JUNE 2022 Prasad on dollar dominance P.12 The sanctions weapon P.20 Chetty on equality of opportunity P.38 FINANCE AND DEVELOPMENT Geoeconomic Puzzle Policymaking in a More Fragmented World I N T E R N A T I O N A L M O N E T A R Y F U N D Contents If geopolitical tectonic plates start drifting apart, we’ll need more bridges, not fewer. 4 4 A MORE FRAGMENTED WORLD 4 Confronting a Perfect Long Storm 20 The Sanctions Weapon To address the world’s most pressing problems, Economic sanctions deliver bigger global shocks we must bridge emerging divides and scale up than ever before and are easier to evade investment in the common goods Nicholas Mulder Tharman Shanmugaratnam 24 Will Inflation Remain High? 10 Shifting Geopolitical Tectonic Plates Much depends on the shocks to the economy and A more fragmented world will need the IMF more, how central banks respond not less Ruchir Agarwal and Miles Kimball Pierre-Olivier Gourinchas 32 Economics of Persuasion in Peace 12 Enduring Preeminence and War The US dollar might slip, but it will continue to rule The rise of mobile broadband and advances in social Eswar Prasad media are reshaping how war is fought Sergei Guriev 16 Turbulence and the Lessons of History 56 New Energy Imperative Opportunities are born of crisis, but the lines that Russia’s invasion of Ukraine highlights connect them are far from direct the crisis and opportunity of the energy transition Patricia Clavin Gernot Wagner Subscribe at www.imfbookstore.org/f&d Read at www.imf.org/fandd Connect at facebook.com/FinanceandDevelopment FINANCE & DEVELOPMENT A Quarterly Publication of the International Monetary Fund June 2022 | Volume 59 | Number 2 DEPARTMENTS 28 Picture This The Global Food Crisis Three compounding crises—conflict, COVID, and climate change—are giving rise to another: hunger Andrew Stanley 30 Café Economics Investing in Refugees Giovanni Peri says that Ukrainian migrants can potentially be assets, not burdens, to their new home bases 34 People in Economics Going the Distance Chris Wellisz profiles Harvard’s Melissa Dell, who pioneers new ways of unmasking legacies of the past 38 54 Back to Basics The Stretch of Supply Chains ALSO IN THIS ISSUE The pandemic has reignited debate over global assembly lines that stretch around the world 38 Ensuring the American Dream Diego A. Cerdeiro and Niels-Jakob H. Hansen Targeting programs during childhood is the best way to increase upward economic mobility 59 Book Review Raj Chetty and Nathaniel Hendren Oceans of Grain: How American Wheat Remade the World, Scott Reynolds Nelson 42 COVID-19 and Trust among the Young Mishandled public health and other disasters erode 60 Currency Notes young people’s trust in politicians for years Empowering Creators Cevat Aksoy, Barry Eichengreen, and Orkun Saka NFTs have opened up a potentially lucrative new world for artists in developing economies 46 What the Pandemic Taught Educators Analisa R. Bala Creative remote education can make up for learning lost during school disruptions Noam Angrist 50 The Basic Skills Gap Meeting the SDGs is impossible without global universal basic skills, still a faraway goal Eric A. Hanushek and Ludger Woessmann 46 34 June 2022 | FINANCE & DEVELOPMENT 1 EDITOR'S LETTER FINANCE & DEVELOPMENT A Quarterly Publication of the International Monetary Fund EDITOR-IN-CHIEF: Gita Bhatt MANAGING EDITOR: Maureen Burke DEPUTY MANAGING EDITOR: A More Peter Walker SENIOR EDITORS: Analisa R. Bala Fragmented Nicholas Owen ASSISTANT EDITOR: World Andrew Stanley DIGITAL AND CREATIVE EDITOR Rose Kouwenhoven THE RARE CONFLUENCE of geopolitical, economic, and technological forces now WEB EDITOR: Rekia Ennaboulssi confronting the world may reverberate for generations. The war is thrusting us into a fraught period of geopolitical realignment, supply disruptions, food PRODUCTION MANAGER: Melinda Weir and energy insecurity, and more volatile financial markets. These shocks could COPY EDITOR: shake social and political stability in some countries while weakening the Lucy Morales world’s ability to confront its foremost long-term challenge, climate change. ADVISORS TO THE EDITOR: The IMF’s Pierre-Olivier Gourinchas describes a sudden geopolitical shift Ruchir Agarwal Rupa Duttagupta that reveals hidden fault lines. He warns of a world fragmenting into “distinct Bernardin Akitoby Hamid Faruqee economic blocs with different ideologies, political systems, technology standards, Celine Allard Davide Furceri cross-border payment and trade systems, and reserve currencies.” Steven Barnett Kenneth Kang Helge Berger Subir Lall With this issue we convene respected thought leaders to help us understand S. Pelin Berkman Raphael Lam these trends—all playing out amid a slowing global recovery, rising inflation, Oya Celasun Papa N’Diaye and shrinking policymaking space—and how we can best respond. Martin Čihák Mahvash Qureshi Alfredo Cuevas Uma Ramakrishnan The war in Ukraine poses the most immediate risk. Nicholas Mulder argues Era Dabla-Norris Daria Zakharova that sanctions against