This Atlantic Council Strategy Paper explores the relationship between the status of the United States as a geopolitical superpower and the role of the US dollar as the world’s dominant currency. It examines how these two facets of US power have reinforced each other and how a decline in either of them could trigger a downward cycle in US influence around the world. The report discusses options for how the United States could counteract such trends, relying on its traditional strengths and strategic alliances.

How to keep the dollar at the center of global trade

Over the past eight decades, the status of the United States as an economic and geopolitical superpower and the role of the US dollar as the world’s dominant currency have reinforced each other. As a synonym for the dollar’s preeminent role in international currency transactions and foreign reserve holdings, dollar dominance has long been associated with the United States’ exorbitant privilege to finance large fiscal and current account deficits at low interest rates. This has helped the United States run a large defense budget and conduct extensive military operations abroad. In turn, the United States has used its military capabilities to support the free flow of goods and capital across the globe, boosting global growth while providing investors with confidence that investments in US financial instruments are secure. This virtuous cycle contributed to the long-lasting stability of the post-World War II international order, leading to a sustained rise in economic welfare in the United States and around the world.

As the size of the US economy relative to the rest of the world continues to shrink, this dynamic may begin to be turned on its head.¹ Maintaining a global military presence would be harder to finance in the future if the US dollar were to lose its dominant reserve position, reversing the virtuous cycle and precipitating a US loss in global influence. This is one of the reasons why strategic competitors, such as China and Russia, currently work toward a “dedollarization” of their economic relations and global financial flows more broadly. Although last year’s BRICS summit failed to make progress on an alternative financial order, China and Russia are set on undermining the leading role of the dollar, limiting the United States’ ability to impose sanctions, and making it more costly to service its debt and finance a large defense budget.²

There is currently no other currency (or arrangement of currencies) that could challenge the US dollar’s preeminence, however. Even a smaller role of the dollar in global trade transactions would not immediately challenge its reserve currency status, given the lack of investment alternatives in other currencies at a scale comparable to US markets. The dollar has also benefited from strong global network effects that would be difficult to replace (that is, the costs for any country to divest into other currencies remain prohibitively high unless other countries do the same). Nevertheless, the tariff measures recently announced by the Trump administration could lead to a decline in the global use of the dollar, especially if they were accompanied by a decline of trust in the United States as a safe and liquid destination for global financial assets. Similarly, a proposal by the current chair of the Council of Economic Advisers to use tariffs as leverage for negotiating favorable exchange rate parities with US trade partners and to restructure their US Treasury holdings into one-hundred-year bonds—a so-called Mar-a-Lago Accord—would deliberately weaken the dollar to support domestic manufacturing. This could further erode the currency’s global dominance. Both scenarios would involve high costs to the world economy, including for the United States. More fragmented markets and higher financial volatility would be associated with income losses and higher inflation. Facing higher borrowing costs, the United States would be forced to make difficult spending decisions between its military budget, social welfare programs, and other priorities. Its global leadership role would decline, allowing strategic antagonists to benefit from any vacuum that a smaller US role would leave behind.

It is therefore vital to US national security that the dollar retain its role at the center of global trade and financial networks. This paper proposes ways for the United States to maintain the attractiveness of dollar-denominated assets for foreign investors, arguing for a speedy resolution of tariff disputes that have a strong potential to weaken its global standing. It underscores the need to compensate for a relative decline in US economic and military capabilities with strong alliances, which would deny China and other autocratic states a strategic opportunity to weaken the United States’ influence on the world stage and the exorbitant privilege that the dollar’s role as the global reserve currency still confers.

Strategic context

For the past eighty years, the United States’ economic and geopolitical preeminence and the role of the US dollar as the world’s dominant currency have contributed to a vast increase in global trade and capital flows. The “exorbitant privilege” to finance large fiscal and current account deficits at low interest rates helped the United States maintain its large geopolitical footprint, which contributed to the stability of the environment fostering global commerce and investment. However, as the center of the world’s population and economic activity has been shifting toward Asia and Africa, the virtuous cycle supporting the US-led global architecture threatens to come to an end, giving way to greater economic and geopolitical volatility.

The exorbitant privilege

The US dollar’s rise as a global reserve currency dates back to about a century ago, when the British empire was in decline after World War I. The United States had become the world’s agricultural and manufacturing powerhouse, its largest trading nation, and a major source of foreign capital around the globe. It was natural for the dollar to also become one of the major currencies used for international transactions, and it eventually started to replace the pound as central banks began to hold larger shares of their reserves in dollars in the late 1920s. The transfer was backed by the economic dynamism of the world’s richest democracy and, after 1945, its might as a victorious military power.

In the early years after World War II, the dollar was the anchor for the Bretton Woods system of fixed exchange rates, established on a US promise to exchange dollars for gold at a fixed parity. It became increasingly clear, however, that the gold-based system was not adequate for a fast-growing global economy that underwent a gradual liberalization of capital flows. In the meantime, French government officials accused the United States of exploiting the status of the dollar to run up large fiscal deficits (driven by the costs of the Vietnam war), a phenomenon they dubbed the “exorbitant privilege.”³ However, when the United States under President Richard Nixon decided to take the dollar off its gold parity in 1971, this did not provoke a major flight away from the US dollar—on the contrary, the dollar itself had by then become the anchor for the global financial system.

Today, more than fifty years after the “Nixon shock,” the United States still benefits from the dollar’s leading role in the global economy, even as the relative size of the US economy has shrunk. Until recently, dollar payments accounted for 96 percent of trade in the Americas, 74 percent in the Asia-Pacific region, and 79 percent in the rest of the world outside Europe. About 60 percent of global official foreign reserves were held in dollars, and about 60 percent of international currency claims (primarily loans) and liabilities (deposits) were denominated in dollars. The United States was the world’s largest investment destination, with foreign direct investment (FDI) totaling $12.8 trillion. Inward FDI flows have increased five-fold in the last three decades with $311 billion in new investment in 2023 (see Figures 1 and 2).

Figure 1. Inflows of foreign direct investment (FDI) to the United States were the same in 2000 and in 2023 (in millions of dollars)

Figure 2. Stock of FDI in the United States has increased five-fold since 2000 (on a historical cost basis, in trillions of dollars)

In an era of floating exchange rates and liberalized capital markets, one should nevertheless be realistic about the benefits the dollar’s status as a reserve currency. It is true that the United States can borrow exclusively in its own currency; it also enjoys somewhat lower interest costs because other countries’ official reserves are being invested in US Treasury securities; and it generates seigniorage income from dollars being held abroad. But real interest rates among the advanced economies have moved broadly in tandem in recent years, and estimates for the interest savings on US treasury bonds due to the US dollar’s reserve currency status amounted to some 10 to 30 basis points at best. The exorbitant privilege therefore seems to lie mostly in the volume of debt the US government can borrow without incurring higher interest rates. One recent estimate, for example, suggests that the reserve currency status of the US dollar increases the sustainable level of US government debt by 22 percent.⁴

US deficit financing

The large size of the US economy and demand for US government securities have made US financial markets the deepest and most liquid markets in the world, with about $27.4 trillion in outstanding US government debt as of July 2024. This has been supported by strong institutions and a transparent regulatory environment, the absence of capital flow restrictions, and the wide range of services offered by the US financial industry, which all have attracted foreign capital into the United States. The importance of US debt markets was also evident during times of crisis when global shocks tended to trigger a “flight to safety” into US assets.

The market depth and safety of US dollar assets are features that traditionally distinguished the United States from other major economies that also have large financial markets and issue bonds primarily in their own currency, such as the euro area, Japan, or the United Kingdom. Moreover, these countries do not have their own means to guarantee their geopolitical security; they depend on alliances with the United States as the ultimate sovereign guarantor. This is in large part a function of US military strength and the US nuclear arsenal, backing up NATO’s credibility as a collective defense organization. Although these factors used to be rarely invoked as an explicit factor in investment decisions, investors’ trust in the ability of the United States to preserve its dynamic economy and honor its financial obligations even during times of conflict lies at the heart of the US dollar’s global dominance.

The strong preference of investors for US dollar assets allowed the United States to run permanent current account deficits in recent decades, driven both by government spending and the low saving preferences of its households. As a side effect, the United States has often functioned as a “locomotive” for the global economy, providing growth impulses for export-oriented economies such as China, Japan, or Germany, whose high saving rates and current account surpluses are the counterpart to US deficits. Moreover, for many years, differences in the composition of US financial assets (largely FDI and other equity) and liabilities (lower-yielding bonds) provided the United States with a positive foreign income balance despite the growing amount of net foreign liabilities.

Will the good times last?

Even before the current administration sought to reorient global trade patterns by imposing tariffs on allies and other trading partners alike, the question was whether and how long the United States would be able to hold on to the dollar’s dominant role. There were several developments that pointed to a more difficult future ahead, including demographics, geopolitics, and technological trends. Already at that time, however, it was clear that domestic policy choices would ultimately determine whether the United States would hit a limit in the willingness of foreign investors to finance its rising liabilities vis-à-vis the rest of the world.

First, while the US dollar is still the world’s leading reserve currency, its share in central banks’ reserve holdings has gradually fallen in recent years. The dollar’s share declined from around 70 percent in the 2000s to 60 percent in 2022, when it was followed by the euro (20 percent) and several currencies in the single digits, including the yen, pound, and Chinese renminbi. The renminbi has gained some market share as a reserve currency in recent years; yet China, with its closed capital account and politically uncertain investment climate, has not been able to significantly increase international use of its currency. Instead, most gains have been made by a range of smaller currencies, including the Australian and Canadian dollars, reflecting digital technologies that have facilitated bilateral transactions without involving the US dollar as a bridge currency. Smaller currencies may indeed continue to gain market share, but there could also be other shifts in the global reserve composition, depending on the further evolution and impact of US trade and sanctions policies. The rise in gold prices, for example, has been attributed to central banks increasing their holdings within their reserve portfolios.

Second, US net foreign liabilities have increased sharply since the global financial crisis, increasing to about 70 percent of gross domestic product (GDP) by 2023. To put this in perspective, only Greece, Ireland, and Portugal are larger net debtors among industrial and emerging economies, and US net liabilities are equal to 90 percent of the net assets of all creditor countries combined. Since current account deficits have generally been modest over the past decade, the decline owes to valuation changes stemming from the strong performance of US equity markets relative to international markets, increasing the wealth of foreign investors holding US stocks. To serve these net liabilities, foreigners implicitly expect US companies to remain highly profitable and the United States therefore to run larger trade surpluses going forward. With the dollar gradually appreciating in recent years, it remains to be seen whether these expectations can be met or whether foreign investors will reduce their net holdings of US assets. The increasing negative interest balance (and the fact that much of the positive net returns on FDI were due to profit shifting into Ireland and other low-tax foreign domiciles) has caused some to argue that the extraordinary privilege is no longer in existence.

Third, prospects of continued large budget deficits could make it more costly to finance US government debt in the future. The Congressional Budget Office (CBO) has projected US budget deficits to remain above 6 percent of gross domestic product (GDP) over the coming years. This projection is made on the basis of current law, that is, assuming the expiration of both the 2017 Tax Cuts and Jobs Act (TCJA) passed during the first Trump administration and the healthcare subsidies passed during the Obama administration. Even under this optimistic assumption, government debt is projected to rise from 98 percent of GDP in 2024 to 118 percent of GDP in 2035. While the current administration has vowed to impose significant expenditure reductions to accompany the presumed extension of the 2017 tax cuts, failure to reduce the US deficit could drive long-term interest rates higher in coming years.

Even so, until recently, it seemed too early to worry about the safe asset status of US government securities per se. This was in large part because there are currently no instruments that could match the role of US government securities at comparable volumes. However, the stability of US debt dynamics rests in no small measure on the continued performance of the US economy, which in turn depends on strong institutions and sound economic policies. History shows that political polarization has the potential to undermine both of these pillars, a warning that would be important for the US government to heed while it is reducing government functions and cutting back its public workforce. As Steven B. Kamin and Mark Sobel write, “partisan divisions, political dysfunction, and the resultant inability to cope with the nation’s challenges” should be considered the main risks to long-term US economic prospects and dollar dominance. The administration’s willingness to risk a deep recession to launch an elusive manufacturing renaissance in the United States plays precisely into those concerns.

Even before April 2025, trade restrictions had significantly increased in recent years after declining for most of the twentieth century. The geoeconomic fragmentation driven by the COVID-19 pandemic, Russia’s war of aggression in Ukraine and, most recently, economic tensions between the United States and China, could now drive a major reorganization of global economic and financial relationships into separate blocs with diminishing overlap. A study by the International Monetary Fund (IMF) estimates that greater international trade restrictions could reduce global economic output up to 7 percent. In case of a wider trade conflict, smaller countries could be increasingly forced to choose sides, with those moving closer to China likely aligning their currency use for international transactions and reserves away from the US dollar and the euro.

Fifth, the United States has used sanctions as a tool of foreign policy, particularly against Russia in the wake of its 2022 invasion of Ukraine. This led to the suspension of trading in US dollars on the Moscow Exchange (MOEX), disrupting financial operations not only within Russia, but also affecting other international market players as a result of the extraterritorial nature of the US sanctions. Since 2014, following the sanctions related to the annexation of Crimea, Russia has increased its use of the Chinese yuan, which became MOEX’s most-traded currency (54 percent in May 2024). Concerns about their bilateral trade relations with Russia and China have other countries looking for alternatives to mitigate possible risks associated with US dollar transactions, for example, in the BRICS grouping, which is set to further expand its membership of emerging market economies in coming years. If accompanied by bilateral tariff increases, as currently envisaged by the Trump administration, this could have further implications for the dollar’s role in global trade transactions.

Finally, in the context of a geopolitical fallout, potential tariffs between the United States and the EU could significantly impact the transatlantic economy, which remains the most important bilateral trade and investment relationship for both partners. For example, a 10 percent universal tariff on all US imports is projected to reduce EU exports to the US market by one-third, and subsequent retaliation could similarly hurt US exporters. Higher interest rates in response to tariff-induced inflation would have additional growth implications. All this could heavily weigh on financial markets on both sides of the Atlantic, further reducing the attractiveness of US dollar-denominated assets.

Limits to military superiority

Any developments that weaken the US economy and the role of the dollar could also affect the United States’ ability to preserve its military superiority. China is in the middle of an extraordinary defense buildup that is challenging US strategic positions in the Indo-Pacific theater. Moreover, the Ukraine war has led to stepped-up cooperation between Russia, Iran, and North Korea (which has been contributing troops to compensate for Russia’s losses), and China increasingly supports Russia’s armament efforts by supplying it with drones and dual-use technology.

The United States and Europe have also been pushed on the defensive in Africa as China, especially, has made strategic inroads there, as have Russia, India, and countries in the Persian Gulf. Many countries are looking to China for help in developing their energy and transport infrastructure, imports of low-cost consumer and investment goods, and market access for their own exports, allowing the use of strategic ports and other locations in exchange.

At the same time, China has a hold on supply chains involving critical raw materials, controlling 85 percent of the world’s refined rare earth materials, which are crucial for high-tech military technologies. If made unavailable to the United States, this could significantly complicate the production of advanced weaponry. The global processing capacity for critical raw materials is also highly concentrated in China, providing it with means to influence market prices and access, and creating supply chain vulnerabilities and dependencies.

Advances in military technology toward low-cost weapons, lower procurement costs in competitor countries, and a relative decline in US manufacturing capabilities (e.g., in shipbuilding) pose significant challenges to US military strength. While the United States retains a large nominal advantage in military spending over other competitors, the discrepancy is smaller when considering cost differences; in other words, the United States has a smaller advantage in real terms than suggested by simple budget comparisons (see Figure 3).

Figure 3. Combined military spending by China, Russia, and India outstrips the US when calculated by purchasing power parity (2019, in billions of dollars)

In fact, a recent congressional review of US defense strategy has raised concerns that the United States is not ready for a multifront war spanning theaters in Europe and Asia. US forces have also been slow to adopt new battlefield technologies, including a trend toward autonomous weapons systems, which will take considerable time to redress. In addition, the end of the New START treaty in 2026 could trigger a nuclear arms race that would force the United States to expand its nuclear forces after decades of deep cuts.

While the United States is still the only country able to project military power at any point in the world, it is unlikely to be able to respond to these challenges on its own. The room to dedicate additional fiscal means to the US defense budget is increasingly circumscribed by growing interest and entitlement spending (see Figure 4), and even under optimistic assumptions, there is a risk of strategic overreach for the United States, given the magnitude of challenges across different regional theaters.

Figure 4. Projected federal outlays show entitlement spending and growing interest may curb defense spending (2025, as a percentage of federal revenues)

While US presidents have long called for European nations to play a bigger part in their own defense, the second Trump administration has ramped up the pressure on NATO allies to take on a larger military role and financing burden in the European theater. However, raising the combat readiness of European armed forces will require several years under the best of circumstances. Unless the United States is willing to cede military dominance in Europe to Russia, it will need to continue supporting its European allies—including in arms production, securing supply chains, and military burden sharing—for the foreseeable future.

If the United States were to forgo a deepening of its alliances in Europe and become outmatched by China in Asia, it could in principle still benefit from the relative safety of its continental geography. However, it would face a loss of military stature and reduced global reach. No longer being a global hegemon, the United States would not be able to protect global trade and financial flows in the way it has done in the past, hurting itself and other economies that similarly benefited from open trade. The United States would leave a vacuum of power that would most likely be filled by China and other autocratic countries, with detrimental effects for its own security and economic stability.

Goals

This paper proposes a strategy to preserve the US dollar’s lead role in international markets, allowing it to continue attracting foreign capital at favorable interest rates. As laid out above, the dominant role of the US dollar has been a key element in a decades-long virtuous cycle that allowed the United States to finance its large military apparatus while expanding its social safety net and keeping a low tax burden.

With the rise in public debt and the sharp increase in net international liabilities, this cycle cannot continue indefinitely. The time has come for the United States to begin reining in deficit spending and rebuilding its fiscal position. Notwithstanding the Trump administration’s commitment to this objective, this process will take time, given continued pressure on defense and entitlement spending. Continued dollar dominance would therefore be critical for keeping a lid on interest rates while nurturing a political consensus that could lead to a lasting decline in government deficits over several administrations.

Continued dollar dominance would also be beneficial from a geopolitical perspective, providing the United States with leverage in shaping the future of global finance, leadership in multilateral organizations, and the continued possibility of sanctioning opponents to raise the cost of acting against US interests. Having said that, the United States’ ability to dominate global developments on its own will likely continue to diminish. To maintain and reap the full benefits of the dollar as a reserve currency, it will need to rely more on networks with countries that have trade, financial, and security interests that align with those of its own. These networks evolve around shared interests, and they will only thrive in an environment of mutual respect and give-and-take.

Breaking up such networks by way of a US isolationist withdrawal—the possibility of which is as high as it has been at any time in the past century—would trigger a fragmentation of the global economic and security landscape with large losses in general welfare (i.e., prosperity and well-being) both in the United States and abroad. It would accelerate the decline in the dollar’s reserve status as it could force countries to fundamentally rethink their security arrangements, possibly leading to a reorientation of trading and financial relationships toward China and other illiberal states.

In fostering US interests, the objective for US policymakers should therefore be to maximize the mutual advantages accruing from working with countries that benefit from the United States’ global economic and security footprint, as well as the stability provided by the dollar as a leading currency. If the United States manages to pursue its domestic interests while remaining at the center of a network of powerful alliances, the dollar’s reserve currency status and its exorbitant privilege could serve US interests for years to come.

Major elements of the strategy

In principle, the new US administration has a strong opportunity to address the geopolitical challenges facing the United States, given its decisive electoral victory and control over both houses of Congress. While there is clearly a risk that ideological priorities might preempt serious work on other issues, the presence of growing external threats should eventually refocus attention on several objectives that would be in the strategic national interest.

Foster strong and robust long-term growth

The first objective coincides with one of the administration’s key priorities, namely, to create the conditions for strong US economic growth and employment over the long term. This is a necessary condition for the United States to retain its economic and military superpower status: Without a strong economy, the burden of maintaining a global footprint would eventually become suffocating and capital would become increasingly unavailable to support a growing debt burden. In the worst case, the United States would follow the example of the United Kingdom, whose leading global status was gradually eclipsed by other powers during the last century (see Figure 5).

Figure 5. China’s GDP growth rates have outpaced those of the United States and the European Union for more than two decades (2000–2024, measured at constant prices)

The question is how the dynamism of the US economy can be maintained against the background of weakening demographics, rapid technological change, and fragmenting global trade. These trends challenge the business model of established US companies, especially those competing against Chinese or other firms that benefit from the tools of state capitalism being deployed by their home countries. Moreover, supply chains for critical raw materials and intermediate products seem more tenuous in the future, given the dominant position of China in key industries.

From a trade perspective, there are two considerations that the administration should have balanced. On the one hand, firms should be allowed to continue to operate in an open and competitive market environment that rewards innovation and efficiency, in turn allowing the United States to reap the productivity gains necessary to generate future gains in income and welfare. On the other hand, it would be naive to expect US companies (or industries) to thrive in sectors where state-backed competitors enjoy large-scale cost advantages due to extensive subsidies or other forms of state support. This suggests that the new administration should have avoided a protectionist trade stance, shielding a large part of the US economy from foreign competition. However, it should also have been prepared to stave off an economic decline of sectors that could be critical for long-term economic or military purposes.

In early April, however, the administration took an opposite approach by raising tariffs on almost all other countries in proportion to bilateral trade imbalances. (Many of the highest tariff rates were temporarily paused a week later, leaving a 10 percent rate on most of the world for now.) Apart from their economic and financial fallout, these measures are unlikely to significantly reduce the overall US trade deficit, given (a) the substantial difference in domestic saving rates between the United States and large trading partners; (b) retaliatory measures taken by many countries; and (c) trade diversions and exchange-rate adjustments that will counter some of the effects of the tariffs.

It remains to be seen whether investment in the United States will pick up to a significant extent, given the uncertainty about the extent and duration of the trade restrictions currently in place. Moreover, labor-intensive manufacturing industries will have a hard time regaining a footing in the United States, given the falling costs of automation and persistent labor cost differentials with emerging markets and developing countries. A major plank of a strategy to boost employment and long-term growth should therefore lie in a speedy resolution of trade negotiations and a reduction in bilateral tariff rates between the United States and its largest trading partners, particularly Europe, Japan, and China.

The United States should also focus its industrial policy on boosting innovation, protecting or regaining technological advantages, especially in artificial intelligence (AI) and quantum computing, preserving access to supply chains and export markets, and maintaining strategic production capacities, preferably in conjunction with its European and Asian allies.

Beyond trade policies, there is a much larger agenda to strengthen the growth fundamentals of the US economy. This includes building a growing and better educated workforce that can translate AI and other innovative technologies into commercial products that can be sold in a global marketplace. Given the significant returns to scale in digital technologies, the United States should ensure that its institutions are strong enough to ensure a fair and transparent marketplace and combat monopolistic practices.

All of this would help the United States preserve its productivity advantage vis-à-vis the rest of the world, a key condition for durable real wage growth and rising living standards. To ensure that gains are distributed broadly throughout society, the expiration of key provisions of the 2017 TCJA provides an opportunity to boost incentives for new investment and labor-market participation while generating additional revenues from higher incomes and economic rents.

Moreover, while the new administration has a critical view toward illegal immigration, cutting off the legal flow of well-educated foreign students and productive workers into the United States, a key ingredient for its past economic success, would be an unforgivable own goal.

Regain fiscal room to maneuver

Despite the projected increases of US government debt in coming years, the United States has been able to easily finance large deficits and is expected to do so in the future. However, the increasing amount of outstanding debt, as well as the rise in the average interest rate paid by the federal government, are constraining the budgetary room for new initiatives by the incoming administration. The share of discretionary spending—that is, spending not mandated by debt obligations or entitlement programs such as Social Security and Medicare—has already fallen from around 50 percent in the 1990s to below 30 percent today. As this share is projected to shrink further over the coming years, the trade-off between defense spending (which currently accounts for about half of all discretionary expenditure) and other priorities (such as infrastructure spending) is becoming stronger.

Everything else equal, reining in the fiscal deficit would therefore have a positive impact on long-term interest rates and crowd in private investment, a key ingredient for long-term growth. Although the creditworthiness of the United States is not yet in doubt, the increase in US government bond yields after the 2021 inflation scare, as well as the rise in bond yields after the April tariff announcements, has been a wake-up call, indicating a departure from the low-interest environment of the 2010s. It also increased the cost of private-sector investment, including higher mortgage rates that have contributed to a significant drop in new housing construction.

The first-best option to realize budgetary savings would be on the back of sustained robust growth, as discussed in the previous section, whereas deficit-financed tax cuts or spending increases would deepen the United States’ long-term fiscal quandary. Fiscal policy should instead focus on enhancing the efficiency of the tax system and reducing public expenditure—especially in the health sector, where the United States outspends other advanced economies by a large margin while achieving inferior outcomes.

However, imposing across-the-board spending cuts and labor-force reductions are not a proven tool to generate significant fiscal savings. They have a relatively small budgetary effect but a possibly significant impact on the government’s ability to function, which will eventually have to be rectified through new hirings. Given the demographic trajectory, there also is a need at some point for better targeting or changing the economic parameters of US entitlement programs (the “third rail” of US politics), but with continued dollar dominance, the United States would still have the space for a gradual phase-in of policy reforms.

Maintain deep and liquid financial markets

US financial markets are attractive to foreign investors because of their openness and underpinning by transparent and market-friendly rules established by US law. As a result, foreign portfolio holdings in US equities amounted to $13.7 trillion in 2023, and foreign investors owned $7.6 trillion in Treasury securities, equivalent to about a third of publicly held federal debt. Moreover, foreign deposits in the US banking system have steadily risen to about $8 trillion in 2024, highlighting the important role of foreign capital for the functioning of the US economy. Besides maintaining a welcoming framework for foreign investors, the United States will also need to ensure that financial market regulations remain effective and stay up to date with technological developments.

The more volatile geopolitical and economic environment has already tested the resilience of US financial markets, and both regulators and private entities should be prepared to deal with future shocks. As in other advanced economies, for example, US banking regulations have considerably tightened since the 2007–2009 global financial crisis; but the failures of Silicon Valley Bank and several other midsize institutions have revealed continued supervisory problems. US and European regulators were close to concluding an extension of the Basel Accord (Basel 3.1), but momentum has been lost given strong resistance by the financial industry on both sides of the Atlantic. Even if the new administration were unwilling to pursue negotiations within the Basel Committee, or planning to consolidate regulatory agencies, it must not lose focus on ensuring that banks remain well-run and adequately capitalized.

In a similar vein, there have been episodes in recent years when liquidity in US government bond markets collapsed, threatening to severely disrupt the workings of the global economy (with daily trading volumes in the Treasury bond market averaging $600 billion in 2023). Both the September 2019 repo crisis and the March 2020 meltdown required emergency intervention from the Federal Reserve system to keep the markets operational. Changes to the functioning of markets, including channeling a larger number of transactions through clearing agencies and improving transparency, should help reduce uncertainty during times of crisis, provided they are left in place by the new administration.

This, of course, assumes that there are no policy accidents, such as the US Congress not authorizing a debt ceiling increase, which could lead the United States to default on its government bonds and seriously undermine the US dollar’s standing abroad. Similarly, a forced change in the terms of US government bonds as has been proposed by some analysts, especially if directed at foreign investors, carries the risk of a large repricing of US financial instruments that could be traumatic for financial markets worldwide.

In the realm of financial regulation, the United States had until recently taken a conservative approach to innovative technologies such as stablecoins and cryptocurrencies. A 2022 report by the Financial Stability Oversight Council found that activities involving crypto assets “could pose risks to the stability of the US financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure.”

The new administration has adopted a more welcoming approach, with several crypto proponents taking on key roles in US regulatory agencies. This pro-cryptocurrency stance may well lead to stronger innovation, but it could also contribute to heightened market fluctuations and uncertainties. Even under a lighter touch, new rules and regulations are likely to emerge from this transition phase. While this will pose some compliance challenges for companies, it will still be important to balance innovation with financial stability concerns. Introducing appropriate safeguards and maintaining a strong commitment to ethical practices will prove essential for helping businesses navigate the evolving landscape, build trust with consumers and regulators, and ensure the long-term success of digital payments.

By contrast, the Trump administration’s negative stance on the creation of a US central bank digital currency (CBDC) creates a potential risk to the dollar’s global standing. While there is indeed no clear use case for a CBDC at present, and adoption of retail CBDCs in most countries so far has been small, technological developments in this area are hard to predict. The United States might prefer to foster US dollar-based stablecoins rather than a CBDC to cement the dominant role of the dollar, but there is a risk that it could fall behind if a large number of other countries were to shift to CBDC-based settlement technologies. Moreover, given the challenging nature of digital currencies, the United States would not be able to shape international regulations that promote the efficient use of CBDCs and address critical concerns related to money laundering, fraud, and consumer protection.

Strengthen relations with emerging markets and developing countries

As the United States and Europe vie to preserve their geopolitical primacy against the onslaught from Russia and China, it is important to keep in mind that the world’s demographic center of gravity has already begun to shift toward Africa, India, and Southeast Asia. The geopolitical weight of these regions is still relatively modest, but their economic role is expected to steadily increase due to powerful demographics. Compared to China, the United States has been slow to recognize the importance of intensified trade relations with countries that may relatively soon become key export markets for US companies and engines for global growth.

Not long ago, the United States and other industrial countries were the major source for development finance, including through bilateral aid and in their role as majority shareholders in the Bretton Woods Institutions. The results of this decades-long engagement were decidedly mixed, however. Numerous large emerging-market countries thrived after the crises of the 1990s, but loans to many developing countries turned sour as countries failed to sustainably generate increases in per capita incomes. Member countries of the Organisation for Economic Co-operation and Development (OECD) consistently missed their targets for grants and other development aid, and developing countries have accused the industrialized world of not providing adequate compensation for the damage caused by past CO2 emissions.

China has used this opportunity to project itself as a friend and partner for many developing countries. Deploying its ample foreign exchange reserves (which it has been keen to direct away from US Treasury bonds), China’s Belt and Road Initiative has financed investment projects in resource-rich and strategically located developing countries—surpassing one trillion dollars—deepening trade and political relationships in a way that the West has been unwilling to match, and making China the world’s largest debt collector. China has leveraged these relationships to secure access to critical minerals and set itself up as the market leader in their processing and refining, gaining geopolitical leverage against the United States in the event of a future trade war. China has also received considerable diplomatic support from developing countries for its policy of unification with Taiwan.

The United States and its Western partners should urgently contest China’s position as an informal leader of the developing world. There is space to do so, as many countries have been disillusioned by China’s self-interested motives, which have often left them with badly executed infrastructure projects and high debt that proved difficult to restructure. To be successful, however, the United States and its allies must increase the speed and volume of their engagement with developing countries, offering projects and loans that exceed those of Chinese lenders in quality while being competitive in cost and timeliness. The Trump administration should therefore advance the planned restructuring of the former US Agency for International Development (USAID) under the State Department or the Development Finance Corporation (DFC), resuming support for partner countries in need of economic assistance.

Moreover, given tight national budget constraints, the Bretton Woods institutions should be more tightly integrated in a strategy to support friendly countries in the developing world. To do so successfully, they will need to remain firmly under Western control. However, to preserve their legitimacy as international institutions, they will need to stay focused on their essential mandates, which still enjoy widespread support.

However, the past few decades have shown that a strategy based merely on loans and development aid is not enough. Developing countries also require better market access to boost exports and raise their growth trajectories. While this will be hard to legislate both in the United States and Europe, there could be significant long-term benefits from a gradual market opening. First, it would preempt Chinese companies from cornering markets in countries with strong population growth, and second, pressures for migration could diminish as income in source countries would rise over time. Taking the long view, healthy trade and investment relations with the dynamic economies of tomorrow would benefit the standing of the US dollar.

Finally, the use of sanctions as a tool to achieve geopolitical objectives is a double-edged sword, and they should be used in a more targeted and sustained manner. The primacy of the dollar enables the United States to effectively exclude targeted individuals and economies from the global financial system. However, the effectiveness of sanctions declines over time as actors find ways to circumvent them; at worst, the broad application of sanctions against other countries can lead to a reorientation of global trade and financial relations that could undermine the dollar’s preeminence. For example, the desire of BRICS countries to develop alternatives to the use of the dollar may be inconsequential at present, but it could eventually become one of many factors that relegate the dollar to a less dominant position in global payments and reserve arrangements.

Preserve military superiority

The US National Security Strategy (NSS) recognizes China as a major national security challenge, emphasizing its ambition and capacity to alter the rules-based international order. As a result, the 2022 National Defense Strategy (NDS) focuses on bolstering US deterrence against China, with a strong emphasis on collaboration with allies and partners. Russia also poses a direct threat to US and transatlantic security, particularly in light of its invasion of Ukraine and the resurgence of traditional warfare in Europe. Additional challenges include threats from North Korea, Iran, and terrorist organizations as well as the rise of authoritarian powers, disruptive technological advancements, global economic inequality, pandemics, and climate change.

To preserve its power, strengthen deterrence, and build an enduring advantage, the United States should better integrate its military efforts with the other instruments of national power, such as economics and diplomacy. In an era defined by strategic competition and the rapid diffusion of disruptive technologies, preserving technological superiority is essential. This requires robust investment in research and development, particularly in innovative technologies like advanced weapons systems, satellites, AI, autonomous systems, and human-machine teaming to enhance the efficiency and effectiveness of US military forces.

The US defense budget, which was $816 billion in 2023 (see Figure 6), constitutes about 40 percent of global military spending and is projected to increase by 10 percent by 2038 (after adjusting for inflation), reaching $922 billion (in 2024 dollars), according to the CBO; 70 percent of that increase would go to compensate military personnel and pay for operations and maintenance. However, defense spending comprises 3.5 percent of US GDP, down from 5.9 percent in 1989, and 13.3 percent of the federal budget compared to 26.4 percent in 1989 (see Figure 7).

Figure 6. US military spending has increased sixfold from 1980 to 2023 (in billions of dollars)

Figure 7. US military spending has remained steady as a percentage of GDP but fallen as a share of federal spending (1980–2023)

During the first Trump administration, the US defense budget saw significant increases focusing on military modernization and development of new technologies, as well as the creation of the Space Force as a new branch of the military aimed at addressing emerging threats in space. The second Trump administration will likely focus on increasing defense budgets as the “peace through strength” doctrine advocates for a robust military presence to strengthen deterrence.

Aligning defense spending with the goals of the NDS requires prioritization of investment in nuclear modernization, missile defense and defeat programs, and resource allocations across air, sea, and land forces in line with strategic objectives, ensuring the efficient use of budgetary appropriations with a focus on the quality of military capabilities over quantity.

This effort would help sustain the global dominance of the US dollar by deterring geopolitical challenges and ensuring stability in international financial and trade systems, minimizing economic coercion, and reassuring global investors of the security and profitability of the US market. The US Navy plays a crucial role in securing global trade routes by keeping sea lanes open, facilitating the free flow of goods and capital. Additionally, strategic alliances and security arrangements with key oil-producing nations, particularly the Gulf states and Saudi Arabia, reinforce the petrodollar system, sustaining global demand for the US dollar in energy markets. Furthermore, US military and geopolitical strength underpin the credibility of economic sanctions, a critical tool of financial influence and dollar dominance.

Leverage military alliances

The 2022 US NSS emphasized alliances and partnerships as fundamental aspects of the US foreign policy to maintain a competitive edge in an era of strategic competition, including military collaboration, economic partnerships, and diplomatic interactions throughout the transatlantic and Indo-Pacific regions. In this aspect, strengthening relationships with key partners such as India and Japan is regarded as pivotal in addressing China’s increased influence. This includes joint military exercises, as well as sharing intelligence, and combining resources for defense initiatives.

The United States should collaborate with allies to create a secure environment by prioritizing comprehensive resilience in a community that can effectively respond to any security or defense crisis posed by adversaries, authoritarian regimes, malign state and nonstate actors, disruptive technologies, or threatening global events such as pandemics and climate change.

To bolster national security, strengthen military capabilities, foster economic resilience, and maintain global competitiveness, the US administration must prioritize a robust division of labor and responsibilities across key strategic areas, such as manufacturing, military operations, supply chain management, and weapons production. The division of labor with allies and partners enhances further efficiency and productivity, allowing partners to focus on their strengths, streamlining processes in specialized manufacturing companies while reducing costs, and providing access to advanced technologies critical for national defense. Pooling resources and know-how enables allies to share advanced technologies, coordinate and streamline production processes, and build strategic stockpiles.

Collaboration with allies plays a vital role in fostering resilient and redundant supply chains that are critical for diversifying sources of critical materials and reducing vulnerabilities in the face of global disruptions; it also fortifies national defense while promoting mutual security and economic stability. Securing critical supply chains is crucial to safeguard national security and the US administration should develop a National Defense Industrial Strategy to coordinate efforts across government agencies to prioritize resilience and protect the integrity of supply chains critical to defense manufacturing and operations.

Some elements of the above are already in place but need further enhancement and stronger commitment, particularly by leveraging economic opportunities. The United States must align economic and security interests within its alliances. Strengthening NATO’s economic coordination can ensure allies remain integrated into the dollar-based system through trade and defense procurement; it also can promote dollar-based investments in European defense, especially as European NATO partners are committing more resources to the defense sector.

Similarly, an expansion of international alliances and cooperation with a larger number of countries would reinforce dollar-based trade conditions in security agreements and promote standardization with US financial institutions among Indo-Pacific partners. Recommended actions include:

• Expanding the AUKUS security pact (with Australia and the United Kingdom) and the role of the “Quad” alliance (including Australia, India, and Japan) in economic security.
• Enhancing naval cooperation in key maritime regions and with nations that control strategic trade chokepoints.
• Increasing coordination through a strategic allied council, as warranted.

In addition, effective communication would be essential to articulate the nature of the threat with clarity and promote credible narratives to safeguard the information space against propaganda campaigns, cyber influence operations, and the weaponization of social media. Proactive information strategies devoted to strengthening partnerships with like-minded democratic nations can protect public trust and reinforce resilience.

Assumptions and alternatives

This strategy paper is based on several assumptions that are central to its proposals and the period over which they should be implemented.

• First, there is no fundamental change in the principal characteristics of the Chinese economy, namely a heavy degree of state intervention and a closed capital account. India is also assumed to maintain capital account restrictions, and Europe will not implement a single capital market for some time. A change in these conditions could prompt some reserve flows into the respective currencies, but it would still be deemed unlikely that capital markets in these countries would evolve to a point where they could compete with the United States in depth and liquidity.
• Second, US deterrence in key military theaters (Europe, South China Sea, Korean Peninsula) will remain effective for the time being, and the United States does not get drawn into an active military conflict, for example, over Taiwan. Otherwise, the United States would have to shift toward a more decisive and short-term war strategy.
• Third, the United States remains dominant, or at least competitive, in developing critical technologies such as AI, microchip production, cryptology, and communications. It will be able to defend strategic assets, such as major military bases, carrier groups, space technology, or command, control, and communications (C3) infrastructure, against physical or virtual attacks. Failure to do so would make the United States more dependent on the technological capacities of its allies, requiring more effective coordination and systems integration that would be hard to achieve over a short time horizon.
• Fourth, another important assumption is that the new administration will also realize that the United States is indeed lacking the resources to remain the sole military hegemon for much longer. Adopting a more realistic approach will not come without challenges to its own credibility, as the wider US public has yet to realize that technological progress has narrowed the military advantage held by the United States over its competitors, that the room for discretionary government spending could narrow dramatically over the coming years, and that US manufacturing would not be capable of supporting a major military conflict for long. In the event of a future conflict, public support for the Trump administration, or for any US government down the road, could evaporate quickly if these expectations were not corrected through public communication in good time.

The new administration may fear that collaborating more closely with political allies, including the necessary compromises it would require, could lead to a perception that foreign interests are driving US policies. At the same time, the increasing cooperation between China, Russia, and North Korea highlights that the Trump administration would not be able to focus on China alone, as it has stated in the past, while leaving its European partners to deal with Russia entirely by themselves. On the contrary, the lack of an effective European nuclear deterrence might force Europe to increasingly fulfil Russia’s geopolitical demands to avoid armed conflict, potentially allowing Russia to undermine political and economic relations between the United States and Europe. Since Europe remains the United States’ largest trading and financial partner by a significant margin, it should be clear that such a strategy would be entirely self-defeating.

As for some of the tariff and exchange-rate pronouncements by the Trump administration, it is important to keep in mind that an economy with free capital movements and an independent monetary policy cannot pick a specific value for its foreign exchange rate (the “impossible trinity” of economics). In the case of the United States, this means that an imposition of tariffs to weaken the dollar, as has been floated by President Donald Trump during the election campaign, will not change the fact that the US dollar exchange rate remains market determined as long as the United States allows unrestricted capital inflows and outflows and has an independent Federal Reserve. In particular, the exchange rate of the dollar would continue to reflect differentials in saving rates among major trading partners, over which the United States has limited influence.

If the new administration were serious about attempting to depreciate the value of the dollar, it could only do so by undermining its appeal as a safe asset to foreign investors. One way to do this would be to renege on the US commitment to free and open trade and capital flows, which have formed the basis for robust growth over many decades. Tampering with the independence of the Federal Reserve, let alone with the US legal system more broadly, could trigger significant financial volatility, including increases in the market interest rate on US government debt, major stock market losses, and a shock to the US economy that could dwarf any gains from what might be considered as a more favorable exchange rate. The self-defeating nature of such moves would quickly become evident; but if confidence is lost, it would be difficult to restore.

Indeed, there are few credible alternatives for any US administration other than leveraging the strength of the US economy and its currency against the growing autocratic threat while operating in close alliance with other democracies.

• Withdrawing into self-isolation, as in the 1930s, could provide a false sense of security in today’s interconnected world. It would undermine the global dominance of the dollar by weakening its economic and strategic influence as allies and partners may hedge against US unpredictability, seeking alternative financial systems to diversify. Moreover, such a policy would allow other countries to occupy geostrategic positions to the detriment of the US economy and national security.
• Similarly, accommodating strategic opponents like Russia or China would undermine trust in US leadership and lead to strategic losses in all theaters. Without the United States providing strong global leadership, other countries would not be able to thrive without catering to the interests of the other powers, and the United States could enter a phase of economic decline.

Finally, the most likely alternative to the strategy outlined above would be that the United States remains mired in a polarized political environment that leads to short-sighted policy decisions that fall short of the strategic challenges ahead. Most importantly, the United States would not be able to improve its fiscal situation and eventually would lack the resources needed to maintain its strategic financial and economic dominance and the superiority of the dollar. The continued erosion of US power might not be catastrophic for the United States itself, but it could trigger bouts of political instability and economic volatility around the globe, with negative consequences for the role of the US dollar and the welfare of US citizens.

Conclusion

This paper outlines a strategy for the United States to maintain dollar dominance. It argues that the United States will likely remain the world’s largest economic and military power, though it will face increasing difficulties in pursuing its strategic objectives on its own. There is a risk of military overreach as US defense spending is competing with other public expenditure priorities. Additionally, high fiscal deficits could further weaken the exorbitant privilege that has enabled the United States to sustain large fiscal and currency account deficits in the past.

The stakes are now higher compared to eight years ago, when Trump first took office, both because of the run-up in public debt during that period and because Russia and China are now more closely aligned in trying to weaken the democratic West. While reining in the fiscal deficit and boosting the US economy’s growth potential, the administration should proceed cautiously, preserving economic and diplomatic relations with existing allies. The United States should also strengthen partnerships with emerging markets and the developing world, where countering China’s efforts to co-opt countries into its economic and political orbit should become a strategic priority.

Executive editors

Frederick Kempe
Alexander V. Mirtchev

Editor-in-chief

Matthew Kroenig

Editorial board members

James L. Jones
Odeh Aburdene
Paula Dobriansky
Stephen J. Hadley
Jane Holl Lute
Ginny Mulberger
Stephanie Murphy
Dan Poneman
Arnold Punaro

The Scowcroft Center is grateful to Frederick Kempe and Alexander V. Mirtchev for their ongoing support of the Atlantic Council Strategy Paper Series in their capacity as executive editors.

Fellow

Martin Mühleisen

Nonresident Senior Fellow

GeoEconomics Center

Digital Currencies Economy & Business

Fellow

Valbona Zeneli

Nonresident Senior Fellow

Europe Center Scowcroft Center for Strategy and Security

Albanian Corruption

Atlantic Council Strategy Paper Series Feb 12, 2025

Global Foresight 2025

In this year’s Global Foresight edition, our experts share findings from our survey of global strategists on how human affairs could unfold over the next decade. Our team of next-generation scholars spot “snow leopards” that could have major unexpected impacts in 2025 and beyond. And our foresight practitioners imagine three different scenarios for the next decade.

