A. 2030 Global Surveillance Report: Corponationals

Corporations with extensive global footprints, both private and state-owned, have assumed the provision of services previously performed by governments. The resulting benefits are spread unevenly within and across countries and there is a shift in the nature and drivers of cross-border investments and spillovers. Corporates expand into low-income countries and small states, but selectively, which leads to uneven convergence.

Corporations are More Influential Than Ever

6. Global growth was 4 percent in 2029 and now well off its earlier peaks. The private Multinational Corporations’ (MNC) assumption of services previously performed by governments has started to slow in maturing AE markets, providing less of an impulse to growth than in the past. MNC competition with State-Associated Enterprises (SAEs) has curtailed the growth model of building infrastructure abroad. Both MNCs and SAEs have extensive global footprints. Many have individual cash reserves that exceed those of G7 sovereigns and turnover several times the tax revenue of many emerging markets and some advanced economies.

7. MNCs continue to use artificial intelligence (AI) and automation to expand into new areas. AI is being applied by MNCs to market intelligence, supply-chain management, and other decision-making, while automation is reducing labor costs. Populations continue to benefit from more efficient and effective corporate healthcare, which is an example of the private sector’s incursion into what, in many countries, was traditionally the domain of the government. Smaller and service-focused firms continue to find it hard to compete. However, the pace of expansion is slowing. Markets are maturing, and firm entry has been hampered by large-firm dominance and high fixed costs.

8. The SAE-driven lending and FDI bonanza earlier in the decade also served most SAE-host countries well. Mimicking earlier global infrastructure investment programs launched in the 2010s and building on success securing medical supplies and vaccines after the Covid-19 pandemic, some governments and oil exporters sought to export their infrastructure-driven model abroad via SAEs. They were also motivated by resource access (e.g., rare earth metals), diversification, and the desire to keep domestic incomes rising to preserve domestic stability. However, in some projects and countries, economic rationale was accompanied by a desire to project soft power, at times leading to lower returns on investment and more volatility for SAE-funded investments and ventures.

9. The contribution of government to GDP growth continues to be negative. Demand for government services is decreasing in MNC jurisdictions, but the ability to meet that demand is falling even faster. Fiscal buffers did not recover from the 2020-2022 Covid-19 pandemic. Low buffers forced governments in AEs to tolerate and, in some cases, invite advancement of MNCs. For example, the collapse of a postal system prompted a large retailer to acquire it (initially to protect its own “in 12 hours or it’s free” deliveries of vaccines and other goods but eventually in response to financially lucrative requests for coverage by thousands of other companies). As guardians of the supply chain and providers of the digital infrastructure and software to improve the remote-working experience, it was increasingly the private sector that was trusted with managing newly-minted essential services. And when a public electrical grid underpinning that digital infrastructure failed due to cost-cutting, citizens were relieved to see it privatized and provided with the expertise and resources needed get it up and running again.

10. Government revenues are falling faster than expenses. MNCs have successfully leveraged their power to argue that their increasing service provision justifies far lower corporate taxes. Tax compliance is decreasing owing to rising dissatisfaction with government which, along with pay cuts, is hindering talent retention. Entitlements risk dominating the budget, and governments’ ability to perform their obligations continues to decline.

11. MNC-dominated countries are vulnerable to even moderate idiosyncratic shocks. Governments’ resources are limited and their sway in the economy is falling. Cash-rich MNCs have replaced many banks and do not use the monetary authority, which dampens the credit channel of monetary policy. However, MNCs have assisted in limited cases. For example, a large emerging market country is recovering strongly from a slowdown in 2029 only because of the fortuitous timing of MNC investment, including 3D “classroom-upgrade-in-a-day” printing services. Following a banking crisis in a small island country last year, an MNC quickly disbursed a US$90 million loan as an advance on future taxes.

New Dimensions of Inequality are Prompting Pushback

12. Changing workforce expectations have created an MNC eco-system. Although primarily profit driven, MNCs are internalizing the values of their workforces. Millennials and Gen-Zers expect modern “corporatized” service delivery in traditional government domains. At the same time, they tolerate less generous salaries, pensions, or life-time employment if their employers’ operations prioritize social justice concerns. Employees have secured social responsibility initiatives within their employer’s “eco-systems.” Services include employer-provided transport, mortgages, and healthcare. The expansion of coverage has been gradual (for example, Covid-19 vaccines and boosters were available to employees, then their families, and then a select number of nominated recipients per employee). Alongside expectations of climate-friendly practices, initiatives to tidy the local environment (air, rivers, etc.) have become commonplace. MNC eco-systems are becoming systemically important in some countries.

