Instead, the ministers cite a vast range of reports, working groups, and reviews, all of which work toward building elusive consensus among a group increasingly riven by geopolitical differences.

A few years ago, the pressing problem of developing-country debt was at the forefront of the ministers’ deliberations. But that issue has been relegated to one paragraph that “welcomes” meager progress in restructuring a few countries’ obligations. Meanwhile, the ministers gloss over the social cost of the debt and its centrality to their headline issues of climate-change mitigation and sustainable development.

It is notable that the communiqué is silent on the biggest global issues: Ukraine and the Middle East. However, Reuters reported that the Brazilian chair issued a statement saying “members had differing views on whether the conflicts should be discussed within the group.” That statement has not been officially posted either.

All of this suggests that the brief era in which it was believed that twenty governments from advanced and emerging market economies could work together productively in a single multilateral forum may be fading into posterity.

Don’t forget about regional development banks. They play a key role in a Bretton Woods 2.0.

As the World Bank and International Monetary Fund turn eighty, multilateral development bank reform is atop everyone’s agenda this week.

The agenda extends beyond the Bretton Woods twins, however, to include the regional development banks (known as RDBs)—the EBRD (Europe), AfDB (Africa), ADB (Asia), and IDB (Latin America), among others. As Undersecretary of the US Treasury Jay Shambaugh noted in his annual-meetings preview speech at the Atlantic Council, RDBs “have become critical sister institutions to the World Bank and IMF, complementing and deepening the impacts of the Bretton Woods system”

In the context of COVID-19, I wrote that RDBs have a critical role to play in recovery given their agility, complementarity, and continuity. 

This is arguably even truer—and these traits more crucial—today in the face of ongoing shocks and a tenuous economic landscape marked by debt, conflict and fragility, fragmentation, demographic pressures, and extreme climate challenges alongside opportunity in the green and digital transitions. The ability of RDBs to specialize, be context vigilant, pivot more quickly to respond to changing needs, and seize investable opportunities differentiates them in the international financial system. These sentiments were echoed in my conversation on Thursday with EBRD President Odile Renaud-Basso: “We can react quickly to events and adjust to the needs of the country; the war in Ukraine for example tested our agility to come up with quick solutions.”

And as the Bank and Fund (and let’s not forget the World Trade Organization) evolve in governance and operational capabilities and efficiencies, new paths and platforms for collaboration and coordination with the RDBs are being created or expanded. For example, AfDB has partnered with the World Bank on Mission 300, a joint initiative to connect 300 million people in Africa to electricity by 2030; and Ajay Banga updated this week that in the just the first six months of the Global Collaborative Co-Financing Platform (announced in April by ten multilateral development banks), more than one hundred projects are in the pipeline.

Given their size and global reach, it is easy for the Bretton Woods institutions to garner all the attention. But ensuring RDBs and all actors in the international financial system are fit for purpose and aligned can bring meaningful scale, efficiency, innovation and impact.

There’s plenty of worry—but not much talk—about China’s economy

Seats in the IMF’s atrium started filling up a full forty-five minutes before the Fund’s biannual Debate on the Global Economy, with guests lining up in the back and sides for this standing-room-only event. 

The panel, which included IMF Managing Director Kristalina Georgieva, discussed the global economic outlook, lingering stress on consumers from elevated prices, liquidity challenges, and limited room for fiscal maneuvering. Without getting into politics, the speakers referenced the US election and the importance of the United States as the “anchor of the multilateral system.” In the same breath, they debated why the United States had such a proclivity for trade barriers compared to the EU’s relative openness. Why would the US be more fearful about China’s threat to its jobs and manufacturing, while European peers’ economies were actually slowing?

Part of the answer they provided was that the United States could afford to be more protectionist and isolated. I delved deep into possible US approaches to tariffs with China in conversation with former National Economic Council Deputy Director Clete Willems on Tuesday. Our conversation leaned more towards the argument that the United States, with its outsized economic weight, could use tariffs as leverage for more suitable terms of trade globally. At the same time, however, the United States needs to provide better incentives to trading partners and put market access back on the table. 

Surprisingly, in the IMF’s conversation about the outlook for global growth and major economies’ fiscal positions, one country’s domestic situation wasn’t discussed: China. According to Bloomberg calculations, based on the IMF’s own World Economic Outlook forecasts, China will be the largest contributor to global growth for the next five years. The panel’s time was limited to just an hour, of course, but it’s still puzzling why more time wasn’t spent on the world’s second-largest economy.

Dispatch from IMF-World Bank week: Gray clouds are rolling in…

Ukrainian Finance Minister Serhiy Marchenko on how his government hopes to use its new $50 billion loan

Europe must have “its own view” on trade and tariffs, says Spanish Minister of Economy Carlos Cuerpo

Irish Finance Minister Jack Chambers: The US and EU must “guard against” rising protectionism

How low-income countries fare in the flagship publications

A look at what’s behind all the talk on payments in Washington and Kazan this week

Read our earlier analysis

Dispatch from IMF-World Bank week: Gray clouds are rolling in…

“Let’s achieve inclusive growth” here, “boost green finance” there. Along 19th Street in downtown Washington DC, the familiar pageantry of the IMF-World Bank meetings is in full bloom, carrying slogans that call upon delegates and visitors to end poverty and collaborate on a bright future for the citizens of the world.

As a former IMF official, I remember the energy and optimism conveyed by this colorful redesign of the Annual Meetings a little more than a decade ago. There was a genuine belief around the world that the global powers could work together peacefully in the Bretton Woods institutions and the, at the time, relatively young Group of Twenty.

Today’s reality looks starkly different, unfortunately. Large countries seem less and less willing to put aside domestic interests in favor of the multilateral process. Autocratic countries would like to end the dollar’s dominance, and a new trade war looms on the horizon as the World Trade Organization fades into oblivion. And Western democracies themselves face populist movements for whom the values espoused by the posters in Foggy Bottom remain an ideological (and budgetary) anathema.

There is still value in holding face-to-face meetings for finance officials in Washington, of course. Quiet diplomacy may be able to avoid an escalation of problems, and an increasing focus on helping low-income countries seems to be the common denominator that still leads to meaningful policy decisions. There is intense geopolitical competition for the “Global South,” which helps facilitate agreement on issues such as the IMF’s reform of its subsidized lending policies and the World Bank’s impending replenishment of its International Development Association, for example. But these accomplishments pale in comparison with the challenges at hand.

The colorful posters that flank 19th Street are becoming a relic of times past. They stack up against a reality of record debt levels, widening inequality, and a hotter planet. There is still time to turn things around, but inside the buildings, blue-sky optimism has long given way to the gray clouds of realism.

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Ukrainian Finance Minister Serhiy Marchenko on how his government hopes to use its new $50-billion loan

During a week when the United States and its G7 partners will approve some $50 billion in loans to Ukraine backed by immobilized Russian assets, Ukrainian Finance Minister Serhiy Marchenko sat down with GeoEconomics Center Deputy Director Charles Lichfield to discuss how Kyiv hopes to use the money. 

The loan—part of the Group of Seven (G7) Extraordinary Revenue Acceleration of Ukraine announced in June this year—“helps us at least to think about some possible relief,” Marchenko said, explaining that he hopes the funds will help cover Ukraine’s current financing gap and also help with medium-term goals over the next few years. 

“There are some discussions about additional military needs,” he said, referring to the United States’ suggestion that it will devote half of its $20-billion contribution to military assistance provided it can get a new appropriation through Congress. He added that the government intends to use “at least part of this money” for reconstruction. 

On international support, Marchenko spoke about the Ukraine Recovery Conference. He said that instead of looking forward to next year’s convening in Rome, he would prefer to look back on “what we already achieved,” such as cooperation agreements and various memorandums. “We shouldn’t try to create some new vehicle in Rome,” he said. “We should track our decisions, which were made during London and Berlin, and then think about how to implement [them].” 

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Europe must have “its own view” on trade and tariffs, says Spanish Minister of Economy Carlos Cuerpo

“Europe has to have its own view and its own position” distinct from both the United States and China when it comes to trade and tariffs, said Carlos Cuerpo, the Spanish minister of economy, trade, and business. Cuerpo appeared at an Atlantic Council event on Thursday in conversation with GeoEconomics Center Senior Director Josh Lipsky.

Spain abstained from voting on the European Union’s decision this month to adopt tariffs on Chinese-made electric vehicles. Explaining this position, Cuerpo said Spain is “a very open economy that actually thrives thanks to multilateralism” and trade under World Trade Organization (WTO) rules. But, he added, “It’s 2024. It’s not 2004. We have to be open, but we should not be naive.” 

This approach, he said, requires protecting Europe’s strategic industries, including electric vehicles (EVs) and ensuring that Chinese EV companies “compete on a level playing field” with European ones. Stating that Beijing employs “unfair” and “asymmetric” EV subsidies, Cuerpo called for an “efficient use of the WTO as a way out of these controversies.” The need for an efficient WTO framework to resolve such disputes, he said, “has been forgotten” in the last few years.

Cuerpo also discussed the state of the Spanish economy amid lagging growth rates across the European Union. While acknowledging that structural unemployment was one of the “main challenges” for the Spanish economy, Cuerpo touted Spain’s low levels of inflation and its expected growth rate of 2.9 percent for 2024—the strongest among all advanced economies. “We expect that as our main partners do recover, we would have a tailwind going forward,” he said. 

On Spain’s role in international financial institutions, Cuerpo noted that Spain’s banks are “ready to engage and to help” in the construction of a digital euro, as well as to take part in discussions with the European Central Bank on its development. He also spoke of Spain’s initiative to expand its aid to low-income and middle-income countries in South America, which includes an increase in its contribution to the World Bank’s International Development Association fund. 

Looking ahead to the future of the International Monetary Fund and the World Bank, Cuerpo said that “we need to be bold in the way that we face what Bretton Woods institutions need for the twenty-first century.” But, citing the GeoEconomics Center’s work on a “Bretton Woods 1.5,” he added that before undertaking massive reforms, “we need intermediate steps that will help us arrive in a realistic way” at those bold objectives.

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Irish Finance Minister Jack Chambers: The US and EU must “guard against” rising protectionism

In a world in which deglobalization and conflict are unfolding, the world needs to reignite cooperation on trade to improve economies globally, said Irish Finance Minister Jack Chambers.  

Chambers appeared at an Atlantic Council event on Thursday in conversation with GeoEconomics Center Deputy Director Charles Lichfield.  

Earlier this month—with the EU’s investigation into Chinese subsidies for electric vehicles still underway—the European Commission voted in favor of imposing tariffs on the import of Chinese electric vehicles. Meanwhile, China has launched an anti-subsidy investigation into EU dairy products. Chambers said that it is important to “resolve [the electric vehicle] issue and indeed other issues that exist between the EU and China as it relates to trade.” 

Ireland “promotes and supports free trade between all countries, and that’s something that has underpinned our wider economic development,” Chambers said. “We need to avoid a situation where we have tit-for-tat disputes or protectionism taking hold,” he cautioned, as that would “damage” the economy. 

Trade is something that the United States and EU will need to work more closely on, Chambers said, including after the upcoming US presidential elections. The finance minister said that he is “concerned” about the “protectionist outlook taking hold” in the EU and United States. “We have to guard against that because it’s a net negative for everybody.” 

In September, the European Court of Justice ruled that Ireland had given Apple (which has its European headquarters in Cork) illegal tax breaks; Ireland is now responsible for recovering those funds from the company. The government plans to use the fourteen-billion-euro windfall to invest in infrastructure. 

“Obviously, we sought to defend a matter of interpretation on tax policy,” Chambers said. “We respect the outcome, but it was important we defended the tax policy that we had at the time.” 

In discussing whether the ruling would dissuade multinationals from investing in Ireland, Chambers touted the country’s ability to give companies stability and predictability. “We’re confident that the system that we have presently is one that gives them that stability for the future.” 

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How low-income countries fare in the flagship publications

Attention to developing-country issues in the IMF flagship publications is noticeably sparse at this year’s annual meetings. The World Economic Outlook offers only a limited assessment of the outlook for the swath of low-income countries that have lost ground since the COVID-19 pandemic hit in 2020, a topic I wrote about earlier this week.

The Global Financial Stability Report (GFSR), whose headline messages my colleague Hung Tran previously summarized for this blog, does detail recent trends affecting the so-called “frontier markets.” These make up the group of developing economies that before the pandemic had become the darlings of sovereign lenders like China and institutional investors because of their solid growth and seemingly bright prospects. However, many of them fell into debt distress after 2020, and their interactions with lenders and investors shifted toward difficult debt-restructuring negotiations.

The GFSR reports that there has been “significant progress” on restructuring, a conclusion that many observers might consider to be overstated given the uncertain prospects for either sustainable growth or debt sustainability in countries like Ghana, Sri Lanka, and Zambia. But at the same time, the report chronicles that frontier economies have enjoyed “strong investor risk appetite” for new international bond issues, “although yields remained high.” Indeed, some 20 percent of those countries have had to offer yields “close to 10 percent or higher” above the rates on US Treasury bonds carrying a similar maturity in order to attract those investors. The GFSR also reports that about four billion dollars of frontier economy debt will have to be repaid before the end of this year, and about thirteen billion dollars will come due in 2024 and fourteen billion dollars in 2025. Nearly 60 percent of those maturing bonds carry yields close to 10 percent or above. This hardly sounds like grounds for confidence if the global economy hits an unexpected speed bump again.

A look at what’s behind all the talk on payments in Washington and Kazan this week

Events at the annual meetings this year have a special emphasis on payments and digital public infrastructure, reflecting the burgeoning emerging market interest in developing and deploying new technologies. The public and private schedule at the IMF and the World Bank this week is chock-a-block with events on digital payments: the macroeconomic impacts of them, issues of inclusion and technological infrastructure, and the nuts and bolts of putting these technologies to use. The Group of Twenty is a welcome entrant to this payments party, as it released its progress report on the roadmap for enhancing cross-border payments on Monday. But even as Washington seems all business this week, the BRICS summit—which is simultaneously underway in Kazan, Russia—is all geopolitics when it comes to payments. 

Russian President Vladimir Putin opened the summit with an emphasis on the role of the dollar in the global financial system, saying that “the dollar is being used as a weapon.” BRICS members have stated their goal to develop an alternative payments channel to the dollar, which would allow them to continue trade and other activities. This is not a surprising proposal, considering the challenges Russia is facing as a result of the economic measures taken by the Group of Seven in response to the invasion of Ukraine in 2014 and 2022. Other BRICS members are more cautious about this announcement, looking to create short-term strategies for mutually beneficial trade relationships—such as increased invoicing in local currencies—while mulling over the long-term strategy of alternative payments channels. The BRICS members’ geopolitical interest in payments systems stands out this week, as discussions of payments systems not only encompass domestic economic considerations but also seek to address the impact on the global financial system.

Bangladesh’s finance adviser on the interim government’s reform priorities

Dispatch from IMF-World Bank Week: Solving the inclusive growth puzzle

Egyptian Finance Minister Ahmed Kouchouk on his government’s reform progress: “We’re not yet out” of economically difficult times

The number of finance ministers and central bank governors who are women is shockingly low. Here’s what that means for the economy.

A warning from the IMF: Risks to financial stability ahead threaten to expose fragilities

Christine Lagarde on European competitiveness, US tariffs, and creating a digital euro

Two new publications show emerging-market credit risk is better than previously believed

The dark end of the WEO street

Read our earlier analysis

Bangladesh’s finance adviser on the interim government’s reform priorities

Less than three months after a caretaker government assumed power in Bangladesh, the country’s finance adviser, Salehuddin Ahmed, sat down with Atlantic Council GeoEconomics Center Assistant Director Mrugank Bhusari to talk about the reforms the interim leadership is pursuing. 

Ahmed explained the interim government will be working to implement “structural” changes across the country’s institutions, banks, insurance companies, markets, and beyond. They “have to be made efficient with the proper people,” he said, “and previously there was a lack of transparency and accountability.” 

Over the long term, Ahmed said he hopes the interim government will “leave some footprint” so that the next government takes up those reforms instead of entering office and proceeding to “sweep everything under the carpet.” 

Even as the IMF is forecasting Bangladesh’s economy to grow at 5.4 percent, its forecast did get a small downgrade. Ahmed said that such a downgrade was a “logical” and “rational calculation,” considering the slowing in economic activity the country faced in the beginning of the year and as student protests swept the country in the summer. 

While Bangladesh is just about to graduate out of the group of least-developed countries, as determined by United Nations standards, Ahmed believes there’s still work to do. “I think we have done reasonably well,” he explained, “but the fruits of development, they have not gone to the people . . . because the rich have become richer. . . so we are now giving this attention,” by focusing on social development, education, and equal growth across the country. 

While the IMF-World Bank Annual Meetings are underway, leaders representing the BRICS bloc of countries—named for the core group of Brazil, Russia, India, China, and South Africa—are also meeting in Russia. Bangladesh has applied to join the bloc, and Ahmed said joining BRICS is “still valuable” because Bangladesh wants to create a wider market for its garments and other products. 

While Bangladesh is developing frameworks to process payments with Indian rupees and Chinese yuan, Ahmed said that he thinks the dollar will “be able to remain dominant.” But the country, he said, is having “some problems” making payments in dollars for a nuclear power plant Russia built in Rooppur, given that Russia has been banned from the financial messaging system SWIFT. Bangladesh decided last year to pay Russia in Chinese yuan. 

Watch the full event

Dispatch from IMF-World Bank Week: Solving the inclusive growth puzzle

It’s day three, and the annual meetings are clearly in full swing on both sides of 19th Street and across town.

The security and cafeteria lines are longer. There are fewer, if any, empty seats at the events—even as organizers put on multiple simultaneous events to absorb enthusiastic delegates and attendees.

To that end, it was a full house this morning over on 15th Street at the Atlantic Council to hear European Central Bank President Christine Lagarde’s insights on the European economy and the international financial landscape, from inflation to digital currencies to decoupling. On many things, she struck a generally sanguine, if not cautiously optimistic, tone.

That positivity ended, however, when she was presented with the number (a measly 12 percent!) of finance ministers and central bank governors who are women, which she called “abysmally small.”

As Lagarde pointed out, more diversity in leadership leads to better outcomes. But, taking a step back, improving women’s economic participation and financial inclusion across the board helps solve many of the challenges leaders are convening in Foggy Bottom to discuss. For example, more women in the labor force and in entrepreneurship increases productivity (improving growth) and boosts tax revenues (easing debt).

It’s a critical piece of the inclusive growth puzzle, along with creating opportunities for youth that can help usher in a demographic dividend. This requires better education and skilling on the supply side and generating more jobs on the demand side—and better aligning supply to demand. There’s no time to waste: 1.2 billion youth will enter the workforce in the next ten years, and only 420 million new jobs are projected (a data point repeated by World Bank President Ajay Banga again today, during a high-profile, packed-house event).

So if you’ve got a list going of issues and announcements to watch from the annual meetings, add “measures that address gender and generational inequality” right at the top.

Egyptian Finance Minister Ahmed Kouchouk on his government’s reform progress: “We’re not yet out” of economically difficult times

Seven months after the IMF agreed to increase its latest loan program with Egypt, Finance Minister Ahmed Kouchouk sat down with Racha Helwa, director of the empowerME initiative at the Atlantic Council, to talk about the deal and Egypt’s reform priorities. 

On the latest extension of the program, Kouchouk said that “usually, every program has its own nature.” This one, he explained, is directed toward helping Egypt improve its current account imbalances that arose after the pandemic and also toward helping the country improve its oversight across public spending. 

According to Reuters, the program had previously stalled amid delays to divesting public assets and increasing the role of the private sector. “I think private sector should be leading,” Kouchouk said, explaining that such an arrangement could be a solution for Egypt as it looks to increase production and growth while taking on less borrowing. “This is in the interests of everybody.” 

In February this year, Egypt signed a foreign-direct-investment deal with the United Arab Emirates to develop the area of Ras El Hekma. “The structure” of the deal “is quite good,” Kouchouk argued, because it will swap eleven billion dollars in UAE deposits at Egypt’s central bank into foreign direct investment. “This investment will give them and give us a higher rate of return, so it’s a good deal.” 

Kouchouk said that the reforms Egypt has thus far implemented, as part of its commitments, are helping support improvements in the economy. But “we’re not yet out” of economically difficult times, he said. “We still need to keep the course of reforms and to keep monitoring things.” 

Kouchouk participated in the Atlantic Council discussion shortly after a Coalition of Finance Ministers for Climate Action meeting. Before the group was formed in 2019, Kouchouk explained, he had seen many Sustainable Development Goals and other aspirations form without finance ministers in the loop—then finance ministers had to deliver the news that there was not adequate financing for those goals. 

The coalition, he said, “lets us all benefit and learn. And it’s making us deal with financing of the climate challenges . . . in a much more proactive manner.” 

Watch the full event

The number of finance ministers and central bank governors who are women is shockingly low. Here’s what that means for the economy.

This week, on the ground at the IMF-World Bank Annual Meetings, the gender gap in global economic leadership is glaringly apparent. Only twenty-two of the 191 IMF countries have women as finance ministers, and twenty-four have women as central bank governors—significantly lower than the average proportion of women in cabinet minister positions globally.

During a conversation this morning between European Central Bank (ECB) President Christine Lagarde and Atlantic Council CEO and President Frederick Kempe, our team shared research illustrating that only 12.3 percent of finance ministers and central bank governors are women. “I think it’s abysmally small and does not reflect the availability of talents and merits that many economists and macroeconomic experts and financial experts have around the world. There’s a whole pool of talent that is not tapped into . . . but it’s also a lack of diversity,” Lagarde commented.

Lagarde is the first female finance minister of a Group of Seven economy, the first woman to head the IMF, and the first female president of the ECB, so she is no stranger to the barriers women face in this field. She concluded, “We all know from having studied that and practiced it, that diversity is a source of better decision, of more stability, of better [outcomes] altogether—whether it’s in the financial sector or otherwise . . . we should learn that lesson and just do it.”

Explore the research

A warning from the IMF: Risks to financial stability ahead threaten to expose fragilities

As I wrote yesterday, the IMF’s World Economic Outlook presents a rather benign view (to quote, “stable yet underwhelming”). But its sister publication, the Global Financial Stability Report has called for policymakers to remain vigilant about medium-term risks to global financial stability. It identifies two main sources of that risk.

The first is the lofty asset valuation around the world, driven by accommodating monetary and financial conditions for too long. Indeed, the price-to-earnings ratio for the S&P 500 index—a standard measure of stock market valuation—has reached 29.6, or one standard deviation above the long-term mean of 19.26. Historically, stock markets have tended to correct when valuation gets much higher than that. Furthermore, public and private debt levels are high, as is the leveraging used by financial institutions in their portfolios. These frothy asset valuations can amplify future financial shocks.

The second is the disconnect between very heightened uncertainty generated by geopolitical rifts and low levels of measured market volatility. This disconnect could cause a surge in volatility when geopolitical conflicts materialize, catching market participants off guard and triggering disorderly market conditions.

This is a timely reminder to policymakers and financial regulators around the world to use the time immediately ahead—while many risks are still contained thanks to the economic soft landing—to strengthen the resilience of financial institutions, so as to be better prepared for future turmoil.

Christine Lagarde on European competitiveness, US tariffs, and creating a digital euro 

The role of a global reserve currency should “never be taken for granted,” said European Central Bank (ECB) President Christine Lagarde on Wednesday at an Atlantic Council Front Page event on the sidelines of the International Monetary Fund-World Bank Annual Meetings.

Lagarde addressed a host of issues facing the continent, including the European Union’s (EU’s) ambition to create a central bank digital currency (CBDC), the ECB’s efforts to keep prices stable, what Europe’s lagging economic competitiveness means for the ECB’s fight against inflation, and the outsize impacts that the next US president’s approach to trade will have on the global economy.

Below are more highlights from this conversation with Lagarde.

Read the highlights

New Atlanticist

Oct 23, 2024

Christine Lagarde on European competitiveness, US tariffs, and creating a digital euro 

By Daniel Hojnacki

The European Central Bank president discussed the European Union’s ambitions for becoming more competitive and modernizing its payments systems.

Economy & Business European Union

Two new publications show emerging-market credit risk is better than previously believed

The International Finance Corporation (IFC)—a member organization of the World Bank Group—has released two important studies, which unfortunately have been buried by the busy talks about other issues at the IMF-World Bank Annual Meetings this week.

The studies are from the Global Emerging Market Risk Database Consortium of twenty-six multilateral development banks and development financial institutions. The publications provide detailed information on credit risk in emerging markets and developing economies based on the investment experience of consortium members.

On their lending to private entities in emerging markets and developing economies, the average annual default rate is 3.56 percent—broadly aligned with many non-investment-grade companies in advanced economies; the average recovery rate is 72.2 percent—higher than many global benchmarks.

On their lending to sovereign and sovereign-guaranteed borrowers, based on forty years of experience, the average annual default rate is 1.06 percent and the average recovery rate is 94.9 percent—much better than previously assumed by many in the financial markets.

While this data reflects the unique experience of multilateral development banks and development finance institutions, it can provide useful input for the private sector’s lending and investment decisions. This is important as the world’s governments and multilateral development banks have tried hard to catalyze private capital to invest in emerging markets, developing economies, and low-income countries, especially in climate-mitigation and energy-transition efforts—to complement meager public investment efforts.

The dark end of the WEO street

Sometimes it makes sense to look at the downside. That’s certainly the case with the World Economic Outlook (WEO), whose authors always devote considerable thought to what could go wrong—and right, although the sunnier outlook always gets less attention. In the latest report, there is a lengthy box in the first chapter with the catchy title “Risk Assessment Surrounding the World Economic Outlook’s Baseline Projections,” which delves into the scenarios and “confidence bands” that give greater texture to the IMF modeling.

But for many readers, the real meat of the report from issue to issue is the section that details “risks to the outlook,” which this time around are “tilted to the downside.” Assembling the WEO is always a process of negotiation. While the IMF Research Department holds the pen, it inevitably must reflect the input and pressures from other departments, IMF management, and the always prickly membership—especially the most important governments that have their own view of how their economies should be presented. Small wonder, then, that some Fund insiders say that the most accurate view of the outlook sometimes can be found in the downside risk section.

In this WEO, most of those risks focus on systemic issues: how the recent cycle of monetary tightening might bite “more than intended,” leading to financial market repricing; intensified “sovereign debt stress” in emerging markets and developing countries; renewed “spikes” in commodity prices; increased protectionism; and a “resumption” of social unrest around the world (which, according to an accompanying chart, supposedly has subsided of late—not that most of us would notice). But one country is singled out: China. That’s because of a scenario in which the country’s already struggling property market experiences a deeper-than-expected contraction. China, of course, did the WEO authors no favor by announcing wide-ranging measures to put a floor under its housing market in the weeks leading up to the annual meetings, when the report was largely done and dusted. As much as anything else in the WEO, this risk bears close scrutiny in the coming months.

A tale of two town halls

Reading between the lines of the IMF’s World Economic Outlook

Dispatch from IMF-World Bank Week: “Stable yet underwhelming”

A crack in the BRICS: Iran’s economic challenges take center stage at Russia’s summit

The Bank of England’s Megan Greene on why interest rates “will probably have to end up a bit higher” than before the pandemic

A bleak paper on the plight of low-income countries

Read our earlier analysis

A tale of two town halls

As an expert at a think tank, I registered as a representative of a civil society organization (or, as the IMF and World Bank say, “CSO”) and thus joined both IMF Managing Director Kristalina Georgieva’s town hall yesterday and World Bank President Ajay Banga’s event today. They followed the same format: opening statements from the principal followed by moderated Q&A with the in-person and online audience. Both were well attended. Both were substantive and informative. And both covered a fairly wide range of topics.

But, like the institutions themselves, they differed in style and vibe, as well as in the substance. 

On style, Georgieva and the moderator were both seated the whole time, while Banga (or Ajay, as he prefers) and his moderator were standing—he delivered his opening speech from a podium, then onstage with a handheld mic. Also notably, he introduced and engaged other executives in responding to questions, including World Bank Managing Director of Operations Anna Bjerde. Taken together, I found the Bank event more informal, candid, and inviting.

On substance, Georgieva touted progress both in the global fiscal situation and the IMF’s operations but reiterated her curtain-raiser message: “We can do better.” She said this message also applies to the extent and nature of the IMF’s engagement with civil society. Perhaps surprisingly, audience questions were limited on debt and fiscal matters, instead skewing toward “macro-critical” issues ranging from dealing with conflict and fragility to addressing climate change, and from gender to governance, even though the Fund is arguably still debating about the extent to which it should be addressing such issues. Banga focused on how he and his team are delivering towards “building a better Bank,” the charge he was given when he took the helm eighteen months ago—bringing speed and simplification to both the money and the knowledge sides of the Bank. He prioritized jobs and enabling environments and made a pitch for International Development Association (IDA) replenishment, telling governments “I need your help” in making the case for them to ante up and even increase their contributions. Questions ranged from addressing informality to operationalizing callable capital to supporting conflict-affected people and beyond.

In the end, we CSO representatives may not have heard anything new, but the commitment and level of engagement and transparency is arguably new and worth acknowledging in and of itself. And for participants like me who like to understand, compare, contrast, and ultimately influence what’s happening on both sides of 19th Street and the Bretton Woods institutions’ varying perspectives, reforms, and impacts, it was two hours very well spent.

Reading between the lines of the IMF’s World Economic Outlook 

Just hours after the IMF released its World Economic Outlook (WEO), three Atlantic Council experts sat down at IMF HQ1 to talk about the updated growth forecasts for countries worldwide and about the reforms needed to boost growth. 

Martin Mühleisen, a former IMF official, pointed out that this WEO was likely easier to write than the last couple of editions, because just before the October 2023 and April 2024 WEOs released, “big shocks”—in the form of war in the Middle East—occurred, and the IMF team had to “scramble” to incorporate how those events would impact the economy. But while this WEO may have been easier to write, it also “presents a different kind of challenge” because of the upcoming US elections, Mühleisen argued. He added that growth numbers are in a way “tentative” because the outcome of the US elections will trigger “volatility that we can’t really assess at the moment,” which could be good or bad for the global economy. 

But in the medium term, Mühleisen said, growth looks “lower than anything we had in the past,” and “trade, geopolitics, [and] inflation surprises just add to the fact that we’re probably going to see a somewhat lower trajectory on average over the next couple of years.” 

Nicole Goldin, a former consulting economist with the World Bank, pointed out that the WEO reflects “relatively stable” global growth overall, but emerging markets and developing economies are seeing low projections. Conflict is playing a role in that, as wars have a “somewhat disproportionate impact” on emerging markets and developing economies. Debt also plays a role in these low projections, she added. Hung Tran, a former IMF official, added that low-income countries falling further behind “will be a big problem socially [and] politically” for the world economy. 

While the IMF has struck a positive tone in seeing countries achieve a soft landing in the battle against inflation, Tran clarified that inflation might just be slowing because of “lower activity,” meaning that while inflation for goods has shrunk dramatically, inflation for services is sticky. That, he said, is “something that we need to keep an eye on.” 

The IMF has called for a “policy triple pivot” to protect from risks to global growth. But, Tran noted, significant reforms will be required. “The political will and the political appetite to do that simply [are] not there,” he said.  

Goldin pointed out a few policy changes that could help secure and boost global growth. One such measure is harnessing artificial intelligence (AI) to boost productivity. AI is “coming in as both the threat and the opportunity,” she said. Another change is for countries to balance punitive policies (such as tariffs and protectionist trade policies) with inducements (such as development financing) when working with other nations. Those “positive economic statecraft” tools can help “bring about the policy reforms that are needed,” she explained. 

Watch the full conversation

Dispatch from IMF-World Bank Week: “Stable yet underwhelming”

One section heading in the World Economic Outlook released by the International Monetary Fund this morning aptly sums up the mood at this year’s annual meetings: “Stable yet underwhelming . . .”

The outlook is stable as major economies have managed to engineer a soft landing with inflation slowing, labor markets proving resilient, and GDP growth at 3.2 percent this year, unchanged from the IMF’s previous estimates (although the estimate for next year was revised down a touch, to 3.2 percent). However, behind that stability is a series of revisions worth taking note of. The US growth rate has been revised upward by 0.2 percentage points (to 2.8 percent) this year, and by 0.3 percentage points (to 2.2 percent) for 2025. The WEO shows that Asia continues to be the growth engine for the global economy, with India expected to grow by 6.7 percent this year and 6.5 percent next year, followed by Vietnam at 6.1 percent in each of the next two years. China is expected to undershoot its “around 5 percent” growth target, coming in at 4.8 percent this year and slowing further to 4.5 percent in 2025.