Russia have unprecedented consequences that should Mame Astou Diouf prompt a rethink of their use as a weapon of economic warfare. Giovanni © 2022 by the International Monetary Fund. All rights reserved. Peri discusses the economic impact of refugees fleeing Ukraine. “Picture This” For permission to reproduce any F&D content, submit a request depicts the food crisis that threatens millions with hunger. Other contributors via online form (www.imf.org/external/terms.htm) or by e-mail see soaring war-induced energy prices as a chance to spur the transition to to [email protected]. Permission for commercial purposes also available from the Copyright Clearance Center green energy. And while some predict that geopolitical competition and new (www.copyright.com) for a nominal fee. technologies will end the dollar’s dominance of international finance, Eswar Opinions expressed in articles and other materials are those of Prasad argues the opposite: it will become more entrenched as the global the authors; they do not necessarily reflect IMF policy. go-to currency. Subscriber services, changes of address, and A more fragmented world, says Singapore’s Tharman Shanmugaratnam, advertising inquiries: makes greater investment in global public goods even more urgent—and IMF Publication Services Finance & Development will require unprecedented public-private collaboration and a stronger, more PO Box 92780 effective multilateralism. Washington, DC 20090, USA There is hope. As historian Patricia Clavin reminds us, turbulent times can Telephone: (202) 623-7430 Fax: (202) 623-7201 energize actors and ideas that can lead to better modes of cooperation. The E-mail: [email protected] overriding priority, says Shanmugaratnam, is to “accommodate a multipolar Postmaster: send changes of address to Finance & Development, world without becoming more polarized.” International Monetary Fund, PO Box 92780, Washington, DC 20090, USA. GITA BHATT, editor-in-chief The English e dition is printed at Dartmouth Printing Company, Hanover, NH. Finance & Development is published quarterly by the International Monetary Fund, 700 19th Street NW, Washington, DC ON THE COVER 20431, in English, Arabic, Chinese, French, Russian, and Spanish. Illustrator Peter Reynolds’ cover calls to mind the complexity of policymaking in English edition ISSN 0145-1707 today’s more polarized and fragmented world—a topic that our June 2022 issue explores in depth. 2 FINANCE & DEVELOPMENT | June 2022 CONFRONTING A PERFECT LONG STORM 4 FINANCE & DEVELOPMENT | June 2022 CONFRONTING A PERFECT LONG STORM To address the world’s most pressing problems, we must bridge emerging divides and scale up investment in the common goods Tharman Shanmugaratnam NOLDS ART: PETER REY June 2022 | FINANCE & DEVELOPMENT 5 T he pandemic, war in Ukraine, the threat to food living will demoralize populations that are now security, and the resurgence of global poverty. much older than they were in the 1970s, when Heatwaves, droughts, and other extreme weather the advanced economies saw their last episode events. These are not random shocks. Nor are they of high inflation. a perfect storm in the conventional sense, a one-off conjuncture of bad events. We face instead a conflu- Flying blind ence of lasting structural insecurities—geopolitical, Third, the existential commons are deteriorating economic, and existential—each reinforcing the at an accelerating pace. Climate change, shrinking other. We have entered a perfect long storm. biodiversity, water scarcity, polluted oceans, a dan- We cannot wish away these insecurities or hope gerously congested outer space, and the spread of that problems that occupy one part of the world infectious diseases will pose growing threats to life will not rebound on others. COVID-19 and its and livelihoods everywhere. We must address these repeated mutations have brought that reality home, threats in parallel because the science is clear on at immense human and economic cost everywhere. how they interact. Global warming and a degraded We can only restore optimism by recognizing the biosphere are leading to major shifts in animal life, gravity and collective nature of the threats we face and with countless new and re-emergent pathogens organizing ourselves more effectively to address them. hopping between species and into human com- First, the risk of escalating geopolitical conflict munities. Recurring pandemics are already baked is greater than it has been in over three decades. into the system. Two years into COVID-19, the The system of global rules and norms aimed at world is still flying blind into the next pandemic. preserving peace and the territorial integrity of Scientists warn that it could come at any time and nation states was always fragile. But the unpro- be even more lethal. voked invasion of Ukraine is not just another The unpalatable short-term reality is that the rupture in the system. Its ramifications go beyond world will have to rely more on fossil fuels, includ- any other, and in ways that could be