13. The divide between those inside and outside MNC ecosystems widened again last year, although global inequality of opportunity is falling. Outsiders, including those in smaller firms, continue to experience stagnant wages alongside decaying and increasingly expensive government service provision. After some populations pushed back, more companies are expanding the eco-system to arms-length suppliers and promising to incur the cost of engaging the local community in order to mute social discontent (see Box 1). Physical access to the greater eco-system campuses and transport requires a passport that certifies one is employed or sponsored by an employee, is up to date with vaccinations, and is healthy (courtesy of constant biometric health screening). Job market inequality between those inside and outside the ecosystems is also rising because new job-placement testing methods govern access to higher-paying jobs and corporation-provided training within the ecosystem meet employer needs better. By replacing expensive traditional education, talent is being rewarded more than educational opportunity within the eco-systems. Since courses and tests are available to those in remote locations, and since communications technologies (e.g., virtual reality) advanced considerably during the Covid-19 quarantines, more talented people in EMDEs are joining the global workforce of MNCs.

^{Box 1.}

The (Lost) Fight Against an Expanding Eco-System

Initially, corporations opted to only include employees in eco-systems, but this proved unsustainable. Case in point is the experience of technology companies in the US’s “Silicon Valley” in the 2010s. As a benefit for employees, big tech companies reportedly introduced shuttle bus transport between neighboring cities and their large corporate campuses. The busses were well-appointed—some complete with plush leather seating, free wifi, upmarket coffee, cold-pressed juice, snacks, and bike racks—and, more often than not, free to employees. One company’s own shuttle stops covered over six counties, more than a dozen cities, and over 200 miles of freeways (double that region’s existing commuter train system at the time of their introduction). As one of the early program leads noted, companies were “basically running a small municipal transit agency.”

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Problems quickly cropped up: the location of stops starting driving real estate prices and catalyzing the displacement of poorer incumbents as proximity to stops attracted employees; by using the shuttles, employees could avoid having to interact with their neighbors, decreasing the sense of community; and public resources were wasted as delays from increased bus traffic during rush hour rose and employees opted out of using the existing public transit. Protests erupted in 2018. After years of discord, city officials eventually forced some companies to pay for permits, comply with city regulations (including reduced designated pick-up and drop-off zones), and provide real-time GPS tracking data to the authorities.

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Amid the Covid-19 pandemic, bus use (both public and private) plummeted as teleworking increased and people complied with social distancing measures. Experiencing several revenue hits at once, cities increasingly moved to cut down their bus service. However, employers continued to offer their private bus services given demand from employees for on-site childcare, fitness, laundry, and dining services (and some just needed a quiet place to work away from their home). In mid-2021, community members without the option of teleworking, and now without alternative public bus services, launched protests calling for private services to be made public. Companies responded by making the shuttles available to the families of employees. Subsequently, they allowed anyone living within a 1 km radius of a stop to use the shuttle systems. Tech firms were praised for stepping up to fill the gap left by the public sector and protests largely halted (although there were some isolated marches following the announcement that health passports were required, effectively excluding many community members).

14. Recipient countries gained from SAE presence. For example, an emerging market country’s struggling oil sector recovered and supported the economy after inviting SAE participation in 2022. SAEs restored tourism infrastructure in the Mediterranean. One country implemented an SAE-financed “Sensing City” upgrade, which permits smart monitoring of human activity and makes cities autonomous-vehicle-ready, after choosing a side in a dispute over fishing rights in the northern part of the Indian Ocean. SAEs have also been effective conduits of accessible credit to increase financial inclusion and green investment. In the early 2020s, provision of vaccines on concessional credit terms was also bundled with many investment projects. Moreover, the SAE-led economic stabilization model has been exported to SAE recipient countries and reduced volatility.

15. SAEs facilitated digital learning in their jurisdictions, reducing inequality within SAE countries. Worldwide, children with access to some SAEs’ proprietary innovative online learning tools and physical infrastructure faced smaller disruptions to their learning in the early 2020s and hence better job market outcomes upon graduation last year. SAEs provided these tools at low cost to entire host populations to head off anti-SAE sentiment. Consequently, youth unemployment, mental distress, and feelings of exclusion are lower in SAE countries than in MNC countries.

16. But SAEs face emerging pressures from investment destinations. As some countries restructured their debts that became unsustainable after the pandemic, SAE write-downs made SAEs more risk averse. As the need for vaccines became less urgent, the SAE value proposition became less attractive, and SAE preference for using source-country workers prompted resistance in some jurisdictions. In one response, a host government passed legislation to nationalize an SAE asset, Rare Earth Global (REG), but was reluctant to take control owing to REG’s superior security forces. REG continues to export directly to other corporations using its own manufacturing and transport infrastructure.

