How International Financial Institutions (IFIs) can help countries navigate economic challenges
The world’s economic future hinges on the actions that governments worldwide are undertaking today. In this interview, Economy Middle East speaks to Dr. Mahmoud Mohieldin, executive director at the International Monetary Fund (IMF) to discuss the complexities that the global economy faces. These include the resurgence of protectionism, the challenges posed by inflation and the critical importance of sustainability and digitalization.
An economist with over 30 years of experience in international finance and development, Dr. Mahmoud Mohieldin also explores the pivotal role of IFIs in helping countries overcome these headwinds; and in fostering financial and economic inclusion, especially in the Middle East region.
What major economic trends do you believe will shape the global economy in the coming years?
In the coming years, the global economy is likely to be shaped by several major economic trends, many of them intertwined with others, presenting a complex landscape for nations and businesses alike.
Volatile and increasingly difficult geopolitical conditions are prompting a return to protectionist policies and agendas. This is resulting in increased fragmentation and polarization likely to define the global economic environment in the coming years. Nations are becoming more inclined to prioritize their interests and to capture as much value as possible from new innovations while keeping them out of anyone else’s hands. This shift disrupts trade patterns and investment flows, compelling countries and companies to reassess their strategies and operational models.
One way we observe this development is the resurgence of “industrial policies”, as seen in the U.S.’ new Inflation Reduction Act, its CHIPS Act and its new Infrastructure law. These laws are unlocking upwards of $2 trillion in investments. The European Union is adopting similar policies to boost competitiveness, and other large nations and economic clusters are following suit. By the numbers, one can observe that since 2010, trade openness, measured as the sum of imports and exports worldwide, has remained stagnant at just shy of 60 percent of global GDP. Research on output loss from trade fragmentation estimates a long-term loss of 2 percent of global GDP due to fragmentation.
Following the compounded effects of the COVID-19 pandemic and the Ukraine war, the interplay between inflation and interest rate policies, and the high likelihood of persistently higher interest rates than pre-COVID will be one key trend in the coming years. Central banks in developing and advanced economies alike are grappling with the challenge of managing inflation while trying not to hamper growth in the process. Thus, inflation is hitting record figures in many places across the world over the past two years, reaching 8.5 percent and 27.9 percent in advanced economies and EMDEs respectively in 2022. The policies central banks adopt from this point onwards, particularly regarding interest rates, will have far-reaching effects. Moreover, the interest rate policies of the advanced economies, as we have already observed over the past two years, will drastically affect developing economies around the world.
Rampant inflation has been troublesome in and of itself but has also put brakes on global economic growth. Many economies could experience slower growth, which could exacerbate existing economic and social issues. This will make it more difficult for countries to address unemployment, inequality, and other challenges. Further adding to these burdens are exorbitantly high debt levels threatening economic stability in many parts of the world and creating a bottleneck for countries, specifically developing economies, to fulfill development and climate action goals.
Developing economies now owe upwards of 30 percent of total public debt globally. Moreover, their public debt stock has risen by upwards of 300 percent since 2010. The recent unraveling of the COVID-19 pandemic and the Ukraine War has both contributed to developing economies accumulating more debt. It has pushed many of the world’s highly indebted developing economies into severe distress, leading in part to the IMF’s new record amount of disbursed funding.
In the midst of these disruptions, sustainability and digitalization will be forces of change. On the one hand, the push toward sustainability is accelerating and is increasingly present and urgent as climate change continues to worsen, perhaps even exponentially. It now presents a much bigger threat to our economies and societies. The past few years have thus come with a greater emphasis on green finance, sustainable business practices, and the transition to a low-carbon economy.
On the other hand, digitalization continues to transform industries, labor markets and everyday life, driving innovation and raising questions about privacy, security and the digital divide. The burgeoning rise of AI is one we’ve yet to understand its magnitude fully. Still, we can assert with certainty now that AI will likely be the largest productivity catalyst of our time. That said, it still comes with its dangers and risks that we need to be aware of.
Finally, demographic challenges will significantly impact economic dynamics. Many countries are facing a youth bulge, with many young people entering the job market without sufficient employment opportunities, mostly in large developing economies. Conversely, more advanced countries deal with aging populations and rapidly falling birth rates. These demographic shifts are playing a key role in shifting centers of economic gravity to new hotspots. Hence, this requires rethinking how we approach our collective goals and problems globally.
