Working Papers
2024
April 5, 2024
How Vulnerable is Sub-Saharan Africa to Geoeconomic Fragmentation?
Description: This paper studies the potential effects of geoeconomic fragmentation (GEF) in the sub-Saharan Africa region (SSA) through quantifying potential long-term economic costs. The paper considers two alternative GEF scenarios in which trade relations are fully or partially curtailed across world economies. Our quantification relies on a multi-country multi-sector general equilibrium model and takes a deep dive into the impact across SSA’s oil-rich, other resource-rich and non-resource-rich countries. The results are based on a detailed dataset including information for 136 tradable primary commodity and 24 manufacturing and services sectors in 145 countries—32 of which are in SSA. We find that under GEF, SSA could experience long-term wellfare losses of approximately 4 percent of GDP, twice the losses of the rest of the world. This strong effect results from the large losses of other resource-rich and non-resource rich countries in SSA, given their high dependence on commodity trade. However, if the world experiences a less severe GEF-induced trade disruption—a strategic decoupling—SSA countries could derive minor gains from the re-shuffling of global market supply, specially in energy products.
April 5, 2024
Unveiling the Dance of Commodity Prices and the Global Financial Cycle
Description: We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.
April 5, 2024
Can Energy Subsidies Help Slay Inflation?
Description: Many countries have used energy subsidies to cushion the effects of high energy prices on households and firms. After documenting the transmission of oil supply shocks empirically in the United States and the Euro Area, we use a New Keynesian modeling framework to study the conditions under which these policies can curb inflation. We first consider a closed economy model to show that a consumer subsidy may be counterproductive, especially as an inflation-fighting tool, when applied globally or in a segmented market, at least under empirically plausible conditions about wage-setting. We find more scope for energy subsidies to reduce core inflation and stimulate demand if introduced by a small group of countries which collectively do not have much influence on global energy prices. However, the conditions under which consumer energy subsidies reduce inflation are still quite restrictive, and this type of policy may well be counterproductive if the resulting increase in external debt is high enough to trigger sizeable exchange rate depreciation. Such effects are more likely in emerging markets with shallow foreign exchange markets. If the primary goal of using fiscal measures in response to spikes in energy prices is to shield vulnerable households, then targeted transfers are much more efficient as they achieve their goals at lower fiscal cost and transmit less to core inflation.
April 5, 2024
Financial Stability in a Higher-for-Longer Interest Rate Environment The Case of the Middle East and North Africa
Description: This paper assesses the state and resilience of corporate and banking sectors in the Middle East and North Africa (MENA) in a “higher-for-longer” interest rate environment using granular micro data to conduct the first cross-country corporate and banking sector stress tests for the MENA region. The results suggest that corporate sector debt at risk may increase sizably from 12 to 30 percent of total corporate debt. Banking systems would be broadly resilient in an adverse scenario featuring higher interest rates, corporate sector stress, and rising liquidity pressures with Tier-1 capital ratios declining by 2.3 percentage points in the Gulf Cooperation Council (GCC) countries and 4.0 percentage points in non-GCC MENA countries. In the cross-section of banks, there are pockets of vulnerabilities as banks with higher ex-ante vulnerabilities and state-owned banks suffer greater losses. While manageable, the capital losses in the adverse scenario could limit lending and adversely impact growth.
April 5, 2024
Designing a Progressive VAT
Description: This paper presents a novel approach to addressing VAT regressivity, by proposing the adoption of a progressive VAT: a single-rate, broad-base, VAT, whereby tax paid on consumption is re-paid to lower income households in real-time, at the moment of purchase. Such a system can effectively eliminate regressivity, while minimizing the political economy, cash-flow, and welfare stigma obstacles that are often associated with standard welfare transfers used in modern VAT systems. It would also have other significant advantages, particularly in terms of compliance incentives.
April 5, 2024
Changing Global Linkages: A New Cold War?
