'Wising Up to the Costs of Aging' looks at how falling fertility and rising life expectancy have combined to threaten the ability of many countries to provide a decent standard of living for the old without imposing a crushing burden on the young. In our lead article, Ronald Lee and Andrew Mason say that while population aging in rich industrial countries as well as in some middle- and lower-income countries will challenge public and private budgets in many ways, a combination of reduced consumption, postponed retirement, increased asset holdings, and greater investment in human capital should make it possible to meet this challenge without catastrophic consequences. Neil Howe and Richard Jackson publish a fascinating ranking of which countries are best and worst prepared to meet the needs of the growing wave of retirees. We also have articles on a broad range of current topics, including Middle East unemployment, the economic repercussions of the earthquake and devastating tsunami in Japan, and banking in offshore financial centers such as the Cayman Islands. Carmen Reinhart and Jacob Kirkegaard look at how governments are finding ways to manipulate markets to hold down the cost of financing huge public debts, and, in Straight Talk, the IMF's Min Zhu talks about the long-term challenges now facing emerging markets. Prakash Loungani speaks to Nobel Prize winner George Akerlof, and we discuss with three other laureates-Michael Spence, Joseph Stiglitz, and Robert Solow-what the global economic crisis has taught us. Back to Basics explains economic models, and Picture This highlights the great variations in the cost of sending money back home.
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This paper summarizes recent developments in the relationships between the IMF, member countries, and commercial banks, with specific reference to five European countries. The paper also highlights that Better assessment of trends in the market and of the attitude of commercial banks toward borrowing countries. These would include: a deeper analysis of capital flows, with special attention to interbank transactions; an improvement in the collection of statistical data and additional efforts made by member countries to release adequate information; and a further examination of the usefulness of setting up in the Fund an internal country risk assessment statistical model. The report also suggests that there should be adequate Fund involvement in rescheduling negotiations through discussions with Paris Club members on rescheduling patterns and possibly through an elaboration of guidelines for rescheduling bank claims; appropriate action to cope with liquidity crises; and adequate international cooperation among central banks acting as lenders of last resort.
The rapid increase in the external debt of nonindustrial countries since 1973–74 and the corresponding rapid growth in cross-border claims of commercial banks have led to a vulnerable structure of international debt. The risks inherent in the system had been pointed out by observers for several years. These risks materialized in 1982, when the persistence of high positive real interest rates, the deepening recession in industrial countries, and political tensions in several regional areas combined to induce a series of adverse developments:
During the 20 years from 1960 to 1980, gross external claims of banks in the BIS reporting area4 (including cross-border interbank claims) grew at an average annual rate of about 25 percent. As of December 31, 1983, they amounted to $2,024 billion ($1,085 billion excluding redepositing among reporting banks). Banks located in the United States, the United Kingdom, and offshore centers play a leading role in the expansion of gross external assets, and the U.S. dollar remains the predominant currency, representing almost three fourths of total claims (Table 1).
As a counterpart to the rapid increase in international bank lending, the external debt of borrowing countries, and especially that of non-oil developing countries, has risen dramatically in recent years. At the end of 1982, the total reported external debt of non-oil developing countries was $633 billion (plus about $100 billion of unreported short-term debt, mainly to suppliers and parent companies of subsidiaries), compared with about $130 billion at the end of 1973. To be sure, there has been a rapid growth of exports, and the ratio of total external debt to exports has not increased as rapidly as the ratio of total debt to gross domestic product. Since the origin of borrowed funds has shifted during the period from official sources to private sources31 with market-related variable interest rates and since interest rates have increased sharply, there has been a rapid deterioration in debt service ratios (the ratio of interest plus amortization to exports of goods and services standing at 23 percent in 1982 against 16 percent in 1973) and of the ratio of interest to current account receipts (11 percent in 1981 against 5.5 percent in 1970).32 Repayment obligations will thus represent a growing proportion of gross external financing requirements, amounting to more than one half of the gross external financing requirements of non-oil developing countries in the next five years. These obligations amounted to $200 million during the period 1977–81 (against $280 million in net borrowing requirements) and might reach $400 million during the period 1982–86.
This paper focuses on observance of standards and codes on the Financial Action Task Force (FATF) recommendations for antimoney laundering and combating the financing of terrorism (AML/CFT) for the Cayman Islands. The assessment reveals that the Cayman Islands’s legal framework for combating money laundering and terrorism financing is comprehensive. All designated categories of offences enumerated in the FATF 40 Recommendations are predicate offences under the Cayman law. The criminalization of FT is in accordance with FATF requirements. The confiscation regime meets most standards and is effective.
International Monetary Fund. Middle East and Central Asia Dept.
This Selected Issues paper discusses the designing and implementing of Kuwait’s fiscal policy for the medium term. Fiscal policy has a major role to play in supporting macrostability and diversification. The fiscal strategy design and implementation on a yearly basis are based on a few key areas such as determining targets or ceilings for major fiscal parameters for a three-year rolling framework with binding next budget year and indicative two outer years, establishing a clear process for expressing policy objectives and their link to expenditure, etc. The illustrative budget sequencing with the fiscal strategy spearheading medium-term fiscal policymaking and linked to the annual budget process would support fiscal policy implementation.
Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen
Macro statistics on foreign direct investment (FDI) are blurred by offshore centers with
enormous inward and outward investment positions. This paper uses several new data
sources, both macro and micro, to estimate the global FDI network while disentangling real
investment and phantom investment and allocating real investment to ultimate investor
economies. We find that phantom investment into corporate shells with no substance and no
real links to the local economy may account for almost 40 percent of global FDI. Ignoring
phantom investment and allocating real investment to ultimate investors increases the
explanatory power of standard gravity variables by around 25 percent.
An effective working of the marketplace relies on adequate information. In an ideal world, banks would have detailed and timely information on the external debt and the economic situation and policies in borrowing countries and thus be able constantly to revise their assessment of those countries, sending them “signals” through a widening of spreads, a shortening of maturities, or in other ways. Those who advocate the usefulness of “private conditionally” believe that market signals are likely to induce the required adjustments in borrowing countries and to pave the way for a new phase of expanded lending when economic indicators point to the success of the adjustment program. In reality, the world is more complex. There are “noises” in the statistical system, making it difficult to discriminate between overall and specific country trends. Also, competition between bankers leads to alternating phases of overlending and abrupt cuts, and regional contagion plays an increasing role.