17. Both MNC and SAE corporations have been selective in their expansion into low-income countries and small states, leading to uneven convergence. Poor and small countries experienced especially severe damage to their fiscal positions after the pandemic and government service provision deteriorated, but corporations did not fill the gap. Judging many markets as simply too small to be worthwhile, most corporations have not extended their reach to economies like some small island states, who were also among the last to receive Covid-19 vaccines. At the same time, resource rich but poor fragile states have been a low priority but are viewed as potentially vulnerable to being overtaken by firms with well-equipped private security forces.

Corporate Rivalries are Solidifying Blocs in a Bipolar World

18. MNCs are also stepping up the competition. Faced with maturing AE markets, private MNCs are venturing into new regions, including those with growing domestic markets, major gaps in service provision, and poor governance. Some MNCs are fomenting and leveraging pockets of anti-SAE sentiment to capture investment deals. More broadly, MNC success stories of joint ventures and service provision are prompting destination countries to seek better investment terms from SAEs than in the past, further reducing the economic rationale from an SAE perspective. The prospect of a hostile takeover of REG by an MNC was recently welcomed by the host government of REG.

19. Blocs are impinging on interconnectedness. The relationship between MNCs and SAEs is increasingly competitive rather than cooperative. SAEs and their affiliated countries were not invited to the inaugural CorpCon featuring 50 of the world’s largest and most powerful MNCs later this year. The theme of the conference is “Global neighborhood watch: security co-operation options for MNCs.” As “blocs” emerge, albeit unintentionally, trade and financial flows between them are dropping.

20. Capital flows directly within and between firms without intermediation. Flows are less affected by global interest rates than before (see IMF (2030a) on MNC and SAE bloc capital flows). The pattern is shifting from North-North flows to North-South flows but tracking such flows has become exceptionally difficult as corporates now avoid strict monitoring given their influence and internal foreign exchange markets facilitated by in-house digital currencies. MNCs’ profits had been re-invested in destination AE countries to develop ecosystems, but maturing markets are now experiencing income outflows (and hence weakening current accounts) repatriated to source AE countries and recirculated as investment in new EMDE markets. Base Erosion and Profit Shifting continues to influence financial flows. SAE outflows have declined due to rising domestic demand and falling oil prices (MNCs have added to oil supply by applying machine learning to geology). Models suggest current account surpluses have fallen further behind those consistent with optimal saving. Capital flows have sometimes been prompted by economic or political stabilization objectives.

Policy Challenges and Trade-Offs

Within MNC-Dominated Countries:

• Given governments’ declining role and resources, a focus on comparative advantage is warranted. This may entail an institutional quality upgrade. These might include (i) improving property rights and the rule of law to attract MNCs (EMDEs) and (ii) lowering the costs to doing business where MNCs are established (AEs). Governments face the challenge of reducing their staff numbers and entitlement spending to allow better targeting of expenditures to those outside of eco-systems.

• In AEs, how can consumption and labor taxes be re-designed to address growing inequality? Low taxes at the bottom of the pay scale may be subsidizing corporates by allowing them to offer lower wages instead of increasing employment and take-home pay. What other tax sources (on capital gains, wealth, inheritance) could yield material revenues without impeding innovation?

• Which potential spillovers are EMs and the “new” frontier economies unaware of? Understanding MNC capital flows is another policy priority. Better data collection on cross-border MNC flows has become urgent. Abrupt changes in MNC investment decisions can be very destabilizing for source and destination countries. Recent work shows MNC flows are associated with measured current account fluctuations and the money supply. IMF (2030b) examines implications for AML/CFT and financial stability.

Within SAE-Dominated Countries:

• Further improvements in public financial management are paramount for efficiency. SAEs’ comparatively stronger monitoring and control of financial flows can be better leveraged as tool for stabilization, but host countries would need to be comfortable with a further erosion of policy autonomy for some parts of the economy.

• For sectors under less SAE influence, traditional monetary policy effectiveness would be a focus area for host country authorities. Complementary host country policies could include influencing the pace of within-MNC flows using macroprudential regulations and moral suasion (requiring source country cooperation).

• Labor-intensive EMDEs face the challenge of inappropriate imported production methods. Capital-intensive labor-saving technologies or imported workers risk providing limited benefit for local labor. SAE-host countries should continue to seek opportunities for transferring control of core industries to their increasingly educated and experienced domestic population. However, care should be taken to avoid military conflict with SAE-source countries that could compromise capital inflows and supply-chains.