catastrophic. ing even coal, to ensure energy security and prevent Second, we face the prospect of stagflation, with sharply higher energy prices. But it also means higher inflation and stalled growth for a period of we must redouble efforts to make the long-term time. What was seen by many as an improbable “tail transition to a low-carbon energy future. We need risk” a year ago is now a likely scenario. Advanced clear policy frameworks—including predictable economies’ central banks have a more complex task schedules for carbon pricing and fossil fuel subsidy than any time in living memory, and their chances phase-outs, and direct assistance to vulnerable of taming inflation while achieving a soft landing groups—to achieve this critical transition while in economic growth are getting slimmer. The task preserving energy security. is made more difficult by the war in Ukraine and Fourth, we must confront the risk of growing the disruptions it has brought to energy, food, and divergences, within and especially across coun- other critical commodity markets. tries. Higher prices of basic foods, livestock feed, When the history of the decade is written, fertilizer, and energy are taking the biggest toll on inflation in the advanced economies is unlikely to poorer countries, which are already the hardest hit be viewed as its most serious problem—certainly by extreme weather events—and especially on the not compared with the implications of distress in poorest in their populations. Their governments the developing world or a weakened international have little fiscal capacity to offset these shocks. order. But prolonged high inflation will seriously More than half of them are already in or near erode the political capital needed for nations to debt distress. Faced with these immediate con- respond to our larger challenges, domestically straints, we risk continued neglect of education and globally, including the climate crisis. It can and healthcare improvements, with dangerous set the world back in ways that economic models longer-term and global consequences. Even before cannot predict. Notably, an escalating cost of COVID-19, more than half of the children in 6 FINANCE & DEVELOPMENT | June 2022 A MORE FRAGMENTED WORLD low- and middle-income countries had not achieved share of government revenues. Governments in basic literacy by age 10; the figure is now estimated the advanced world have also declared the end of to be as high as 70 percent. Girls especially have the “peace dividend” that had prompted many of suffered large learning losses during the pandemic, them to spend less on defense over several decades. with many not returning to school and millions We must now reorient public finance, in part- being pushed into early marriage. nership with philanthropic capital where possible, There is now a real prospect of rollback of the toward mobilizing private investment to meet hard-earned economic and social gains that many the needs of the global commons. The world will of these developing countries made in the last two need to invest an estimated $100 to $150 trillion decades. It will risk permanent scarring of the young, further disempowerment of women, civil wars, and conflicts between neighboring states. We must bring preparedness Each of these would make it harder to address the world’s most pressing challenges. for threats, known Financing global public goods or unknown, into the We must address these threats, not on the basis of scenarios that reflect our hopes but through a mainstream of public policy realistic appraisal of what could plausibly go wrong. COVID-19 and the Ukraine war were not black and collective thinking. swan events. The full scale of these tragedies may not have been foreseen, but the risks had been blinking visibly on the radar for some time. over the next 30 years to achieve net zero carbon We must bring preparedness for threats, known emissions. That may sound daunting. But the $3 or unknown, into the mainstream of public policy to $5 trillion annual cost is not a large percentage and collective thinking, just as regulators learned of the world’s $100 trillion capital markets, which from the global financial crisis and sought to for- grow by about that amount each year. tify financial buffers in advance of the next crisis. There is no lack of private and market finance. We have to invest at significantly higher levels, But channeling it to meet the needs of the commons over a sustained period, in the public goods needed requires a proactive public sector and well-designed to address the world’s most pressing problems. We frameworks for risk-sharing with the private sector. must make up for many years of underinvestment Policies and standards to rapidly scale up the deploy- in a wide range of critical areas—from clean water ment of clean energy technologies that are already and trained teachers in developing economies to proven, and to incentivize large scale infrastruc- upgrades of an aging logistics infrastructure in tural investments