By contrast, euro area growth has been revised downward by 0.1 percentage points (to 0.8 percent this year) and by 0.3 percentage points (to 1.2 percent) next year. Also concerning is the downward revision of low-income countries’ growth by 0.2 percentage points (to 4.0 percent) this year and by 0.4 percentage points (to 4.7 percent) next year.

The growth estimates and revisions in the WEO are indeed underwhelming, a product of uneven global recovery from the many shocks of the past few years. More importantly, the world seems set for a period of low growth, triggered by challenges such as aging populations, weak investment, and historically low production efficiency—especially if countries fail to implement significant structural reforms to improve economic performance (but even the WEO admits such reforms face strong social resistance).

But there’s a second beat to the subhead in the WEO: “Stable but underwhelming—brace for uncertain times.” That points to factors that could tilt the balance of risks to the downside, but the WEO says nothing about the elephant in the room: the outcome of the US presidential election, which could heighten turmoil in geopolitical conflicts, trade wars, and social instability in the United States—the largest shareholder of both institutions. Such developments would trigger the need for a fresh set of revisions of economic forecasts.

Putting the WEO aside, two issues that IMF Managing Director Kristalina Georgieva raised in kicking off the meetings did pique my interest, but they are drawing less attention. The first is that in facing climate change, countries should try to free up funds for the green transition by eliminating their fossil fuel subsidies—such subsidies amounted to seven trillion dollars in 2022. The second point is that countries should work together to set up AI regulations, not just to avoid the risks the technology poses but also to harness its ability to raise productivity, potentially boosting growth by 0.8 percentage points. If the IMF can get governments focused on that, it would be a great service to the Fund’s membership.

This week, our team will continue to tease out developments big and small from the annual meetings.

A crack in the BRICS: Iran’s economic challenges take center stage at Russia’s summit

This week, finance ministers and central bank governors from over 190 countries will gather in Washington, DC, for the International Monetary Fund (IMF) and World Bank Annual Meetings. But there is another major economic event happening on the opposite side of the world. Leaders of the BRICS group are meeting in the Russian city of Kazan for their annual summit, with Iran’s new president, Masoud Pezeshkian, in attendance for the first time after his country officially joined the BRICS earlier this year.

Uncertainty continues to loom over Iran as Israeli officials pledge to retaliate against Tehran’s ballistic missile attack on Israel earlier this month. However, while most analysis focuses on Iran’s geopolitical objectives in the region, there has been less discussion about the severe economic constraints facing the regime. These challenges will be at the center of Iran’s priorities during its first BRICS summit. 

Read the full analysis

Econographics

Oct 22, 2024

A crack in the BRICS: Iran’s economic challenges take center stage at Russia’s summit 

By Josh Lipsky, Alisha Chhangani

The reality is that Iranian President Masoud Pezeshkian will show up to the BRICS leaders meeting and look for support across the BRICS not only in the military domain, but also for his country’s economy.

Economic Sanctions Economy & Business

The Bank of England’s Megan Greene on why interest rates “will probably have to end up a bit higher” than before the pandemic

According to Megan Greene, an external member of the Bank of England’s Monetary Policy Committee, the United Kingdom’s neutral rate of interest—the rate when there is full employment and stable inflation—has “probably risen a bit.” 

“We’re not going back to the [interest] rates that we had pre-pandemic,” she said in an interview at the Atlantic Council’s IMF HQ1 studio. 

Greene, in conversation with Atlantic Council GeoEconomics Center Senior Director Josh Lipsky, said that she favors “more of a gradualist approach” to cutting interest rates in pursuit of the neutral rate of interest, commonly called “r star.” Back in August, she explained, she voted against an interest rate cut at the Bank of England based on various indications that inflation has been sticky. But the Bank voted 5-4 in favor of a cut.  

“Now that we’re in a rate-cutting cycle. . . we should remain on a cautious and gradual path,” she said. 

In September, the Monetary Policy Committee voted to hold rates steady, in part based on “uncertainty [about] what state of the world we’re in, off the back of a pandemic and a war in Europe,” she explained.  

The committee, she added, has come up with three “states of the world” to map the future of the rate-cutting cycle: 1. Inflation is coming down as inflationary shocks ease, meaning the Bank won’t need to be restrictive. 2. Inflation persists somewhat, requiring the Bank to “bear down” on inflation. 3. There have been more structural changes in the economy that require the Bank to be “more restrictive for much longer.” 

“I think it’s most likely that we’re in the second state of the world, where actually it requires monetary policy to bear down on inflation,” she said. 

On whether there is a risk that the Bank is too restrictive heading into the next vote on interest rates in November, Greene said that relative to other developed economies, the United Kingdom’s “speed limit” for how much it can grow without it being inflationary “is pretty low,” due to low investment overall that has slowed productivity growth. 

Speaking at the IMF-World Bank Annual Meetings, Greene said that the institutions are “a microcosm for a better state of the world than the one we’re living in,” with conflicts happening in Europe and the Middle East. “People from different countries do come together over really good analysis to try to support those who are most vulnerable.” 

Watch the full interview

A bleak paper on the plight of low-income countries

On a day when attention focuses on flagship publications like the World Economic Outlook and Global Financial Stability Report, it is always useful to dig into papers that will attract less attention. It’s well worth the time to read through a World Bank report on the deepening financial plight of low-income countries (LICs). Fiscal Vulnerabilities in Low-Income Countries: Evolution, Drivers, and Policies by the World Bank’s Joseph Mawejje offers a bleak view of where the world’s twenty-six poorest countries—home to 40 percent of all people living in extreme poverty—stand four years after the COVID-19 pandemic hit. The bottom line: Unlike most of the world, these nations have not rebounded from the brutal impact of the crisis on the global economy.

The study calculates that the average government debt-to-GDP ratio in these countries “increased by 9 percentage points in 2023 alone—the largest annual rise in more than two decades—to 72 percent,” driven largely by expanding fiscal deficits. Those deficits have “expanded markedly, from 1.2 percent of GDP in 2019 to 2.4 percent in 2023.” While that is relatively low compared to many advanced and middle-income economies, the LICs have much less ability to finance their deficits, especially as they have little recourse to raise money from scarce domestic sources. Instead, they try to obtain financing from abroad.

However, the study says that “net financial flows—including foreign direct investment and official aid—fell to a 14-year low in 2022,” the most recent year for which comprehensive data was available. That means these countries have to borrow, and most now are in, or at high risk of, debt distress. This underlines the importance of finding new approaches to debt relief, an issue that has vexed the IMF and World Bank for years—and is unlikely to be resolved this week.

Our experts outline what to expect from the IMF-World Bank Annual Meetings

What’s behind the IMF and World Bank’s data dance-off

Dispatch from IMF-World Bank Week: What you won’t see on the agenda, and why it matters

All eyes on China as IMF-World Bank Week gets underway

The IMF needs to find its geopolitical bearing

The IMF-World Bank Annual Meetings in 2024: Five important issues to be addressed

Our experts outline what to expect from the IMF-World Bank Annual Meetings 

On the first day of the IMF-World Bank Annual Meetings, three Atlantic Council nonresident senior fellows gathered in IMF headquarters to talk about what they’re hoping to see as the week rolls on—and to reflect on the changes that have been achieved since last year’s meetings in Marrakesh. Here are some highlights from the conversation. 

• Central banks have done a “good job . . . so far” in slowing inflation, said Martin Mühleisen, a former IMF official. Hung Tran, also a former IMF official, added that while central banks have had some success, the structural reasons behind high inflation—including geopolitical competition, economic fragmentation, and trade friction—still exist, and will “feed and keep structural inflation higher.” 

• Nicole Goldin, a former consulting economist with the World Bank, noted that prices are still high, and financial leaders will need to focus more on dealing with the fallout. “Inflation tends to impact those most vulnerable the most,” she said. 

• Tran said China’s struggle to restore its growth and recover sustainably has been a surprise, and that China’s youth unemployment problem would play a part in burdening the growth potential “for many countries, including China, for years to come.” “That needs to be a high-priority item for the IMF,” he said. 

• Mühleisen noted that over the past year, he has been struck by “the reality of much closer collaboration between different autocratic countries,” pointing to China’s support for Russia as it continues its war in Ukraine. He sees an “open competition between different camps,” adding that the United States, as a major shareholder in the IMF, will need to think about whether to freeze out countries in the autocratic bloc. In such a scenario, those countries, he explained, “will still be members,” but Western allies could “take decisions that the majority of the Western democracies take in their own interests.” 

• Goldin said that she will be watching to see whether the Bretton Woods institutions can “walk and chew gum” to concurrently address both short-term issues such as debt distress and long-term issues such as liquidity pressures in countries. Mühleisen said that he would like to see IMF shareholders “insist on more accountability” for lending programs, which have not resulted in some countries implementing reforms they committed to earlier on in negotiations. “Shareholders need to think a bit more about what teeth they can give the IMF,” he said. 

• Mühleisen expressed skepticism about whether there will be “any progress” on the matter of reforming IMF quotas in the short term. “That will drag on for some time, and as long as that is kind of on hold and not proceeding, I don’t think the IMF will be able to tackle much.” 

• Tran is watching what the IMF does to mobilize the fiscal resources needed to adapt to and mitigate climate change. He pointed to the IMF managing director’s call to eliminate fossil-fuel subsidies, which Tran said is the “right approach,” in contrast to recent efforts to mobilize private-sector resources. 

• Goldin said she’ll be watching whether the International Development Association, a mechanism of the World Bank, will be replenished and how the conversations around artificial intelligence evolve. 

Watch the full event

What’s behind the IMF and World Bank’s data dance-off

It’s opening day of the annual meetings and there seems to be a new field of (friendly) competition between the IMF and the World Bank: data. 

The Bank has evicted its swag store from the prime real estate at the atrium’s front entrance to the lower level (C1, just by the cafeteria entrance), swapping it with an interactive data exhibition complete with a supersized display of real-time indicators and statistics across its priority work areas such as gender, food and agriculture, electricity, the International Development Association, and corporate outcomes, courtesy of the Bank’s Scorecard launched at the Spring Meetings this year. There are large interactive touch screen monitors, too.

For its part, the IMF has set up a slightly less conspicuous stand on the second floor of HQ1, where it’s touting its new—and improved—portal. The updated platform consolidates data and statistics from fragmented sites across the Fund, including data.imf.org, DataMapper, the Regional Economic Outlooks, and the World Economic Outlook (WEO)—but don’t go looking for the latest WEO yet, which will be released tomorrow. The goal is that the data will be easier to find and, arguably more importantly, that it will be easier to use the Fund’s data to inform decision making, policy, and investments.

Truth be told, the IMF and World Bank’s data and research are complementary. And of course, emphasizing the importance of data and evidence is not new to either Bretton Woods institution, as both of their mandates include providing evidence-based advice, and they regularly publish statistics and analyses, research, and visualizations of their data. Both participate in data generation and data sharing initiatives. The Bank, for example, is a member of the United Nations-led Global Partnership for Sustainable Development Data, and both the Bank and the Fund are part of the Development Data Partnership along with a variety of multilaterals, international organizations, and companies.

Perhaps as multilateral reform efforts hit stride, pushing new data platforms and putting them on such display is an effort to signal or amplify to the broader development, economic, and finance communities that these institutions are even more committed to data-driven impact, open for data business, and keen to engage. As a believer in “you can’t manage what you don’t measure,” this data nerd is here for it.

PS: Check out the Atlantic Council’s Econographics for our data-driven analyses and visualizations.

Dispatch from IMF-World Bank Week: What you won’t see on the agenda, and why it matters

The world’s financial leaders are descending on Washington this week for the IMF-World Bank Annual Meetings, but one of the most important issues for the future of the global economy won’t be on the official agenda.  

While China’s economy, debt relief, and slowing inflation will all be at the top of the agenda for ministers, what everyone wants to talk about is the US election. They have good reason. The outcome will determine the trajectory on trade policy and tariffs in the world’s largest economy and may impact who is selected as the next Federal Reserve chair (Jay Powell’s term is up in 2026). It will also tell the world how the United States plans to engage—or not—in international economic collaboration over the next four years. 

There is a reason why the US Treasury’s Jay Shambaugh has been arguing (as he did at the Atlantic Council last week) that the world needs the Bretton Woods institutions—and that without them, there would be a giant “IMF-shaped vacuum” in the global economy. He’s concerned that as the institutions mark their eightieth birthday, many around the world have forgotten why they were created in the first place. 

It wasn’t only the ravages of World War II that forced the delegates in New Hampshire to build a new international financial architecture: It was also the trade wars of the 1930s, including the Smoot-Hawley Tariff Act and retaliatory tit-for-tat tariffs, which prolonged and deepened the Great Depression. 

I was in the room last week when IMF Managing Director Kristalina Georgieva, in her curtain-raiser speech ahead of the meetings, said trade was “exhibit one” of where the global economy can do better. For an institution that has a reputation for being focused on fiscal policy (the old joke is that IMF stands for “it’s mostly fiscal”), it was a telling choice. She knows, as does everyone coming to Washington this week, that the decision made by the American people on November 5 will impact every economy in the world. 

It may not be on the official agenda, but you can bet we’ll be diving into the election this week.

All eyes on China as IMF-World Bank Week gets underway

One of the many big questions looming over the IMF and World Bank this week is how they will assess China’s recent efforts to revive its sagging economy. Faced with the challenging combination of a property crisis, deflation, a mountain of local-government debt, rising youth unemployment, and plummeting business and consumer confidence, Beijing has announced a series of efforts aimed at boosting growth. But so far, those measures seem to be falling short of what is needed, as I write this week.

No doubt, many officials and analysts will be looking to Tuesday’s release of the World Economic Outlook to gauge how the IMF assesses China’s shifting policies. Last week’s curtain-raiser speech for the meetings from IMF Managing Director Kristalina Georgieva was silent on the subject, but in an interview with Reuters, she did hint at some concern about the course that Beijing is charting. She said that China’s economy has become too big for Chinese policymakers to continue relying on exports to drive growth. Instead, she said, China needs to shift toward reliance on consumption. Without such a shift, she said, China’s annual growth could fall below 4 percent in the medium term (compared with the government’s current target of “around 5 percent”). Such an outcome, Georgieva told Reuters, “is going to be very difficult for China. It’s going to be very difficult from a social standpoint.”

The most recent IMF forecast, released in May, projected 5 percent growth for China this year and 4.5 percent in 2025. But the Fund’s call for more domestic consumption, which has been a constant theme for the past decade, seems increasingly out of step with the direction of Chinese economic policy, which has been prioritizing the development of high-tech industries while brushing off criticism of rising exports.

Read more on China’s economy

New Atlanticist

Oct 21, 2024

China’s economic stimulus isn’t enough to overcome that sinking feeling

By Jeremy Mark

Local governments are struggling under large amounts of debt, the property sector is heavily burdened, and Chinese leadership is preoccupied with just keeping the economy afloat.

China Economy & Business

The IMF needs to find its geopolitical bearing

The following is an abridged version of a recent article in Econographics. Read the full version here.

At the IMF-World Bank Annual Meetings, Western delegates should think hard about how the financial and intellectual capital invested in the Bretton Woods institutions can be put to better use in the interests of democracies around the world.

The World Bank’s case is relatively straightforward (it needs more financing and efficient project implementation), while the IMF’s case is more complicated. The fund saw a major shift of its activities into climate and development lending in recent years, requiring several rounds of fundraising to increase its basic capital (or quotas) and build up trust funds to provide subsidized loans to lower-income members.

These efforts have recently borne fruit, allowing the fund to lower its lending rate for the poorest member countries. However, the IMF is increasingly running into budget constraints among its larger members, and it will need to push for better lending results. It should insist on more thorough debt restructurings before concluding programs with countries, many of which are mired in (Chinese-held) debt; some of those countries are both frequent IMF customers and known to quickly forget the promises made at the time their lending programs were concluded, spelling financial trouble. The United States and other Group of Seven (G7) countries, as the main creditors of the IMF, have the most to lose if the institution continues to extend loans that put its own balance sheet at risk.

The IMF will also need to sharpen its policy messages. Its role in economic surveillance has moved to the background in recent years, although its reports and pieces on geopolitical fragmentation (including the semi-annual World Economic Outlook) still attract interest. But the policy conclusions in those reports and policies often disappoint. For example, a recent blog post downplayed the impact that Chinese subsidies and trade practices have on strategic sectors and how those practices would provide China with advantages in a further intensification of geopolitical tensions.

The IMF’s main shareholders should therefore use the Annual Meetings to lean on the IMF to refocus its resources on where they could be most useful at this time—freeing up its excellent staff to analyze economic trends and develop useful policy solutions in an environment of geopolitical rivalry. Democratic countries around the world need its work and its independent voice more than ever.

The IMF-World Bank Annual Meetings in 2024: Five important issues to be addressed

The world’s finance ministers and central bank governors will be confronted with a very complex and difficult situation—including five important issues they must address. Despite intense geopolitical contention that has stymied international cooperation on many fronts, there is a chance that the gathering could lead to agreements to stabilize a volatile global economy. It is important such an opportunity not be missed.

1. Policy coordination to ensure a global soft landing

Major countries’ economies, including those of the United States, China, and many in Europe are in similar, negative cyclical circumstances. They share a common interest to engineer soft landings for their economies as headline inflation rates slow despite persistent services inflation, and employment growth weakens while unemployment rates rises. China has been particularly mired in deflation. Its GDP price deflator—a comprehensive measurement of price changes—has remained in negative territory for five consecutive quarters, amid a balance sheet slowdown triggered by a property sector crisis. All the major countries could benefit from coordinating their stimulative policy measures to generate positive feedback effects.

Doing so would be an opportune moment for the Group of Twenty (G20)—which will gather during the annual meetings—to deliver on their mission as the premier forum for international policy coordination. They could start by agreeing on a set of measures—such as coordinated easing moves—to ensure a soft landing for the global economy. In particular, interest rate cuts announced by major central banks, especially the US Federal Reserve (the Fed), would revive bond flows to emerging, developing economies. The IMF can play a catalytic role in this endeavor by providing analytical support for coordinated monetary easing coupled with appropriately supporting fiscal policy measures. At the same time, it should safeguard government debt sustainability where necessary. After all, a soft landing is the base case scenario in the IMF’s latest growth estimates, which show global GDP growing at 3.2 percent and CPI slowing to 5.9 percent in 2024.

Read the other four big issues on the docket

Econographics

Sep 27, 2024

The IMF-World Bank Annual Meetings in 2024: Five important issues to be addressed

By Hung Tran

Despite intense geopolitical contention that has stymied international cooperation, the October gathering could nevertheless lead to agreements to stabilize a volatile global economy.

Economy & Business International Financial Institutions

The post Get an inside look at the IMF-World Bank meetings as finance leaders navigate a geopolitically fragmented world appeared first on Atlantic Council.

With digital transformation of economies and societies progressing at an increasingly rapid pace, the global community has recognized the need for clear policies, increased financing, creative innovation, and effective regulation of digital technologies to serve the public good and enhance financial inclusion of underserved populations. Digital public infrastructure, or DPI, brings together these priorities in a holistic framework for countries to adopt and adapt per their own developmental objectives. The Group of Twenty (G20) New Delhi Leaders’ Declaration defines DPI as “a set of shared digital systems that are secure and interoperable, built on open technologies, to deliver equitable access to public and/or private services at a societal scale.”¹ As in the case of India, successful DPI requires a symbiotic and mutually reinforcing relationship between the public and private sectors on public policy, digital assets, and market innovation (Figure 1).

Operationalizing DPI and financial inclusion

DPI spurs innovation for financial inclusion in myriad ways. Most notably, if implemented well, it expands access to digital services for even the most remote consumers and businesses who might otherwise be underserved by incumbent financial-services offerings. New products and services built on top of DPI targeting previously uncovered populations significantly expand the potential consumer base.

For the financial-inclusion benefits of the new digital infrastructure to be fully realized, entrepreneurs and other private-sector innovators must be able to identify large enough market opportunities for various last-mile use cases and be rewarded for the risk they undertake in solving such user challenges. By adopting the right mix of incentives and regulations, countries should be able to attract private-sector investment to fund their exponential growth and reach sustainable scale.

The India model and its global relevance

How India has used DPI to foster financial inclusion    

DPI has been at the heart of India’s digital transformation, and financial inclusion has been at the heart of India’s DPI. While other countries, such as Brazil, have also taken a similar approach, India’s experience stands out for both its scale and scope. By enabling a policy framework that fosters data privacy and empowerment, mandates interoperability, and promotes market participation accompanied by public investment in digital assets, India’s DPI has expanded the market for goods and services. Over the last decade, this approach has transformed and dramatically increased the country’s financial inclusion, also helping India meet its SDG goals.²

India’s DPI framework

Access to financial services has increased globally over the last decade. According to the Global Findex Database 2022, 71 percent of adults in developing economies now have a formal financial account, compared to 42 percent in 2011. The gap in access between men and women in developing economies has fallen from nine percentage points to six percentage points, indicating a closing of the gender gap in financial inclusion.³

Even given this improvement, India’s experience stands out from those of other developing countries largely thanks to its innovative DPI. Nearly 80 percent of all Indian adults (age fifteen and up) had a bank account in 2021, compared to 35 percent in 2011. Two-thirds of the new bank accounts were opened to receive government transfers targeted at the bottom 40 percent of the population, including the rural poor, mainly through the Pradhan Mantri Jan-Dhan Yojana (PM-JDY)—the national mission to provide financial access—from 2014 onward     .

This was followed by the creation of the Unified Payments Interface (UPI), which leveraged Aadhaar, electronic know your customer guidelines, and smartphones—the so-called Jan Dhan– Aadhaar– Mobile (JAM) trinity. India’s UPI is currently the world’s largest instant digital- payments system with a 46- percent share in global transactions volume.⁴ While available to all Indians, UPI-based payment applications are being utilized by previously cash-dependent and vulnerable populations, such as the urban and rural poor.

Beyond the technology stack itself, India’s DPI has benefitted from the country’s enabling environment for digital inclusion. India has one of the lowest costs of mobile access and data transmission globally, at  16 cents on average, largely due to low telecommunications tariffs for mobile internet access as well as widespread fourth-generation (4G) coverage.⁵ India has also implemented policies and programs to promote bank account ownership, such as the PM-JDY and the licensing of payment banks as a special category of banking institutions. While questions remain about the regulation of payments banks, as shown by the Reserve Bank of India’s recent actions against Paytm, the move to license these banks set the precedent for a banking institution focused on both digital and financial inclusion. These factors, among others, have enabled India’s DPI readiness by fostering digital inclusion that could serve as a model for other countries to follow. Of course, for all of its strengths, India’s model of financial inclusion is not necessarily a one-size-fits-all solution and might need to be adapted to better suit countries that do not have both a large population and technological capacity.

Lessons learned from India’s stack    

India’s DPI model has the potential to help other countries in the Global South leapfrog previously necessary steps and systems to create inclusive government services and financial systems. Because these countries lack legacy systems, they can also— to some extent—avoid impediments to technological innovation associated with creating their own DPIs. By leveraging technology and a network approach, efficiency, accuracy, and effectiveness of financial-inclusion programs can be vastly improved, and India can help this process by sharing its DPI technology and expertise.

There are also some lessons to keep in mind about the Indian model. The first is that its degree of centralization is both a positive aspect and an area for caution and improvement. The centralization introduced by Aadhaar and leveraged by other layers of India’s DPI contributed to its efficacy and reach, increasing financial inclusion for many underserved individuals and communities. However, centralization raises questions about data security and the government’s intention with centralizing that much personal data, which may in turn introduce doubts among potential users and inhibit their participation.

Second, ensuring constructive and equitable cooperation between the government and private sector will help promote a healthy competitive ecosystem for DPI. India has experienced challenges in this regard. For instance, on the UPI, the National Payments Corporation of India has sometimes been at odds with foreign investors seen as proponents of privatizing DPI. Given the scale at which India is operating, there is significant space for the private sector, both domestic and foreign, to be included in the DPI ecosystem. For optimum outcomes, the “public” in digital public infrastructure should not mean government dominance or control of infrastructure      but, rather, public ownership and prioritization of the public interest. Developing robust cooperation methods and mechanisms for the public and private sectors will help maximize innovation, regulation, and collective ownership and accountability, enabling high-quality and high-impact DPI.

To enable this ecosystem flywheel, successful DPI should neither prevent nor discourage commercialization in financial services, including in payments, digital savings and credit, fintech infrastructure, and insurance. A healthy DPI ecosystem must encourage both private and public innovation with appropriate fee structures, funding mechanisms, data guardrails, and stable, predictable regulatory frameworks. DPI can accelerate every aspect of financial innovation for local inclusion, especially in markets with less mature financial services industries. Examples can include new neobanks for mobile money, monthly subscriptions for insurance and other key products, supplemental data to encourage better and more affordable underwriting for under-banked populations, and merchant solutions for small businesses with limited digital footprints to grow their businesses. A robust mechanism for ongoing collaboration with the private sector, civil society groups, and technology innovators is also critical for successful, sustainable, and inclusive DPI. Enacted thoughtfully, DPI has the potential to spur an entire new Silicon Valley of financial-services innovation in new geographies to expand what’s possible for financial inclusion.

Balancing regulation and innovation in the DPI ecosystem

There are two additional lessons of India’s financial-inclusion experience that can be built upon as the idea of a DPI-based financial inclusion diffuses globally. The first is that financial inclusion is not the same thing as financial access. Inclusion in this context entails financial stability, security, and trust in the system, which requires specific attention. Second, components of the DPI stack, such as the use of biometric ID for authentication and a digital-first approach to payments, might leave certain vulnerable groups behind, especially the elderly and the rural poor. Efforts to mitigate these adverse effects should be part of the DPI design, not an afterthought.

Policy recommendations    

Financial health and well-being are integral to thriving individuals, communities, institutions, and economies. The current discourse on DPI and financial inclusion has focused on access and usage while disregarding other factors that lead to a financially healthy life, especially in a digital-first environment. These include capacity to interact with the digital ecosystem, building trust and ensuring security, and creating an innovation ecosystem that supports inclusion and well-being. Taking a holistic, outcome-based approach vis-à-vis the role of DPI in the financial ecosystem will enable policymakers to set objectives, provide financing, track outcomes, and monitor progress toward the achievement of the Sustainable Development Goals (SDGs). 

I. Enable and rigorously evaluate digital readiness.  

Countries seeking to develop DPI should invest in enabling factors for digital readiness, including internet access, cellular network coverage, technology governance, and other infrastructure to build a robust foundation for DPI. These are essential to build applications that run on DPI rails, especially financial inclusion and digital payments.

II. Adopt a holistic approach to digital financial inclusion.    

Policymakers should follow an outcome-based and people-first approach to digital financial inclusion. This approach should advance financial inclusion by working toward      measurable outcomes that demonstrate progress and impact— for example, by tracking Global Findex indicators for financial account ownership and usage and linking it to the DPI stacks.

III. Prioritize user centricity and trust.    

Countries following the DPI approach should center the interests and well-being of individual users and their communities to ensure adoption and promote trust in digital financial services, broadly defined. Countries should seek to balance innovation and regulation so that they reinforce each other (Figure 2). A robust mechanism for ongoing collaboration with the private sector, civil society groups, and technology innovators is also critical for a successful, sustainable, inclusive, and trustworthy DPI. Governments can also support and empower innovation hubs to pilot new financial technologies in controlled environments with regulatory support—for example, through sandboxes.

IV. Align public and private-sector incentives.    

Stakeholders should work to align public and private-sector incentives to achieve an optimal balance of innovation and regulation in DPI. Private-sector innovation should be sought, and space should be created for the private sector to experiment. Governments and regulators should focus on the objectives of public interest and data safety by directing the private sector rather than being a lead, solo actor on DPI.  

V. Prioritize sustainability, durability, and literacy.    

Countries should invest in the long-term durability of DPI through investments in digital literacy and capacity. Sustaining DPI in the long run requires a skilled workforce of developers, including fostering of an open-source technology community, to maintain existing and build new infrastructure as countries seek to expand their technology stacks. By developing their own human and technical capacity, countries can ensure ongoing DPI innovation and make it a sovereign pursuit that utilizes their citizens’ expertise and creativity. Moreover, for the end users—particularly in developing countries—many citizens are getting their hands on technology, particularly the internet, for the first time. Digital literacy  is, therefore, a key area for governments to focus on. Digital etiquette and know-how—from simple aspects like how and where to securely store passwords and information to utilizing DPI for day-to-day activities such as bill payments—are best initiated by governments to ensure maximum reach and create a digitally responsible populace.

Working group leaders

• Katherine Hadda, CSIS
• Anit Mukherjee, ORF America

Working Group Members

• Ajay Chhibber, Atlantic Council & George Washington University
• Melissa Frakman, Emphasis Ventures
• Ananya Kumar, Atlantic Council
• Jeff Lande, The Lande Group & Atlantic Council
• Aran Mehta, ASG
• Srujan Palkar, Atlantic Council
• Rakhi Sahay, Access Assist and UNCDF
• Heba Shams , Mastercard
• Atman M Trivedi, ASG & Atlantic Council

This report was made possible in part by the generous support of Mastercard. 

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations. The Atlantic Council and its donors do not determine, nor do they necessarily endorse or advocate for, any of this report’s conclusions.

Issue Brief Oct 21, 2024

Finding security in digital public infrastructure

By Justin Sherman

As governments worldwide adopt Digital Public Infrastructure (DPI), the need for robust cybersecurity and privacy protections has never been greater. This paper delves into the critical risks and opportunities associated with securing DPI systems. With examples from India, Ukraine, and other nations, it explores how governments are managing data privacy, addressing cyber threats, and building trust in digital services. The paper highlights key considerations for policymakers, including the balance between openness and security, the role of encryption, and the importance of resilience in digital systems. As more nations turn to DPI, ensuring the safety and privacy of citizens’ data is essential to creating sustainable, trustworthy digital infrastructures.

Cybersecurity India

Issue Brief Oct 25, 2024

Global DPI models: Lessons from India, Brazil, and beyond 

By Barbara Kotschwar and Colin Colter

The concept of Digital Public Infrastructure (DPI) is gaining momentum globally, as countries seek to digitize essential services like identification, payments, and civil registration.

Brazil Digital Currencies

The post How digital public infrastructure can support financial inclusion appeared first on Atlantic Council.

The post CBDC tracker cited by the Economist on rival payment systems from BRICS countries appeared first on Atlantic Council.

This emergence of bilateral swap lines and regional financing arrangements to supplement IMF lending was a crisis response, not a political one. However, in the emerging era of global fragmentation, the world can expect these newer insurance mechanisms to increasingly be used as political footballs. To be clear, a broader set of insurance providers could support a more robust system if they are underpinned by greater international cooperation. Yet this year’s Annual Meetings, held October 21 through October 26, will likely highlight just how difficult the current political constraints to such international coordination are.

Not your mother’s safety net

Collectively, these insurance mechanisms for countries facing crises are referred to as the global financial safety net (GFSN). The GFSN—which comprises international reserves, bilateral swap lines, regional financing arrangements, and IMF resources—provides liquidity to countries who struggle to meet their balance of payments needs and supports a robust global economy. In the years leading up to the GFC, the IMF was the largest component of the safety net. It made up anywhere between 76 to 95 percent of the GFSN’s total resources, excluding reserves. Following the crisis, the IMF’s share of resources has waned to 28 percent. Bilateral swap lines and regional financing arrangements have become the largest elements, collectively making up between 72 to 74 percent of total resources.

Unlike IMF programs, bilateral and regional arrangements are often extended with domestic political motivations in mind. For example, the People’s Bank of China swap lines are extended with the intent to support the internationalization of the renminbi and to strengthen Chinese diplomatic ties. Federal Reserve swap lines are extended to countries that pose spillover risks to US financial stability. India’s $760 million of support to the Maldives is the latest example of such politically motivated lending.

Rising geopolitical tensions threaten to expose vulnerabilities in this evolved, and increasingly complex, safety net. The IMF’s diminished role as lender of last resort could result in a less equitable system where geopolitically relevant countries receive outsized bilateral support—as was the case when Egypt narrowly avoided a crisis situation earlier this year. Developing countries who do not fit this description may be required to default on their obligations and rely on the IMF’s less timely support, which would have real developmental impacts. All in all, the shifting composition of the safety net could lead lending arrangements astray from their core purpose, which is to support global financial stability, and place domestic politics in the driver’s seat.

Ensuring robust support in an era of fragmentation

Expanding the safety net to include diverse financial insurance mechanisms is not, in its own right, a bad outcome. Introducing new support lines can provide more effective and tailored funding for countries facing different types of crises. Federal Reserve swap lines, for example, are effective insurance for countries who face acute dollar shortages but don’t exhibit structural imbalances that would be better addressed through an IMF program. A diversified GFSN can also provide support when IMF resources are constrained—as is currently the case with the Poverty Reduction and Growth Trust, the IMF’s main vehicle for providing concessional lending to low-income countries.