How can IFIs best help countries navigate these trends?
Many of the challenges and problems the world faces today, such as climate change, the sustainability challenge or AI, can be thought of as global public goods or bads. Thus, with challenges of a global nature, global action is a must to address them. This highlights the need for strong and concerted action through the many multilateral institutions we know today represented in the United Nations, the Bretton Woods Institutions in the World Bank and the IMF, and the regional development banks.
That said, these institutions were created many decades ago under a markedly different global order with different centers of political and economic gravity that are shifting eastwards today. The capacity of these institutions has also not matched the capacity, the scale and scope of what is needed of them, specifically concerning newer global challenges such as climate change. The representation of “Global South” countries within the multilateral institutions is lackluster, despite these countries representing more of the global economy and the world’s population.
The multilateral institutions we have today thus need to evolve and develop to match the needs of the present and the future. This evolution would need to primarily come with much-enhanced financing and funding capacities for the multilateral institutions. Moreover, the is a need for a more permeable and equitable process of knowledge sharing and technical assistance. Furthermore, a stronger convening capacity on a regional and international level to catalyze stronger action is crucial.
In light of current global challenges, what strategies do the IFIs, including the IMF, advocate to enhance global economic stability?
IFIs should advocate for a series of strategies to enhance global economic stability, the cornerstone of which should be building resilience against shocks, underscoring that stability does not imply stagnation but rather the ability to invest in policies and institutions that enable countries to withstand and recover from internal and external disturbances.
To achieve this, IFIs need to emphasize the importance of investing adequately in developing robust policies and institutions. Moreover, they need to be mindful of the importance of the provision of timely and adequate support, both technical and financial. This support must be based on countries’ specific demands and needs, acknowledging that a one-size-fits-all solution is often ineffective. This granularity of analysis and tailoring of support are areas where IFIs can improve as they evolve to meet the growing challenges of today.
Another key strategy is the proactive sharing of early warnings regarding potential threats to economic stability. Past precedents of delays in sharing such information have sometimes compromised efforts toward building resilience. IFIs, therefore, should improve their communication and information-sharing mechanisms, ensuring that countries receive ample warnings of potential threats in advance. Finally, the localization of efforts is as essential for enhancing the impact of IFIs. By localizing their scope of work, IFIs can ensure that their interventions are meaningful at the local level, thereby contributing to the overall goal of enhancing global economic stability.
How can IFIs, including the IMF, support countries in addressing climate challenges?
IFIs are pivotal in supporting countries in navigating and addressing the myriad challenges posed by climate change. Recognizing the scale and complexity of these challenges, the approach to climate action is multifaceted. Nobel Prize Laureate Esther Duflo puts forth three key areas of action to address the crisis: finance, technology research and development (R&D), capacity development, and the structuring of incentives to induce behavioral change.
On the finance front, IFIs can play a crucial role by mobilizing and augmenting resources to fund climate change mitigation and adaptation initiatives. This involves providing direct financial support and facilitating access to international climate finance mechanisms for countries, especially those most vulnerable to climate impacts. By offering financial assistance and leveraging additional funding through partnerships with the private sector, IFIs can help close the significant funding gap that currently exists in climate finance. This is of immense importance when we factor in that EMDEs, excluding China, need $2.4 trillion per year until 2030 for climate action needs. Today, the total global flows of climate finance are $1.27 trillion.
In the realm of technology R&D and capacity development, IFIs support the innovation and dissemination of climate-smart technologies. This is possible through investments in R&D activities, sharing of best practices, and building partnerships that connect countries with leading technology providers. Furthermore, IFIs can assist in building the necessary institutional capacity and human capital to implement and sustain these technologies, thereby enhancing countries’ resilience to climate change.
Lastly, the creation of effective incentive structures is essential for inducing behavioral change among individuals, businesses, and governments. IFIs can support the development and implementation of policy frameworks that incentivize low-carbon investments, sustainable land use, and energy efficiency, among other practices. This may involve technical assistance for policy design, support for carbon pricing mechanisms, and promoting subsidies and financial products that encourage more sustainable behaviors.
With the rapid advancement of technology, how are the IFIs guiding policies to ensure both innovation and economic stability and progress?