Civil Society Climate Change & Climate Action

Issue Brief Apr 10, 2024

Standards and interoperability: The future of the global financial system

By Ananya Kumar, Alisha Chhangani, Jennifer Lassiter, and Katherine Haar

Digital assets promise enhanced efficiency, inclusion, transparency, and choice to global payments. But to fulfill this promise, the international community must first develop interoperability standards.

Digital Currencies Economy & Business

Dec 11, 2023

Dollar Dominance Monitor

The Dollar Dominance Monitor analyzes the strength of the dollar relative to other major currencies across the world. The project presents interactive indicators to track China’s progress in developing an alternative financial infrastructure.

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1. What did the IMF agree to and what is being asked of Argentina?

Argentina approached the IMF for a new program because it wanted to unwind strict controls on capital outflows that have been an obstacle for foreign investment over many years. Removing these controls could have led to a sharp depreciation in the exchange rate, which is why the government needed to bolster its foreign exchange reserves with IMF funds, both to instill confidence and to intervene, if necessary, to maintain orderly market conditions.

The IMF was willing to provide Argentina with another loan of twenty billion dollars, coming on top of the outstanding forty billion dollars that Argentina will still need to repay. About eleven billion dollars of the new loan will be used to cover loan repayments to the IMF over the next four years. However, given the substantial frontloading of the IMF’s disbursements, the IMF’s peak exposure to Argentina will increase to some $58 billion in 2026. The program is conditioned on the path of the government’s primary deficit, a halt on central bank financing of the government, and a floor under social expenditure, among other conditions. As a precondition for program approval, the government committed to let the exchange rate float within a band of 1,000 to 1,400 pesos per US dollar and to abandon current and capital account exchange rate restrictions.

—Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF official with decades of experience in economic crisis management and financial diplomacy.

What is striking is not only the scale of the program and disbursements, but that both parties have agreed to a plan that presents a roadmap with significant support from other multilaterals (the IDB and World Bank) as well as from the market. The accumulation of reserves and the continuation of Argentina’s fiscal consolidation, as well as the elimination of the cepo, are all objectives that the market and investors have been pushing for as the next step of the Milei administration’s impressive reform agenda, as we explained in December. Now, this new agreement appears to be a roadmap to assuage investor concerns and strengthen the country’s ability to deepen its reforms and respond to global uncertainty.

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

2. What does this mean for Argentina’s economy?

One of the key takeaways is that Argentina, and the Milei administration more specifically, now has the ability to think about the next chapter in its stabilization and reform agenda, with an emphasis on the latter. With the limitations that the agreement sets on the central bank’s ability to intervene in the foreign currency market (so long as there are no wild moves in the exchange rate) the bank should now be able to shore up its reserves by focusing on the acquisition, rather than the sale, of dollars. This will likely be done conservatively to prevent an upward pressure on the local dollar value, but it is good news in the medium term for Argentina’s reserves and for the sustainability of its debt.

Looking ahead into 2026, if the exchange rate holds within the agreed-to bands and the country acquires significant reserves, this will allow Argentina to reenter international capital markets and access private financing at lower rates (because of the lower risk that more reserves entail). This, in turn, would allow the country to meet its obligations with foreign creditors while seeing its country risk fall further, finally bringing down its sovereign risk premiums to levels closer to the regional average. This is a necessary condition to unleash the foreign investment that the country needs to fulfill its potential.

—Jason Marczak

The reforms of the Milei government have boosted confidence in its ability to lift Argentina’s economy on a durably higher growth path at lower inflation. To maintain public support after this past year’s painful but necessary budget-cutting exercise, it is essential that private investment now kicks in to support employment and growth over the coming years. The removal of capital controls is an important component of this plan, along with other structural reforms that are partly covered by the program.

However, the exchange rate is still overvalued, which by itself is reducing Argentina’s attractiveness as an investment destination, and a rapid exchange rate adjustment could lead to a resurgence in inflation. This could undermine economic as well as political sentiments, proving fatal for the overall reform effort. The IMF’s support could therefore be critical for the government to maintain its market-friendly policy course.

—Martin Mühleisen

3. Is this a vindication of Milei’s stabilization plan? What might this mean for Argentina’s politics?

The IMF has been in a difficult position. The loan will significantly increase its already large exposure to Argentina, which has a history of difficult and controversial programs with the IMF. In case of a global downturn, there is a risk that growth may again disappoint, leading to further peso depreciation and resurgent inflation. Given the political significance of the exchange rate, the government could then be tempted to use its reserves to artificially prop up the peso in the run-up to this year’s midterm elections, a strategy pursued with disastrous results by some previous governments.

On the other hand, the Milei government has successfully implemented a major fiscal adjustment effort, and it has a valid claim that its treatment by the IMF should at least be as favorable as that of the previous government, which was granted a de facto loan rollover without any serious reform commitments in exchange.

The stakes are therefore quite high. But if the IMF and the Milei government can implement a successful reform program that will meet with electoral and parliamentary approval, it could finally herald a departure from Argentina’s lost decades, both economically and politically.

—Martin Mühleisen

The compromise reached on monetary and reserves policy between the IMF and the government was greatly aided by the proven commitment of the administration with its own home-grown stabilization program. Few instances exist where a government has been as committed to fiscal consolidation as the Milei administration is. This commitment, which was essential to stabilize the economy and rein in triple-digit inflation, has been rewarded. The key now will be to see how the new phase of the stabilization program progresses. Particularly, if the administration succeeds in moving away from the foreign exchange rate anchor on inflation (via the now suspended currency controls) and toward a fiscal anchor that weakens inflation by controlling the scale of spending. If that mission succeeds, it will be great news for the economy and the administration.

—Jason Marczak

4. What are the wider implications, and what should we expect next?

If the program succeeds in its implementation and Argentina successfully navigates the current global uncertainty without stumbling back into currency or capital controls, the future may be much brighter, especially if the country can regain access to private finance and further investment flows. The visit by Treasury Secretary Scott Bessent to Buenos Aires and the clear support by US officials, including Bessent, Secretary of State Marco Rubio, and congressional leaders such as Representative Maria Elvira Salazar, is also promising and indicates US commitment in the days ahead.

It also remains to be seen what the political map will look like following Argentina’s October midterm elections. Will voters reward the government for its bold move toward liberalization or will an unexpected surge in inflation erode some of the administration’s support? Provincial elections between now and October will be a good thermometer for the market to gauge the political temperature ahead of the midterms, with potential effects on the market’s risk perception.

With the new deal and with the elimination of large elements of the cepo, Milei’s government has closed its opening, crisis-management chapter. It is now in a new moment of consolidation that may yet see the country move on to a period of stability and growth moving forward.

—Jason Marczak

The Argentina loan is a first test of the Trump administration’s dealings with the IMF. There has been a suggestion by the White House that Argentina should unwind its central bank swap line with the People’s Bank of China in exchange for US support at the IMF Executive Board. Argentina has since partially renewed this swap line, however, no doubt reflecting its dire need for foreign exchange reserves. Bessent’s visit to Buenos Aires on Monday provided a positive signal. But only the coming months will reveal the extent to which both Argentina and the IMF will be drawn into the US-China rivalry, and whether there is indeed some middle ground that a large emerging market economy and a multilateral lender can hold between these two geopolitical powerhouses.

—Martin Mühleisen

The post Four questions (and expert answers) about Argentina’s new $20 billion financial rescue appeared first on Atlantic Council.

Today, Washington is once again chattering about the possibility of a currency deal. This time, the venue may move south for what Trump’s incoming chairman of the Council of Economic Advisers, Stephen Miran, described as a “Mar-a-Lago Accord.” In a September report, Miran declared the overvaluation of the US dollar responsible for the “roots of economic discontent.”

Several in Trump’s inner circle have expressed an interest in devaluing the dollar to address the US trade deficit. Weak-dollar advocates believe that the strong dollar creates international trade imbalances, handicapping US manufacturers. A weaker dollar would make US exports more competitive.

But there’s a key difference between the countries that would gather in Palm Beach today and the group that met in New York in the 1980s—the countries that comprise the US trade deficit.

How will this different constellation impact any potential negotiation? It makes a deal much more complicated.

Miran and others want to use tariffs to get countries to the negotiation table. If these countries are worried enough about the cost of tariffs, Miran thinks they will be willing to make major changes to their currencies that they’d never otherwise consider. But Miran doesn’t stop there. He knows tariffs alone aren’t enough of a stick, so he thinks it is time to put the US security umbrella up for debate.

Miran argues that the security zone should be financed by the beneficiaries, and this can be leveraged to both depreciate the dollar and to mitigate the inflation effect of tariffs. Countries in the security zone should “fund it by buying Treasuries,” especially century bonds, and “unless you swap your bills for bonds, tariffs will keep you out.” US Treasury Secretary Scott Bessent has also discussed the idea that countries can enjoy shared defense as long as there are shared currency goals, while tariffs can be used for negotiation of terms. This administration seems at least open to the idea of linking the US security umbrella with the restructuring of the global trade system to benefit the United States.

The problem, of course, is that the countries the United States has the highest trade deficits with are no longer allies dependent upon this security umbrella. In 1985, the United States provided the security guarantee for France, Germany, Japan, and the United Kingdom. These signatories of the Plaza Accord hosted nearly a fourth of all overseas US military bases in the ’80s. Neither China, nor Mexico, nor Vietnam rely on the US military in 2025.

Without the incentive of shared security, are tariffs enough to push non-allies towards a currency agreement? It doesn’t seem to be for China. A major reason for resistance is that Beijing sees Japan’s experience after the Plaza Accord as a cautionary tale.

The “Japanification” of China?

The Plaza Accord forever altered the trajectory of Japan’s economy. The appreciation of the Japanese yen contributed to bursting Tokyo’s asset bubble and the lost decades of economic stagnation. At least, that is the lingering impression of the 1985 currency agreement in China.

There are certain similarities between Japan’s economic slowdown in the ’90s and the one that China is currently experiencing, such as deflation, low consumer demand, and capital flight. In January, China’s thirty-year government bond fell below that of Japan’s for the first time, and over the weekend, China’s inflation dropped below zero again. China is willing to go to lengths to avoid a “Japanification” of its own economy, including refusing to appreciate the renminbi against the dollar, even if it means weathering a protracted trade war.

China has previously raised concerns about the US dollar’s role as the dominant reserve currency and wouldn’t necessarily complain if the dollar’s preferential position in foreign reserves and global finance weakened. But with persistently sluggish consumer demand, China is still counting on the export sector to help drive economic growth in 2025. Beijing won’t want to risk any changes to the renminbi that would decrease the competitiveness of its exports in the midst of a trade war.

The idea of a Mar-a-Lago Accord is going to appeal to Trump. After all, he was the man who bought the Plaza Hotel in 1988, right after the famous agreement. But getting there is going to require more than just tariffs and a threat to remove security guarantees. China is going to have to see what’s in it for them. And that, so far, remains a mystery.

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

Jessie Yin is an Assistant Director with the Atlantic Council GeoEconomics Center.

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

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The post Meeting in Mar-a-Lago: Is a new currency deal plausible? appeared first on Atlantic Council.

“We will take a people-centered approach and place a stronger economic policy focus on improving living standards and boosting consumer spending,” declared Premier Li Qiang in his work report to the gathering.

A close look at the spending plans unveiled at the NPC suggests far less than full bore support for consumers and businesses that are trying to keep their heads above water after several years of desultory demand and falling prices. The plans are unlikely to restore the household wealth destroyed by China’s real estate crash or provide jobs to millions of unemployed college graduates.

The announced government outlays won’t exactly light a fire under an $18 trillion economy.  There will be $41 billion for an enhanced trade-in program for consumers and businesses. That initiative was introduced last year and lifted sales of cars, household appliances, and business equipment. The additional subsidies will cover new smartphones and home renovations. In addition, seniors will receive an additional twenty renminbi ($2.76) a month in old-age benefits—the same increase they received last year—and two subsidies for healthcare will rise by a combined thirty-five renminbi. This, in a society where high hospital costs can ruin a family’s finances.

Certainly, the overall spending plan is expansionary, with plenty of infrastructure investment. The budget deficit has been raised to four percent of gross domestic product from three percent in 2024, and one estimate that includes off-budget spending and borrowing shows the deficit totaling 9.9 percent of gross domestic product. Beijing insists that this will keep China’s economic growth at “about five percent” this year—the same level it claimed last year. However, many economists take that achievement with a grain of salt. Rhodium Group colleagues estimate that last year’s growth was actually between 2.4 and 2.8 percent.

The 2025 budget again includes vast sums for high-tech industries. About 11.9 trillion renminbi of “special funds” is earmarked to “support the high-quality development of key manufacturing sectors,” an increase of 14.5 percent from 2024, according to the budget report to the NPC—although the time frame for those expenditures is not specified. There will be expanded credit for exporters hit by US tariffs, and a 7.2 percent increase in spending on China’s military—a number that the US government says significantly understates the real level of military expenditures. In addition, the government announced  several trillion renminbi of special purpose bonds to continue restructuring local governments’ vast debt burden over the next three years. There is also 500 billion renminbi dedicated to state-owned banks to shore up capital reserves depleted by the country’s property crisis. On top of that, the central bank has announced that it is prepared to continue cutting interest rates and bank reserve requirements at the “appropriate time,” and the Ministry of Finance  has said it has the ability to increase spending as needed. Both of those statements have been made regularly since last September.

A lot of the planned spending—for example, the local government bailout—will be unproductive since it will go to restructure debts. Admittedly, the rising fiscal tide inevitably will lift some boats, especially businesses with ties to Xi’s high-tech dream for China. But most Chinese citizens earn their livings outside of these industries, and their immediate prospects remain far more uncertain. One-third of white-collar workers told a recent poll that their wages fell last year.

Indeed, the daily problems facing China’s citizenry have become severe enough that the government was forced to acknowledge them before the NPC—no small admission for a communist party whose propagandists normally offer a steady diet of hubris. The premier’s reference to “weak public expectations” in his work report, and the decision to spotlight the importance of consumption, were a bow to public opinion in a country where the public normally has no way of expressing itself.

However, Xi clearly remains deeply committed to his core economic policies—a point underlined on the eve of the NPC with the publication of a speech he delivered in December. While also acknowledging “consumption shortcomings,” he made clear that the highest priority must remain “more world-class enterprises and leading technologies.” The speech also insisted that the government’s response to China’s economic problems had already “boosted the property market, stock market, market expectations, and social confidence,” suggesting that China’s paramount leader is skeptical about opening the taps too much for those struggling to make ends meet. Xi is well known for his criticism of policies that encourage “welfarism.”

Xi’s laser focus on technology can only be heightened by rising US-China tensions. President Donald Trump’s imposition of twenty percent tariffs on Chinese exports, continued restrictions on semiconductor sales to China, and a recent presidential memorandum outlining policies that would further restrict investment flows between the two countries all point to greater pressure on Beijing to pursue economic and technological self-sufficiency. As the Wall Street Journal’s Lingling Wei and Alex Leary reported last week, Xi is privately concerned that Trump’s policies could isolate China. So, while stronger domestic demand would make the Chinese economy more resilient, the signals from the NPC suggest that the many unfunded social safety net programs outlined at the NPC likely will remain that way.

In the meantime, Beijing may be betting that public sentiment already has started to return to optimism—just somewhat later than the shift in “social confidence” that Xi claimed was underway back in December. Last month’s unveiling of the DeepSeek artificial intelligence program shook global markets and caused Chinese technology stocks to go on a bull run.

How much this shot in the arm for China’s artificial intelligence (AI) development ends up affecting the whole economy remains to be seen. Some investment banks are raising their forecasts for the country’s “potential growth,” at least in the short term. But the government certainly made every effort to talk up AI at the NPC.

All that helped fuel the premier’s optimism when he declared that the “giant ship of China’s economy will continue to cleave the waves and sail steadily toward the future.” But for now, China’s consumers appear to be stuck in steerage.

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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The post China’s economic plans prioritize consumption—but only on paper appeared first on Atlantic Council.

Introduction

2024 has brought a time of renewed upheaval in Mexico, six years after the election that fundamentally changed the political and economic systems of the country. Claudia Sheinbaum, standard-bearer for the incumbent Morena party, won the presidency in June 2024, the first ever woman to do so. The presidential and legislative elections were among the most decisive in Mexican history. With her victory comes a spate of questions about the political and economic future of the country, as she moves to cement the momentous political reforms her predecessor, Andrés Manuel López Obrador (known as AMLO), set into motion. In such a time of transformation, the Atlantic Council’s Freedom and Prosperity Index remains deeply illuminating.

Starting in the late 1980s, Mexico underwent a series of structural transformations that have significantly modified the nature of the state, the market, and their relationship in the country. At the tail end of the Institutional Revolutionary Party’s seventy-year single-party rule, public and international pressure brought about a democratic transformation that included the emergence of wide-ranging independent and technical institutions, with remits of electoral integrity, monetary policy, competition, statistics, transparency, and the specific regulation of markets. The state’s interventionist role in the economy was reduced, with an overarching privatization process that, among other things, touched banking, telecommunications, and infrastructure. More structural economic change came with free trade agreements and their upward pressure on competition in the private sector. Most notable among them was the North American Free Trade Agreement (NAFTA), which along with its 2018 successor the United States–Mexico–Canada Agreement (USMCA) has shifted the economic matrix over three decades from significantly primary to mostly secondary and tertiary activity: Where oil-related products once represented almost 20 percent of exports in the early-mid 1990s, today they account for less than 5 percent; instead, manufacturing has climbed to approximately 90 percent of exports over the past decade. Several notable milestones have followed:

• Technocratic rule prevailed for years and favored a relatively unfettered private market.
• The ruling party lost in the 2000 presidential election—a first in seven decades—to a right-wing party.
• The 2018 landslide election of a left-leaning populist prompted changes to the nature of the state-market relationship by strongly favoring the role of the state. 
• The concentration of power has accelerated since 2024, when the incumbent ruling party achieved a legislative supermajority (via a friendly legal interpretation) and full judicial control (through a constitutional amendment). The promise, at least on paper, is not only to give extraordinary weight to the state but also to give force to the market as an engine for growth and prosperity. The result of this experiment is yet to be known.

Taking a step back to examine the Mexican index from its beginning in 1995, we can see a notable difference between the freedom and prosperity indices. On the one hand, the Prosperity Index has shown a steady, though slow, rise over the past twenty-eight years from 55.4 to 65.8 (the COVID-19 crisis notwithstanding). On the other hand, the Freedom Index shows Mexico rated only slightly higher than in 1995, despite a significant period of improvement in the 2000s. We can see two distinct inflection points that form a kind of “plateau” of higher freedom scores, around the years 2000 and 2018. The former coincides with the election of Vicente Fox, of the National Action Party (PAN), to the presidency, enabled through democratic reforms in the 1980s (including the establishment of the precursor to today’s National Electoral Institute). His rise marked a momentous moment in Mexican politics as the first president from outside the PRI, which had previously enjoyed essentially single-party rule since 1929.

The second inflection point, in 2018, is particularly notable as it includes the effects of two countervailing forces on the Freedom Index. The first is the signing of the USMCA, which according to the index’s methodology resulted in a significant increase in economic freedoms. The second is the election of AMLO, who rose to power on a wave of antielite sentiment. Once in power he began implementing his unique brand of populist governance, combining a redistributive fiscal policy with democratic backsliding and power consolidation. These features have blended to create a notable downward trend in freedoms over a half a decade, as we will explore in detail below, though they also have contributed to the continued improvement in some of the prosperity indices.

Focusing on the past five years, the index shows the continuation of a trend that is rare in the region and elsewhere—the decoupling of freedom and prosperity. Mexico is one of the few cases in the last five years, together with Nicaragua and Chile, where prosperity has continued to increase while freedom has declined. This is contrary to the wider trend in the Latin America and Caribbean (LAC) region, where both indices have declined.

In a marked shift from its categorization as “mostly free” in the 2023 index, Mexico is classified in the 2024 edition as a “low freedom” country, ranked 90 in the world—reflecting accumulated, significant antidemocratic shifts over the years of the AMLO presidency. Mexico continues to be “moderately prosperous,” though the changes underlying the reductions in freedom can be expected to damage prosperity as well, sooner rather than later. 

Atlantic Council research suggests that, in general, the level of freedom in a country plays a significant causal role in its prosperity. The effect of a significant shift in freedoms is usually delayed by several years, taking up to two decades to manifest fully. In the case of the recent reductions in freedom in Mexico, the economic effects are likely to be felt much sooner. For example, as I will discuss below, judicial reforms are likely to pose an enormous challenge for the private sector and the renegotiation of the USMCA in the coming year, which could have severe economic ramifications for the country, as uncertainty affects investment climate. In the context of the current authoritarian shift in Mexican politics, this highlights the importance of steadfast, long-term public policy. That said, whether we continue to see this divergence going forward through the Sheinbaum presidency is yet to be seen.

Evolution of freedom

Mexico’s Freedom Index score has continued its decline, falling almost six points to 63.3 over the five years leading up to 2023. The score is characterized, after a decade of stop-start improvement, by a sharp fall since 2018, driven by declining political and legal freedoms. While Latin American countries have seen declining freedoms in this timeframe, Mexico’s slide is an outlier. Despite starting the period with a higher freedom score than the rest of the region, it has now slipped well below the average of 66.4, ranking eighteenth among the twenty-four nations in LAC, and the trendline continues to be negative. While economic freedom has been steady at around 76 after a notable drop in 2019, legal and political freedom scores have plunged since 2018. Mexico’s legal freedom score is 48.6, down from 54 in 2018; in fact, while the score has steadied in the past year, recent judicial developments (discussed below) suggest that we will see a severe drop next year. Political freedom has recorded an even more severe decline, dropping over ten points to 65.4 in 2023.

We can see several notable declines within the political subindex. Political rights have fallen steeply in the past five years. Mexico has dropped over twelve points and twenty-five places in the international rankings, and well down among the LAC countries in the nineteenth position. This score reflects the adversarial stance of the former AMLO government regarding criticism, opposition, public protest, and most significantly, the freedom of the press. The president presided over a militarized response to anti-femicide protests in Mexico City, for example, and he continued to constantly attack specific press representatives during his mandate. On one occasion in February 2024, he revealed the private phone number of a New York Times journalist during a live press conference; on another, he exposed private income and tax information of a Mexican one.

In another sign of democratic backsliding, the elections score has declined almost three points to 89.1. As president, AMLO often used his platform to campaign for members of his party as well as continuously attack political opponents from his privileged tribune, contrary to legal principles. The decline also reflects the fact that while the National Electoral Institute (INE) remains de jure independent, it has been subject to relentless political pressure and intervention, as well as severe funding cuts. The former president accused the institute of fraud and sought to centralize it under the executive. Furthermore, the legislature—controlled by the ruling party, Movimiento de Regeneración Nacional, or Morena—has continued to leave the Elections Tribunal without its required seven magistrates. Those threats and the loss of funding have yet to translate into a further deterioration of election integrity; nonetheless, it remains part of a worrying trend.

On a similar note, the most severe decline was in the legislative constraints on the executive score, which fell almost thirty points to 36.3 in 2023. This period coincided with AMLO’s sweeping election and legislative majorities (including a supermajority in the Chamber of Deputies), giving the administration a period of total legislative control until the supermajority was lost in 2021 (coinciding with a brief uptick in the constraints score). However, AMLO continued to undermine legislative independence: for example, forcing through legislation in violation of procedure. With Sheinbaum’s election victory in 2024 came not only the presidency but a questionable supermajority in the Congress of the Union. In fact, the ruling coalition now controls 73 percent of the Chamber of Deputies with 54 percent of the popular vote for the chamber, against a constitutional limit of 8 percent for the difference between representation and vote share. Despite initially falling one vote short in the Senate, a subsequent—questionable in its form—defection from the opposition has handed the coalition a supermajority across both bodies for the first time since the 1990s. Morena has also sought to remove additional constraints on executive power, for instance by following through on the elimination of several key autonomous agencies. These include the National Institute of Transparency Access to Information and Data Protection (INAI), an essential resource for government accountability; the Federal Economic Competition Commission, known as COFECE, which has a broad antitrust and competition remit; the National Council for Evaluation of Social Development Policy (CONEVAL), which is in charge of the evaluation of social programs and for poverty reduction strategy; the Federal Telecommunications Institute, the telecom regulator; and the Energy Regulatory Commission. The proposal was passed in November 2024, ostensibly to reduce costs, though the savings will amount to less than 0.05 percent of the federal budget. This follows years of AMLO hamstringing the agencies via unfilled appointments and budget cuts. Additionally, while Sheinbaum’s government made some changes to AMLO’s initial proposal to remain compliant with USMCA provisions, potentially compromised regulatory functions may yet violate the treaty if they end up favoring state-owned entities.

A similar dismantling on presidential checks and balances characterizes the decline in the legal subindex score. Apart from informality, which has been steady, every other legal indicator has fallen sharply since 2018, driving a twenty-one-place drop in global rankings for Mexico. Judicial independence has nose-dived to 50.4 from 62.2, reflecting an extended offensive from the Morena government against the national judiciary. AMLO appointed four justices to the Supreme Court of the Justice of the Nation, including a party insider with no judicial experience. He has repeatedly accused the court of treachery and corruption, encouraged public anger at the court’s president, threatened the pensions of judiciary workers, and slashed the court’s budget. Among the most contentious political issues of the past two years is a radical judicial overhaul, first proposed by AMLO but supported by, and eventually passed under, President Sheinbaum in late 2024. In a world first, the reform aims to require every judge in the system (over 17,000) to be elected by popular vote along with a reduction by two seats in the size of the Supreme Court. A significant portion of the candidates will be prescreened by the ruling Morena party. This presents severe dangers to the rule of law and independence in the judiciary, with judges exposed to the influence of political pressure and public sentiment on what should be a fully indifferent, impartial process. Legal interpretations will become unreliable as politicization in the judiciary results in inconsistent ad-hoc rulings. The role of the judiciary as a check on the executive and legislative will be greatly diminished, primarily by means of its ability to intervene against political parties and other political actors which will now control its judges’ candidacies. Despite the imminent need for significant improvement and the administration’s continuous attacks on and heavy-handed influencing of the court, it had remained de jure independent; but the recent judicial reform throws even that into question.

The ramifications of this fundamental reform, which undermines the capacity and oversight of the judiciary, will be manifold. This includes effects on the Mexican economy, as discussed below, but to start with, top-to-bottom elections set for June 2025 will cost $650 million. These expensive elections come in the context of one of budgets aiming at reducing the historically high fiscal deficit of 2024through severe fiscal consolidation in 2025.

The fight against corruption, which has been a key justification for Morena’s authoritarian measures like the judicial reform, has shown little signs of improvement over the past five years. On the contrary, some notable loci of corruption have only emerged during recent years. In one case, the director of the recently established Institute to Return Stolen Property to the People (INDEP) resigned after explosive revelations of theft within the agency. The agency was established to redistribute the value of assets seized from criminals to the Mexican people (though critics argued it simply renamed an existing agency with the same purpose); instead, “multimillion dollar corruption” has plagued its operations. Additionally, while seized assets were previously used solely to compensate victims of crime, the new agency has opaque authority to distribute funds as it pleases, including to other political priorities, increasing risks of cronyism on top of corruption.

The judicial reform is likely to exacerbate the problem by politicizing judicial officials in lower courts and opening them to the influence of political interests and even crime. Additionally, the elimination of key autonomous oversight agencies, as discussed above, is likely to lead to less transparency and accountability for two reasons. One is that by destroying the agencies and absorbing their functions into the executive branch, regulatory and antitrust capacity are likely to suffer significantly, likely allowing more cases of bad practice to fall through the cracks. Additionally, they would be less likely to scrutinize entities associated with the executive. Similarly, while in office AMLO also directed a growing share of economic power to the sole purview of the military, including seaports, airports, customs processing, and major pet infrastructure projects like Tren Maya (Maya Train) and the Trans-Isthmic Corridor. Removing the requirement of competitive bidding and procurement, along with limited outside oversight of militarized economic activity, raise additional transparency and accountability concerns.

Militarization was also a key component of AMLO’s approach to security. In this case, a relatively flat trendline may belie a regression in Mexico’s internal security situation; the former president’s conciliatory approach to cartel violence has failed to reduce their impunity; despite misleading assurances to the contrary, a government agency confirmed that more homicides occurred during AMLO’s time in office than any other Mexican president in history. He also reversed course on his support for Mexico’s “desaparecidos,” over 100,000 unsolved cases of criminal kidnapping. However, President Sheinbaum’s approach to security may prove to be a case of significantly distancing herself from the previous government. Instead of continuing AMLO’s “hugs, not bullets” strategy, she seems willing to rely more on action than inaction, and on counterintelligence and coordination to combat and deter unsustainable levels of violence. This enormous change will be legitimized (vis-à-vis AMLO) by the need to opt for a completely different approach when put between a rock and a hard place by the United States, threatened with a 25 percent blanket tariff if inaction and lack of cooperation occur in terms of tackling drug-trafficking organizations and migration.

Finally, the clarity of law has also suffered, with Mexico dropping twenty-seven places in global rankings and losing eleven points to reach a score of 37.6. This metric assesses whether Mexican laws are general, public, consistent, and predictably enforced. Indeed, all four of those characteristics were tested repeatedly by the previous administration, perhaps most notably in an anticompetitive electricity reform bill that was struck down by the Supreme Court in early 2024. Now that Morena has pushed through its judicial overhaul, it is likely that such distortions of the clarity of the law will have fewer checks going forward, whether through anticompetitive measures from the government or unpredictable enforcement by a judicial system in disarray. Further reduction in the clarity of the law has taken place via government abridgments of private property rights.

The economic subindex shows only a moderate decline of three points since 2018. However, within the average lies an interesting dynamic, with subindices moving in different directions. On one hand, trade freedom and investment freedom show a marked increase in 2018, following the ratification of the USMCA. Trade freedom especially benefited from the agreement, showing further improvement in 2020 once the agreement was ratified.

On the other hand, the property rights score has decreased dramatically following the 2018 election. Despite being an enshrined principle in the constitution, the previous administration took several notable actions to weaken the right to private property and fair treatment of that property by the government. In 2019, the government passed a law equating tax evasion with organized crime and assigned the corresponding punishment; among its outcomes is the ability to enforce mandatory pretrial detention without bail as well as asset forfeiture prior to a guilty verdict. While this was later overturned by the Supreme Court in 2022, citing unconstitutionality, such court-ordered rollbacks are less likely given the recent erosion of judicial independence. We can see the effect of this law on the sharp drop in the score in 2019. This follows from one of the broader themes of the past AMLO administration, which was active interventionism and an anticompetitive role for the state in a variety of sectors. For example, AMLO’s energy nationalism has resulted in more and more of the government’s fiscal eggs going into the basket of Pemex, the state-owned oil company, at the expense of private investment in both fossil fuel energy production as well as, critically, renewables. This is likely to be another area where President Sheinbaum distances herself from her mentor and predecessor as she recently presented an Energy Plan which included private-sector participation through mixed investment and the reprioritization of energy transition through renewable generation. It is yet to be seen, however, what the practical implementation of such a plan will be and how a much more doubtful private sector will respond to these recent policy shifts.

It is important to also mention that the government showed a particular tendency to infringe on property rights when pushing AMLO’s pet projects; for example, in May 2023 the government illegally seized a privately administered rail track, despite a legal contract granting the company its concession, to advance the Trans-Isthmic Corridor rail initiative. Additionally, in 2023, the government sent armed military, in contravention of court order, to seize the port assets of an American company in Playa del Carmen. In the final days of his presidency, AMLO issued a decree expropriating the entirety of that private land for a nature reserve. He has previously suggested using the rare deepwater port as a cruise dock; it is also the only port in the region capable of transporting the required raw materials for the Tren Maya, which has been subject to considerable environmental and economic criticism from opponents. Neither of those two incidents are reflected in the property rights score for the past two years, but they will affect foreign investment, particularly from the United States, and resulted in a sharp rebuke from the US Senate Foreign Relations Committee. While President Sheinbaum has taken a conciliatory tone with foreign investors so far, it remains to be seen how she will align further concentration of power with an environment of enablement and certainty for business development in Mexico.

By contrast, despite some concerning years when women’s marches were met with the use of force, the women’s economic freedom score has stayed flat at 88.8 and now offers reason for cautious optimism. President Sheinbaum plans to introduce several policies aimed at advancing women’s empowerment, including supplemental pensions for women aged sixty to sixty-four and an extension of parental leave. She also has proposed a National Care System aimed at supporting unpaid work (like childcare) that traditionally falls to women, though funding for the system has yet to be established.

Evolution of prosperity

Despite the dramatic backsliding in political, economic, and legal freedoms, Mexico has mostly resisted a similar decline in the Prosperity Index during the same period, rising six places in the global rankings. Despite a foundation of macroeconomic stability, overall growth has remained frustratingly low relative to its potential. Its score has tracked fairly closely with the regional level since 1995.

While Mexico’s global prosperity score rose above pre-COVID-19 levels in 2022, in contrast to the regional average, the income subindex shows the opposite: Mexico remains below its pre-COVID levels, while the region on average has surpassed them. This can be attributed to the government’s low levels of fiscal support (0.7 percent of gross domestic product) during the pandemic, which stands in stark contrast to others in the region such as Brazil, which spent close to 9 percent of GDP on its response. Even before COVID-19, the economic growth of Mexico suffered a significant deceleration. During the first year of AMLO’s government, the economy contracted by 0.1 percent and the compounded average growth of his term (excluding 2024) is less than 1 percent. The economy notably underperformed compared to the just-under 2 percent compounded annual growth seen over the three preceding administrations from 2001 to 2018.

There are also lagging indicators that suggest constraints on growth going forward. For example, while overall foreign direct investment (FDI) has grown in recent years (mostly due to profit reinvestment), new FDI inflows show a different story. Fresh FDI inflows via equity capital have plunged steeply from $15.3 billion in the first three quarters of 2022 to only $2.0 billion for the same period in 2024, based on the latest Mexican government data.

Despite sluggish income growth, Mexico has made significant strides in reducing inequality since 2018, moving up eleven places in the global rankings and five points to 57.7. This has been driven by AMLO’s social policy; for example, the minimum wage has nearly tripled since 2018 (by decree, rather than as a result of higher productivity and competition), and poverty has declined by 20 percent since 2020, in large part due to a costly and enormous rise in cash transfers. This creates further fiscal pressures at a time when the country is running its highest deficit in almost four decades, at 5.9 percent of GDP. Remittances have also virtually doubled from about $8 billion in the first quarter of 2019 to $14 billion in the first quarter of 2024. (International Monetary Fund research has shown that remittances have a downward effect on inequality in Mexico). It should be noted, however, that the rate of improvement in the inequality score has remained reasonably consistent since 2012.

On the environment, the index shows Mexico suffered only a slight decrease from 67.2 in 2018 to 67 in 2023. This reflects a flat trend, on average, for emissions, air pollution deaths, and access to clean cooking technology. In the case of Mexico, however, this obscures significant setbacks in environmental progress from a policy perspective. Mexico dropped seven places to 39 in the 2024 Climate Change Performance Index, which rated its climate policy as “low performance.” AMLO’s oil nationalism prioritized public investments in the floundering state-owned oil supermajor, pushing out competition and heavily disincentivizing investment in renewable energy and the wider green transition. Additionally, some of the administration’s pet projects, particularly the Tren Maya, have been criticized for environmental damage to sensitive ecosystems of the Yucatán peninsula. According to Global Forest Watch, primary forest loss saw a large increase in 2019 and 2020. This was likely due to the misguided Sembrando Vida (Sowing Life) policy, which aimed to address rural poverty and environmental degradation but resulted in large tracts of forest destroyed for timber or agriculture—despite many of the landowners having been compensated for protecting existing forest under the prior government’s policy regime. The data shows a marked improvement in 2021, suggesting the government acted to stymie Sembrando Vida’s negative externalities.

The path forward

Thus far, democratic backsliding has seemingly been either aligned with the will of the voters; a cost they are willing to pay for cash transfers, a renewed hope derived from populist rhetoric, or as punishment to previous governments. Or perhaps Mexicans simply don’t care or do not acknowledge – due to a lack of effective engagement and communication from previous governments – material benefit from a rather ethereal concept: democracy. AMLO’s presidency came with noticeable material improvements in many lives, as we can see with significant progress on poverty, inequality, remittances (though unrelated to his policies), and the minimum wage. Additionally, the political opposition is in total disarray, tainted with accusations of elitism and corruption—and without capacity to self-assess, regroup, and present a compelling alternative. AMLO, with his singular star power, and now Claudia Sheinbaum with more than 75 percent popularity (in January 2025), have effectively capitalized on their absence with an inclusive narrative of economic nationalism and executive strength.

On top of backsliding, the targeted problems of corruption, lack of security, and a culture of privilege remain largely unsolved. Additionally, the risks of continuing down the path of democratic retrenchment are immense and wide-ranging. The politicization of the judicial system risks an even deeper loss of public trust in the law as well as deeper entrenchment of a single hegemonic party, further reducing the viability of a basic democratic requirement: a strong opposition, which has also inflicted significant self-damage to be seen as an appealing and trustworthy political option.  

In addition to driving a cycle of continuously shrinking freedoms, the existing approach may also struggle to generate an adequate growth engine required for improvements in economic vibrancy. The country is facing several headwinds in achieving its growth potential in the medium term. For one thing, returning the budget deficit to manageable levels—Sheinbaum has pledged to meet a 3.9 percent deficit target in 2025—will require fiscal trade-offs. It will require the president to confront her government’s relationship with Pemex, the roughly $100 billion elephant in the room. While her predecessor injected almost $100 billion into Pemex via direct financing and tax breaks, production declined and losses doubled to $8.1 billion in October 2024 compared to a year earlier. The company’s debt now stands at almost 6 percent of the entire country’s GDP and the government has pledged almost $7 billion more this year amid a rapidly tightening budgetary environment. The Pemex albatross will hang heavily on the sovereign balance sheet, as we are seeing already. Along with concerns about the constitutional reform, Pemex’s fiscal burden helped drive Moody’s latest downgrading of Mexico’s debt outlook from “stable” to “negative” in November 2024.

Additionally, Mexico’s macroeconomic scenario is highly dependent on foreign trade, particularly its integration with the United States and Canada via the USMCA. Exports accounted for over 40 percent of Mexico’s GDP in 2022, and over 80 percent of those exports went to the United States. Those who invest and trade with Mexico crave certainty, particularly in a context of transformative changes to international supply chains. However, current uncertainty is driven by two key factors, one domestic and one international. Domestically, dramatic policy change toward concentration of power, fewer checks and balances, and less competitive markets are likely to alarm international investors as well as curtail domestic economic activity. The latter factor concerns Mexico’s trade relationships within North America, especially the outcome of USMCA negotiations and their effect on nearshoring growth. Donald Trump, following his decisive electoral victory in the United States, has advocated for extreme trade protectionism, including against Mexican imports. While rhetoric must soon give way to actual policy implementation for the Trump administration, it remains to be seen if his most severe threats will be realized, such as the imposition of a 25 percent tariff on Mexican imports that would have likely been implemented the first day of February, had the Mexican president not engaged in a forty-five-minute call with Trump in which, among other things, she committed to the immediate deployment of 10,000 military forces in the northern border area of the country. The coming four years, but particularly this year, are expected to be quite uncertain as, according to mostly vague thresholds of cooperation on organized crime and migration, the main anchor of the Mexican economy (trade with the US) will become extremely volatile.

One thing is for sure: There will be uncertain and tense times ahead, beginning with the first months of the second Trump administration and continuing until an agreement for a revamped trade agreement is in place, most probably, one which considers a form of sectoral customs union. Mexico is the main US trading partner and source of imports. Mexico also is among the top trading partners of the majority of the fifty US states, so having a free trade agreement that anchors certainty and promotes competitiveness and productivity in North America is a matter of priority for the United States as well. That said, one should expect a great deal of rhetoric and threats to stand in the way before a consensus emerges. Mexico will have to stay focused and display a sophisticated and effective multilevel strategy to reduce uncertainty and enhance its position in the negotiating process. The most important aspect will be managing the effects of rhetoric on business sentiment and avoiding the implementation of drastic and costly measures for Mexicans and the country’s economy.

The drop in FDI noted above is a foreboding sign. Investors had been awaiting the outcomes of the Mexican judicial reform and the US election, among other factors, and now they watchfully wait to see the Trump administration’s actual policies. Meanwhile, so far, Mexico has seized less of the unique nearshoring opportunity than it should have from Asian competitors like India and Vietnam. To do so, it must still meet important nearshoring requirements such as improvements in infrastructure, energy reliability, and security.

In conclusion, the past several years of deepening democratic retrenchment have culminated in a seismic shift in Mexican politics. Despite continued improvements in poverty and inequality and steady, if low, income growth, these reductions in freedoms may soon threaten Mexico’s prosperity in the medium term. Most of the population has fluctuated between eagerness and indifference vis-à-vis these changes so far. If President Sheinbaum and Morena continue to consolidate power and reduce checks and balances, it may be too late to reverse course once the full effects are felt.

President Sheinbaum has made her choice on the political transformation of the country, moving toward more concentration of power in the executive and the cancellation of several checks and balances which, however imperfect and thus improvable, were there as both limit and anchor. Her second conundrum will be around the economic system, where a series of contradictions derived from the chosen course of action in the political sphere will play out. We have yet to see what can become of a new model and a new trend in the world: regimes with autocratic features or even full-blown autocracies that create the avenues, spaces, and conditions for the private sector to accommodate and flourish in an era of deglobalization and strategic ally shoring; post-truth politics and social media; and a more polarized and volatile ecosystem.

Note: The text of this report was finalized in February of 2025.

Vanessa Rubio-Márquez is professor in practice and associate dean for extended education at the London School of Economics’ (LSE) School of Public Policy. She is also a member of the Freedom and Prosperity Advisory Council at the Atlantic Council, an associate fellow at Chatham House, and a member of organizations such as the Mexican Council of International Affairs, the International Women’s Forum, Hispanas Organized for Political Equality, and LSE’s Latin America and the Caribbean Center. Previously, Rubio-Marquez had a twenty-five-year career in Mexico’s public sector, including serving as three-times deputy minister (Finance, Social Development, and Foreign Affairs) and senator.

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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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.

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1. Who are the biggest winners?

The biggest winners are those parties on the political fringes—the AfD on the far right and the Left Party on the far left. Deep frustration with failed migration policies, the gridlock of the former government coalition, and a general sense of economic uncertainty and decline drove an expectedly strong performance from the AfD, placing second at around 20 percent. More unexpected was the surge of the Left Party past the 5 percent threshold to just under 9 percent. Under thinly veiled peace agendas, both parties question Germany’s NATO commitments, have strong pro-Russian sympathies, and call support for Ukraine into question. The success of both parties in these elections signal that the fragmentation of Germany’s party landscape is likely here to stay. It is also a call to action for those in the democratic mainstream to finally start focusing on the fundamental economic, social, and foreign policy challenges facing Europe’s largest economy.      

—Jörn Fleck is the senior director of the Atlantic Council’s Europe Center.

The biggest winner in Sunday’s election is certainly the AfD. This is a party barely over ten years old that has, until now, sat on the fringes of the German political landscape. A second-place finish for the AfD shows that Germany is roughly where the United States was about ten years ago: coming to terms with a completely new political reality and dealing with forces that many mainstream political players have tried in vain to subdue. At the same time, this is also a big moment for the CDU, which has evolved as a party since the days when it was led by former Chancellor Angela Merkel. The hope is that Merz sees this win as an opportunity to change Germany’s approach to its economy, its defense spending, and its general role as a leader within and beyond Europe.

—Rachel Rizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center.

The biggest winner is the AfD. The party has doubled its vote share compared to the last election and has also successfully pushed the CDU/CSU, once the party of Merkel, much further to the right. It is less than fifteen years old, and it has now beaten several of the country’s oldest parties to become the second-largest German party. Although the “firewall” will likely hold and keep the AfD out of government, the party is undoubtedly a force that is too big to ignore.

But the Left Party should also be lauded as a winner. Just a few months ago, in the regional elections, it appeared to be on the brink of extinction. But it has since made a remarkable comeback as the definitive voice of the urban left.

—Carol Schaeffer is a Berlin-based journalist and nonresident senior fellow with the Atlantic Council’s Europe Center.

The biggest winner is the Left Party, which scored almost 9 percent of the vote. It should thank US President Donald Trump and his billionaire adviser Elon Musk for stirring up hostility toward the United States on the German left.

—Jacob Heilbrunn is a nonresident senior fellow at the Atlantic Council’s Eurasia Center and editor of the National Interest.