Yet international cooperation is essential to ensure that all components of the GFSN are working towards the same goal. The proliferation of bilateral and regional arrangements introduces differing incentives which reflect local, rather than global interests. Consensus is needed at the global level to align incentives across GFSN components. Agreement could, and should, be achieved through an explicit discussion of the costs and benefits of different relief measures.

Conclusions

The IMF/World Bank Annual Meetings present an opportunity for finance ministers and central bank governors to engage with one another and assess whether the Bretton Woods institutions are adequately performing their core duties. Geopolitical dynamics will inevitably influence many of these discussions, whether over the merits or flaws of industrial policy or in relation to IMF policies such as the quota formula. The IMF has a role to play in breaking through this impasse. A first step toward facilitating more productive debate would be for the IMF to acknowledge that it is too polite, as recently emphasized by US Treasury Assistant Secretary for International Finance Brent Nieman. While Assistant Secretary Nieman’s remarks were made in the context of the IMF choosing not to recognize political dynamics in country lending and surveillance operations, the IMF would also do well to acknowledge rising geopolitical influences and how they could impact the GFSN.

Revisiting the effectiveness of the GFSN is needed now more than ever, as ballooning external debt stocks in low- and middle-income countries inhibit their ability to achieve climate and development goals. A frank discussion about political influences in crisis support would mark a meaningful step towards greater cooperation and begin a process of reimagining the role of the IMF in the evolved GFSN.

Patrick Ryan is a Bretton Woods 2.0 Fellow at the Atlantic Council GeoEconomics Center.

Amulya Natchukuri is a Next Gen Fellow at the Atlantic Council GeoEconomics Center and an undergraduate student at Rutgers University studying math and economics.

The views expressed in this article are the authors’ and do not reflect that of any employer.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post The rising influence of geopolitics in economic crisis support appeared first on Atlantic Council.

The post Event with Under Secretary of the Treasury Jay Shambaugh featured in Bloomberg on US plans for providing financing to developing nations appeared first on Atlantic Council.

Public Event Fri, October 11, 2024 • 10:00 am ET

Treasury’s Jay Shambaugh on the future of international financial institutions 

Under Secretary Shambaugh will deliver remarks on the future of the international financial institutions, including their role in fostering global growth and their importance to US economic security. 

China Economy & Business Fiscal and Structural Reform International Financial Institutions

Speaker

Jay Shambaugh
Under Secretary for International Affairs, US Department of the Treasury

Moderator

Greg Ip
Chief Economics Commentator, the Wall Street Journal

Introduction

Josh Lipsky
Senior Director, GeoEconomics Center, Atlantic Council

Event transcript

Uncorrected transcript: Check against delivery

JOSH LIPSKY: Good morning. Welcome to the Atlantic Council. I am Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. On behalf of the Center and the entire Council, we are so pleased today to welcome US Treasury Undersecretary for International Affairs Jay Shambaugh for a speech and conversation on the future of the international financial institutions.

In just over one week, the world’s finance ministers and central bank governors will convene here in Washington for the annual meetings of the IMF and World Bank. We will host many of them right here at the Atlantic Council and at the IMF for a special series of events.

These leaders face a range of challenges confronting the global economy: faltering growth in China, the risk of wider conflict in the Middle East, the economic fallout from Putin’s war of aggression in Ukraine.

But they are also facing internal challenges. The Bretton Woods institutions turn eighty this year, and there are critical steps both the IMF and World Bank must take to ensure they are fit for purpose for the future.

Standing in this very spot two-and-a-half years ago, Treasury Secretary Janet Yellen, in what is now known as the friendshoring speech, reminded us that these institutions were critical engines of prosperity both here in the US and around the world. She called for imagination and vision in crafting their next chapter.

We took that call seriously here at the GeoEconomics Center. We launched our Bretton Woods 2.0 Project. We focused on delivering a blueprint for the next era of the IMF and World Bank. Our work on digital currencies, cross-border payments, China’s economy, sanctions, and economic statecraft all came together to make an important point: economic security and national security are deeply interconnected.

That was a lesson the founders of this system knew all too well in 1944. And while over time it may have faded from our memories, in this decade that lesson has come roaring back. So we built our program not only to write and research and convene, but also through our Bretton Woods Fellowship to bring new leaders and new ideas to the international financial system.

We weren’t the only ones who listened closely to the secretary on that day. The entire Biden administration, in particular our guest today, has made it a central focus to invest time and energy in the health of both the IMF and World Bank because they understand the importance of these institutions and how they can deliver prosperity not just around the world, but also right here in the United States.

That is why we are honored to hear from Undersecretary Shambaugh this morning ahead of the annual meetings. He is uniquely qualified to speak about the future of these institutions. He previously served as a member of the White House Council of Economic Advisers and chief economist at the CEA. His areas of research have focused on exchange rate policy, capital flows, and reserve holdings. It is not surprise, then, that his speeches on international economics—including last year’s ahead of the annual meetings in Marrakesh and his recent speech on China’s imbalances—have become important markers of US policy. No pressure for today, Mr. Undersecretary.

Following his remarks, he will join a conversation with the chief economics commentator of the Wall Street Journal, Greg Ip. But first, Mr. Undersecretary, the floor is yours.

JAY SHAMBAUGH: Well, thank you, Josh, for your very kind introduction, and to the Atlantic Council for having me here today.

So, as Josh mentioned, in ten days we’re going to have, basically, the entire international financial policymaking apparatus descend on Washington, DC for the World Bank-IMF annual meetings. And I think gatherings like these are an opportunity—a good reminder of the various other times these types of policymakers have come together for a big cause. And while international economic policy can be a contentious space at times, allow me to start with something I think we can all agree on, which is it’s important to remember your anniversary.

And the anniversary I’d like us to remember today is of a particular gathering of previous ministers and financial policymakers. That’s the anniversary of Bretton Woods. Eighty years ago, a group of 730 delegates representing forty-four countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to hash out the future of the global economy. And this was remarkably bold. World War II still had another year to go. The Nazis were still in Paris. And yet, even as they remained squarely focused on winning the war, the delegates at Bretton Woods understood that without planning, without reimagining the global economy and the international system, they risked losing the peace.

So today I’d like to reflect on the importance of the Bretton Woods institutions—the IMF and the World Bank—and how important they are to US economic security: how they have lifted up the global economy and supported American strength and prosperity since their founding, and how they stepped up through crises of the past four years, and how we see their role in driving growth and prosperity in the years to come.

So when US policymakers led in the creation of the Bretton Woods institutions there was an altruistic motive, to be sure. Helping ensure robust global growth would be good for billions of people, and that is still true. Global growth has been the greatest antipoverty program ever. As the world economy grew more than 250 percent over the last four decades, global extreme poverty rates fell from over 40 percent of the population to under 10 percent.

But there was clearly a self-interested rationale as well. By supporting growth and helping fight crises, these institutions would help generate a more stable world. The hope was they could help prevent the economic collapse that came in the decades after World War I that many believe contributed to the rise of fascism and the start of World War II.

And a strong and stable global economy was seen as essential for a strong US economy. The US economy is, obviously, the largest in the world. It is broad and diverse, and can provide many of its own needs—energy and food—domestically. But even the US economy is not an island. Time and time again, the decades since Bretton Woods have corroborated this basic intuition of our predecessors at that conference about the importance of the global economy for US growth.

US export growth, for example, has tracked growth in foreign GDP quite closely for many decades. And this macroeconomic pattern really reflects an existential imperative for US businesses with significant exposure to global growth. This includes our largest firms, with, for instance, as much as 40 percent of all S&P 500 firms’ revenues derived from foreign markets in recent years. And workers at these firms benefit from this exposure; jobs in export industries have been shown to pay a wage premium as high as 20 percent.

And it’s not just trade or foreign investment that depends on what happens in the rest of the world; our own investment levels are in many ways affected by global growth. There’s strong empirical evidence that business investment follows an accelerator model, which is increases in investment depend on increases in the rate of economic growth. To the extent that US firms depend on the rest of the world for much of their revenues, their investment levels will depend on what they see as potential growth abroad. And the evidence is that this effect of global growth on investment dynamics is significant.

So the US is roughly 16 percent of the global economy in PPP terms, more in—at market exchange rates, and contributed about 0.4 percentage points to real GDP growth in 2023. Strength of the US economy was an upside surprise last year, and it helped drive global growth forward. But even in that circumstance, we comprised of less than one-seventh of total growth, and I think about a quarter of growth at market exchange rates.

So, in addition, over the next half-century the UN estimates that virtually all population growth will occur in countries that are currently low- or middle-income countries, and so it’s essential that the global economy generate jobs and incomes where people are living.

Now, we’ve come to understand quite viscerally how crises that begin by threatening economies overseas ultimately impact American workers, families, and businesses. With the COVID-19 pandemic, a viral outbreak across the globe led to the sharpest drop in GDP since the Great Depression. It left many economies around the world smaller than they would have been on their pre-crisis—pre-crisis growth trends, and particularly when compounded by the effects of Russia’s unlawful war against Ukraine on global food and energy prices. Without a strong rebound in growth, we could simply be left poorer going forward than expected prior to these shocks. It is essential that we have institutions able to help the global economy rebound when a slowdown strikes.

And then, obviously, global financial markets are linked as well. A shock in a British bond market or yen borrowing or the near failure of a Swiss bank have all reverberated through global markets in the last two years, and financial crises with major global impacts have begun on nearly every continent over the last four decades at one time or another.

So, while the global economy has shown resilience over the last two years, it also faces numerous challenges. There are geopolitical risks, changing demographics, and slow productivity growth in many countries. The United States has actually seen productivity growth rebound, even slightly above its pre-COVID rates, but that is an atypical experience across richer countries.

The Biden-Harris administration has placed an emphasis both on trying to recover from the COVID recession rapidly, generating a return to pre-recession trends faster than in previous recessions and faster than other major economies. It has also, though, emphasized growth over the medium term. Secretary Yellen has referred to this strand of policymaking as modern supply-side economics, focusing on ways in which proactive government policy can boost long-run growth through investments, including in labor supply, human capital, public infrastructure, R&D, and sustainability.

The world also faces a challenge coming from China’s current economic model. Having a very large economy with such a high savings rate can cause spillovers unless there are domestic uses for much of that savings. Now, recently China has been directing large sums towards investment in manufacturing, despite already being over 30 percent of global manufacturing. And there appears to be a lack of domestic demand driving growth, potentially leading to a reliance on exports for growth.

A very large economy growing above the global growth rate based on exports is both unlikely to succeed and likely to cause spillovers to others. By focusing on manufacturing via nonmarket tools and subsidies despite China’s already outsized role, this also means that China may be closing what has been a typical development path to many other countries eyeing low-cost manufacturing as essentially the next stage of their development. And by channeling the savings to particular sectors, this increases the likelihood of overcapacity and spillovers to other countries.

It’s critical that we use all the tools we have to combat forces that might be pushing the economy towards slower growth. Global economic growth and stability are essential to our economic security, and the Bretton Woods institutions have played an important role in supporting these since their inception.

So the IMF has earned the moniker of the world’s financial firefighter, stepping in to offer financing and policy advice to countries in times of economic crises. It’s easy to look back and debate the Fund’s successes or missteps, but unquestionably the global economic system we have today would have an IMF-shaped vacuum if it—in its absence. And if it did not exist today, we would wind up creating something very similar to it right now.

It’s worth recognizing how an institution initially charged with maintaining a system of global fixed exchange rates has evolved to respond to generation-defining events. And beyond these global shocks, the Fund has also stepped in to help individual member countries at pivotal times—as they emerge from conflict, or look to respond to economic downturns and instability, or other shocks.

And similarly, the World Bank, initially established to support postwar reconstruction, has evolved to become an essential partner for countries. Its International Bank for Reconstruction and Development, or IBRD, is a key provider of financing and policy advice and technical assistance to middle-income countries across the globe. And IDA is the largest source of critical concessional financing and grants for low-income countries, including those affected by fragility and conflict.

Often working complementarily with the IMF, the World Bank is also a key purveyor of policy advice and technical assistance to help reduce poverty and advance sustainable and inclusive development. World Bank funding and support has translated into material quality-of-life improvements for billions of people across the globe, with just those projects currently underway at the Bank yielding improved educational and job outcomes for 280 million people, stronger food and nutrition security for 156 million, and more inclusive access to electricity for a hundred million people, just to name a few of the effects.

And their advice is likely just as important. A finance minister once said to me, “I need the financing, but it’s—the most important thing, I need to know where to spend the money and how to grow.”

And although they are not officially Bretton Woods institutions, the regional development banks—primarily founded in the 1950s and 1960s—have become critical sister institutions to the World Bank and IMF, complementing and deepening the impacts of the Bretton Woods system.

The importance of the IFIs to US interests and US economy continues, of course, today. There are those who have suggested the US withdraw from these institutions. This would be a step backward for our economic security. Without US leadership at the IFIs, we would have less influence and we would weaken these institutions. We cannot afford that.

Consider how the IMF and World Bank sprung into action during the two crises that have defined the global economy the past four years: COVID-19 and Russia’s criminal war on Ukraine. Without the urgent work of the IFIs in responding to the pandemic and preparing for future ones, I am certain that the outcomes of COVID-19 pandemic would have been even more terrible and the economic aftershocks even worse.

The World Bank made over $275 billion in new commitments between mid-2020 and mid-2024, with more than half of those going to the poorest countries in the form of highly concessional loans or grants. And as part of this effort, the Bank made available ten billion dollars specifically for the purpose of getting vaccines to those who needed them. The urgent work of the World Bank also drew attention to the need to establish a permanent body that could respond to the world’s health crises the way financial authorities respond to the global financial crises. With our partners in Italy, in Indonesia, and elsewhere we answered that call by seeding this fund, the Pandemic Fund. As of today, the Pandemic Fund has approved over $450 million in funding to more than forty countries.

The IMF’s Poverty Reduction and Growth Trust, or PRGT, which lends to the world’s poorest, has provided thirty billion dollars in zero-interest-rate loans to fifty countries over the past four years alone. This funding helped stabilize vulnerable countries as the global economy was grinding to a halt due to the pandemic, and as inflation and interest rates spiked following Russia’s invasion of Ukraine. The PRGT also helped make sure that even as other creditors withdrew from the developing world, and as private creditors pulled out too, the IMF was there to help.

Today’s financing pressures for developing economies would have likely been much worse absent the extraordinary financing support of the IFIs since the pandemic. From 2020 to 2022, this collective support accounted for nearly 60 percent of the net debt inflows to developing economies. So, earlier this year, Congress authorized us to lend to the PRGT at very little cost to taxpayers, and that loan will help this critical work continue in the years ahead.

The IMF has also innovated in the last four years, creating the Resilience and Sustainability Trust to help countries deal with balance-of-payments shocks that can stem from longer-term challenges such as climate change and pandemic preparedness. We’re encouraged that the IMF, the World Bank, and the WHO recently announced principles of cooperation for supporting country RSF programs for pandemic preparedness, and we look forward to them operationalizing these quickly. The IMF also created a temporary food shock window in the wake of Russia’s invasion of Ukraine and the subsequent spike in food insecurity around the globe. These institutions simply play an essential role that world governments on their own cannot fill in a timely way.

Another essential innovation at these institutions in the last four years has come from the MDB Evolution agenda to make the world’s leading providers of development finance, the MDBs, bigger and better. In just two years, there has been substantial progress. The World Bank has declared a new mission, eliminating extreme poverty and boosting shared prosperity on a livable planet. MDBs have been hard at work on reforms to their visions, and to their incentives and operations and financial capacity, all of which are essential to responding to global challenges with sufficient speed and scale. And the G20 has estimated that reforms already identified could enable over $350 billion more in additional lending over the next decade across the MDB system.

There is still much to be done, particularly in creating institutional incentives for realizing the Bank’s updated mission; improving pandemic prevention, preparedness, and response; addressing fragility and conflict; and boosting private capital mobilization; among other priorities.

Another important change in the international financial architecture in the last few years comes in the new—in the form of a new way of handling debt restructuring. The Common Framework, launched by the G20 in November of 2020, is intended to be a method to bring together creditors across a range of official bilateral and other creditors to finalize debt restructuring for low-income countries. The process has been frustratingly slow, especially at the start, but extensive efforts has continued to work on the technical details of debt restructurings to make the process more transparent and swift.

From our perspective, it would be helpful to have even more explicit timelines and procedures so countries in distress know how they’ll be treated, as well as debt-service suspension during negotiations to avoid having delays lead to growing burdens. The World Bank and IMF play an important role in anchoring the process with their debt sustainability analysis, as well as with providing crucial financial support to countries going through a restructuring.

So, as noted above, there are many risks to global growth going forward. As countries look to chart paths for their economies, it will be important for the World Bank and the IMF to provide the critical advice to countries about how they can navigate the near term, but also how they can take the steps they need to boost their long-run potential. The IMF and the World Bank will also need to provide deft policy surveillance and advice to address spillovers from China’s current economic policies.

An urgent issue that we at the Treasury Department have been working with our partners to address is the financing challenges faced by low- and middle-income countries. We see this work as being urgent. There are pressing needs for investment in these countries to support sustainable development. But recently, funds have been flowing out of and not towards far too many countries.

Low-income countries’ average annual spending on debt service has jumped from about twenty billion dollars between 2010 and 2020 to around sixty billion dollars today. As some of these countries face significant principal repayments in the month ahead, they and the global debt architecture may be put under significant strain.

And that’s why we think it’s critical for the international community to establish a new Pathway to Sustainable Growth, a process for managing liquidity pressures as they arise. To be clear, if a country needs to restructure its debt, it should. But for the countries that are struggling under temporary financing challenges but for whom debt is sustainable over time, we’re working with partners and the international financial institutions to find a better path. If you are a country committed to sustainable development, and you’re willing to engage with the IMF and the MDBs to unlock significant financing alongside significant reform, there needs to be a financing package from bilateral and multilateral and private sources to bridge your liquidity needs in a way that is supportive of your sustainable long-run development.

Some creditors may provide net-present-value-neutral reprofilings; other partners may provide new liquidity support. We can also use the many tools of the MDBs or at the bilateral development financial institutions to encourage the private sector to stay invested on sustainable terms. It’ll be important for countries to step up with their own financing by mobilizing domestic resources, as well. And this is somewhere where the World Bank and the IMF can also help in important ways with technical assistance, as well as technical assistance coming from many countries, including Treasury’s Office of Technical Assistance.

For a plan like this to work, it will require hard work and innovation at the IFIs, and it’s encouraging that these institutions have been thinking through these topics lately and putting out papers and blogposts on the ideas. And the annual meetings represents a real opportunity to make concrete progress. It will be important for countries to have a better understanding of the tools that exist to help them through liquidity challenges, essentially a decision tree that lets countries and creditors understand what is available to countries under different conditions.

And the IFIs will need to design their programs in ways that avoid having temporary fiscal adjustments lead to permanent harm due to cuts in important investments. Countries and IFI country teams need to be clear about what investments need to be protected, and they need to be confident that the international financial system will step up and provide the required funding. It will be important for the IMF to emphasize when financing assurances are needed from creditors to smooth through a temporary financing challenge even when debt is sustainable. Creditors need to do their part, but in today’s complex sovereign debt landscape the IMF plays a critical role of guide and sometimes referee and air traffic controller. The World Bank, other MDBs, and the IMF will also need to use their new financing headroom to aggressively but responsibly support countries.

The responsibility will also fall to shareholders of these institutions to support them. Many countries, including the United States, still need to finalize domestic passage of the sixteenth General Review of Quotas that puts the IMF resources on a more durable footing. The IMF and its shareholders must also come together to return the PRGT subsidy account to a self-sustaining model. And utilizing the earned income of the IMF above what is needed for precautionary balances presents a real opportunity to make sure that low-income countries have access to critical financing when they need it.

At the World Bank, countries need to follow through on commitments to boost the concessional lending capacity of the Bank. And this fall, a crucial task will be securing a robust and impactful replenishment of IDA, the World Bank’s financing arm for low-income countries.

The challenges of the past few years have put tremendous pressure on IDA’s borrowers. And IDA has risen to this occasion, successfully scaling up disbursements by over 70 percent over the past four years and providing nearly 20 billion in net positive financing flows the last—the last year—couple years. It will take both donors stepping up and financial creativity to optimize the balance sheet to make sure we can deliver on this important goal.

The United States benefits immensely from growth abroad. We have an array of tools we use, from USAID’s direct support and programs, to DFC’s investments, to the Millenium Challenge Corporation’s large grants, to State Department engagement, and to technical assistance from Treasury and other agencies that help propel that growth. And we use multilateral settings like the G7 and G20 to work with other countries to navigate crises and support policies that drive growth over time. And we also help propel world economic growth through our trade and investment relationships with other countries and by pursuing strong economic policies in the United States as well.

But the institutions created eighty years ago at a meeting in the mountains of New Hampshire remain essential to the mission of seeing living standards rise around the world. These institutions cost the United States very little in budgetary terms, especially relative to spending on defense or other global spending. Yet, they deliver immense value to the United States and to the world. And one reason they are still so relevant is the constant reinvention or evolution of these institutions. They have made important strides in the last four years, and now we need to continue to challenge them and ourselves to create a better international financial architecture going forward.

Thank you.

GREG IP: Jay, thanks very much for coming and speaking, for those remarks, which were incredibly helpful and thorough. And thank you, everybody, for coming here.

Before I start, we will be—there will be an opportunity to ask questions later on. If you go to AskAC.org, there will be a place there where you can file questions and I can see them here, and we’ll see if we can find some time to get to them.

But, Jay, let me just start with a really basic question. As you say, it’s the eightieth anniversary of the IMF and the World Bank. Not everybody thinks they’re a great idea. Project 2025, you know, which represents some of the views of people associated with former President Donald Trump, has called for the United States to withdraw from the IMF. They say this is an organization that repeatedly lends to countries whose policies are inimical to ours, that is always giving us advice like raise taxes. So what’s the case for staying in these organizations? Why is it so important that we be part of these organizations?

JAY SHAMBAUGH:  Sure. Greg, thanks for that question, and thanks very much for having this conversation.

So, first, I will just say as an official bound by the Hatch Act I will not comment on anything remotely near to electoral politics.

What I will say is that to the extent that over the last few decades you do occasionally see people—whether it’s columnists or think tanks or politicians—say that we don’t need these organizations anymore and we’re better off without them, I would just say I think the evidence suggests that’s entirely inaccurate. And I think that if you look, as I noted in the speech, at crisis after crisis, there is simply no way the United States can suddenly on the fly marshal a bunch of other countries to help us respond to these crises. You need these institutions to do what they’re doing, is one thing.

The other thing is across a whole range of countries around the world where we would like to see those countries doing well, we’d like to see them having robust and good growth that’s good for them, obviously—it’s good for us in terms of our exports, it’s good for us in terms of reducing immigration flows in some cases, where you don’t want people fleeing a country out of panic because of a crisis or things like that—I think it’s clear that having organizations that can go and work in countries to support them with money on the one hand, but crucially with advice and conditions on the other to drive them towards better growth. You look at the IMF; literally, no one else can do what they do in terms of on the one hand providing money, but on the other hand kind of policy advice and direction, to bring countries in the direction they are.

And you know, without IDA I just don’t think we could imagine how much worse off the poorest countries would be. And without the World Bank lending to key countries, we would really struggle. So I just think it’s not just that they are essential to the world, but they give us an incredible tool in American foreign policy and economic policy that we have key leadership roles in these institutions. We’re the largest shareholder. We can go in and help make sure they are driving the global economy in a way that we think makes sense. So from my perspective, they really are the essential institutions that we have to work with.

GREG IP: There have, of course, been time through history with the US and the Treasury and the IMF have disagreed, right? What are those conflicts like? And how do they resolve? And, like, do they come out our way all the time?

JAY SHAMBAUGH:  So, you know, I don’t think any multilateral setting comes out your way all the time. I’ll just stipulate that. And I do want to be clear, and I tried to flag, you know, I’m not saying we agree with everything the IMF or the World Bank has ever done. And I think there are times we are relatively pointed in our comments around that. And I think a year ago I gave a speech leading into the annual meetings where I was trying to push the IMF on a number of things. And Assistant Secretary Brent Neiman just gave a speech a couple weeks ago that, similarly, was encouraging the IMF in particular directions. And Secretary Yellen laid out the call for MDB Evolution because she felt like we needed to see the MDBs change, and we needed to see them do something different.

So I don’t want to say that, you know, these are perfect places that always do what we want on their own. But on the other hand, I think when we do try to challenge them—and in particular, when we try to challenge them along with ourselves—we are able to help drive change. And I think the MDB Evolution process is a great example. We marshaled a set of allies who had similar views and brought them together, and pushed at the board, and pushed with management. We’re lucky Ajay Banga’s a terrific president of the World Bank and has taken up this charge and has really been trying to make change there. And we’ve seen the regional MDBs make really important steps too. So I think when we try and we when we seriously engage these institutions, we can make a real difference.

GREG IP: So, as you say in your remarks, I mean, the world has changed a lot in the last eighty years. And the role of the IMF has changed with it. You know, it originally was conceived as to help in an era of fixed exchange rates, limited international capital flows. And it was there to essentially police balance of payments, and so on. We get into the 1970s, and 1980s, and the 1990s, era of flexible exchange rates, growing international capital flows. In the 1980s and the 1990s a lot of its job was helping a lot of countries, developing countries, work through debt crises. And even as recently as 2009, with respect to Greece, it once again had that role. But is that still the—has that changed? Are the debt crises of old like the debt crises of today? And do the IFIs, and the fund in particular, have to adjust their approach to recognize that fact?

JAY SHAMBAUGH:  I think they do. I think—and I think they are, to some extent. So one thing I would say is one of the biggest differences, the creditors are different. So you used to have a group of creditors, and they created a club. They called it the Paris Club, right? And so it actually was kind of easy. The IMF could call the Paris Club and say, hey, we need to work this out. And the creditor landscape is just more complicated now. So you have China as a major lender, but not just China. You know, whether it’s India, Saudi Arabia, a number of other countries. And so now the landscape is more complicated.

It’s also private credit plays a huge role. So whether it’s euro bonds or direct loans from banks. And so I think there was a realization that we needed a better way to do debt workouts. And so that’s what the common framework was intended to be. It, as I noted, has been frustratingly slow. I think there has been a lot of work to try to improve it. And I think sequentially the countries that have entered more recently have been moving through faster, and that’s important. It’s important to keep improving it.

But I think—what we’ve argued, as I noted in the speech, is that there needs to be something beyond that. We can’t look at financing challenges or issues with debt strictly from a restructuring debt crisis perspective. We have to think about the fact that for a wide swath of countries, actually, net flows are negative. So poor countries are sending more money out than is coming in. And any economist will tell you, that’s backwards. That doesn’t make sense to us. And so we really need to try to take steps that will shift that. And what we’re seeing is lots of countries who borrowed money five, eight years ago, assuming they could refinance as loans come due, suddenly finding—whether it’s bilateral creditors, sometimes China, or the private sector through bonds—not interested in re-extending credit, necessarily. And that’s a problem.

And I think this is what we’ve called for changes on. President Biden, alongside President Ruto talked about the Nairobi-Washington vision, trying to call attention to this back in May. I did a speech back in April trying to talk about it. And the IMF and the World Bank are recognizing this. And I actually think this annual meeting is a real opportunity for them to put forward how they’re thinking about this. They’ve got something they refer to as a three-pillar approach to try to change how we deal with this.

GREG IP: So I want to drill down a little bit on common framework here. And certainly, the journalistic narrative has been that there’s been a real just division of views between China and the rest of the G20 on how to approach this, partly because of the unusual nature of China’s financing system. You know, there are bilateral flows to these countries. They’re not simply, like, you know, through concessional lending facilities. Some of them are through policy banks. Some of them are through commercial banks, right? And at times, they’ve taken the view, for example, that if they were to take haircuts, the World Bank should as well.

Talk to me a little bit about how the unusual nature of China’s creditor position has complicated that? And, like, what progress have you made talking to your Chinese counterparts to try and resolve that? Because I think—correct me if I’m wrong—that is one of the reasons why common framework has been slower than a lot of folks hoped to make progress.

JAY SHAMBAUGH:  I think it’s fair to say that China figuring out how it wanted to approach debt restructuring was something that took some time to work through. I think when we try to be fair, especially when I talk to the terrific longtime civil servants at the Treasury Department, they’ll talk about how when we were first going through some debt restructuring, because it took us a little time to figure out procedurally, how do you do it, and things like that. But we’ve kind of gone through that. And, frankly, we’ve largely got out of the business of extending loans to very poor countries. We do grants now. You know, so I think we’ve done—you know, we’ve loaned very little money to sub-Saharan Africa in the last five years, but I think we’ve done through grants almost seventy billion dollars to those countries. So we can provide substantial flows. And we think it would be better if more countries were doing it in that way.

On the other hand, with regards to China, China’s initial view was, well, if we’re taking haircuts, everyone else should too. And, honestly, I think this is somewhere where dialog really did help. They said to us, well, hey, look, back in the 1980s and 1990s you did things where the MDBs took some haircuts. Why can’t we do that? And we said, well, just to be clear, when that happened, we took 100 percent haircuts. Like, we wrote everything off. Do you guys want to do that first? No. No, that’s not what we want to do. And so—but I think, honestly, it took some work of working through, look, this is why it’s different.

And then talking through, look, the MDBs aren’t just collecting money back from these countries. The net flows are always positive. They are providing new grants and new money to keep these countries alive. And they have a different business model, where they’re effectively taking the haircut ex ante, right? They’re lending at a loss to begin with. And I think working through that with the Chinese helped us get to a place where they could see what type of terms they could cut deals on. A lot was technical stuff around what does it mean to have comparable treatment across creditors when you’ve made different types of loans. And I think this is somewhere where really technical, detailed, hard staff work of working through the details actually did matter. And now what we’re hoping is that we can continue to improve on that.

GREG IP: All right. Well, let’s stick with the China question for a while, because I know this is something you’ve been giving a lot of time and thought and travel to. So you went to China last month. And you repeated some of the concerns that Secretary Yellen made, which is effectively that their industrial policies and excess production are having severe and negative spillovers to the rest of the world. How serious is the problem? Does it impair the Biden administration’s own efforts to, like, revive American manufacturing in certain sectors?

JAY SHAMBAUGH:  So I think the problem’s serious. And I think there is a real risk of spillovers, not just to us but really across the world. And I think that’s one reason you’ve seen the concerns and policy responses coming not just from us, but from a whole range of countries—whether it’s Europe talking about countervailing duties on electric vehicles. You’ve seen India talk about solar panels. Brazil, I think Turkey, a number of other countries on steel. Lots of countries are taking action because they are worried about what China’s policies are doing.

And so, you know, our concern is, in a nutshell, this. That they have this huge amount of savings. There was a stretch of time they ran massive current account surpluses when—but they were a smaller country when they did that. There was a lot of pressure on them that that wasn’t OK. They actually did quit running the huge current account surpluses for a while. They channeled all the money into the property sector and infrastructure. Both of those have effectively played out. And now what we’re seeing is massive channeling of money towards manufacturing. They’re already 30 percent of global manufacturing. You can’t grow at a massive rate when you start from 30 percent of the world without displacing not just us, but lots of countries. And so I think that’s the conversation we’ve been trying to have.

And one of the things, going back to when I was there in February, especially when Secretary Yellen was there in April, she really pushed very hard this notion that you have agency. That it is your policy choices. If we take action, it’s going to be defensive. And you need to recognize that and not view it as anti-China if a whole bunch of countries are doing this. We’re not ganging up on you. We’re responding to something you’re doing.

GREG IP: You saw the stimulus measures that the Chinese authorities have mentioned, primarily in the monetary field but also some hints that something in the fiscal field is coming along. What’s your impression of it so far? And will this go some ways to resolving the concerns that you have?

JAY SHAMBAUGH:  So, thus far what I would say is I’ve been encouraged by some of the statements about intent. So going back, as long ago as July, that the State Council—you know, the Politburo came out with a statement saying we need more domestic demand. This has been our core point. You need more domestic demand. They’ve then followed up that with a number of statements.

And then finally in the last three weeks, I think after September 23rd, they’ve started a whole raft of announcements. Of saying we’re going to do things to try to drive growth. As you noted, it’s been more on the monetary side and not quite as much on the fiscal. And I think our view is they probably need more direct actions to lift domestic demand with fiscal policy, both in a temporary sense but also, frankly, in a more structural sense of trying to shift more money to households and consumption, and not exclusively rely on exports and investment.