21. Global co-operation between governments, SAEs, and MNCs can boost the common good. A large e-commerce platform is still approaching all governments in an effort to expand its global trade corridor, an initiative that started more than a decade ago. Since global corporations stand to gain more from global public goods than individual countries, corponationals can take more responsibility for them. MNC delegates at the inaugural CorpCon have an opportunity to set up a global pool to finance global goals like universal access to vaccines and the internet and to enable smaller states play their role in the global economy. In parallel, agreeing to an international corporate taxation and state subsidy framework would help mitigate “beggar thy neighbor” tendencies.

B. 2030 Global Surveillance Report Planet Protectionism

Excessive green protectionism has evolved and become entrenched, amplifying negative aggregate supply shocks including droughts. Although there are tradeoffs, there are also complementarities between environmental and debt sustainability.

More Frequent Natural Disasters and the Policy Response Have Left the Global Economy Fragile

22. Global growth was anemic again in 2029, capping a decade of weak economic performance. Growth was weighed down initially by the increased frequency of natural disasters including droughts and, more recently, by the latest countries to impose exceedingly high, untargeted, and uncoordinated carbon tariffs on imported industrial goods while not taking action to transition to low carbon economies (including by discouraging carbon reduction domestically; see Box 2). Protectionism and climate shocks have compounded the drag caused by lingering Covid-19 containment, aging workforces in many large economies, and xenophobia flared up by water scarcity. In addition to anemic growth, global inflation is in the double digits.

23. Countries less affected by water shortages continue to benefit from their improved comparative advantage, while water-stressed countries have seen their external positions weaken. Countries exporting water-intensive agriculture (e.g., wheat) and industry (e.g., textiles) are experiencing current account surpluses from this terms-of-trade windfall. Manufacturing protectionism and resistance to migrants has reduced the skill premium in AEs. In water-stressed LICs, women have withdrawn from the labor force as they have to travel farther for access to potable water. In AEs, many unemployed people—mostly the young—split their time between queues rationing jobs or queues rationing water. Countries that have experienced more natural disasters (including, with unfortunate irony, flooding attributed to melting land-based ice) have been severely harmed by lower and more volatile fiscal and external revenue streams.

24. Many countries continue to experience adverse debt dynamics owing to climate change. Some countries, adversely affected by the climate-driven sudden re-evaluation of their long-term growth potential and risk profiles (see Box 3), are running enforced fiscal and external surpluses in the face of limited financing and high risk of debt distress. Financial institutions with large sovereign debt exposures hold severely weakened portfolios. In some places, social shifts are making the relative importance of aggregate GDP growth versus social and environmental progress a key political issue. However, the extent of adverse effects of a lower-growth model on macroeconomic stability (e.g., debt sustainability and fiscal/external balances) could be a constraining factor.

25. Carbon tariffs have discouraged cross-border supply chains. Countries that used to specialize in narrow components of long and complex global value chains suffered disproportionately from the steep and abrupt carbon tariff since they lacked the industrial base to find substitute activities and there was no complementary support. For countries where foreign financing did not stop suddenly, demand has not had to adjust fully, so current account balances are weaker than implied by fundamentals. Tariffs have increased fiscal revenues, but not enough to compensate for the downturn in economic activity caused by the array of supply-side shocks.

26. Gross international investment stocks remain well below those at the start of the decade. Capital was withdrawn from newly risky destinations after the natural disaster shocks earlier in the decade. The one exception to that trend, the earlier rush to secure arable land and agri-processing businesses, has been slowed by measures to curtail capital flows into these now-strategic sectors.

Global Growth is Expected to Edge up but Remain Well Below Previous Potential Rates

27. In 2030, growth is expected to stabilize in larger markets as smaller countries pursue niche opportunities. Despite signs of higher growth than in the recent past, reclaiming the decade’s lost output seems a distant prospect.

• Larger and more diversified economies are finding domestic substitutes to fill the gaps left by previously foreign-sourced goods and components. Production methods are inefficient and of lower quality. Absent coordination on carbon pricing, countries acting as a haven for pollution-intensive industries by relaxing long-standing environmental safeguards are expected to see faster employment and GDP growth.

• Some smaller countries will take over all tasks in the manufacture of a small set of goods. They tend to be those who previously contributed a substantial share to that product’s value-added; are close to large markets; and are located along the emerging Arctic trade corridor.

• Digital services trade is offsetting some of the manufacturing decline, since some countries are responding to carbon tariffs by allowing international corporate customers to download designs. For example, since tariffs have increased prices, demand for 3D-printed medical testing devices has grown.

• Some countries are growing exports of established energy efficient water technologies bred by necessity (e.g., geothermal or solar powered desalination).