Description: Global linkages are changing amidst elevated geopolitical tensions and a surge in policies directed at increasing supply chain resilience and national security. Using granular bilateral data, this paper provides new evidence of trade and investment fragmentation along geopolitical lines since Russia’s invasion of Ukraine, and compares it to the historical experience of the early years of the Cold War. Gravity model estimates point to significant declines in trade and FDI flows between countries in geopolitically distant blocs since the onset of the war in Ukraine, relative to flows between countries in the same bloc (roughly 12% and 20%, respectively). While the extent of fragmentation is still relatively small and we do not know how longlasting it will be, the decoupling between the rival geopolitical blocs during the Cold War suggests it could worsen considerably should geopolitical tensions persist and trade restrictive policies intensify. Different from the early years of the Cold War, a set of nonaligned ‘connector’ countries are rapidly gaining importance and serving as a bridge between blocs. The emergence of connectors has likely brought resilience to global trade and activity, but does not necessarily increase diversification, strengthen supply chains, or lessen strategic dependence.
March 29, 2024
Call of Duty: Industrial Policy for the Post-Oil Era
Description: Oil-exporting economies face the risk of an acceleration in the energy transition. A risk-based approach calls for urgent preparation for the post-oil era by diversifying exports and transforming the prevailing growth model. We outline the principles of industrial policy to achieve this objective based on the experience of the Asian Miracles and propose a sketch of the strategy required to transform these principles into practice. The key component of the strategy is to select sectors along two dimensions—proximity to the current production structure or capabilities set and a timeframe for results to materialize. The three strategies—snail crawl, leapfrogging, and moonshots—determine how far from the current production structure the selected sectors are. These sectors need to show results both in the short run to jumpstart growth and ensure policy continuity—“quick wins”—and the long run to create a new growth model—“transformative gains.” We argue that the strategy should focus on supporting the exports of sophisticated sectors in both manufacturing and services while capitalizing on complex tasks and activities in existing industries but should leave non-sophisticated sectors such as tourism and non-tradable services to the private sector.
March 29, 2024
Public Debt Dynamics During the Climate Transition
Description: Managing the climate transition presents policymakers with a tradeoff between achieving climate goals, fiscal sustainability, and political feasibility, which calls for a fiscal balancing act with the right mix of policies. This paper develops a tractable dynamic general equilibrium model to quantify the fiscal impacts of various climate policy packages aimed at reaching net zero emissions by mid-century. Our simulations show that relying primarily on spending measures to deliver on climate ambitions will be costly, possibly raising debt by 45-50 percent of GDP by 2050. However, a balanced mix of carbon-pricing and spending-based policies can deliver on net zero with a much smaller fiscal cost, limiting the increase in public debt to 10-15 percent of GDP by 2050. Carbon pricing is central not only as an effective tool for emissions reduction but also as a revenue source. Delaying carbon pricing action could increase costs, especially if less effective measures are scaled up to meet climate targets. Technology spillovers can reduce the costs but bottlenecks in green investment could unwind the gains and slow the transition.
March 29, 2024
Mobile Internet, Collateral, and Banking
Description: Combining administrative data on credit, internet penetration and a land reform in Rwanda, this paper shows that the complementarity between technology and law can overcome financial frictions. Leveraging quasi-experimental variation in 3G availability from lightning strikes and incidental coverage, we show that mobile connectivity steers borrowers from microfinance to commercial banks and improves loan terms. These effects are partly due to the role of 3G internet in facilitating the acquisition of land titles from the reform, used as a collateral for bank loans and mortgages. We quantify that the collateral's availability mediates 35% of the overall effect of mobile internet on credit and 80% for collateralized loans.
March 29, 2024
E-Money and Monetary Policy Transmission
Description: E-money development has important yet theoretically ambiguous consequences for monetary policy transmission, because nonbank deposit-taking e-money issuers (EMIs) (e.g., mobile network operators) can either complement or substitute banks. Case studies of e-money regulations point to complementarity of EMIs with banks, implying that the development of e-money could deepen financial intermediation and strengthen monetary policy transmission. The issue is further explored with panel data, on both monthly (covering 21 countries) and annual (covering 47 countries) frequencies, over 2001 to 2019. We use a two-way fixed effect estimator to estimate the causal effects of e-money development on monetary policy transmission. We find that e-money development has accompanied stronger monetary policy transmission (measured by the responsiveness of interest rates to the policy rate), growth in bank deposits and credit, and efficiency gains in financial intermediation (measured by the lending-to-deposit rate spread). Evidence is more pronounced in countries where e-money development takes off in a context of limited financial inclusion. This paper highlights the potential benefits of e-money development in strengthening monetary policy transmission, especially in countries with limited financial inclusion.