such as in smart transmission some of the most advanced economies. But we also and distribution grids, will be critical to achieving have the opportunity now to spur a new wave of significant cuts in emissions by 2030. However, innovations to tackle the challenges of the global almost half the technologies needed to reach net commons, from low-carbon construction materials, zero by mid-century are still being prototyped. to advanced batteries and hydrogen electrolyzers, Governments must put skin in the game to leverage to combination vaccines aimed at protecting simul- private sector R&D, and promote demonstration taneously against a range of pathogens. projects, to accelerate the development of these To fund these investments we must embark technologies and bring them to market. Besides on public-private collaboration on a scale never getting to net zero on time, they should aim to before adopted. Public sector finances will not spur major new industries and job opportunities. be able to meet these needs on their own. As it The social returns to protecting the global is, debt-servicing costs will take an increasing commons will typically be far in excess of the June 2022 | FINANCE & DEVELOPMENT 7 We cannot address the challenges of this new era without a more effective multilateralism. private returns, which makes a strong case for the reflects political myopia and financial imprudence, public sector to share risks with private investors. which we must overcome urgently. Developing and producing vaccines at scale for the next pandemic is a strong illustration of the point. Updating Bretton Woods A project to immunize the world’s population even Second, we must repurpose the Bretton Woods six months earlier will save trillions of dollars and institutions. The IMF and World Bank were set up countless lives. almost 80 years ago to help with problems faced by countries individually, at a time when financial Making multilateralism work markets were mostly small and not interconnected. However, we cannot address the challenges of this Their missions must be brought up to date for an new era without a more effective multilateralism. era where financial crises are often global in nature, UN Secretary-General António Guterres’ report, and where the deterioration of the global commons Our Common Agenda, sets out a bold and credible will pose an increasing economic challenge to all vision of multilateralism: one that is more inclusive countries, most especially in the developing world. of different voices, more tightly networked, as well The IMF and World Bank must be better as more effective in delivering outcomes and hence resourced and empowered by their sharehold- more trusted. ers to make larger and swifter interventions in It does not require a root and branch reconstruc- this new global era. The IMF must be given the tion of multilateralism or building entirely new mandate to manage a stronger and more effec- institutions. But we have to move with urgency to tive global financial safety net, more akin to how reorient existing institutions for a new era, devise the leading central banks inject stability at home new mechanisms for networked cooperation among when a crisis hits. The global commons must be the multilaterals and other institutions including placed at the core of the World Bank’s mandate, non-state players, and pool resources in ways that together with poverty alleviation. It must also play can meet both nations’ collective interests and a much bolder role as a multiplier of development self-interests more effectively. finance. It must pivot more boldly toward mobi- First, we need new thinking on the global com- lizing private capital, using risk guarantees and mons. We must view money spent on strengthening other credit-enhancement tools rather than direct them not as aid to the rest of the world but as an lending on its own balance sheet. The World Bank investment that benefits nations both rich and and IMF must also work to join up operations with poor many times over. As the G20 High Level other international financial institutions and devel- Independent Panel on financing pandemic security opment partners to overcome today’s fragmented showed, the additional international investment efforts, build convergence around core standards required to plug major global gaps in preparedness, such as on debt sustainability and procurement, with contributions fairly distributed across coun- and achieve greater development impact. tries, will not only be affordable for all but also Third, we have to safeguard the digital commons. enable us to avoid costs that would be several hun- The positive agenda is clear. We must build the dred times larger if we fail to act together to prevent infrastructure and policy frameworks needed to another pandemic. The longstanding aversion to close the digital divide and make serious efforts to collective investment in pandemic preparedness close digital literacy gaps in every society. But we 8 FINANCE & DEVELOPMENT | June 2022