• Small states are providing expertise in coping with climate shocks, including how to buy and sell weather-contingent securities.

28. Declining oil supply and overseas green investment could intensify global imbalances. Lower energy-intensity of economic growth could push oil prices down. However, production in countries using water-intensive fracking could slow, decreasing supply and increasing their trade deficits. Financial flows are slowly starting to venture beyond safe havens. This is because climate-induced risk aversion is starting to ease slightly following a few years in which natural-disaster intensity has not exceeded its early-decade peaks. For example, some investors are betting on foreign technologies that reduce water scarcity (e.g., UV disinfection of wastewater) and affect the weather (e.g., cloud seeding to induce rain).

29. Covid-30 represents a key downside risk to the outlook. The cause was quickly established. A drought in a large forest sparked wildfires, which caused rodents to flee and transmit the virus to humans. Cases are being recorded worldwide but the economic impact is uncertain. Hygiene habits preserved since Covid-19, which have reduced incidence of contagious diseases, could contain the spread. It might be straightforward to augment existing vaccines to provide Covid-30 immunity. However, the global community has fewer financial resources to fight a new pandemic than it had in the early 2020s.

Policy Challenges and Trade-Offs

30. Global cooperation can make climate tariffs less distortionary for global trade. IMF (2030) estimates that “green tariffs” have reduced energy-intensive trade considerably and, to a lesser extent, overall energy intensity, but at an unnecessarily large cost to GDP growth. Analysis suggests a broader carbon tax that covers domestic industry, including non-traded goods and services, would provide considerable additional environmental benefits. Moreover, by removing distortions and the excess burden on cross-border trade, this would undo some of the economic harm from the current policy. Global coordination can reduce special treatment for local sectors and can reduce the scope for energy-intensive havens to succeed. Established satellite monitoring technology can aid enforcement. Together with other measures being discussed, this could help meet the IPCC’s recently revised target of ‘net-zero’ emissions by 2055.

31. Countries should free up space to respond to shocks now. If there is little global appetite to provide financing or debt relief and Coivd-30 is as serious as Covid-19, which expenses must be cut? IMF (2028) shows how removing energy subsidies is good for growth, inequality, and the environment. The unexpected rise in nominal interest rates has placed further strains on public finances. Although the zero-lower-bound no longer constrains monetary policy, fiscal dominance is handicapping its ability to contain inflation.

32. Fiscal policy to mitigate and adapt to climate change risks. The increased sense of urgency prompted a policy response that has made the tradeoffs more acute than in 2021. For larger countries making the bigger contributions to global carbon emissions, how can they transition to a greener economy while mitigating the negative growth effects already caused? How can green investments be financed when there is even less fiscal space? For smaller and poorer countries particularly affected by climate change and precarious debt situations, how do they balance the need to reduce debt stocks against the need to invest in infrastructure to make growth more resilient to climate change?

33. Trade policy and structural reforms in small open economies: should they follow the lead of larger countries and impose tariffs? What are the new macroeconomic “fundamentals” needed to attract investment and mitigate the slowdown in potential growth? In particular, should countries aim to attract green investment or provide a haven for pollution-intensive industries?

34. Monetary and complementary policy in high- inflation countries: In AEs with positive output gaps, how long should they tolerate rising inflation without risking hard-won credibility? (see Box 4). For EMs, how committed should the authorities be to reducing inflation if the output-inflation sacrifice ratio is high? How heavily should external balance factor in interest rate setting?

C. 2030 Global Surveillance Report: Big Data Building Blocks

Just as the productivity gains from a big-data, 5G-fueled information wave began to taper off, last year’s hybrid “EION” attack cemented a downshift in the global economy as it hit countries with less data protection and financial regulation the hardest.

The Effects of the Hybrid Attack Linger, Hampering Growth Across Most Regions

35. After a momentous decade of declines in poverty, we find ourselves in rough waters. Countries across the globe have begun charting a course toward recovery from 2029’s catastrophic hybrid “EION” attack, which used physical and cyber means in tandem with misinformation to exploit regulatory gaps and produce a multi-front attack with global implications (see Box 1).³ Losses amounted to US$15 trillion in assets across 10 central banks that were connected via an automated algorithmic swap system; equity market declines of almost 45 percent globally; the paralysis of health systems in 46 countries; weeks-long electricity blackouts in 93 countries; and, consequently, the deaths of just under 1 million people.