It is a remarkable victory for the AfD and a stark contrast to the state of play in Berlin even just a few years ago. Following its electoral successes last year in the European Parliament and the state elections in Saxony, Thuringia, and Brandenburg, the AfD now has its strongest ever presence in the Bundestag.

The CDU may celebrate today, but pressure will build quickly on Merz to deliver on his party’s new mandate. Voters may soon become reacquainted with the dissatisfaction toward the CDU that led to the party’s ouster after Merkel’s sixteen-year stint in power. If the CDU fails to address voters’ mounting concerns about the economy, cost of living, and migration—and especially if coalition-wrangling drags on in Berlin—then the AfD could make a winning case for voters in the next Bundestag elections, due by 2029 at the latest, that neither the center-left nor the center-right can fix Germany’s problems.

—Stuart Jones is a program assistant in the Atlantic Council’s Europe Center.

2. Who are the biggest losers?

Undoubtedly, Scholz and the SPD, Germany’s oldest party, are the biggest losers of the evening, having secured the worst result for the party in a hundred years. For Scholz himself, this will mark the end of his career in national politics. The party leadership chose not to pull a Biden-Harris move by swapping Scholz out for the most popular German politician, Defense Minister Boris Pistorius, at the beginning of the campaign. It will now have to answer for that move and oversee a complicated process of leadership change and party renewal while likely navigating coalition talks and then government responsibility as the CDU/CSU’s junior partner.        

A close runner-up is the former finance minister Christian Lindner and his liberal Free Democratic Party (FDP). Having gambled big on the breakup of the unpopular traffic light coalition, the FDP likely won’t make it into the next Bundestag. Lindner underestimated how effective his former coalition partners would be at offloading a great deal of frustration with the government’s infighting onto the FDP. Lindner, who previously brought the FDP back to the Bundestag after it missed the threshold in 2013 and spent four years in the wilderness, won’t be the comeback kid again. He announced the end of his political career on election night.

Germany’s voters will also not get the stability that so many hoped for after the traffic light coalition’s gridlock and infighting. Depending on whether the Alliance Sahra Wagenknecht (BSW) and perhaps the FDP make it past the 5 percent threshold, the CDU/CSU might need two partners to form a stable governing majority. There is already talk of a black traffic light, or Kenya, coalition—in German party chromatics, an alliance of the CDU/CSU (black), the SPD (red), and the Greens. 

Also among the losers are Musk and US Vice President JD Vance, who waded into German politics to an unprecedented degree to strengthen the AfD. At just over 20 percent, the AfD performed exactly how it polled when the previous government collapsed. If anything, Musk’s and Vance’s meddling fed into countermobilization. 

—Jörn Fleck

It’s a tie for me over the biggest losers—is it the SPD, who suffered the worst results in its entire party history, or is it the FDP, which, at time of writing, seems not to have reached the 5 percent threshold to stay in the Bundestag (again, that is: from 2013 to 2017, the FDP also failed to meet the threshold). The FDP has struggled to unify a strong base and was often blamed for obstructing the previous coalition government. Both the SPD and the FDP are among Germany’s oldest parties, and both will have a tough re-evaluation ahead.

—Carol Schaeffer

The biggest loser is certainly the SPD, whose support dropped 9 percent since Germany’s last election and saw its worst results in decades. Many Germans increasingly viewed Scholz as ineffective, especially during a time of geopolitical upheaval. He was never really able to send a message of strength and unity from the German government, never able to “get things done.” Rather, his governance was slow and bureaucratic and was hindered by weak messaging, causing the German public to view his coalition government with increasing consternation as time went on. That frustration was made clear in Sunday’s election results. 

—Rachel Rizzo

3. What does this outcome mean for Washington?

Under Merz, who is displaying great moral clarity, Trump will discover a more determined Germany that will seek to maximize the prowess of the European Union (EU) against the United States, whenever and wherever the CDU leader deems it necessary. Perhaps he can take comfort in Trump’s social media post hailing the conservatives’ victory, declaring that: “This is a great day for Germany, and for the United States of America under the leadership of a gentleman named Donald J. Trump.”

—Jacob Heilbrunn

A CDU chancellorship may be exactly what Germany needs to snap itself out of its political malaise, but we must wait and see what happens with coalition talks. In terms of how Washington might react, we should expect some loud criticism from Trump and his team toward the Germans for holding the “Brandmauer,” or firewall, and keeping the AfD out of a coalition government. They will say that Germany isn’t respecting the will of the people and will use this to further their own political messaging and claim that Europe is becoming anti-democratic. 

—Rachel Rizzo

Trump and his team should expect a stubbornly pro-European Germany that will not take any perceived US bullying lightly. Merz has already said that the United States’ interference in Germany’s election via Musk and Vance was as “brazen” as that of Moscow. He also had some strong criticism for the White House over Europe’s exclusion from peace talks in Ukraine. Trump and his team should be advised to proceed carefully, though that is not exactly their preferred style.

—Carol Schaeffer

Merz on election night vowed to strengthen Germany’s and Europe’s independence vis-à-vis the United States. That might suit a Trump administration just fine if that means a push to strengthen German defense capabilities and a new energy policy that focuses on transition fuels. Merz also has a personal affinity for the United States, has experience with the US business world, and could perhaps get off to a fresh start with Washington—if the new US administration doesn’t prematurely make this all too difficult for Merz domestically. Here the tariff threats—to which Germany’s sputtering, export-reliant economy is especially vulnerable—are the main focus. A future Chancellor Merz will also be more outspoken on US tariffs and is perhaps less likely to break EU solidarity on a common European response.        

—Jörn Fleck

“This is a great day for Germany,” was the message from Trump on Sunday. Indeed, Washington has reason to welcome the CDU’s victory. For instance, Merz and the CDU’s relatively hawkish stance toward China differs greatly from the caution of Scholz that often frustrated Germany’s allies—illustrated by Germany’s decision in October to vote against EU tariffs on Chinese electric vehicles. If Merz does ramp up Berlin’s rhetoric on China, it would be an important signal that Germany stands together with Washington on the most significant US strategic rival since the Soviet Union.

Furthermore, the CDU’s focus on the economy should also be good news for Washington’s economic priorities at home. A staggering 96 percent of German companies surveyed by the 2024 German American Business Outlook plan to invest more in their US operations over the next three years, particularly in the states of North Carolina, Pennsylvania, California, Illinois, and Texas. With Merz’s pragmatic, pro-business attitude and background in the private sector, his victory in Berlin should be seen by the White House as an opportunity to work out a good deal in both countries’ interests.

—Stuart Jones

4. What does this outcome mean for Brussels?

If Merz and the CDU/CSU can form a stable government—quickly and ideally with only one partner—this will be an important injection of stability for the EU from its largest member state. Germany has been AWOL as a political and economic leader of the EU, as part of the Franco-German engine, and as a security actor. At a time of tremendous instability, fraying transatlantic links, and fundamental challenges to Europe’s security and economy, Europe simply can no longer afford a Germany missing in action—as both a political heavyweight and an economic engine. Merz, as a committed European, can offer a fresh start if he plays his cards right. Rapprochement with Paris and early and convincing signals toward Warsaw and Nordic-Baltic partners, many of whom share party family links with him, could set a new tone on key initiatives.  

Merz said in his victory speech that the world won’t wait on Germany. It also won’t wait on Europe. And much of what Europe does next will depend on whether Merz can get his own party and people behind some creative solutions. This will be needed to tackle issues including European competitiveness, defense-industrial cooperation, funding both nationally and under a new EU budget, and a potential initiative for joint European debt. That will likely require flexibility on some German orthodoxies. Much will also depend on whether Merz’s party and coalition at home will allow him sufficient flexibility and stability to retake German leadership and initiative at the European level.

—Jörn Fleck

A Merz chancellorship will mean a stronger Brussels and EU. While another three-way coalition is hardly anyone’s preference, it appears the only other option would be a CDU/AfD alliance, which is all but unimaginable. The CDU’s pro-European stance is deep in its party roots and history. Merz is unlikely to turn away from the CDU’s pro-European legacy, partly because he desperately wants to be respected within his own party. Nearly the total opposite of the CDU on foreign policy, the AfD is a fundamentally anti-EU, pro-Russia party. But the AfD’s electoral successes will not be felt too strongly in Brussels, at least for now.

—Carol Schaeffer

The champagne corks should be popping in Brussels, as Merz will set out to strengthen the EU.

—Jacob Heilbrunn

5. What can we expect next in Berlin?

Next up are hopefully swift but likely difficult coalition talks. Merz announced Sunday night that he aims to form a coalition by Easter. That’s still two months away—a long span of time, during which Europe needs a reliable Germany to face numerous security challenges, especially to provide support to Ukraine and navigate an uncertain transatlantic relationship.

The shape of this coalition remains uncertain until all votes are counted and we know all the factions in the next German Bundestag. Two parties, the FDP and the newly formed BSW, failed to cross the 5 percent threshold to make it into the Bundestag, significantly impacting coalition possibilities.

A so-called “Große Koalition” (Grand Coalition) between the CDU/CSU and SPD—historically named as such because they were traditionally the two strongest parties—would have failed to secure a majority if either or both of the smaller parties had gained enough support to enter the Bundestag. This is especially due to significant losses for the SPD, which finished third, far behind the anti-democratic AfD—a party that Merz has ruled out of coalition talks. It would have marked the first time in the history of the Federal Republic that such a coalition lacks a majority.

—Theresa Luetkefend is an assistant director in the Atlantic Council’s Forward Defense program.

Despite its “catastrophic” defeat, the SPD will be the cornerstone of the CDU’s coalition negotiations, and expect Pistorius to become a more prominent figure in Berlin as talks get underway. After the results became clear, Pistorius signaled that the SPD is “negotiation-ready” for building a new government and that he envisions a “leadership role of the party” for himself in this process—a role that Scholz also officially abdicated from.

After the nail-biting conclusion of vote-counting late on Sunday which saw the BSW fall 0.03 percent short of entering the Bundestag, Merz will be counting his blessings that a two-party “Schwarz-Rot” coalition is possible with the SPD to pass the 316-seat threshold needed to form a majority. This will mean Berlin can avoid another three-party coalition, the likes of which proved unsustainable in the previous government, as well as keep the “Brandmauer” on the AfD still intact.

It is also worth reflecting that this election saw the highest voter turnout in Germany since reunification in 1989, at 83 percent—up from 76.4 percent in 2021. This should add to the pressure that Merz will be under to form a more cohesive government with more effective policies than the outgoing traffic-light coalition.

—Stuart Jones

Note: This article was updated on Monday, February 24, to reflect the fact that BSW did not reach the 5 percent threshold to enter parliament, and that the CDU, SPD, and Greens did not together reach a two-thirds supermajority.

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Evolution of freedom

Poland, along with the three Baltic states, stands as one of history’s most remarkable examples of how embracing democratic institutions and a free-market economy can radically transform a nation and propel it onto a trajectory of rapid development. Following an unprecedented transition in 1989, Poland and other former communist bloc nations successfully established the three foundational pillars of a free society—rule of law, democracy, and market economy—guided by frameworks like the Freedom Index. Although the Index’s coverage begins only in 1995, when many key reforms were already implemented, Poland’s journey in the subsequent decades offers valuable insights. Notable milestones include its accession to the European Union (EU) in 2004 and, more recently, significant challenges to the rule of law starting in 2015, which is the primary focus of this piece. 

The political shift following the 2015 parliamentary elections serves as an archetype of what might be called a “bad transition.” In such scenarios, authoritarian leaders or parties rise to power through legitimate electoral processes—a necessary but insufficient condition for true democracy—and proceed to systematically erode institutional independence, particularly within the justice system and civil service. The Law and Justice Party (PiS), under Jarosław Kaczyński’s leadership, secured a decisive victory in a fair election but quickly revealed its authoritarian tendencies. The sharp decline in political and legal subindexes from 2016 onward vividly illustrates this regression. 

Among the political subindex components, the most severe deterioration occurred in political rights, driven largely by the PiS’s capture of public media, turning it into a propaganda tool. Fortunately, private media outlets managed to resist government pressure and served as a critical counterbalance. 

However, the most dangerous attack came against the judiciary, as evidenced by the more than thirty-five-point drop in the judicial independence component within the legal subindex. Legislative changes in 2016 merged the roles of prosecutor-general and minister of justice, granting a political appointee sweeping powers over the judicial system, including appointments, promotions, and case allocations to specific prosecutors. This effectively undermined safeguards for prosecutorial independence, which allowed compliant prosecutors to be rewarded and dissenters punished. Judicial independence similarly eroded under politicized appointment processes. 

Poland’s judicial system survived this assault primarily due to the vigorous defense mounted by civil society and advocacy groups. The rulings of the European Court of Justice in 2021 and 2023, alongside political pressure from the European Commission, played a crucial role, but these external interventions would likely have been insufficient without the active involvement of Polish non-governmental organizations (NGOs) and grassroots organizations. 

PiS was unsuccessful in undermining the free elections, and those held in 2023 were democratic. The newly elected government has prioritized the restoration of judicial independence, a commitment that has led to the European Commission’s recent decision to terminate the Article 7(1) Treaty on European Union (TEU) procedure, citing that “there is no longer a clear risk of a serious breach of the rule of law in Poland.” 

Turning to the economic subindex, several notable aspects deserve attention. From the early 1990s, the anticipation of eventual EU membership spurred a series of significant liberalizing reforms. Between Poland’s accession to the EU in 2004 and 2016, the country benefited from increasing policy credibility and access to the common market for trade and capital, driving a robust convergence process with other EU member states. 

However, during the years of PiS governance, economic freedom suffered, primarily due to increased nationalizations and expansion of the state sector in the economy. Higher fiscal spending and growing budget deficits during this period Evolution of Prosperity further weighed on economic freedom, representing a clear drag on progress in this area. 

Despite these challenges, the economic subindex reflects an overarching positive trajectory, largely attributed to a notable increase in women’s economic opportunities. A rare positive legacy of the socialist era is the strong foundation of gender equality within Polish society, particularly in economic participation. The sharp rise in this indicator in 2010 aligns with the adoption of European regulations promoting equal treatment—standards that were already a widespread practice in Poland. 

Evolution of prosperity

The Polish economy has undergone a remarkable convergence with the EU. In 1990, Poland’s gross domestic product (GDP) per capita was less than 40 percent of the EU average. Over the past twenty-five years, this gap has significantly narrowed, reaching 83 percent of the EU average by 2023. 

A notable aspect of Poland’s economic performance is its resilience during the 2008 financial crisis, which left no significant negative impact on the country’s economy. As illustrated in Figure 1, Poland’s GDP per capita growth remained consistently positive from 1992 until the onset of the COVID-19 pandemic. In contrast, the financial crisis, followed by the debt crisis, had substantial repercussions in neighboring countries such as Estonia and Latvia, not to mention the severe impacts felt in Greece. Consequently, Poland today is wealthier than all these countries, despite having a lower GDP per capita than each of them in 2007. 

Finally, it is worth noting a significant external factor that has boosted the Polish economy in recent years, namely, the absorption of around one million Ukrainian refugees since the beginning of the Russian aggression on Ukraine. In 2023, estimates suggested that Ukrainian refugees contributed between 0.7 and 1.1 percent to GDP in Poland.

Figure 1. Real GDP per capita in selected countries

Source: World Bank, GDP per capita, measured in purchasing power parity (PPP), constant 2021 international dollars.

When analyzing the health component, it is evident that persistent challenges remain. Poland’s life expectancy continues to lag behind EU averages, particularly among men, who face a gap of over four years. Lifestyle factors such as high rates of tobacco and alcohol consumption account for much of this disparity. While smoking rates in Poland have declined in parallel with the EU, alcohol consumption has stagnated since 2007, posing an ongoing public health concern. Alcohol consumption is more than three times higher among men. Similarly, 28 percent of Polish men smoke tobacco, compared with only 20 percent of women. 

Figure 2. Life expectancy by gender, EU vs Poland, 1990-2019

Source: World Bank.

The socialist economic system proved to be detrimental not only to consumers but also to the environment. The shift toward market-oriented policies in Poland significantly reduced the volume of emissions required to generate additional income per capita. However, the transition to an environmentally sustainable economy is not yet complete, as coal continues to play an important role in industry and energy generation. EU regulations in this area are expected to drive further change and the adoption of environmentally sustainable policies, though the pace of the reform will be a critical factor. While there is a risk that some of these regulations may be overly severe or implemented too quickly, the general direction of these measures is undeniably positive. 

Turning to the minorities component, it seems clear that the marked decline in this component beginning in 2015 correlates with the rise to power of the PiS government. A detailed analysis of the underlying data confirm this connection. The sharp drop primarily reflects increased discrimination in access to public sector employment and business opportunities based on political The Path Forward affiliation. This decline illustrates the previously mentioned politicization of public institutions, including the prosecution office and public media, among other agencies that should have remained neutral and independent. 

The path forward

Following the turbulent tenure of the previous government, support for democracy and the rule of law has strengthened in Poland. Consequently, there is little reason for concern, in my opinion, about the stability of these institutions in the near future. Instead, the more pressing issue lies in sustaining economic growth. Although Poland has significantly narrowed the income gap with the EU, including Germany, disparities remain, and the country faces several unresolved challenges requiring a new wave of reforms. 

One persistent issue is the incomplete privatization process initiated in the 1990s. The public sector’s share in the economy remains high—one of the largest in Europe. To ensure sustained growth, Poland must pursue privatization and enhance competition in sectors like energy and oil processing. Unfortunately, no major political party has presented a comprehensive strategy for addressing this issue. Nonetheless, a carefully planned privatization initiative is essential for medium- and long-term economic growth. 

Another major challenge is excessive fiscal spending, largely driven by social welfare programs. What is more, this spending is not effectively targeted, as it does not primarily benefit the poorest households. The tax and transfer system has a minimal impact on reducing income inequality. For instance, the “Family 500+” program, introduced by PiS and later expanded by the current government, provides universal child allowances irrespective of income and number of children in a given household. Such unselective transfers are more characteristic of populist policies than measures aimed at addressing inequality. 

Finally, Poland shares demographic challenges with other developed nations, particularly the rapid aging of its population. Without substantial reforms, economic growth is likely to slow further, and fiscal pressures will intensify. Polish civil society has shown remarkable resilience in defending democratic institutions during recent crises. With these threats now neutralized, it is crucial for citizens to channel this energy to pressure the current government to implement essential reforms. These efforts will be vital to ensuring continued prosperity over the coming decade. 

Leszek Balcerowicz is an economist and professor of economics at the Warsaw School of Economics. He served as deputy prime minister and minister of finance in the first non-communist government in Poland after 1989 (1989–91), and again between 1997 and 2000. He was president of the National Bank of Poland from 2001–07. A member of the Washington-based international advisory body Group of Thirty, he is founder and chairman of the Civil Development Forum, a Warsaw-based think tank. 

The author is grateful to Bartłomiej Jabrzyk for assistance in the preparation of this paper. 

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Evolution of freedom

Spain became a democratic country only fifty years ago, through a paradigmatic transition process from Franco’s autocratic regime to becoming one of the freest and most advanced modern democracies in the world. Just eight years after the approval of the democratic Constitution of 1978, Spain joined the European Union (EU), and by the year 2000 the country also became part of the European Economic and Monetary Union. The European dream (and the Maastricht requirements) led to an extremely deep and fast transformation of the country in terms of democratic freedoms and economic liberties. That is, the most important reforms in Spain took place before 1995, and thus are already accounted for at the beginning of the period covered by the Freedom Index. Although many reforms and improvements in the Spanish institutional framework have been undertaken in the last thirty years, the profound transformation of the country during the 1980s and early 1990s needs to be underscored for an adequate interpretation of the data compiled in this Atlas.

This is particularly relevant when trying to explain the evolution of the economic subindex since 1995. A close look at the different components shows that the scores on trade and investment freedom, as well as on property rights protection, have been high throughout the period, and it is the radical improvement in women’s economic freedom that single-handedly drives the overall positive trend of this subindex. Both tendencies are accurate. On the one hand, the bulk of the regulations and policies related to trade and investment are determined at the EU level, ensuring a common and extremely open environment for all member states, both within the Union’s borders and with the rest of the world. Additionally, European institutions make it very difficult for national governments to interfere in foreign investment, and very significantly reduce expropriation risks. Therefore, property rights protection is relatively high, and the mild deterioration observed in this component between 2005 and 2014 probably just captures some isolated disputes between the government and some large companies regarding subsidies to green energies that peaked in the 2008–10 period, together with the temporary uncertainty generated by the sovereign debt crisis of 2010–12.

On the other hand, the radical progress made in women’s economic opportunities, autonomy, and independence is one of the most important developments in recent Spanish economic history, and the effects have been astonishing. As Figure 1 below shows, female labor force participation increased from barely 40 percent in 1991 to 70 percent today, completely closing the gap with respect to the EU average. Educational attainment among current generations is higher for females than males, and there is no significant inequality in terms of access to the labor market for recent graduates. Nonetheless, it is clear that policies aimed at helping families and especially women in their work-life balance have not progressed accordingly and the gender gap has mutated into a very significant maternity gap. To be sure, this is a generalized problem in developed societies, but it is undeniable that some countries are able to tackle it better than others. I believe that today, this factor explains the noteworthy gap observed in Figure 1 with respect to the most advanced countries of the world (8 percentage points below Denmark or 12 below Sweden). The very substantial extension of paternity leave is certainly an important policy tool in this respect and Spain has passed a series of reforms in the area, already achieving equalization. Anyhow, it is still very common that women are pushed to part-time jobs after having the first child, which is, in most cases, not the result of a voluntary expression of their preferences, but the only option to continue their professional careers while having a family. Overall, it seems clear that, after a very successful integration of women into the labor market, Spain needs to continue implementing policies in the areas of more accessible childcare and work flexibility so mothers can develop professionally on equal terms with their male counterparts.

Figure 1. Female labor force participation rate (% of female population aged 15–64)

The political subindex situates Spain as one of the most democratic countries of the world. The components measuring the quality of elections and civil and political rights receive very high scores throughout the 1995–2023 period, with very minor fluctuations. This is especially relevant given the political rollercoaster of the last decade, and most importantly when one recalls that Spain endured in 2017 the most serious challenge to the democratic institutional framework in decades, namely, the Catalan independence crisis. The culmination of that process was the unilateral declaration of independence by which the Catalan government tried to subvert the Constitutional order and exchange it for a different “Catalan” set of independent laws, ignoring the legal and democratic procedures to do so, without the necessary majorities in either the Catalan parliament or the national Congress in Madrid, and consciously disobeying several Constitutional Court rulings on the matter, in order to unilaterally proclaim the independence of Catalonia from the rest of the nation. The response on the political and judicial fronts was certainly firm and strong, at all times according to the legal provisions and constitutional powers granted to the different branches of power. This is well captured by the absence of any significant movements of the judicial independence component included in the Freedom Index. Nonetheless, the outcome of the process involved the imprisonment of several political leaders, which is undoubtedly an exceptional situation in developed and well-established democracies. The very recent clemency measures exercised by Pedro Sánchez’s government have generated a heated debate among the Spanish public but are probably a reasonable step to normalize the situation.

Besides the very particular situation in Catalonia, the Spanish political atmosphere shares various contemporaneous features with many other established democracies in Europe and North America. In particular, the emergence of extremist parties at both sides of the political spectrum and an increase in populist rhetoric and conduct are certainly worrisome. One of the effects of the greater political fragmentation that started in 2015 is the growing difficulties in approving laws and relevant reforms in parliament. This explains the significant upsurge in the use of emergency legislative instruments that emanate directly from the executive (real decreto ley), and are only ratified by parliament after their implementation, in a process that limits public debate and impedes the possibility of introducing amendments or changes. Originally envisioned as an exceptional instrument to be used in very restricted situations, the different governments in the last decade have turned to this tool as a way to circumvent the legislative process and overcome a situation of parliamentary weakness. To give a sense of the issue, during the fourteen years of Felipe Gonzalez’s presidency (1982–96), 130 norms of this kind were passed. Pedro Sánchez, who has held the presidency since June 2018, has already passed 167 such decrees. There is no doubt that this tendency, together with other legislative strategies like the practice of proposing omnibus laws that contain a wide variety of heterogenous and unrelated measures, erodes the legislative and controlling powers of parliament, which could explain Spain’s relatively low score on the legislative constraints on the executive component of the political subindex.

Among the components of the legal subindex, I think clarity of the law, and bureaucracy and corruption are the most relevant for understanding the Spanish situation in relation to the rule of law. Regarding the former, the quantity and ambiguity of Spanish legislation, much higher than in neighboring countries, is certainly a matter of concern. The very decentralized quasi-federal system designed in the 1978 Constitution has proven beneficial in many aspects, but has also produced undeniable overregulation, generating economic inefficiency and legal uncertainty. This problem especially affects small and medium-sized businesses, which find it really difficult to navigate the legal system and comply with all its requirements. Even more so when there is a clear lack of proper coordination mechanisms between different levels of government, as during the pandemic crisis.

The massive real estate boom of the 1990s and early 2000s produced numerous adverse economic distortions that will be addressed in the next section. The real estate boom fueled political corruption, especially among local governments in charge of granting construction permits. Upon joining the Eurozone, the very favorable economic conditions produced by lower risk perceptions and easy credit worked as a mirage, making it difficult for citizens and voters to extract the signals from the economy they needed to judge and control political leaders. Uncovered corruption scandals seemed to have few electoral consequences for the parties or individuals involved. The financial crisis painfully exposed the situation, and widespread corrupt practices became apparent, infuriating a citizenry that was suffering the severe effects of austerity policies while newspapers were filled with political scandals and excesses. There is excessive politicization of some parts of the state apparatus, especially in the regional and local bureaucracies, as well as among top public officials in supervisory or regulatory agencies. These officials, who should have detected and prevented the situation, failed to do so, probably influenced by political considerations. Demands for a substantial regeneration of the system led to the emergence of two new parties on the extreme left (Podemos) and center (Ciudadanos) of the political spectrum with a clear anti-corruption agenda. Anyhow, during the last decade, change has been very modest on this front and very few initiatives have been put forward to reduce abuses of influence by political parties on independent agencies.

Finally, the quality of bureaucracy does not seem to be much worse in Spain than in other comparable countries, but there are three factors that may generate a certain degree of inefficiency: aging public servants; the low level of digitalization, especially of publicly available data for the evaluation of public policies; and the sometimes perverse incentives associated with lifetime jobs typical in the public sector. A modernization of the administration, with a special focus on these three areas, would unquestionably be beneficial for the country. Unfortunately, the political costs of such reforms make them improbable in the near future.

Evolution of prosperity

In economic terms, from the 1970s to the mid-2000s Spain followed a solid path of convergence with the EU average. From being about 30 percent below the mean income per capita in the EU, the gap was closed to 9 percent in 2006. However, the trajectory started to diverge since the financial crisis, and today Spain’s income per capita is about 15 percent lower than the EU’s average.

It is not clear that the implicit assumption of the European Economic and Monetary Union—that if low productivity countries were stripped of the capacity to devalue their currency, they would be forced to make institutional reforms favoring efficiency gains through human capital accumulation, improved technology adoption, etc.—has worked as expected. This push from outside certainly helped Spain to drastically reform the country during the 1980s to enter the European Economic Community and then to meet the Maastricht requirements to join the euro. But once these goals were accomplished, the drop in the risk perception for the country led to high amounts of capital inflows and cheap credit, and a relaxation of the political constraints, which fueled a giant real estate bubble. Just to give an idea of its magnitude, at the peak of the boom in 2007, about two-thirds of the houses built in the EU were built in Spain, and about one in every four male workers was employed in construction-related activities.

As became apparent during the financial crisis, Spain’s fast catch-up growth was not founded on solid grounds but was based on a low productivity economic structure with severe imbalances. Some of the factors causing the low levels of productivity of the Spanish economy include: a bias toward low value-added sectors such as tourism and related services, proliferation of small firms and businesses, relatively low human capital accumulation, and a segmented labor market (temporary versus permanent workers). As a result, the recovery from the crisis was extremely painful and slower than in neighboring countries, taking the country ten years to recover the pre-crisis level of income per capita. Once again forced by external factors, some relevant liberalizing reforms were implemented following the banking bail-out by the “troika” (EU, International Monetary Fund, European Central Bank) in 2012, the austerity measures helped to contain public debt, and growth and job creation reignited for a few years until 2019.

The economic effects of the pandemic were significant, but Spain’s recovery has been surprisingly strong. Despite having a very difficult governance situation and a precarious and unstable majority in parliament, Sánchez has managed to stay in power and pass some relevant reforms in a large left-wing coalition. These include the already mentioned extension of paternity leave, a cumulative minimum salary rise of more than 50 percent with no substantial negative effects on the economy or job creation, and a new labor regulation that has improved the situation of temporary workers. Unfortunately, other much-needed structural reforms have not been pursued in the last decade, as I will point out in the final section.

The evolution of inequality has two important specificities. First, it is closely linked to labor market performance. The fundamental source of inequality in Spain is between those with permanent and relatively stable jobs and those who are endlessly switching between employment, underemployment, and unemployment. The extreme volatility of unemployment in Spain, which reached 24 percent in 1994, went down to 8.2 percent in 2007, rose again to 26.1 percent in 2013, and is today around 12.5 percent, reflects the volatile evolution of inequality observed in the data. Second, children and youth in particular suffer from this pattern, and it is very discouraging to see that Spain performs significantly worse than other OECD countries in terms of infant poverty and youth unemployment, despite some policies implemented to tackle this problem in recent years.

The treatment of minorities is inseparable from the immigration debate. From the mid-1990s to the Great Recession, Spain received more than four million immigrants, a remarkable inflow for a country with a population of around forty million in 1995. The absorption process has proven very successful by all standards, compared to other countries in Europe, due to a combination of good integration policies and a cultural factor, as a very large share of the immigrants came from Spanish speaking countries of Latin America. In general terms, social unrest associated with immigration is very low in Spain, and this is something to celebrate. But at the same time, being one of the EU’s border countries with North Africa generates a constant f low of migrants trying to cross to Spain illegally at the Moroccan border, as well as by sea in small boats, which many times ends in catastrophic loss of life. The eruption of an extreme-right political party with a hard, sometimes outright xenophobic, discourse on illegal immigration is contributing to the increasing perception of immigration as a problem in Spain, and it has proven extremely difficult to reach a consensus on adequate policies regarding the close to 400,000 illegal immigrants already in the country.

The universalization of education in Spain was a great milestone in the 1980s, but the lack of a profound modernizing reform in the last three decades has exposed numerous structural deficiencies in the system. This is a clear example of a real political topic that very much matters to the average citizen, but because it is so politically loaded, it is only used by the political elites as a political weapon, endlessly postponing necessary reform. The incentive scheme to attract good students to the educational profession, which has proven the cornerstone of the best systems of the world, has not been addressed in the numerous educational laws passed since 1990. Moreover, according to comparative data from the Organisation for Economic Cooperation and Development (OECD), the system is not managing to truly succeed in the two most important academic objectives: generating excellent students; and improving the situation of vulnerable students. In fact, poor students are four times as likely to repeat a school year as rich students. Additionally, the fact that educational spending is decided by regional governments generates substantial differences in levels of investment per student, creating unacceptable inequalities of opportunity among children living in different areas of the country. An interesting fact observable in the data is the high dropout rates (among the highest in the EU) in the 1995—2008 period, produced by a kind of “Dutch disease” attributable to the construction boom that pulled thousands of young Spaniards to leave school early to work in the housing sector. A few years later, they found themselves in an extremely precarious situation, combining unemployment with very low human capital. Fortunately, since 2010 Spain has managed to significantly reduce dropout rates, advancing towards convergence again with the European average.

The Spanish healthcare system is internationally recognized as one of the best of the world, with a combination of efficiency and low expenditure that has produced outstanding results in the last four decades. Moreover, the quality and excellence in some areas like transplants is a source of national pride. The relatively large shock produced by the COVID-19 pandemic in terms of excess mortality was, in my view, due to the fact that Spain was one of the first countries to be severely hit, and thus was not as prepared as those who could learn which policies and measures had been effective elsewhere. The lack of integrated digital information and insufficient coordination between regional administrations and the central government, caused by excessive politicization, were arguably detrimental as well, but probably were not the main factor.

Spain has taken advantage of its unparalleled natural environment and conditions to produce green energy, especially solar and wind power, which has allowed the country to become one of the leaders in renewable energies and the green transition. Moreover, recent research has documented a clear disconnect between GDP and pollution levels in the country, evidence that environmentally sustainable economic growth is a real possibility for developed nations.

The path forward

Since the promulgation of the democratic Constitution of 1978, Spain has experienced the largest improvement in prosperity in the country’s modern history. The country’s current position in the Freedom and Prosperity Indexes corroborates this fact. Nonetheless, the reform impulse seems to have slowed in the last decade, and it is imperative that it is reinvigorated if the country is to take advantage of the opportunities lying ahead to continue improving the standards of living of its citizens. I am particularly concerned that the important windfall of resources represented by the NextGenerationEU funds—of which Spain, together with Italy, is the largest beneficiary—may translate into insufficient structural reform. The relaxation of political constraints thanks to the apparent easy availability of resources, both external and internal, could easily lead to a complacency trap, hampering the reform impetus. Given the divergent productivity trajectory of Spain vis-à-vis the EU and the growing spending and investment needs, Spain needs to ensure sustained increases in productivity for the next decade, and this will require some fundamental reforms.

Medium-term fiscal sustainability is a central area of concern, especially regarding the pension system, due to the extremely challenging demographic prospects for Spain. The flip in the population pyramid projected in the medium term will produce a dramatic rise in the proportion of the population above sixty-five years old, from the current 35 percent to 75 percent by 2050. The Spanish pay-as-you-go pension system has produced deficits since 2010, and these can only increase unless a rigorous reform is put in place. Unfortunately, this is a politically thorny issue and reforms of the system in 2021 and 2023 have gone in the opposite direction, eliminating previous restrictions to limit the system’s growth—such as demographic or economic growth considerations—and ensuring the automatic update of pensions with the price index.

First and foremost, the educational system requires a profound overhaul with the clear aim of improving its quality at all levels, with a long-term vision that necessarily requires an ample political consensus. Some central aspects of such a reform should involve: (1) the selection process for teachers and professors, in order to attract the most talented, improving their remuneration and social recognition; (2) a decided commitment to excellence, especially at the university level, extending the incentives for top researchers to return and stay in Spain; (3) a focus on improving the effectiveness of active labor market policies so they actually help to redeploy workers into sectors where the demand is rising, such as tech or clean energy; and (4) a significant expansion of educational reinforcement for students with learning difficulties and especially those from marginalized and less favorable social backgrounds.

The current political fragmentation is a strong source of concern for Spain. The two parties in the center of the political spectrum (Social Democrat and Conservative), which have alternated in power since the 1980s, now have meaningful competition coming from their respective extremes. This has led to a pernicious increase in polarization and poses serious impediments to reaching transversal agreements indispensable to push forward structural reform. The capacity to reach agreements among those with different political views, epitomized in Spain during the democratic transition, needs to become a reality again. This, however, should by no means stop governments pushing forward small incremental policies to help advance in some key areas such as education.

The reduced tensions in Catalonia nowadays cannot lead to the conclusion that territorial conflict in Spain is a problem of the past. A reform of the federal system consecrated in the Constitution should contribute to setting up clearer rules regarding the relative powers of the regions and the central government, the financing system, common public services and their minimum standards, and the establishment of the necessary coordination mechanisms to ensure the efficient collaboration of all levels of government. The current strategy of bilateral negotiations between the central government and each of the regional administrations does not seem optimal, as the national government’s dependence on small Catalan and Basque parliamentary groups is likely to produce agreements involving a reduction of interregional transfers that will inevitably be rejected by poorer regions. Once again, only a consensus among the two majoritarian parties seems to be a potentially successful path on this front.

Finally, there are non-negligible signs of institutional erosion produced by the current government’s insufficient respect for formal and implicit agreements regarding the independence of important agencies and institutions. I am not naïve on this matter. It is clear that no public agency is perfectly independent since it is led and formed by individuals who obviously have political opinions. However, the president appointing some of his former cabinet members as general attorney, Constitutional Court justice, or governor of the central bank could lead to a dangerous slippery slope of institutional deterioration if those patterns are established as a point of departure by future governments.

Toni Roldán Monés is the director of the ESADE Center for Economic Policy (EsadeEcPol) and visiting professor in practice at the School of Public Policy of the London School of Economics (LSE). Prior to joining ESADE, Roldán was a Member of the Spanish Parliament, and economics spokesman and head of policy for Ciudadanos, a centrist party. Roldán has worked as a senior political risk analyst at Eurasia Group, the European Commission, and the European Parliament.

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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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That pattern started to reemerge last week after the Chinese leadership’s annual conclave on economic policy. Xi declared in his keynote speech during the December 11-12 conference that “the economy is stable and making progress . . . and the main economic and social development goals and tasks are about to be successfully completed.” The conference communiqué announced that the most important policy task in 2025 will be to “vigorously boost consumption” through “moderately loose monetary policy” and “more active fiscal policy.”

The reception was decidedly mixed. Echoing many other observers, investment bank Morgan Stanley called the government announcement the “most aggressive stimulus tone in a decade,” but also said that “implementation remains uncertain.” In the absence of concrete details accompanying the announcement, China’s stock markets immediately tanked. In a country that lacks other outlets for public opinion, it was a clear vote of no confidence.

This lack of confidence should come as no surprise. Amid economic problems that include weak household consumption and anemic business investment, a property market collapse, high youth unemployment and deflation, the Chinese government is not facing up to a root cause of the downturn. It has spent five years stifling the country’s once-dynamic private sector. Policies that favor state-owned enterprises and give center stage to state planning have come at the expense of a market economy hit by tight regulation and Chinese Communist Party interference. “Building entrepreneurial confidence depends primarily on the reform direction, not on the strength of monetary policy stimulus,” said Zhang Weiying, a leading Chinese professor of economics, in an August speech. “However, recent practices suggest that focusing solely on [monetary and fiscal] solutions cannot fundamentally resolve China’s economic challenges.”

There is also an important international dimension to the policy choices Xi faces. China is the largest driver of global demand, and many countries need China to sustain a high level of import demand. But imports have been falling as the economy struggles, and Beijing has relied on export growth to keep China’s manufacturers alive. As a result, trade tensions are rising as a flood of Chinese goods hits both advanced and emerging market economies. And with President-elect Donald Trump threatening new US tariffs against China, the Chinese government will need to look to domestic drivers of growth.

The government certainly can do more to boost demand. The stimulus measures taken since September have focused on increasing credit, supporting local-government purchases of China’s vast store of unfinished or unsold homes, and restructuring the massive debt of local governments. In addition, Beijing is spending heavily on developing advanced technologies and building infrastructure, but the benefits of those expenditures—especially for more roads and railways—appear to be more limited than in the past. Most importantly, corporate and household borrowing has failed to gain momentum despite the easy credit—a sign of the depressed confidence that has undercut consumption and investment. Weak November retail sales and home sales figures show that, as far as consumers are concerned, it’s not nearly enough.

The true scale of the economic downturn has recently received attention in China through widely circulated comments by private sector economists. Earlier this month, Gao Shanwen, chief economist at SDIC Securities, was quoted as saying that post-pandemic China is “full of vibrant old people, lifeless young people, and despairing middle-aged people,” and he suggested that as many as forty-seven million people are unable to find formal work in China’s cities. Gao also estimated that the country’s economic growth over the past three years may have been overstated by 10 percentage points.

Meanwhile, Fu Peng, an economist with Northeast Securities, highlighted the plight of the country’s poor, saying on December 4: “Whenever the economy contracts, it’s those at the bottom who suffer the most at first. However, that barely has any impact on the macroeconomic data.” Not long ago, such critiques would have been just a small part of a wide-ranging policy debate that used to take place in China. But now, in the country’s current climate of strict control over all policy discussions, both economists’ remarks were removed from the Chinese internet after a few days and their social media accounts were restricted.

Public criticism of government economic policies has not been limited to private sector economists. “In recent years, the lack of effective demand in China can . . . be attributed to the government failing to return income to the public while itself also not actively spending,” said Xu Gao, chief economist at the state-owned Bank of China International in a September speech.

The Chinese government’s economic policy communiqué last week does speak of a “greater focus on benefiting people’s livelihood.” But it only cited a program introduced at an earlier stage of the stimulus effort to subsidize trade-ins of cars and household appliances. There was no new reference to income subsidies or other initiatives to directly assist China’s unemployed and underemployed, especially those in the construction and real estate industries who have lost work and millions of recent university graduates who are unable to find jobs. There also has been no talk of using the government’s central bank digital currency to make direct payments to consumers.

Since China’s middle class can buy only so many refrigerators and electric vehicles—even with government subsidies—the big question is whether Beijing is prepared to consider a wider effort to support consumers. However, Xi previously has expressed skepticism about “welfarism,” and he has spoken positively of his own experience during China’s Cultural Revolution of having to “eat bitterness.” So, public assistance may prove a bridge too far for a party that rose to power nearly eighty years ago claiming to represent China’s less fortunate citizens.

Perhaps it will take another shock to the system—for example, a sharp drop in exports—to jolt China’s rulers out of their current failing approach.

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

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It may be tempting to blame Ghana’s situation on the outgoing president, Nana Akufo-Addo, who will leave office in January. And, granted, the Akufo-Addo administration has its fair share of responsibility for Ghana’s financial predicament. But the roots of the problem run deeper. For years and across several administrations, Ghana’s government has relied too heavily on excessive borrowing from domestic and international capital markets to finance fiscal expenditures. Mahama himself previously lead Ghana between 2012 and 2017. He was voted out at the end of that one term, which should serve as a reminder that the population is eager for change and ready to remove any leader who moves too slowly. Mahama, who is known as a pragmatist, will need to turn the situation around swiftly considering the popular discontent. 

To get out of the current financial predicament and reset its economy, Mahama and his administration will need to reform how it governs its gold, oil, and cocoa industries. But to enact these necessary economic reforms, Ghana and the international community will need to follow through on the country’s external debt restructuring.*

Ghana’s debt crisis

How did Ghana get to this point? The country’s ramp-up in external borrowing was made possible beginning in 2004, after it had completed the Heavily Indebted Poor Countries program—a debt-relief program created by the International Monetary Fund (IMF) and the World Bank for developing countries. Then, energy companies discovered the Jubilee Oil Field in 2007, followed by several other oil fields. This coincided with the start of the era of low interest rates following the global financial crisis. The easy financing conditions and the anticipated revenues from this new oil find stimulated large infrastructure projects. Then, the outbreak of the COVID-19 pandemic resulted in a pervasive decline in investment and production in the oil sector in Ghana. In turn, revenues fell, even as large-scale borrowing from international markets continued as a “gamble for redemption.”

This all came to a halt in 2022, when the depreciation of the cedi, Ghana’s currency, raised external debt and interest payments so high that they surpassed government revenues, which led Ghana to default on its eurobond obligations. Total public debt, which includes both external and domestic debt, reached 92 percent of gross domestic product (GDP) at the end of 2022, which is far higher than the average among Sub-Saharan African countries. Public debt has since declined but remains high (around 83 percent of GDP).

Other factors have also contributed to the country’s economic problems. Just a few months ago, Ghana lost an arbitration case against Trafigura, a commodities multinational, over the rupture of an energy contract, which will cost the country more than $140 million. This outcome has enraged civil society.

In an attempt to stop the crisis, the government has restructured its domestic debt and, in October, announced a deal to restructure its external debt that could be completed by June 2025. This is good news after protracted negotiations, but the final elements of the deal and the issues of implementation and enforcement remain important hurdles to clear. Delay on dealing with these issues could subdue growth and increase poverty. Indeed, poverty in Ghana has worsened over the past few years, reaching more than 30 percent of the population.

The current situation is reminiscent of the troubled economic times of the 1990s, when Ghana, like many developing countries in Africa, faced a debt crisis. It took more than ten years for debt relief initiatives to deliver an economic reset. But what is different this time is that private creditors, as well as China, have become important players, making it more difficult for creditors to coordinate to deliver an expedient debt resolution. The debt treatment under the G20 Common Framework has been too slow, and the rules lack clarity and enforceability. The lesson from Ghana is that countries facing debt crises cannot afford to wait for this process to be fixed. The international community needs to support indebted developing countries in a much more decisive and urgent way, perhaps by bringing more forceful actions against creditors, especially private creditors, by enforcing the comparability of treatment.

What Ghana needs now

A more expedient debt resolution for Ghana is a necessary condition for an economic reset. One key objective for Ghana is to rebalance its structure of external capital away from external debt and toward foreign direct investment. This would shift the international investment position away from debt and toward equity. That accrued foreign direct investment would bring much more stability to its external financing, a needed boost to productivity, economic growth, and job creation that Ghanaians have been longing for. But Ghana must also achieve a radical governance shift in key sectors to deliver that economic growth.  

