2019 Global Economic Outlook: World Bank Report

The World Bank released its 2019 Global Economy Outlook in January this year. In this post I try to highlight the key facts and information from their press released and patially from the report as well.

Global Summary

  • International trade and manufacturing activity have slowed down.
  • Intensifying trade tensions could result in even weaker global growth and disrupt global interconnected value chains.
  • Borrowing costs for emerging and developing economies have increased.
  • Uprising in commodity exporters has stagnated and activity in commodity importers is decelerating.
    • Energy prices have fluctuated, mainly due to supply factors.
    • Other commodity prices have also weakened – particularly metals – posing further challenges to commodity exporters.
  • Past increases in public and private debt could heighten vulnerability to swings in financing conditions.
    • Debt vulnerability (debt-to-GDP ratio) is rising in low-income countries.
  • Maintaining low global inflation may become a challenge as long-term factors that helped reduce inflation in past decades may lose momentum.
East Asia and Pacific remains one of the world’s fastest developing regions. Regional growth expected at 6% in 2019.
  • China 6.2%
  • Indonesia 5.2%
  • Thailand 3.8%
Europe and Central Asia. Financial stress in Turkey is weightening down regional growth, expected at 2.3% in 2019.
  • Turkey 1.6% (due to high inflation, high interest rates and low market confidence)
  • Poland 4%
Latin America and Caribbean. Regional growth is expected at 1.7% in 2019.
  • Brasil 2.2% (assuming fiscal reform is quickly put in place).
  • Mexico 2%
  • Argentina -1.7% (as deep fiscal consolidation leads to loss of employment and reduced consumption and investment)
Middle East and North Africa. Regional growth expected to rise to 1.9% in 2019. Domestic factors such as policy reforms are promoting growth in the region. Oil exporters expected to pick up slightly and GCC countries expected to grow 2.6%.
  • Iran -3.6% (due to sanctions)
  • Algeria 2.3%
  • Egypt 5.6% (as investments is supported by reforms and consumption picks up)
South Asia. Regional growth expected to accelerate tp 7.1% in 2019, by strenghtening investment and robust consumption.
  • India 7.3%
  • Pakistan 3.7%
  • Sri Lanka 4%
  • Nepal 5.9%
Sub-Saharan Africa. Regional growth expected to accelerate to 3.4% due to diminished policy uncertainty.
  • Nigeria 2.2% (assuming that oil production will recover)
  • Angola 2.9% (assuming that oil sector recovers)
  • South Africa 1.3% due to constraints on domestic demand and unlimited government spending.

The United States remains stable due to fiscal stimulus and better than expected domestic deman, with GDP growth projected at 2.9% in 2019. Growth in the European Union, on the other hand, is weaker than expected at 1.6%, due to slowing exports and as monetary stimulus is withdrawn.

Source: World Bank Press Release

[Podcast] Christine Lagarde’s call for action – IMF World Economic Outlook

In today’s podcast we are going to be speaking about the IMF World Economic Outlook, which is a publication that was release by the International Monetary Fund in October of 2018. I actually want to focus this conversation a little more on the press conference that was delivered in the World Economic Forum on January 21st of 2019, where a panel was held with directors of the IMF – the Managing Director Christine Lagarde, she is very well known, but she also had the support of an economic counselor, who is the director of their research department, in order to deliver the sort of information that we are going to review today. What I think was very interesting – the highlight of this study, of course – will be Lagarde’s message because she introduced us to the study. She gave us an overview of what is actually happening in the global economy. But she had a very strong call for action and, of course, when that comes from Christine Lagarde I think that we need to focus and pay attention. She is a powerful woman, she is running the IMF, and it was very interesting to see her out there and deliver this message.

In the beginning she tried to make this analogy between cross-country skiing with the global economy. It was quite interesting, it was kind of cute to see her – such a powerful woman – come down and say: “here,” – in a very educational manner – “this is what we expect from the economic environment. We want predictability, less risk. We want things to run smoothly, just kind of like cross-country skiing”, which is a personal practice. So that was quite interesting.

But Lagarde did not have a very exciting message to tell us. She actually had some unfortunate news for the global economic environment. She told us, here, we have to deliver this message that we are downgrading the growth forecast since october 2018, because risks are on the rise and we have some bad news on the trading front, so we have some threats in the trading environment which is sort of escalating all sorts of problems and risks in the global economy and for that reason they had to announce a further downward revision of the forecast that was published in October. This is pretty much because of the significantly higher risks.

Higher trade tariffs and rising uncertainty over future trade policies. That is a big issue that is one of the key sources of global economic risks. Lower asset prices, higher market volatility, which these three combined are tightening financing conditions and that is including for advanced economies. And this is in a scenario of high debt burden in both private and public sectors are carrying a high debt load right now.

But she does give us the message that we are not facing a global recession right around the corner. This does not mean that a major downturn is happening. But what is happening is that a sharper decline in global economic growth is happening, there are many issues, including geopolitical worries as well.