36. The global economy contracted by 2 percent last year, the worst performance since 2020. The contraction was widespread, representing most regions with the lone exception of Europe, which grew at 1 percent. The outlook is negative with risks are tilted to the downside. Low growth, financial volatility, and high exchange rate pressures plague governments. Inflation, which had been slowly rising in the two years prior to the crisis, has accelerated as supply shortages and increased demand for medical services and diesel generators has ticked up. Global current account imbalances have fallen in the near-term, but in some cases, adjustment is lagging expectations. To examine potential next steps, let us map how we arrived in this precarious position.

The big-data led information revolution created many winners; Europe took a different path.

37. In the early 2020s, governments step changed their investments in the availability, access, and use of information via an expansion of 5G and big data technology to improve their Covid-19 contact tracing efforts. While initially succeeding in quickly stamping out outbreaks within and across borders (once travel restrictions were relaxed), the broader use of these technologies induced structural changes that ushered in a decade of unbridled growth, low inflation, and expanding financial inclusion across the world. However, there was an important exception; after Covid-19 was addressed, Europe stood apart from its peers by opting to re-prioritize strict regulation of individuals’ data privacy and protection over such information-led enhancements. This path kept big data small, required protracted quarantines and containment measures, and contributed to anemic but stable productivity growth for Europe.

38. Outside of Europe, two alternative data policies allowed information-led enhancements in both market-based and centralized-planning efficiency: prices fell and access increased for health and education services; agricultural yields rose; risk was more accurately priced and fueled an investment boom; and financial inclusion exploded given the greater availability of data for credit risk assessments and the proliferation of fintech companies (see Box 2 for country-specific snapshots). European investors were largely excluded from reaping direct gains from the revolution as foreign investments in ventures that violated their regulations were prohibited and its fintech industry remained relatively limited; many of the sector’s firms were wiped out by funding pressures following Covid-19 and the remaining fintech firms were heavily regulated.

39. While improvements were shared broadly amongst countries with less stringent data protection and financial regulatory environments, some boats were buoyed more than others. Across income groups, low income countries (LICs) disproportionately benefitted, gaining from increased food security, access to better education, and higher financial inclusion. Together with the associated decline in birth rates, now-dated fears about our ability to feed a global population—with increasingly sophisticated food preferences (e.g., meat)—abated and female labor force participation is rising, especially in emerging markets (EMs). Advanced economics (AEs) with aging populations, benefited from lower health care costs placing less pressure on governments’ fiscal space and allowing the elderly to work longer. Within income groups, countries where large investments took place in digital infrastructure and in key digital skills were best positioned to leverage the benefits of the revolution. While some disruptions due to displacement and reallocation of labor took place, global poverty and within-country inequality declined and real wages rose, especially for technology-proficient workers that were able to adapt and leverage new technologies more holistically than the elderly.

^{Box 5.}

The EION Attack

On August 1, 2029, a syndicate named EION (“End Illiberal Opportunism Now”) began a multi-pronged and coordinated global hybrid-attack that would last over a month and was fought on multiple fronts. The syndicate launched the attack primarily against what they saw as government overreach, but also included firms perceived to be plundering citizens’ data without compensation. The attack had both physical and cyber dimensions, including the spread of terror through misinformation. The attackers adeptly exploited vulnerabilities in our existing web of regulatory financial standards to steal an unprecedented amount of funds and data. 6 airports were also taken over and used to launch advanced military-like operations against nearby heavily-populated areas.

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The impact included:

• Hacks that deleted billions of citizens’ entire social credit scores, biometric data, and banking histories.

• Paralysis of health systems in 46 countries due to misinformation campaigns spread through social media and by the official websites of disease controls centers globally. For example, one country’s citizens were told that a flesh-eating, antibiotic-resistant bacteria was spreading in public areas. Hundreds of thousands of people presented themselves at hospitals with psychosomatic symptoms they ascribed to the false illness.

• Cyber, physical and, in some cases, armed sabotage caused weeks-long electricity blackouts in 93 countries.

• Theft of US$ 15 trillion in assets across 10 central banks (conducted using weaknesses in an automated algorithmic swap system).

• Equity market losses of almost 45 percent globally. These were largely concentrated outside of Europe, where losses were less than 9 percent.

• 976,000 deaths with almost 395,000 from an inability (or unwillingness) to access medical services during the attack.

Despite a global coalition of law enforcement and network technology experts, the specific attackers have still not been identified nor have any of the stolen assets been recovered. The intergovernmental Financial Action Task Force has launched an investigation to track down the illicit financial flows, which are thought to be hidden across 100s of cryptocurrencies and in the world’s few remaining “dark money” havens.