GREG IP: Jay, are you familiar with the work of Michael Pettis, a finance professor at Peking University?

JAY SHAMBAUGH:  Yeah.

GREG IP: So he’s associated with Carnegie. And he recently came out with a report. And I was. like, you know, privileged to, like, hear him present it a week ago, actually, not far from here. And this is what he writes. He said—his basic view is that global surpluses and deficits—current account surpluses and deficits—have to sum to zero. And so those two things interact. And so you cannot talk about our surplus or deficit in isolation from those surplus countries, like China. And he writes: In the current global trading system, the purpose of exports is not to maximize the value of imports, but instead to externalize the consequences of suppressed domestic demand. Are you familiar with this theory? And what do you think about it?

JAY SHAMBAUGH:  So I’m familiar with Michael’s work over the last decade. That most recent sentence is something I did read, but I don’t know if I’ve thought as much about that in particular. What I would say is—I don’t know if the word purpose—where it’s the purpose of exports. The impact of exports, maybe. And I think that—I think his point, that I have always agreed with and it’s something that a number of economists—I’m an international macro economist, so I kind of come from the same direction as Michael. Which is to say that, at the end of the day, we often talk about trade, but it’s the fundamental macro imbalances that are driving things. And that really in China for a very long time, there’s just been an incredibly high savings rate and low levels of household consumption.

And that when China was a small, open economy and growing 30 years ago, maybe that has spillovers to the world but they’re smaller. China’s not small anymore. It’s the second-largest economy in the world. It’s a really important economy to the globe. And when it has policy shifts, they affect everybody else. In particular, if it doesn’t have enough domestic demand, that affects everybody else. And I think that’s where I find myself very much in line with the types of things Michael’s talked about, which is that it is important to see major economies drive enough of demand internally, or they’re relying on somebody else for that demand.

GREG IP: Let’s talk a little bit about how the IMF sees this. So in a recent blog post, IMF research staff, led by their research chief economist, wrote that the contribution of the Chinese saving shock to the US current account deficit is small, and so is the effect of the US dis-saving shock to China’s surplus. External surpluses and deficits in both the US and China are mostly homegrown. Agree, disagree?

JAY SHAMBAUGH:  So I think the fundamental point, that your own macro imbalances drive your external imbalances, is true. I think where we have tried to make an emphasis is what we’ve been concerned with. And this is—Secretary Yellen really tried to drive this home. You can have concerns about the macro imbalance, but what we’ve seen in China is directing that excess savings towards particular sectors. And when that happens, you get even bigger spillovers.

And so if you say you’re going to kind of flood the world with products in a narrow set of sectors, manufacturing writ large but especially some parts, you know, if your firms are being supported in ways that they can lose money for five years on end, my firms can’t, right? At which point my firms all go out of business. And so you get these huge spillovers to other countries. And so I think that’s where, yes, our own domestic policies have a big impact on current account imbalances. But what those current account imbalances mean and how they get channeled can have a lot to do with domestic policies. And I think China’s subsidies, and especially their nonmarket policies and practices, have really had big impacts on the US and other countries.

GREG IP: I’m going to push you on part of this discussion, Jay, though. And that is the IMF, specifically. The IMF was founded basically to police the balance of payments of different countries. Now, as we just talked a minute ago, it’s a different world of, like, free capital flows and flexible exchange rates, so the mission changes. But nonetheless, there is a view that that ought still to be something that they dwell a lot. And there are those who feel that they’ve kind of lost sight of that.

You know, Brad Setser—I’m sure you know Brad. He’s at Council on Foreign Relations. He’s made the following critique: When it looks at China, it basically says—his view is that the—you know the old joke, IMF stands for it’s mostly fiscal, right? And so they dwell inordinately on fiscal balance and not sufficiently on external imbalance. And so they look at China, and their advice is ease monetary policy, tighten fiscal policy, even though the external consequence of such a common policy combination is clear. I will actually aggravate the external surpluses that you have just been talking about are causing these spillover effects. I want you to address very specifically, is the IMF getting it wrong? Has the IMF lost sight a little bit of its core mission?

JAY SHAMBAUGH:  So I don’t know if it’s lost sight of its core mission, in the sense that in some countries in crisis they’re going in, and in some cases it is mostly fiscal for those countries. I think in its surveillance role, especially of major economies, I think keeping a very clear focus on external imbalances and what is driving those external imbalances is a key role of the IMF. And I would like to see even more attention there. I would say in the IMF’s last article four—which is where they evaluate a country’s economy—last article four of China they did put a big emphasis on China’s industrial policy and nonmarket policies and practices. And said, these are having big spillovers around the world.

I think that was important. I think that’s important for that to come from the IMF. We can say it, but it came from the IMF. Where I would like to see them pay more attention is to the aggregate external imbalance. I think in part because during COVID China’s imbalance actually did get much lower, I think it made them say, well, look, the current account surplus is less than 3 percent. All is well. I would say all is not well. I think we’re seeing risks of them relying on export-led growth in a way that, for a very large country, can have big spillovers. And I think that does require more attention.

GREG IP: And, in general, would you like to see external sustainability become a more important part of the IMF’s overall monitoring framework?

JAY SHAMBAUGH:  I think it needs to be an important part. I think the fund does have an annual external balances surveillance report. And I think trying to make sure that that is—really focuses on what the big countries are doing to the rest of the world would be important.

GREG IP: Sticking with the IMF mission for a moment, I’m going to quote from a blog post that Martin Mühleisen, who is a nonresident senior fellow here at the Atlantic Council and was formerly with the IMF. And he wrote the following, “The IMF is neither a climate nor a development institution, nor is it a fund for geopolitically convenient bailouts.” And the context of this was that—the implication was that it’s become a little bit too much of all those things. What’s your reaction to that?

JAY SHAMBAUGH:  So I think a year ago when I did a speech that was all about the IMF, I certainly had some lines in there that the IMF needs to stick to its core mission. I don’t think that means it has nothing to do with climate. I think I’m a big—I believe very strongly that climate has serious macro and financial impacts, and so it makes sense that the IMF is thinking about it. In particular, countries trying to adjust to climate has big macro impacts for them. And it becomes macro critical. And therefore, the IMF needs to deal with that in that way. It’s why they created the Resilience and Sustainability Trust.

I think sometimes when you hear people say things like that, what they’re worried about is that the IMF is going to try to staff itself up with a mass number of climate scientists and program people. And there, I agree. That’s not what you need the IMF to do. The IMF needs to be focused on the macro side of this. And I actually think in the last year or so, they’ve done some important work of partnering with the World Bank to kind of figure out, how do we divide this up? That the World Bank should be doing the programmatic side and the climate evaluation side. The IMF needs to be thinking about the balance of payments implications and the financing implications. And that they can work together. And, you know, they’re across the street, but the distance sometimes seems large. Lately, they’ve tried to narrow that gap.

GREG IP: There’s a question here. This person asks—actually, he said—he or she says: Is there room for coordination with other countries that are also concerned about a surge in Chinese exports? Now, you’ve already talked that there’s almost been this, like, ad hoc response of various countries complaining and introducing measures to deal with these sorts of things. Is there a case to be doing that in a more coordinated way?

JAY SHAMBAUGH:  So I guess what I’d say is it hasn’t been entirely ad hoc. You know, we all talk. The G7 gets together. The G20 gets together. I meet with lots of people from lots of countries. And, not surprisingly, how are China’s policy spilling over towards you is a pretty major topic of conversation. And so there are challenges sometimes, because every country has different tools and trade tools and different laws of how to apply them.

And so we might not do exactly the same thing in exactly the same way, but as we’re talking about what we need—and I think, frankly, what is crucial is that we’re talking to China in a similar way, to explain to them, like, this is what we’re talking about. This is the concern. When they hear it only—they hear us. And, you know, one of the great things about having Janet Yellen as my boss is, as a very highly respected global economist, when she goes to talk to other countries, they take her seriously. And that’s helpful. And she can go and meet with, you know, the premier of China, and go talk to him directly on these issues, as she has. But it is helpful if they are also hearing from other countries. And so that’s what we’re trying to do.

GREG IP: And certainly, one of the policy responses you’ve seen in the United States, and to some extent other countries, and even prior to this year’s concerns, is taking measures to try and, like, you know, impose tariffs, provide domestic subsidies to industries that we consider important—whether it’s, for example, the renewable energy space. But this has been met by the IMF and some others with concerns that it’s leading—that it’s breaking down the global—the world trading system. That the word they talk about is “geoeconomic fragmentation,” a tendency of countries to migrate to their geopolitical allied blocs. And this is damaging to the welfare of the world as a whole, especially the poorest countries. What are your thoughts? Is geoeconomic fragmentation, as they describe it, a problem?

JAY SHAMBAUGH:  So I think when they describe it as a theoretical risk, I have no problem with that because I think, sure, lots of things are theoretical risks. And as economic policymakers, we should be worried about all the ones that could be big. I don’t think there’s a great amount of evidence that this is driving things a lot right now. I think when you look around—and I especially don’t think there’s a lot of evidence it’s bad for the poorest countries. If anything, I think what you see is attempts by the United States to diversify its trading relationships. As noted earlier, Secretary Yellen has talked about friendshoring. And we like say, we have lots of friends. Like, this doesn’t mean shoring to a handful of countries. It’s to a lot of countries.

And what we’re really talking about is diversification. So I don’t think it’s been bad for, say, Vietnam, or India, or Mexico to see some production rotate out of China. I also think that’s a part of natural economics. China’s getting richer. It’s not the last stop on the production chain anymore. The same thing happened with Japan, where instead of exporting directly to us they were doing a lot of the work and then exporting to the newly industrializing countries in Asia to do kind of the last turn of the screw. So you’re going to see the trading relationship shift in some ways. And I don’t think we should overinterpret that.

I think both the United States and China—we’ve had it in statements we put out together, we talk about it a lot—have been very clear we are not interested in decoupling our economies. And so I think that—if someone said, boy, I think decoupling would be bad for the world economy, I am very happy to agree with that statement. It would be bad for the world economy. I think, as the secretary has said, it would also be entirely impractical. And so we’re not trying to do that.

What we’re trying to say is that we think, especially in critical industries, we’re not comfortable importing 100 percent of what we need from one country, especially, frankly, when sometimes it’s, like, one province and one port in one country. I think we’ve learned, both from geopolitical shocks and from supply chain issues during COVID, that that’s not a very well-structured supply chain. And you’d like to see more diversification. I don’t think that’s fragmentation. And I don’t think it’s bad for the rest of the world.

GREG IP: A question here: What are US priorities for the sixteenth Quota Review? And just to step back a little bit, the issue of quota—which is essentially IMF’s word for capital, right?

JAY SHAMBAUGH:  Yeah.

GREG IP: So capital subscription. I think there’s a consensus they need more capital. But I think there’s been an inability to come to a consensus on how that capital is provided and allocated. Bring us up to date on where that stands.

JAY SHAMBAUGH:  So we actually got to an agreement on this to do what, in technical terms, is an equiproportional increase in capital, so everyone keeps the same share they have but we’re going to go up by 50 percent, all of us. And so we’ll all have the same shares. And I think that was a hard-fought battle to get to, but I think everyone realized, as you said, it’s important to put the IMF on a more durable financial footing. It’s not that it increases its lending that much. It’s just the IMF has been relying on tools like borrowing arrangements from other countries, or things like that that we thought it would be useful to get away from and get back to pure capital. And so that has been agreed.

And now what’s really crucial, frankly, is that the US Congress needs to pass domestic law that says we’re bringing this into force. And so a lot of other countries still need to do it also, but it’s a crucial thing because the deal that was cut, frankly, is a very good deal for us. It preserves our role at the IMF, which is the leading shareholder and a critical role. And we really should pass that as soon as we can.

GREG IP: Question from Michael Stopford, UM6P University, Morocco.

Let’s look at the Global South. Can you respond to resentment on the part of Global South at their underrepresentation in the IFI decision making processes?

JAY SHAMBAUGH:  So I think the IFI landscape is a broad one. And so I think it’s hard to sum it up into one situation, because there are some IFIs that have leaders from one country, others that have it from other countries. I think when people are talking about, in particular, the Bretton Woods institutions we’ve been talking about today, I think we’ve tried to take a lot of steps to make sure that there is representation. One of the things, in fact, that the US championed a year ago at the annual meetings, and we’ve been taking steps to finalize, is to have a twenty-fifth board chair. There were only twenty-four. We thought there needed to be one more because we thought sub-Saharan Africa needed more representation. And so we pushed with a number of allies, including allies in Africa, to say let’s get another seat at the board for sub-Saharan Africa, and we’ve gotten that done.

So I think we are trying to listen where countries are saying they need things and really try to adjust.

GREG IP: Yeah. I feel like I spend way too much time on the IMF and not enough on the World Bank, so I do want to touch on that a little bit.

JAY SHAMBAUGH:  Sure.

GREG IP: And you talked in your speech about how reforms at the multilateral development banks could unlock an additional 350 billion dollars in lending resources. And I know that one of the priorities of the new president, Ajay Banga, was to find ways to look at the Bank’s sort of like capital or asset-equity ratio and sort of find ways to increase its leverage and increase those resources. Give us a report card on how that’s going and how much further we have to go.

JAY SHAMBAUGH:  So I think it’s going well is the shortest answer. So the—it’s not just at the World Bank; it’s the MDB system as a whole.

So there was a report within the G20 called the Capital Adequacy Framework Report that was trying to push on these types of ideas, and then we’ve really been pushing that through the MDB Evolution process. If I recall off the top of my head, which is always dangerous, the Bank has done—unlocked about seventy billion dollars in things they’ve done so far—this is measured over what could you do over ten years of lending—with another seventy billion dollars, roughly, where they’ve got the ideas that they are working on but they’re not necessarily passed yet. Other banks have done a lot more. So, as you noted, the system as whole, we think, has about 350 billion dollars that it has either unlocked or is unlocking, and the individual MDBs, I think, are making great progress.

The Asian Development Bank, I think it just turned out when you look at their balance sheet, had a lot of room to be more ambitious. And up to, I believe, around a hundred billion dollars of that 350 billion dollars is just can the Asian Development Bank make the right steps, and it’s in the process of doing so.

So one part of this is unlock the balance sheet. The next part, obviously, is you’ve got to use it. And so I think that’s the second step, is making sure these institutions are nimble enough and their operations models are working in ways to get the money to the countries that need it.

GREG IP: You’re the undersecretary of the treasury for international affairs, so you can’t expect to escape this without a question about the dollar.

JAY SHAMBAUGH:  Sure.

GREG IP: We have two questions, and I’m just going to sort of meld them. You know, President Trump has said the future of the dollar as the world’s reserve currency would end if Vice President Harris is elected. How do you see the role of the dollar and its long-term health as a reserve currency?

Related question: How do you view the international role of the dollar? Are you concerned at all that the dollar is ceding its role to other currencies?

JAY SHAMBAUGH:  So, first, again, not commenting on the first part of the first question.

What I would say is I think the role of the dollar is always under question. People are always wondering, well, is this change in the economy—in the global economy going to mean something for the dollar? Is this change? And I think what we know is that at the end of the day it is a combination of our financial markets being liquid and deep and well-run, crucially our rule of law, our legal and regulatory framework and governance structures of our financial institutions, those are the fundamental things that support the role of the dollar. They make the dollar’s role, frankly, quite good for us.

I think we have a national interest in maintaining it. But it makes it very good for other countries because you have strong anti-money laundering and counter-financing of terrorism rules in place. You have strong transparency rules in place that make the system work better.

I think people wonder anytime there’s either a geopolitical or geoeconomic shift, what does that mean for the dollar? I don’t think I’m seeing the dollar under siege in any way or anything like that. What I see is the dollar maintaining a very important role in the global economy that benefits us and others.

GREG IP: Is the dollar too strong right now?

JAY SHAMBAUGH:  That’s a question I can’t answer.

GREG IP: OK.

JAY SHAMBAUGH:  You’d have to ask my boss.

GREG IP: I will. When we get her up here, I will make sure we ask that.

Jay, you’ve been very generous with your time. Excellent insights and answers. Thank you very much.

JAY SHAMBAUGH:  Thanks a lot.

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Foreword

Can China’s economic system be compared to the world’s largest and most open advanced economies? Four years ago, when we began the China Pathfinder Project, the teams from Rhodium Group and the Atlantic Council GeoEconomics Center set out to answer that question.

In the intervening years, the global economy navigated a pandemic, supply chain shocks, the highest inflation in forty years in the United States, and the return of industrial policy across the Group of Seven and beyond.

That means today’s economic landscape is far different from the one we set out to explore. What began as an effort to create a shared language for understanding China’s economic trajectory—and benchmark its movement toward or away from open market economy norms—has evolved into a project that is trying to understand what it means to be an open market economy in the 2020s.

At the beginning of the project, policymakers and financial leaders in the West still viewed the Chinese economy with cautious optimism. Despite growing tensions between Beijing and Washington during the trade wars of the last decade, China had made modest progress toward market economy norms.

It was an open question whether China would continue that progress. Four years later, we all know the answer. The Chinese economy has shifted away from market norms. But how the movement happened is just as important as the top line.

In nearly every area we have tracked—financial system development, market competition, innovation, trade, and direct and portfolio investment—China’s progress has stalled or, in some cases, backslid. The initial hope that China would adopt more transparent and market-oriented policies has given way to a reality in which systemic state intervention and opaque decision-making continue to dominate.

The lack of clarity around China’s decision-making is now seen as a source of global economic risk. The Chinese Communist Party’s growing role in the economy stifles the private sector’s dynamism and fosters a dangerous environment of uncertainty for investors. The decline of the property sector and the correlated focus on manufacturing have raised alarm bells worldwide about a second China trade shock.

Look more closely at China Pathfinder, and you’ll uncover another layer of the story. Like a scientist who begins with one experiment but discovers in the lab that her antibiotic actually treats another disease, the China Pathfinder Project has revealed unexpected outcomes.

China’s prioritization of national security over economic growth has frozen most reform efforts. But what about the world’s advanced economies? Many have begun pursuing a range of policies based on the concept of economic statecraft, which, in our rankings, move their scores further away from open market norms.

This is the value of a data-driven approach to China’s economy. Instead of trying to calibrate policy based on officials’ statements, or one-off events, our method was to be comprehensive, objective, and focused on long-term trends.

All eyes will be on the US presidential election in the coming weeks. The next administration will develop a range of policies to grapple with China on trade, technology, Taiwan, and more. What kind of economic system will they be dealing with? As you will see in the following pages, China Pathfinder helps tell that story.

What has surprised us the most in this process is how universally translatable the story is. These reports have been used by economists from West Point to Warsaw. Whether in London, Paris, Tokyo, or Beijing, you will find China Pathfinder now referenced in your government’s own economic assessments.

And, so, the answer to the question we set out to explore is clear. Is it possible to compare China’s system to the world’s advanced economies? Yes. And it is necessary work.

We are grateful to the teams at the Atlantic Council and Rhodium Group, whose tireless work and dedication made this project possible. We extend our thanks to the policymakers, business leaders, and academics who engaged with and provided feedback on this research. As we close this chapter of China Pathfinder and look forward to the next evolution of the project, we hope that the lessons from China Pathfinder will continue to help policymakers navigate a rapidly changing global economy.

Josh Lipsky
Senior Director, Atlantic Council GeoEconomics Center

Executive summary

The current cycle of China Pathfinder is coming to a close at a critical time for China’s economy. After delaying major policy moves in 2023, China announced a major slate of reforms at the long-awaited Third Plenum of the Chinese Communist Party in July 2024. It faces enormous challenges: 2023 saw lackluster growth, continued property sector woes, and growing foreign pushback against manufacturing overcapacity and the treatment of foreign firms. China’s reform experience in 2023 and its successes and failures set the stage for the new reforms.

To track Beijing’s reform efforts to date, China Pathfinder compares China’s economic system to those of market economies. Using six components of the market model financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness—we established a quantitative framework for understanding China’s progress or regression on reform. China’s outsized role in the global economy and the necessity of reform to maintain the country’s growth make this work key to understanding China’s future trajectory.

Key findings

• Compared to its own 2010 baseline, China has improved. In all of the clusters analyzed by China Pathfinder, China has narrowed the gap with the Organisation for Economic Co-operation and Development (OECD). However, further progress has been elusive, and our indicators suggest China has hit limits on convergence with the OECD. This gap will likely remain in the coming years.
• In market competition—especially seen in the presence of state-owned enterprises in the economy, but also more broadly—China is unwilling to make the concessions to the traditional role of the state in its economy necessary to achieve more durable structural reform.
• China’s progress stalled in several areas tracked by China Pathfinder. These include innovation, as China’s fiscal constraints began to have a meaningful impact on its technological and development capacity by some metrics. They also include trade, where security concerns and geopolitics (including uncertainty over data and security rules) weigh on China’s trade openness. Even as China exported more and more in 2023 and became increasingly important for marginal economic growth, services trade has been affected.
• In a narrow sense, China saw some progress in dealing with financial challenges in 2023. Beijing prevented debt emergencies in the property sector and local government financing space from triggering a general financial crisis; the resulting slowdown in credit (and cleanup) was reflected in an improvement of China’s financial system reform score. Its composite cluster score surpassed that of several OECD countries for the first time since 2020. However, such achievements are modest compared to ongoing problems: poor- quality financial intermediation, declining capital productivity, and deviations from market financial regulatory principles.
• Developed market scores continued to decline on average in several categories, including innovation and market competition (marginally). This shows some reform backsliding and a resurgence of industrial policy (and geoeconomic security policy) in the OECD, even as most countries remain well ahead of where they were in 2010.
• There are more data obstacles now to analyzing China’s economy than in 2019, including data lags and delays that hamper study and have a chilling effect on open discussion of economic problems in China. But alternative data—and a rise in frank domestic and international economic commentary—are improving these conditions.

Figure 1: 2023 annual economic benchmarks

Chapter 1: A decade of tracking China’s economic structure

How it started, how it’s going

Years of tracking China’s economic policy evolution make clear that its appetite to converge with liberal market economic norms has reached its limit in several areas. This slowing of progress is a major factor behind the developing bifurcation in global economic systems. It is directly reflected in the rise of de-risking and decoupling efforts in developed economies. Such a shift in systemic direction has deep ramifications for the world, creating challenges for liberal economic hopes and a serious macroeconomic slowdown for the citizens of China. Tracking these systemic dynamics is what China Pathfinder was created to do.

China Pathfinder was undertaken as an Atlantic Council- Rhodium Group partnership in 2021 and will complete its four-year funding cycle in the fall of 2024. China Pathfinder built on a prior program, China Dashboard, produced from 2016 to 2020 by Rhodium Group and Asia Society, tracking China’s progress toward its self-stated economic reform goals. We defined those goals in China’s own terms, as laid out at the Chinese Communist Party’s (CCP’s) Third Plenum meeting of November 2013, and analyzed in great detail in the report Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications in 2014.¹ China Dashboard measured China’s policy footprint benchmarked against where it was in 2013 to document whether Beijing was successful at “making the market decisive,” as it had pledged. While reforms were made in earnest from 2013 to 2015, by 2016, we observed a stall. Since 2021, the emphasis on politics over market signals in guiding the economy has been manifest, and not just as a response to the COVID-19 pandemic.

Our goal in benchmarking China against those market   economies—exemplified   by    the    members of the Organisation for Economic Co-operation and Development (OECD)—has always been to take Beijing’s stated policy ambitions at face value and provide an independent voice to validate evidence of marketization and convergence with the norms of market economy status. In addition to its stated commitment to marketization, China’s leaders unambiguously pledged to continually improve the quality of national economic statistics for the benefit of policymaking at home and transparency for researchers, businesses, and the public in China and abroad.

The ability of China Pathfinder to forge consensus on policy adjustment in China was, by design, contingent on accurate and timely official data. Days after Chinese President Xi Jinping issued his Third Plenum reform blueprint in November 2013, his government committed to upgrading China’s statistical accounting system. Since 2021, we have continued to record assurances that that statistical system would be modernized. Official reports are common.² And yet, as of this writing, China is still using a statistical system based on the United Nations System of National Accounts 1993 framework. That is, Beijing is measuring a 2024 economy with a thirty-year-old methodology; OECD nations use the SNA2008 or equivalent and are preparing to upgrade to SNA2025. As research has shown, this has long led to a distorted estimate of economic activity in China, for instance, understating the size of the property bubble and underestimating the value of private sector service activity.³ More recently, unexplained changes to China’s method of counting trade imbalances hid hundreds of billions of dollars of growth in external surpluses during the middle year of our China Pathfinder program. These have often been buried in the appendices of the International Monetary Fund’s (IMF’s) consultations with Chinese officials.⁴

While we hoped for statistical upgrading, we built China Pathfinder to make do with existing data standards. Unfortunately, that turned out to be overly optimistic. Four problems have arisen to frustrate our methodological game plan. First, over the past four years, several data series we’ve relied on have ceased to be available or have undergone significant changes. These include several published by the OECD and the IMF. Second, the time lags of many of the data series have gotten longer. Third, many data that remain available have shown increasing inconsistencies with other evidence or have been revised without explanation. Fourth, as a result of the preceding realities, rather than setting our methodology at the start of this four-year project and applying it consistently throughout (which best practice requires), we have had to scramble for want of basic data, often late in production cycles, to come up with workarounds for missing information. The risk of distortion has risen as we have had to be increasingly creative to fill these data gaps.

Yet, despite challenges, our goal of objective analysis of China’s economy has not wavered. Each year we have noted workarounds and corrections in footnotes and methodological notes. We discuss 2023 updates later in this chapter. We also discuss the next evolution of China Pathfinder in the conclusions of this report.

Four-year conclusions and 2024 annual findings

On net, we believe the insights gleaned through the China Pathfinder Project have justified our methodological approach. Indeed, limitations of our research design as we reach the end of the project’s lifespan are themselves an important takeaway, and the difficulty of accurately assessing China’s progress is, in part, an indication of its status. The developed markets grouping, by definition, can be evaluated on a common statistical basis, and data quality concerns are not generally an issue. The emerging markets world—a much larger set—is frequently characterized by less reliable data and questions about the reliability of statistics. There are wider margins of error around EM performance estimates, and higher risk is attached to dealing with these economies accordingly.

At the start of the China Pathfinder Project just four years ago, there was a broad consensus that China was on the cusp of inclusion in the developed market cohort. Global portfolio indices recommended a growing allocation to China, and most businesspeople believed significant diversification from China—let alone more draconian “decoupling”—was impossible given the logic of continued engagement. In the brief period since then, the world’s largest money managers have asked whether China is “uninvestable.”⁵ Over the life of China Pathfinder, the value of China plus Hong Kong equities has fallen by $5.1 trillion, and the value of property assets has fallen by about $7 trillion. The sum of these losses constitutes almost 70 percent of China’s gross domestic product (GDP).

For our four-year assessment of China’s economic trajectory, we observe that all (six out of six) dimensions of market economy policy norms have seen narrowing gaps with our OECD benchmark since 2010, using our combination of original and replacement indicators. In at least two of these clusters, the change has as much to do with the OECD’s movement downward as China’s improvement. This reflects how the role of the state is now in flux in high-income economies, too, as appetites for industrial policy grow. These score outcomes based on changes in our indicators largely accord with a common-sense diagnosis of what has happened in the world economy, where post-COVID-19-pandemic policies have given way to increasing economic and geoeconomic competition.

The foremost conclusion we take from these results is that the gulf between China’s economic system and those of open market economies, while narrower than in 2010 and 2020, will remain for years to come. Four years of tracking China’s progress has made it clear that its reform trajectory has plateaued in several areas, adding to mounting evidence of the developing bifurcation in global economic systems. Growing partial decoupling efforts by liberal market economies in recent years are a recognition of this state of affairs. These developments have deep ramifications for nations built on liberal economic foundations.

Not all economic interactions with China are harmful to the interests of developed market economies. A systemic bifurcation does not necessarily mean countries cannot engage in mutually beneficial interactions. However, open market economies need to comprehensively review how to manage this partial decoupling. Such efforts may be contingent upon changes in China’s economy, but the burden of adjustment is on Beijing.

Our final annual net assessment on the six market economy dimensions is detailed in Chapter 2. Three cross-cutting takeaways for the year (the 2023 data year) stand out. First, China saw backsliding away from open economy norms on balance across our benchmarks. Since 2010, there has been marked improvement across most of our indicators to China’s credit. However, these gains appear to have wavered in 2023, with half of our benchmark indicators witnessing slight regression in 2023 compared to the previous year. There are some bright spots in 2023, but the few optimistic trends are overshadowed by the far larger number of benchmarks that have reversed course. In some areas, such as market competition, China remains a stark outlier, especially with respect to state-owned enterprise (SOE) presence in the economy. In other areas, such as innovation, China looked to be converging but was met with stalled progress.

Part of these trends are attributable to global macroeconomic dynamics. Our open economy samples all experienced mild backsliding in 2023—for example, with respect to trade intensity. However, the major source for many of these developments remains China’s policy choices themselves. As our policy year in review sections demonstrate, Beijing has doubled down on a policy direction that steers China, on net, away from open economy norms.

We would also be remiss if we did not reflect on the role COVID-19 played in outcomes over the 2021–24 period. The pandemic triggered state activism in all economies. In all six clusters in our framework, we can easily tell a story about the appropriate insertion of the state in lieu of normal market economy activity. One example can be seen in the market competition cluster, where SOE presence in several OECD economies increased after 2020 partly due to a surge of government rescue funding. Yet, we have also carefully evaluated the stated intentions of Chinese policy in the system in our qualitative quarterly China Pathfinder reviews. These have made clear that while the pandemic offered a textbook opportunity for Beijing to rebalance the growth model toward household consumption and away from systemic bias toward the supply side and more capacity creation, leaders did the opposite. This has clearly widened the gap with OECD notions of compatibility.

The China Pathfinder indicators also illustrate how the flows of goods, services, and capital are becoming increasingly strained. China’s portfolio and direct investment benchmark indicators both declined in 2023 after making moderate progress since 2010. Services trade intensity declined, and the services trade restrictiveness index for China worsened slightly. Intellectual property (IP) protection remains a large issue for firms operating in China, reducing incentives for direct investment. Unequal treatment of foreign firms and other problematic market competition dynamics compound these concerns. Overall, the only flow left redeeming the Chinese economy is trade in goods intensity, which saw another increase, consistent with its long-term trend. This is emblematic of an economy that is overly reliant on exports as the last remaining source of reliable growth. At the same time, Germany and Japan within our comparison group have also variously leaned on exports during their economic history; neither has concurrently faced comparable pressures across other financial and trade flows.

Lastly, the outsized role played by the CCP in the economy continues to be a major obstacle to China’s convergence with open market norms. In Chapter 2, we point out in several sections how the CCP continues to influence the economy unduly. Some of these dynamics are intangible or unquantifiable in our framework. The CCP’s reach into the private sector continues apace, with few signs of slowing down, affecting corporate governance and distorting what would otherwise be market-driven innovation and competition dynamics. Many of our benchmarks, however, do underscore these points. On SOE presence in the economy, China is a far outlier amongst the countries under study. Until the state retreats from its influential, structural position, it will be difficult for China to fully converge with open market economy norms in many of our cluster areas.

In Chapter 3, we return to these and other broader conclusions drawn from across the China Pathfinder Project’s lifespan.

China Pathfinder data and analytic methodology: Updates for 2024

As stated in our inaugural 2021 report, the goal of China Pathfinder is to objectively assess China’s structural economic reform progress in order to promote consensus on where China stands in relation to advanced market economies. We do this with an evaluation framework reliant on data collection, synthesis, and analysis. We draw from many sources and series published by governments, international organizations, and nongovernmental organizations, as well as our own proprietary efforts. The quantitative findings in our reports have tracked the qualitative policy scene closely each year.

Our framework evaluates China’s convergence with market economy norms across six clusters covering both domestic and foreign-facing features of China’s economic system (Table 11). The domestic dimensions include China’s financial system development, market competition policies, and innovation system, while the external clusters include trade, direct investment, and portfolio investment openness. Each cluster is tracked with annual benchmark indicators—readily available data series with cross-country coverage that capture the essence of that dimension. A composite score for each cluster is also calculated by taking the simple average of each benchmark indicator to produce an overview of China’s annual trends.

There are aspects of China’s economy that are not easy to compare with other countries. We recognize the importance of addressing these characteristics and thus include supplemental indicators, which inform our conclusions but do not contribute to the annual composite scores. The final component of our framework is a qualitative review of policy changes in each cluster. Throughout the year, China Pathfinder publishes quarterly updates highlighting major developments and making qualitative judgments on movements closer or further from market economy norms. This annual report synthesizes these updates in Chapter 2, adding nuance to our benchmarks and helping clarify how scoring changes manifest in China’s politics and economics.