But she says that this scenario actually shows us a very clear message for policy-makers. One is that they need to address remaining vulnerabilities. And two, is that they need to be ready if a serious slow down were actually to materialize. So, if a recession is actually to materialize, policy-makers need to be ready. Third message is that policy-makers need to harness existing growth momentum, and she is very emphatic. She says, yes, there is growth momentum, so we need to take advantage of that and harness these sorts of opportunities.

Policy-makers also need to work on reducing high government debt, and she is making a point here that this opens space to fight future downturn in the global economy. So, economies need to be ready if that comes to take place.

As far as monetary policy, they should be data dependent and exchange rates should be allowed as shock absorbers, and I thought that that was kind of interesting because of the whole conversation behind exchange rate manipulation. Next message is about economic reforms. They need to be in place in order to push growth, specially in labour markets and infrastructure investments.

So, these were the messages that she believes that this risky scenario is showing us. But she also makes a point in saying that if we must deliver the promise of the digital revolution, it has to be inclusive to all people, including measures to help workers that are displaced because of the automation of work, and we also need to create opportunities for women and young people.

She has a very important point here on International Cooperation. She said that for efficient and effective collaboration in the international system we have to increase our efforts in resolving the shared problems and that meaning, we need to fix the global trading system. There is a call for action here for the G-20 saying that they have to deliver results. This is a call for the World Trade Organization reform. I think this took place in Buenos Aires. She says that we need to collaborate in fighting corruption and tax evasion, and also, collectively address climate change.

Now, one very interesting message, I think she nailed in closing her speech talking about something that she calls New Multilateralism. And that was brilliant, because she runs away from the term globalization. Because people have been feeling very uncomfortable about the globalization topic, and globalization issues. Countries are becoming more nationalist driven, and she puts this here that is not becoming a unit, it is staying multilateral but acting together. And I thought that that was quite brilliant. She gives us a new perspective on globalization. Kind of running away from the term, but still sticking to togetherness. Kind of nice. And that includes macroeconomic policies and structural reforms that need to be applied to many economies in the world.

Now, going back to the report. In October of 2018, the IMF had this projection of global growth at 3.7% in 2019 and they reduced that to 3.5% in 2019 and then they also reduced to 3.6% in 2020. Now this is for global growth. The growth in advanced economies is forecasted at 2% in 2019 and 1.7% in 2020. And then emerging markets and developing economies at 4.5% in 2019 and 4.9% in 2020.

Both in the report and the press conference, they really put emphasis on the rising trading tensions and then the policy uncertainty that raise concerns about the global economic prospects, because these factors could actually lead firms to postpone or forgo capital spending, and then hence slow down economic growth and investment and demand.

One very interesting point in the report – and this is where I am going to close this podcast with – is the point that the IMF is now keeping an eye on increasing market power. They also think that this is a risk for economic growth. They said that the concerns about corporate market power is growing pretty much for two reasons. One is because, in the past decades, there has been some macroeconomic trends that can be somewhat the fault of corporate behaviour. Low investments, despite of rising corporate profits, declining business dynamism, low productivity growth and falling labour income. This is quite interesting because they pretty much raise a flag here saying, here, we have to review the behaviour that is happening in the private environment, we have to follow up on actions that are going to change this sort of trending behaviour. And, I mean, if we are talking about Corporate Diplomacy, there is a lot to be talked about on here – activities and strategies that need to be built in order to respond to such a claim that corporate market power can actually account for these macroeconomic trends that are not so positive for the overall economy.

And then the second reason about the rising concern in the market power of corporations is that the rise of tech giants has raised questions about whether this trend – of the tech giants becoming more powerful – and if this trend continues, the IMF is saying that we need to rethink the policy that is needed in order to maintain fair and strong competition. I thought that it was very nice to put in the context of Corporate Diplomacy. So, there is a lot that could be explored in this report. This increasing market power session in this report itself is evidence that government is becoming aware and it actually wants to tackle the sort of increase in power for private environment. And all sorts of strategies that have to be built, not because the private environment needs to win in the game. We actually want a balanced governance strategy nowadays.

Brazilian government reduces import tariffs on ICT and capital goods

The Brazilian Foreign Trade Chamber (CAMEX) issued Resolutions No. 14 and 15/2018, reducing to zero percent the import tax on capital goods (780 items) and computer and telecommunications goods (50 items). The tariff reductions that entered into force on February 28th under the Brazilian Ex-tarifário regime are temporary and will be in place until December 31st, 2019 as established by the new resolutions.

The Brazilian Ex-tarifário regime consists of the temporary reduction of the tax on imports of goods when there is no equivalent national production. The special customs regime is intended to promote a reduction in the cost of investments and to produce a multiplier effect on employment and income on differentiated segments of the national economy. Camex Resolution No. 66/2014 established the rules for the concession of the Ex-tarifário regime.