40. Both corporate-and government-controlled data offered paths to technological progress and government effectiveness. In some countries, most citizens tolerated a change in the social contract, temporarily relinquishing data privacy in return for better health security. Some governments in advanced economies outside of Europe leveraged this to take ownership of expanding and increasingly connected datasets, catalyzing and amplifying their use through central planning frameworks that quickly embedded new system platforms across large populations. This allowed them to overcome two sources of government failure, namely insufficient planning and an inability to monitor information in real-time. Elsewhere, technology reduced microeconomic market failures, including moral hazard and adverse selection. Still, after grappling with increased political backlash from better informed and well-resourced constituencies concerned about increasingly indiscriminate government intrusion in private activities, these governments began to shed their liberal democratic values in favor of illiberalism, leveraging their control of big data to create propaganda-heavy “thought bubbles” (i.e., synchronized and persistent but subtle pro-government message campaigns with contact points across individuals’ personal and professional lives). In several middle-income countries, the private sector coordinated to maximize the use of their databases for efficiency and profit gains. At the same time, Fintech companies proliferated drawing those in the informal sector to the formal; in AEs and EMs these companies operated as non-banks, whereas banks in LICs adopted fintech tools (see Box 3).

However, Big-Data and the Rise of Fintech Also Generated Substantial Vulnerabilities in Exposed Countries, Outweighing Their Benefits in Recent Years

41. Vulnerabilities were building in countries exposed to the information revolution. Fintech-driven credit growth and a surge in gross capital flows to these countries created pockets of asset overvaluation and imbalances. Traditional banks in non-European AEs and EMs were hit from several angles. Non-bank fintech companies proved to be fierce competition, partly because they were far less regulated. Regulators, despite their efforts and use of sandbox regulatory structures, were unable to bridge regulatory gaps across countries quickly enough. Banks also learned far too late that they were behind the curve in preparing for the effects of climate change. Changing weather patterns—especially flooding in heavily populated coastal areas with accompanying saltwater intrusion—and poorly implemented climate mitigation policies, triggered sudden drops in asset valuations, negatively impacting banks’ balance sheets. Advances in monitoring technology could have reduced climate risks, but political will was lagging. A large swath of citizenries questioned the results of elections, as major breaches became almost commonplace. Even prior to last year’s crisis, growth had begun slowing and inflation picked up as the benefits from the information revolution’s efficiency gains petered out.

42. Monetary institutions were less resilient than previously thought. Exposed countries’ central banks weathered the deflationary environment well during the early part of the last decade but addressing the volatility from structural changes in the financial sector was an unsolved conundrum. Different data ownership regimes also stymied efforts to synergize regulatory frameworks both across countries and regions. More frequent and larger data breaches and fintech failures generated idiosyncratic country-specific hits to growth, but none were systemic enough to affect global growth prospects prior to 2029. Until that point, central banks addressed such disturbances in an ad hoc, piecemeal manner. Unfortunately, EION showed how unprepared central banks’ previous actions were to shield their domestic financial sectors from a large attack and they themselves suffered great losses in their own asset holdings.

43. Fiscal space is diminutive at a time when countries need it. On the fiscal side, many authorities had engaged in procyclical spending as most assumed the gains of the information revolution would continue indefinitely. Moreover, expensive government bailouts became a feature rather than an outlier in such countries over the past few years as more fintech ventures have failed (in the poorly monitored non-banking sector in AEs and EMs and in the banking sector in LICs). While the EION attack is unrivaled due to its scale and physical footprint, the costs of previous cyber-related attacks were also increasing in recent years, despite governments having fewer resources to direct at cyber-security (including for protecting elections) in the context of limited fiscal space. Insufficient fiscal prudence also meant debt ratios declined only modestly during the boom and the crisis has increased debt to new peaks.

The Global Outlook is Overcast in the Near to Medium Term.

44. The economic and financial outlook remains negative in the near to medium term. To date, asset recovery has been unsuccessful in crisis-affected countries, leaving their central banks in a fragile state as risk premia have increased and financial markets are set to remain volatile. Banks’ and non-bank fintech’s balance sheets have been decimated and the latter sector is facing an unprecedented push for far more restrictive regulation. Prior to the crisis, gross capital outflows had already slowed outside of Europe due to moderating growth. Post-EION, flows plummeted as authorities placed emergency restrictions on cross-border transfers to prevent further losses from the attack. Only highly-vetted transactions are currently approved.