Ghana’s export structure is dominated by three commodities—gold, oil, and cocoa—constituting respectively 47.7 percent, 26.1 percent, and about 10 percent of its total merchandize exports. Ghana is the world’s second-largest producer of cocoa, and the cocoa sector employs millions of workers. Like in many sectors in Ghana, the state has a heavy hand in the cocoa sector, which is run by a Cocoa Board, a state-controlled organization that supports the production, processing, and marketing of cocoa. Yet, Ghana has been structurally unable to develop efficient production and move up the value chain by transforming cocoa beans. In spite of skyrocketing cocoa prices—expected to last until 2026—the cocoa industry has been unable to attract financing, and investment has plummeted. 

This situation mirrors that of the oil sector, where investors have been wary about the business climate in Ghana. The gold sector also enjoys rising prices and is mostly controlled by private operators. The government is eager to boost production and attract more investment, but the gold sector throughout the continent is faced with major transparency challenges, with gold smuggling leading to significant losses in government revenues. What’s more, illegal mining is causing environmental and health challenges, including river pollution. To reset its economy, Ghana needs to inject radical transparency in these key sectors to maximize government revenues and benefits to its citizens. Ghana also needs to achieve a better balance between the need for private sector investment and the state’s role in regulating investment in these sectors.   

As Mahama prepares to take office as Ghana’s new president on January 7, he will need to work toward achieving macroeconomic stability while boosting the competitiveness of the country’s economy. Yet, poverty is already rampant, with inflation further eroding the purchasing power of the country’s impoverished population. Therefore, the sequencing of reforms must account for that social context. The Mahama administration will need to focus on increasing transparency and removing corporate subsidies—whether public or private—rather than removing household subsidies, which many rely on for subsistence.

Rabah Arezki is a former chief economist and vice president at the African Development Bank and former chief economist of the World Bank’s Middle East and North Africa region. He is also the former chief of commodities in the International Monetary Fund’s research department. He is a professor and research director at the CNRS, a member of the FERDI’s chair working group on the international architecture of financing for development, and a senior fellow at Harvard Kennedy School.

Note: This piece was updated on December 14 to clarify the status of Ghana’s debt restructuring. 

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Faced with rising macroeconomic pressures and the aftershocks of global crises, many nations are scrambling to stay afloat. Unsustainable debt has too often prevented my country—Ghana—from achieving its full potential. Recently, Ghana has successfully restructured thirteen billion dollars in international debt, offering important lessons for countries facing such issues and the wider international financial community.

Lessons for debtor countries

Successful debt restructuring cannot be achieved until a country puts its house in order. An IMF-supported reform agenda that stabilizes the economy and lays the foundation for sustainable, inclusive, and long-term growth is essential. In Ghana, this meant restructuring domestic debt, bringing inflation down, strengthening social safety nets, increasing the flexibility of exchange-rate policies, and tightening monetary policy. Ghana has also used this debt restructuring to refocus our medium-term policy vision on green investments and development projects that will help us meet our climate goals while driving sustainable growth and the creation of new, well-paying jobs for the Ghanaian people. This will ensure that Ghana not only leaves debt challenges behind for good but reemerges in international markets stronger.

Second, Ghana’s proactive approach to negotiating with the IMF, bondholders, and the official creditor committee allowed for swift progress under the Group of Twenty (G20) Common Framework. The negotiation took just two years, making it the fastest to date. We adapted to move at the speed of the market and aligned Ghana’s internal bureaucracies to respond to creditor feedback and proposals more quickly. The involvement of African advisers with a deep understanding of financial markets, local knowledge, and key stakeholders, as well as the ability to navigate Ghana’s bureaucracy, was essential in getting the deal across the finish line—an important lesson for other countries.

Lastly, countries must prioritize transparency to regain the trust of their creditors, investors, and international partners. In Ghana’s case, we committed to regular disclosures of the public debt portfolio, increased our surveillance on debt issuance by public entities, and are digitizing debt management to enhance transparency and efficiency. These are all policies that have been supported and recognized by the IMF. These reforms helped boost the confidence of our private and international partners and show that Ghana is planning for long-term fiscal stability and sustainable growth. Ghana’s priority now is ensuring we do not need a future restructuring, which would damage the market confidence we’ve worked hard to restore.

Lessons for the international financial community

Ghana’s case shows that the G20 Common Framework is working out its growing pains. The Common Framework has come a long way in improving coordination between traditional and nontraditional creditors and accelerating the pace of restructuring. However, the international financial community must continue to increase these coordination efforts to further improve the Common Framework’s speed and efficiency. Waiting two years to regain access to international markets may not seem long, but it still hampers economic progress. Swift, transparent, and fair processes in the international financial system benefit not only debtor countries but also the global economy.

Additionally, many African nations are actively reforming and building stable, growth-focused economies, but they are limited by international perceptions. While political and geopolitical dynamics naturally influence credit ratings, as recognized by the United Nations Development Programme, it is imperative that these standards are applied fairly and consistently.  Credit agencies should ensure that they have sufficient on-the-ground resources to understand the complexity of the continent for their qualitative assessments of policies and geopolitical dynamics. The international financial community must reassess whether risk evaluations reflect today’s realities accurately or are influenced by misperceptions.

Ghana is a stable democracy and serves as an important trading partner on the global stage. Despite that, skewed risk perceptions continue to hinder access to capital, driving up interest payments and stifling development. These biases are costing Africa billions—funds that could be otherwise invested in infrastructure, healthcare, education, and economic growth.

The international financial community can foster a more equitable financial environment by working together to address these disparities. This will benefit African nations and, more importantly, contribute to a more robust and fair global economy. It is my hope that Ghana’s case can serve as a catalyst to continue accelerating the pace of restructurings and improving the international financial system so that it can be a driver of inclusive growth, poverty reduction, and global innovation. 

Nana Addo Dankwa Akufo-Addo is the president of the Republic of Ghana.

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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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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.

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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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.

Watch the full event

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.”

Watch the full event

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].” 

Watch the full event

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.

Watch the full event

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.” 

Watch the full event

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.

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.

The post The China Pathfinder 2024 Annual Scorecard Report featured in the Semafor on China’s stimulus measures appeared first on Atlantic Council.

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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Japan’s experience during its lost decades proves a useful example. In response to the country’s economic crisis, only significant fiscal support managed to sustain Japan’s economy when it was burdened with a balance sheet recession triggered by a collapsing property sector, plummeting stock markets, increased savings rates, and decreased consumption. This is a lesson China should pay attention to.

Monetary easing policies

The recent monetary easing package impacts all key aspects of monetary policymaking in China. The list of announced measures is as follows:

1. Cut the benchmark seven-day reverse repo rate—considered the most important PBOC policy rate to manage liquidity conditions and influence other lending rates—from 1.7 percent to 1.5 percent. Reducing the rate by twenty basis points, instead of by the usual ten basis points, is a significant change.
2. Reduce the existing mortgage rates by fifty basis points, on average, and lower interest payments by homeowners by 150 billion yuan ($21.4 billion). This measure, it should be noted, is of limited helpfulness because the net transfer to the household sector will be offset by planned reductions in bank deposit rates.
3. Lower banks’ required reserves ratios by fifty basis points to achieve 6.6 percent on average for the banking sector. This step will allow commercial banks to reduce the amount of cash they must keep at the PBOC, which earns a low rate of return.
4. Reduce the down payment ratio on second home purchases from 35 percent to 15 percent—similar to the move for first home purchases announced in May.
5. Enhance support for a 300 billion yuan ($42.5 billion) fund set up in May to lend to local governments money to buy unsold homes and convert them to publicly subsidized housing units. Support can include increasing the share of such loans from 60 percent to 100 percent of the price of each unsold home.
6. Establish a 500 billion yuan ($70.5 billion) structural monetary policy facility to provide liquidity to securities firms, asset management, and insurance companies when purchasing stocks by a swap line pledging their assets for high quality assets.
7. Establish a 300 billion yuan ($42.5 billion) facility with an interest rate of 1.75 percent to encourage banks to support listed companies’ share buybacks.

The announcement of these measures has helped improve market sentiment, especially by raising expectations of additional fiscal measures to come. Chinese equity markets and the exchange value of the Chinese yuan have risen since the policies were made public, with positive spillover effects on international financial markets. Chinese equities have risen by more than 20 percent since the announcements—technically entering a bull market. However, while helpful at this moment, these measures will not be enough to maintain improvements to China’s lackluster economic growth going forward.

The need for forceful fiscal interventions

China’s household sector has experienced a balance sheet slowdown milder than Japan’s balance sheet recession, but with similar underlying dynamics. The slowdown has been triggered by the property slump and sustained falls in stock markets, which destroyed a sizable portion of China’s household wealth and undermined consumer confidence. Specifically, the prices of existing homes in China’s large cities are down nearly 30 percent from 2021 levels according to the Japanese investment bank Nomura. Chinese stocks have lost six trillion dollars in value in the past three years—or more than 45 percent as compared to 2021 levels. Even factoring in the 20 percent rebound triggered by the recent policy announcements, Chinese equities are still more than 30 percent lower than in 2021. In response, Chinese households are visibly curbing personal spending. According to the PBOC’s Urban Depositors Survey Report, 61.5 percent of respondents wanted to increase their bank deposits in the second quarter of 2024, a big jump relative to 2021. Chinese households’ bank deposits rose to $40.9 trillion (or more than twice the country’s GDP) in July 2024, increasing by more than $2 trillion from the previous July.

Consequently, Chinese household consumption growth has slowed since 2021. It is only expected to grow by 3 to 4 percent in real terms per year in the next five to ten years (compared to the 10 percent growth rate prior to 2018)—contributing around an underwhelming 1.5 percentage points to annual real gross domestic product (GDP) growth. The trend could curtail overall GDP growth to 3 percent per year, after accounting for expected headwinds of strong growth in investment and net exports.

As demonstrated by Japan’s experiences during its own lost decades, it takes forceful fiscal actions involving large deficit spending to sustain and stimulate economic growth. Doing so will compensate for slowing personal consumption until households can repair their balance sheets. This process has been shown by Japan to be slow and lengthy. It takes time for property and stock prices to recover their losses, during which period households would prefer to save. Households will be less tempted by lower interest rates to borrow and consume more—weakening the effect of monetary easing.

In an effort to avoid falling into a balance sheet recession, the Chinese political leadership has promised more fiscal spending to support the economy. It needs to promptly deliver on these promises, implementing concrete and significant fiscal measures. For example, it should invest in new digital and green infrastructures, which promise higher returns compared to traditional infrastructure like bridges and roads. In short, China needs to go beyond the limited steps taken so far—such as the plan to issue two trillion yuan ($284 billion) of government bonds or a rare one-off cash handout to those living in extreme poverty.

With one quarter left in 2024, China needs to move expeditiously and forcefully if it hopes to meet its growth target of around 5 percent this year. International economists, such as those from Goldman Sachs and Citigroup, have just downgraded their full-year estimates for China’s GDP growth to 4.7 percent. Beyond this year, the economic prospects for China remain as challenging as ever. Even slower growth is expected in 2025 by many international economists. More significantly, with its long-term government bond yields poised to fall below those of Japan, China faces a growing risk of “Japanification” with decades of slow growth ahead unless it can match its softer monetary stance with proper fiscal intervention.

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.

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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Introduction

After decades of globalization, structural transformation, financial collapse, and technological change, the global economy faced a once-in-a-century pandemic. COVID-19, and the associated lockdowns, sent shock waves through households, businesses, and government budgets. Real economic activity and employment ground to a near halt, while digital work and commerce skyrocketed overnight. Subsequently, recovery was hindered by inflation. The war in Ukraine and the heightened pace of extreme weather events caused further economic devastation. Amid such tumult, governments spent an unprecedented amount of money, especially on fiscal transfers. In the process, they often struggled to deliver those transfers directly to citizens, compounding and creating new demand for financial inclusion and innovation.

In today’s uncertain economic and geopolitical environment, comprehensive financial services—lending, payments, savings, insurance—have grown even more critical to economic resilience, participation, and growth. Yet, worldwide data shows a gap: most people globally lack access to these services. Individuals and communities at the greatest disadvantage more often than not face other challenges to economic or social empowerment, which compounds the inequality. At the same time, however, these workers, entrepreneurs, and consumers who belong to the global majority have the potential to earn, spend, produce, and invest in ways that unleash financial dynamism and well-being for their families while also promoting global prosperity and inclusive, sustainable development.

Despite their strength in numbers, the global majority has been largely overlooked in research and deliberative forums. To address knowledge and action gaps, this brief will provide the basis for mobilizing policymakers, investors, and innovators to advance a new financial inclusion agenda designed for the global majority.

What is meant by “global majority”

Many characteristics are shared by individuals and communities around the world. People may be united by gender, generation, race, ethnicity, work, or language. Less obvious as a unifying trait, however, is a person’s status vis-à-vis financial services. While 76 percent of the world’s population has access to a financial account, more than half (52 percent) of adults globally do not save at all. They are emblematic of this global majority, which fintech has been described as “the portion of the world’s population who, while having trillions of dollars in economic power, have historically been excluded from accessing financial services.” In other words, the global majority is the world’s financially underserved population without basic or adequate access to financial services, including borrowing, banking, insurance, payments, and remittances. They earn money but are not maximizing it. They may be able to stretch limited funds to “get by,” but find it more difficult, if not impossible, to save, build wealth, or prepare for potential crises. These people comprise the aspirational, emerging, and expanding middle class, defined by Pew Research Center and the World Bank as those living on $10 a day.

Many of the global majority have limited access to financial services, including though legacy institutions, but are still excluded from the system or unable to use the full range of products available to optimize their economic opportunity or guarantee economic security. They are not likely to be extremely poor, but more likely to be categorized as low income or financially insecure. While being financially underserved is the defining characteristic considered in this brief access to education, health, energy, transportation, and other social and developmental inputs are associated factors for success and empowerment of the global majority and worthy of further exploration.

Enabling this global majority, including those who work in the informal economy, is about ensuring they are better able to protect, utilize, leverage, and grow the money they are making or the assets they have. It is about optimizing quality of life and creating economic security in the present and future. Achieving this objective, however, requires the ability to save, send, and receive money, and being empowered and able to borrow for the range of one’s ambitions and needs—education, housing, starting or expanding a business, old age and retirement, etc.—and to protect assets once accrued.

Who forms the global majority

Among the many reasons to pay attention to the global majority is the reach and representation across and into diverse communities worldwide, including people in low-, middle-, and high-income countries. People of the global majority are multiethnic and intergenerational. They are all genders, though women are more likely to face financial inclusion challenges. The International Monetary Fund (IMF) reports that “on average, men own 55 percent more deposit accounts than women in the sample and also hold significantly higher outstanding value of deposits than women. The gender gap widens further if the loan account ownership and outstanding value of loans are taken into consideration.”

The global majority includes youth, refugees or displaced persons, racial and ethnic minorities, migrants, and people with disabilities who are less likely to be well served by traditional institutions or to be able to access the products or services they need. They are likely to have some education, but may not have robust financial literacy.

From a workforce perspective, they are students, farmers, freelancers, formal and informal workers, and owners of micro, small, and medium enterprises (MSMEs) in a wide range of goods and services sectors. They are among those sending or receiving $857 billion in global remittances in 2023. They are at the core of productivity and consumption that underpins growth.

Given that they are not defined by a single characteristic, the global majority may be hard to quantify into a single number. Indicators and surveys suggest, however, that at least half the world’s adults—roughly 3 billion people—are likely experiencing some form of economic insecurity or aspiration that could be improved with financial services.

People of the global majority are among the 50 percent or more of those in many low- or middle-income countries who do not have an account with a formal financial institution or mobile money provider. (It should be noted that the global average of those with an account reached 76 percent in 2021.)

Global majority by the numbers

They are among the 74 percent who would find it difficult to come up with emergency funds within a week.

They are among the 75 percent who are worried about being able to pay bills if faced with a medical emergency.

They are among the 71 percent concerned about saving money for retirement and old age.

They are among the 53 percent of adults globally who borrowed money in some way, including the 46 percent of those in developing economies who did so exclusively through the help of family and friends.

They are among the 93 percent of adults globally who do not have access to formal housing finance.

They are among the 68 percent of business owners or operators worldwide that perceive access to finance as a principal business constraint.

Why the global majority matters now

The global economy is on a slow and divergent path of recovery, and people face lingering uncertainty. Five-year growth prospects look dim, forecast at their lowest point in decades, owing to headwinds such as geopolitical tension, demographic pressures, and persistent inflation. At the same time, there is risk of protracted stagnation across lower-income countries, with poverty resurging. Today, one out of three countries is poorer than it was at the onset of the pandemic. At the same time, the future of money—the rapid pace of financial services development and increasing digitization—spells opportunity for economic participation and growth that the right agenda for the global majority can capitalize on.

Given what is already known, and what is being learned, about the criticality of financial inclusion for economic participation, equitable prosperity, resilience, and financial well-being, the importance of the global majority agenda is clear. Even though “global majority” is a newer framing, the differentiated evidence and significance around the global majority has yet to be fully collected, unpacked, and analyzed.

Effect on economies and businesses

Financial exclusion is a drag on economic participation, sustainable development, and global growth. By bringing more people into the system, financial inclusion reduces poverty, promotes investment, drives consumption, and creates small-business value. Inadequate access to financial services widens inequality, undermines inclusive growth, and prolongs or exacerbates economic as well as environmental, social, and governance (ESG) risks.

Both qualitative and quantitative evidence points to the potential of the global majority to drive inclusive growth if increased and improved access to financial services is unlocked. The effects have been both direct and indirect, macro and micro. For example, a major study by the World Bank and IMF across 218 countries from 2004 to 2021 showed that increasing the penetration, availability, and use of financial services has a significantly positive impact on the world’s economic growth. Moreover, by lowering transaction costs and better spreading capital and risk across an economy, financial sector development and improved financial systems—key factors of financial inclusion—have been found to have positive impacts on employment and economic growth. Regional studies in Africa and Asia point to similar patterns and links between financial inclusion, economic growth, and inequality, further underscoring the case for a global majority agenda.

Increased financial inclusion, especially of the poor and in particular poor women, can have wide-ranging positive impacts at the micro level that ultimately contribute to prosperity. The benefits have been seen in self-employment business activities, household consumption, and financial well-being, though the impact varies across different types of financial products. Moreover, financial inclusion appears to have an even larger impact in lower-income households and countries—home to most of the global majority—where need and gaps are likely to be greater.

Inequality was exacerbated during the pandemic, and those facing economic precarity before the pandemic suffered the shock more acutely. Importantly, financial development and inclusion has proved to be associated with decreasing inequality. The effect is primarily driven by the disproportionate impact financial inclusion has on poorer or economically disadvantaged people by easing their credit constraints such as lack of collateral, networks, or credit history.

Effect on people and families

The case for amplifying the global majority extends beyond the ways in which their financial inclusion could affect economies at large, to the potential effect on people’s lives and well-being. Helping people feel secure in their financial future is key to well-being and the willingness to take on calculated risk, which is key to innovation and growth. Surveys and experiential and anecdotal reporting from the global majority can be drawn upon to tell an initial story even as further analyses are called for as part of the agenda.

For example, a 2018 Gallup survey of more than 15,000 people in ten countries—Bangladesh, Chile, Colombia, Greece, Japan, Kenya, South Korea, the United States, the United Kingdom, and Vietnam—showed that perceptions of financial inclusion and control are closely linked to economic outlook and security. On average across the countries just a third reported having financial control. The highest rate was in the United States (54 percent); the lowest was in Kenya (14 percent). In the 2021 Global Findex Survey (which, like any dataset, has its limitations), 63 percent of adults in developing economies reported being “very worried” about one or more common expenses.

Client and financial services user data can also be revealing. Focus groups and surveys of people’s financial behaviors and attitudes toward digital payments and central bank digital currencies in India, the Philippines, Mexico, and Nigeria reveal, for example, that the ability to hold money in a variety of cash and digital forms helps them maintain control and flexibility over finances. Cash is seen as the most immediate option, while the ability to reverse transactions is an advantage of digital payments. In a customer survey by Tala, a money app operational in India, Philippines, Kenya, and Mexico, users reported a range of benefits including improved financial management and decreased financial stress. Female borrowers also expressed increased self-confidence and influence on decision-making. Sentiments are shifting for business users as well. For example, a survey of SMEs in the US, UK, China, Mexico, and South Africa found that while 24-7 availability and range of functionality and services are key reasons they are adopting fintech, 57 percent of users still report that products are not adequate to meet their business needs from financial services

These illustrative insights underscore that gathering further customer and provider feedback along with data and evidence, including on the specific role, impact, and outcomes of the global majority to incentivize and encourage action, is a pivotal piece of the work ahead.

Advancing an agenda for the global majority

In many ways, prospects for the global majority lie in differentiation and diversification. Beyond addressing the range of barriers, solutions are needed across financial products and services to meet specific unmet needs and wants of the global majority, including those that are more sophisticated or upmarket or require more risk, as well as integrated and comprehensive services. Given that a large share of the global majority are employers and entrepreneurs who form the backbone of economies worldwide, the agenda should explore promising financial solutions for businesses, especially small ones, to better enable them to thrive, grow, and hire. At the same time, as the products and services for the global majority are likely to grow in complexity, the need to prioritize consumer safety, including through policy and regulatory measures, becomes tantamount.

Understand and meet diverse needs

An agenda for the global majority must build on what we global stakeholders know to form a deeper, data-driven, disaggregated understanding of the state of the global majority and financial services gaps. This includes engaging and elevating the lived experiences and voices of the global majority. Research into the global majority has been fragmented. Existing quantitative and qualitative data needs to be better collected to paint a more comprehensive picture of the shared and differentiated needs and wants, opportunities, and challenges with respect to access and use of financial services by the global majority in all its constituencies. Similarly, financial inclusion has largely relied on account ownership and related metrics that may be outdated, especially with digitization. A holistic picture of financial inclusion needs to include adoption, diversification, and impact indicators. Recognizing that the global majority exists in diverse communities and contexts, it is critical to assess specific needs and barriers to the full range of formal financial services faced across people and places.

We have a few baselines that must be taken forward. Among the most common challenges to accessing financial services products are lack of money, registered identity, resources, or documentation to establish accounts or credit. Lack of education in general is a challenge, as many people may not have received a primary education or have been prohibited from any education. Weak numeracy or financial literacy is a significant handicap, especially for using services that require more complex awareness, planning, or computational thinking. Individuals new to account ownership may not understand the fees and risks and may be more susceptible to fraud.

Though some challenges are shared, there is no “one size fits all” for the global majority. We know, for example, that women and youth tend to experience many of these challenges more acutely, but better data is needed to understand the intragender inequalities (such as age or geography) in financial independence. Financial literacy is very often a higher hurdle for women. In the Global South, women are less likely to have a phone, less likely to have an account because another family member has one, and more likely to need help using an account. In sub-Saharan Africa, for instance, one in five unbanked women lacks a government-issued ID.

We know there are also demand-side constraints to be tackled. For example, a shared issue is that the cost of services, interest rates, or transaction fees are deemed too high by consumers. Many people of the global majority distrust formal financial systems and institutions, especially in societies where the banking sector is controlled or influenced by the government. When it comes to borrowing, religious or societal norms can also influence the demand for financial services, with lower appetites for taking on debt characteristic of some cultures. While mobile money and other financial technologies are becoming more widespread, many people, especially seniors, continue to lack digital skills, technology, or access to the necessary infrastructure (digital, communications, electricity) to make use of what is available.

Beyond understanding constraints, advancing a global majority agenda is about understanding people’s financial concerns and identifying where their needs may not be met sufficiently through existing products, methods, or community structures. Solutions must cater to the user’s existing skill set and be safe and reliable. While this need must be assessed more rigorously, some data suggests, for example, that at the household level, lacking the ability to pay medical bills and education fees causes the most worry, especially in low- and lower-middle-income economies. At the same time, an estimated 70 percent of MSMEs in emerging markets lack sufficient financing amid the global MSME finance gap—the difference between current supply and potential demand, which can potentially be addressed by financial institutions. The gap now stands at approximately $5.7 trillion, rising to $8 trillion when informal enterprises are included.

Identify what is, or is not, working, why, and for whom

Moving toward an agenda for the global majority requires taking stock of effective, scalable solutions and policies, and asking why they work, why not, and for whom.

We saw microfinance among the first innovations that brought financial inclusion to the masses, spawning related solutions such as microinsurance. But providers and the ecosystem must balance scale against risks for the global majority that have become more variable as microfinance and related products and services have become more widespread and commercialized from the initial philanthropic orientation. Recently, for example, borrowers have seen aggressive debt collection methods, with some borrowers taking on more debt than they can manage from predatory lenders. Moreover, in many countries where microfinance took root early, the market has become oversaturated, bringing additional risks.

We see countries integrating financial education alongside numeracy as part of school curriculum to promote financial literacy and improve downstream financial behavior, but there are potential issues in implementation, such as ensuring compliance, access to high-quality teaching materials, and training for educators that will need to be addressed.

We recognize that solutions for the global majority need to have the proper degree of targeted design, context vigilance, and customization to meet their diverse needs. Underlying discrimination or language can be a barrier for many. The next step is to identify what solutions work and for whom. For example, solutions, or specific design elements, may need to be different for women and men. Because women may have less product experience than men do, particular attention to ease of use, instructions, onboarding, and practice can help women use products consistently and confidently. Innovations such as blind applications that do not include demographic data or gender-intentional (i.e., not blind) credit scoring and risk-based pricing are worthy of exploration and evaluation.

As new products and opportunities for the global majority take shape, so will new risks. More research is needed on what is effective and what is necessary to ensure consumer protection is balanced with consumer choice and business opportunity. Existing systematic reviews and evidence gap maps for access to finance or other financial inclusion interventions (including digital, discussed below), as well as benchmark surveys of financial consumer protection regulations and policies, offer a departure point for placing a global majority lens on understanding and advancing a knowledge-informed, differentiated-solutions agenda.

Double down on digital

Beginning with mobile money, digital solutions have proved to be transformational, and we can expect even more fintech innovations to be at the forefront of the agenda for the global majority. Underscoring the importance of the technological channels, a novel IMF study of fintech solutions across 198 countries revealed that digital lending has a statistically significant positive effect on economic growth, with a larger effect in developing countries but a wider magnitude in higher-income economies. As fintech helps individuals save or spend, it can also help businesses unlock capital, protect assets, and provide complementary business services such as inventory management and customer intelligence. Digital credit has also shown to have positive effects on subjective well-being.

Typically, there are lower costs to maintaining a mobile money or branchless banking account than a traditional bank account: 19% cheaper by one study. Roughly two-thirds of people in sub-Saharan Africa do not have mobile money accounts, but among the millions who do, many are now using them for more than making payments, including to save and borrow. In middle-income economies, the IMF’s latest Financial Access Survey (2023) shows that the number of retail agents and mobile money agents more than doubled between 2019 and 2022, while the number of ATMs and bank branches declined by 9 percent over the same period.

Moving forward, we need to assess just how positively disruptive blockchain, crypto and artificial intelligence will be for the global majority, while risks through technology design (including positive friction), regulation, or industry standards need to be exposed and managed. Already blockchain-based solutions are said to offer lower costs with fewer barriers to entry to the underserved, and digital currencies—including emerging retail central bank digital currencies such as in Nigeria, India, and the European Central Bank—are being hyped for building trust and promoting faster, safer transactions, loan and capital origination, and dollarized protected savings.

Create pathways for collaboration on a differentiated agenda for the global majority

Multilateral forums have been important pathways for drawing attention and resources to global shared challenges and experiences. Two initiatives that could be part of the foundation of a collaborative pathway for the global majority are the G20’s Global Partnership for Financial Inclusion (GPFI) and the Bank for International Settlement’s (BIS’s)new Fully Scalable Settlement Engine (FuSSE) initiative with the IDB.

GPFI was launched in 2010, following the G20 Summit in Seoul, where leaders recognized financial inclusion as a key pillar of the global development agenda. They endorsed a concrete Financial Inclusion Action Plan and included it in the Leaders’ Declaration. GPFI is the main implementing mechanism of the endorsed action plan and serves as an inclusive platform for G20 and non-G20 countries alike and relevant stakeholders for peer learning, knowledge sharing, policy advocacy, and coordination. Importantly, the GPFI’s efforts include helping countries apply the G20 Principles for Innovative Financial Inclusion, strengthening data for measuring financial inclusion, and guiding countries on target-setting methodologies.

On the digital money side, the BIS has initiated a new initiative with the IDB to provide open-source technology among central banks to facilitate the implementation of payment systems and other settlement infrastructures. By also providing regulatory advice and building institutional capacity, the Fully Scalable Settlement Engine (FuSSE) initiative aims to strengthen and integrate financial systems across Latin America and the Caribbean and in doing so lower barriers to entry, ease transactions, and improve product design and accessibility for consumers. A related collaboration among the World Bank, IMF, and BIS could break new ground tokenizing these institutions’ lending, guarantee, and financing instruments in ways that could reshape the global financial system. Together, these initiatives demonstrate the potential for a global multilateral platform to serve the global majority.

Call to action

The global majority agenda is more than a catchphrase. Rather, it is an inspired and informed new framing for financial inclusion for all. The global development community and private sector have a unique opportunity to build on the work that has been done to advance financial inclusion for more people, with more impact. By launching new efforts around digital money, and by stimulating and streamlining efforts to innovate, research, and create community and collaboration, a deliberate and differentiated agenda for the global majority will emerge to improve the lives of billions of people, contributing to global prosperity. Weaving together the elements highlighted in this brief, an agenda for the global majority could follow the World Bank’s Financial Inclusion Support Framework and multitiered approach to financial inclusion. The agenda could emerge concurrently across service providers and platforms at the micro level; infrastructure and support services at the meso level; and policy, legislation, regulation, and supervision at the macro level. Industry, governments, researchers, and everyday economic citizens all have a role to play. This effort must be driven by generating and synthesizing strands of research and data to develop an improved understanding of the diverse needs and experiences of the global majority and of existing policy, technology, and programmatic solutions. Ultimately this will foster new ideas and solutions on multiple levels, from service providers to infrastructure and governance.

Correction: A previous version of this report misstated in which countries Tala is operational. They are India, the Philippines, Kenya, and Mexico.

Dr. Nicole Goldin is currently Senior Fellow (non-resident) with the Atlantic Council GeoEconomics Center as well as Executive Principal and Chief Economist of NRG Advisory a boutique consulting practice. Her work focuses on economic growth and financial inclusion, generational, geographic and gender inequality, positive economic statecraft, development finance and multilateralism. She is former Senior Advisor to the State Department and USAID, and Lead Economist and Strategy Advisor to the World Bank and UNICEF. She has worked with leading international non-governmental and public policy organizations including Center for Strategic and International Studies (CSIS), Clinton Global Initiative, Ford Foundation, and FHI360, and with private sector entities such as Gerson Lehrman Group, Abt Global, and Chemonics International. Additionally, Dr. Goldin has been Professorial Lecturer at George Washington University and was elected and served as an ANC Commissioner in Washington D.C. local government. She holds a PhD in economics and two master’s degrees in international development studies and international affairs.

This issue brief was made possible by the generous support of Tala as part of a new research partnership on the global majority.

Sophia Busch, Assistant Director of the GeoEconomics Center, provided primary research and data visualizations. Alisha Chhangani and Clara Falkenek provided additional research support.

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 gulf between economic data and official pronouncements grew through the second quarter of 2024. Property markets, stock prices and consumer sentiment all indicated weakness while China showcased engagement with foreign investors and private Chinese firms to signal intent to boost activity. But new policy actions were not market friendly in the period before the July 2024 Third Plenum economic planning meetings. There were a few encouraging signs for foreign investors, including pledges to discipline local protectionism and arbitrary regulations, but these have been heard before, and “promise fatigue” is a serious problem. Most of the clusters we track showed limited progress or further divergence from OECD norms. On trade, China refused to acknowledge the legitimacy of the overcapacity concerns the world was alarmed about.

The second quarter generally reflected the takeaway from the July plenum meetings: China will leverage whatever it can to drive technological advancement, and national security will override efficiency at home and engagement abroad. New rules to address excess local regulation contain expansive national security carveouts, as do pilot measures to allow foreign investment in data centers and telecom. Beijing’s commitment to direct state support to vast swaths of the economy was reinforced this quarter, with the state planning plenum manifesto as a capstone.

Read the full issue brief below

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Sinographs Jul 23, 2024

Key takeaways from China’s Third Plenum 2024

By Hung Tran

The communiqué of the Third Plenum of the CCP Central Committee lacks major policy initiatives to address the country’s near-term growth challenges.

China Economy & Business

Issue Brief May 15, 2024

China Pathfinder: Q1 2024 update

By GeoEconomics Center and Rhodium Group

In the first quarter of 2024, Beijing pushed forward with a flurry of efforts to support a faltering stock market, ramp up exports to make up for domestic demand, and double-down on high-tech sectors with subsidies and other innovation funding.

China Fiscal and Structural Reform

Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

The China Pathfinder project examines whether China’s economy is converging or diverging with the world’s leading open market economies.

China Digital Policy

The post China Pathfinder: Q2 2024 update appeared first on Atlantic Council.

With EU countries now facing greater fiscal constraints, the bloc needs to either further amend them or find a way to have more common European debt. Only then will EU member states be able to make the increases in defense spending that are necessary to bolster security on the continent and deter further aggression from Moscow.

The EU’s fiscal rules

The EU is a partial monetary union (not every state uses the euro) and is not a fiscal union. Twenty of its twenty-seven member states use the euro, but they maintain their own public accounts. The EU’s budget amounts to just 1 percent of the bloc’s entire gross domestic product (GDP). Brussels levies few taxes and spends little for the bloc, and that relatively small budget is the sum of the EU’s fiscal union. The real power of the EU resides in the supervision of the member states’ fiscal policies.

This is why some countries with high levels of debt or deficit—France, Italy, Poland (which spends 4.1 percent of its GDP on the military), and several others—might be under special supervision by the European Commission under the Excessive Debt Procedure (EDP). The EDP requires the country in question to provide a plan of fiscal consolidation that it will follow, as well as deadlines for its achievement. Countries that do not follow up on the recommendations may be fined. Of course, many EU countries are in debt, and most of them run a deficit even in good times; in bad times, they just run even bigger deficits. The European Commission will take into account additional military expenditures in the assessment, but only on military equipment, not on increasing the number of soldiers.

In 2023, the average debt-to-GDP ratio in the EU reached 82 percent, and it was even higher in the eurozone, at 89 percent (with France exceeding 110 percent and Italy going beyond 137 percent). The highest deficits were recorded in Italy (7.4 percent of GDP), Hungary (6.7 percent), and Romania (6.6 percent). Eleven EU member states had deficits higher than 3 percent of GDP. In comparison, the United States has a debt of around 123 percent of GDP and ran a deficit of 6.3 percent in 2023.

The original EU fiscal rules implemented thresholds for each country’s deficit and debt at 3 percent and 60 percent of GDP, respectively, and they required cutting national excess debt-to-GDP ratios by one-twentieth each year. These restrictive rules contributed to the eurozone’s prolonged recession from 2011 to 2013, and some rules have since been relaxed. In response to the COVID-19 pandemic, for example, the bloc activated its general escape clause, which allows for deviations from the EU’s Stability and Growth Pact in times of crisis. Moving forward, however, the rules will likely turn restrictive again, though less so than the old ones. In April 2024, EU institutions agreed on a consensual change to the fiscal framework, making the path back to a debt of 60 percent GDP and a deficit below 3 percent of GDP a matter of negotiations between each member state’s government and the European Commission.

Treat military spending differently

Some EU countries, such as France and Poland, argue for military expenditures to be treated differently, as some member states have different needs in the current geopolitical climate. Not all EU member states are in NATO; for example, Austria is neutral. But under the current EU rules, the fiscal space for military expenditures is one-size-fits-all. After Russia’s full-scale invasion of Ukraine in 2022, defense expenditures incurred that year were within the escape clause, but this does not address the underfunding of the military within the EU.

In 2024, the average military expenditures of NATO and EU members is expected to reach 2.2 percent of GDP, with a group of countries far below the threshold of 2 percent. More importantly, these are big economies with relatively large armies, such as Italy (1.49 percent of GDP), Belgium (1.3 percent), and Spain (1.28 percent). All of these countries have high levels of debt and issues with deficits. Germany is set to reach 2.12 percent of GDP on defense spending this year, but it is held back by its constitutional debt brake, which does not allow for an annual deficit higher than 0.35 percent of GDP. This has created tensions within Germany’s coalition government, since spending more on weapons might mean having to spend less on climate change mitigation and social services.

Meanwhile, the United States spends 3.38 percent of its GDP on defense. To put that into perspective, the total expenditure of all European NATO members is $380 billion, almost three times lower than that of the United States (nearly $968 billion). At the same time, Russian military spending this year is estimated to reach $140 billion, or 7.1 percent of its GDP.

Common debt

European capitals need to treat the need for a stronger military in Europe as urgent and serious, but their accountants in the finance departments are not going to make it easy. Unless Brussels changes its fiscal rules to allow for greater defense spending, common EU debt might be the only solution.

The bloc can issue EU debt outside of national fiscal rules, which it did for the first time in response to the COVID-19 pandemic. Some analysts argue for common debt for a European air defense system, which is a good starting point. EU debt funding could include spending on the further development of European defense industrial capacities. EU leaders such as former Estonian Prime Minister and future EU High Representative Kaja Kallas, French President Emmanuel Macron, and European Commissioner for Internal Market Thierry Breton have supported some version of common debt for defense purposes.

Utilizing common debt should not aim solely to expand the power of the European Commission, as some critics in various capitals fear. Instead, it should transform this measure from a temporary crisis-management tool into a standard policy instrument, enabling Europe to develop a meaningful defense industrial strategy, which has been lacking since the EU’s inception. After the failed attempt to establish a European Defence Community in the 1950s, the European project has primarily focused on economic issues. Unfortunately, it’s time to revisit that discussion.

Europeans must now prepare for a challenging geopolitical environment by investing in European defense, whether through changes in fiscal rules or by taking on more European debt.

Whichever path forward the EU chooses, it must do so quickly. There’s no time to waste.

Piotr Arak is the chief economist at VeloBank Poland.

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Mere moments after the announcement, Macron declared that he would not name a prime minister until after the conclusion of the Olympic Games in August. Until then, a caretaker government under Prime Minister Gabriel Attal will remain in place. Still, the potential of an NFP prime minister spooked the markets, as the party’s economic policies would trigger even more deficit spending. The spread of France’s ten-year bond yield against Germany’s increased by five basis points, reflecting a loss in confidence in the French government’s finances. 

But even after the Olympics, Castets is unlikely to be tapped to form a government. Instead, the parties of the center, center right, and center left will have to endure a tedious drill from which France’s constitution has spared them for decades: negotiations. 

The moderate “Republican Right” (DR) appears ready to play ball and recently put forward a set of policy proposals complete with two red lines that will inform the negotiations. But a deal including the Republicans would not be enough: The centrists would need the more moderate forces from the NFP (read: excluding the far left) to support—or at least not oppose—a government for the time being.

The negotiations behind an arrangement that would bring Communists, Gaullist Republicans, Greens, and centrists under the same banner is likely to be every bit as complicated as one would imagine. But in the likely case that the NFP fails to clear the bar for government formation, this would become the only option. The question then becomes: What could this political hodgepodge compromise on? 

Synchronized steering

Despite having lost the legislative election, the Macron-supporting center block will not concede much on any of its policy laurels. Reversing the controversial and hard-won increase of the retirement age from sixty-two to sixty-four, for example, will be off the table. 

The center right has also set explicit red lines: that there be no tax increases and that fiscal reform not hurt pensioners. 

Taking into account these constraints and the need to manage France’s strained fiscal situation, there is not much negotiating flexibility left. Nevertheless, the centrist coalition must consider some concessions and secure certain inducements if they hope to bring the Republicans, Socialists, and Greens onside. 

1. Green reindustrialization

The adoption of the Inflation Reduction Act (IRA) in the United States prompted pushback from many European states. French Finance Minister Bruno Le Maire and his German counterpart Robert Habeck claimed the legislation was not compatible with World Trade Organization principles and called for the “defense” and green reindustrialization of the European Union (EU). 

In July 2023 the French National Assembly unanimously agreed on the creation of a “national strategy” for green industry, which lays out a plan for the 2023-2030 period. One week later, a Green Industry Law was approved at first reading and later adopted in October 2023. Like the IRA, France’s Green Industry Law seeks to meet environmental objectives (reducing forty-one million tons of CO2 by 2030, or 1 percent of France’s total footprint) and economic ones (positioning France as a leader in green and strategic technologies, while reindustrializing the country). As part of the law, the Green Industry Investment Tax Credit (C31V) was established to encourage companies to carry out industrial projects involving batteries, wind power, solar panels, and heat pumps. The C31V is expected to generate €23 billion in investment and directly create forty thousand jobs by 2030. 

While in opposition, the Socialists and Greens voted against the law and other left parties abstained. All cited the lack of specificity and actual green commitments in the industrialization-centered bill. However, if the centrist bloc offered to revisit the bill or introduce new, more targeted standards and legislation, it could serve as a powerful inducement to win the Greens and Socialists’ support. Given that this French counter to the IRA involves private-sector mobilization and promises reindustrialization, it has the added benefit of being (just about) fiscally feasible and acceptable to the right. 

2. Rewarding effort

The thirty-five-hour work week was first introduced into French law by Lionel Jospin’s Socialist-led government in 2000, and it has since become a cornerstone of the left’s platform. However, the fact that most employees still work above the legal thirty-five-hour limit has led to a system where they can take half days or full days off to compensate for extra hours. 

In August of 2022, Macron’s government successfully passed an amendment that allowed firms to buy these hours back from their employees, essentially transforming them into paid overtime. 

As part of the center right’s current proposal, the group is seeking additional flexibility in the thirty-five-hour work week by reducing taxation on overtime, on top of cutting overall social charges paid by employees. The center right has been fairly nonspecific about how much these would be cut, most likely to avoid alienating the left. However, the main way the Republicans propose to fund this—a cap on unemployment benefits at 70 percent of the minimum wage—would be a red flag for the parties which could otherwise be lured out of the NFP.

3. Balancing budgets

France’s large budget deficit, which in 2023 soared to 5.5 percent of gross domestic product (GDP), raises the stakes. In May, S&P Global Ratings downgraded the country’s long-term credit rating from “AA” to “AA-” and the European Commission reprimanded France for exceeding the EU’s deficit cap of 3 percent of GDP. Today, the Commission formally opened proceedings against France and six other violating countries, directing them to immediately take corrective measures to rectify their fiscal deficits or else face financial sanctions from Brussels. 

Both S&P and the Commission forecast positive economic growth, but emphasize the urgent need for France to address its public finances. Growth alone will not be enough to overcome the fiscal hurdles ahead. 

Reconciling the center right’s rejection of any tax hikes and the need to provide parties of the left with guarantees on social spending for them to abandon the NFP will be very challenging indeed. But there is some room for compromise. 

Shortly after Macron’s arrival at the Élysée Palace for his first mandate in 2017, he moved to slash France’s contentious wealth tax, replacing it with a real estate tax. A flat tax of 30 percent on capital gains was also introduced. The decision came as part of Macron’s pro-business platform in a bid to curb the flight of French millionaires from the country, and it drew sharp criticism from political opponents who labeled him “president of the rich.”

The centrist bloc could offer to reintroduce a progressive taxation scheme on capital gains. In the spirit of France’s goal of green reindustrialization, the centrists could move to keep the favorable 30 percent flat tax for green technologies to encourage investment, while introducing a progressive scheme in other sectors. If they do decide to favor green industrial investment, the tax benefit would have to apply to capital gains accrued throughout the EU—not only France—so as to not violate single market rules. 

Sticking the landing

Negotiations will be more of a marathon than a sprint. Macron is unable to call for new elections for at least the next twelve months, so until then, this parliament will have to find a way to work together. 

After the formation of a government—which Macron has indicated will not begin until after the Olympics—the next major challenge facing French policymakers is to pass the yearly budget by December. This grueling event will be made all the more difficult by today’s unprecedentedly divided National Assembly.

Whichever government emerges from current negotiations will risk having its spending plan voted down immediately. Fortunately for France, the constitution contains a proviso that would allow the state to carry on. Essentially, if the Assembly cannot agree on a new budget, the plan approved for the previous fiscal year will roll over. 

However, recycling this year’s budget would still create a projected deficit of 4.4 percent. This would again violate the EU’s 3 percent cap and fall well short of the deficit reduction the markets—the ultimate referees of how France is faring—are hoping to see. 

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

Gustavo Romero is an intern 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.