We have sought to establish a rigorous and consistent methodology with the China Pathfinder framework. By maintaining a similar approach year after year, we have been able to identify trends in China’s economic reform. Over the project’s lifespan, however, we have had to accept some methodological updates. With each successive report, we have made adjustments while preserving the basic approach. For example, in 2022, we began including 2010 baselines not only for China but also for each OECD country in our sample. The largest change to our methodology came in 2023 when we adopted a new min-max methodology that calculated relative scores for countries drawing from all data in the scope of our analysis. For the 2024 edition, we have elected to carry forward our methodology with no major revisions. Additional improvements would add marginally to precision but at the cost of increased complexity and decreased accessibility. One of the primary goals of our research design was to provide quantitative measures that are rigorous but also accessible to non-economic experts.

While our analytic methodology has seen no change this year, there have been significant changes in data availability, which has become increasingly challenging for the framework. At the outset of this project, we attempted to hedge against this issue by making data availability and consistency key criteria for inclusion in our annual benchmark indicators (the most important data series that feed into our composite scores). Indicators were selected based on whether they correlate with and are essential for openness and market orientation, are consistently available for both China and comparators, have a limited time lag of six months maximum, and are straightforward enough for a broad audience to understand. Many indicators now fail the timeliness and consistency criteria. In the 2024 edition, we encountered availability issues in almost a third (ten out of twenty-nine) of our foundational data series, a marked uptick from previous years. For example, the OECD’s FDI Openness Index, IMF’s Financial Institutions Depth Index and Financial Markets Access Index, and World Integrated Trade Solution (WITS) tariff rates, all key indicators used in our cross- country comparison, are missing current-year data for 2023 as of the time of publication.

Moreover, gaps are unevenly distributed across the clusters, magnifying the problem. Portfolio investment and direct investment openness both lack data in 2023 for half of their constituent benchmark indicators, requiring us to seek alternatives. While some indicators are no longer published, others have faced increasing time delays in their publication that make their inclusion unfeasible with the cadence of our annual analysis. This is not to mention data quality concerns, such as those noted in the trade balance statistics above.

To be sure, data drop-off is an issue with any long- running research initiative. To its credit, the immense number of hours devoted to stress testing and the evaluation of our expertise and analytic procedure early on in this project’s life cycle has paid large dividends. For example, pandemic-related disruptions to our data retrieval were minimal. However, as more data series have become unavailable, we are left with difficult choices. We must balance methodological consistency against using alternative data that speaks to the questions at hand. In the latest cycle, the gulf between these two priorities has widened. Assessing China’s progression has forced us to veer further from our original data sources. This is acceptable for an intra- year comparison and benchmark, but it adds greater unreliability to cross-year comparisons. Because the focus of the project is first and foremost on tracking China’s evolution, this presents, in our view, severe obstacles.

The options for addressing all this are imperfect. The choices for gap-filling include:

1. Carry forward the prior year’s data. This reduces or discounts the potential magnitude of change in the cluster.
2. Impute or splice the data by applying some form of average growth rates, across countries within a year or across countries across years. This risks missing surprising forward or backward movements.
3. Draw from alternative data sources that speak to the same underlying issue. This introduces comparability issues across years.
4. Reconstruct missing data indicators. This requires the availability of methodological documentation and additional data series relied upon to construct the indicator, neither of which are always readily available.

For our analysis in this report, we combine these solutions to address data gaps. A consistent principle adopted in China Pathfinder is transparency. To that end, we make clear in each subsection of Chapter 2 the data complications we had and what procedure we adopted as a remedy. Additionally, we put great effort into caveating our conclusions as appropriate. In some instances, the quantitative results present contradictory or surprising findings. We offer a qualified interpretation of these results based on our domain expertise.

As China Pathfinder comes to a close, the data issues outlined here are to be expected. Many would be obviated if China adopted the same data transparency and publication standards as OECD nations. Absent this, however, we believe that our efforts at objectivity, consistency, and rigor provide the next-best solution. The analytic methodology has proven robust, if imperfect, and offers lessons for future research on competing economic systems—lessons that will be carried forward, hopefully, in future China Pathfinder phases.

Remainder of the report

In the next chapter, we address each of our cluster issue areas. Following that, in Chapter 3, we summarize significant takeaways drawn from specific clusters and build on them to offer cross-cutting conclusions about the past year based on the evidence we collected. Since this is the final edition of this series, we also share lessons learned and principles for success based on our experience analyzing China’s economic system today and over the past four years. Finally, we preview our ideas for a next-generation China Pathfinder 2.0 design and refresh our mission statement for the kind of public policy research we believe will serve the interests of people and policymakers in the advanced economies, China, and the wider emerging world alike.

Table 1: Summary of China Pathfinder clusters and indicators, 2024

Chapter 2: Historical baseline and 2023 stocktaking

In this chapter, we review each of our six clusters in detail. We define each cluster and its relevance to a market-oriented economy. This provides a framework for how we selected indicators and why they are a fair proxy of that particular area of economic performance. The next section outlines each indicator and its corresponding methodology, followed by an analysis of the 2023 data findings for China and open market economies. The individual indicator stocktaking leads to our overall composite score results, where we assess countries’ relative performance and interesting trends for 2010, 2020, 2021, 2022, and 2023. The six sections of this chapter each conclude with a review of the major policies enacted and other relevant developments that occurred in China in 2023.

2.1 Financial system development

Figure 2.1: Composite index: Financial system development, 2023

Definition and relevance

Open market economies rely on modern financial systems to efficiently price risk and allocate capital.⁶ Key pillars of modern financial systems are generally market-driven credit pricing, the availability of a broad range of financial instruments, the absence of distortive administrative controls on credit price and quantity, and access for foreign firms to financial services and foreign exchange markets.

2023 stocktaking: How does China stack up?

In 2023, China’s financial system development score improved over both its 2022 score and its 2010 baseline. However, it continued to lag behind the OECD average in 2023. There were improvements in several indicators, including the efficiency of credit pricing and financial market access. China’s stock market capitalization as a share of GDP also saw improvements, though it was distorted by the slowdown in GDP growth between 2022 and 2023. China continues to maintain a high degree of state ownership in the financial sector compared to OECD economies.

In calculating this score, we chose the following annual indicators to benchmark China’s financial system development against that of open market economies.

Efficient pricing of credit

We use the absolute value difference between the average borrowing rates for nonfinancial corporations and projected GDP growth as a proxy for efficient pricing of credit. In an efficient financial system, the cost of capital (the average interest rate) should roughly mirror the expected return (for which we use the projected GDP growth rate). Countries with efficient credit pricing will be close to zero in our chart.

In 2010, China’s projected growth rate far exceeded the real interest rate for corporate borrowers, effectively subsidizing producers and punishing savers.⁷ In 2023, a combination of tightening credit markets, a sharp slowdown in growth, and China’s slowing economic growth—which have both affected new credit and reduced inflation-adjusted interest rates—has seen the gap narrow in our sample. China’s score for credit pricing has thus significantly improved and now exceeds both the OECD average and the United States’, reaching over 9.0 points in 2023.

As we noted in 2022, in many open economies, high inflation rates outpaced produced a negative real cost of borrowing. Lower growth (with the exception of the United States) and high interest rates in developed markets saw the gap between the two converge across the OECD scores in 2023.

Direct financing

The extent of direct financing in an economy reflects firms’ ability to borrow directly from the market instead of going through banks and other intermediaries. We include two measures of direct financing: stock market capitalization as a share of GDP and outstanding non- government debt securities as a share of GDP.

China’s stock market capitalization-to-GDP ratio does exceed that of Italy, Germany, and Spain, though it trails behind the OECD average and far behind the United States. Denominator effects are partially at play, given China’s growth slowdown in 2022 and 2023. However, even though credit growth was sluggish last year, growing debt finance helped China surpass all countries in our sample except for South Korea and the United States. Equity finance via the stock market continued to increase as a share of GDP, though China remains well behind most of the OECD.

State ownership in top ten financial institutions

We again deploy our own composite indicator, looking at the degree of state ownership in the country’s top ten financial institutions by market capitalization. For each country, we look at the proportion of each institution’s public stock owned by the government. We then weigh the results according to each institution’s market capitalization.

The high degree of state participation in China’s financial institutions remains a core systemic difference between China’s financial system and that of open economies. China’s weighted average of government ownership of financial institutions has improved in comparison to when it stood at 47 percent in 2010. However, it has stagnated at 39 to 40 percent from 2021 to 2023. Simultaneously, the OECD weighted average has remained around 3 to 4 percent over the same period. South Korea’s government ownership share is the only other rate exceeding 10 percent. South Korea’s share has not significantly improved from 2010 levels, standing at 18 percent in 2023, yet remains markedly ahead of China.

Financial institutions depth

Previous reports deployed a financial institutions depth indicator compiled by the IMF as a proxy for overall financial system sophistication. However, that indicator ceased updates in 2021. To compensate, we deploy our own composite indicator using the IMF’s methodology and alternative data series with more recent data available for 2023.⁸ We use this index to generate updated baseline scores for 2010 and 2023. Because they draw on alternative data streams, they are not directly comparable with the previous IMF scores. However, the new index shows similar country ranks and direction of change since 2010.

China’s performance on the composite depth index still lagged behind the OECD average in 2023. However, China’s score markedly improved from 2010 (by 0.9). While it previously ranked just behind Spain and Italy in financial institutional depth, China surpassed those countries last year. This is due (in part) to declining private credit and insurance premium volumes in those countries in 2023.

Financial markets access

As with the above, the IMF’s financial markets access indicator is no longer published, requiring us to deploy our own composite indicator based on existing methodology. While the old IMF indicator utilized data on the number of bond issuers per capita, our indicator deploys data on overall corporate debt volume per one hundred thousand adults. It preserves the use of a second input series, the percentage of market capitalization outside of the top ten largest companies, to proxy access to stock markets.

As with the financial system depth indicator, in 2023, China performed better than the lower-performing OECD economies of Italy and Spain. China has also shown substantial improvement since 2010. China’s score reflects the rapid expansion of its bond markets since 2010. China’s score would likely decrease if our indicator utilized data on issuers rather than the value of issued bonds.

Composite score

Blending our annual indicators, our Financial System Development Composite Index puts China at 4.4 in 2023, a notable improvement over its score of 3.5 in 2022.⁹ All OECD countries improved from the previous year except for Japan, which saw a very small technical decrease (less than 0.1 points). Thus, China’s score surpassed Italy and Spain for the first time; until 2022, China consistently scored the lowest among all in- country samples. This reflects nascent improvement in China’s credit allocation, under deleveraging policies and amidst the collapse of its property sector, which caused lenders to pull back on new credit.

Our composite scoring captures major movements in China’s performance using indicators comparable across economies. In addition to these benchmark indicators, we also track relevant policy signals germane to financial system development and monitor several additional higher-frequency or China- specific indicators. These policies are detailed below, and Figure 23 presents a selected number of these supplemental data points, including the pace of credit growth in the Chinese economy; the distribution of credit to consumers, the private sector, and SOEs; the distribution of Chinese bond ratings; interest rates for savers; and exchange rate dynamics.

A year in review: China’s 2023 financial system policies and developments

In 2023, the Chinese government focused on mitigating the outcomes of domestic financial system stress— including a loss of domestic and foreign business confidence—rather than core structural issues.

Mounting local government debt continued to weigh on financial stability. Calling on a playbook of measures to deal with the property sector, weaker growth, and local government financing vehicle (LGFV) debt in 2014–15, the central government initiated a debt refinancing policy package that would offer extensions and rate cuts on LGFV debt.¹⁰ The midyear budget revision increased central government bond issuance by RMB 1 trillion, with RMB 500 billion to be disbursed in 2023.¹¹ The People’s Bank of China (PBOC) also increased the pledged supplementary lending quota by RMB 500 billion at the end of 2023 to support policy loans for housing projects, urban revitalization, and public infrastructure. Of that, RMB 99.4 billion in lending was extended by year-end.¹² These measures provide LGFVs a solvency reprieve without addressing the underlying causes of liquidity constraints, perpetuating systemic moral hazard by allowing LGFVs to maintain unsustainable debt positions and increasing the risk of zombie enterprises. These measures also burden financial institutions with fulfilling state policy priorities at the expense of profit maximization.

On the other hand, several market-oriented measures eased local government access to listing SOEs on the stock market. These developments included the rollout of a new registration-based system for initial public offerings (IPOs), which replaced a system that required approval from the securities regulator, and the relaxing of some hard requirements on profitability and other financial ratios, making it easier for SOEs to qualify for listings.¹³ SOEs are valuable local government assets. Sales can assist in the repayment of local debt.

Throughout the year, the Central Commission for Discipline Inspection’s ongoing anti-corruption campaign in the financial sector and crackdowns on financial sector wages were a continued constraint on market forces. The heightened insecurity caused by crackdowns is likely to make loan officers more conservative and perpetuate pressures to lend to SOEs over private sector actors. There was also little progress on implementing government promises to improve market conditions for the private sector, including improvements to private enterprises’ credit conditions and increased investment in the private sector.

Market reforms for foreign players were slightly more promising. In June, the State Council rolled out new pilot measures for six of China’s twenty-one free trade zones (FTZs) and free trade ports, which included several actions opening the financial sector.¹⁴ However, the impacts of the new regulations on the business operating environment will likely take time to manifest. Revisions were made to speed up the processing of investment remittances (e.g., dividends, capital gains, etc.) and to allow individuals and companies to use overseas financial services. The new measures also promise that the government will not be permitted to ask for the source code of any software imported and distributed within the six FTZs.

Figure 2.2: Annual indicators: Financial system development (2023*)

2.2 Market competition

Figure 2.4: Composite index: Market competition, 2023

Definition and relevance

Market economies rely on a pro-competitive environment where firms face low entry and exit barriers, market power abuses are disciplined, consumer interests are prioritized, and government participation in the marketplace is limited and governed by clear principles. These dynamics are important to the overall development of an economy because firms with healthy competitors have a greater incentive to innovate and improve productivity. This adds diversity to the market and promotes higher-quality growth.

2023 stocktaking: How does China stack up?

In 2023, China’s market competition score remained mostly unchanged compared to 2022. Persistent problems continue to hinder fair competition in the Chinese economy. The rule of law is still exceedingly weak, and SOEs and other government-controlled or influenced firms continue to have an outsized presence amongst the largest listed firms by market capitalization. While China does have a lower market concentration score than OECD economies, it is excessively low and indicative of other problems in the Chinese economy, such as interprovincial barriers to commercial activity. To its credit, China has not backslid as far as open economies have on several measures in recent years, but it remains far behind those economies on average.

We chose the following annual indicators to benchmark China’s market competition against open market economies.

Market concentration

We measure overall market concentration across all industries using the top five listed companies’ revenue as a share of total industry revenue. The higher the proportion of total revenue the five firms constitute, the more concentrated the industry. The indicator is a simple average of the calculated proportions from eleven industries: communications, consumer discretionary, consumer staples, energy, financials, healthcare, industrials, materials, real estate, technology, and utilities. The industry categorization is consistent across all countries in the sample. For countries with industries comprising less than fifty listed companies, we use the top 10 percent of the total firms in the industry instead of the top five. The indicator was constructed using data from Bloomberg.

Similar to our scoring for China in 2022, China’s economy remained relatively less concentrated than economies in our OECD sample. Our benchmark indicator of concentration decreased marginally from 38.4 percent to 38.2 percent between 2022 and 2023. This is a substantial decrease from China’s baseline measure of 55.7 percent in 2010. By contrast, the open market economy average became slightly more concentrated this year, increasing from 61 percent to 61.6 percent. Canada and France had the largest increases, adding about 5 percent industry concentration, while Germany and Canada decreased by about 5 percent.

Lower market concentration in China should be interpreted carefully, however, as excessively high and abnormally low levels of market concentration may be indicative of problems in the economy. China’s low score on market concentration is mostly the result of structural issues, whereby interprovincial barriers and local government support artificially suppress rates of firms’ market exit. Indeed, the percentage of loss-making firms continues to rise across numerous industries. Where we might expect to see some industries become increasingly concentrated, state intervention is instead enabling fragmentation in the economy. Conversely, a smaller number of industries, such as transportation and energy, are highly concentrated as the state exercises monopoly rights.

SOE presence in the top ten firms

One important determinant of market competition is the role of SOEs in the economy. Our indicator for this area is calculated by summing the market capitalization of SOEs in the top ten firms within each industry and dividing it by the total market capitalization of the top ten firms by market capitalization within each industry. This ratio is then averaged across industries to arrive at our measure of SOE presence. This procedure remedies an issue in earlier editions of China Pathfinder, where the massive assets held by Chinese SOEs compared to their counterparts in OECD economies were insufficiently reflected in the benchmark. The process is repeated for the eleven industries listed in the market concentration indicator description.

Government ownership disclosures reported by companies in market economies capture the extent of state ownership more reliably. For these countries, a company was considered an SOE if the government owned 50 percent or more of its shares. However, many Chinese SOEs’ largest shareholders are not clear-cut government entities such as the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council or Ministry of Finance. The team used firm-reported ownership information from WIND supplemented with Chinese-language reporting to conduct outside research on Chinese companies, determining whether a company counted any of the following governmental entities as a key shareholder:

1. other SOEs
2. the Central Huijin Investment Co. (a state-owned investment company); or
3. The Hong Kong Securities Clearing Company (of which the Hong Kong government is the largest shareholder).

This supplemented the results offered in firm disclosures accessed via Bloomberg. As with prior years, the role of SOEs in China’s economy continues to be a key differentiating factor. In 2023, SOEs comprised 65.4 percent of the top ten firms’ market capitalization across industries. This represents a 14.5 percent increase over 2022’s measure, which was a 30 percent increase over 2021’s. It also increased over the 2010 benchmark, which stood at 53.6 percent. In contrast, open economies SOEs’ presence has been consistently smaller in open economies, with only Italy, France, and South Korea showing more than a couple of percentage points of state presence over the entire study period (and France, as of 2024, scored <0.5 percent). Even Italy, the economy with the largest SOE presence in the top ten firms at 12.6 percent in 2024, does not even remotely approach China’s score.

Overall, rather than show convergence with OECD market norms on the role of the state in the economy, China continues to trend in the opposite direction. As the private sector becomes increasingly marginalized, SOEs will continue to play an outsized role in China’s economy, at least in the near to medium term.

Foreign direct investment restrictiveness

Openness to competition from foreign companies is a characteristic of open market economies. To benchmark this characteristic, China Pathfinder has to date relied upon the OECD’s FDI Regulatory Restrictiveness Index, an established indicator that measures how open an economy is to foreign competition.¹⁵ However, this data series is no longer maintained, with the last update made in 2022 (covering policies and practices of countries in 2021). For our calculations, we carry forward the latest entry in this data series. China scores 0.73 on this index, which ranges from zero (most restrictive) to one (least restrictive). The open market economy average is, by comparison, 0.92. While China has improved notably over its 2010 baseline of 0.53, the latest update to this series leaves it far below its market economy counterparts. Indeed, discrimination against foreign firms remains a large problem in China, with continuing complaints from foreign companies regarding forced technology transfers, unequal access to procurement, and little progress on easing the Negative List for foreign investment.

Rule of law

Another key ingredient for a competitive marketplace is the fair and impartial enforcement of rules. The World Bank’s Rule of Law Index captures the extent to which actors have confidence in the law, including elements such as the quality of contract enforcement, property rights, and the courts. Our adjusted index ranges from zero to five, with lower values representing less rule- of-law-based governance. On this indicator, China lags far behind its open economy peers. The update to this year’s metric saw China remain around 2.5. The open economy average regressed very slightly from 3.8 to 3.7. China has made little progress on this indicator over its 2010 benchmark, especially compared to its progress on many other indicators.

Composite score

On balance, China experienced mild backsliding in our Market Competition Composite Index from 4.3 in 2022 to 4.2 in 2023. In comparison, the score for our sample of open market economies also declined marginally from 7.31 to 7.22 over the same period (Figure 25).

While China’s score has improved greatly since 2010 (where it scored a 1.7), it appears that further progress on market competition has stalled. Excluding the data with no new updates for 2023, China backslid on every other benchmark indicator this year (market concentration, SOE presence, and rule of law). While there are segments of the economy that exhibit true competitiveness and have robust market dynamics, overall, China’s economy falls far short of open economy norms. The primary issue is the role of the state in reducing market competitive dynamics. SOEs have monopolies in numerous sectors, government subsidies and interprovincial barriers sustain firms that would otherwise fail, and the reach of the CCP into corporate affairs subverts the rule of law.

While the magnitude of decline on average in our market economy sample was roughly equivalent to that of China’s, these economies have, overall, sustained a much higher level of market competitive dynamics year over year; the average for open economies in 2010 was 7.5, close to their 2023 score. Overall, our quantitative indicators show that China is not on track to close the gap with OECD countries. Moreover, these quantitative indicators only capture market competition in part. Dynamics such as informal barriers to market participation (discrimination in procurement against foreign and private companies), uneven access to industrial policies amongst firms, and the influence of the CCP in corporate governance via grassroots party organization and administrative guidance can’t be adequately quantified by the currently available data, but complement the picture painted by our benchmarks.

To help address these gaps, we track policy developments in 2023 below and present a number of alternative indicators. These include more granular measures of state ownership in the Chinese economy.¹⁶

A year in review: China’s 2023 market competition policies and developments

Overall, policy trends in 2023 reinforced the backsliding found in our quantitative indicator. In 2013, Chinese President Xi Jinping emphasized the importance of market mechanisms in guiding resource allocation. Over a decade later, such aspirations have yet to achieve their full potential, and the role of the state in the economy is resurgent. Combined with arbitrary, stringent regulations and a pervasive focus on national security, this left a pessimistic outlook for both the domestic and foreign business communities.

Several pieces of legislation posed heightened challenges for business operations in China in 2023, especially for foreign firms. For example, the Cyberspace Administration of China (CAC) finalized the Cross-border Transfer of Personal Information Standard Contract, which included many provisions that were ultimately stricter than what had been proposed in working drafts. It introduced additional measures enforcing stricter alignment of any cross- border transfer agreement with that of the Standard Contract and heightened the requirement of monitoring by Chinese authorities of foreign recipients of personal information. For foreign companies, especially those in financial services and technology, these rules pose steep barriers to their operations and cause essentially discriminatory treatment in the domestic market.

Similarly, China’s Anti-Espionage Law received an amendment and went into effect in the middle of 2023. It was widely noted to be ambiguous in its formulation, with new language added broadening the scope of potential espionage targets to include “all documents, data, materials, and articles” related to national security interests.¹⁷ Because “national security interests” as a term is ill defined and potentially expansive, foreign companies have feared that these rules could be applied arbitrarily. Such worries built off a series of raids on foreign consulting groups, including Mintz Group, Capvision, and Bain & Company, where staff were detained for questioning.¹⁸ A large fine was additionally levied on Deloitte for allegedly failing to perform its duties adequately in auditing China Huarong Asset Management Company.¹⁹ Lastly, Chinese regulators directed SOEs and publicly traded domestic firms to heighten scrutiny when hiring foreign accounting firms, which has further restricted the ability of auditors to independently assess Chinese company data. These events highlight the tighter supervision of data, especially sensitive economic data, by Beijing and have disproportionately affected foreign firms.

There were some improvements in the policy environment in the latter half of 2023. The State Council sought public comments on several issues concerning private sector investment, such as market entry barriers, unfair competition, and arbitrary fines. There was a recognition by officials that further guidance and potential easing of cross-border data transfers would be forthcoming, but that has yet to materialize. The CAC hinted that some personal information involved in routine commercial activities, such as cross-border shopping, may be exempt from security assessments.

Ultimately, however, optimism for improvements faded as meaningful changes failed to materialize. Firms, especially foreign ones, have been left facing more uncertainty. Clarifying regulations and standards and ensuring the equal treatment of foreign versus domestic and state versus private firms would do much to repair the loss of confidence in the business community in 2023.

Figure 2.5: Annual indicators: Market competition (2023*)

2.3 Modern innovation system

Figure 2.7: Composite index: Modern innovation system, 2023

Definition and relevance

Market economies rely on innovation to drive competition, increase productivity, and create wealth. Innovation system designs vary across countries. However, market economies generally employ systems that rely on government funding for basic research but emphasize private sector investment, encourage the commercial application of knowledge   through the strong protection of IP rights, and encourage collaboration with and participation of foreign firms and researchers, except in defense-relevant technologies.

2023 stocktaking: How does China stack up?

China’s innovation system reform efforts in 2023 were similar to those in the previous year, lagging many of the developed economies in the sample. China’s IP was less attractive globally and fewer high-quality patents were filed by Chinese entities. Increases in OECD spending on research and development (R&D) outpaced that of China’s, as well, though China performed marginally better in securing venture capital (VC) spending than comparable economies. In general, we evaluate that progress in reforming the innovation system has stagnated.

We chose the following annual indicators (also used in previous China Pathfinder reports) to benchmark China’s track record against open market economies in terms of a modern innovation system.

National spending on research and development

R&D expenditures as a percentage share of GDP measure R&D spending relative to comprehensive economic activity across the economies in our sample.

China’s R&D expenditure as a share of GDP has steadily increased from 1.7 in 2010 to 2.55 in 2022, as expected of countries moving toward innovation- driven economic growth. At 2.55 percent, China’s share significantly converged toward the OECD average of 2.64 in 2022. However, in 2023, China’s funding ratio stagnated at its 2022 level, while the OECD average marginally increased to 2.67. While spending on R&D and innovation is likely to remain a high priority for China’s central and local governments, as articulated in high-level policy documents, the need for increased spending for social welfare—for example, on pensions and health care—due to an aging population, alongside stagnating growth prospects and local government fiscal debt burdens, is straining the fiscal space available to continue increasing funding for R&D.

Venture capital attractiveness

While recognizing the limitations of using R&D spending as a measure of innovation, we also look at VC investment as a share of GDP. VC plays a key role in innovation-driven entrepreneurship and shows the confidence of private sector investors in an economy’s ability to catalyze disruptive new technologies.²⁰

In 2023, all sampled countries experienced a decline in VC investment as a share of GDP as the global venture market took a steep downturn. According to PitchBook data, global capital invested fell to 2018–20 levels, and exit value fell to 2017 levels.²¹ The United Kingdom and the United States experienced the greatest decrease in their shares (sixty-three and thirty-eight percentage points, respectively). The OECD average fell from 50 percent in 2022 to 30 percent in 2023. While China was no exception, it fared relatively better, losing only five percentage points and dropping its share from around 40 percent to 35 percent in the same period, demonstrating significant convergence toward the OECD average. This is not as strong as China’s performance in 2021, when it stood at 67 percent, compared to an OECD average of 63 percent, but marks a significant improvement from 2022, when China’s share fell ten percentage points below the OECD average. Along with heightened geopolitical risk, a reassessment in the prioritization of investing domestically, and high federal fund rates in the United States, China’s increasingly challenging business environment for foreign capital in tech and other popular VC destinations still poses barriers for foreign firms. State investment continues to be a significant driver of VC in China through government guidance funds and other vehicles as an alternative to traditional grant funding.

Triadic patent families

As an indicator for the quality of innovation output, we use the number of triadic patent families filed, controlled for GDP. Triadic patent families are corresponding patents filed at the European Patent Office, the United States Patent and Trademark Office, and the Japan Patent Office. They are generally considered higher- quality patents and, thus, offer a better perspective than purely looking at the number of patents.

China’s total number of filed triadic patents decreased by roughly 100 in the analysis year. The number of filings by other countries either decreased (Japan, the United States, France, Germany) or increased marginally by an average of eleven patent families. Increased costs and disruptions due to the COVID-19 pandemic may have affected new patent filings in the period; China’s drop in our 2023 indicator was not as sharp as that of the United States or Japan.

International attractiveness of a nation’s intellectual property

Another proxy for a country’s innovation output quality and global relevance is the receipts for payments from abroad for the use of IP. Controlled for GDP, this indicator offers a perspective on the relative attractiveness of national IP to other nations.²² China’s improvement on this indicator in 2022 proved temporary. In 2023, IP receipts as a share of GDP decreased by more than 50 percent to 0.06 percent of GDP, while the open economy average remained roughly the same (0.6 percent of GDP).

Strength of IP protection regime

To measure the protection of IP, we use the International Intellectual Property Index provided by the US Chamber of Commerce’s Global Innovation Policy Center. The index is composed of fifty individual indicator scores that look at existing regulations and standards and their enforcement. Because the index was not launched until 2012, we use that year as our baseline. China’s performance on IP remains unchanged from the previous year, as do almost all rankings for the OECD countries in our sample.

Composite score

Our analysis has some limitations. For example, it does not include certain unique aspects of China’s economy, like the presence of SOEs in leading sectors relevant to innovation, including telecommunications, airspace, biotech, and semiconductors. Data constraints also restrict our insight into specific components of China’s innovation ecosystem, such as subsidies or government guidance funds.

In 2023, China’s score on the Modern Innovation System Composite Index remained similar to 2022 levels, at 2.5, short of the OECD average of 4. The United States, the UK, and Germany saw the largest score decreases of 0.3, 0.4, and 0.6, respectively. Poor performance on VC, patenting, and IP attractiveness depressed the OECD average score to its 2020 level of 5.6.

A year in review: China’s 2023 innovation policies and developments

The major development in innovation policy in 2023 was bureaucratic shuffling that indicates Xi and the CCP will drive the direction of China’s innovation for the foreseeable future. For one, the Ministry of Science and Technology was given a lead role in coordinating China’s R&D ecosystem. Moving forward, it will play a key part in determining the allocation of science and research-related funding. Additionally, the Central Science and Technology Commission, a CCP committee, was elevated to a policymaking role in China’s R&D ecosystem. This centralizes control of China’s innovation infrastructure even further in the hands of the CCP rather than with private actors.

Although some positive indications began   to emerge on artificial intelligence (AI) policy, they were ultimately overshadowed by state interference in market dynamics. Overly restrictive regulations on AI research and commercial activity were toned down in 2023, and four large generative AI models passed government assessments. But the state continues to anoint winners, and government-sponsored language models dominate the industry. More strident guidance on data use targets for industries and local authorities also leaves less and less room for the market to play a role, let alone a decisive one.

In 2024, the mood at innovative firms is somber. State sector damage to dynamism has been severe and will be difficult to reverse. Credible policy signals would need to convince anxious private companies, foreign businesses, and venture investors that market-driven innovation will not only be tolerated but promoted. Clear definitions and practical examples of what “important data” means in the CAC’s “toned-down” cross-border data flow regulations would encourage investment. Ongoing Chinese de-risking efforts driven by rising security pressures are also reducing room for technology transfers, hurting the innovation outlook. There are conciliatory steps Beijing could take to arrest that trend, such as tempering brash foreign policy postures, but few expect such a pivot.

Figure 2.8: Annual indicators: Modern innovation system (2023*)

2.4 Trade openness

Figure 2.10: Composite index: Trade openness, 2023

Definition and relevance

Free trade is a key feature of open market economies to facilitate specialization based on comparative advantage. We define trade openness as the cross- border flow of market-priced goods and services free from discriminatory, excessively burdensome, or restrictive measures.²³

2023 stocktaking: How does China stack up?

In 2023, China backslid heavily in its overall trade openness. China does perform well on metrics concerning trade in goods, but this is unsurprising given the economy’s reliance on exports to drive growth. Conversely, restrictions on trade in services continue to hold back China’s overall progress. To assess this, we apply the following annual indicators to benchmark China against open market economies.

Goods and services trade intensity

Our primary de facto trade openness indicators are gross two-way goods trade as a share of global two- way goods trade and gross two-way services trade as a share of global two-way services trade. This metric is often referred to as the trade openness ratio. However, a low ratio doesn’t necessarily imply restrictive policies— it can also derive from the size of a country’s economy or a non-trade-friendly geographic location.

Both indicators show that China is heavily integrated into global trade flows. Of the countries under study, China has the highest trade in goods intensity, at 11.9 percent in 2023. This is a slight increase of 3.5 percent over the previous year (11.5 percent intensity), and a 33.7 percent increase over 2010 (8.9 percent intensity).²⁴ Open market economies typically sustained lower scores and were more consistent year over year, with the exceptions of Germany and France, which had slight increases in their trade in goods intensity scores in 2023. The United States held the highest trade in goods intensity amongst our OECD sample at 10.6 percent.

Regarding services, China had a trade intensity of 5.2 percent in 2023. This is a decline over its 2022 score of 6.4 percent, though it remains an improvement over its 2010 baseline of 4.2 percent. Services trade intensity declined on average amongst our open economy sample as well, falling from an average of 4.2 percent in 2022 to 3.8 percent in 2023. The United States leads this group with a score of 10.7 percent, while most other open economies scored in the lower single-digit percentages.