45. Migratory pressures across and within countries have intensified due to the immediate fallout from EION and concern over potential copycat attacks. The human toll from the crisis was severe and prompted a wave of still-ongoing migration toward Europe. The continent found itself both protected and vulnerable. On one hand, its data privacy regulations prevented the syndicate from stealing private financial data. On the other hand, the same regulations prevented European countries from collecting data on incoming migrant flows and their movements throughout the rest of Europe upon arrival, limiting countries’ ability to meet migrants’ needs and integrate them. In less regulated countries far from Europe, the EION crisis led to sudden and large de-urbanization; 14 percent of an EM megacity’s population has abandoned the city in the past 6 months, wreaking havoc in rural areas unprepared for this spike in demand for services, while leading to plunging real estate prices, which in turn bankrupted construction companies and led to a further round of negative asset collateral effects. Social tensions appear set to bubble over and within-country inequality is rising for the first time in over a decade as the technology-driven virtuous cycles has turned vicious. While all are suffering, it is those that were most tech-exposed that are bearing the brunt of EION’s attack.

46. With both fiscal space already limited and the monetary authorities in a weak position, staff expect growth in many regions to remain negative in the next two years, before trending toward zero thereafter. While exchange rate depreciations might have improved competitiveness in a bygone era, high policy uncertainty and muted external demand are likely to prevent this channel from fully operating. Moreover, regulators in market-based economies will struggle to reign in the private sector—used to operating with little to no oversight over its data protection processes and fintech offerings—and close regulatory gaps. On the other hand, centrally-planned governments will struggle to re-structure their massive tech-heavy and tightly-networked apparatuses.

47. The outlook is less severe for Europe, despite the increased fiscal pressures it is facing due to recent migration and its previously slow productivity growth. The region’s “steady wins the race” approach and decision to prioritize data privacy and non-economic considerations over GDP growth prevented major policy mistakes and recently has made it a safe haven for global capital flows, although they currently remain quite limited in scale (i.e., Europe also imposed emergency restrictions on cross-border transfers as it also concerned that its financial system will be used for money-laundering purposes by the EION or other groups). The EION syndicate shielded Europe from its attack. The rest of the world is now looking to Europe for both lessons and leadership. Its regulatory and private sector have leapt at the opportunity to sell knowledge on how the region protected itself from previous attacks; the contribution of Europe’s cyber-security sector to GDP rose 18 percent since Q3 2029. Once crisis-affected countries stabilize and the international monetary system re-sets, stronger capital inflows are expected. Staff expect the region’s potential output to rise and for growth to reach 2.5 percent in the medium term.

Policy Challenges and Trade-Offs

48. Looking forward, all crisis-affected countries will face challenges and large policy trade-offs as they seek to: re-set the international monetary system by gradually reducing emergency restrictions; re-establish central banks’ ability to operate without threat of major data breaches and attacks (in parallel, central banks should balance the need to restore their assets with supporting price stability and recovery); prudently use fiscal space, where available, to address vulnerable populations’ needs; and repair banks’ balance sheets through careful re-structuring.

In crisis-affected economies where the private sector owns the data:

• Financial vulnerabilities in the private sector (especially, fintech) could be better understood and ring-fenced by appropriate regulation. However, regulation should not be overly burdensome as the key to reigniting growth may come from allowing some risk. Will kneejerk regulation prevent the next productivity game-changer?

• The private sector has already begun extensive efforts to re-collect lost data and establish better back-up storage mechanisms and governments could consider how they might support such efforts (e.g., by supplementing private data with archived birth and death records). In doing so, governments must also prioritize transparency in sharing what will be provided to private firms, allowing individuals to opt-out (i.e., go off the grid) if they so desire.

In crisis-affected economies where government owns the data:

• The large and tightly-networked nature of service delivery remains highly vulnerable to additional syndicate attacks. Networks might be reorganized into “pods” so that future attacks have a greater chance of being stopped before reaching the full network. Building in these circuit breakers may reduce productivity but increase the sustainability of the system.

• Governments might consider whether there is a need to re-collect lost data. While individuals’ data were lost, the system settings, algorithmic-automated processes, and aggregate migration data were not. Avoiding such a process would free up fiscal room to address more pressing issues (e.g., de-urbanization).

49. In Europe, the authorities will need to grapple with how to monitor and manage capital inflows once restrictions are lifted (i.e., systemic vulnerabilities might develop). Countries might also identify priority infrastructure needs to maximize the productivity gains from the shift in investment towards the region. Moreover, after a decade of out migration, policymakers will need to help populations navigate the sudden influx of new migrants in parallel with promoting a rapid integration process for migrants (e.g., by providing targeted social transfers). The ”Better. Together” campaign of a small European country serves as a best-in-class example.

50. At a global level, closing still-present gaps across cybersecurity and fintech regulatory sandboxes should be a priority. Those responsible for EION, and others like them, are working hard to construct a similarly lucrative and harmful attack; we must work harder. At first glance, the resulting landscape may appear more restrained as more systems of checks, balances, and firewalls are put in place, but in the medium-term countries will be far more resilient.