Learn more

The post What French economic policy may look like after the Olympics appeared first on Atlantic Council.

On July 19, GCH/IPSI nonresident senior fellow Dexter Tiff Roberts was quoted in VOA regarding China’s recent Third Plenum meeting. He discussed the dilemma Beijing faces in balancing economic reform and tightening control, noting that while reforms require loosening control, the Chinese government is focused on consolidating power. Roberts emphasized that this approach could hinder the effectiveness of economic reforms and exacerbate the challenges China is currently facing.

Fellow

Dexter Tiff Roberts

Nonresident Senior Fellow

Global China Hub Indo-Pacific Security Initiative

China Chinese

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Since their inception in July 1944, they have played central roles in global finance and built the world’s economic architecture as the norm-setters, knowledge-producers, convenors, and actors in the international development and finance landscape.

In 2024, the BWIs are facing multi-faceted existential challenges, posing serious risks for their relevance and effectiveness. The rapidly changing nature of the global economy, commerce, and finance and the increasing challenges triggered by the emergence of new players, technologies, and crises—especially in the past two decades—are forcing these institutions to take a renewed look at their governance structure and mandates. This is not the first time they have had to do so.

A reformed Bretton Woods system already emerged nearly five decades ago in 1976 through the Jamaica Accords. In 1971, the Nixon administration created a shock when it canceled the direct convertibility of the US dollar to gold and rendered the old Bretton Woods system inoperative as currency exchange rates became more volatile. The new rules stabilized the international monetary system by permitting floating exchange rates and formally abolishing the gold standard, which the United States was already no longer underpinning.

This time, meaningful reform for the BWIs will require a genuine acknowledgment of the following developments in the global political economy:

1. Economies that are not part of the high-income club are playing an increasingly large role in global trade and finance. However, the BWIs’ voting, leadership, and governance structures do not reflect this shift in the global economy and the IMF and WBG remain US-, Group of Seven (G7)-, and European Union (EU)-centric institutions. Together, the EU and the United States still maintain about 40 percent of votes in the World Bank and the IMF even as their relative prominence in the global economy has eroded.
   
   
   
   
2. The global economy is facing a growing number of challenges that have stretched the resources of BWIs and tested their effectiveness in bringing together the right stakeholders. One can point to unsustainable levels of sovereign debt, weather-related extreme events, increasing risk of pandemics, and aging populations as only some of these multifaceted challenges. Moreover, tariffs, subsidies, currency wars, protectionism, industrial policies, sanctions, geoeconomic fragmentation, and decoupling have become commonplace hurdles to globalized trade. The emergence of heightened geopolitical tensions between some of the world’s largest economies has undermined global financial stability and has also introduced significant difficulties for the BWIs to adhere effectively to their mandates of effective global governance, shared prosperity, and international monetary cooperation. This is eroding gains made through globalization in the past few decades.
3. The emergence of state-led development finance institutions and the growing number and influence of regional multilateral development banks and financial institutions, sovereign wealth funds, and pension funds have drastically altered the global landscape of development finance, calling for a more active collaboration between BWIs and the following parallel institutions:
   • Nearly 160 countries are signatories to China’s Belt and Road Initiative (BRI) and/or the G7’s Partnership for Global Infrastructure and Investment.
   • More than forty multilateral development banks and financial institutions—such as the Asian Development Bank, the Inter-American Development Bank, the African Development Bank, the Islamic Development Bank, and the Asian Infrastructure Investment Bank—are active in the global development finance landscape.
   • More than fifty national development banks such as Qatar Development Bank, Korea Development Bank, and Development Bank of Nigeria are offering a wide range of financing products to international public and private entities.
   • More than 130 sovereign wealth funds boast around $12 trillion in assets globally.
   • Public and private pension funds have over $24 trillion and $42 trillion in global assets, respectively.
4. Several multinational corporations (MNCs) command economic and technological might larger than many countries and are increasingly shaping the future of global economy through innovation and by influencing policy debates. MNCs are estimated to account for nearly one-third of global gross domestic product (GDP) and a quarter of global employment, and the revenue of Walmart alone was larger than the GDP of more than 170 countries in 2023. Environmental, social, and governance standards have been put in place to create a framework where MNC activities are not detrimental to environmental and social objectives but are based on best governance practices. However, the BWIs have played too minor a role and influence in these conversations. 
5. The emergence of digital currencies and assets and the increasing role of technology (artificial intelligence, machine learning, and fintech) in economic and monetary policy offers challenges and opportunities for the efficiency and stability of the global economy. Alternative finance championed by non-state actors has moved faster than international and domestic supervisory and regulatory bodies, including the BWIs, which have not kept up with the rapid pace of change. For example, the IMF in collaboration with the Bank for International Settlements could play a significant role in coordinating the global efforts in standard-setting for central bank digital currencies and new cross-border payment systems.
6. New debates and policies are altering global economic, monetary, and trade policies. Modern monetary theory, universal basic income, quantitative easing and tightening, modern central banking, global minimum taxation, fair trade, and human rights considerations in global supply chains are some of the issues BWIs need to be more proactive about.

Acknowledging the gravity of the risks facing effectiveness and relevance of BWIs, our Bretton Woods 2.0 Project has conducted in-depth policy research on the rising challenges facing BWIs’ governance and operations and has put forth feasible policy recommendations for their consideration in their reform journey. Substantive reforms are never easy, especially for multilateral organizations with such long and complex histories and intractable geopolitical rifts between their members. Difficult decisions, especially regarding the governance and leadership structure of these institutions, must be made, however. As Axel van Trotsenburg, senior managing director at the WBG recently acknowledged, for the IMF and WBG to remain true to their mandates and still relevant at their one hundredth anniversary in twenty years, they must embark on reforms that heed the issues highlighted above.  

Amin Mohseni-Cheraghlou is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington, DC. Follow him on X (formerly known as Twitter) at @AMohseniC.

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This surge in defense spending follows Russia’s full-scale invasion of Ukraine in February 2022. The war in Ukraine has prompted an unprecedented 18 percent increase in defense spending this year among NATO allies across Europe and Canada. In total, NATO countries now meet the 2 percent target, together spending 2.71 percent of their GDP on defense. This creates positive momentum and success to build on for the Washington summit, which is expected to highlight the Alliance’s collective strength and focus on deeper integration with Ukraine. 

Poland stands out as the biggest spender, allocating 4.12 percent of its GDP to defense. Sweden has also increased its defense spending dramatically since the 2022 Russian invasion of Ukraine. The Washington summit will witness Sweden’s first participation in a NATO summit as an official NATO member, following its accession in March.  

As NATO celebrates its seventy-fifth anniversary, the large increase in defense spending can help renew the Alliance’s unity and strength to continue supporting Ukraine and be prepared for the future. 

Clara Falkenek is an intern with the 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.

Learn more

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One of the IMF’s tasks is indeed to deflect some of the political blame from a government that has committed to fiscal adjustment measures and faces public opposition. Even after the bill was withdrawn, however, public anger has yet to subside, fueled by killings of demonstrators and accusations of corruption and misuse of public money.

The truth is, of course, that Kenya’s decline into fiscal trouble has been entirely predictable, led by the ambitions of past leaders who followed the path of easy money. Especially during the mid-2010s, under President Uhuru Kenyatta, Kenya was looking for ways to leverage its “frontier market” status into higher growth via debt-financed investments and infrastructure projects. As a result, within a decade, Kenya’s public debt ratio almost doubled from 41 percent of gross domestic product (GDP) in 2014 to a projected 78 percent of GDP in 2024.

One prominent creditor has been China’s Export-Import Bank, which provided Kenya with $3.2 billion to build a Standard Gauge Railway (SGR) between Nairobi and the port of Mombasa—a project that has been criticized because of its weak governance and high cost but, according to recent reports, will be extended to Kenya’s western border with Uganda.

Although public investment does have an important role in raising a country’s economic fortunes, Kenyans are still waiting to see the social returns of the debt-financed investment spree. GDP growth has hovered around 5 percent since the mid-2000s, real GDP per capita has stagnated in recent years, and the poverty rate (at just below 40 percent) remains above pre-COVID-19 levels. It is no wonder that the fiscal belt-tightening now required to arrest a further run-up of public debt has met with resistance, amid legitimate questions about who benefited from the loans that ordinary Kenyans now have to repay.

Ruto, in office since 2022, carries his share of responsibility for the fiscal sins of the past, having been vice president in the previous administration and a proponent of the Chinese railway loan. His government is also dealing with droughts and the aftermath of the COVID-19 crisis, which hit Kenya and other frontier markets particularly hard, including through spillover effects from global inflation and higher interest rates. Being caught out in a weak fiscal position and facing eventual default, Kenya turned to the IMF in 2021 to help stabilize its finances, including a “multi-year fiscal consolidation effort centered on raising tax revenues and tightly controlling spending.”

The government did reasonably well under this program, which originally foresaw a steady pace of fiscal adjustment (at about 1 percentage point of GDP per year over five years) and allowed for measures to absorb its social impact. Both the primary fiscal deficit and the trade balance improved, and the shilling unwound much of its decline vis-à-vis the US dollar as Kenya surprised markets by repaying a two-billion-dollar Eurobond last month. Moreover, the program unlocked a considerable amount of concessional multilateral financing, including from the World Bank.

But the country remains in a financial hole from which it will be very difficult to climb out. One problem is that higher interest rates keep adding to Kenya’s debt dynamics, as illustrated by the hefty 10 percent interest rate on a smaller Eurobond that Kenya issued in February to meet its June payment. Therefore, despite an improvement of the primary deficit broadly in line with program targets, Kenya’s public debt is still projected to increase this year.

While the government planned to continue on its programmed adjustment path, the latest package of measures—including tax measures to offset gradual revenue slippages over the years—appears to have been the political straw that broke the camel’s back. So, what are the alternatives available to the government now?

• First, “keep calm and carry on” may be the motto of the day. The government appears to be looking for spending measures to substitute for lost revenues, but this will not be viable in the long term. Expenditure compression has its own distributional (and political) consequences, and the overall fiscal adjustment strategy will need to be balanced across revenue and spending items.
• Second, with interest payments accounting for more than a quarter of total revenue, the Kenyan government may decide to seek a debt restructuring. This is not something the IMF could impose on Kenya, unless it judged that public debt was unsustainable. However, the government went to great lengths in the past to service its debt and retain access to financial markets. It would have been cynical on the part of IMF shareholders, who routinely call for strong ownership from program countries, to force Kenya into an unwanted debt operation—as long as there was still a realistic chance of avoiding it. This now looks less assured, and it may be the only avenue left for the government.
• Third, however, the Export-Import Bank of China is the biggest bilateral lender to Kenya, holding claims worth $6.5 billion, close to two thirds of all bilateral debt. China has a special responsibility to provide debt relief, given the history of corruption and questionable economic value of the SGR project it helped finance. Kenya would have to request a debt treatment under the Group of Twenty (G20) Common Framework, which has recently become more efficient in dealing with problem cases. However, bilateral debt negotiations could still take a long time to resolve, and Kenya would risk being cut off from external financing for a considerable period.

As the government needs to chart a fresh course in this difficult environment, it is also very likely that supporters in the West will call for more money and fewer fiscal adjustment as the solution to Kenya’s problems. The Nairobi-Washington Vision, formulated during Ruto’s state visit to the United States in May, has also called for increased financial support for developing countries. The question is, where should this money come from?

• First, anyone who has looked at a financing needs table of an IMF program (for example, see Table Six here) understands that spending can either be financed by revenues, grants, or borrowing. Since grants don’t carry any interest or repayment burden, they would be ideal for a country in Kenya’s situation. But taxpayers in rich countries have shown less and less inclination to finance development aid, let alone through direct transfers or outright debt relief for poorer countries.
• Second, the IMF and other multilateral institutions have raised funds and mobilized special drawing rights (SDRs) in recent years to subsidize interest rates paid by poorer member countries, and Kenya is already benefiting from this effort. However, there are limits to this approach. Subsidies have to be either financed from donor countries’ budgets (with less and less political support) or they are generated from richer countries’ SDR holdings.
• Third, SDR-based lending works only to a limited extent. SDRs derive their value from their status as foreign exchange reserves and being exchangeable for dollars and other hard currencies held by central banks in wealthy countries. Any overuse or exposure to default risk (for example, from rising public debt in recipient countries) could compromise their reserve-asset status, which would impact both the IMF’s financing model and its capacity to lend to countries in distress.
• Fourth, could the IMF and World Bank provide larger loans? The two institutions regularly review the amounts that countries can access under various conditions. Ceilings have gone up over time, but shareholders (who carry the ultimate risk) generally require that larger loans come with stricter macroeconomic conditionality, an approach that would presumably have triggered a similar outcome for Kenya. Moreover, multilateral loans already account for more than a quarter of Kenya’s public debt. Since these loans cannot be restructured, private creditors might be more hesitant to invest in the country, because any future debt operation might need to be deeper than in similar countries with a smaller share of multilateral debt.

To sum up, Kenya’s predicament is largely homemade, albeit with help from willing external lenders. The COVID-19 crisis exacerbated a lack of fiscal discipline, eventually forcing the country to adopt a stabilization program. While meeting with some initial success, recent events have made it clear that the government’s adjustment strategy needs to change, putting a possible debt operation on the table. The IMF did its best to support an initially credible effort by the government, but it must also ask itself what could have been done to prevent the sharp increase in public debt that is at the heart of Kenya’s problems today.

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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The high rate of dropouts ahead of the second round make the number of three-way races favoring National Rally much lower and a hung parliament more likely. An absolute majority for National Rally cannot be fully ruled out yet, but an absolute majority for the New Popular Front already can. This shift in probabilities has led to diverging reactions in bond yields, which have remained slightly higher than before the first round, and stock prices, which have rallied.  

Following Macron’s announcement of the snap election on June 9, French ten-year bond yields increased more than in any other week since 2011. In other words, it was the worst week for the rate at which France borrows from markets since the heart of the eurozone crisis. 

While he was admittedly in campaign mode, French Finance Minister Bruno Le Maire’s warning of a possible “Liz Truss-style” event if National Rally wins—referring to the 2022 bond market meltdown in the United Kingdom that forced the then-prime minister to reverse course on her fiscal plans—was more than a mere talking point. Increased yields arise from falling demand for government loans, reflecting a diminished faith in a government’s finances. The market could see both the extreme right and the extreme left promising to reverse cost-saving measures taken by the incumbent government (such as pensions reform) without offsetting these with new sources of income. 

This graph shows that the “spread” with German bonds has yet to fall significantly despite the greater likelihood of a hung parliament. Why? 

France’s finances are already fragile. Two weeks ago, the European Commission named France as one of seven countries in violation of its new fiscal rules due to high debt levels and no expected reduction in spending. With no tradition of broad coalitions in France, the assumption at this point is that no government will be able to conduct more cost-cutting or efficiency measures. 

Still, France’s bond yield increases thus far remain far less severe than the UK gilt crisis in 2022. 

On the other hand, the results of the first round prompted stock market prices to rally from their initial steep drop following the announcement of the snap election. France’s private sector seems to have taken comfort from the central scenario of a hung parliament and the elimination of a New Popular Front majority scenario. The likelihood of punitive taxes and other major economic changes businesses would need to contend with is now much lower, but not gone.

While France’s CAC 40 index noticeably increased on Monday and Tuesday, it hasn’t fully recovered the losses made following Macron’s decision to dissolve parliament. Clearly, investors are still waiting to see how the second round and its aftermath play out. In a hung parliament scenario, Macron’s party would have to negotiate with all parties that reject the far right. The strongest bloc among these will be the left. This is enough for investors to remain in wait-and-see mode for now.

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

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center.

Clara Falkenek contributed research to this piece.

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

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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Compared to last year’s economic free-fall, Argentina’s situation is indeed looking up. President Javier Milei and his team have embarked on a serious fiscal adjustment initiative and are making a determined effort to bring inflation down from record levels. These policies have met with considerable early success, but the austerity measures needed to reduce the fiscal deficit have led to massive social disruption and serious street protests against the government.

Despite these early achievements, the real issues facing Argentina remain low productivity, a weak growth outlook, and large external financing needs in the foreseeable future. Together, they call into question whether Argentina will be able to crawl out from under its large debt burden and access markets to obtain fresh financing beginning in 2025, as projected by the latest IMF staff report. This forecast corresponds to an exceedingly optimistic scenario, in which continued reforms lead to an improvement in Argentina’s twin deficits, culminating in a strong pickup in capital flows in the medium term.

In reality, it is more likely that the reform momentum will be slowed by hardening opposition in the National Congress of Argentina, in particular in the Senate, where Peronist provincial governments still hold sway. Further exchange rate depreciation, the lack of a strong rebound in labor markets, and accumulating pain from continued austerity will also impair Milei’s hopes of gaining a parliamentary majority of his own during next year’s midterm elections.

A drubbing at the polls could throw Argentina back to square one. Both of the last two governments were hobbled by weak election outcomes halfway through their presidents’ terms. Despite Milei’s popularity with a large part of the Argentinian public, failure to array Congress behind his movement could again leave Argentina with a lame duck government and a half-completed reform agenda.

In such a situation, the envisaged liberalization, if not outright dollarization, of Argentina’s exchange rate regime—which still seems to be one of the president’s key objectives—is bound to fail. The country would need a strong and growing economy to sustain the kind of fiscal discipline that is required for a stable exchange rate regime, and this will not be possible without deep changes to Argentina’s economic laws and structure, starting with the government’s own footprint.

Such changes require a societal consensus toward market-friendly reforms, but also toward the appropriate distribution of incomes in case growth takes off. In Argentina, such middle ground between radical reform and government largesse has been elusive for decades, and it is unlikely to be found unless the main political camps are prepared to compromise.

Without dismissing this possibility outright, it is much more likely that the economic hardship currently experienced by ordinary Argentineans will drive voters back toward the main opposition party. The Peronist party will, without doubt, promise large handouts to core constituencies that abandoned them during the last elections, frustrated by high inflation and rising unemployment. And as the economic environment is stabilizing, many voters will have forgotten who was responsible for Argentina’s precarious situation in the first place.

The IMF should therefore remain cautious in its discussions with the current government. The institution was wrong to lower its standards for the current program, which granted Argentina a fairly easy restructuring of its repayment terms, an operation that is in principle ruled out by the IMF’s own statutes. Going forward, the fund should be leery of granting Argentina fresh money, digging itself even deeper into a hole that is already threatening to upend its own balance sheet (and possibly imposing losses on shareholders whose per-capita income is still below Argentina’s).

Instead, any new relationship with Argentina should be based on conditionality that ensures sustained growth and the eventual repayment of Argentina’s debt. As it failed to do in 2022, the IMF should insist that both political camps sign on to a meaningful reform program. Otherwise, it risks a reprise of the Macri experience, when IMF funds provided the incumbent government with a financial war chest to support its reelection which the next opposition-led government did not feel obliged to repay when it came to power.

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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Women and civil society are indispensable as first responders in the ongoing war. They must also be central to the planning, distribution, and oversight of funds in reconstruction efforts. As the German and Ukrainian governments recognized, the physical reconstruction of Ukraine needs to be paired with a comprehensive social, human-centered recovery. Women, who represent the majority of the highly educated and skilled workforce in Ukraine, are well-positioned to strengthen anti-corruption measures, modernize the energy sector, and drive Ukraine’s reform agenda. All of these components are essential for an effective recovery. In addition, these efforts can help Ukraine meet the conditions for its accession to the European Union (EU).

The record to date for women’s inclusion in recovery efforts has not been what it needs to be. Policymakers must continue to ensure that Ukrainian women leaders will have the opportunity to meaningfully and fully participate in Ukraine’s recovery. Ukraine can only recover if women and civil society are fully involved in its reconstruction.

Where do women fit in the Ukraine recovery agenda?

Held in Lugano, Switzerland, in July 2022, the first recovery conference resulted in the adoption of the “Lugano Declaration,” which includes guiding principles for Ukraine’s recovery process. At the 2023 conference in London, the EU announced the creation of a new Ukrainian facility that would provide a total of fifty billion euros to Ukraine over four years. From this total amount, thirty-nine billion euros will be allocated to the state budget to support macroeconomic stability. Another eight billion euros will go toward a special investment instrument that will cover risks in priority sectors. This year’s conference in Berlin aimed to attract private-sector investment in Ukraine, including in human capital. The agenda included the explicit goal of investing in women and youth. This was a positive development and should encourage international financial institutions and private donors to continue to invest in women-owned and -led businesses in Ukraine, as well as to train Ukrainian women to take on jobs in Ukraine’s critical sectors.

How to unleash Ukrainian women’s economic potential

Invest, train, and enable Ukrainian women. Women in Ukraine and elsewhere have traditionally had limited access to credit, markets, and training opportunities. They have also struggled to balance responsibilities in the workplace and their primary caregiver responsibilities. These challenges must be overcome if women are to fulfill their economic potential.

The World Economic Forum notes that one solution for improving women’s access to credit is to not necessarily demand collateral, because women often do not own private property. Moreover, many women (as well as men) in Ukraine have lost their homes and properties to the war, so providing property as collateral is not likely to be an option for them. Therefore, adopting alternative ways to determine women’s creditworthiness could encourage more women to apply for business loans.

Ukrainian women, with the support of Western companies and institutions, have already stepped up to launch their own startups. These should be scaled up. Since the start of Russia’s invasion, an increasing number of Ukrainian women have founded tech startups, benefitting from improved access to investors outside Ukraine, as well as programs sponsored by the EU, international organizations, and private companies. For example, VISA launched its “She’s Next” program in Ukraine in 2020, and it has since hosted gatherings where Ukrainian women presented their business proposals and received funding and training at business schools. More Western companies should team up with women-led Ukrainian nonprofits to create opportunities for funding female-led startups and give them access to education and training.

Train Ukrainian women to fill workforce gaps in critical sectors. Now is an important time to train Ukrainian women in two critical sectors that will play a key role in rebuilding Ukraine’s economy: finance and cybersecurity. Ukraine has consistently ranked as one of the most corrupt countries in Europe in Transparency International’s global Corruption Perceptions Index. Although Ukraine has made significant progress in the fight against corruption since 2014, it remains a problem and a concern for the United States and other foreign partners. The cost of complete reconstruction is currently estimated to be around $750 billion, but international donors are concerned about the potential misappropriation of funds put toward reconstruction.

Reform of its financial sector is essential for Ukraine to secure financial aid for reconstruction, as well as to meet the requirements for joining the EU. The urgent need for financial system reform coincides with women playing a much larger role in the financial system, both within the government and private sector. By transferring the knowledge of, for example, the best anti-money laundering (AML) practices to Ukrainian women, the West would create a generation of AML experts in Ukraine who are capable of detecting suspicious money flows and preventing corruption and money laundering within the Ukrainian financial system.

At the same time, equipping Ukrainian women with cybersecurity skills would help them defend Ukrainian banks and the financial system from Russian intrusions. Ukrainian banks were one of the primary targets of the cyberattacks that Russia initiated right before launching its full-scale invasion of Ukraine in February 2022. More recently, at the end of 2023, Monobank, one of the largest Ukrainian banks, reported a massive hacker attack. While the bank has not publicly attributed this attack to any specific threat actor, Russia has been suspected due to its history of backing cybercrime groups attacking Ukraine. The persistent threat of Russian cyberattacks against Ukrainian banks should be countered by training Ukrainian women in cybersecurity and digital forensics.

Ukraine’s partners and allies can learn from and build on existing work to train Ukrainian women in cybersecurity. For example, the United Nations Institute for Training and Research organized a project that trained Ukrainian women evacuees in Poland in cybersecurity and data analytics. The project was held from October 2023 to March 2024 and was funded by the government and people of Japan. Private companies have also launched similar initiatives. For example, Microsoft is working with nonprofit organizations in Poland to train Ukrainian women refugees to enter the workforce in cybersecurity. Such projects need to expand to include more partners and reach more Ukrainian women.

Investing in Ukrainian women is smart economics

Leveraging Ukraine recovery conferences and other global convenings to encourage Western investment in Ukrainian women corresponds with the United States’ existing strategy of providing economic incentives to allies—also known as positive economic statecraft. The EU, United Kingdom, and other Group of Seven (G7) members are already heavily invested in Ukraine’s success. Directing investment toward the female workforce will strengthen an already existing strategy of ensuring Ukraine has the resources to minimize economic dependence on Russia. Investment in Ukrainian women will create a multiplier effect for the economy. It is well-known that women often spend their income on education, healthcare, and nutrition—all of which raise the standard of living. This is a force that moves economies forward but is often sidelined.

Finally, Ukrainian women can fill in global workforce gaps, too. Training Ukrainian women in cybersecurity would help address the global cybersecurity skills crisis. Private companies and policymakers often note that the world does not have enough cybersecurity professionals. Meanwhile, Ukraine has a highly educated population, especially in technical subjects. Cyber-trained Ukrainian women could defend not only Ukrainian banks but also businesses and governments around the world.

As policymakers and private sector actors adopt strategies for Ukraine’s reconstruction, it is crucial that they fully leverage the potential of Ukrainian women and help establish the groundwork for an inclusive and sustainable recovery.

Melanne Verveer is the executive director of the Georgetown Institute for Women, Peace and Security and a former United States ambassador-at-large for global women’s issues at the US Department of State.

Kimberly Donovan is the director of the Economic Statecraft Initiative at the Atlantic Council’s GeoEconomics Center and a former senior US Treasury official.

The post Women should play a central role in rebuilding Ukraine’s economy appeared first on Atlantic Council.

The reality is that Beijing’s measures are a mere drop in an ocean of empty or unfinished apartment buildings, moribund developers who have defaulted on at least $124.5 billion of dollar debt, and hundreds of millions of homeowners who once bet on a now-collapsed property bubble. It also is bad news for an economy that over the past two decades came to rely on the property sector—and the industries like construction that it turbocharged—to provide between 20 and 30 percent of the growth that fueled China’s economic “miracle.”

Even if the Chinese government eventually comes to grips with the current crisis, it is extremely unlikely that the property engine will end up firing on more than a few cylinders. The combination of a declining population, slowing urbanization, and market changes that have made new homes less attractive than existing housing stock means that frothy property development will be a thing of the past.

None of this is good news for the global economy. The downsizing of China’s housing demand will be felt by natural resource suppliers across the developing world. But of far greater concern will be the implications of China’s growing reliance on low-priced exports to fuel growth—a surge that already is sparking trade tensions with the United States, Europe, and emerging market countries. This dependence on factory output will be a constant now that the property bubble has collapsed, taking with it a big chunk of Chinese domestic demand.

The impact of the real estate downturn has been reflected for months in China’s economic indicators. Sales of new and existing homes fell at a record pace in April, and property investment plummeted nearly 10 percent year on year. Home prices posted their sharpest decline in nearly ten years. The impact on employment in the property sector has been severe: an estimated half million real estate jobs have disappeared since 2020.

The carryover to the larger economy has been severe. Consumer spending has been hit especially hard, with many small businesses failing to recover from China’s strict Covid-19 shutdowns. Automobile sales posted their largest one-month drop in nearly two years in April, and overall retail sales rose at an anemic pace. Youth unemployment is a lingering problem, although the government’s recent recalculation of that number after it rose to an embarrassing 21 percent has masked the true extent of the problem.

The damage from the property collapse is virtually everywhere in China, with the possible exception of mega-cities like Shanghai and Beijing. Unoccupied and uncompleted buildings are ubiquitous, especially in smaller provincial cities that hosted the final stages of the building boom. Housing statistics compiled by Bloomberg and Chinese researchers estimate that the current stock of unsold housing in 100 major cities totaled 511.8 million square meters at the end of February, down from a peak of 530.6 million at the end of 2022. That is roughly ten times the total office space in Manhattan.

Goldman Sachs estimated last month that it will cost 7.7 trillion yuan to buy up enough apartments to return China’s inventory of empty homes to 2018 levels—and that assumes a 50 percent discount on current market prices. That figure is roughly 25 times the amount in the central bank’s bailout plan. The same study calculates that Chinese developers need $553 billion to complete housing that they pre-sold to buyers, and then failed to finish, in what amounted to a nationwide Ponzi scheme. Even that is far more than the $42 billion allocated in the new plan.

The core problem that China faces in dealing with the remains of its property bubble is the sector’s interlocking financial obligations of private and government developers, financial institutions ranging from state banks to shadow institutions, and local governments (many of which set up financing vehicles to buy land that the governments themselves put up for sale). With the market’s collapse, that foundation now has become profoundly unstable.

While developers have defaulted on their dollar-denominated bonds issued overseas—leaving foreign investors with little recourse but to file suit in Hong Kong courts—Beijing so far has tried to forestall defaults and restructuring of yuan debts. To mishandle the situation could have destabilizing consequences that would further damage the economy and undermine the legitimacy of Xi Jinping’s government. The result so far has been incremental steps: funding for some developers to complete pre-sold apartments, interest rate cuts to encourage buyers, and the release of funding like last week’s central bank initiative.

But buyers remain cautious, in part because prices so far are not coming down significantly. More importantly, banks are very hesitant to lend the cheaper money that’s been made available. For example, when the central bank last year made available $27 billion of interest-free funding developers to complete apartments, banks lent only a tiny proportion. They worry that they will be left holding the bag when defaulters eventually default.

On the other hand, history suggests that a bailout delayed only becomes an ever-larger bailout. The IMF, which has considerable experience helping countries address property crises has recommended that China pursue “more market-based adjustment in home prices and quickly restructur[e] insolvent developers to clear the overhang of inventories and ease fears that prices will continue to gradually decline.”

But it is not clear whether Beijing is willing to commit the trillions of yuan—and the political capital—that will be required to do this. The government has begun issuing what is slated to amount to $138 billion of ultra-long-term bonds this year and has announced plans for $539 billion of local government bonds. But it remains to be seen how much will go to relieve the property crisis. With local governments and their financing vehicles overloaded with more than 100 trillion yuan of debt, Beijing is facing many difficult decisions.

It may just end up trying to muddle through while repeating its declaration of the need “to urgently build a new model of real estate development,” as the Politburo stated on April 30. In that case, it will continue to widen the divide between weak domestic demand and expanding exports—with all the international political tensions that inevitably will result.

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.

The post There’s less to China’s housing bailout than meets the eye appeared first on Atlantic Council.

In March 2024, China’s Premier Li Qiang capped off a bumpy first quarter by cancelling a traditional annual press conference to talk about the government’s plans for the coming year. But in many ways, China’s policy measures spoke for themselves. The year-to-date story has been one of harried effort to support a faltering stock market, ramp up exports to make up for domestic demand, and double-down on high-tech sectors with subsidies and other innovation funding. The most important policy document of China’s economic year, the Government Work Report, promised state guidance and fiscal expansion but did not address the structural problems that have impaired Beijing from doing that in the past several years.

We identify some positive policy developments compatible with global market norms this quarter, including in financial system development and direct investment openness. New data security guidelines provided some reassurance to skittish foreign investors after years of uncertainty on the scope of data rules. Beijing pledged once again to ease the business environment and level the competitive playing field for foreign firms, this time through twenty-four measures and a charm offensive with foreign CEOs at the China Development Forum. And despite uncertainty, foreign portfolio investors took advantage of premium China bond returns, even as direct investment stalled.

These policy strategies were mostly familiar. In most of the areas monitored under the Pathfinder framework, there was either no market convergence or active backsliding. There was little to no public discussion of the structural and systemic factors weighing on the economic outlook, low productivity, foreign concerns over overcapacity or exchange rate risks. This paucity of needed debate fanned the flame of discussions in G7 capitals about the need to coordinate collective trade defense. While a few signs of the end of the property correction are showing up, suggesting a cyclical stabilization with the next several quarters, the longer-term headwinds to sustainable growth will mount until meaningful market reforms are implemented.

Read the full issue brief below

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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Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

The China Pathfinder project examines whether China’s economy is converging or diverging with the world’s leading open market economies.

China Digital Policy

Issue Brief Feb 5, 2024

China Pathfinder update: Lack of policy solutions in second half of 2023 belies official data

By GeoEconomics Center and Rhodium Group

Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems and an unprecedented drop in foreign direct investment was stark.

China Economy & Business

Econographics Dec 11, 2023

China’s manufacturing overcapacity threatens global green goods trade

By Niels Graham

Chinese lending is exacerbating a growing glut in its green manufacturing sector. Beijing is increasingly looking abroad to absorb excess capacity. This may have devastating effects for the global trading system as economies move to protect their own domestic industry.

China Economy & Business

The post China Pathfinder: Q1 2024 update appeared first on Atlantic Council.

The EU’s economic weight in the world has declined substantially in the past few decades and its strategic position has weakened seriously as the geopolitical rivalry between the United States and China intensifies. Against that backdrop, one of the report’s main recommendations is to transcend the Capital Market Union to promoting a Savings and Investments Union instead. The aim is to mobilize savings and investments in EU countries, and the report proposes launching a variety of investment vehicles to facilitate retail and institutional investments in the EU economy and especially its green energy transition efforts. These include an EU-wide auto-enrollment Long Term Savings Product leveraging tax incentives by member states; enhancing the Pan-European Personal Pension Product; a European Long-Term Fund; as well as a European Green Guarantee facility to support bank lending to green energy projects. Unfortunately, this well-meaning proposal fails to tackle the underlying causes of the EU’s fragmented capital markets.

While the proposed funds and products may be worthwhile, it is difficult to assess their contributions to reviving EU economic growth until more operational details are forthcoming. Meanwhile, by emphasizing the use of tax incentives and guarantees, the report has downplayed the unglamorous but crucial tasks of harmonizing laws, regulations, market structures, and practices in twenty-seven member countries to forge a seamless European capital market where savings can flow to the best opportunities without internal barriers. The harmonization job is far more complicated than it sounds—involving the development of common rules or at least common and consistent standards for corporate laws. That includes bankruptcy and reorganization provisions, creditors’ ease in seizing and liquidating loan collaterals, tax procedures, supervision of markets and entities, accounting standards, trading rules including for shorting, investment rules for institutional investors such as pension funds, insurance companies and mutual funds, listing requirements including the languages used for prospectuses, etc. Turning all these national rules and regulations into a common EU rules book has run into strong resistance from vested interests in various countries, explaining the slow progress to date in advancing the Capital Market Union. However, without making much more headway in these nuts-and-bolts issues, the proposed European Savings and Investments Union will likely be slow in taking shape as well.

The report also singles out practices which hinder the channeling of savings to investments in the EU but does not get to the root causes of the problems or suggest ways to overcome the impediments.

Firstly, the report bemoans the fact that while the EU is home to €33 trillion ($35.4 trillion) of private savings, annually €300 billion ($321 billion) are being diverted to overseas financial markets, primarily to the United States, due to internal fragmentation. However, it does not recognize, and does not suggest ways to rectify, the fundamental factor attracting European savings to the much larger US stock market, which accounts for 54.5 percent of world market capitalization compared to large European markets at 15.7 percent. Investment flows to the United States primarily because of superior returns on American equity markets compared to those of the EU. Specifically, for the period 1900-2020, the average annual nominal return on US equities was 9.6 percent compared to 7.2 percent for Europe. So long as this remains the case, savings from the EU and the rest of the world will continue to be attracted to the United States, where foreign investors own 40 percent of the stock market. So the EU need both reforms and investment: structural reforms to make the EU economy more productive and its corporations more profitable will create more investment opportunities to deploy European savings at home—while more investment now could help improve EU productivity and growth prospects. Thus, while it is wise to find ways to increase investment in the EU, the problem is more fundamental than just the efficiency of capital markets.

The Letta report also points out the fact that EU households keep 34.1 percent of their savings in bank deposits, not investing those in stock and bond markets. It is important to realize that this behavior of European households reflects their cultural and traditional preference for loss avoidance over capital gains with risk.  As such, a more developed Capital Market Union may encourage somewhat more allocation from bank deposits to portfolio or direct investments, but that would not substantially change the loss-avoiding investment behavior in the near term. Instead, it is more useful for policy makers in the EU to find ways to create a business environment for EU banks which receive an important part of its funding from retail depositors to invest the proceeds more productively.

Relative to US peers, EU banks have posted very low returns on assets (ROA) (of 0.4 percent vs. 1.4 percent for the United States) as well as low returns on equity (ROE) (fluctuating between 2-6 percent, about half of the US level). Consequently, market valuation of EU banks has been much lower than that of US banks: the price to book ratio of EU banks in 2014-2021 averaged 0.79x compared to 1.53x for US banks. In short, helping EU banks become more efficient and profitable—for example by launching the European Deposit Insurance Scheme (EDIS) to complete the Banking Union—would probably do more to support EU economic growth than trying to get EU households to change their investment behavior from bank deposits to market investments.

In conclusion, in highlighting the inefficiency of EU capital markets and proposing several products and policies for improvement, the Letta report has focused attention to the need to complete and upgrade the Capital Market Union, and the Single Market in general, to help the EU improve its economic performance in an era of geopolitical rivalry. However, much of the work requires attention to the detailed harmonization of economic and financial rules and regulations across the membership to promote a seamless market for savings and investments. These are unglamorous and painstaking tasks, but they need to be done.

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

The post The Enrico Letta Report and the state of the EU’s Capital Market Union appeared first on Atlantic Council.

Recent economic data and projections by international institutions, including the World Bank, reveal that the country faces considerable headwinds. Several notable social indicators, too, raise concerns that the country’s success story may be unraveling. Not coincidently, these shifts are taking place under a government that is less and less accountable to its citizens.

The worsening economy: The big picture

Published on April 2, the World Bank’s Bangladesh Development Update forecasted that the country’s gross domestic product (GDP) growth in fiscal year 2024 would be 5.6 percent. Within days of the World Bank’s forecast came a report from the Bangladesh Bureau of Statistics (BBS) that GDP growth in the second quarter of the current fiscal year, between October and December 2023, was 3.78 percent. This is a dramatic decline compared to the previous quarter’s growth, which stood at 6.01 percent. The numbers were far higher in previous years’ second quarters; in fiscal year 2022 it was 9.3 percent and in fiscal year 2023 it was 7.08 percent. The overall GDP growth projection of the World Bank sharply contrasts with the government’s initial projection for fiscal year 2024, which the Bangladeshi government revised down in January from 7.5 percent to 6.5 percent.

Analysts have described the government’s growth target as unachievable. Those who have been following Bangladesh’s economy were not surprised that the World Bank projected a rate below last fiscal year’s growth of 5.8 percent and well below fiscal year 2022’s growth of 7.1 percent. The country’s average GDP growth over the past decade, according to government statistics, was around 6.6 percent. The World Bank forecast suggests that Bangladesh’s economic growth has been on a downward trend for two consecutive years and that the projection for next year is not much different from this year.

The economic crisis in Bangladesh, which has been evident since the middle of 2022, didn’t appear suddenly due to external shocks. It was in the making for quite some time. Two years ago, Bangladesh reached out to the International Monetary Fund (IMF) and other international lenders to avert a meltdown. The government did secure new loans, but these have added to existing external loans. For the first time, external debt surpassed one hundred billion dollars in late 2023. As a result, the cost of servicing the debt is increasing at an unprecedented rate. In the first eight months of the current fiscal year, the country spent $2.03 billion making payments on this debt. The debt servicing, not only the foreign but domestic sources, is forcing the government to borrow to “repay a large part of its PPG [public and publicly guaranteed] debt obligations,” according to economist Mustafizur Rahman.

This is putting a serious dent in Bangladesh’s foreign exchange reserves, which have continued to slip. As of early April 2024, they stood below the IMF’s suggested $19.26 billion. Concurrently, nonperforming bank loans, which are about 10 percent of total outstanding loans, according to the central bank’s statement, are increasing. In the past fifteen years, the amount has increased six and a half fold. In a single year, it increased by more than 20 percent. Faced with pressure from the IMF to reduce the defaulting loans, the Bangladesh Bank has devised a stealthy way to do so—essentially, by cooking the books. The Bangladesh Bank has decided to relax the write-off policy that will wipe out a large amount of loans from the books but will hold nobody accountable—neither those banks which have allowed this to happen nor the businesses which have defaulted.

Instead, a recent amendment to the Bank Company Act will allow the sister companies of the defaulters to continue to borrow. In another controversial move, the Bangladesh Bank has decided to merge “weak banks” with “strong banks”  as part of its banking sector reform program. In April, the World Bank described this move as “counterproductive,” and experts have questioned its prudence. It will force the liabilities of weak banks onto the depositors of stronger banks. Many of the banks identified by the central bank as weak were approved in the past fifteen years for political considerations. The benefits enjoyed by those who established these banks and borrowed from various banks are now being paid by the public at large.

Economic woes of citizens

The broad economic crisis is having serious consequences for Bangladeshis, especially those in the middle class and poorer segments of society. While official statistics from February claim that inflation is below 10 percent, the prices of food and essentials in the market indicate a far greater number. Although food and fuel prices have fallen in the global market, Bangladeshis have not enjoyed the benefits of this. Instead, the government in March once again raised the price of electricity. In 2023 alone, the government raised the price of electricity and gas three times.

The plight of the common people can be gleaned from the data provided by a BBS survey conducted in the middle of 2023, “Food Security Statistics 2023.” The survey revealed that around 37.7 million people experienced moderate to severe food insecurity in the country. The report also noted that more than a quarter of families were taking out loans to cover the cost of daily necessities, including food. A survey by the South Asia Network on Economic Modeling, a think tank, shows that 28 percent of households resorted to borrowing money between April and November of 2023. The share of households borrowing money, largely from informal sources, has been on the rise for the past decade. According to a 2022 BBS survey, the average amount of loans per household in the country nearly doubled between 2016 to 2022, whereas the amount increased just 34 percent in the six-year period between 2010 and 2016. These numbers point to a difficult, perhaps even deteriorating, economic situation for many Bangladeshis.

Social indicators are showing strains

While the economic indicators alone are concerning, there are also disturbing developments in several social development indicators.

Bangladesh had been registering increases in life expectancy for decades. In 2020, it reached 72.8 years, the highest to date. But since then, the pattern of growth has been broken. In 2021, there was a decline, to 72.3 years. In 2022, a modest increase to 72.4 was reported by the BBS. But the Bangladesh Sample Vital Statistics-2023 (BSVS-2023), published by the BBS in March 2024, shows a reversal, to 72.3 years. Combined with the information that food insecurity has increased in the past year, it is worth asking what might be causing this decline.

The decline in life expectancy is in part a result of the increase of the death rate in children. The BSVS-2023 shows that the mortality rate for children under five years of age, newborns, and children under one year has increased. Nor was the increase a one-off incident. Take, for example, the mortality rate for children under one year of age. The number was 21 per 1,000 five years ago, while in 2022 it increased to 25 and in 2023 it reached 27. The death of children below one month has reached 20 per 1,000 live births, up from 16 in 2022. Five years ago, the death rate of this age group was 15. The death rate of children under five years was 33 per 1,000 in the past year, an increase from 31 in 2022 and 28 five years ago. The BVS-2023 identified other troubling trends in social indicators as well. For instance, child marriage has increased significantly in recent years—from 31.3 percent in 2020 to 41.6 percent in 2023.

Two aspects of education and employment are noticeable in the statistics provided in the BSVS-2023 and a survey conducted by the Bangladesh Bureau of Educational Information and Statistics (BANBEIS). First, there has been a drop in students at the secondary-school level and an increase of NETT (not in employment, education, or training) among the youth population. Over the past four years, the number of students at the secondary school level in Bangladesh has decreased by one million, according to the BANBEIS.

According to the BSVS-2023, the share of children between five and twenty-four years not in educational institutions has risen since the COVID-19 pandemic. In 2020, at the onset of the pandemic, 28.46 percent were out of educational institutions, while in 2023, the share reached 40.72 percent. On the other hand, BSVS reveals that 39.88 percent of youth between the age of fifteen and twenty-nine are neither in school nor in employment. The percentage was a little better than 2022, when it was 40.67 percent, but according to the labor force survey of 2016-2017, the NETT was around 30 percent. As such, this increase by almost ten percent in eight years reflects a pattern.

How did it happen?

These economic and societal shifts are happening neither abruptly nor in a vacuum of policy decisions. Instead, they are taking place incrementally and under a system of governance that has repeatedly claimed its legitimacy based on “development,” even at the expense of democracy and an inclusive political system.

The absence of accountable governance is allowing a crony system to flourish, even as it is holding back the economy. The government has created a clientelist network upon which it relies for survival and stability. Recent elections have been neither free nor fair, and they have resulted in an economy that is increasingly beholden to a small group of people who facilitate the victory of the incumbent.

This is not unexpected. The dire warnings that authoritarianism can burst the bubble of growth appear to be coming to pass. As the country’s system of governance has transformed from a hybrid regime to an autocratic system, especially after the 2018 election, social development has received less attention from the government, which relies less and less on a mandate from citizens. Regime survival is not contingent on public support, which tends to judge the incumbent based on performance. If these trends continue, then the optimism that accompanied the fiftieth anniversary of Bangladesh’s independence may soon seem like a distant memory.