IFIs are increasingly cognizant of the pivotal role of technology in shaping the future of our economies. As digital transformation accelerates, IFIs are guiding policies that aim to harness the benefits of technological advancements while ensuring that these developments are contained within guard rails to minimize their risks. Two key areas of focus in this effort are the development of a Readiness Index for countries to capture the value of digital transformation and dedicated work on AI to better understand its potential and the possible threats that come with it.
The IMF AI Preparedness Index, for example, measures how prepared countries are to embrace digital transformation and AI. It evaluates various factors such as infrastructure, regulatory environments, skills, and innovation ecosystems. The Index provides valuable insights into the capabilities and readiness of countries to leverage digital technologies for economic growth and development. It can then measure that against how exposed they are to AI. This tool aims to help policymakers identify areas requiring investment and improvement. This ensures that the digital revolution benefits are equally distributed and contribute to overall economic progress. One observation on that note is that a positive correlation exists between preparedness and exposure. Hence, advanced economies are more prepared to capture the value of AI and are more exposed in terms of labor market exposure and vice versa.
Furthermore, the work on AI by IFIs underscores the importance of understanding and integrating AI technologies in ways that promote economic stability and inclusivity. Through research and policy guidance, IFIs are exploring how AI can optimize economic policies, enhance public services, and drive innovation. This includes examining the implications of AI on labor markets, privacy, ethics, and governance, ensuring that the deployment of AI technologies aligns with broader economic objectives and societal well-being.
In guiding these policies, IFIs are acting on the principle that innovation should not only drive economic growth but also contribute to solving pressing global challenges. By focusing on readiness for digital transformation and the responsible use of AI, IFIs aim to create a framework where technology serves as a catalyst for sustainable and inclusive economic progress. Through these efforts, IFIs provide a roadmap for countries to navigate the complexities of the digital age. This ensures that technological advances contribute to a stable, prosperous, and equitable global economy.
In what ways are the IFIs promoting financial and economic inclusion, especially in the Middle East?
IFIs are increasingly focusing on promoting financial and economic inclusion, with a special emphasis on developing regions. This focus is rooted in the understanding that macroeconomic stability and financial inclusion are deeply interconnected and that the former is a prerequisite for the latter. A sound and efficient financial sector is fundamental for achieving substantial financial inclusion.
Firstly, the development of markets and regulatory frameworks is essential. This includes the formulation and implementation of fintech strategies, which serve as a cornerstone for modernizing financial services and making them accessible to broader segments of the population. However, the mere introduction of fintech is not sufficient. The regulatory environment “reg-tech” must evolve alongside these technological advances. This ensures that innovations in the financial sector are harnessed for the good of economic inclusion, mitigating potential risks associated with rapid technological advancements.
Government involvement, or “gov-tech,” is also crucial in this process. By integrating technology into government operations, public entities can lead by example in adopting inclusive financial technologies. This not only enhances the efficiency of government services but also encourages the private sector to follow suit, thereby broadening the impact of financial inclusion initiatives.
Lastly, societal adaptation is the most critical link in this story. The benefits of fintech and the broader objectives of financial inclusion can only be fully realized if society is equipped to engage with these technologies effectively. This involves a combination of education, awareness and the development of a supportive digital infrastructure that ensures equitable access to financial services.
About Dr. Mahmoud Mohieldin
Dr. Mahmoud Mohieldin serves as an executive director at the International Monetary Fund (IMF). Before joining the IMF, Dr. Mahmoud Mohieldin served as the senior vice president for the 2030 Development Agenda, United Nations Relations, and Partnerships in the World Bank Group until January 2020.
Dr. Mahmoud Mohieldin also held numerous senior positions in the government of Egypt. This includes the minister of investment from 2004 until 2010. Dr. Mahmoud Mohieldin also served on several boards of directors, including the Central Bank of Egypt and the banking and corporate sector. Moreover, Dr. Mahmoud Mohieldin was a member of the Commission on Growth and Development and selected a Young Global Leader of the World Economic Forum.
Dr. Mahmoud Mohieldin is a professor of economics and finance at Cairo University, an honorary professor at Durham University and a member of the Advisory Board of the Durham Business School. He also held leading positions in national and regional research centers and think tanks. Dr. Mahmoud Mohieldin has authored numerous publications and articles in leading journals in the fields of international finance, economics, and development in English and Arabic.
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