Trade Barriers: Tariff Rates

We utilize official tariff rates to judge the formal barriers to trade. Our methodology employs the simple mean of most favored nation (MFN) tariff rates across all product categories. We use a simple mean instead of a weighted average because the latter is often skewed downward (goods facing high tariffs are imported less, lowering their weight in the calculation).²⁵ The MFN rate is used instead of the applied rate for data availability and comparability across countries.

As of mid-2024, the tariff rate data from the WITS have not been updated. We thus carry forward the latest available data covering 2021. China maintained a tariff rate of 5.3 percent, which is higher than our comparison market economies, though lower than in previous years. However, it is important to note that all sampled countries reduced their tariff rates over the study period. China has reduced its MFN rate to around 3 percent since 2010, down from 8.1 percent.

Restrictions on services trade

For a de jure measure for services trade openness, we rely on the OECD’s Services Trade Restrictiveness Index (STRI), which measures policy restrictions on traded services across four major sectoral categories.²⁶ These are physical, digital, and professional services and logistics, all weighted equally. Each sectoral category also contains several specific industry subindices. A lower score on the index indicates a less open policy to services trade, with scores ranging from zero to one. This index only started to provide data in 2014, so this is the earliest year for benchmark comparison.

In 2023, China’s STRI score was 0.36, slightly higher than its 2022 score of 0.35. This indicates that the services trade became more restrictive both within China (even though it has improved notably since 2010) and in comparison to our open economy sample, which averaged 0.20 in 2022 and 0.21 in 2023. The open economy scores have consistently maintained better services trade openness scores since 2014.

Restrictions on digital services trade

In previous years, China was an even greater outlier in digital services trade, a crucial subcategory of global services trade. Our research adapts the OECD’s Digital Services Trade Restrictiveness Index (DSTRI), which measures barriers that affect trade in digitally enabled services across fifty countries.²⁷ This includes infrastructure, connectivity, electronic transactions, payment systems, and IP rights. The index ranges from zero to one, with higher scores indicating a greater degree of restrictiveness. This index only started to provide data in 2014, so this is the earliest year for all countries in our sample.

In 2023, China’s DSTRI score was 0.35. This is an increase (more restrictive) over 2022’s score of 0.31. Throughout the study, China has scored higher on this benchmark than its open economy peers and has, in fact, backslid significantly from 2014. This is likely reflective of the increasing securitization and control of the digital sphere under Xi. On the other hand, OECD economies have moved little from their 2014 benchmark.

Composite score

China’s Trade Openness Composite Index score in 2023 was 4.36, a notable decline from the previous year’s score of 5.11, though still an improvement over the 2010 baseline score of 3.50 (Figure 211). The primary source of this decline was the enhanced restrictions on digital services trade. China’s DSTRI index for 2023 marked the lowest score of any country in the sample over the study period. This, combined with additional decreases in trade in services intensity and reduced service trade flows, resulted in a much lower score for China’s trade benchmark. While Canada and the United States saw decreased trade scores this year, every other open market economy in the study improved.

While we have good access to basic trade-related data, our coverage faces several shortcomings. China’s trade intensity measures are a yardstick for fairness and openness. The services trade data have flaws, including significant distortions through tourism spending and hot money flows. Also, measuring services trade, including tourism, during the pandemic years can produce skewed results. Finally, some of China’s most problematic practices—for example, nontariff barriers, informal discrimination, and exchange rate interventions—are difficult to capture through internationally comparable datasets.

To help address these shortcomings, we outline below policy developments relative to trade openness and present several supplemental indicators of China’s progress in Figure 2-12.

A year in review: China’s 2023 trade policies and developments

China’s trade openness contracted in the second half of last year, marked by increased controls. Trade dragged on GDP growth in the second half of 2023 despite surging exports in some sectors that are fueling foreign concerns about dumping and spillovers from Chinese overcapacity.

China maintains domestic subsidies and supply-side policies while decrying policy support for consumer demand as welfarism. This asymmetry leads to overcapacity, aggravating trade imbalances. Rather than acknowledge the unfair implications for producers in other nations and propose some sort of voluntary export restraints, Beijing emphasizes the decarbonization potential of its products and appeals to anxieties about global warming. Exports of electric vehicles (EVs), lithium-ion batteries, and solar products to the European Union (EU) took off in 2022 and remained high through 2023. China has also argued that its exports have a disinflationary effect on the global economy, and that countries struggling to rein in inflation should welcome China’s subsidization of its exports.²⁸

Parallel to these exports, China imposed export controls on key intermediate inputs for EV batteries, semiconductors, wind turbines, and other technologies. The curbs on graphite, germanium, gallium, and the technology used for making permanent rare earth magnets—China is the top producer globally of all of these—would make it more challenging for other countries to diversify their supply chains. The Ministry of Commerce (MOFCOM) and the Ministry of Science and Technology jointly invoked national security concerns in rolling out export controls on drones, laser radars, and technology used for making optical sensors, among other items. These measures are ostensibly in reaction to US controls on equipment exports and chips related to China’s high-end semiconductor sector.

At the end of 2023, China announced the end of tariff cuts on twelve chemical imports from Taiwan and accused Taipei of violating World Trade Organization (WTO) rules, ratcheting up restrictions on Taiwan trade just prior to Taiwan’s elections. At the same time, Chinese officials extended an olive branch on other goods, rescinding tariffs on Taiwanese grouper and Australian meat and barley.

China’s use of economic statecraft and political influence over trade policy is not likely to change soon. There is ample room for Beijing to change this impression by stepping up reporting of subsidies to the WTO or eliminating existing trade coercion measures. Specific actions that would indicate greater trade openness include moving away from the practice of raising or lowering the value-added tax, which distorts global crop markets; revising China’s decrees on food imports, which were implemented in 2022 and required the registration of all foreign food manufacturers; and publishing data on how Intellectual Property Action Plans have been enforced. This would demonstrate meaningful efforts to achieve fair and transparent trade practices outside of the more common trade opening measures that China has adopted, like adding free trade zones.

Figure 2.11: Annual indicators: Trade openness (2023*)

2.5 Direct investment openness

Figure 2.13: Composite index: Direct investment openness, 2023

Definition and relevance

Direct investment openness refers to fair, nondiscriminatory access for foreign firms to domestic markets and freedom for local companies to invest abroad without restrictions or political mandates. Direct investment openness is a key feature of open market economies that encourages   competitive   markets and facilitates the global division of labor based on comparative advantage.

2023 stocktaking: How does China stack up?

In 2023, China made little progress in improving its direct investment openness and it remains far behind open market economies. Inbound and outbound FDI continued to decline as a share of GDP. Developed economies, on the other hand, have become more open and have increased their relative inward and outward FDI in recent years. Direct investment openness is the area where China remains furthest behind its peers. We use the following annual indicators to benchmark China against open market economies in terms of direct investment openness.

FDI intensity

Our main de facto indicator for inbound direct investment is the inbound FDI intensity of the economy, which is calculated by dividing the total inbound FDI stock of an economy by its GDP. In recent years, China’s ratio of inbound FDI stock to GDP has declined from its 2010 level of 26 percent, plateauing at around 20 percent from 2021 to 2023. By contrast, the OECD average has risen more than ten percentage points, from 30 percent in 2010 to a steady 40 percent. In 2023, the United States and Canada’s inbound FDI intensity scores recovered from drops reported in 2022, increasing by eight and ten points, respectively.

Outflows are measured by outbound FDI intensity, which is calculated by dividing outward FDI stock by GDP. China’s outbound investment intensity has experienced an even greater decline than inbound investment. In 2010, China’s level of outbound investment intensity was 35 percent, which declined to around 15 percent by 2021 and remained there in 2022. In 2023, China saw a slight increase in its outbound investment intensity to 17 percent. The OECD average was at a comparable level to China’s in 2010, at 35 percent, but has steadily risen to 52 percent as of 2023, with a two percent age point increase in the past year. The UK’s rate was an exception to the OECD average increase over the past year, declining from 70 percent to 64 percent.

Direct investment restrictiveness

We built our own indicator for direct investment restrictiveness to measure de jure restrictiveness for FDI. While there is a robust body of academic work on cross-border capital controls, existing research was unsuitable for our purposes due to the lack of a magnitude metric,²⁹ coverage gaps, and significant time lags.³⁰ Our indicator is compiled for outflows and inflows and covers three types of restrictions: national security reviews, sectoral and operational restrictions, and repatriation requirements and other foreign exchange restrictions. The scoring is based on a proprietary framework derived from information contained in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) as well as proprietary research on national security review mechanisms and sectoral restrictions.³¹ At the time of publication, IMF AREAER data for 2023 was unavailable, and 2022 values were used in scoring.

From 2010 to 2022, every country sampled, except China, increased restrictions on inbound investment, as measured by the restrictiveness indicator. Likewise, all countries’ scores on outbound investment restrictions showed no change or increased restrictiveness since 2010, with China the only improvement. China’s heavily regulated capital controls set it far behind the OECD average as a baseline, and domestic and foreign firms are still operating in a much smaller market access window than in open economies, with reforms remaining targeted and incremental.

Composite score

In 2023, China’s score on the Direct Investment Openness Composite Index continued to improve slowly, rising from 2.1 in 2022 to 2.2, driven by growth in both inward and outward FDI stock in 2023, as well as a slight improvement in outbound restrictiveness in 2022 (carried forward to the current scoring period). Over the past four years, regulatory uncertainty and slowing economic growth prospects have changed prospects for investors who rushed in to capitalize on cheaper costs of capital and labor to build manufacturing capacity in the 2010s. China’s attempts to attract foreign investment through investment incentives and the easing of restrictions on certain sectors and special economic zones (reflected in the improvement of China’s inbound restrictions score since 2010) contributed to the slight increase in China’s inward FDI stock as a share of GDP in 2023. Despite recent discussions characterizing China’s outbound FDI in recent years as accelerating, China’s strict capital controls maintain a level of outbound investment flows that are modest for its economic size. China’s score has improved from 0 in 2010 to 0.9 in 2023, but China remains the lowest performer in the group.

However, compared to the other indices covered in China Pathfinder, there is less volatility in the change in open economies’ scores on the Direct Investment Openness Composite Index from 2010 to 2023. China’s 1.6-point score increase from 2010 to 2023 represents the strongest growth out of the sample countries. Canada comes in a close second with a 1.4-point score growth. While the average OECD score stands distinctly ahead of China’s, its improvement has been more modest, from 6.1 in 2010 to only 6.3 in 2023. The scores of several countries, including Australia, Germany, Italy, and South Korea, have declined in 2010, which has largely been driven by worsening scores on inbound and outbound investment restrictiveness.

As with other indicators, our de facto measures for direct investment openness are imperfect because they are influenced by a host of non-policy variables, such as market size, economic growth, and business cycles. Our measures for de jure restrictiveness reflect scoring judgments that are subject to a certain degree of subjectivity. We address these shortcomings below by providing a summary of major policy developments in 2023 pertaining to direct investment openness. Supplemental indicators are presented in Figure 2.15 to help provide additional context.

A year in review: China’s 2023 direct investment policies and developments

According to official data, in 2023, inbound FDI flows hit new lows. MOFCOM data recorded a 19 percent and SAFE a 78 percent year-over-year decrease in inbound FDI, with unprecedented net FDI outflows in quarterly data.³² Regulatory uncertainty under Xi, China’s changing growth prospects, and the rise of investment screening regimes and other restrictions have resulted in a slowdown in new inbound FDI flows to China since 2021. On the other hand, China’s outbound FDI intensity grew marginally, increasing by one percentage point in 2023 as outbound FDI flows increased, according to MOFCOM data. Diversification pressures and enhanced inbound investment screening regimes in Western countries and Japan have contributed to shifting Chinese outbound investment. Investments are becoming more concentrated in certain sectors while also targeting new destinations. Expanded export controls on Chinese industry are also motivating some targeted industries to expand or move production abroad. Rhodium Group research finds that China’s investment in Europe and the UK dropped to its lowest levels since 2010 and became even more heavily concentrated in the EV supply chain.³³

Over the second half of 2023, China developed several initiatives to bring back foreign investment. At the end of June, new pilot programs for six of China’s 21 free trade zones and ports were announced, with the goal of reducing trade barriers and streamlining customs procedures.³⁴ In August of 2023, the State Council released a 24-point plan to help boost inbound FDI. These measures were largely devised to restore foreign business confidence, which, after three years of the zero-COVID policy and deteriorating macroeconomic and geopolitical conditions, had reached a new low.³⁵ In November 2023, the State Council separately released a “23 Tasks” plan to boost Beijing’s services sectors, followed in December by pledges at the Central Economic Work Conference to boost foreign investment in sectors including telecommunications and medical services in 2024. Promises include several pro-market reforms such as reducing the scope of the Negative List that outlines restrictions on foreign investment in some sectors,³⁶ lifting ownership caps, and increasing opportunities for foreign private companies to participate in government procurement processes. However, the proposed reforms only apply to certain sectors, and their implementation has been limited so far. In addition, other factors, like evolving data security regulations and the lack of substantive financial system reform, continued to dampen investor sentiment toward the Chinese market.

While these reforms will increase opportunities for foreign firms, China’s application of the Anti-Espionage Law became increasingly unpredictable in 2023. State- directed raids, threats, and intimidation of foreign businesses—particularly consulting and due diligence companies—undermine efforts to preference market forces and level the playing field for foreign investors. Under the new law, bureaucratic processing times and red tape for investment approval and market research have also increased.

In 2024, foreign-invested enterprises in China are waiting to see action on promised reforms outlined at the Central   Economic   Work   Conference   and the implementation of a new data security policy. However, reforms directed toward fundamental issues contributing to heightened costs for foreign investors would be a more significant step toward opening direct investment.

Figure 2.14: Annual indicators: Direct investment openness (2023*)

2.6 Portfolio investment openness

Figure 2.16: Composite index: Portfolio investment openness, 2023

Definition and relevance

Portfolio investment openness refers to limited controls on two-way cross-border investment in equities, debt, and other financial instruments. It is a key ingredient for financial market efficiency and market-driven exchange rate adjustments in open market economies.

2023 stocktaking: How does China stack up?

China’s portfolio investment openness saw little change between 2022 and 2023. While there has been moderate improvement since 2010, China lags far behind OECD economies in liberalizing cross-border financial flows. We apply the following annual indicators to benchmark China against open market economies in terms of portfolio investment openness.

Internationalization of debt and equity markets

To measure de facto openness to portfolio investment, we calculate the sum of cross-border debt (government and corporate bonds) assets and liabilities relative to the size of the economy, as well as the sum of cross- border equity (stocks) assets and liabilities relative to the size of the economy. Assets are holdings of foreign securities by residents, and liabilities represent foreign holdings of securities issued by residents. China lags significantly behind the open-economy average in both categories.

Since 2010, China’s cross-border debt assets and liabilities as a share of GDP have increased from 3 percent to a steady 6 to 7 percent since 2020, far behind the OECD average of 83 percent. China’s equity assets and liabilities as a share of GDP have grown even slower. Standing at 8 percent in 2010, China’s share reached 13 percent in 2020 before declining over the past three years to 9 percent in 2023. In 2023, the OECD average rate of equity assets to GDP recovered from a drop in 2022, rising from 86 percent to 93 percent in 2023.

Portfolio investment restrictiveness

For a de jure perspective, we created our own Portfolio Investment Restrictiveness Indicator that captures regulatory restrictions on portfolio investment flows based on the IMF’s AREAER database and our own research. We calculate separate indices for portfolio outflow and inflow restrictiveness, assigning numerical scores based on the implementation of opening or closing measures during a given year. At the time of publication, IMF AREAER data for 2023 is unavailable and 2022 values were used in scoring.

The inward portfolio restrictiveness indicator captures rules that prevent nonresidents from purchasing bonds and equity securities locally and rules that stop residents from selling and issuing bonds and equity securities abroad. The outward portfolio restrictiveness indicator captures rules that prevent residents from purchasing foreign securities and restrictions on nonresidents selling and issuing bonds and equity securities.

Historically, China has tightly restricted short-term foreign capital inflows, allowing a select number of transactions through narrow programs such as the Qualified Foreign Institutional Investor (QFII) scheme.

Since 2010, China’s inbound restrictiveness score has improved from 0 to 2.9 in 2022. However, it trails far behind the OECD average score, which has remained around 9.3 to 9.4 since 2010. Over the past decade, several schemes such as the 2014 and 2016 Shanghai- and Shenzhen-Hong Kong Stock Connects, the 2017 Bond Connect, and the 2020 China Interbank Bond Market Direct, as well as the loosening of certain restrictions, have opened greater access to China’s markets. Yet, investment quotas and inadequate cross- border settlement infrastructure still pose major barriers for foreign investors.

Concerns about the destabilizing effect of large- scale capital outflows guide China’s caution toward liberalizing outward portfolio restrictiveness. In recent years, China has expanded connections with several international exchanges, including the UK, Swiss, and German markets, with the ongoing development of the Shenzhen-London Connect in 2023. However, households remain generally unable to invest in overseas securities, and institutional investors are constrained by special programs, such as the Qualified Domestic Investor Initiative, which is capped by SAFE. As a result, China’s outbound restriction score has only improved from 0 in 2010 to 1.7 in 2022, while the OECD score has remained around 9.5 to 9.6 since 2010.

Composite score

With limited fluctuation in China’s debt and equity assets as a share of GDP and values for investment restrictiveness carried forward from 2022, China’s Portfolio Investment Openness Composite Index score remained at 1.2 in 2023. China’s score in 2010 was zero, representing the lowest level of openness among all sampled countries across all years. The China Pathfinder normalization method captures countries’ progress or regression compared to their performance in prior years. As such, China remains far behind all other countries, with the OECD average standing at seven in 2023, but has shown a very modest improvement over the past decade.

China exercises a level of control over its capital account that is distinct from open market economies. We have seen large improvements in the ability of foreigners to access and participate in China’s markets relative to 2010 through investment programs such as the QFII, stock and bond connects, and through the raising of quotas for several programs and easing of restrictions (such as reducing the number of industries restricted from listing stocks on the Negative List for foreign investment). However, the de facto indicators of debt and equity asset and liability levels also capture fluctuations with discrete impacts from policy changes, such as market sentiment, macroeconomic dynamics, and other business environment factors, such as tax optimization and financial system designs.

We noted in 2022 how these factors impacted portfolio volume as a share of GDP data, with sizable declines for both China and OECD economies compared to 2021. In 2023, all open economies sampled showed an improvement in their scores. The average OECD score showed a slight recovery, rising from 6.9 to 7, but has  still  not  reached  2020–21  levels.  Since  2010,  the scores of all economies sampled, except the UK, have improved. The UK’s score decline is primarily driven by a dropping ratio of debt securities to GDP. On the other hand, Canada and Japan have improved market access the most, both showing significant growth in shares of debt and equity positions to GDP since 2010.

While our benchmark indicators capture major movements in China’s reform progress and allow for a standardized comparison with open market economies, we undergo a qualitative assessment of China’s policy reforms in the section below to provide greater context to China’s progress in 2023. Supplemental indicators relevant to portfolio investment openness are presented in Figure 2.18.

A year in review: China’s 2023 portfolio investment policies and developments

As part of efforts to boost economic growth in 2023, Beijing rolled out several measures that marginally opened capital markets at the beginning of the year. These steps were followed by substantial government intervention to artificially shape supply, demand, and prices in the second half of the year. State interventions sought to regulate the effects of heavy portfolio capital outflow pressures brought about by a yawning interest rate gap with the United States and other market economies and the abysmal performance of China’s stock market in 2023, the worst of major stock markets globally.

In the earlier half of the year, prior to the stock market downturn, there was marginal progress in opening portfolio investment markets in some areas. The Shenzhen and London exchanges took additional steps toward establishing the Shenzhen-London Connect, which will improve capital market connectivity. The China Securities Regulatory Commission (CSRC) also softened restrictions on the offshore listing of Chinese companies with variable interest entity structures, and a new registration-based IPO system will allow investors opportunities to invest in a wider range of companies.³⁷

In the second half of the year, government-guided security   purchases   aimed   to   stabilize   markets and assuage investor confidence as stock market performance took a steep downturn. China’s Central Huijin Investment fund purchased exchange-traded funds in October, and the China Reform Holdings Corp (another state-owned strategic investor) purchased tech-focused index funds in December. Meanwhile, the government allowed social platforms such as WeChat to direct retail investors to the stock market. Government-backed funding vehicles also acquired “golden share” stakes in Alibaba and Tencent’s local operations, allowing more government oversight of company decisions. In January, CAC was reported to have taken a 1 percent stake in an Alibaba digital media subsidiary in Guangzhou.³⁸

To regulate supply, the government raised barriers for new public offerings and introduced restrictions on trading, aiming to reduce supply volatility. The CSRC slowed the pace of IPOs and tightened restrictions on refinancing activities for underperforming listed firms. The CSRC also tightened rules on share sales by large shareholders of listed firms and increased scrutiny of program trading, later banning mutual fund managers from selling more shares than they bought daily.

China’s response to portfolio investment troubles also contained some marginal market opening. To reduce transaction costs, China halved the stamp duty on stock trading and reduced transaction handling fees submitted by brokers to the exchanges. Chinese stock exchanges also lowered margin requirements to boost investor financing.

Figure 2.17: Annual indicators: Portfolio investment openness (2023*)

Chapter 3: Conclusions and implications

The challenge to reform in China has always been its real and perceived costs. China’s policymakers and economic experts have long understood the need for economic reforms; the key question has been whether policymakers and leaders would accept and incur the consequences of short-term growth, unproductive state-owned firms, and other interests. Whether in the marquee 2013 Third Plenum reform program, the supply side capacity reduction push in 2015–16, or the financial de-risking program that peaked in 2018,³⁹ previous reform pushes aimed to alter economic principles in China. All involved facts of ceding economic leadership to the private sector, embracing foreign investment and competition, and resolving longstanding questions of fiscal capacity and domestic demand, accepting short- term disruption for long-term viability. Instead, in 2023— as since 2013—policymakers retreated when faced with costs and constraints. Increasing geostrategic competition with the United States and Europe, increasing state direction of investment, and surging support for priority sectors instead took priority. These dynamics presaged what emerged in July 2024—in an overdue meeting from 2013—during the Third Plenum of the CCP.

Stalled reform, however, does not imply that China made no progress, whether in 2023 or since 2020 when the China Pathfinder Project was launched. But these small improvements come with major caveats, and the China Pathfinder results thus point to ongoing friction between the OECD and China in the coming years.

Main findings from China Pathfinder 2024

In 2023, China’s policy reforms stalled, while OECD scores came under pressure. On net and pulling together the findings from our detailed benchmark assessment of six clusters, we make the following observations.

Beijing continued to emphasize SOEs, even as it demanded more from the private sector to meet industrial policy goals: The dominance of state firms in China’s economy continued to grow in 2023. Given China’s ambitious technological goals and urgent fiscal crisis, analysts might have predicted policy to reduce SOEs’ throw weight and empower private sector innovation. Even some targeted asset privatization might have been reasonable, generating much-needed revenue at the cost of local protectionism. Instead, the weighted average of state ownership among top firms across sectors continued to grow, reaching 65 percent; it continues to surpass 2010 levels. State ownership in China’s top financial institutions also remained above 60 percent. Several policies increased state support for SOEs in 2023. Beijing granted new tranches of LGFV stimulus in 2023 and relaxed regulations on public offerings for listing SOEs. At the same time, there were few signs of action on promised private sector reform in 2023. High-level policy directives to stimulate domestic investment in innovation, manufacturing sectors, and industrial development are calling on the private sector to take on more funding responsibility. The private sector has responded; in 2023, its stated share of R&D spending in China reached its highest rate since 2020. But it is unclear what else the government can practically, and effectively, do to fund additional innovation. Government funding is constrained, and inbound VC and FDI are deteriorating. Increasing funding for SOEs without meaningful structural reform to address existing debt troubles will expand moral hazard and pose risks to capital productivity.

Surging goods trade numbers highlight overcapacity, while services trade suffers from the impact of geostrategic and security policies: China’s exports from certain sectors increased dramatically in 2023 as overcapacity industries offloaded products elsewhere to compensate for low domestic demand. These overcapacity issues are likely to get worse. But as concerning as overcapacity is for the OECD, security and geostrategic policies in 2023 had a more dramatic impact on China’s trade openness, especially in services.

China’s 2023 exports of commercial and transport services declined by $43 billion and $59 billion, respectively, and heightened regulatory barriers restricted market access. The drop reflects the extended crackdown on technology firms, as well as data and cybersecurity restrictions that worried foreign companies. Consequently, China’s digital services trade openness score dropped below its 2010 level. That Beijing chose to reinforce security over increased services trade highlights how economic policymakers were unable to convince high-level leaders of the need (and benefits of) services engagement. Lingering effects from COVID-19 lockdowns in 2023 explain some of the decline in China’s services trade, but Beijing’s focus on security—and unwillingness to accept trade- offs between digital growth and digital control—resulted in intervention in other areas of the economy.

Innovation ratings declined in the OECD: In 2023, innovation scores across most of the OECD decreased, while China’s score showed little change from 2022. Both developments reflect financial constraints: all countries suffered from the global VC slowdown in 2023, as seen in decreased indicator scores, and high interest rates hampered access to debt financing. Funding for innovation remained a top priority for the Chinese government in 2023, and government funding did attempt to spur development during the year. However, fiscal constraints in 2023 and increased spending on areas key to social stability threaten China’s ability to subsidize and finance innovative industries and strategic sectors. Local governments are tasked with greater funding responsibilities amid a lack of substantive financial system reform to improve debt positions. Yet China was not alone, and many OECD countries also saw declines in patent output and IP attractiveness. Rising barriers to investment and trade constrain access to critical inputs, market scale, and international research collaborations, which are necessary for both Chinese and OCED economies to grow or maintain a robust innovation ecosystem.

Looking back at four years of systemic change

After four years of analysis, we can see that 2023 was not exceptional. While both China and OECD progress during the four-year period was mixed, China’s challenges during the China Pathfinder period were consistent, and structural, as certain reforms remained off the table. Based on this report and previous China Pathfinder editions, we make the following observations about China’s progress, and the challenges of interpreting data during the period.

China has shown improvement in several areas since 2020: China’s financial system reforms have expanded market depth and access along several dimensions, even as shortcomings remain. In 2022, China scored the lowest out of all sampled economies on the Financial System Development Composite Index indicator. In 2023, however, China stands ahead of Italy and Spain. Most of this movement is due to the Chinese government’s deleveraging policies in the wake of the property sector collapse, which have improved China’s credit efficiency. But significant problems remain. Despite government efforts to support stock exchange through the creation of bond and stock connect programs and the easing of restrictions on stock market access, China’s stock market continues to falter, incurring losses upwards of $6 trillion since 2021.⁴⁰ State ownership in China’s financial system, and the absence of more significant structural reforms to improve local government debt, hold China back from closing the gap with our broader sample of OECD markets. China has also improved the prioritization of innovation funding and diversity of funding sources in its economy. Since 2020, China’s score for R&D spending as a share of GDP has risen to almost meet the OECD average, bolstered by strong prioritization of R&D for central and local government funding. Diverse government funding vehicles outside of traditional grants and tax incentives provide alternative avenues to finance China’s innovation ecosystem. Private funding for innovation has also remained well above the OECD average since 2010, and China’s score has grown at a faster rate than the OECD’s through 2023. Reinvestment of profits is the largest source of R&D funding for commercial actors by value, and as China’s fiscal space becomes more constrained, commercial actors are being called on to take a greater role in R&D funding. These actors are subject to state influence as Beijing attempts to ensure that spending is directed toward government priorities. China’s performance on the Direct Investment Openness Composite Index has also shown slow but consistent improvement, though it still trails the OECD average. A gradual easing of China’s heavily restricted FDI inflows and outflows in certain sectors has improved China’s scores on FDI restrictiveness indicators.

But a lack of system-wide structural financial system reform constrains China’s ability and willingness to reform in other areas: China’s financial system has opened since 2010, and its composite benchmark score increased moderately in 2023 as credit allocation improved. Yet even China’s improved score is still lower than it was in 2020 and remains lower than all countries in our sample other than Italy and Spain. These subcomponents of China’s scores since 2020 tell the story. While their scores are higher than in 2010, financial market access and our direct financing ratio benchmarks have all decreased since 2020, reflecting deep-seated constraints on depth and efficiency of the financial system. This has impacts well beyond the financial system. A distorted financial system will continue to struggle to stimulate domestic consumption, and preferential credit will make it harder for private and foreign firms to compete. Despite its side effects, domestic credit will continue to power investment in China’s economy. Innovation goals will be more difficult to accomplish if R&D and start-up activity cannot be effectively financed. Portfolio and direct investment could fill some of this gap. But while our scoring of, for example, China’s portfolio investment openness has improved marginally since 2020, it remains far below that of all other countries in the sample (at 1.2 points compared to the next-lowest scorer, South Korea, at 5.9 points). China’s VC investment score (in the innovation cluster) did not improve significantly during the China Pathfinder study period. The absence of deep and liquid financial markets and constraints on government funding will be bottlenecks to funding a rich innovation ecosystem that allows Chinese firms to remain at the forefront of technological innovation.

The COVID-19 pandemic affected our benchmarking between 2020 and 2024 and continues to affect economic analysis today: The scores we track reflect the challenge of interpreting economic data in the wake of the COVID-19 pandemic. The first China Pathfinder report was launched in 2020, at the height of the pandemic, as markets and government policy scrambled to respond. While 2010 data provides a comparative baseline for our market sample, COVID-19 dynamics mean that the changes in scores we have observed since 2020 may be temporary adjustments enduring movements toward or away from market norms, making it harder to conclusively determine reform patterns in China and the OECD. One-off COVID effects have impacted several scores in these reports; for example, supply chain disruptions may have suppressed China’s FDI stock performance in 2021–22 and affected services trade in countries with large tourism and transport sectors. There are special challenges in disaggregating the impact of COVID-19 on China’s performance. In the years prior to the pandemic, China’s economic growth began to slow, the expansion of domestic credit began to cool, and China entered a trade war with the United States. Shortly after the onset of the pandemic, China’s property market downturn sent shockwaves through a destabilized system. Retrenchment toward familiar tools of state intervention in response to these sources of economic instability can thus be difficult to attribute to discrete pandemic effects. It may instead represent the strengthening of a persistent structural feature. However, policies such as zero-COVID are examples where China’s pandemic response may obscure longer- term trends in the prioritization of state versus market forces.

Geo-fragmentation and backsliding impact OECD scores: China isn’t the only economy backsliding on reform. OECD countries are also relapsing as trade barriers, nearshoring, and the securitization of economic interactions grow. The OECD average for both inbound and outbound investment restrictiveness has dropped below 2010 levels as of 2022, the most recent year surveyed, and digital services trade restrictiveness has remained below the 2010 benchmark for several years despite slow improvement. Restrictions on flows of investment and people, alongside supply chain fragility under geopolitical tensions, create challenges for international research exchange and access to inputs needed for cutting-edge science and technology development. In 2023, the OECD’s patent score dropped back to 2010 levels.

Beyond the framework

Beyond its quantitative results, the China Pathfinder Project has important implications for how analysts should approach China’s economy and system. In light of our past four years of work, three principles bear special mention:

First, as noted in Chapter 1, the way the world looks at China has changed radically since China Pathfinder began. Rather than assuming that China has joined (or is soon to join) the club of developed markets, global investors in 2024 now analyze China with the same principles and caution they deploy for analyzing other emerging market countries. Between equity and property assets, China has lost $15 trillion in value since 2021; for global investors, such losses require them to question whether China is even baseline investable. Answering that question requires sufficient quantitative data, as does a broader analysis of China’s economic performance, like the China Pathfinder Project. The challenges we faced with data availability, reliability, and continuity illustrate the challenges faced by any analyst of China’s economy at the aggregate level. We are not alone in our quest for reliable metrics, whether from China—where data series have been retired, rebased, or arbitrarily suppressed—or from international organizations, which face publication delays and their own priority shifts that may orphan critical data streams without notice. International investors have many reasons to worry about China’s markets, including period crackdowns on private firms, increasing geopolitical tension, and reform promise fatigue. Data unreliability is yet another plausible justification for pulling back on investment in China. Just as some analysts have turned to anecdata or qualitative approaches, in the future, any attempt to quantitatively engage with China will require muddling through.