Ali Riaz is a nonresident senior fellow at the Atlantic Council South Asia Center and a distinguished professor at Illinois State University.

The post Is the Bangladesh success story unraveling? appeared first on Atlantic Council.

It starts with Draghi’s forthcoming report on EU competitiveness, at the request of European Commission President Ursula von der Leyen, to be published after the June 6-9 elections for the European Parliament. According to a source close to Draghi, who shared early details on condition of anonymity, the report will likely include a frank appraisal of Europe’s weaknesses. Brussels should pay close attention, and lawmakers should elevate Draghi to be the next European Council president to help make his report’s prescriptions for a more integrated and competitive EU a reality.

Time to compete

The most important things that happen in the world don’t happen in Europe; this is especially true regarding the economy and technological innovation. Draghi is strongly convinced of this, and the competitiveness report will likely dive into Europe’s limited creative and productive capacities.

Draghi is set to deliver a cold, hard dose of reality: Right now, Europe lacks both the resources and the will to compete with the rest of the world, especially considering the capacity of the United States and China to stimulate the economy through government spending. But the report will also likely highlight the fact that Europe has tremendous opportunities to correct for these shortcomings.

One reform that the document will promote is the establishment of interconnections between national production systems, with a view toward creating a single European system of integrated continental supply chains—an ambitious aim, to say the least. “The geopolitical, economic model upon which Europe has rested since the end of the second world war is gone. The European Union has to become a state,” Draghi said at the end of November. His vision for Europe entails the establishment of public debt, fiscal policy, and defense as the pillars of the new EU. He is also convinced that the EU needs five hundred billion euros per year to lead environmental and digital transitions and to provide social protection to its citizens.

As Draghi said in Washington in February, European countries will require “more investment even at the cost of higher public deficits to stimulate growth and fight inequality without forgetting the importance of raising productivity and to assign a new role of budgetary policy that reaches where monetary policy alone cannot reach.”

Draghi is widely regarded as, above all, a defender of European interests and an Atlanticist. As Italian prime minister, he was a key player in aligning Europe with Ukraine. Moreover, he personally developed the system of sanctions placed on Russia’s central bank. This demonstrates a strong track record for defending the EU’s freedom and democracy against any threats.

Draghi’s vision could be the source of inspiration for a government program for the EU for the next five years. And Europe needs his engagement to realize these aims.

The next Council president?

How might Draghi engage with the European institutions? Many observers in Brussels and across the continent think that he could be the next president of the European Council. Even though this institutional office is often criticized for being largely symbolic and lacking a cabinet, it’s the person that makes the office. The president sets the agenda of the Council and could be more than an honest broker between national leaders. A president with Draghi’s vision could truly lead. For example, as European Council president, Draghi would be able to start the process of reforming the EU’s founding treaties by proposing items in formal and informal discussions, as well as crafting plans to realize the policies he will suggest in his report. As he said in Brussels at the High-level Conference on the European Pillar of Social Rights on April 16, “we will need a renewed partnership among member states—a re-defining of our union that is no less ambitious than what the founding fathers did seventy years ago with the creation of the European Coal and Steel Community.”

The problem is that, for now, Draghi has said publicly that he is not interested in assuming any European office, and no political leaders are asking him to get involved.

The campaign for European Council president will start after the elections in June. The new balance of power between the European parties will be determined, together with their agreement on who will hold the main European offices. Three parties that are likely to contend for a leading role in the EU institutions are the European People’s Party (EPP), the Socialists and Democrats (S&D), and Renew Europe (Liberals).

The EPP is expected to be the largest group in the European Parliament. Draghi has a strong influence on the EPP’s leader, von der Leyen, who could ask him at the very least to go on with his work on competitiveness. However, the EPP—mainly the northern European members—are not too keen on the idea of “good debt” that Draghi proposes.

S&D is likely to nominate former Portuguese Prime Minister Antonio Costa as president of the European Council, but he might not be proposed by his country, in which case the nomination would not move forward. During the Socialist Congress in Rome, one of the main leaders, secretary of the Italian Democratic Party Elly Schlein, publicly supported Draghi’s plan to spend five hundred billion euros per year for environmental and digital transitions. And the former Italian prime minister is highly respected by two other influential S&D members: Spanish Prime Minister Pedro Sánchez and German Chancellor Olaf Scholz.

In addition, Draghi has a strong relationship with French President Emmanuel Macron, the leading voice of the Renew Europe group. According to a source close to Macron, his support for Draghi will depend on the outcome of French president’s talks with other European leaders after June 9. The sense is that Macron considers von der Leyen a good choice for a second term as commission president, despite the two campaigning against one another and having disagreements on specific issues. And if von der Leyen backs Draghi, that will bring Macron along, too.

Concerning the other parties, it looks like it will be difficult for the Conservatives and Reformists Party (ECR) to enter into a coalition together with the Socialists. But ECR leader and Italian Prime Minister Giorgia Meloni already has a strong relationship with von der Leyen, and proposing the pro-European Draghi for president of the European Council might be a way to strengthen her accountability with EU partners. Whatever happens after June 9, Europe will need, to paraphrase a quote often attributed to Henry Kissinger, a leader able to carry the European Union from where it is to where it has not been. Draghi could provide that kind of leadership as president of the European Council.

Mario De Pizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center. He is currently a journalist at TG1, Italy’s flagship television newscast program produced by RAI, Italy’s national public broadcasting company.

The post The case for Mario Draghi as the next European Council president appeared first on Atlantic Council.

Times are changing and the IMF’s Fiscal Monitor released earlier this month documented this in detail. Policymakers are increasingly turning to subsidies to achieve a variety of objectives. The Fiscal Monitor documented the proliferation of industrial policy and, notably, offered a partial endorsement. The report also illustrates how economists’ views of industrial policy are evolving and where there is still disagreement.

What’s the IMF-approved version of industrial policy? In short, the IMF cautiously endorsed sector-specific interventions as a way to promote innovation, but remains skeptical of measures that get in the way of free trade.

The IMF’s case for industrial policy starts with the acknowledgement that innovation doesn’t happen under ideal market conditions. New ideas and inventions have positive spillovers (externalities) which means that the market, left to its own devices, won’t provide sufficient innovation.

That opens the door to policies like research grants or R&D tax credits that subsidize new research and inventions. Those economy-wide measures are known as “sector neutral” or “horizontal” industrial policy, and they tend to have more buy-in from economists. But the IMF’s Fiscal Monitor went further, outlining when and why “vertical” or sector-specific industrial policies can be worthwhile, too. The key, according to the IMF’s researchers, is to target sectors that either have especially high spillovers—where a breakthrough would improve productivity in lots of other arenas—or where there are other unresolved market failures at work. They cite clean energy and health care as examples.

“This Fiscal Monitor shows that well-designed fiscal policies to stimulate innovation and the diffusion of technology can deliver faster productivity and economic growth across countries,” the report concludes.

The IMF’s endorsement comes with a lot of caveats, which the researchers summarize:

They also note that larger, less open economies like the United States benefit more from such policies—because they capture more of the benefits of innovation subsidies.

The IMF is not the only international organization recognizing the case for industrial policy. The OECD’s researchers published an extensive and largely positive evaluation in 2022.

However, the IMF’s version of industrial policy isn’t necessarily the one most in vogue. Most notably, the Fiscal Monitor warns that “policies discriminating against foreign firms can prove self-defeating and trigger costly retaliation.” In a paper published in January, IMF researchers found that two-thirds of industrial policies enacted in 2023 distorted trade. So while the IMF may be warming to industrial policy in theory, it remains skeptical in practice.

Walter Frick is chief editor of 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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Below are his prepared remarks.

The Middle East – North Africa (MENA) has emerged as an important strategic region for the People’s Republic of China (PRC), with a significant expansion of its interests and presence across the region. However, at this stage China remains primarily an economic actor there, with growing political and diplomatic engagement and little in the way of a security role. This economics-first approach has contributed to improved public perceptions of China across MENA; public polling data from the Arab Barometer consistently shows positive views of China as an external actor, with respondents from 8 out of 9 countries perceiving China more favorably than the US. At the same time, its modest involvement in regional political and security affairs, evident in its minimal response to Houthi strikes on maritime shipping, underscores its reluctance to play a more meaningful role in MENA, which has no doubt been recognized by governments that expected a more robust response given Beijing’s outsized economic presence.

This highlights an important point about how MENA features in the PRC’s broader strategic objectives. It is first and foremost a region where China buys energy, sells goods, and wins construction infrastructure contracts. These economic interests have not required a corresponding political or security role, and Chinese leaders have not indicated that they will do so; they benefit significantly from the US security architecture that underpins the region’s fragile status quo. China works closely with US allies and partners in MENA, especially the Gulf Cooperation Council states and Egypt, and in many regards Beijing’s interests in the Middle East have been consistent with those of the US.

At the same time, MENA has to be considered as part of a larger global strategy under which US- China interests diverge substantially. China’s more assertive foreign policy since the global financial crisis started under the leadership of Hu Jintao and has intensified under Xi Jinping. The 2017 US National Security Strategy identified China as a great power competitor, and the rivalry is playing out in MENA as elsewhere. Beijing has rolled out new global initiatives – the Global Development Initiative (GDI), Global Security Initiative (GSI), and Global Civilization Initiative (GCI), discussed below – to present itself as a leader of the Global South, using a state-centered alternative to Western liberalism.

In this effort, the MENA is a region where China aims to establish a normative consensus consistent with Beijing’s preferences. As a result, we see several examples of PRC leaders promoting narratives that the US is unreliable, or that its presence in the region exacerbates tensions and conflict. After a January 2022 meeting with MENA officials, for example, Chinese Foreign Minister Wang Yi said the Middle East “is suffering from long-existing unrest and conflicts due to foreign interventions…We believe the people of the Middle East are the masters of the Middle East. There is no ‘power vacuum,’ and there is no need of ‘patriarchy from outside.’” Whereas in the preceding two decades the PRC rarely overtly challenged the US position in MENA, it has become a regular feature as Chinese leaders exploit pressure points between the US and regional actors in order to differentiate itself from the US and to create friction between Washington and its MENA partners and allies. This has been especially present in Chinese messaging since the October 7, 2023 Hamas attack on Israel, as PRC leaders have consistently used the crisis to undermine the US and present itself as a more reliable partner to the Arab world.

China’s diplomatic activities in the Middle East

While it has not been widely recognized, China has developed a deep, broad and systematic approach to diplomatic engagement across MENA. It uses a range of bilateral and multilateral diplomatic tools, and these have been complemented in recent years with international organizations where Beijing has significant influence. It also has appointed special envoys for region-specific issues.

At the bilateral level, China has diplomatic relations with all regional countries. Several of these are enhanced by strategic partnerships, which are mechanisms to coordinate on regional and international affairs. Five MENA countries – Algeria, Egypt, Iran, Saudi Arabia, and the UAE – have been elevated to comprehensive strategic partners, the top level in China’s hierarchy of diplomatic relations. This results in the “full pursuit of cooperation and development on regional and international affairs.” To be considered for this level of partnership a country has to be seen as a major regional actor that also provides added value, such as Egypt’s control of Suez, or Saudi’s leadership role in global Islam and energy markets. Therefore, when assessing China’s diplomatic efforts in MENA, these countries (Algeria to a lesser extent) are the load-bearing pillars of Beijing’s approach. They see more official visits, attract more investment, do more contracting, and generally support a wider range of China’s interests in the region. That China has comprehensive strategic partnerships with both Saudi Arabia and Iran means there are more frequent bilateral high-level meetings, no doubt contributing to China’s role in the Saudi-Iran rapprochement.

At the multilateral level, China uses the China Arab States Cooperation Forum, which includes all Arab League members, and the Forum on China Africa Cooperation, which includes nine Arab League members. These forums present China with regular ministerial-level meetings where they map out cooperation priorities. They also have several sub-ministerial level issue-specific working groups. The result is a relatively deep level of diplomatic engagement.

China has appointed special envoys for the Middle East, the Horn of African Affairs, and the Syrian Issue, all of which were designed to present the PRC as an actor with influence and interest in these issues, although the impact of each has been marginal.

Finally, two international organizations where China plays an influential role, BRICS and the Shanghai Cooperation Organization Forum, have admitted Middle Eastern states as members in recent years. BRICS expanded for the first time in 2023 to include Saudi Arabia, Egypt, Iran, the UAE, and Ethiopia, giving the organization a presence in MENA and the Horn. The SCO admitted Iran as a full member in 2023, a position it has coveted since 2005. Other MENA participants in the SCO are Bahrain, Egypt, Kuwait, Qatar, Saudi Arabia, and the UAE, all of which are dialogue partners. This does not make them SCO members; it is a position for countries that wish to participate in discussions with SCO members on specific issues that they have applied to join as dialogue partners. It could eventually result in full membership but that does not appear to be on the horizon for any Middle Eastern dialogue partners for now.

All in all, Chinese diplomacy has been highly active and quite successful laying the groundwork for a deeper presence in the Middle East.

China’s involvement in MENA conflict mediation

China’s efforts to position itself as a conflict mediator is part of a larger strategy, embedded in the GSI, to present the PRC as a leading global actor. As a 2023 report from MERICS cautioned, “China’s current mediation push seems to be largely a reflection of its geopolitical competition with the United States and its ambition to expand its global influence at the expense of the West.” In MENA as elsewhere, the results have been mixed. The Saudi-Iran rapprochement is an example of a low cost ‘win’ for China. It has been well documented that much of the negotiation that led to the March 2023 announcements in Beijing had been done through Iraqi and Omani efforts. China’s involvement appears to be as a great power sponsor that was broached during Xi Jinping’s December 2022 summit in Riyadh and further discussed during President Ebrahim Raisi’s visit to Beijing in February 2023. Given China’s comprehensive strategic partnerships with the Saudis and Iranians, it has significant diplomatic relations with both countries and was therefore the only major power that could play such a role. However, it has to be stressed that most of the groundwork had been laid before China’s involvement, and that the rapprochement itself was the result of domestic political and economic pressures within Saudi and Iran.

Given this highly publicized diplomatic ‘win’, Chinese analysis promoted a narrative of a “wave of reconciliation” in the Middle East as a result of Beijing’s efforts. Ding Long, a Middle East expert at Shanghai International Studies University, described China’s mediation diplomacy, guided by the GSI, as driving events in the Middle East in the wake or the Saudi-Iran deal:

Within a month since then, the Saudi-Iran rapprochement is like a key that opens the door to peace in this region. The warring parties in Yemen took a critical step toward a political solution; Bahrain and other Arab countries have restored diplomatic relations with Iran; Saudi Arabia and other Arab powers are interacting more frequently with Syria. A wave of reconciliation is also encouraging more joint efforts between China and the Middle East in pursuing peace.

Shortly after the Saudi-Iran deal, the PRC announced that it was willing to wade into the Israel- Palestine conflict during a June 2023 visit from Palestinian President Mahmoud Abbas. Immediately following this, Israeli Prime Minister Benjamin Netanyahu announced that he had accepted an invitation to Beijing for October; for obvious reasons the visit did not happen. China’s response to the Hamas attack, discussed below, has negated any prior work towards being a mediator on the issue; its relationship with Israel has been deeply damaged at this point and it is hard to see how Beijing could play a constructive role negotiating between the two. The March 2024 meeting in Doha between Chinese ambassador Wang Kejian and Hamas official Ismail Haniyeh further cements this. Any role China can play would be in support of Palestine and highly partisan.

In any case, just over a year after Beijing’s first successful foray into Middle East diplomacy, the region is less stable that it has been in recent memory, and China’s efforts at mediation have had little tangible impact. It has little influence on Iran or its non-state partners of Hamas, the Houthis, or Hezbollah, and is not seen as credible by Israel. Generally, its response to events since the Hamas attack have made China look very transactional and self-interested in the region, rather than a responsible extra- regional power with substantial Middle East interests.

A point worth considering on this topic is that China is a relative newcomer to Middle East political diplomacy. As described above, it is primarily an economic actor in the region, and despite its special envoys, cooperation forums, and strategic partnerships, it does not have the depth of regional specialization that the US or European countries do, given their longstanding involvement in MENA. As China develops a deeper pool of MENA talent this will change, but it is early days. Its area studies programs in universities and think tanks are not nearly as developed as their US counterparts, making for a much shallower pool of expertise.

China’s response to the Hamas attack on Israel

The Hamas attack on Israel had significant repercussions for China’s approach to the MENA and resulted in a more blatantly realpolitik approach to the Israel-Palestine conflict. China’s ambition to play a role in resolving this conflict was based largely on the ‘peace-through-development’ framework of the GDI/GSI. The attack demonstrated the need for a more robust response, but in the wake of the attack the limits of Beijing’s normative approach were evident. Since then, China has not pursued a mediator role, siding firmly with Palestine while frequently condemning Israel and the US. Pointedly, it did not blame Hamas for the attack and has seemingly made the ‘one man’s terrorist is another man’s freedom fighter’ argument; during International Court of Justice hearings Ma Xinmin, a legal advisor for the Chinese Ministry of Foreign Affairs, argued that Palestinian acts of violence against Israelis are legitimate “use of force to resist foreign oppression and to complete the establishment of the Palestinian state.”

A point worth considering is that within China, the Israel-Palestine conflict resonates differently than it does in the US and other Western liberal democracies. The demographic composition of the West with large immigrant populations means that there are significant Jewish, Muslim, Christian and Arab communities for whom the Israel – Palestine conflict is a major issue that animates voters, NGOs, and lobbyists. Democratic leaders are expected to have positions that represent their constituents, and Middle East policy has to try to thread the needle of interests and values in a manner that balances citizens’ often deeply held convictions. In China, religious minorities – especially of the Abrahamic faiths – are comparatively insignificant in the demography, and the immigrant population from the Middle East is virtually non-existent. The Party has increased repression against Muslims, Jews, and Christians during the Xi Jinping era, making overt political action from them incredibly costly. This, combined with the fact that China has an authoritarian government, means the issue if Israel and Palestine does not mobilize Chinese citizens like it does in the US, and the government is less concerned with being responsive to citizens’ concerns. It is, therefore, a purely geopolitical issue. The CCP can use its policy in the region to advance its own interests while challenging the US and its Western allies without the additional consideration of managing domestic pressures. Its messaging on the war in Gaza is therefore more about China presenting itself as an alternative to the US as a global leader than it is about the war itself.

China’s global initiatives and international order

At this point China’s three global initiatives (GDI, GSI, GCI) are following the same early-stage trajectory of the Belt and Road Initiative (BRI). When it was announced in 2013 there was little understanding or awareness of it outside of China, and within China ministries, agencies and municipalities spent most of 2014 and 2015 incorporating the BRI into their missions. The 2015 white paper on the BRI and the 2017 Belt and Road Forum enhanced its global profile. The GDI, GSI, and GCI have been appearing in joint communiques across MENA and are cited by local actors as useful contributions from China, but they do not appear to be widely understood yet, nor do many local governments seem to be aware of them. It is likely that the GSI first came to a wider audience when then-Foreign Minister Qin Gang described the Saudi -Iran rapprochement as “a case of best practice for promoting the Global Security Initiative.”

However, the normative framework of these initiatives has appeal for regional governments. Whereas liberal norms of global governance focus on democracy, free markets, human rights, and international institutions, China’s trio of initiatives promote sovereignty, territorial integrity, self-determination, and noninterference in the domestic affairs of states. Essentially, it rejects the universalism of liberal norms and promotes a statist vision instead. For governments and societies long frustrated by the inconsistent promotion of liberal values from the west, or by those that reject liberalism altogether, China’s model is attractive.

The impact of China’s global initiative and the BRI should also be considered as a consequence of a global order transition. During the Cold War, bipolarity meant governments in need of development assistance could turn either to the West or the Soviets. The end of the Cold War meant the developing world was limited to Western institutions underpinned by liberal values that imposed conditions, often inconsistent with local norms. The emergence of China and its global initiatives provides alternatives, and that Beijing presents these initiatives in contrast to liberal institutions is appealing to many governments in the Middle East.

The issue of Xinjiang

The CCP identified its ‘core interests’ in a 2011 white paper, “China’s Peaceful Development”. These core interests are state sovereignty, national security, territorial integrity, national reunification, maintenance of its political system and social stability, and maintaining safeguards for sustainable economic and social development. Importantly, all of these are domestic concerns. In practical terms, anything another country does to undermine these – especially including support for independence movements in Xinjiang, Tibet, Hong Kong and Taiwan – will damage the relationship. The CCP faces numerous challenges from issues of domestic governance, and pressure from within is the most significant threat to its continued rule. When foreign governments apply pressure on Beijing on domestic issues there is pushback, typically in the form of coercive economic statecraft.

All of this is to say that Middle Eastern governments have shown no inclination to speak or act on the issue of repression of Uyghurs or other Muslim minorities in China. No regional government wants to jeopardize a bilateral relationship with one of its most important trading partners on an issue that few feel is relevant to their own core interests of building sustainable economies and improving governance in the face of significant domestic pressures. Engagement with China is largely seen as an opportunity for regional governments to address these challenges, and China’s own experience of development since the Reform Era began in 1978 is perceived as a model for this.

Another consideration here is that Beijing frames its repression of Uyghurs as a response to a conservative religious ideology that promotes separatism and has used terrorism in an attempt to establish an independent state. In doing so, it addresses a concern for many Middle Eastern governments, most of which are deeply concerned about the spread of political Islam in their own countries. As such, the issue is less about any notion of pan-Islamic solidarity than it is about challenges to the state from an ideology seen with deep hostility from regional governments.

Policy Recommendations

• Provide explicit support for MENA countries in their development programs.
• Encourage more investment into MENA from private US companies.
• Improved messaging on what the US does in the region beyond the realm of security.
• Improved messaging on how MENA features in US interests and policy.
• Enhance public diplomacy – bring more MENA students to US on training and education programs.
• Draw upon the narratives of other extra-regional allies and partners that have interests in MENA and have also had challenges in dealing with China. They can help with the messaging – what have their experiences with China been? What issues should MENA countries be considering?
• Where possible, align approaches to MENA with US allies to provide a greater range of investment, development, and trade options.

Jonathan Fulton is a nonresident senior fellow with the Atlantic Council. He is also an associate professor of political science at Zayed University in Abu Dhabi. Follow him on Twitter: @jonathandfulton.

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But central bank governors and finance ministers who met in Washington this week grappled with more than the question of when their countries will be “landing” after a period of high inflation: They also looked to manage how their countries recover, aiming for a soft landing that avoids recession.

With so much at stake, we dispatched our experts to IMF and World Bank headquarters in Foggy Bottom to decode the institutions’ plans to navigate the turbulence of the global economy.

• Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

• This week in one word: Clarity

• Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

• The Polish finance minister on his country’s “U-turn” toward European values

• See day five analysis

Watch all our conversations with central bank governors, finance ministers, and experts

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: Your cheat sheet on progress made

This week, the world’s finance ministers and central bankers came together in force for the first time since the “Marrakesh miracle,” that was the annual meetings last year—at least in the words of former IMF Managing Director Christine Lagarde—which finally resulted in progress on quota reform and a debt restructuring deal for Zambia.

But I doubt this week will go down in history as the “Washington wonder.” Tepid global growth, difficulty recovering from the pandemic (among developing countries), US-China competition (with Washington’s threat of new tariffs), and war cast a long shadow. Still, the officials were able to make real progress on both sides of 19th Street.

Yesterday, my colleague Martin outlined the IMF’s successes: The Fund adjusted its lending policy, allowing it to step in to support countries in debt distress, and called attention to the risks of large fiscal deficits.

But there are, after all, two sides to 19th Street. And on the World Bank side, countries including the United States, Japan, and the United Kingdom pledged $11 billion for some of the Bank’s guarantee instruments, which make its programs less risky—and more attractive—for private investors. The added firepower complements restructuring within the Bank to streamline the guarantee system. Hopefully, these changes will encourage private investors to fill countries’ funding needs for the green and digital transitions.

The G20 finance ministers and central bank governors also met this week, with Brazil’s Fernando Haddad giving the group homework: Find agreement on a wealth tax by the time the ministers meet again in Rio de Janeiro in July (the Atlantic Council will be there too).

Later today, as officials and their delegations start heading home, the security barriers will come down and 19th Street will open again. For the ministers, the hard work begins when they get home—and we will be watching closely to analyze whether the financial leaders make meaningful progress before the annual meetings in the fall.

This week in one word: Clarity

As the spring meetings drew to a close and leaders made their final statements, a few points became clearer.

Even though the global economy can feel hyper-interdependent at times, it is now becoming clearer just how muddled the economy is by divergence, inequality, and fragmentation. “Winners” and “losers” are seeing the economic gaps between them widen. There’s a heightened sense of uncertainty, with the threat of another political, economic, or natural shock looming.

What some may have seen as mission creep in finance—addressing energy transition challenges, the inclusion of gender and youth, and fragility—has become mission critical as macroeconomic stability and growth have become more dependent on, or disrupted by, these factors.

As a result, the timeframe for analysis—and more importantly action—has shrunk as spillovers, impacts, and risks from debt, inflation, conflict, and climate change have brought more urgency. On top of that, fiscal space has tightened, and capital flows stream away from where they are needed most. New research shows that countries in the Global South are paying out more in debt service than they are bringing in grants or loans—to the tune of fifty billion dollars. The United Nations’ annual Financing for Development report, released just before the spring meetings, reveals a more than four-trillion-dollar annual shortfall in funding to meet the Sustainable Development Goals, as I discussed this week with Assistant Secretary General Navid Hanif. 

While the World Bank and IMF have introduced reforms to optimize balance sheets, quotas, and capital adequacy to increase available financing, those changes are necessary but insufficient; that makes the World Bank announcement on Friday (that eleven countries have pledged eleven billion dollars to support the Bank’s hybrid capital and guarantee instruments) a welcome step.

Another thing that is clear after this week: the role regional multilateral development banks and international financial institutions (beyond the Bretton Woods institutions) play in addressing today’s challenges. This role isn’t new; I wrote about their role in COVID-19 response and recovery a few years ago. But there is again a need for private capital and philanthropic funding in a revamped international architecture that meets the moment.

And while more resources are key, it has become even clearer that more consideration needs to be paid to how funds are actually disbursed and delivered. As UN Undersecretary General and UNOPS Executive Director Jorge Moreira da Silva noted in our conversation, more than half of existing IDA funds have yet to be allocated. Furthermore, while analysis and policies are important, implementation matters and warrants additional attention.

Leaders across the global economy must ensure that even as they drive supply, they don’t forget about demand—from bankable projects to business environments, and from building capacity to domestic resource mobilization. This is the macro- and micro-challenge of the road ahead.

Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

On Thursday, Côte d’Ivoire’s Minister of Economy, Planning, and Development Nialé Kaba sat down with Rama Yade, senior director of the Atlantic Council’s Africa Center, to discuss the country’s economic priorities—among them, fostering sustainable growth. The two, conversing in French, spoke at an event that took place at the Atlantic Council’s IMF broadcast studio.

Côte d’Ivoire’s economy is predicted to rank fifth this year among the fastest-growing economies in Africa. Kaba said that the country would continue to make economic reforms to “enhance competitiveness, attractiveness, and economic performance.”

Kaba touched upon the IMF’s support to Côte d’Ivoire, which includes $3.5 billion under the Extended Fund Facility and Extended Credit Facility, in addition to a newly agreed upon 1.3 billion through the Resilience and Sustainability Facility. The minister also noted the importance of reform efforts at the Bretton Woods institutions, pointing to changes in how the IMF and World Bank select their leaders. “Perhaps one day the World Bank could be led by an African. After all, why not?”

Kaba also discussed topics closer to home. On Côte d’Ivoire’s agricultural sector, the minister said she’ll be looking to focus on the “local transformation of our raw materials.” Côte d’Ivoire is the world’s leading producer of cocoa, and Kaba said there is a need for investors to “settle and employ local labor.”

Touching on more global matters, Yade asked about the relationship between Côte d’Ivoire and China—specifically how a decrease in Chinese investments in Africa would affect the economy. Kaba was clear in her position that while China has been a primary investor, Côte d’Ivoire remains “strongly connected to Europe and also to the United States.”

Watch the event

The Polish finance minister on his country’s “U-turn” toward European values

“Poland is back to Europe… we’ve made a ‘U-turn’ from what I call a ‘Hungarian path,’ which is out of the European values,” Andrzej Domański, minister of finance for Poland, argued at an Atlantic Council event on Friday.

Domański gave his remarks in discussing how Poland’s economy—which has proven resilient after avoiding recession in periods of mounting global economic challenges—fits within the greater European economy.

When analyzing the reasons why Poland’s economy recovered relatively quickly after the pandemic and after the initial wave of impacts from Russia’s full-scale invasion of Ukraine, Domański pointed to Poland’s economic diversification. “We don’t have one sector that would be overwhelming the whole economy. I believe this is one of the factors that is behind our resilience.”

Following that, when discussing Poland’s plan for the energy transition, Domański said that Poland can take “two obvious directions: one of them is renewables, and the second one is nuclear energy.”

Domański also discussed the ongoing priorities of the Polish government in further bolstering the economy. On the topic of security, Domański vowed that Poland “will not cut spending on defense” and that it will “will not stop helping [its] Ukrainian friends.”

Watch the event

• Dispatch from IMF-World Bank Week: What will this week’s legacy be?

• Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

• Is the global financial system fit for climate change?

• The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

• “Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

• See day four analysis

Dispatch from IMF-World Bank Week: What will this week’s legacy be?

There were plenty of reasons for a dour mood to spread across the spring meetings this week.

One such reason is that higher-than-expected inflation readings in the United States dampened expectations of Federal Reserve rate cuts, driving up long-term rates around the world. The Financial Times even spoke of relegating the low-interest period of the 2010s to the dustbin of history. Countries are beginning to realize that they may not have the means to service their debt, support their aging populations, pay for the green transition, help Ukraine, and finance military rearmament all at the same time.

The dour mood was reinforced by the Israel-Iran exchange of direct attacks and Russia’s destructive air campaign in Ukraine. Higher oil prices and further supply-chain disruptions consequently topped the IMF’s downside risks to the forecast. Calls from the Biden administration to triple aluminum and steel tariffs provided a reminder of the risk of future trade conflicts and increasing economic fragmentation.

Less discussed, but similarly mood-souring, was the topic of the stronger dollar, which might have negative consequences for emerging and developing countries with growing fiscal deficits.

The International Monetary and Financial Committee chair released a statement today that was among the most bland in recent history, repeating well-known positions about the IMF’s role in the global economy and committing to the implementation of recent decisions, but falling well short of new initiatives.

But when determining this week’s legacy, there are reasons for a better mood to prevail. The IMF did propose a tweak to its debt policies, allowing the Fund to lend to countries even if they’re still in debt restructuring negotiations with big bilateral creditors (think China). The IMF also, in its World Economic Outlook, finally zeroed in on the “significant risks” that large countries’ fiscal deficits pose to the global economy. And there are signs of momentum ahead: Liechtenstein is on track to join the IMF as member number 191, in a year marking the eightieth anniversary of the Bretton Woods institutions. Whatever mood the delegates are in when they depart Washington, their work will carry on.

Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

In a discussion at the Atlantic Council on Thursday, Paolo Gentiloni, the European Commissioner for Economy, expressed a surprisingly positive outlook about the European economy, as the European Union (EU) continues to face post-pandemic and security challenges. 

In discussing the IMF’s latest World Economic Outlook, which slightly downgraded forecasts for the eurozone, the former Italian prime minister said he sees “the conditions for an acceleration of the economic activity for the second part of this year, and probably more in 2025.” His conviction rests, he said, on “better-than-expected” declining inflation, shared “strong labor markets” across the Atlantic, and an increase in purchasing power in several European countries “not impacting inflation, but consumption, which would trigger a better level of growth.” The EU’s goal was ultimately to “avoid a recession and major energy crises.”  

When assessing Europe’s economic-rebound prospects, Gentiloni urged to not “compare the impact of the Russian invasion in Ukraine, in Europe, with other parts of the world,” highlighting its disproportionate impact on “Europe and the Global South.” Russia’s invasion “disrupted part of the European business model” reliant on “cheap gas” and exports, which particularly affects Europe’s largest economy, Germany. The geopolitical risk remains “the largest risk” threatening Europe, he said, while there is no “substantial risk from a financial stability point of view” or “divergences in level of growth among different European countries.” Gentiloni said he is “quite optimistic that [Europe is] out of the most difficult part” of its “economic situation.” 

Amid the growing debate about Europe’s future competitiveness, Gentiloni said that the topic fits into wider discussions on “how the model we built the European Union [on] in the last decades should be probably transformed.” To achieve its ambitions, Europe must “find common funding” beyond the NextGenerationEU (which is expiring in 2026) to further attract private investments and complete the green transition, “avoiding the idea that slowing down or taking a different direction will solve our problems, because the global competition on clean tech is there,” Gentiloni said.  

Drawing on a quote from former European Commissioner Pascal Lamy, Gentiloni remarked how “the EU cannot be the only herbivore in a world of carnivores” and argued that the “solution is to compensate economically, socially those that are most affected and to win the battle of the cultural narratives.”

Watch the event

Is the global financial system fit for climate change?

We know what the future is set to look like: By 2040, according to the Intergovernmental Panel on Climate Change, we will be living in a 1.5 degrees warmer world, with consequences that are already being predicted by science. That’ll be the case unless extraordinary action is taken.

The private sector is now waking up to this reality. Industry is beginning to recognize that climate risks raise financial risks. Homeowners are finding it harder to insure their houses. Water levels are rising, disrupting ports that play a large role in the global economy. Outdoor workers cannot work safely in heat waves, which are striking with alarming frequency.

The economic costs of inaction cannot be postponed and passed on to future generations.

There must be a new ambition for adaptation and resilience finance. Currently, progress on catalyzing investments in climate solutions is often slow and scattered, and it also often lacks scale. The solution: Redefining the economic and financial order.

To begin imagining what that new order should look like, we sat down with climate finance experts, who helped us spread our Call for Collaboration between the public and private sectors that we launched at COP28 last year. Catch up on that conversation, held on the sidelines of the IMF-World Bank Spring Meetings, below.

Watch the event

The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

South African Minister of Finance Enoch Godongwana joined the Atlantic Council’s IMF Broadcast studios on Wednesday to outline his country’s economic priorities, including its vision for the Group of Twenty (G20) agenda during its presidency in 2025.

In the conversation with Atlantic Council Africa Center Senior Director Rama Yade, Godongwana said that South Africa is focused on being not the biggest economy but the strongest. “What we must focus on is that we are the most industrialized economy on the African continent, and to what extent we can build on that, to build competencies, that makes us the strongest economy on the African continent,” he said. Sharing his optimism about economic growth on the African continent, Godongwana cautioned that a slowdown in growth in South Africa’s trade partners, such as China, may lead to a spillover effect not only on South Africa’s economy but that of the South African Development Community region.

Regarding South Africa’s upcoming presidency of the G20, the minister said that South Africa is developing an agenda that will include some of Brazil’s current priorities—and others from previous presidencies—and that South Africa “will inject an African perspective into that agenda” after consultation with countries on the African continent.

Turning to South Africa’s membership and ambition within the BRICS group, the G20, and the IMF and World Bank, the minister argued that there is no tension for South Africa within these groupings, but that they have been helpful in addressing challenges that the country faces. Responding to a question about a possible BRICS currency, the minister stated that there “is no document from the BRICS that talks about a BRICS currency in our declarations.” Godongwana stated that there is a push, regionally in Southern Africa and within the BRICS, to accept local currencies and to use alternative payment systems beyond the dollar when conducting international trade. But BRICS, he said, is not about undermining the current system—but changes in the current system are needed.

Speaking during the IMF-World Bank Spring Meetings, Godongwana discussed reforms he’d like to see the Bretton Woods institutions make, including governance and funding changes at the IMF and the World Bank. The minister argued for a change in the selection of heads of the IMF and World Bank and called for non-American and non-European candidates to be considered for the top leadership positions of the organizations. Speaking to investors, Godongwana stated that he welcomed investment into South Africa and the African continent that respected countries’ sovereignty and geopolitical strategies.

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“Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

DRC Finance Minister Nicolas Kazadi joined the Atlantic Council’s IMF broadcast studios on Wednesday to outline his country’s economic priorities, including its intent to create more opportunities for investment.

Kazadi argued that “Congo is open for business” and “the mining sector specifically is driven by foreign investment.” In March this year, the Congolese government began to implement a 2017 law requiring all subcontracting companies to be majority Congolese-owned. The minister explained that while Congo encourages investment, the country wants to ensure that private investors share the prosperity with local partners and build local capacity. “We don’t even need a law for that, it is a matter of principle” to help local Congolese businesses grow, argued Kazadi.

In the mining sector, the finance minister said that Congo is looking for investments along the full energy value chain, “trying to raise awareness in our youth, support them as they invest in the ecosystem that we are trying to build in partnership with the big private sector,” he said. Kazadi said that “Congo is trying to bring more transparency along the value chain to raise the standards” to avoid situations in which products do not meet international environmental, social, or governance standards that can impact the image and business environment of the country. He said that he hoped companies working in the Congo would help charge a “local transformation of critical minerals” that would change the economy “completely,” bringing the gross domestic product “from billions to trillions,” he said.

Speaking during the IMF-World Bank Spring Meetings, Kazadi discussed Congo’s upcoming sixth review of its Extended Credit Facility program and reforms he’d like to see the Bretton Woods Institutions make, including changes to the channeling of Special Drawing Rights. He expressed a readiness to work with international financial institutions on addressing the development challenges facing his country.

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• Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

• European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

• “The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

• The Global South’s reform agenda for the IMF and World Bank

• See day three analysis

Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

IMF headquarters was abuzz today following the announcement of Managing Director KristaIina Georgieva’s new global policy agenda, outlining the economic challenges of the day and what the IMF plans to do about them.

The three priorities she chose for the Fund to tackle: rebuilding fiscal buffers, after public debt edged upward to 93 percent of GDP; reviving medium-term growth, which has deteriorated since the global financial crisis; and renewing its commitment to its members, with more quota resources to go around.

All of the above are worthwhile things to do. But, at least from where I was watching in the IMF HQ1 Atrium, Georgieva didn’t seem to mention anything about two of the most pressing issues of the day when she presented the global policy agenda this morning.

The first issue is China’s industrial overcapacity and its global impacts. The EU has launched or is expected to soon launch anti-subsidy investigations looking into Chinese electric vehicles, wind turbines, and medical devices. But the news that really spread like wildfire at the spring meetings was that, just a couple blocks away, the White House announced an investigation into China’s shipbuilding practices. President Joe Biden also called for tripling tariffs on Chinese steel and aluminum products, the starting gun for more protectionist measures to come—and a major risk to global growth.

The second issue is the divergent monetary policies being put forth by the US Federal Reserve and the European Central Bank, pushing up the dollar’s value in foreign-exchange markets. The topic did come up during the G20 press conference following the group’s meeting of finance ministers and central bank governors today. A strong dollar will undermine low-income countries’ growth prospects—something the IMF must pay attention to.

The silence on these risks to global growth shows the Fund should pay more attention to the issues at the core of its mandate to coordinate members’ economic policies as they are being shaped and implemented. Doing so early—rather than reactively helping countries deal with the fallout of poor international cooperation—would avoid negative spillovers on the global economy.

European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

On Thursday, Nadia Calviño—who this year took over as president of the European Investment Bank (EIB)—spoke to the Atlantic Council at the IMF-World Bank Spring Meetings, where she talked about the EIB’s priorities, including encouraging investment in Ukraine for reconstruction, rallying climate financing, and helping the European Union achieve its strategic priorities.

Calviño explained that the EIB is working with other multilateral institutions and with local Ukrainian partners to identify Kyiv’s rebuilding priorities—including infrastructure projects and support to small and medium-sized enterprises—to “make the most of Europe’s money.” She added that the EIB is working with the European Bank for Reconstruction and Development, the World Bank, and the United Nations Development Programme to ensure that “the experts that are on the ground are providing the most efficient service… to all of us.”

Calviño said that the EIB is proud to have garnered a reputation as “the climate bank,” with over 50 percent of its investments being in green projects and having supported the development of innovative technologies. “The green agenda is really ingrained in everything we do, inside and outside the EU,” she said. She argued that the investments being made in less-developed countries were strategic in nature and critical for Europe’s future priorities.

Calviño additionally said that there’s a sense of a “shared responsibility” across the Global North in addressing climate financing needs and deconflicting those efforts. She added that a North-South dialogue is “very important” and “needs to be accompanied by facts, not just words.”

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“The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

In the bustling IMF headquarters on Tuesday, I sat down with Ukrainian Deputy Finance Minister Olga Zykova to talk about the role of digital development in post-war reconstruction.

Ukraine had been busy taking many of its public services digital, even before the outbreak of the war in 2022. Zykova, who became deputy finance minister a few months into the war, told me that Ukrainian citizens have used technologies, such as the Diia app, to do everything from travel to access healthcare to buy war bonds for financing. She told me (and also Candace Kelly from the Stellar Development Foundation and Kay McGowan from Digital Impact Alliance, who also joined the expert panel) that she believes Ukraine’s efforts can be a successful example for other war-torn economies looking to rebuild their digital infrastructure.

The conversation then turned to the importance of open-source infrastructure, as the panelists discussed the collaborative advantages of open-source technological solutions which can provide developers the flexibility to adapt technologies to fit their needs across countries and situations.

We also discussed the need for a robust evaluation and impact assessment of the funding of these programs and the technologies themselves, to ensure that they reach their full potential. This call for robust impact metrics has been a consistent theme of this week, echoed by multilateral development banks, the private sector, and civil society.

Zykova also outlined Ukraine’s priorities for the IMF-World Bank Spring Meetings, calling for the creation of a sustained plan to equip Ukraine with the means to meet its reconstruction demands. She encouraged countries to not lose focus, even with lingering uncertainties about funding in Ukraine, and reiterated the importance of building resilient networks as the EU approaches its elections.

Reconstruction in Ukraine represents many of the existential questions ahead for the World Bank and IMF this decade—how to shore up democratic resilience, build consensus across an increasingly fracturing global order, and use technology to reduce inequality and achieve lasting prosperity.

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The Global South’s reform agenda for the IMF and World Bank

International media has until now paid little attention to statements of the Group of Twenty-Four (G24). The committee represents developing countries within the IMF and World Bank, playing a similar role to the Group of Seventy-Seven, a coalition of developing countries that comes together at UN gatherings. As Global South countries have become more vocal in their demand for reforms of the Bretton Woods institutions, the G24’s statements have become more important. The group should be considered counterparts to the Group of Seven (G7) in discussions about changes, especially in the context of the International Monetary and Financial Committee (IMFC)—an important body in the governance of the IMF.

On April 16, the G24 met and issued a communiqué summarizing the positions of developing countries on many issues on the reform agenda.

Regarding the IMF:

• The G24 welcomed the equi-proportional increase in quota but stressed the need for a quota realignment to reflect involving realities of members. (Developing countries in aggregate have increased their weight in the global economy but feel underrepresented in the Fund’s quota and voting-share distribution.)
• It urged the Fund to eliminate the surcharge on its base lending rate which has resulted in high borrowing costs to members in need of substantial IMF support.
• It proposed considering sales of IMF gold to increase the financial resources of concessional lending facilities such as the Poverty Reduction and Growth Facility.

Regarding the World Bank:

• The G24 acknowledged the Bank’s efforts in implementing the Evolution Roadmap, sponsored by the Group of Twenty to optimize its balance sheets and increase its financing capability and efficiency.
• However, the G24 cautioned that the commitment to allocate 45 percent of annual financing to climate-related projects should not be at the expense of financing for basic development challenges like combating poverty and hunger.
• It called for a capital increase for the World Bank and multilateral development banks in general—especially a strong replenishment of the resources of the International Development Association (providing grants and low-interest loans to low-income countries) in its twenty-first round of funding, which is currently underway.

In the view of many in developed countries, the demands articulated by the G24 may resemble a wish list containing many items difficult to command sufficient agreement to be adopted—for example, the quota reform. Nevertheless, developed countries should take these demands seriously and engage constructively with developing countries to find a reasonable way forward. Failure to do so would undermine the legitimacy and effectiveness of the IMF and World Bank—institutions that should play important roles in sustaining global growth and supporting less-developed countries.

• Dispatch from IMF-World Bank Week: A tale of two headquarters

• Mixed developments on sovereign debt restructuring

• The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

• Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

• Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

• Back to the basics: High turnover rates for central bank governors do not help with inflation

• Spooking the spirit of Bretton Woods

• See day two analysis

Dispatch from IMF-World Bank Week: A tale of two headquarters

In many ways, the story on day three of these spring meetings feels like a tale of two headquarters: Both style and substance differ between the boisterous World Bank on one side of 19th Street and the more buttoned-up IMF on the other.