Second, statistical data access is not the only constraint on independent researchers conducting studies like this one. Since 2020, the ability to do firsthand research and meetings has been dampened by a perfect storm of factors, including pandemic travel restrictions, pressure on Chinese officials not to interact with foreigners, and a chilling effect on economists and due diligence professionals who might otherwise publicly criticize authorities. This has damaged the overall degree of transparency and free flow of information that serves as a critical input to our framework and hampers interpretation.

Third, the China Pathfinder Project takes a targeted— but potentially too narrow—view of economic outcomes. The framework evaluates a broad set of indicators covering many facets of market economic systems. However, it does not directly compare the outputs of these systems: growth outcomes and productivity. The latter includes the concept of total factor productivity (TFP), the proportion of potential economic output that cannot be accounted for by factors like a growing labor force or more capital investment. China’s productivity has been declining for several years,⁴¹ and our evidence of partial, stagnating reforms reinforces how policy is prolonging that slowdown. Our evidence would also predict a continued decline. If these dynamics persist in coming years, whatever China’s progress in specific metrics, a wider view of China’s system as compared to other economies might need to integrate analysis of outcomes to fully address the effects of piecemeal reform.

These takeaways present a challenge for future research, but conditions are changing. For starters, despite the severe problems with the quantity and quality of Chinese data, we believe new analytic strategies can deliver answers. Alternative credit data, satellite imagery, and efforts to integrate (and rectify) mirror and partner country data offer creative researchers increasingly valuable tools. There remains a lot of value in quantitative analysis, even with a higher margin of error than we expected, and even if approaches must adapt to new data streams.

A larger takeaway, though, is that serious Chinese economists share these concerns about data, information, and productivity. As hopes of an easy post-COVID recovery have faded, these economists have become more pointed in their critique of current conditions. Academics like Zhang Bin, Huang Yiping, Yu Yongding, and others have correctly asserted the need for credible economic statistics and a clear-eyed assessment of China’s economic conditions. With time and facing as substantial an economic challenge as China currently confronts, there is some reason to hope that objective data from within China and frank discussion of that data will once again be possible in the coming years.

Looking ahead

What does the future hold, based on what we have learned in the China Pathfinder Project? We conclude with a few conjectures about that for business and policymaking. We also offer a look ahead to our research team’s next-generation ambitions, with some lessons learned for analysts.

We predict that today’s observed structural slowdown will be persistent because it is clearly rooted in divergence from market-oriented policy reorientation. In theory, market systems are more efficient than politically controlled economies, enabling them to reach a higher production possibility frontier and potential growth rate. This is also what we observe in practice. China turned toward marketization, and its growth outperformed. It is now steering toward statism, and its growth is underperforming. This trend predates the COVID-19 pandemic and survived it.

Slower macro expansion means businesses will need to fight over market share rather than count on a fast- growing pie to feed all firms. In theory, this should compel competitors to work harder to attract customers, which could drive innovation and productivity. If the government suppresses competition to avoid structural adjustment and instability, this will deplete productivity. The “lie flat” movement—a widespread disinclination to strive due to a sense of low probability of success— can be seen as a reflection of this tendency. Slower domestic growth also increases the marginal pressure to export, invest abroad, and compete for customers overseas in higher-growth opportunity markets. This is a major theme presently and one our framework suggests will become even more salient.

Shifting business expectations for the quantity and quality of China’s macroeconomic growth will also impact the political economy of business-government relations in the West. Less concerned with shielding their China operations from home government policies, firms will shift their lobbying focus from moderating strategic and commercial de-risking to advocating for trade protection, relocation subsidies, innovation incentives, and other benefits.

Political and national security policymakers in market democracies will lift their ambitions in response to this change in business sector positioning. Economic security as a subfield of economic policymaking, including industrial policy, will continue its nascent rise in importance as a result of the competitive risks and opportunities of a bifurcating global supply chain landscape. Financial officials will be greatly concerned about the risks of crises and financial spillovers due to shifting economic flows, stranded assets, and changing assumptions about supply and demand.

This is just a rough initial sketch of some of the likely repercussions of an extended slowdown of China’s economy. Whether China’s “socialist market economy” model ceases to be emulated around the world is another huge question, as is whether the liberal market approach is the default to which attention returns. The seal has been broken on industrial policy in the West, and this is likely to persist.

Another policy-level question is at the international organization level. Institutions including the IMF, the WTO, the World Bank, and even the industrialized- democracies-centered OECD largely accepted China’s variant of the economy and lauded it for its developmental achievements over the past two decades. Even today, these organizations are over- cautious about critizing China’s official economic performance narrative. Institutionally, they view their remit as challenging member data, even if staff views often differ from leadership. How these organizations function in a world focused on bifurcation and de- risking is unclear.

China Pathfinder: The next generation

Our annual and quarterly China Pathfinder reports have been read worldwide: the website is most used by users from the United States, but the second-most users are from China itself, followed by Germany, France, and the UK. As discussed at length above, a methodology dependent on official Chinese data has grown harder to employ, but the demand for an integrated perspective on China’s economy has never been higher. Thus, we intend to continue our research partnership with modifications.

As of this writing, a variety of next-generation strategies are under discussion. The principles we will carry forward are clear, though: 1) policymakers and business decision- makers are the primary audience; 2) readers find the most value in assessment of specific, real economy outcomes; 3) our decade of quantitative databasing is foundational; 4) we must maintain a systemic analysis which takes stock of political and security factors; and 5) our outputs should speak to the most pressing, current topics, rather than perennial debates. On what is topical, discussions about overcapacity, diversification, growth slowdown, and barriers to cross-border capital, information, and technology flows are illustrative.

We intend to focus less on cataloging China’s policy aspirations and more on performance outcomes. We intend to evaluate performance less with official data at the core and more based on alternative proxies that are less prone to delay and politicization. We intend to maintain objectivity and quantification while putting more weight on independent measures of economic activity at risk outside China as a function of non- market norms and interventions in China. Finally, we will continue to critique excessively protectionist policies unreasonably justified as necessary to respond to China.

Parting words

The China Pathfinder Project illustrates China’s relative progress on reform: China’s economic system looks much different than it did in 2010, even as it continues to diverge from market norms. Despite China’s stagnation or backsliding in several of the areas China Pathfinder evaluates, there is still room—and need—for managed, constructive economic engagement between China and the rest of the world. While market economies seek to de-risk from China where necessary, trade and investment in other sectors still offer mutual benefits. The global commons also presents China and the OECD with challenges that we must manage together as effectively as possible. If nothing else, China Pathfinder shows the importance of economic and policy choices. China’s past reform choices do not prevent its leaders from making different ones that can further benefit China’s growth and its people. We encourage fellow researchers in China and elsewhere to take a broad, long-term view of economic reform and all readers of China Pathfinder to engage with us on how our work can be more valuable and impactful.

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About China Pathfinder

Mission

China Pathfinder is a joint initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group that measures China’s economic system relative to advanced market economy systems. Few people, even within the circle of China experts, seem to agree about the country’s economic system, where it is headed, or what that means for the world. This initiative aims to shed light on whether the Chinese economic system is converging with or diverging from open market economies. Over the course of two decades, China has risen from the world’s sixth-largest economy, with a gross domestic product (GDP) of $1.2 trillion in 2000, to the second largest, boasting a GDP of $17.95 trillion in 2022. China now intersects with the interests of all nations, businesses, and individuals. With China’s past and future systemic choices impacting the world in both positive and negative ways, it is essential to understand its global footprint. The hope is that China Pathfinder’s approach and findings can fill in some of the missing puzzle pieces in this ongoing debate—and, in turn, inform policymakers and business leaders seeking to understand China.

Partners

The Atlantic Council is a nonpartisan organization that galvanizes US leadership and engagement worldwide, in partnership with allies and partners, to shape solutions to global challenges. By informing its network of global leaders, the Atlantic Council provides an essential forum for navigating the economic and political changes defining the twenty-first century. The Atlantic Council shapes policy choices and strategies to create a more free, secure, and prosperous world through the papers it publishes and the ideas it generates.

Rhodium Group is a leading independent research provider. Rhodium Group has one of the largest China research teams in the private sector, with a consistent track record of producing insightful and path-breaking analysis. Rhodium China provides research, data, and analytics to the private and public sectors that help clients understand and anticipate changes in China’s macroeconomy, politics, financial and investment environment, and international interactions.

Authors

This report was produced by Rhodium Group’s China team in collaboration with the Atlantic Council’s GeoEconomics Center. The principal contributors on Rhodium’s team were Daniel H. Rosen, Matthew Mingey, Charles Austin Jordan, and Laura Gormley. The principal contributors from the Atlantic Council’s GeoEconomics Center were Josh Lipsky, Jeremy Mark, Sophia Busch, and Benjamin Lenain.

Acknowledgments

The authors wish   to   acknowledge   a   superb   set of colleagues and fellow analysts who helped us strengthen the study in group review sessions and individual consultations. These individuals took the time, in their private capacity, to critique the indicators and analysis in draft form; offer suggestions, warnings, and advice; and help us to ensure that this initiative makes a meaningful contribution to public debate.

The authors also wish to acknowledge the members of the China Pathfinder Advisory Council: Steven Denning, Gary Rieschel, and Jack Wadsworth, whose partnership has made this project possible.

This report is written and published in accordance with the Atlantic Council’s intellectual independence policy. The authors are solely responsible for its analysis and recommendations. The Atlantic Council, Rhodium Group, and its donors do not determine, nor do they necessarily endorse or advocate for, any of this report’s conclusions. This report is published in conjunction with an interactive data visualization toolkit, at http://chinapathfinder.org/. Future quarterly and annual updates to the China Pathfinder Project will be published on the website listed.

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Among the two institutions, the World Bank is the more straightforward case. After last year’s leadership change, the Bank is back to the business it does best—supporting global development as well as fighting the effects of climate change and preparing for future pandemics, among other tasks. The issue here is providing the Bank with the financial means to conduct its operations, as well as ensuring efficient project selection and execution. The tasks may have become more complex, but the fundamental business of the Bank has not changed, nor have the interests of its shareholders.

With the IMF, the issues are more complicated. The institution saw a major shift of its activities into climate and development lending in recent years, partly in response to the COVID-19 pandemic and partly because major shareholders got impatient with the slow embrace of climate initiatives by the previous World Bank president. The IMF embarked on several rounds of fundraising to increase its basic capital (or quotas) and build up trust funds to provide for subsidized loans to lower-income members. These efforts are now running into budget constraints in richer countries, but a decision to reduce interest rate surcharges for certain borrowers is still expected to take place prior to this month’s meetings.

Lending needs better results

As a result of these changes, the IMF is now engaged on a large number of relatively small programs with developing countries, many of which are mired in (Chinese-held) debt and have difficulties making ends meet. In principle, the IMF should insist on more thorough debt restructurings before concluding programs with the latter group, a condition that often remains unfulfilled because creditors are either unwilling or exceedingly slow to act. Still, as the supposed “lender of last resort,” the IMF is under pressure from well-meaning shareholders (who are also competing with China’s Belt and Road Initiative) to proceed, storing up financial trouble for its borrowers and itself down the road.

Larger countries have by and large eschewed IMF lending in recent years. The exceptions are countries such as Argentina, Egypt, and Pakistan that would have difficulties borrowing money from financial markets at reasonable rates. These countries are among the most frequent IMF customers in recent history and are known to quickly forget the promises made at the time their lending programs were concluded. Yet, they  tend to regain access to IMF programs because of their geopolitical relevance or other considerations relevant to key IMF shareholders. Their preferential treatment carries financial risks and serves as a major disincentive for other countries to fulfill their program obligations.

The IMF’s leadership has a key role to play in this regard. The IMF’s statutes have endowed its managing director and staff with considerable independence. It is their role to negotiate programs and assess the conditions under which disbursements can move to the board for approval. They should use that prerogative to design programs that leave countries and their populations better off over the medium to long term, rather than burying them under highly senior multilateral debt that will have to be repaid before claims by other creditors. The message sent by IMF management to shareholders should be: “Let us negotiate sensible program conditions and help us by providing recipient governments with additional incentives, financial or otherwise, to fulfill their obligations.” Anything else might be convenient in the short term but detrimental to the long-term standing of the IMF, which is still a major geopolitical asset of the West.

Unfortunately, the signs go in the opposite direction. For example, the recent news that Rodrigo Valdés, the director of the IMF’s Western Hemisphere department, had to recuse himself from the IMF’s negotiations with Argentina runs diametrically opposed to this principle. His withdrawal follows weeks of pressure from Argentina’s President Javier Milei, who said that he could not work with Valdés because of his policies as Chile’s finance minister.

This is where larger shareholders should get worried. If Valdés was the one to caution about Argentina’s unbalanced policies and failure to adjust the peso to market conditions, then he should have enjoyed the full backing of his management. The United States and other Group of Seven (G7) countries, as the main creditors of the IMF, have the most to lose if the institution continues to extend loans that put its own balance sheet at risk.

Policy messages need sharpening

Another concern relates to the IMF’s role in economic surveillance, which has moved to the background in recent years. The semi-annual World Economic Outlook (along with seven other reports in its orbit) still attracts interest, and the IMF also publishes regular country reports as well as select pieces, for example, on geopolitical fragmentation. These papers reveal the technical expertise of staff, but its policy conclusions often disappoint, mindful of the interests of board directors whose job security partly rests on shielding their home authorities from divergent policy recommendations out of Washington, DC.

A case in point is a recent blog post by several IMF department heads that appeared to downplay the importance of Chinese subsidies for global trade tensions. The article laid out well-reasoned arguments against broad-based tariff and other trade remedies to be applied against China, based on the (correct) insight that growing global current account imbalances are primarily the result of domestic developments in the two largest global economies, including large fiscal deficits in the United States and Europe and weak demand growth in China.

Where the blog post got it wrong, however, was in downplaying the structural and geopolitical impact that Chinese subsidies and trade practices have in the current global environment, a point just emphasized by US Treasury Under Secretary for International Affairs Jay Shambaugh at the Atlantic Council Transatlantic Forum. With its current trade policies, China pursues interests that go well beyond the traditional economic mainstay, including to achieve economic dominance in certain sectors that China holds of strategic importance. The effects of this policy will only become evident over time, most likely during a further intensification of geopolitical tensions when it would be too late for the West to react. One would have wished the IMF to take a clearer line on these policies, as would behoove an institution that counts mostly democracies among its largest members.

The lack of a deft geopolitical posture also revealed itself in an own goal that the IMF shot by announcing (and then canceling) a visit to Moscow for the 2024 Article IV Consultation, a regular surveillance exercise that all IMF members are required to undergo. Given the increasing lack of economic statistics published by Russia, the visit could have been an excellent opportunity to assess the true state of its economy, as well as identifying any Potemkin constructs in the country’s national accounts. Unfortunately, the IMF seems to have been swayed by member countries that focused on the perceived political significance of the visit, with some even accusing the institution of contributing to the Russian war effort. The IMF could have easily made the opposite case, showcasing its much-needed financial support for Ukraine. Instead, through unfortunate timing and bad communications, it missed a serious opportunity to demonstrate its value and explain its mission to the wider public.

Use it responsibly

The IMF’s main shareholders should use the Annual Meetings to lean on the IMF to refocus its resources on where they could be most useful at this time—freeing up its excellent staff to analyze economic trends and develop useful policy solutions in an environment of geopolitical rivalry. The IMF is neither a climate nor a development institution, nor is it a fund for geopolitically convenient bailouts. It is dedicated to enabling open trade and maintaining global financial stability, as laid down in its Articles of Agreement eighty years ago. Democratic countries around the world need its work, and its independent voice, more than ever.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF official with decades-long experience in economic crisis management and financial diplomacy.

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Watch the full event

Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

Daleep Singh, US deputy national security advisor for international economics, emphasized on Thursday, September 26, that we are in the “most intense period of geopolitical competition since the Cold War,” with Russia and China seeking to disrupt the US-led order. He argued during the Transatlantic Forum on GeoEconomics in New York that economic and technological competition will dominate future conflicts because nuclear powers will try to avoid direct military conflict.

On the issue of immobilized Russian assets, Singh underscored that “political will” should ensure the G7 follows through on its commitment to bring the interest revenue forward into a $50 billion aid package for Ukraine by year’s end. “We are going to get to the finish line on Russia’s reserves.” He highlighted the historical significance of this multilateral effort, stating that “never before in history has a multilateral coalition frozen the assets of an aggressor country… and found a way to harness the value of those frozen assets to fund the aggrieved party.”

He acknowledged technical challenges but, when referring to Russian President Vladimir Putin, emphasized that “the choice is ours, not his.” Singh named Hungary’s Prime Minister, Viktor Orban, as the only European Union leader obstructing the legal changes the United States is asking for to unlock its participation—but suggested that Orban “doesn’t have as much leverage as he may perceive.”

Regarding economic statecraft, Singh advocated for a balanced approach, warning that restrictive tools like “sanctions, export controls, [and] tariffs” don’t “win hearts and minds.” He emphasized the need for positive tools that promote “supply chain resilience,” “technological preeminence,” and “energy security.” This aligns with the GeoEconomics Center’s expertise in the matter, with research from last year’s Transatlantic Forum in Berlin and Nonresident Senior Fellow Nicole Goldin’s recent issue brief, “Toward a financial inclusion agenda for the global majority.”

He also expressed concern over the lack of financial firepower for large-scale investments, arguing that the private sector lacks the incentive to invest in long-term, high-risk projects. Singh called for initiatives like a “strategic resilience reserve” or public authorities with more flexibility and scope to fill this gap. More highlights from his conversation with Atlantik-Brücke CEO Julia Friedlander are below.

Industrial policy and global competition

• Singh argued that industrial policy is crucial because the private sector alone cannot address major challenges like the “loss of supply chain resilience,” “fading technological preeminence,” and the “hollowing out of our industrial base.”
• He highlighted the positive results from recent government interventions, such as tax incentives and research and development investments, which have driven “sustained above-trend growth” and a resurgence in “innovation and productivity.”
• Singh noted that the delay in adopting a more active government role was due to policy muscles which had “atrophied” over the past forty years. It has taken time to “course correct” from a laissez-faire approach.
• On global competition, Singh stressed the need for a “multiplayer, multistage game theory” approach, especially regarding China, which “floods the market” with state-backed overcapacity in key sectors like steel, solar, and semiconductors.
• He outlined the US strategy to strengthen domestic capacity, form alliances with countries that “play by the same rules,” and use “restrictive measures” like tariffs to prevent unfair competition and safeguard national security.

China’s role in Russia’s war machine

• Singh emphasized that Russia has turned its economy into a “war machine” and is now relying on rogue states like Iran and North Korea, which have become “witting cogs in this arsenal of autocracy” to sustain its military capabilities.
• Singh found China’s actions over the last years particularly baffling, questioning why a country that claims to seek “better relations with Europe” and wants to be seen as a “responsible stakeholder” is now supporting the biggest threat to European security and aiding Pyongyang’s nuclear program.
• Singh noted China’s deflationary slump and reliance on external demand but questioned why it continues to “antagonize all the major sources of external demand,” calling Beijing’s role in the war a “strategic wedge” rather than a win.
• Singh stated that sanctions aren’t about shock and awe but about “stamina,” pointing out that there are signs of China pulling back from financing Russian military inputs.
• He suggested that China has the power to “pull the plug tomorrow on the factory to the war machine” and warned that failure to act would result in “profound reputational damage” for Beijing.

Humility, creativity, and structural reform

• Singh emphasized the importance of humility in addressing global challenges, especially in light of “the uncertainties of our domestic political climate, geopolitical backdrop, and global macroeconomic regime,” which are all intensifying and feeding on one another.
• He called for a cultural shift in national security, advocating for “bottom-up creativity” and less top-down hierarchy. Singh stressed the need for individuals to “speak up, take risks, admit when you’re wrong,” and challenge assumptions to avoid risk management failures.
• Singh underscored the importance of historical perspective, drawing parallels between the current era and the early twentieth century. He cited examples including the first US-led wave of globalization (1870–1913), emphasizing structural reforms like the creation of the Federal Reserve and income tax to address inequality, as relevant lessons today.
• Singh highlighted the need for modern structural change, pointing to recent legislation like the Inflation Reduction Act, CHIPS and Science Act, and infrastructure bills as good steps, while also urging policymakers to focus on repairing the social contract at home and rebalancing global leadership.

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The post ‘We are going to get to the finish line on Russia’s reserves,’ says White House’s Daleep Singh appeared first on Atlantic Council.

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Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

“If we were to root out all fraud across the banking system in the United States, our calculation is that the GDP of the United States would be fifty basis points higher than it is today,” President and CEO of Nasdaq Adena Friedman said on Thursday, September 26.

Friedman’s interview, in which she explained how money laundering and fraud represent “a 3 percent drain on the US economy,” was part of a series of panels and fireside chats hosted by the Atlantic Council and Atlantik-Brücke at the Transatlantic Forum on GeoEconomics in New York.

Friedman also discussed the critical role of the banking system when managing risks and combating financial crime globally. “Banks cannot tackle these challenges alone” because criminal networks leverage advanced technology and exploit multiple banking systems, making it a global issue.

To enhance anti-financial crime efforts, Friedman advocated for improved data sharing capabilities among banks, as well as a feedback loop to evaluate the effectiveness of submitted reports. This approach would leverage artificial intelligence to identify potential criminal activities, “making banks and regulators more efficient and effective in solving these problems.”

Friedman noted that Nasdaq currently employs advanced models to identify potential criminal transactions and that the institution “provides this technology to 2,500 banks… pooling data across those banks.” Below are more highlights from her conversation with Bloomberg anchor David Westin, which touched on the technological race against financial crime, the need for regulatory cooperation and smarter regulations, the risks of companies staying private, and the importance of ensuring everyday citizens have access to investment opportunities in public markets.

Technology’s impact on financial markets

• Friedman acknowledged that financial markets have become increasingly complex over the past thirty years due to technological advancements, but that technology also “opens up accessibility.” She stated that “billions of people [now have] access to real-time information about markets,” which promotes economic growth and empowers individual investors.
• Friedman highlighted that technology is an “unstoppable force” in financial markets. She stressed the importance of leveraging technological advancements to enhance market efficiency, transparency, and integrity, stating, “if we can use technological innovation…to drive the markets into a state of high liquidity, high integrity, and high transparency, then we will be able to combat those actors that are trying to take advantage of technology.”
• Addressing the cost of technology, Friedman noted a disparity between larger institutions and smaller banks. She explained that while larger banks can afford to invest substantially in technology, it’s crucial to create efficiencies that allow smaller banks to compete, stating, “our job is to try to balance that scale by creating efficiency in the market to make it…more accessible.”
• Friedman discussed the impact of economies of scale in the financial system, suggesting that those who adopt technology quickly will succeed, while those who resist may lose ground. She mentioned that by partnering with hyperscalers, firms can lower data costs and enhance competitiveness, noting, “the cost of data… has come down 80 percent in the last ten years.”

Comparing global financial markets

• Friedman highlighted Nasdaq’s operations in various regions, stating, “we own and operate… the markets here, of course, in the United States and also in Canada,” as well as in the Nordic and Baltic regions emphasizing Nasdaq’s need to adapt to different economic ecosystems.
• She described the Nordic countries as a “beautiful shining star of the capital markets.” She attributed this success to government engagement with retail investors through “tax advantage accounts,” resulting in 47 percent of citizens owning equities, compared to 18 percent in Europe.
• Friedman also noted that Nordic countries balance strong social safety nets with capitalism. Their approach allows small to medium companies to access public markets while fostering a robust investment culture, “creating something really special” in that region.
• Nasdaq aims to share its expertise globally by advising markets about how to engage retail investors and improve policies pertaining to innovation, bankruptcy, or tax, stating, “we do advise the exchanges and the governments on how to engage more retail… to make the markets more technologically advanced, but also safer.”

Challenges of private market growth

• Friedman stated that “vibrant capital markets are the underpinning of economic growth,” suggesting that a trend toward keeping companies private could undermine economic stability and growth.
• She noted that while “there’s risk, of course, in bringing companies to the public markets,” there is also significant potential for “enormous amounts of wealth creation across the country” when more people have access to these investments.
• Friedman went on to emphasize that “if you choke off access to these great growth companies to the everyday citizen, then you are creating an economic distortion,” which limits wealth creation opportunities for individuals who could benefit from investing in these companies.
• She called for a reassessment of the regulatory framework underpinning capital market, advocating for “smart regulation” to achieve “the right balance between private and public,” as the current landscape is “definitely skewed towards private.”

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The post Nasdaq’s Adena Friedman on how to stop financial crimes that undercut economic growth appeared first on Atlantic Council.

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Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

Speaker

Adena Friedman
Chair and Chief Executive Officer, Nasdaq

Moderator

David Westin
Anchor, Bloomberg Wall Street Week, Bloomberg Television

Event transcript

Uncorrected transcript: Check against delivery

DAVID WESTIN: Thank you so much. Thanks for doing this, Adena.

ADENA FRIEDMAN: Well, it’s a pleasure to be here. Thank you.

DAVID WESTIN: It’s great. So let’s start with the forum itself. It sort of resides at the intersection of geopolitics and finance or economics. You live your life in markets essential to economics and economic growth. Give us your sense of the state of markets right now, in the United States but you’re also global. Where are we in financial markets? And where are they headed?

ADENA FRIEDMAN: Yeah. It’s a great question. And you’re right about geopolitics impacting finance. Obviously, finance being the engine for the economy. And there is—there are a lot of impacts to that. So interestingly, I think you have to look at the US markets, Europe, and Asia in kind of different contexts. If we started in the United States, obviously the monetary policy in the United States has really been a huge driver in terms of the health of the markets, the direction of markets, and also the ability for companies to raise capital, which is the underpinning of markets. And the constrictive monetary environment that we’ve been living in the last two years has clearly had a huge impact on the ability for companies to raise capital, both private capital and public capital.

And now that we’re starting to see the rates come down, I think that’ll give investors more confidence in being able to deploy capital, assuming the economy stays strong. But what I do think you’re—it is interesting to note is, while geopolitics of course plays a role in understanding markets and looking at the future growth of a particular company or asset class, it has not had a huge impact on markets. You know, I think that there—the tail risks are not necessarily fully baked into market performance. But as the geopolitical environment shifts around, and certainly the domestic political environment shifts around, you know, that will definitely, I think, over time, have more of an impact here.

But around the world, I think you’re seeing more of that impacting markets. And you’re also having less engagement by retail investors, by investors in the markets around the world, which is making it even harder in other economies to raise capital, to have a vibrant innovation ecosystem, and to generate economic growth. And that’s an area where we spend a lot of time. We really do a lot of—a lot of work to try to understand, what are the underpinnings of a healthy market ecosystem, which then of course drives a healthy economy? And we’re spending a lot of time in Europe right now working with European regulators and government officials to really help them understand what it takes to be a successful market, and how is that going to drive certain policy decisions that they make going forward.

DAVID WESTIN: For those [who were] not involved in the markets day to day the way you are, there’s a sense they’re incredibly complicated, very complex, and getting worse. Is that overstated? Or is there some risk to the system itself in getting too complex?

ADENA FRIEDMAN: I have to say, we’ve been dealing in complexity in markets for as long as—when I started it, now, was like thirty years ago. It was a simpler time thirty years ago for markets, but it has become—you know, technology has come into the markets. I would actually say the financial services sector is one of the leading indicators of technological innovation, in many respects. And the markets themselves—you know, we’ve had—we’ve had the most incredible technology come into the market ecosystem over the last twenty years. And now we’re still seeing, you know, the leading edge of technology coming into markets.

So that does create both complexity but it also opens up accessibility, right? If you have the ability for billions of people to get access to real time information about markets and real time information about companies or asset classes, you have all these online platforms that give them access—direct access to markets, you then have a global investor base that kind of can come into your markets. I actually think that that’s a very good thing for overall economic growth and the health of the economy, the ability for individuals to control their destiny, to control their investments.

So all of that complexity actually carries a very big benefit. But it also does create a lot of—you know, some challenges too. So it is, you know, especially as more AI and automation comes into markets, comes into investment decisions, trading decisions, you know, you’ve got to make sure that the regulations keep up. You’ve got to make sure that the surveillance and the technologies keep up, what I’ll call the protective technologies keep up with what could come into markets in terms of those who do not have the right intent. And how do you make sure that you’re protecting the markets against bad actors, by using the most advanced technology available to—you know, into those protections?

And that’s an area that we actually play a big role in, because we provide the market surveillance technology to many of the markets around the world and most broker dealers as well. So it’s a big—it’s a big part of what we focus on, from a—as a technology company, is making sure that the technology is being used for the right purpose, we’re modernizing markets, and we’re making them, I would say, as efficient and effective as possible, even in—even in a complex state.

DAVID WESTIN: So financial markets are on the cutting edge of technological innovation. Is technology making it better or making it worse?

ADENA FRIEDMAN: Oh great question. I would have to say—let me put it this way. We can all have opinions about that but, no matter what, the technology is coming. So, you know, I always say technology is an unstoppable force. If you try to fight technological innovation, you are—you are fighting a losing battle. So instead of trying to fight it, you have to look at how can—how can we, as a market operator, use the same technology, that’s making the world, as complex as it is, to bring efficiency and effectiveness to markets? To bring more transparency and integrity into markets? To drive liquidity into markets?

That is literally what Nasdaq does for a living. It’s all about liquidity, transparency, and integrity. If we can use technological innovation—the cloud, AI, all the things—and, frankly, hyper low latency capabilities, global networked capabilities—to really drive the markets into a state of high liquidity, high integrity, and high transparency, then we will be able to combat those actors that are trying to take advantage of technology to do the wrong thing.

DAVID WESTIN: Technology, the last time I checked, costs money. And you have to have a lot of investment. We’re seeing that right now in AI, you mentioned, for example. Huge investments being made by the hyperscalers. Does that cost of technology affect the players in the financial markets? We hear a lot about the big banks, the big money center banks. They can afford all that. But when you get to some of the smaller regionals, much less community banks, they really can’t afford this.

ADENA FRIEDMAN: Yeah. So I think—actually, I think right now you do have some elements of scale in the financial system. And that’s global—you know, global elements of scale that comes into the financial system. And I think, frankly, you can see that in every single industry right now. And technology is going to make it so that, I think, the winners and the losers are going to—are going to be determined faster, right? So those who lean into technology and technological innovation are going to find themselves in the right position, and those who fight it or are slow in adopting it are going to kind of lose their market position faster than they used to.

However, I also think the hyperscalers are spending a lot of money, but our ability to use inference against those hyperscalers and to drive the cost of data—like, the cost of data, for us at least as we’ve gone more to cloud in managing our markets, has come down 80 percent in the last ten years. So it’s not—it’s not like—because there’s an enormous amount of economy of scale that comes from the partners you choose, too. You know, if we choose a hyperscaler as one—as a partner, we’re going to get the benefit of their scale as a player.

And so I think banks are—I think you’re right that you’ve got certain elements of the market system and the financial system that’s driven towards scale. What we are—what our job is to do is to try to balance that scale by creating efficiency in the market to make it—to lower the barrier to entries in the markets, to make the markets more accessible, and to actually create capabilities that allow the small to medium banks to compete more effectively.

So how do we, even in our own infrastructure, create the ability for them to do inference at the edge? Create the ability for them to have virtual servers instead of, you know, physical servers? Create the ability for them to have more engagement in the markets without as much capital investment? That’s actually, again, part of our role, is to try to figure out how to do that across the world. We provide technology to 130 markets around the world. So we’re not just a technology provider to our own markets. We really do try to drive that into emerging markets as well.

DAVID WESTIN: Yeah, glad you mentioned the 130 markets, because some of us in New York may be a little parochial. And we think of Nasdaq as New York. That’s what you are. But, I mean, you are active in Canada, the Nordic states, the Baltic states, and around the world, and then you provide services elsewhere. Do a compare and contrast what it is to run financial markets in those different environments.

ADENA FRIEDMAN: Yeah. Yeah, so we own and operate the markets here, of course, in the US, and also in Canada. And then we own and operate most of the markets in the Nordics. And so we have—and the Baltics. So we have an opportunity to really evaluate, how do markets need to evolve in order to have healthy ecosystems in very different economies? And we really do take a huge interest in trying to drive economic development into the Baltics and into the Nordic states. I have to say, the Nordics—if you look at the Nordics in the context of Europe, they are this beautiful, shining star of market—I would say, of the capital markets.

And it’s not just because of us. In fact, I would say that it has a lot to do with many, many other factors. But those factors are super important to understand. You know, in the Nordics, the government of the Nordics have—in the Nordic states have made concerted efforts to engage retail investors in markets. They have tax advantage accounts, and they have—and that’s an enormous—there’s enormous amount of capital going to these individual tax advantage accounts that allow investors to go and invest in any EU-listed company. Which, of course, drives capital into the markets. You’ve got the pensions, and they’re very strong market players in the Nordics. They’re consolidated. They’re strong. And they actually really do focus on domestic investment.

And then you also have a government who has a beautiful social safety net, but believes in capitalism. And so they really do do a good job of balancing the need for economic growth, the taxes—corporate taxes and other things, really driving innovation, and allowing small to medium companies to tap the public markets with a retail underpinning, with the pension underpinning. It’s actually—it’s an amazing ecosystem. Forty-seven percent of citizens in the Nordics own equities. That compares to about 52 percent in the United States, but 18 percent average across Europe. So that is a fundamental difference in what has been created in the Nordics versus the rest of Europe.

So we get to live in that. And then we provide our technology, our ecosystem, our know-how, our market participant engagement into those markets as well, the market structure advantages. And we do really think we’ve created something really special there. Now, as we go and then be a technology provider to other markets around the world, all across Asia, the Middle East, Europe, Latin America, we’re really trying to bring a lot of that modern thinking, but not just about technology. We do advise the exchanges and the governments on how do you engage more retail? How do you drive—how do you look at tax policy, bankruptcy policies? How do you make sure that your government is doing its part to drive an innovation ecosystem, and to engage citizens in the markets, and to make the markets more technologically advanced, but also safer? You know, we do a lot around surveillance, anti-financial crime. How do you bring all of those capabilities into the capital markets as well?

DAVID WESTIN: Well, one of the developments I think we’ve watched over the last several years in the United States when it comes to public policy is sort of almost a merging of a lot of national security, geopolitical issues with economic policy. They’re one of the same. Look at the Biden White House right now. You have both the National Security Council and the national economic advisor doing their work together. Do you see that in financial markets? Is there increasingly a blurring?

ADENA FRIEDMAN: Well, I would actually say I see it across the financial system. So kind of even broaden it out to look at the banking system and how the banking system kind of underpins economies. You know, some interesting stats. One of the areas of engagement and expansion that we’ve had in the last several years is we’ve bought a suite of technology capabilities, that we now deliver to about three thousand banks around the world, that focus on capital markets risk management. So, how do you manage your risk across asset classes, across your global participation in markets. Regulatory reporting, which means how do you make sure you’re complying with rules. And then also, anti-financial crime.

And that’s an area where you’ve got this incredible intersection of geopolitics and the economy, because—one interesting stat we just ran is just, in the United States alone, if we were to root out all fraud and we were to eliminate fraud across the banking system in the United States, our calculation is that the GDP of the United States would be fifty basis points higher than it is today, right? So, and that is—that drain is something like a 3 percent drain on the US economy. I mean, it’s—well, AML and fraud together, sorry, is essentially a 3 percent part of the GDP. It’s a huge issue.

Now, and the banks can’t do this alone. I mean, so the banks are put on the front line of trying to solve this problem, but they have to work very collaboratively with the public sector. And it’s—if you think about what kind of criminal activity they’re trying to get out of their system, you’ve got that—you know, you got the fraudsters—just people coming in and stealing your money. You’ve got—you’ve got criminal gangs. You’ve got child trafficking, human trafficking, and terrorist networks. I mean, these are geopolitical challenges facing the world. And the banks are there to try to figure out how to make sure that the money flows are choked off for these criminal actors.

Very, very difficult. Big data problem. Big, big, big data problem. Because if you think about it, the criminals, they use every bit of technology available to make—to perpetrate their crimes. And they go across the banking system. It’s a global problem. It’s not just a domestic issue. And so you also have to look at the fact that they’ll go across multiple banks. They’ll spread their activity across those banks.

And so one of the things that we really focus on in our technology, but also in talking to the regulators and the policymakers, is making sure that you develop data sharing capabilities across banks. And that—in the United States that already exists, which is excellent. But then also to have a feedback loop. Like, there’s a lot of activity traps right now in the regulation that exists in anti-financial crime. Just ticking a box and counting how many reports you submit, as opposed to, well, are those reports helpful? Do they actually root out criminals? Can we get some feedback to know whether or not that was an effective report or not?

Because if I could, if we could get that back, we can feed that back into these incredible engines that we have to make the engines smarter and smarter and smarter, using AI, to be able to make sure that when we are catching—you know, we’re looking at an alert, it’s very likely that alert is a criminal actor. It makes the banks more efficient and effective. It makes the regulators more efficient and effective. And it solves the problem more effectively. Those are all things that really have to we have to—we have to work together on to solve this, I would say, really endemic problem across the world.

I think some of us might be surprised, number one, at the size of financial crime. But, number two, when you say the financial system is on the cutting edge in technology, you’d sort of think technology should be able to take care of that problem. We should be able to address that problem. Is it that we don’t have the technology? The bad guys are ahead of us on the technology? Or are we’re not using the technology that’s available?

ADENA FRIEDMAN: Well, first of all, I do think that there’s a technological race in this space. There’s no doubt about it. So we have to make sure that—the criminal actors are going to use everything possible. And so therefore, the banks need to be able to use everything possible. And there are a lot of restrictions right now in how banks can use AI for certain purposes. What we are seeing is policymakers and regulators starting to realize that it’s not a one size fits all on how to look at banks and their use of technologies like AI. They have to look at it on a use case-by-use case basis. And for the purpose of crime management, it should be that we can really unleash the potential of this technology.

Today, Nasdaq is a—we provide this technology to 2,500 banks. We pool the data across those banks so that we can, in fact, look at transactions across banks. We use Bayesian models, computer vision, other things that really kind of drive and generate alerts. We have very structured topologies that are specific to different criminal behaviors. So we have all of that. But there are limitations in what we can use—how we can drive that AI, because the banks have a lot of restrictions on how—the explainability of models, and how they have to report to regulators.

I think that if we could kind of work with regulators to be more open minded around how this technology can be used, similar to how it’s used in law enforcement, national security, how do we use it in a way that really can drive better outcomes, and then get the feedback loops back so that we can drive those engines to be smarter. I think that there’s a lot of—a lot of opportunity there to be better at what we do.

DAVID WESTIN: So there are opportunities in making sure that banks can share information and make use of information across banks. What about across regulators?

ADENA FRIEDMAN: Yes.

DAVID WESTIN: Are regulators cooperating across, for example, the Atlantic?

ADENA FRIEDMAN: They talk to each other. No. I mean, I—so even within the European Union there are, you know, conflicting—there’s multiple layers of regulation, and, frankly, some conflict with each other. And up until now, there—and it really is a new phenomenon that they’re starting to work on—is they are working on policies and laws that will allow for the banks to bring data together across banks across the EU. That doesn’t even exist today. It doesn’t even exist in-country.

So a bank is sitting there only with their own data trying to figure out who the criminal actors are. There’s no way they’re going to be able to solve that problem. So, it’s both national legislation and regulation and then EU-level legislation and regulation that has to change in order to allow for the banks to collaborate, and then allow for the regulators to look at the layers of regulation to try to figure out how to have smart regulation. And that’s a big thing. I’m a huge believer in regulation in the financial industry, but really driving towards smart regulation, outcome-driven regulation.

What are you—what problems are you trying to solve? Does this regulation actually solve that problem? How are you—what are the—what’s the evidence? What are the KPIs that you’re using to determine its effectiveness? I think those are all things that every regulator can spend more time on. But I think as we’re looking at this criminal problem, this is such an important part of getting it right. And you’re right, even between, let’s say, the US and Canada, there’s some, but not a lot of collaboration. It’s more at the law enforcement level where there is. But at the regulator level, I think that they’re still—they’re still, you know, looking at the problem differently from one to another.

DAVID WESTIN: Pivot to a slightly different subject, but I think they’re related, but you’ll tell me whether they are. And that is the move toward private markets from public markets. I mean, certainly it’s been a big trend. We talk a lot here in New York, for example, private equity first, but then private credit, the growth of private credit. Explain to us what that means for the financial system because, I mean, back when I learned, you know, securities law, sort of 1933 Act, 1934 Act, it was all about public disclosure, public markets that will protect our system overall. Is there a risk in putting more and more businesses behind a private curtain?

ADENA FRIEDMAN: Well, I think the first thing we have to think about is if you choke off access to these great growth companies to the everyday citizen, then you are creating an economic distortion, I would say, in terms of the opportunities that everyday citizens have to drive wealth creation and plan for their future. So if companies don’t go public, then everyday citizens don’t have ready access to making those investments. And, therefore, they don’t get the benefit of the growth. Now they also—you know, you’d argue that it’s a risk-reward trade off, right? So there’s risk, of course, in bringing companies to public markets. Equity is a risk capital, and so is—even debt is a risk capital.

But there’s also the ability to drive enormous amounts of wealth creation across the country, if you give that access to more people. And one of the big risks of having more companies stay private is just that you don’t—you’re basically not creating that opportunity for the everyday citizen to have. I would say that’s number one. And that is an economic—I think that’s a real economic risk.

I think that the second, though, is that vibrant capital markets are the underpinning of economic growth. And if more of the companies stay private, and there are structural reasons why that’s happening and there’s cyclical reasons why that’s happening. You know, it flows. I mean, definitely there’s cyclical underpinnings to why companies are not going public—cost of capital, the inability for public investors to predict the future earnings of a company is very hard right now. So there’s a cyclical element.

But there’s a structural element too. I mean, the burden of being a public company is pretty extreme. And that’s not just here. That’s everywhere. I think that that—when I talk to great innovators, they say, I’ll go public when I have to, or when my VC investors have decided it’s time. But it’s not a—it’s not something where they say, I really want to be a public company. I want to have that—I want to have that imprimatur. I want to grow as a public company. That used to be what I would hear.

So I think we have to change the—we have to look at the regulatory apparatus and make sure, again, smart regulation. What are we doing to make sure we’re creating that right balance between private and public? I’m a huge believer in the balance. I just think that the balance gets skewed occasionally. And right now, it’s definitely skewed towards private.

DAVID WESTIN: Adena, it’s always great to talk to you. Thank you so for your time.

ADENA FRIEDMAN: Thank you.

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The post Nasdaq’s Adena Friedman discusses AI, financial crime, and the future of global markets appeared first on Atlantic Council.

Flagship Event Thu, September 26, 2024 • 9:00 am ET

2024 Transatlantic Forum on GeoEconomics

The objective of this year’s forum is to increase transatlantic alignment between Western allies and the private sector in three highly interconnected sectors: finance, technology, and energy.

Economic Sanctions Economy & Business European Union International Financial Institutions

Minimizing economic vulnerabilities by protecting sensitive technology and ensuring energy security should be a national security priority of the next US administration, regardless of who wins the election in November. The next administration will need to work with Western allies and the private sector to address national security threats and achieve three interconnected goals: (1) protect sensitive US technology, (2) drive the energy transition, and (3) secure the financial system. 

Identifying economic threats to national security

The United States’ economic strength and competitiveness is primarily derived from three interconnected but often siloed sectors—finance, technology, and energy. The United States has benefited from the post-Bretton Woods era, as the US dollar remains the primary currency for global trade and the most secure and dependable reserve currency. As such, the US financial system has become the backbone of the global financial system. Through reliable flows of venture capital, the US technology sector continues to innovate and advance technologies such as artificial intelligence. These technological innovations have led to advancements in the energy transition that reduce dependencies on fossil fuels but increase reliance on critical minerals not found or processed in the United States. Protecting these three pillars of economic strength is a national security priority.

The United States has been developing trade dependencies with other nations for decades. In addition to creating economic efficiencies, such dependencies were meant to create a common global interest in preserving rules-based international trade and economic security. 

However, in recent years, these dependencies have created vulnerabilities for US economic security and therefore US national security. The COVID-19 pandemic, Russia’s invasion of Ukraine, technology competition with China, and conflict in the Middle East put a spotlight on supply chain disruptions and the vulnerabilities they can create for the US economy. Meanwhile, the national security apparatus has grown increasingly wary of the potential weaponization of supply chain dependencies by adversarial and competing regimes.

As a result, trade and economic security considerations are increasingly being incorporated into the national security policy debate. In addition to discussing the traditional geopolitical dynamics and terrorism threats common in national security strategies, the 2022 National Security Strategy framed climate and energy security as an existential challenge. It also stated the objective of preventing strategic competitors from using US critical technology to undermine US national security. 

Meanwhile, this year the Office of the Director of National Intelligence’s Annual Threat Assessment identified disruptive technology and digital authoritarianism as some of the top transnational threats facing the United States, along with climate change and extreme weather.  

Protecting sensitive technology from falling into the wrong hands

The next US administration will have an opportunity to address a challenge in the technology sector: Figuring out how to keep US and Western critical technology from falling into adversarial or competing states’ hands. Since Russia’s full-scale invasion of Ukraine in February 2022, Western allies have used export controls to prevent the flow of advanced technologies to Russia. While challenges persist in enforcing export controls, the US government and Western allies have been on the same page in terms of what needs to be done to thwart Russia’s military capabilities. 

Meanwhile, the threat from China has been simmering for years, particularly when it comes to Beijing’s use of Western technology and capital to further its military-industrial complex. Through investment or knowledge-sharing, US companies may be inadvertently transferring know-how, intellectual property, and technology to Chinese state-owned enterprises, which could pose a threat to US economic and national security in the future. The United States and its allies have leveraged export controls on sensitive Western technology and proposed investment screening regulations to address this issue. However, there is much less agreement on how to address the China challenge more broadly, both within the US government and among Western allies. 

The next US administration should ensure a whole-of-government approach to clarify the United States’ strategic end state when it comes to the protection of sensitive Western technology from China and understand the economic implications of achieving that end state. Only then can Washington find common ground with allies on this issue.

Driving the energy transition while securing supply chains

The United States’ use of export controls against China is likely to trigger countermeasures from Beijing: China could leverage its near-monopoly over critical minerals and impose export restrictions on them. This would be problematic for the United States’ clean energy transition goals because clean energy production requires critical minerals. China has already shown its readiness to weaponize critical mineral supply chains: On October 20, 2023, Beijing announced export restrictions on graphite after the United States restricted the exports of highly advanced semiconductors to China. Graphite is one of the major components of electric vehicles and nuclear reactors, which are important technologies in driving the energy transition. 

As the world shifts toward clean tech, the demand for critical minerals and competition for them will significantly increase. The United States is joining the game late, but it can still forge partnerships to secure supply chains and drive the transition to clean energy. To this point, 30 percent of the world’s critical mineral reserves are located in Africa. While China and Russia have a larger presence in Africa, US allies such as the United Kingdom, Canada, and Australia have ramped up their engagement with African nations and cooperation on critical minerals mining. The United States could leverage its technological know-how and strong alliances to deepen multilateral engagement with African nations and secure US supply chains for critical minerals and drive the clean energy transition. 

Securing the global financial system

Finally, the next US administration should ensure that the backbone of the US economy—the US financial system—is protected from malicious actors who are constantly trying to take advantage of it. According to Nasdaq, financial criminals managed to move $3.1 trillion through the global financial system in 2023. Meanwhile, cyberattacks pose a risk to the core of the global financial system by diminishing its integrity and disrupting critical services. Nearly 20 percent of all cyberattacks target financial institutions to gain sensitive information and extort money from targets.

The security of the US financial system is a critical factor in the world’s trust in the United States and for the success of the technology, energy, and all other sectors of the US economy. Protecting the financial system from cyberattacks and preventing financial crimes are just as critical for US economic success and national security as protecting sensitive technologies and securing critical mineral supply chains. Thus, developing public-private partnerships to help secure the US financial system should be another priority for the next US administration.  

There is a growing consensus that US national security and economic security are inextricable. The next administration should focus on preventing adversaries from getting hold of sensitive US technology, driving the energy transition, and safeguarding the global financial system to protect the United States’ interests and secure its position on the world stage.

Kimberly Donovan is the director of the Economic Statecraft Initiative at the Atlantic Council’s GeoEconomics Center and a former senior US Treasury official.

Maia Nikoladze is the associate director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

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The international community must lift this regulatory burden with greater support for private sector climate financing. Banks, insurers, and investors can be a north star for climate resilience. They have the resources and expertise to inform more impactful approaches to climate finance.

Indeed, the United Nations (UN) Climate Conference, also known as COP, has acknowledged that finance is “a great enabler of action.” Last week, the COP presidency announced a new action agenda ahead of COP29 in Azerbaijan in November. It called for a new Climate Finance Action Fund, which will be funded by voluntary contributions from both governments and private sector energy companies. It also outlines grants, pledges, and declarations that governments can voluntarily adopt. Notably, climate finance is woven throughout the text.

As Climate Week NYC gets under way, policymakers and business leaders have a clear call to action. But it is also clear that they cannot achieve impact at scale alone.

In the lead up to COP29 and the 2024 UN Biodiversity Conference, the world has a unique opportunity to collaborate with the private sector on climate adaptation and resilience. This week in New York, more than one hundred companies will be on the ground to drive these conversations forward. It is on governments to understand how to work more effectively with them.

The private sector is starting to open its eyes to the fact that the only way to survive is to internalize climate risks and costs. Industries have contributed disproportionately to the consequences of climate change without accounting for them. In 2021, the private sector accounted for 84 percent of global emissions. It is now clear to businesses and companies that the climate crisis comes with clear costs—from consequences with the supply chain to reduced labor productivity. Investing in resilience protects private sector interests. So, rather than being a barrier to participation, governments around the world must ensure that their policy environment enables private sector action and ambition when it comes to climate adaptation and resilience.

The question is: What can the public and private sector do to make these changes? First, we need to drive dialogue. Through the Atlantic Council’s Climate Resilience Center, we created the space for these conversations to happen. We have worked with the UN Climate Change High-Level Champions to connect banks, insurers, and private finance actors to understand how the public and private sector can more effectively work toward a systemic solution. These conversations have made clear that the appetite for partnership is there, but better efforts are needed to develop the instruments and public sector bodies that can mobilize private sector investments. For instance, the public sector must create taxonomies for climate adaptation. We need these new taxonomies to understand what types of investment count toward adaptation, so there can be effective incentives for private sector funding and more investor confidence to make the returns clearer.

The moment is ripe. Last year, when we launched the Call for Collaboration at COP28, governments and companies signed on immediately. Climate Week NYC is multiplying these opportunities. Many of the events are hosted by the private sector, showing companies’ increasing motivation to be a part of these conversations. The world is changing, and we need to capitalize on this momentum. What remains is to ensure that these conversations can turn into real action.

Jorge Gastelumendi is the senior director of the Atlantic Council’s Climate Resilience Center. He previously served as chief advisor and negotiator for the government of Peru during negotiations that led to the Paris Climate Accords.

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The IMF imposes surcharges if its loan to a member exceeds a certain level or persists longer than the agreed duration. Level-based surcharges of two-hundred basis points are added on top of the basic charge associated with IMF borrowing for member countries with high debt levels owed to the IMF General Resources Account (exceeding 187.5 percent of a member’s quota). Time-based surcharges of one hundred basis points are applied to loans lasting longer than thirty-six months (under a regular standby loan) or fifty-one months (under an extended funding facility loan). The basic IMF charge rate is one hundred basis points above the Special Drawing Rights (SDR) interest rate. The IMF Special Drawing Right (SDR) rate is determined by the weighted average of the interest rates of the five major currencies (the US dollar, euro, pound sterling, yen, and renminbi) making up the SDR—currently at 3.8 percent. As a consequence, such surcharges would bring the total lending rate of IMF loans subject to surcharges to 7.8 percent at present—quite onerous for countries already in deep economic distress and short of hard currency.

The IMF says its surcharge policy intends to incentivize borrowing countries to repay the IMF in a timely manner and to contain their borrowing. The IMF also needs surcharges to build up its precautionary balances to safeguard its capital base against potential credit losses. In reality, surcharges have been found an insignificant factor in deterring countries from borrowing more from the IMF. The conditions that come along with borrowing from the IMF already deter many countries from relying on the institution until their situation deteriorates to the point that they have no alternatives. Concerns about conditionality also disincentivize members from asking for too big a loan unless driven by the magnitude of the crisis. The bigger the loan, the more stringent the conditionality. By and large, countries would try to repay the IMF to regain sovereignty away from the Fund’s scrutiny of their compliance with loan conditions.

The fact that some countries let their IMF loans remain outstanding longer than originally agreed usually results from a protracted crisis making timely repayments difficult. For example, multiple crises in recent years have led the number of countries paying surcharges to rise from eight—before the Covid pandemic—to twenty-two. The surcharges did not deter this increase. Finally, the IMF will achieve its target of SDR 25 billion ($33.2 billion) for its precautionary balances by the end of FY2024. Its balances will likely continue to grow, even without the surcharges.

Surcharges have substantially increased the payment burdens on countries in economic distress, especially depleting their dwindling foreign exchange reserves. Total surcharges will amount to $13 billion between 2024 and 2033. Surcharges will be a significant financing burden for low- and middle-income countries, which have been spending more to service their debts to external official and private creditors than they receive in new funds.

Five countries have borrowed the most from the IMF—Argentina, Ecuador, Egypt, Pakistan, and Ukraine. They paid $5.1 billion combined in surcharges between 2018 and 2023 and will pay an additional $7.2 billion between 2024 and 2028. Ukraine alone paid $621 million between 2018 and 2023 and will have to pay $1.6 billion between 2024 and 2028. Such surcharges sharply increase the cost of interest payments to the IMF, bringing IMF financing close to market rates—well above the concessional rates typically offered to countries in need by international financial institutions.

Ukraine, in particular, has a four-year IMF program under the Extended Funding Facility worth $15.6 billion (445 percent of its quota), signed in March 2023. Ukraine also has an outstanding loan of $10.5 billion from the IMF. In the next four years, Ukraine will probably repay to the IMF as much as it will receive in new loans. Its debt service payment (principal and interest) to the IMF will reach between $1.1 and $1.2 billion in 2025, as estimated by the Wilson Center. This is a financial burden the country can ill afford. It is important to note that from 2018 to 2022, Ukraine was a net payer to the IMF, paying back $7.2 billion while receiving $4.2 billion in new loans.

Many observers have criticized the surcharges as unfair and unreasonable. They can be procyclical, increasing financing costs precisely when countries are in economic distress and short of hard currencies. In 2022, several members of the US House of Representatives proposed legislation asking the IMF to review its surcharge policy with a view to abolish it. At a recent House Financial Services Committee hearing, Treasury Secretary Janet Yellen said the United States supports a review of the IMF surcharge policy, but qualified that by repeating IMF rational for surcharges.

In response, at the IMF/World Bank Spring Meetings in April 2024, the IMF decided to review the surcharge policy. The review started in early July this year and is expected to produce recommendations to be discussed at the Annual Meetings in October. The Group of Twenty-Four—representing developing countries at the IMF—issued a statement at the Spring Meetings asking the IMF to suspend its surcharge policy as soon as possible, pending changes (including the elimination of surcharges, reducing the surcharge spreads, and relaxing the thresholds that trigger surcharges) to be discussed and approved by the IMF Board. Such a decision requires 70 percent of the votes.

The IMF should seriously consider these requests and move expeditiously to significantly reform its surcharge policy, ideally abolishing it. This policy has not served its purposes, is no longer needed to build the Fund’s precautionary reserves. Instead, it imposes unnecessary financing burdens on low-income countries in debt distress—the very countries that need all the help they can get. Dropping the surcharge would help relieve some of the financial burdens on Ukraine, especially, which has experienced extraordinary hardship and sacrifice fighting against Russia’s war of aggression.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the International Institute of Finance, and a former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Kenya is a prime example: In 2007, a local telecommunications provider launched a form of mobile money called M-PESA, which enabled peer-to-peer money transfers between mobile phones and became wildly successful. Within five years, it grew to fifteen million users, with a deposit value approaching almost one billion dollars. To address rising security concerns, in 2013, the Kenyan government implemented a law requiring every citizen to officially register the SIM card (for their cell phone) using a government identification (ID). The measure was enforced swiftly, leading to the freezing of millions of SIM cards. Over ten years later, SIM card ID registration laws have become common across Africa, with over fifty countries adopting such regulations. 

But that is not the end of the story. In parallel, a practice called third-party SIM registration has become rampant, in which cell phone users register their SIM cards using someone else’s ID, such as a friend’s or a family member’s. 

Our recent research at Carnegie Mellon University, based on in-depth user studies in Kenya and Tanzania, found that this phenomenon of third-party SIM registration has both unexpected origins and unintended consequences. Many individuals in those countries face systemic challenges in obtaining a government ID. Moreover, some participants in our study reported having privacy concerns. They felt uncomfortable sharing their ID information with mobile money agents, who could repurpose that information for scams, harassment, or other unintended uses. Other participants felt “frustrated” by a process that was “cumbersome.” As a result, many users prefer to register a SIM card with another person’s ID rather than use or obtain their own ID.

Third-party SIM registration plainly undermines the effectiveness of the public policy and has additional, downstream effects. Telecommunications companies end up collecting “know your customer” information that is not reliable, which can impede law enforcement investigations in the case of misconduct. For example, one of our study subjects shared the story of a friend lending their ID for third-party registration, and later being arrested for the alleged crimes of the actual user of the SIM card. 

A core implication of our research is that the Kenyan government’s goals did not fully take into account the realities of the target population—or the feasibility of the measures that Kenya and Tanzania proposed. In response, people invented their own workarounds, thus potentially introducing new vulnerabilities and avenues for fraud.

Good policy, bad consequences 

Several other case studies demonstrate how even well-intentioned regulations can have unintended consequences and practical problems if they do not appropriately consider security, privacy and usability together. 

• Uganda: Much like our findings in Kenya and Tanzania, a biometric digital identity program in Uganda has considerable unintended consequences. Specifically, it risks excluding fifteen million Ugandans “from accessing essential public services and entitlements” because they do not have access to a national digital identity card there. While the digitization of IDs promises to offer certain security features, it also has potential downsides for data privacy and risks further marginalizing vulnerable groups who are most in need of government services.
  
• Europe: Across the European Union (EU), a landmark privacy law called General Data Protection Regulation (GDPR) has been critical for advancing data protection and has become a benchmark for regulatory standards worldwide. But GDPR’s implementation has had unforeseen effects such as some websites blocking EU users. Recent studies have also highlighted various usability issues that may thwart the desired goals. For example, opting out of data collection through app permissions and setting cookie preferences is an option for users. But this option is often exclusionary and inconvenient, resulting in people categorically waiving their privacy for the sake of convenience.
  
• United States (health law): Within the United States, the marquee federal health privacy law passed in 1996 (the Health Insurance Portability and Accountability Act, known as HIPAA) was designed to protect the privacy and security of individuals’ medical information. But it also serves as an example of laws that can present usability challenges for patients and healthcare providers alike. For example, to comply with HIPAA, many providers still require the use of ink signatures and fax machines. Not only are technologies somewhat antiquated and cumbersome (thereby slowing information sharing)—they also pose risks arising from unsecured fax machines and misdialed phone numbers, among other factors.
  
• Jamaica: Both Jamaica and Kenya have had to halt national plans to launch a digital ID in light of privacy and security issues. Kenya already lost over $72 million from a prior project that was launched in 2019, which failed because of serious concerns related to privacy and security. In the meantime, fraud continues to be a considerable problem for everyday citizens: Jamaica has incurred losses of more than $620 million from fraud since 2018.
  
• United States [tax system]: The situation in Kenya and Jamaica mirrors the difficulties encountered by other digital ID programs. In the United States, the Internal Revenue Service (IRS) has had to hold off plans for facial recognition based on concerns about the inadequate privacy measures, as well as usability concerns—like long verification wait times, low accuracy for certain groups, and the lack of offline options. The stalled program has resulted in missed opportunities for other technologies that could have allowed citizens greater convenience in accessing tax-related services and public benefits. Even after investing close to $187 million towards biometric identification, the IRS has not made much progress.
  

Collectively, a key takeaway from these international experiences is that when policymakers fail to simultaneously balance (or even consider) usability, privacy, and security, the progress of major government initiatives and the use of digitization to achieve important policy goals is hampered. In addition to regulatory and legislative challenges, delaying or canceling initiatives due to privacy and usability concerns can lead to erosion in public trust, increased costs and delays, and missed opportunities for other innovations.

Policy as product design

Going forward, one pivotal way for government decision makers to avoid pitfalls like the ones laid out above is to start thinking like product designers. Focusing on the most immediate policy goals is rarely enough to understand the practical and technological dimensions of how that policy will interact with the real world.

That does not mean, of course, that policymakers must all become experts in creating software products or designing user interfaces. But it does mean that some of the ways that product designers tend to think about big projects could inform effective public policy.

First, policymakers should embrace user studies to better understand the preferences and needs of citizens as they interact digitally with governmental programs and services. While there are multiple ways user studies can be executed, the first often includes upfront qualitative and quantitative research to understand the core behavioral drivers and systemic barriers to access. These could be complemented with focus groups, particularly with marginalized communities and populations who are likely to be disproportionately affected by any unintended outcomes of tech policy. 

Second, like early-stage technology products that are initially rolled out to an early group of users (known as “beta-testing”), policymakers could benefit from pilot testing to encourage early-stage feedback. 

Third, regulators—just like effective product designers—should consider an iterative process whereby they solicit feedback, implement changes to a policy or platform, and then repeat the process. This allows for validation of the regulation and makes room for adjustments and continuous improvements as part of an agency’s rulemaking process.

Lastly, legislators and regulators alike should conduct more regular tabletop exercises to see how new policies might play out in times of crisis. The executive branch regularly does such “tabletops” in the context of national security emergencies. But the same principles could apply to understanding cybersecurity vulnerabilities or user responses before implementing public policies or programs at scale.

In the end, a product design mindset will not completely eliminate the sorts of problems we have highlighted in Kenya, the United States, and beyond. However, it can help to identify the most pressing usability, security, and privacy problems before governments spend time and treasure to implement regulations or programs that may not fit the real world.

Karen Sowon is a user experience researcher and post doctoral research associate at Carnegie Mellon University.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an assistant professor of electrical and computer engineering at Carnegie Mellon University.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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First, what is a strategic reserve? A strategic reserve is a stock of a systemically important input, which can be released to manage serious disruptions in supply. The most well known example—the strategic petroleum reserve (SPR)—was created as a response to the 1973-74 Arab oil embargo, as well as to meet the reserve obligations of the international energy program. Since the 1970s, the SPR has been tapped more than two dozen times for a range of reasons: from providing critical petroleum supply after natural disasters, to most recently reducing inflationary pressures on energy prices after Russia’s invasion of Ukraine. In addition, if managed well, drawdowns of the reserve can occur when the United States is able to sell the crude oil at high prices and buy it back when prices are low.

What purpose would a strategic bitcoin reserve serve? Proponents of the idea think of bitcoin as a national and economic security asset like oil or gold. However, in economic security terms,  bitcoin clearly does not serve the same function in the US economy as petroleum. Oil is one of the basic inputs that powers our economy and daily living—crypto is not. Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.

Moreover, as this week has made clear, bitcoin price is impacted by macroeconomic factors and recovers slower, even as markets are settling down this week. As the one-two punch of an unexpectedly weak jobs report and a surprising rate hike in Japan came in over the weekend, markets all over the world reacted strongly. A bigger, mirrored dip was seen in crypto prices after Friday. What we saw is a sell-off of crypto—an exchange of a liquid asset to pay off debts and higher borrowing costs—incurred by rising uncertainty in the markets as they begin to price in a possible conflict in the Middle East, in addition to the macroeconomic data. Compare this with gold—another reserve asset—which stayed relatively stable over this period. This volatility of crypto is persistent and makes it an ineffective hedge against inflation. 

Additionally, bitcoin is only one type of crypto asset. In the case of a strategic petroleum reserve, we don’t just use one provider of crude oil, regardless of its market share. Moreover, a large majority of the US government’s seized crypto assets are in the form of tether and other assets. It’s still an open question if they would become a part of the strategic reserve.  

Since it’s not about the resilience of bitcoin during a period of macroeconomic uncertainty, or its strategic importance in our economy—what is the idea of strategic bitcoin reserve actually about? Both critics and proponents have talked about how this proposal could make bitcoin and crypto more institutionalized and  enmeshed with traditional finance, raising its popularity and use for commercial purposes. For the last five years, the crypto industry has wanted to shed its outsider status and enter the mainstream of global finance. It has been somewhat successful with the introduction of BlackRock’s bitcoin ETF this year, in addition to increased interest in tokenization experiments. This sort of institutionalization has helped, largely because it has been realistic about crypto’s capabilities and importance in global markets. 

The biggest drawback of the strategic bitcoin reserve proposal is that it prescribes crypto values it does not have, at least for now. This proposal is at best, premature, and at worst, out of touch with the reality of markets and US national security objectives. Bringing bitcoin into mainstream use is not reason enough to create a strategic bitcoin reserve. 

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Data visualization created by Alisha Chhangani.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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