The Bank’s atrium has been decorated with hundreds of colorful drawings by staff members’ children, depicting a “livable planet”—the newly added objective to the Bank’s vision statement. The Fund’s atrium, on the other hand, hosts an interactive “let’s grow together” board where delegates can affix stickers to the types of training and institutional strengthening they need. Both spaces strive to inspire and provoke thought, but the vibes are quite different.

Substantively, the Bank is abuzz with chatter about its “evolution,” touting progress such as a new guarantee platform, the corporate scorecard, and the series of reforms initiated last year to improve its impact. People at World Bank HQ are also energetically making the case that the Bank’s “money and knowledge” are vitally needed now, as a “great reversal” in development—explained in a new report—has resulted in one in three low-income countries becoming poorer than they were on the eve of the pandemic.

At the Fund, it’s about “resilience amid divergence” (as I discussed this afternoon with my fellow World Economic Outlook ‘decoders’ from the Atlantic Council): cautiously celebrating the fact that better-than-expected resilience in the US economy, coupled with stronger labor markets and cooling inflation in many places, is driving steady global growth. But that celebration doesn’t paper over the fact that debt, higher-for-longer interest rates, and conflict are undermining growth and impeding recovery in many developing countries.

Where Bankers, Funders, delegates, and guests seem to be speaking the same language is around “leverage” (the need to use the Bretton Woods institutions’ funding to crowd in additional financing) and “demographics” (with certain population trends raising macroeconomic and social-development pressures and opportunities, which I’ll be talking about at the IMF on Friday).

PS: If you’re wondering which of the headquarters has the better store for some spring meetings swag, it’s the World Bank’s.

Mixed developments on sovereign debt restructuring

This was a big week for those working to help vulnerable middle- and low-income countries overcome debt crises. For years now, there has been a slow-moving discussion about how to improve the framework for sovereign debt restructuring. And on that front, there has been both good news and bad news in recent days.

First, the good news: Three years or so since Zambia defaulted on its international bonds, it has just reached a restructuring deal with its bondholders which has been accepted by the official bilateral creditors. However, Zambia is not out of the woods yet. It still has to negotiate debt deals with its commercial creditors—basically international banks including many Chinese stated-owned banks such as the China Development Bank, Industrial and Commercial Bank of China, etc. It is not clear if this problem will hold up the actual implementation of the agreed debt restructuring measures—highlighting the complexity of the sovereign debt restructuring process.

The second piece of good news is that the IMF Executive Board has just approved some adjustments to the Fund’s Lending into Official Arrears (LIOA) policy—basically allowing the Fund to lend to a member in distress even though that member is in arrear in servicing its debt to an official bilateral creditor. The just-approved adjustments would give the Fund more flexibility in making use of the LIOA policy when a creditor country (i.e. China) has not been forthcoming in the restructuring process, delaying its timely conclusion. The key outstanding question is whether a low-income debtor country would be prepared to go along with the idea of activating the LIOA vis-à-vis China—especially those who have relied on China for trade and investment via the Belt and Road Initiative.

Then there’s the bad news. A piece of proposed legislation is moving through the New York State Legislature that would amend the state’s creditor and debtor law. Basically, the amendments would unilaterally impose a restructuring regime, for example compelling bondholders to accept a restructuring deal managed by an overseer appointed by the governor of the state of New York. As about half of international sovereign bonds have been issued under New York law, and the other half under English law, this legislation would, if passed and implemented, introduce a huge element of uncertainty to the sovereign bond market. It could potentially disrupt its smooth functioning and raise borrowing costs for emerging market and developing countries. And it could short circuit international efforts, such as the G20-sponsored Common Framework and the Sovereign Debt Roundtable, which are trying to develop international agreements to improve the sovereign debt restructuring framework.

All three stories highlight the complexity of debt restructuring negotiations. But the summary of the week’s news on that front: two steps forward, one step back.

The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

Spain is positioning itself as a “growth engine” in the eurozone, argued Spanish Minister of Economy, Trade, and Business Carlos Cuerpo.

He said that in 2023, Spain “grew five times the euro area average.” That, coupled with his prediction of a 20 percent drop in the country’s debt-to-GDP ratio (with respect to the peak post-pandemic), “[configures] a good way forward” for Spain, Cuerpo said, with sustainable growth likely ahead in the medium term.

Cuerpo said that Spain is hopeful about its economic prospects, as foreign direct investment has grown, indicating “confidence of world investors in the Spanish economy.”

Cuerpo spoke with GeoEconomics Center Senior Director Josh Lipsky at Atlantic Council headquarters during the IMF-World Bank Spring Meetings. They discussed Spain’s path forward utilizing NextGenerationEU funds and its role in the conceptualization of new EU fiscal rules. Cuerpo reflected on the transformation of primary themes of discussion over the EU’s fiscal rules, beginning with the green transition, pivoting to strategic autonomy, and now focusing on economic security. “There is a common denominator [within] those discussions, which is the need for investment,” he said.

Cuerpo pointed to Spanish investment in green hydrogen, semiconductors, and battery-related initiatives through the NextGenEU funds. A midterm evaluation from the European Commission found that the Spanish GDP level increased by 1.9 percentage points in 2022, when compared with a hypothetical Spanish economy without the NextGenEU funds present. “It’s not just an opportunity for the Spanish economy,” Cuerpo said. “The impact of the plan is already a reality.”

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Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

You’ve heard it before. Gross domestic product, or GDP, is not the best indicator to understand Russia’s economic performance under sanctions. Nor is the exchange rate. Yet, the IMF’s decision this week to revise Russia’s growth forecast for this year upwards to 3.2 percent after another upward revision in January is one of the most talked-about findings of the World Economic Outlook. And while the widening fiscal deficit and rapid inflation remind us that the Russian economy is still under strain, it’s important to acknowledge that, at the start of Russia’s full-scale invasion, sanctions policymakers thought they could reasonably hope to plunge Russia into a prolonged recession. And in April last year, when the IMF predicted the Russian economy would grow in 2023, most thought this was wrong, but it did indeed grow by 3 percent.

How are they pulling this off? It’s not just about oil and gas export income, though higher oil prices help. Combined disclosed and undisclosed military and domestic security spending exceeds 30 percent of GDP—and therefore represents a major boon for overall GDP figures. The Ministry of Finance had to reach into its savings more than expected at the end of 2023, taking the liquid part of the National Wealth Fund down from $150 billion to $130 billion. The weak exchange rate and labor shortages are also working together to keep inflation very high, at almost 8 percent.

It’s wrong to say the Russian economy is doing well. The problem is that it has enough resources to keep funding the war.

Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

On Monday, Pakistani Finance Minister Muhammad Aurangzeb emphasized the country’s need for structural reforms over a span of two to three years. In an Atlantic Council conversation with the South Asia Center’s Kapil Sharma, Aurangzeb outlined Pakistan’s strategy, arguing that efforts shouldn’t merely focus on financial stabilization: They should also lend focus to sustainable growth and inclusivity. 

“The crux of our strategy with the IMF involves not just temporary relief but laying the groundwork for enduring stability and economic resilience,” Aurangzeb said. He underlined the importance of understanding and implementing long-term policies that have been on the nation’s agenda for decades. The minister argued that the time for action on these reforms is now, especially with the looming end of Pakistan’s three-billion-dollar Stand-By Arrangement with the IMF, currently set for late April. 

Pakistan reportedly intends to ask for a larger and extended program from the IMF to support its economic reforms. To that end, Aurangzeb argued that when it comes to these economic reforms, Pakistan doesn’t need more policy prescriptions: It needs implementation. 

“Ensuring macroeconomic stability is not merely about stabilization; it’s fundamentally about inclusive growth and addressing climate impacts,” said Aurangzeb. He noted that the financial and structural reforms would help Pakistan mitigate the adverse effects of climate change and promote financial inclusivity, especially among vulnerable groups, including women. 

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Back to the basics: High turnover rates for central bank governors do not help with inflation

Inflation is front and center at the spring meetings. Reducing it is crucial for any inclusive growth and development strategy because, after all, inflation is a regressive tax on the poor, who lack the real assets to effectively hedge against inflation.  

While the global median headline inflation has declined to 2.8 percent in 2024 and many central banks have been successful in their fight against inflation—particularly the Federal Reserve (known as the Fed), Bank of England (BoE), and European Central Bank (ECB)—many developing and emerging economies are still suffering from high inflation rates, sometimes with rates higher than 20 percent. Several factors continue to contribute to these rates: rising energy and food prices; increasing sovereign debts; higher policy rates in the ECB, UK, and Fed (and thus larger capital inflows to these economies); and growing budget deficits—partly because of the higher cost of energy and of servicing debt due to higher interest rates.

An often ignored but equally or even more important factor is the independence and reputation of central banks. While the majority of countries suffering from inflation rates higher than 20 percent claim that their central banks are independent and their policies are not influenced or dictated by their central governments, in practice the so-called “independence” of these central banks is severely undermined by the high turnover rates of their top bosses.

Available data suggests that over the past decade, the median tenure of a central bank governor or president in the twenty economies with the highest inflation rates has been a mere two years. Over the past ten years, a number of central bank governors have come and gone: Seven in Argentina, eight in Turkey, six in Venezuela, and five in Iran. Just to put this in perspective, during the same period, the median tenure of the leadership in the Fed, ECB, BoE, and Bank of Japan has been five years, and these institutions have each changed leadership only once in the past decade.  

Such a high turnover rate for the central bank leadership is a clear sign of its lack of independence. It also severely undermines the most important asset of a central bank: its reputation and credibility. Economic actors, markets, and consumers in an economy look to the central bank and its leadership for direction on the future of the economy and directly equate high turnover in a central bank leadership to policy uncertainty, demolishing the reputation and policy credibility of a central bank. A central bank lacking reputation and credibility is like a chef without a kitchen.

In fighting inflation, it’ll be important to go back to the basics: religiously protecting the reputation and independence of central banks and aggressively rebuilding any losses on these fronts. After all, reputation is extremely hard to build but very easy to lose. And that is the most important tool a central bank has to fight inflation.

Spooking the spirit of Bretton Woods

It was supposed to be a week of multilateralism, breaking down barriers between borders, and preventing “fragmentation” (as the IMF often likes to say). But the United States had different ideas.

Following US Treasury Secretary Janet Yellen’s recent trip to China where she hammered home the risk of Chinese manufacturing overcapacity, the Biden administration today called for a tripling of tariffs on Chinese steel and aluminum. As if that wasn’t enough, the Office of the United States Trade Representative is beginning an investigation into Chinese unfair trade practices on shipbuilding and maritime logistics, per a White House announcement this morning.

Couple this with the European Union’s ongoing anti-dumping investigation on Chinese electric vehicles (as we’ll discuss with EU Commissioner for the Economy Paolo Gentiloni tomorrow), and suddenly the spirit of Bretton Woods is looking a little spooked. That’s one reason why the understated warning in the IMF’s World Economic Outlook yesterday about downside risks may already feel out of date.

• What the World Economic Outlook left out

• What should be done with Russia’s blocked reserves?

• Dispatch from IMF-World Bank Week: IMF report launches keep it dull

• The IMF warns the United States to get its fiscal house in order

• How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

• When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

• Read day one analysis

What the World Economic Outlook left out

The just-released World Economic Outlook (WEO) has a nice subtitle that sums up very well its key messages—”steady but slow: resilience and divergence.” Resilient because economic activity in advanced countries has been solid and precipitated a 0.2 percentage point upgrade in the IMF’s growth forecast, to 1.7 percent this year. Divergent because low-income countries (LICs) have had their growth estimates cut by 0.2 percentage points to 4.7 percent this year. They have absorbed most of the $3.3 trillion loss in global economic output relative to the pre-COVID trend. They’ve also built up onerous levels of debt so that many are in debt distress and now have to use more than 14 percent of their government budget to pay interest, crowding out other important and necessary expenditures.

Unfortunately, the outlook for the LICs looks to be even worse than the WEO’s forecast, thanks to the Iranian attack on Israel over the weekend, as well as recent upticks in US inflation data.

Going forward, the heightened risk of war following Iran’s direct attack on Israel will likely keep oil prices elevated, having risen by some 12 percent since the beginning of the year. Meanwhile, higher-than-expected inflation will delay any easing by the Federal Reserve. That has caused a renewed uptick for the dollar. The combination of elevated oil prices and a strong dollar is bad for many countries, but it is particularly devastating for LICs because most LICs have to import oil—so high oil prices coupled with a depreciating currency against the dollar represent a double whammy, undermining growth. Also hurting LICs is the fact that a strong dollar increases their debt and debt servicing burdens, and it also tends to trigger capital outflow exacerbating the stress.

These two news events will push LICs even further behind in the convergence process. In short, global economic disparities will likely increase with unfavorable social implications for the world. The WEO has not paid sufficient attention to this risk.

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What should be done with Russia’s blocked reserves?

Since February 2022, Western sanctions have blocked roughly $300 billion in Russian reserves. Thanks to high interest rates, these reserves have been generating income for their custodians, the largest of which is Belgium-based company Euroclear. The question Group of Seven (G7) members will be discussing this week is how to use that interest income.

Bloomberg’s Viktoria Dendrinou and the Council on Foreign Relations’ Brad Setser joined the Atlantic Council GeoEconomics Center’s Charles Lichfield to compare the two primary proposals: 1) Tax almost all the interest income and use the windfall as a funding source for Ukraine or 2) pull forward some of the interest income stream to provide funding more quickly, maximizing its value through financial engineering.

Although the United States wants to come to an agreement by June, Dendrinou explained that things are moving more slowly on the European side due to the greater risks posed by Russian retaliation, as Europe has more assets in Russia. This adds to fears of knock-on effects on the euro’s role as a reserve currency.

Still, Setser came back with ambitious plans to generate even more interest income by actively managing the funds. “If you put this in deposit accounts and you had access to the full $300 billion,” he said, a reasonable estimate “is nine to ten billion dollars per year.”

Dendrinou and Lichfield expressed skepticism about the feasibility of doing this from a legal perspective, as it may require changing the ownership of the assets. Looking to the future, Dendrinou tentatively suggested that there’s “probably going to be some kind of financial engineering in place” by next year’s spring meetings.

Setser, on the other hand, boldly predicted that by June, the G7 will “agree to a facility that pulls forward some, not all, future interest income so that the current sum that flows to Ukraine this year is more than the three to four billion that is currently being discussed.” G7 outcomes from this week may provide some early signs about a realistic timeline for using the interest income.

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Dispatch from IMF-World Bank Week: IMF report launches keep it dull

Each year at the spring and annual meetings, participants like me count down to the launch of the IMF’s most important flagship publications—the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). The launches are typically the high point of the week, often receiving more media attention than pronouncements from the finance ministers and central bank governors that come later on.

The GFSR unveiling has always been a jargon-laden affair. While the WEO press conferences have become increasingly staid over the years, they were once known for public debate and even sarcasm.

The most memorable launch happened in the aftermath of the 1997 Asian financial crisis, when the IMF came under fire for its tough policy prescriptions. Then IMF Chief Economist Michael Mussa had firmly defended the Fund against the attacks—which especially rankled when they came from then World Bank Chief Economist Joseph Stiglitz. At the September 1998 WEO launch, Mussa declared that “those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal.”

But today’s launch events at IMF headquarters hewed to the new status quo. IMF Economic Counsellor Pierre-Olivier Gourinchas, who heads the Fund’s Research Department, offered the WEO’s case for optimism—with global growth forecast at 3.2 percent in 2024 and 2025—arguing that “the global economy remains remarkably resilient” although progress to reduce inflation has “stalled.” Notably, he called on China to address its property downturn and “lackluster” consumer demand. IMF Financial Counsellor Tobias Adrian then elaborated on the financial sector risks hanging over China at the GFSR press conference.

Mentioned only in passing were global geopolitical fragmentation, the divergence of fortune between advanced and low-income countries—the latter an important theme of this WEO—and the stalled progress in restructuring developing country debt. These uncomfortable issues were left to another day.

The IMF warns the United States to get its fiscal house in order

Unlike last year, the IMF’s World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) were not derailed by events happening a few days before publication. Last October, the Hamas terrorist attack on Israel the weekend before the Marrakesh meetings rendered the Fund’s forecasts outdated by the time they appeared.

Iran’s large-scale attack on Israel, by contrast, has not yet led markets to a fundamental reassessment of geopolitical developments, although the situation remains extremely fragile. The IMF’s spring reports therefore deliver a timely message about the factors behind a more somber medium-term outlook. With the inflation shock gradually diminishing, the Fund’s forecasters are on more solid ground assessing the challenges facing the IMF’s member countries, with fiscal pressures front and center in this year’s reports.

These are also depicted in an excellent article by Pierre-Olivier Gourinchas, the IMF’s chief economist. The degree of fiscal adjustment needed to stabilize medium-term debt ratios for many countries is striking, including the United States. The US fiscal stance is raising “short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” as Gourinchas put it. In other words, US fiscal policy poses a risk both to US disinflation and to global long-term interest rates unless the United States gets its fiscal house in order.

“Something will have to give,” concludes Gourinchas, an ominous reference to a long list of downside risks that are listed in the two reports. However, the good news is that the GFSR is less alarmist about financial sector developments this time, focusing instead on how to manage the “last mile of disinflation,” a considerable change in tone compared to the discussions only a year ago when the United States was on the verge of a major banking crisis.

As always, the IMF as a multilateral institution needs to be careful how it depicts geopolitical events, and there are well-calibrated references to commodity price developments and supply chain disruptions caused by ongoing conflicts. The reports, however, cannot elaborate on the precarious situation caused by Russia’s war in Ukraine and the ongoing conflict in the Middle East.

But these conflicts may increase pressures on government finances, including from rearmament needs, fiscal spending during an election cycle, and lower tax revenues due to mediocre growth rates. As a result, the advocated fiscal adjustment may remain elusive. Still, the IMF’s staff has done its duty by pointing out the underlying risks.

How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

In redefining its mission as striving for a world without poverty on a livable planet, the World Bank—under President Ajay Banga—has drawn attention to the need to mobilize capital resources to help developing countries close the climate action funding gap: A gap that currently amounts to the difference between the $100 billion committed annually by donor countries and the over $2.4 trillion needed per year by 2030.

It is clear that developed countries and multilateral development banks don’t have the capital resources to meet much of the investment gap. As a consequence, the Bank has put much effort into finding ways to catalyze, or crowd in, private capital by providing risk-sharing and guarantee facilities. With private institutional investors and asset managers holding more than $400 trillion of assets under management, the Bank hopes to draw in multiples of private capital to stretch its project dollars.

However, research by the Institute of International Finance has found that in recent years, multilateral development banks collectively managed to mobilize just fifteen dollars for every one hundred dollars committed—or one-fifteenth, decidedly not significantly multiplying the amount it has put up in its commitments.

While it is truly important and laudable for the Bank to find ways to catalyze private capital, it is better to be realistic about the potential outcome and impact of such efforts, so as not to set the stage for later disappointment. By presenting realizable targets—at least for the foreseeable future—the Bank can focus on the tremendous climate action investment gap that needs to be filled, continuously urging the international community to rise to the occasion to help meet the challenge before it is too late.

Of course, developing countries can help themselves by implementing structural reforms, especially in governance, to make themselves increasingly investable in the eyes of both domestic and international investors, attracting the needed investment flows.

When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

Mexico’s Secretary of Finance Rogelio Ramírez de la O joined the Atlantic Council’s studios on Monday to outline his country’s economic priorities, including its relationship with the United States.

Ramírez de la O argued that Mexico is “one of the most open economies in the world for both trade and capital,” thanks in part to the country’s exports, which are reported at over 35 percent of gross domestic product. The secretary of finance said that the country benefits from its level of openness, which he stated is comparable to certain European countries—but it’s also one that “fewer economies in Latin America have.”

Last year, Mexico surpassed China as the biggest exporter of goods to the United States. Mexico is committed to North American integration because “it’s where the core of our exports activities [lie],” Ramírez de la O argued. “This doesn’t mean that anything else comes secondary, but it comes next.” Looking ahead toward the USMCA renewal in 2026, the secretary of finance reassured members about product traceability—a demand rising from concerns over Chinese products. “We’re trading mainly and foremost North American content,” he said.

Speaking on the first day of the IMF-World Bank Spring Meetings, Ramírez de la O discussed reforms he’d like to see the Bretton Woods Institutions make, including correcting current account imbalances to revisit the world trade rules architecture and advocated for revisiting financial assistance for Latin America. He expressed readiness to engage with the Group of Twenty and multilateral development fora to define a global tax framework.

Watch the event

• What’s the strategy behind this year’s smaller-scale spring meetings?

• Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

• Geopolitics is eroding the IMF’s relevance

• COVID-19’s economic impact on the poorest countries has just become clearer

• Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure
• Read preview analysis

What’s the strategy behind this year’s smaller-scale spring meetings?

The spring meetings have just gotten underway, but thus far the official events around 19th Street feel somewhat scaled down. The registration and security lines today were certainly shorter than last year. And there are notably fewer headline events, at least as far as the official World Bank side convenings are concerned.  

Perhaps it’s reflective of the Bank’s intent to bring more focus to its work—as President Ajay Banga discussed in his preview press conference. The Bank consolidated its public schedule into three days with just two “flagship events”—one on the energy transition in Africa and one on strengthening health systems. Both are decidedly linked to the International Development Association (the Bank’s concessional fund for low-income countries) whose twenty-first replenishment campaign seems to have more urgency and ambition as debt and other macroeconomic, microeconomic, and geopolitical challenges stymie recovery and growth in deeper ways.

Or perhaps it reflects an interest in putting more time into one-on-one, closed-door, dealmaking meetings—including with the private sector. Leveraging resources and mobilizing private capital is a priority for the Bank, as Anna Bjerde, managing director for operations, reiterated in our conversation this afternoon: “In a world where resources are scarce, ‘leverage’ is the name of the game,” she said.

Or perhaps it reflects the pace and impact of the “unofficial” spring meetings: The increasing number of side events with a broader array of actors around and beyond 19th Street, including our robust dual-sited slate at the Atlantic Council. These convenings are as well, if not better, placed to unpack—and discuss critically—the global geoeconomic, financial, development, and sustainability challenges and opportunities we collectively face, as well as navigate how (after eighty years) the Bretton Woods Institutions and the larger multilateral system should evolve and respond.

Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

With the IMF-World Bank Spring Meetings taking place again in Washington this year, the setting is familiar—but there’s also something strikingly new. As I walked into the World Bank’s headquarters today alongside many of the world’s finance leaders and experts, I was pleasantly surprised to see that the Bank’s mission statement, posted by the entrance, had changed: “Our dream is a world free of poverty,” had smartly been amended to add “on a livable planet.”

The new statement reflects the World Bank’s goal to evolve and to equip itself fully to deliver on its mission, which I discussed today with the Bank’s managing director of operations, Anna Bjerde.

The statement also exposes a hard truth: A world free of poverty cannot be attained or sustained in a world where carbon dioxide (CO2) emissions keep rising and climate challenges keep growing at the expense of the poorest—even as low-income populations contribute a mere 0.5 percent of global CO2 emissions, according to World Bank data.

Addressing global poverty and climate change requires more cooperation among the world’s largest economies and emitters; but the recent rise of geopolitical tensions and geoeconomic fragmentation, as our Bretton Woods 2.0 Project has pointed out, has made such cooperation much harder. This year’s spring meetings are a golden opportunity to make the case for more cooperation on addressing global challenges and reducing the rising temperature—both of the planet and its geopolitics.

This July, the Bretton Woods institutions will celebrate their eightieth anniversary, amid multifaceted perils facing the global economy and the world order. The countries present at the spring meetings must face these threats head on, so that by the time the IMF and World Bank turn one hundred, their member countries can look back with pride at the hard decisions they made to secure a livable and peaceful planet for all.

Geopolitics is eroding the IMF’s relevance

Expectations for this week’s Group of Twenty (G20) and IMF-World Bank Spring Meetings have hit a floor as the geopolitical environment continues to deteriorate. Russia and Iran are intensifying their pressure on Ukraine and Israel respectively, and political divisions in the West on the conflicts are becoming more acute. China is about to trigger another trade scuffle by throwing the (financial) weight of the state behind key industries that compete for global market share. The United States and Europe are on the defensive, fiscally stretched and riven by societal polarization that is also shaped by geopolitical adversaries.

There will be ample diplomatic squabbling over communiqué language concerning the wars in Ukraine and Gaza and the usual appeals to the spirit of multilateral cooperation—but there will also be complaints over excessive subsidies, trade restrictions, and financial sanctions. Discussions over quota reallocations will be doomed by irreconcilable geopolitical differences, and progress toward a more workable global debt architecture is likely to remain gradual, even if important work is proceeding on a technical level.

The one area where some consensus may exist is in raising funds for climate and development finance. Again, Western countries are on the defensive here, given that national development budgets have generally shrunk. Leveraging the funds of multilateral lenders, which the Western countries still dominate, remains an important way to at least partly match the financial resources that China, the Gulf countries, and increasingly India channel into building diplomatic ties with the developing world.

This also explains the selection of Kristalina Georgieva from Bulgaria to serve another term as IMF managing director. Under her leadership, the fund has expanded its toolkit to lend to developing countries, generally with fewer questions asked of loan recipients than under her predecessors, likely spelling financial trouble in the future. Already, there are demands for further reductions in the IMF’s lending rates as well as additional Special Drawing Rights (SDR) issuances.

By contrast, the Fund’s core economic work has generally received less attention. During her first tenure, the institution’s work was tailored to Georgieva’s personal areas of expertise, most of which lie in the mandate of the World Bank. The Fund was largely silent on the run-up in inflation, and its global economic messages have lacked clarity as it generally shies away from calling out countries for bad economic management.

Kenneth Rogoff, a former IMF chief economist, asked in a 2022 article why the IMF has turned into an aid agency. This question has now been answered by the majority of the IMF’s shareholders, who simply seem to prefer it that way. Whatever may be achieved during this year’s spring meetings, the mandate of the once proud institution seems to have shifted from safeguarding global financial stability to becoming a source of cheap funding for climate and development purposes.

COVID-19’s economic impact on the poorest countries has just become clearer

Four years after COVID-19 shook the global economy, the World Bank has released a report that lays out in the starkest possible terms just how devastating the pandemic was for the world’s poorest economies. In a report entitled “The Great Reversal,” the Bank details how much ground many of the world’s seventy-five least-developed countries have lost: One-half of that group is seeing its income gap with advanced economies widening, and one-third is poorer today than on the eve of the pandemic.

A key reason for the failure to regain growth momentum after COVID-19 has been sharply rising debt. In a separate report on developing country debt issued late last year, the World Bank estimated that eleven of the low-income countries were in “debt distress,” and twenty-eight were at “high risk” of distress. In 2022, the year the report analyzed, low- and middle-income countries paid $443.5 billion in debt service and $185 billion in principal repayments.

The countries assessed in “The Great Reversal” are eligible for World Bank low-interest loans and grant aid from the Bank’s International Development Association. They account for 92 percent of the world’s population living without access to affordable, nutritious food and over 70 percent of the world’s extreme poor. At the same time, their economies collectively account for only 3 percent of global output.

As central bank governors and finance ministers gather this week, the question—which they have faced at every spring and annual meeting since early 2020—will be whether they are prepared to work together to address this crisis of deepening poverty and debt. Or, will they leave town having only issued more communiqués expressing their “deep concern”?

Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure

The IMF-World Bank Spring Meetings have officially kicked off, and international financial markets have maintained fragile stability in the immediate aftermath of Iran’s large-scale attack on Israel, which included the launch of more than three hundred missiles and drones. The United States, along with several European and Middle Eastern countries, has emphasized the need to prevent further escalation. Due to the fact that Iran’s attack was less damaging than some anticipated, but with the still lingering risk of war, oil prices have given back some of the risk premiums built up last week in anticipation of Iran’s attacks, with Brent Crude sinking to just below ninety dollars a barrel—after having gained some 12 percent since the beginning of this year. In case of all-out war between Israel and Iran and disruptions of the oil flow through the Strait of Hormuz, oil prices can well exceed one hundred dollars a barrel. About a fifth of the volume of the globe’s oil consumption ships through the strait, with very few alternative routes.

Meanwhile, persistently strong inflation data in the United States has pushed market expectations for the first Fed cut later in the year, keeping the dollar strong—the greenback has appreciated by about 14 percent since the recent low in 2021. The dollar is also underpinned by safe haven flows given heightened geopolitical tension.

The combination of elevated oil prices and a strong dollar has put pressure on many countries, especially low-income countries. In particular, nearly all Group of Twenty (G20) members have seen their currencies weaken against the dollar—led by the Turkish lira and the Japanese yen, which each lost more than 8 percent since the beginning of the year. This has prevented many countries from easing monetary policies to support their economic recoveries. Watch this topic closely: The dollar’s strength, and the potential negative impact of it, could be a main topic of discussion in the G20 meeting of finance ministers and central bank governors scheduled for April 17 and 18.

• Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

• IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

• What to expect from the 2024 IMF-World Bank Spring Meetings

Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

As the world’s finance ministers and central bank governors descend on Washington this week—and snarl the city’s traffic—they seem to just want to be able to stick to the script.

It’s an understandable sentiment. The agenda is daunting, with issues such as sticky inflation, China’s struggling economy, and a rising risk of debt defaults. And, as IMF Managing Director Kristalina Georgieva made clear in her curtain-raiser speech at the Atlantic Council on Thursday, those are just the immediate problems. The medium-term challenges of job disruptions from artificial intelligence and the green energy transition can’t be ignored.

But as Iran’s large-scale attack on Israel this weekend reminded us, the ministers and governors will need to first address something else—the reality that geopolitical tensions and conflict have, as Georgieva said, “changed the playbook for global economic relations.”

Six months ago, on the eve of the IMF-World Bank annual meetings in Marrakesh, Hamas unleashed its brutal terrorist attack on Israel. The ministers spent the next five days being asked about the possible impacts on the regional and global economy, and nearly all of them demurred. As we at the Atlantic Council pointed out at the time, that was a mistake. It was clear from the start that war between Israel and Hamas would have economic repercussions. Sure enough, two months later, Houthi attacks linked to the war began disrupting major shipping routes in the Red Sea.

Now, Iran’s attack has cast a dark shadow over the spring meetings. Once again, many of the ministers will surely try to avoid addressing the potential fallout. Even if geopolitics is the last thing the ministers want to be discussing, they may not have a choice. It’s worth remembering that the Bretton Woods Institutions were created during a war to address the devastating economic toll of conflict. For the last several decades, it was often possible to keep geopolitics and economics separate—but that time is over. The sooner the ministers recognize the new reality, the more effective they can be.

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below, read more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, which touched upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

New Atlanticist

Apr 11, 2024

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

By Katherine Golden

“Making the right policy choices will define the future of the world economy,” International Monetary Fund Managing Director Kristalina Georgieva said at the Atlantic Council.

China Financial Regulation

What to expect from the 2024 IMF-World Bank Spring Meetings

Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center, breaks down the issues at the top of the agenda for the spring meetings.

The post Our experts decode policymakers’ plans for the global economy at the IMF-World Bank Spring Meetings appeared first on Atlantic Council.

Online Event Thu, April 11, 2024 • 9:00 am ET

IMF Managing Director Kristalina Georgieva on the state of the global economy

AN #ACFRONTPAGE EVENT—IMF Managing Director Kristalina Georgieva previews the latest findings on the economic outlook and financial stability.

Digital Policy Economy & Business Fiscal and Structural Reform Future of Work

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below are more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, touching upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

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).

Time for reform in China

• The IMF forecasts that China will see 4.6 percent gross domestic product (GDP) growth, just below Beijing’s target of 5 percent. But its productivity remains low, and it has an aging population. “China has to take on a new policy course,” Georgieva said. “What has worked in the past cannot be sustained for the future—and the Chinese leadership is aware of that.”
• Georgieva said that the IMF is slated to have consultations with China soon, where it will discuss what the managing director called three “solvable problems” for China: Low domestic demand, a need to reform its state-owned enterprises, and its real-estate crisis.
• On China’s challenges in the property sector, Georgieva said that while Beijing has taken some measures, it could “be more forceful” to let the market “decide on price,” and that it could also help support construction and “be more decisive” in dealing with failing companies.
• During a recent visit to China, US Treasury Secretary Janet Yellen stated that China is using unfair trade practices, a consequence of overcapacity, that hurt US businesses and workers. Georgieva said that China continues to face overcapacity problems in some sectors, making it “critical to develop domestic demand and shift the economy more towards services.”
• Georgieva estimated that when China drops 1 percentage point in growth, the rest of Asia drops about 0.3 percentage points. “China making good choices would be good for everybody,” she said.

“Expect the unexpected”

• “It is tempting to breathe a [sigh] of relief. We have avoided a global recession and a period of stagflation… but there are still plenty of things to worry about,” Georgieva said.
• She said to expect inflation to decline, albeit with “ups and downs,” and only some countries—mainly advanced economies—will be ready to begin cutting interest rates in the second half of the year. “This monetary pivot will differ from country to country,” she cautioned, as premature easing could lead to new inflation and monetary tightening. “No more [are we] in the place of 2020 when everybody went in the same direction,” she said.
• She added that policymakers will need to “deal decisively” with debt, as fiscal buffers “are exhausted,” and debt levels in many countries are “simply too high.” “For most countries, the prospect of a soft landing and strong labor markets mean there is no better time to act, to reach sustainable debt levels and build stronger buffers to cope with the shocks that will come in the future,” she said. “Delay is simply not an option: Consolidation must start now.”
• Georgieva also urged countries to adopt policies that reinvigorate growth and improve productivity, including policies that speed up the green and digital transformation. “How well we handle them will define the legacy of this decade,” she said.
• And with artificial intelligence (AI) poised to affect almost 40 percent of jobs globally, according to the IMF’s estimates, investing in digital infrastructure and introducing strong social safety nets could determine whether AI will enhance the economy, she said.
• “The pandemic, wars, geopolitical tensions: They have already changed the playbook for global economic relations,” the managing director said. “In a fast-changing and more turbulent world, bringing countries together to tackle challenges and pursue opportunities is more important than it has ever been.”

Watch the full event

The post IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy appeared first on Atlantic Council.

The issues Yellen raised reflect real concerns in the United States and Europe—in particular about hi-tech and clean energy sectors like electric vehicles (EVs), lithium batteries, and solar panels. However, it is not a straightforward matter pushing back against China on grounds of overcapacity. The EU has initiated anti-dumping investigation of Chinese EVs—imports of which have surged in many European countries threatening domestic producers—but evidence of overcapacity in that sector is weaker than in solar panels and batteries. Measures to restrict import of these products would simply raise their prices, as Western companies are not in a position to replace Chinese products.

More importantly, the West needs to recognize that overcapacity is intrinsic to China’s economic model—and therefore that calls to end it amount to wishful thinking. In other words, while the complaints about overcapacity are justified  from a Western perspective, they will not change the situation any time soon—despite platitudes about US-China relationship being on a “more stable footing” expressed at Yellen’s meeting with China’s Premier Li Qiang.

Chinese EVs pose different challenges than batteries and solar panels

China does have overcapacity problems. Overcapacity is typically measured using utilization rates, the rate of industrial capacity in a sector that is being used for production—low rates imply surplus capacity. Companies with a lot of surplus capacity tend to lower prices to generate demand, hurting the profitability of the whole sector. China has low utilization rates—which have fluctuated around 75 percent, well below the 80 percent considered to be normal. At the end of 2023, China’s capacity utilization rate has recovered to almost 76 percent—a few percentage points higher than the pre-Covid low in 2016 and a few percentage points lower than those of other major countries including the United States (whose utilization rate fell below 80 percent in 2023).

However, behind the aggregate low utilization rate of 76 percent is a very wide dispersion among different sectors. EVs have a high utilization rate, whereas China has very low-capacity utilization rates in low tech sectors such as cement and glass—which are being pulled down by the property construction slump—as well as in lithium batteries and solar panels.

In automobiles, producers of internal combustion engine (ICE) vehicles have suffered from very low capacity utilization rates—in many cases well below 50 percent—as consumers have been shifting from ICE vehicles to EVs. By contrast, EV producers, especially large ones like BYD, SAIC and Li Auto, have high utilization rates, exceeding 80 percent. These companies have increased their production and export of EVs significantly in recent years, arguably because they are quite efficient in terms of prices and quality. Even Elon Musk admitted that Chinese EV companies “are extremely good…and the most competitive in the world.” The smaller and less efficient EV producers have been weeded out relentlessly from the more than 400 companies launched more than a decade ago to about fifty having some degree of recognized name brands. This consolidation process has accelerated after China ended its subsidy program for EVs at the end of 2022—putting huge pressure on less efficient producers. (While past subsidies supported Chinese EV companies, the fact that this subsidy has been ended could be used by China in its defense against the EU investigation.)

Furthermore, China is not as dependent on the export of automobiles including EVs as some other major car manufacturing countries. Specifically, its export rate is quite low, at 15 percent compared with 48 percent in Japan, 72 percent in South Korea, and 79 percent in Germany. As a result, possible EU and US tariffs may blunt China’s EV export growth in those regions but can hardly be expected to alter the overall growth trajectory of the country’s EV sector.

In the first two months of 2024, China experienced an 8 percent increase in total EV export in volume terms, having been able to shift EV sales in the EU (which has declined by 20 percent) to Asia (export to RCEP countries has increased by 36 percent). These two regions account for 30 percent each of China’s EV export. Furthermore, China can boost domestic demand by raising the target for the share of EVs in new car sales from 45 percent by 2027 (rather low relative to the target of 65 percent by 2030 in the EU). Such a move would be helped by the fact that China has rolled out 2.7 million charging stations across the country at the end of 2023–compared with only 64,187 in the United States.

In contrast to the EV sector, lithium battery and solar panel producers have suffered from very low capacity utilization rates—in many cases below 50 percent. In particular, China’s annual production of solar panels is more than twice the global demand. This huge overcapacity has significantly driven down the prices of these products, benefiting all importing countries in their green transition efforts. Raising tariffs on these products will increase their prices to users and delay many countries’ green transition targets, especially as Western companies are not in a position to replace Chinese products. It is instructive to note that President Biden has vetoed a Congressional resolution to reinstate tariffs on cheap solar panel imports from South East Asian countries—for fear of delaying the pace of solar installations necessary to meet his administration’s target of 100 percent clean electricity by 2035.

Overcapacity is intrinsic to China’s economic system

The West should focus its complaints on the sectors where Chinese overcapacity is most egregious—for example in wind power turbines on which the European Commission has just launched an anti-subsidy probe. As it does so, it must also recognize that the long cycle of overcapacity build-up and correction is generic to China’s economic system of state capitalism. Strategic decisions by leaders the Communist Party of China (CCP) will mobilize resources to invest in chosen sectors. That leads to overcapacity, which comes with unfavorable side effects, which eventually cause the leadership to undertake corrections. This process usually takes far longer than the prompt market-driven resolution of inefficient and unprofitable companies in the West. In China, grossly inefficient companies have been liquidated or absorbed by more efficient units, but in a managed and gradual consolidation process to minimize undesirable social impacts such as rising unemployment or hollowing out manufacturing communities.

A clear example of China’s overcapacity cycle can be found in the huge stimulus program unleashed by Beijing in response to the 2008 Global Financial Crisis—offering abundant and cheap credit to spur construction in infrastructure and housing. The resulting overcapacity in coal, steel, and other construction materials was quite severe, depressing producer price inflation, keeping it in negative territory for more than fifty consecutive months. In addition, overcapacity in the steel industry caused bitter complaints by other steel producing countries. By 2015, China launched a wide-ranging Supply Side Structural Reform to reduce overcapacity  by encouraging a consolidation process in those sectors, cushioned by measures to boost demand. China’s Belt and Road Initiative (BRI), launched in 2013, could have been designed partly with the goal of exporting the country’s surplus capacity in construction in mind. These measures were able to bring the overcapacity problem under some degree of control.

In another example, China has had significant overcapacity in the shipbuilding sector, which is 232 times greater than that of the United States, posing a threat to competitors like South Korea and Japan. China has addressed that problem in a strategic way by using its abundant capacity to build modern warships to catch up with the US Navy.

At present, CCP leadership seems to be aware of the industrial overcapacity problem which has caused producer price inflation to be negative continuously since late 2022. In presenting the government work program at the National People’s Congress meeting last month, Premier Li Qiang said that “China wanted to reduce industrial overcapacity” but flagged more resources for tech innovation and advanced manufacturing to develop “new productive forces.” It appears that, like in the 2015 episode, China will spur the consolidation of the sectors having significant surplus capacity. However, the result could be more efficient and competitive enterprises, continuing to pose a challenge to producers in the West and a few developing countries aspiring to develop their manufacturing industry.

A realistic path forward

The United States and EU, together with other manufacturing nations, have wrestled for some time with the overcapacity problem in various industries, caused by China’s economic system of state support to its enterprises. So far, the major remedy to this challenge has been countervailing duties on China, either sanctioned by the World Trade Organization (WTO) after a lengthy and difficult process or imposed unilaterally by former President Trump and maintained by President Biden. However, raising tariffs has not been a totally satisfactory solution. It has given some protection to impacted sectors in importing countries at the cost of higher prices to consumers. But it has not been a game changer in terms of ensuring a level playing field for all countries.

Based on historical experience, it’s safe to say the current phase of China’s overcapacity in hi-tech and green industries like lithium batteries and solar panels will be impacting the rest of the world for some time to come. It is reasonable to criticize and complain to China, but policymakers should remember that an end to overcapacity would mean a major shift in China’s economic model, which is exceedingly unlikely. They must therefore be prepared for a sustained period of heightened trade tension during which Beijing will eventually take some measures to reduce industrial overcapacity when its domestic impact becomes unacceptably negative—but in China’s own way and on its own timeline.

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

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Africa’s growth potential

Over the past four decades, extreme poverty rates in the world, measured as share of population living with less than $2.15 a day (2017 PPP), declined from around 44 percent to less than 10 percent. However, as of 2019, the share in Sub-Saharan Africa was around 35 percent—and is expected to have risen to 45-50 percent in the past five years because of the back-to-back shocks of the pandemic, debt and inflation crises, and increasing food and energy prices caused in part by the Russia-Ukraine war. Clearly, Sub-Saharan Africa has missed the benefits of globalization in the past four decades which lifted billions out of poverty around the world through trade and an integrated global supply chain.

At the same time, Africa has tremendous potential which, if unleashed, can lead to rapid growth in the continent and higher aggregate demand for globally produced goods and services. Africa’s growth could revitalize global growth, which has been decelerating for various structural reasons over the past two decades. With deeper engagement of BWIs and other Multilateral Development Banks (MDBs) and International Financial Institutions (IFIs), African economies can seize the moment and become the engine of global growth.

Promoting public-private partnerships

As the World Bank’s and other MDBs’ financial and technical resources are becoming increasingly limited, they need to shift their focus from merely providing loans and various forms of financial assistance to actively catalyzing the flow of other quasi-public and private resources into the development of Africa’s human capital and social and physical infrastructure. Therefore, BWIs and other MDBs should prioritize strengthening financial governance and legal structures of African economies which would encourage private investment in the continent. The establishment of the Global Infrastructure Facility (GIF) by the World Bank marks a significant stride in this direction. However, much more needs to be done to establish infrastructure as a new asset class in global capital markets and the BWIs, engaging with more than forty other MDBs and IFIs, have a unique position to lead the global discussion on this front. The case of quasi-state institutional investors is of particular importance. With more than $70 trillion of assets under management (AuM) and long-term investment horizons, SWFs, public and private pension funds, and various retirement saving vehicles are uniquely positioned to bridge Africa’s growing infrastructure financing gap.

Accelerating Africa’s regional integration

BWIs including the World Trade Organization (WTO) can play crucial roles in promoting regional integration in Africa through various mechanisms and initiatives. First and foremost, the MDBs, with the World Bank leading the efforts, can provide financial support for regional infrastructure projects, such as transportation networks, energy grids, and communication systems. These projects can facilitate the movement of goods, services, and workers between countries in the region, promoting economic cooperation and development. Trans-Saharan Highway and Trans-African Railway are two examples of such projects that could facilitate intra-continental trade in Africa. Second, the IMF can help countries in the region manage their monetary and exchange rate policies to facilitate cross-border financial flows and reduce currency volatility. This can enhance economic stability and create a conducive and fairer environment for regional trade and investment. Third, the MDBs with WTO leading the efforts, can support the negotiation and implementation of regional trade agreements or customs unions, which aim to reduce trade barriers and increase market access among participating countries. Efforts such as African Continental Free Trade Area (AfCFTA) must be enhanced and supported with relevant regulatory and infrastructure development project.

Prioritizing Africa’s integration into global supply chains

Given its triple advantages—vast natural resources, growing and young population, and its geo-strategic location and access to open seas—Africa can play a central role in the global economy and supply chain. However, Africa is currently responsible for only about 5 percent of global trade. BWIs, and other MDBs and IFIs should therefore prioritize programs and projects that would leverage Africa’s triple advantages in the global economy, making Africa an essential and indispensable part of the global supply chains, energy, and labor and consumer markets for decades to come.

Programs that could speed Africa’s inclusion in global supply chains include:

• Vocational training programs would provide African youth with the skills in highest demand in today’s globalized economy.
• Construction of ports and linking them via railways and roads would reduce the cost of trade with and inside Africa and help accelerate Africa’s integration.
• Development of solar, wind, and green hydrogen energy production could make Africa the global hub of renewable energy with massive export potential, especially to Europe and Middle East.
• Agricultural development would help Africa benefit from its massive agricultural potential and potentially allow it to become the world’s major supplier of food and agricultural products.
• Developing Africa’s tourism industry should be a priority since Africa is home to some of the world’s magnificent natural and historical attractions. Given that tourism industry makes up more than 10 percent of global GDP, MDBs should prioritize developing Africa’s tourism industry, which can contribute significantly to the continent’s development and long-term employment.

Multilateralism is the key

Africa’s needs go beyond debt restructuring. The continent has tremendous potential and a “big push” from BWIs, other MDBs and IFIs, and global private sector and institutional investors, mixed with meaningful steps by Africa’s leaders to improve their governance structure, can unleash an economic renaissance in Africa. The revival of multilateralism, with Africa having more voice and representation in BWIs and other institutions of global economic governance, is a necessary first step.

Amin Mohseni-Cheraghlou  is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington DC. Follow him on X at @AMohseniC.

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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In the sixty-four years since, those three major economies have never all faced a recession at the same time (outside of the Global Financial Crisis). But as of last week all three were in technical recessions—until updated GDP numbers on Monday showed Japan very narrowly avoiding one.

What’s particularly concerning is that nearly half of the G7 experienced stalled growth at the end of 2023 and none of these slowdowns are alike. In Germany, the manufacturing sector is going through a painful transition as weak demand, competition on electric vehicles, and the aftershocks of Putin’s invasion have slowed growth to a standstill.

In the UK, the post-Brexit labor shortage and sluggish productivity growth have created an economic cycle that still hasn’t curbed high prices. In fact, the government has signaled that this recession might be the only way to break the back of inflation. 

Then there’s the most interesting case, Japan, where an aging population is consuming less and less. In fact, Japan is on pace for a 15 percent contraction in its population between now and 2050. With an average age of forty-nine, Japan has one of the highest proportions of elderly citizens in the world. When the disappointing GDP data came out last month, Japan lost its spot as the third-largest economy in the world.

The good news is that each of these recessions is expected to be short-lived. The latest data out of Japan on Monday shows 0.4 percent GDP growth in Q4, (meaning it avoided two straight negative quarters of growth). Even before the new data, the Nikkei has been surging due to expectations that the Bank of Japan (BOJ) may finally be ending the era of negative interest rates. In the UK, Bank of England Governor Andrew Bailey may finally be able to start cutting rates this summer. And in Germany, new manufacturing orders unexpectedly jumped 10 percent at the end of year—prompting hope that the spring will truly be a season of revival.

But here’s the key difference between now and then. When the United States turned the corner in 1961, the import demands from its booming middle class helped pull up countries around the world. But in 2023, the United States was already the fastest growing G7 country. In 2024, US GDP growth will likely slow, not surge.

Combine the US situation with China’s deepening economic problems and the picture becomes clear. The world’s two largest economies won’t be able to generate enough growth for the UK, Germany, and Japan—it is going to have to happen from within.  

And that’s a scenario unlike 2008, unlike the 1960s, and in some ways, different from nearly any time since World War II. 

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

Alisha Chhangani is a program assistant for the Atlantic Council GeoEconomics Center where she supports the center’s future of money work

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

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 government did announce economic targets for the coming year and expounded upon its lofty pursuit of high-tech industrialization. But the week of meetings offered no real insight into how Chinese leader Xi Jinping intends to deal with a deepening property crisis, trillions of dollars of local government debt, falling prices, soaring youth unemployment, the loss of business and consumer confidence, and a rapidly aging society.

For a government that takes pride in announcing reams of policy blueprints and diktats, the absence of any detail on how it plans to take on these interlocking issues left the inevitable conclusion that Beijing simply doesn’t know how to proceed. In contrast with some past sessions, the nominal legislature failed even to raise polite questions about the road ahead, and journalists were denied a customary post-Congress news conference with the premier.

Beijing’s silence sends a message to China’s citizens that they are on their own in an anemic economy. All they got was a vague promise in Premier Li Qiang’s work report to the Congress to “see that no large-scale return to poverty occurs.”

That will be small consolation for Chinese from all walks of life who have tasted prosperity over the past two decades but now are struggling to make ends meet. As the Bloomberg columnist Shuli Ren wrote after the premier’s speech, “it is now clearer than ever that the Communist Party is walking further away from its own people.”

Inevitably, Li’s report contained an optimistic forecast of economic growth “around 5 percent” of gross domestic product (GDP) in 2024, following the government’s claimed 5.2 percent gain last year. (By contrast the Rhodium Group estimates that China’s economy grew only 1.5 percent in 2023, the difference at least partially explained by the frequent fungibility of Chinese government statistics.)

As my Atlantic Council GeoEconomics Center colleague Hung Tran outlined at the beginning of the Congress, the government’s growth forecast is based on a fiscal deficit of about 3.8 percent of GDP. Government spending will be augmented by nearly five trillion yuan of bond issues and most of the proceeds of a one trillion yuan bond issue from late 2023.

Much of that spending is expected to go to infrastructure—which China already has built so much of that new investments are unlikely to have significant economic returns. It is also expected to go toward developing higher value-added industries, such as green technology and semiconductors. However, there was no sign that the government was prepared to channel resources to boost household spending, which is necessary if growth is to revive. Without higher levels of consumer spending, Beijing’s efforts to stimulate the economy increasingly will be akin to pushing on a string.

Similarly, while the premier’s work report called for the government to “foster a new development model for real estate” and to “make concerted efforts to defuse local government debt risks while ensuring stable development,” there was no discussion of devoting serious resources to either challenge. With local government debt totaling more than thirteen trillion dollars and nearly three dozen real estate companies defaulting on bonds and loans, the government’s silence on these issues did little to reassure domestic or foreign investors. Over the weekend, China’s housing minister received attention for saying that insolvent property developers should go bankrupt or be restructured, a statement that did not indicate a significant policy shift.

Moreover, there was no explanation of how the money flowing to state-owned enterprises in the government’s drive for “high-quality development,” led by what Xi calls “growth poles” of new productive forces, will offset the government’s sharp turn in recent years away from private sector innovators who have helped drive the economy. A regulatory crackdown on leading private companies in the e-commerce and online services sectors has sapped the economy of vitality: Total investments by corporate giants such as Alibaba, Tencent, and Baidu plummeted 40 percent in 2023, and employment in the sector has been hit by layoffs, depriving millions of recent college graduates of job opportunities.

Nor was there any discussion of how Beijing intends to fund its touted “silver economy” that would reorient domestic demand toward supporting senior citizens, who are estimated to reach 30 percent of the population by 2035. The only concrete commitment in the work report was an increase in the monthly benefit for the rural and “non-working” urban senior citizens of a paltry twenty yuan ($2.78).

Xi appears focused on pushing an outmoded approach to state-led modernization—a twenty-first-century version of the Maoist drive in the 1950s to build heavy industry. The Chinese leader, speaking to a provincial delegation at the Congress, appeared to go out of his way to declare that “we must not declare a model” and “establish [new industries] first and then break” the old ones. But there can be no doubt that he is intent upon breaking the mold of private sector-led growth.

The problem is that he is placing his expectations on a government that is ill-equipped to take on this task. China is not only saddled with debt and facing the need for belt-tightening. As the premier’s work report acknowledged, the bureaucracy is riddled with inefficiency, waste (especially involving priority government projects), and corruption. This, combined with all the country’s deep-seated economic problems, suggests that the “modern industrial system with advanced manufacturing as the backbone” that Xi seeks is being built on a fractured foundation.

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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In July, the United States formally released its proposal on how to implement the final elements of an international regulatory framework for banks. The proposal immediately generated criticism and has created a semblance of bipartisanship in the House Financial Services Committee. Republicans unanimously called for the proposal to be scrapped as Fed Chair Powell testified this week, while Democrats worried about a lending squeeze. But the effect the rules might have on US banks’ central role in the global financial system also deserves scrutiny. 

Since the Global Financial Crisis (GFC), the Basel Committee on Banking Supervision has been working to establish a newly agreed set of measures to strengthen the regulation, supervision, and risk management of banks globally. Built on two previous accords, many of the “Basel III” additions to the Basel Framework are already in effect. The recent controversy concerns the final set of rules, known as the “Basel III Endgame” (or B3E), which focuses on the capital and leverage ratios banks will need to implement to cover the risk that their assets lose value in another market downturn.

Why are they needed in the first place? The B3E framework is a response to the large government bailouts of “too big to fail” banks during the GFC. It expects clear domestic rules on how banks calculate the capital they are meant to hold. Capital is what is left over when a bank subtracts its liabilities from its assets. In case too many of a bank’s assets lose value, its capital—and therefore future profits and shareholders—is meant to take the hit before depositors do. But during the GFC, low capital ratios meant governments had to step in to protect deposits.

The new proposed rules, released in July by the Fed, Office of The Comptroller of The Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have been heavily criticized by the financial industry. The argument is that this is a classic example of “gold plating,” whereby the US rules as currently proposed would create regulatory burdens beyond what the international framework requires and put eight Global Systemically Important Banks (G-SIBs) based in the United States and over thirty-five banks with assets worth over $100 billion at a competitive disadvantage.

It’s true the new rules venture into new territory. The risk-weighted approach brought in by previous Basel Frameworks focused on assets like loans and mortgages. However, the new rules expand the range of items on a bank’s balance sheet that factor into capital adequacy ratios.  Now, derivatives covering interest rate risk and counterparty credit risk (among others) will be included. B3E also introduces leverage ratios preventing banks from borrowing more than a certain ratio to their earnings.

So, what’s the problem? The rules could prevent US banks from using their own internal models to work out how much capital they need to hold against their loan books. Instead, banks will have to rely on standardized measurements of risk using credit ratings from agencies, even if derivatives carry little to no risk to a bank acting in an agent capacity. They also lay on additional capital requirements to account for the complexity and interconnectedness of G-SIBs, in addition to their size.

By the Fed’s own estimation, the overall capital increase required by the new rules is 16 percent but it readily acknowledges this will be higher for the largest and most complex banks as a larger share of their assets will become risk-weighted assets requiring capital buffers. Contrary to what Europe-watchers may expect, the EU’s interpretation of B3E is less stringent. Its version is estimated to increase RWA by less than the Fed’s 16 percent estimation, because the EU will allow for the use of internal models and include other opt-outs from assets being included in capital ratio calculations when the risks to banks are small to non-existent.

Yes, the technical side is daunting, but B3E matters for everyone in the United States. The foreign policy community should care whether these rules improve or hinder the GeoEconomic position of the United States by potentially creating a combination of higher lending rates and due to banks exiting markets associated with higher risk weighting. That could be a problem if it leaves these markets open to rivals and adversaries.

US regulators including US Federal Reserve Vice Chair Michael Barr argue the rules are appropriate given that government has had to shoulder risks taken by banks in the past. Moreover, supporters argue better-capitalized banks tend to lend more in downturns—providing a much-needed stimulus—and avoid lending irresponsibly when times are good. This domestic reasoning needs to be squared with the geopolitical challenges the United States faces at the moment.

If US banks do exit certain derivatives markets, to be unevenly replaced by Non-Bank Financial Institutions (NBFIs) and foreign, mainly European, competitors, will the US financial system remain as central to providing dollar liquidity to corporations? Currently, the depth and reach of US capital markets is connected to the world by globally active US banks. This is one of the factors which has kept the dollar as the pre-eminent currency for trade invoicing but alternatives like the Euro and the Yuan have been rising. A retreat by US banks from their global role could also make it more challenging for the US government to implement sanctions and other economic statecraft policies against adversaries. Washington should consider if the new rules could eventually hamper the implementation of financial sanctions.

These are the tests which the foreign policy community should apply to the B3E rules. There’s no need for alarmist scenarios. The rules proposed last July would not challenge the dollar’s dominant position in international finance. Treasury bills are considered risk-free under the framework and owning them will not force banks to hold any additional capital. And there is no doubt following the GFC, and more recently the collapse of Silicon Valley Bank, the Basel process and other regulatory changes are needed and useful.

But the challenge going forward is to think about B3E beyond the impact on the banks and into the realm of foreign policy and geoeconomics. In the hearings this week Chair Powell recognized the rules need to be looked at and even revised before they are final. Hopefully the Fed will consider the foreign policy implications of their decision, too.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of 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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Economic targets for 2024

The 2024 Government Work Report sets this year’s economic targets, which are virtually identical to those made in 2023. GDP growth is planned to be “around 5 percent”, with a central government budget deficit of 3 percent of GDP in continuation of a proactive fiscal policy and a prudent monetary policy. In particular, China plans to issue one trillion yuan of ultra-long special government bonds to support the budget; and to raise the special local government bond quota to 3.9 trillion yuan from 3.8 trillion yuan in 2023. The urban unemployment rate is set at around 5.5 percent with twelve million new jobs to be created.

More interesting than the targets are the government‘s priorities as reflected in the increases in spending. Total central government expenditure is projected to increase by 3.8 percent to 28.5 trillion yuan (almost $4 trillion), with debt interest payments topping the list rising by 11.9 percent; followed by science and technology at 10 percent; stockpiling of grains, edible oils, and other necessities at 8.1 percent; national defense at 7.2 percent (same as last year); diplomatic activities at 6.6 percent; and education at 5 percent.

The planned fiscal deficit at 3 percent of GDP—declining from the realized deficit of 3.8 percent in 2023—along side the commitment to“prudent” monetary policy have disappointed many analysts and financial market participants who had hoped for a “big bazooka” stimulus plan to kick start the lackluster economy. Furthermore, they point out that this year will not benefit from the base effect resulting from earlier slow growth due to Covid-19. As a consequence, most analysts are keeping their estimates for 2024 growth below 5 percent, with the IMF expecting 4.6 percent.

The key factor in this year’s growth prospects is whether the property sector starts to stabilize, having been in a sharp decline over the past three years. In particular, after suffering the worst price fall in nine years—a drop in investment of 9.6 percent and in new construction starts of 20.4 percent in 2023—home sales and prices have increased modestly in recent months. If this trend gains traction, it would set the stage for the series of moderate support measures implemented so far to show some positive results. In this context, it is interesting to note that Rhodium Group, which had estimated actual 2023 growth to be 1.5 percent instead of the official 5.2 percent, has expected a cyclical recovery to 3.5 percent in 2024.

Developing the “New Three” for high-quality growth

In any event, more important than the exact GDP growth estimates is the NPC’s endorsement of the decisions made earlier by the CCP Politburo. These decisions reflect Xi Jinping’s emphasis on developing new quality productive forces, through strengthening capability in science and technology to form the foundation for high-quality growth. This has emerged as Xi’s main strategy to develop a new engine of growth for China. It is also a way to stay competitive with the West in science and technology, not the least to sustain the modernization of the Chinese military.

New quality productive forces refer to new clean energy technologies and products—dubbed the “New Three” by the Energy Intelligence Group. These include electric vehicles (EVs), lithium ion batteries, and renewable energy products such as solar panels, wind turbines, storage facilities and other infrastructures—all together accounting for 11 percent of China’s GDP. These sectors were targeted in the 2015 “Made in China” plan as well as the 14th Five Year Plan adopted in 2021. Last year, with state guidance and support, the New Three sectors have experienced a surge in investment of 6.3 trillion yuan ($890 billion)—40 percent higher year-on-year. According to Finland’s Center for Research on Energy and Clean Air (CREA), without that investment, China’s growth in 2023 might have been 3 percent instead of 5.2 percent. The Energy Intelligence Group has estimated that the new clean energy sectors will continue to grow, accounting for 18 percent of China’s GDP by 2027—in contrast to the property sector shrinking to a smaller but more sustainable 15 percent from its former peak of 25 percent of GDP.

Overcapacity problems

The problem with this approach is that it has created substantial overcapacity in those sectors, leading to a surge in export at low prices to Europe, the United States, and the rest of the world.

For example, China accounts for 75 to 96 percent of the global production of various components of solar panels but demands only 36.4 percent of the output. The rest has to be exported. And China’s export of EVs has increased by 1,500 percent in the past three years, helping China replace Japan as the largest exporter of automobiles. All together, exports of New Three products increased by almost 30 percent in 2023, exceeding one trillion yuan ($139 billion) for the first time.

Alarmed at the prospects of their markets being swamped with Chinese green energy products enjoying state support, the EU has started an anti-dumping investigation into EV imports with a possibility of imposing countervailing duties. The United States has opened an investigation into the data security risks of Chinese vehicles using “connected car technology”. China has reacted strongly to such moves, threatening retaliation. And China will try to export those products to countries in the Global South, many of which having no domestic manufacturing and would welcome competitively priced goods for their climate transition efforts.

In short, one of the biggest implications of the Government Work Report is that the development of clean energy industries has been identified as a strategic focus to promote high-quality growth—a new Xi catchword. The chosen strategy serves China’s strategic and economic interests but has created serious overcapacity problems, distorting world markets and raising trade tensions with the West. This adds another dimension to the geopolitical rivalry between China and the United States, making it more intractable and difficult to diffuse.

Hung Tran is a nonresident senior at the Atlantic Council’s Geoeconomics Center; a former executive managing director at the Institute of International Finance and 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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Table of contents

Evolution of freedom

The evolution of the aggregate Freedom Index in Brazil is clearly hump-shaped. During the first half of the period of analysis, from 1995 to 2013, the freedom score either increased or was relatively stable, driven mainly by improvements in just two indicators of the economic freedom subindex.

The first of these is the women’s economic freedom, which shows a clear step-change in 2002, although the reasons for this are not clear. During that year, there was a change in government, and the Worker’s Party (Partido dos Trabalhadores) took office. They were very much committed, at least in rhetoric, to increasing women’s economic freedom. In 2003, some parts of the civil code were reformed, which did lead to an improvement in women’s rights. However, it seems unlikely that this one legislative change can explain the 17-point increase in this indicator. Around the same time though, married women’s property rights improved, and punishments for sexual harassment—especially in the workplace—increased.

The second positive trend began in 1996, an important year for the stabilization of the economy. The liberalizing reforms introduced by the government of President Fernando Henrique Cardoso led to significant improvements on the trade freedom indicator. Sectors such as telecommunications and energy were opened to competition. There were also proposals for trade liberalization, even if some of these did not pass into law. Even the early years of Lula’s (Luiz Inácio Lula da Silva’s) government were very favorable to trade freedom, and the data seem to suggest that trade freedom did not decrease until after 2018, with the election of President Jair Bolsonaro. Bolsonaro did not create any barriers to trade, but very soon it became apparent that European countries did not want to continue negotiations on a trade deal with Bolsonaro.

In terms of political freedom, elections in Brazil are superb, and this is well captured by the elections indicator. They are fast, efficient, transparent, and the system is very secure. Even in locations where the electoral process is computerized, it is completely offline, decreasing the security risk. There is a slight fall on this indicator, starting in 2015, which is possibly attributable to polarization: when society is very politically polarized, you will always hear claims about the “unclean” electoral process. This is something we have seen recently in the United States and other countries.

Similarly, the political rights indicator shows a decline in recent years that is hard to identify in reality. It may be that, when the level of polarization is high, there are always segments of the population that can feel disenfranchised. And perhaps the indicator is capturing the repression of protests against President Dilma Rousseff’s government in 2015–16, or President Bolsonaro’s rhetoric regarding the Supreme Court, both of which may have caused anxiety about political freedoms. But there has been no obvious objective fall in political rights. The same applies to civil liberties. For example, when President Bolsonaro was elected, he publicly attacked journalists and other groups, but he took no concrete action against them. So, the feeling that political and civil rights have been reduced is understandable, but there have been no substantive changes that would allow us to say that people in Brazil were less free—and certainly not enough to justify a 33-point fall in the score.

Legislative constraints on the executive increased in the last few years, and here the indicator score is an accurate reflection of reality. However, while progress on this indicator is generally intended to be read as a positive shift, in Brazil’s case there are reasons to see greater legislative power as problematic. In 2016, President Rousseff was impeached. People connected to the Worker’s Party would say it was a “legislative coup,” a common accusation in many Latin American countries when similar situations arise. I am not of that opinion, but it is clear that a nontrivial share of the population is. During the President Bolsonaro years, a group of legislators, mostly interested in pork-barrel projects, gained a lot of power, to the point that the Supreme Court had to intervene to shut down their “secret budget”—effectively a slush fund for paying off supporters. The same group of legislators has continued to hold power after Lula’s election. This situation may have increased the impression that political rights were deteriorating, because presidents elected by the people seem, in reality, to be constrained by Congress.

The evolution of legal freedom, especially concerning judicial independence, is easier to agree with. The judicial system has been affected by executive interventions, justifying a deterioration of judicial independence scores. Moreover, the same indicator also measures judicial effectiveness, and here too the worsening situation has been very evident since 2014. Even before this, Brazil’s scores—of between 85 and 90—seem unjustifiably high because the country has long suffered from an ineffective judicial system. Only 10 percent of murders in Rio de Janeiro end up with a trial, and the numbers have been bad since at least the 1990s, when I was looking at crime and social interactions in the city. The fact that the accused do not receive any punishment until the appeals process has been exhausted means that some court decisions are only implemented ten years (or more) after they are handed down.

On top of this structural problem, in the last decade the judicial system in Brazil has become very influenced by politics. As a result, we see the Supreme Court making a decision, only to completely reverse it two or three years later, with essentially the same set of judges. This appears to be captured by the clarity of the law indicator. Laws in Brazil are very badly written—a lawyer’s dream. To give just one statistic, the value of all the unresolved tax claims in Brazil’s judicial system equates to 75 percent of Brazil’s gross domestic product (GDP). The macroeconomic impact of the low level of clarity in the law is serious, but there are always those interested in the obscurity of the law.

From freedom to prosperity

The evolution of the Prosperity Index, and in particular the fall in Brazil’s score in the last decade, seems to be driven by the minority rights indicator, which is proxied by religious freedom. Brazil has been experiencing fast growth in the percentage of its population identifying as evangelicals and, in particular, neo-Pentecostals. This has created at least two sources of friction. Neo-Pentecostals complain about persecution from the Catholic establishment, liberal legislators, mainstream media, and tax authorities. For example, even though there is no income tax on the profits of religious organizations in Brazil, nonprofit organizations are not exempt from paying social security or taxes imposed on purchases. Neo-Pentecostals feel they should enjoy full exemption from tax and regulations such as city codes. Second, Catholicism and Afro-Brazilian religions are often thought to be connected to “progressive” politics in Brazil, while evangelicals are usually more right wing, so the increase in political polarization may also partly explain the evolution of this indicator. As evidence of this tension, there have been attacks on followers of African-rooted religions by some neo-Pentecostal groups, occasionally allied to local drug gangs.

There is no question that income in Brazil stagnated in the last decade. But Brazil’s economic performance has been mediocre for the last fifty years. In the early 1980s, labor productivity was around 55 percent of the US rate. Now it is less than 25 percent. An exception is the agricultural sector, which has experienced remarkable productivity growth. Development means catching up with the technology frontier, and that is something Brazil has been unable to do. Japan, South Korea, Spain, and many others were able to do so. India and China are doing it now. But not Brazil; we can say the country is, in fact, un-developing.

President Cardoso’s government (1994–98) implemented programs to help the poorest in the country. The effort was amplified during President Lula’s administration (2002–06), which explains the overall positive trend in equality. The problem is that Brazil started from a very high initial level of inequality. Short-run fluctuations are likely to be explained by the fact that inequality is counter-
cyclical: when the economy goes down, inequality goes up. Since the COVID-19 crisis, there has been some temporary expansion of social programs, which has helped decrease inequality, but the long-run fiscal sustainability of these programs is by no means clear.

There has been an improvement in health in Brazil since 1995, mainly due to programs aimed at ensuring that the very poorest have access to regular check-ups and vaccinations. These efforts bore obvious fruit during the rollout of COVID-19 vaccines, because the whole system was already in place, so the vaccine program was relatively effective and fast. Health often requires a small marginal investment to generate large benefits, as was the case here.

Finally, it is undeniable that there have been some improvement in terms of years of education and enrollment in Brazil, and these are the metrics captured by the education indicator in the Prosperity Index. However, with the exception of very few states, there has been very little improvement in educational achievement—something that is not captured in the indicator. Progress is even lower in terms of preparing youth for the labor market. This explains why labor productivity is falling despite years of schooling increasing, which may otherwise seem a puzzle. It is worth highlighting one state in particular, Ceará, which clearly outperforms all the others in terms of educational spending effectiveness, despite its relative poverty. My advice to everyone involved in education in Brazil would be to simply copy whatever Ceará is doing, because the results are encouraging. The current minister of education was the governor of Ceará, so we may see some improvements across the country. However, there is reason to remain skeptical because education leaders usually prefer to reinvent the wheel instead of just replicating whatever is working in other places. This seems to be a universal law of decentralized public systems of education.

The future ahead

Labor productivity in Brazil is a clear signal of the economic prospects for the country—though I think it is a symptom of those prospects rather than a cause. Businesses in Brazil face a huge number of hurdles: We have very high and inefficient taxes. Firms are more worried about paying less tax than producing in a more efficient way. Regulations in Brazil are also especially inefficient, and there are important difficulties regarding long-term financing, related to the legal risks and fiscal deficits in the country. The labor market is very rigid, and even if President Temer and President Bolsonaro tried to remove some of these frictions, President Lula has announced plans to impose more labor regulations. These regulations would hurt firms and the overall economic prospects for Brazil.

A second important challenge for Brazil is security. A special concern is the relatively new route for drug trafficking from producers in Colombia, Peru, or Bolivia to Europe, which goes through Brazil. It is similar to a negative technological shock. Gangs fight with each other for control of the new routes, and this increases crime. Some paramilitary groups are also gaining strength, and these are more organized than the gangs and often affect legal businesses. For example, Rio de Janeiro’s largest electricity company, Light SA, may go bankrupt due to the amount of electric supply that is stolen and then resold to consumers and firms. These groups also control the transportation and construction sectors in some urban areas. All these things have large economic effects. And many states in Brazil lack an efficient police force. The police in the states of Rio de Janeiro and Bahia are particularly violent and inefficient. Unless the security situation improves, it is hard to foresee improvements in other dimensions.

What is going to happen with Brazil? Well, some things will help, like the proposed tax reform, which hopefully will simplify the tax code and curb exceptions, loopholes, and litigation. The finance minister is also committed to tackling the fiscal deficit. It is not clear how he will do it, but an improvement of the fiscal situation inherited from President Bolsonaro would greatly help the country.

Top firms in Brazil are excellent and, if the cost of doing business in the country was smaller, they could truly contribute to growth. Brazil has the cleanest energy mix of any country, and should be able to deal effectively with the illegal deforestation in the Amazon. Reforestation of the Amazon forest could be a source of cheap carbon capture at scale. This could make Brazil a big exporter of goods that have an excellent climate footprint—an exceptional opportunity for the country. Brazil missed an opportunity in the 1980s, when they could have educated their growing labor force, and now it is presented with a similar opportunity again. But the country needs to deal with all of the challenges discussed here.

José A. Scheinkman is Charles and Lynn Zhang Professor of Economics at Columbia, professor of economics (emeritus) at Princeton, and research associate at NBER. Scheinkman is a member of the National Academy of Sciences, recipient of a Guggenheim Fellowship, docteur honoris causa from Université Paris-Dauphine, and board member of Cosan S.A. Scheinkman’s current research focuses on the economics of forest preservation in the Amazon.

Trackers and Data Visualizations

Jun 15, 2023

Freedom and Prosperity Indexes

The indexes rank 164 countries around the world according to their levels of freedom and prosperity. Use our site to explore twenty-eight years of data, compare countries and regions, and examine the sub-indexes and indicators that comprise our indexes.

The post Economic reform is crucial for growth in Brazil appeared first on Atlantic Council.

Table of contents

Evolution of freedom

The evolution of political freedom is conceptually the simplest issue in the Indian context. In big-picture terms, the trends shown in the political freedom subindex are very accurate. The graph clearly shows a significant fall in India’s performance in the last ten years. This trend could be termed “democracy capture,” rather than “democracy backsliding,” for a reason that will become apparent below. Looking at the scores on the four indicators of political freedom (elections, political rights, civil rights, and legislative constraints on the executive), India’s score has reduced in every dimension.

Nonetheless, the election score, as reflected in this data, seems to show a steeper fall than most people working in India, or most political scientists, would endorse. And this is the paradox of Indian democracy at this moment. In a narrow interpretation of the electoral core of democracy—which mainly captures elements such as peaceful transitions of power, contestability, and the fairness of the process itself (i.e., Robert Dahl’s polyarchy)—India still does quite well. In fact, no opposition party in India is questioning the legitimacy of elections, which in itself tells you something. Elections are deeply contested, and India performs well on measures of participation, political contestation, or freedom to form political parties. If we look at state or local elections, the degree of contestation is even higher. The dominant Bharatiya Janata Party (BJP) rules only 15 of 28 states currently. In the electoral indicator, India may even be performing better than is reflected in the Index. However, there are some concerns over the degradation of some aspects that make elections fair. For example, the BJP receives three times more funding from electoral bonds than all other national parties combined.¹ The Enforcement Directorate, which investigates corruption, typically focuses its efforts more on opposition politicians: about 90 percent of current investigations involve opposition politicians. While this has not yet led to opposition politicians withdrawing from electoral contests, it does seem to place additional burdens on them. But all things considered, the political system does not question the legitimacy of the electoral process.

It is between elections that a decline in civil liberties and political rights for civil society is evident. There is a palpable sense of a decline in freedom in these areas. There is a greater criminalization of dissent. Several political activists, including students, are being held under India’s draconian preventive detention laws. The whole “information order,” (which includes mass media and social media), particularly media in vernacular languages such as Hindi and most television channels, is tightly controlled. There has been a massive decline in academic freedom. It is harder for many groups to obtain permission to protest. The checks and balances of a constitutional democracy are eroding. There is more open dissemination of hate speech that targets minorities.

It is important to underscore the fact that you can have pretty good elections and institutional machinery and yet produce outcomes that are not as protective of our freedoms as we would like. It also points to the fact that the way in which this BJP government regulates or suppresses political rights and civil liberties is somewhat artful. Unlike previous episodes of backsliding in India (e.g., 1975, when a formal state of emergency was declared), there have been no mass arrests or major changes in the law. The government is very selectively targeting particular individuals or institutions, using the formal administrative and legal machinery at its disposal. It uses tax laws, administrative law, and informal threats to target institutions or individuals that dissent from the government. This is artful for three reasons: First, there is plausible deniability. Each of these instances of targeting is presented as simply the normal operation of law, rather than what they are: a form of repression. Second, it allows for a form of statistical reassurance. The numbers of individuals or groups being targeted may not be, as a proportion of the population, very large, and so large sections of society are convinced that these attacks on freedom of expression are not going to really affect them. Third, as a consequence, this selective, exemplary targeting multiplies in effectiveness because it also leads to self-censorship—a more efficient way for the government to achieve its aims. It also makes the issue seem less politically urgent, and divides opposition parties, for whom some targets are more salient than others.

Such strategies are in line with how a lot of modern authoritarianism works. This is a crucial paradox to understand: you can have vigorously contested elections by almost all measurable criteria, and yet that can be accompanied by a dramatic decline in political and civil rights in particular, as well as legislative constraints on the executive. Some might be tempted to say that this makes India closer to an illiberal democracy. This term is an oxymoron though, since some of the basic liberal freedoms—like free expression, equality before the law, freedom of association, and a fair information order—are constitutive of both liberalism and democracy. So an attack on liberal values is, inevitably, an attack on democracy. It also raises the specter of whether those who begin by attacking liberal freedoms may not, at some point, also attack electoral processes. But at the moment one cannot deny the fact that the government of Narendra Modi is popular and that it won power through legitimate means.

What are the drivers of this process? The proximate explanation is simply that Indian democracy is electing to power an explicitly majoritarian government. The BJP’s stated ideology is to make Hindus a self-conscious political force and consolidate Hindu political and cultural power. It seeks to reclaim India as a Hindu nation and rescue it from what it regards as a thousand years of Hindu subjugation in three phases: first subjugation by Islamic rulers, then by the British, and after independence by a secular elite. It also seeks to reclaim a more authentically Indian idiom of discourse and politics. This involves a massive project of cultural engineering: rewriting history, renaming public spaces, marking more sharply the boundaries between the Western and the Indian, or between Muslim and Hindu. It is important to keep this ideological background in mind because a significant explanation for the decline in India’s freedom scores has to do with the domination of this ideology. Wherever you have a project that converts a pluralist society into an ethno-nationalist state, minorities will be targeted. The clampdown on civil liberties is justified in the name of nationalism: almost all dissenters from this ideology are marked as anti-national, which licenses their persecution. The political support for the abridgment of individual rights is mobilized in the name of nationalism.

You can ask a deeper question: Why is it succeeding? The standard story in most democracies that experience this kind of backsliding is that the center and the left, or anybody who is not aligned with the autocratic right, is fragmented, which allows for nationalist political strategies to succeed much more easily. In India today, there is no opposition leader even remotely able to match Narendra Modi in terms of individual charisma. Narendra Modi’s personal biography, as a leader who did not come from either economic or social privilege, allowed sections of marginalized groups to identify with him in a way that would have been impossible a decade ago. Political strategies and political communication do matter, and Modi’s ability to identify with the poor and the lower-middle classes is really quite remarkable. He has been able to construct the argument that most of the opposition represents a kind of corrupt, privileged, ancient regime that for seventy years kept India backward, with low ambitions, and prevented the majority from realizing its full political destiny. We always used to assume that, in India, the natural check on right-wing authoritarianism was the fact that India has lots of cross-cutting divisions (language, region, caste, and so on), which provided a natural distribution of social power. The joke in India used to be that people do not cast their vote, they vote their caste. But if you look at caste voting patterns now, they are much more evenly distributed across parties. One of the interesting things that has happened over the last fifteen or twenty years is that these social groups—that once were assumed to be “natural” checks and balances on Hindu consolidation and majoritarianism—are themselves becoming more strategic in orientation. This is partly a consequence of economic growth and greater political freedom. The dynamics of growth have created inequalities not only among caste groups but also within caste groups. So for example, the interest of different subgroups among the Dalits now diverges, based on their situation in the economy. This has made the relationship between caste and voting a lot more fluid, and has led to a greater individualization of decisions.

Additionally, Mr. Modi, unlike many of his right-wing colleagues across the world (e.g., Erdoğan or Bolsonaro), is actually competent in economic management. We are nowhere near the 10 percent gross domestic product (GDP) growth the government claims, nor in an environmental paradise, nor are we seeing significantly reduced inequality. But the Modi government is a reasonably competent steward of the economy. India still enjoys relative macroeconomic stability, with inflation under control. A growth rate of close to 6 percent provides enough revenue—and political capital—to build a coalition that will support welfare reform.

The legal freedom subindex highlights two important stories. First, on bureaucracy quality and corruption, the massive expansion in state capacity in India in the last fifteen years has produced a movement from retail corruption to wholesale corruption. A lot of ordinary Indians now experience the state as being less corrupt. Previously, a large number of public services would be subject to corruption by bureaucrats. In part, this was allowed to continue because these bureaucrats contributed to systems of political corruption—the bottom-up networks created by political actors. One of the interesting results of economic growth has been that politicians have realized that you can easily make money and extract rents from just two or three sectors of the economy, like construction or defense. And you can now do it in a way that is much less inefficient than used to be the case. It also means that political parties have become more centralized, because now they do not have to rely on diffuse networks of patronage across the system. They can rely instead on particular relationships between state and capital to extract all the rents they want. So, in that sense, the corruption story is relatively good news. But this is accompanied by greater concentration of capital at the top, which may pose long-term challenges for small businesses.

Second, the judicial independence score reflects the real bad news story in the area of legal freedom. The Indian Supreme Court used to be considered one of the most independent supreme courts in the world, particularly over the last twenty years. But it has more or less abdicated its function as a custodian of political values. It has consistently delayed hearings on a range of constitutional cases that would have preserved the checks and balances of the current system. Here are just some of the cases in question: the electoral bond case, which has so far failed to improve the transparency of party donations; a range of federalism petitions relating to the status of Kashmir; and the constitutional validity of the government’s use of “money bills” as a legislative device, allowing it to bypass the upper house, even in nonmoney legislation. The Supreme Court is allowing Hindus to reclaim disputed shrines, the centerpiece of Hindu nationalism. The Supreme Court has more or less subordinated itself to government, going along with the administration’s ideological agenda, even if it puts minority rights at risk. The government’s attack on political freedoms and civil liberties could not happen without the cooperation of the judiciary, and again the way in which they cooperate is very artful. The Supreme Court basically does not hear politically sensitive cases. One example is the situation with a number of students from Jawaharlal Nehru University, imprisoned awaiting trial in connection with the 2020 Delhi riots. The Supreme Court has not heard even the case for bail for three years. The judiciary has improved on things like contracts, contract law, economic disputes, and so on. But on issues where the government’s ideological agenda or power is at stake, the judiciary has, in essence, ceded its authority. The decline in judicial independence is likely to be even more severe in reality than is captured by the indicator.

In terms of economic freedom, it is surprising that the score on the investment freedom indicator is not higher because, at least for domestic businesses, further domestic liberalization is generating a great deal of optimism. Two things might explain the data: First, we are at a juncture where the frameworks for both investment and trade are relatively uncertain. There is an ongoing discussion around the development model that India should follow. The uncertainty around India’s orientation to the global economy makes for domestic regulatory uncertainty. Second (and with more on this below), the current government has been successful in publicly producing some private goods such as roads or sanitation, but it has been unable to enforce other kinds of economic regulations that could sustain economic growth in the long run.

Finally, the overall evolution of the women’s economic freedom indicator is a fair reflection of the real picture, as this is an area that has improved significantly in the last decade in India. However, the drivers of this change are probably not those captured by the Index. The data shown in the figure mainly reflects the legal changes made in terms of working hours flexibility and maternity leave. But these legal reforms apply to a very limited number of firms, and thus cannot explain the significant improvement in women’s economic freedom. Instead, the real improvement in this area seems to come from the increase in access to basic goods such as sanitation, cooking gas, or drinking water, as captured by the progress of India on the Multidimensional Poverty Index. Progress in these areas truly impacts women’s economic freedom and produces a massive expansion of their economic potential.

From freedom to prosperity

India had a remarkable period of growth until 2009, with eight years of almost 8 percent GDP growth. From 2009 to around 2014, the economic situation is hard to assess because India experienced multiple shocks. Dealing with the financial crisis of 2009, the previous government left a remarkably broken financial system. Then the process of de-monetization significantly pulled income growth down. Another remarkable economic reform was the introduction of a single nationwide goods and services tax. In the long run it is likely to be very beneficial, as it raises government revenue more efficiently and cuts down on tax evasion, but in the short run it imposes severe costs on small businesses that are still struggling in some ways. Finally, we had the COVID-19 crisis. Despite all these events, GDP growth has not fallen below 5 percent in the last ten years. This is why there is some optimism about Indian growth.

Nonetheless, there are two noteworthy potential constraints on Indian economic development in the near future. The first is reflected in the recent decrease of the legal freedom subindex, as the tax and regulatory environment is still a lot more uncertain than investors would like. This is not because of a legislative desire to suppress legal freedom in these areas. It is more a function of the state’s inability to create regulatory clarity. The second has to do with the distribution of the growth dividend. The top 20 percent of India’s income distribution has probably done very well lately, as in most countries in the world. The bottom 20 percent has actually not done too badly, because of several welfare measures, as reflected in an improvement in the Multidimensional Poverty Index. It is actually the middle 40 percent that is struggling. India’s workforce is moving away from agriculture at a rate that might be expected. But the transition from low-productivity and low-paid work to high-productivity and better-paid jobs is proving elusive for the middle 40 to 60 percent. There are two reasons for this: First, the Indian economy is still very informal. The government has made attempts to bring more of the economy into the formal sector to increase scale, productivity, and access to credit. But the process of doing it, in the short run at least, raises the costs for very small informal businesses. Many of them are struggling. There is greater concentration of capital. Second, the employment elasticity of capital is rising. It takes more capital investment to create jobs. India’s growth path is still quite capital intensive. The result is high underemployment.

Progress on education is slower than it should be. The improvements in the quality of human capital will take eight to ten years to show up. There is considerable reason for optimism regarding the human capital issue, as it is less of a binding constraint in India than it used to be. The evolution of the health indicator in the Prosperity Index is an accurate reflection of reality, but again, there is a paradox here. One of the big successes of the Modi government has been to make health insurance available to large numbers of Indians. It is one of his flagship schemes and is quite remarkable. But the investment in public health is still clearly insufficient, and this is reflected in the dramatic drop in the indicator due to the COVID-19 crisis. Similarly, Mr. Modi has done very well on sanitation. More people have toilets and fewer Indians practice open defecation. That is a huge success. But in terms of building systems that can transport that sewage and reprocess it, we are not doing so well.

In terms of environmental regulations, there is again an interesting paradox. India is doing better than many peer countries on creation of renewable energy. Progress on solar, wind, and renewables has been remarkable. Yet, the government is at the same time enabling greater investment in coal. Also, the government is still unwilling to enforce some of the key environmental regulations that are already in place. Therefore, India has one of the most polluted environments in the world. All in all, on both environment and health, and despite progress, this government is unsuccessful at creating systems and processes that can account for market failures.

The future ahead

The evolution of political freedom in India is worrisome. In the next two or three years, there is a very high probability that political freedoms will decline even more. The way in which this government has empowered hate speech against minorities and co-opted the judiciary is very concerning.

We are at a big crossroads. It is the first time since 1975 that we must ask this question: Will there be a smooth transition of power? If it looks like this government is struggling and could lose the election, will it accept transition of power as smoothly as India has been used to? And here’s the catch-22: if this government wins, the majoritarian consolidation will be a continued threat to political freedom. But if it looks like it could lose, then the chances of resorting to extra-legal means to either hold on to power or ensure that its successor is not able to function will rise considerably. We can see evidence of this course of action in state elections which the BJP has been losing. In many of them, the BJP is deploying the central government’s power to break up the state governments that have been elected.

On the economic prosperity front, I think there are reasons to be cautiously optimistic. Yet, there is a politically problematic take on the situation: I do not think the harm to political freedoms is going to translate into an economic penalty for India. Large parts of Indian capital and foreign investors may not care. If they can make money, they will come. This has always been the case; it is the blunt truth.

Whether improvements on prosperity will be enough to overcome the structural problem of the middle 40 to 60 percent remains an open question. This group cannot be satiated by welfare expenditure. But nor does it fully participate in the gains of growth. It is also worth remembering that India is a highly diverse federal country. Peninsular states of south India have historically done much better and have per capita incomes 50 percent higher than the rest of the country. North Indian states like Uttar Pradesh and Bihar are still lagging in growth, and that is where most of the poverty is now concentrated. Most of these states present no real challenge to Hindu nationalism as an ideology, but they may resent moves towards greater economic centralization. So India will have to manage the political challenge of a geographically unequal society. This could work for democracy in two opposing ways. On the one hand, federalism can check the centralizing tendencies of Indian democracy. On the other hand, it could exacerbate political conflict and deepen the yearning for authoritarianism.

Pratap Bhanu Mehta is senior fellow and a former president of the Centre for Policy Research, New Delhi and Laurence Rockefeller Visiting Professor for Distinguished Teaching at Princeton University. He was previously vice chancellor of Ashoka University. He is the author of The Burden of Democracy (2003), co-editor of The Oxford Handbook to the Indian Constitution; India’s Public Institutions; and The Oxford Companion to Indian Politics. He was convenor of the Prime Minister of India’s Knowledge Commission (2005–07) and member of India’s National Security Advisory Board. He is also editorial consultant to the Indian Express and a fellow of the British Academy.

Trackers and Data Visualizations

Jun 15, 2023

Freedom and Prosperity Indexes

The indexes rank 164 countries around the world according to their levels of freedom and prosperity. Use our site to explore twenty-eight years of data, compare countries and regions, and examine the sub-indexes and indicators that comprise our indexes.