Technical Trade Barriers Brazil: The case of organic imports

National regulation for organic production in Brazil was implemented on January 1st of 2011, demanding all imported organics to be certified according to the specifics of Brazilian norms. This new regulatory framework brought a particular condition of technical barriers to trade in the country, as it makes it unfeasible for foreign brands to locally certify their organic manufacturing processes due to the complex demand of tracking all raw material used in production, extending it to the need of multiple certification packages far down the supply chain.

For US brands, for example, the inability to conform to such measures becomes particularly proven by the fact that the largest and most recognized certifying agency in Brazil (IBD) has only two certified US producers in their database – both in the very primary base of agricultural production.

This article is an attempt to initiate a debate on possible alternatives to stimulate market transformation and perhaps openness to organic imports. In this sense, we propose the following four potential strategies for local market development:

Strategy 1: Conform to certification norms

Though in itself the national regulation structure is one of extremely difficult comformity, the program is setting the bar at a high quality assurance standard for organic farming and industrialization practices – not at all prejudicial to a conscious consumer demand. Files containing the regulatory framework for organic certification in Brazil are available for download in this link.

Strategy 2: Adopt a market driven approach

Adaptation is a premise of international markets, so if no other option seems to be feasible, then foreign companies must adapt the product to local market features.

Brazil is a potential market with roughly 200 million consumers, which makes it unquestionable that the cost-benefit relation of investing in marketing and package redesign is no higher then either certifying or interfering in regulation. Plus, in order to be commercialized in accordance to current regulations, organic products must show the BR certification logo on the package, so some level of adaptation would occur either way. In fact, one strong argument behind the defense of current regulatory practices is on policy reciprocity, being that brazilian brands very frequently must conform to foreign market conditions.

Based on Decrete 6323, Chapter II, Section III – Of the Technical Regulation of Production. Art. 9o. Paragraph 2o. The norms for products from sustainable organic extrativism will be applied only to those which have as its objective the identification as an organic product.

The suggestion here is finding a substitution for the branding term organic, yet making sure it doesn’t fall into the specifics of organic regulation. This will most likely drive the consumer to rethink the concept. Some adapted branding examples are: Sustainable Production, Sustainable Culture, etc. In short, developing a local marketing strategy that compensates for the lack of organic certification.

We do however, have to observe the following Decrete 6323, Chapter IV, Section III. Of Publicity and Advertising. Art. 23. It is forbidden, in the publicity and advertising of products that are not produced within organic systems of production, the use of expressions, titles, marks, images or any other mode of information capable of inducing the consumer to error in regards to the organic quality of products.

But we should also notice that there is room for interpretation in the text, and specially when crossing this passage with the one previously mentioned – of not objectively identifying (i.e. cathegorizing) the product as organic or even as a product sourced from an organic system of production (i.e. if you don’t meet the specifications in the law, then you’re not producing from such a system). This strategy implies the creation of a new market concept for toxin free production.

For some particular cases, what is present today in Brazil is a market opportunity to focus on the consumer who is lactose intolerant, and/or in the phases of substituting animal products for a plant based diet. And lastly, a peculiarity of the brazilian market is that imported brands are often placed as premium products, and brands from developed markets are often a reference to high quality standards, and therefore pricing is not a limitation when companies still have room for similar profit margins expected from organics per se.

Strategy 3: Diplomatic articulation for regulation revision

Though a time intensive, unsure and expensive process, participation in regulation revision if foreseen in the following passages:

Law 10831, Art. 11, Paragraph 1. The regulation will contemplate the participation of representatives of the agricultural sector and civil society with recognized participation in any stage of the organic production chain; and

Law 10831, Art. 11, Paragraph 2. The regulation of this Law will be revised and updated when necessary and, in the maximum, every four years.

These revisions are executed through a specific mechanism, as per Decrete 6323, Chapter III, Section II – Of the Commissions. Art. 34. Responsibilities of CNPOrg (National Comission). II. Propose regulations that have as objectives the improvement of the organic production chain at the national and international levels, considering proposals sent by CPOrg-UFs (Comissions from each state).

These are the comissions to which proposed formulations must be addressed. An interesting suggestion is to provide an international mechanism  under the structure of an Economic Complementation Agreement for thorough transfer of technology and technical capacitation of local producers, allowing significant improvements in national quality and productivity, specially targeting the country’s national family farming programs.

Needless to mention, Brazil is a developing economy that is greatly damaged by a lack of good public governance practices, and local producers, broadly capillarized into a network of small traditional farming communities, would significantly suffer the social impacts of fierce corporate competition.

Strategy 4: Mobilize a dispute or agreement under the WTO TBT

Claiming that the brazilian government is violating the World Trade Organization’s Technical Barriers to Trade Agreement is an option. In this link you will find a copy of the agreement with key highlights in consideration to this particular case. However, the text can be interpreted in such a broad and subjective manner, that under the agreement you will find arguments for both in favor and against current regulatory practices in Brazil, as likely as in many cases of TBT disputes in the WTO system. So, ultimately, this option is more reliable if an inclusive counterproposal for standardized practices is put in place.

Author: Juliana Michelon Alvarenga. BSc. International Relations, MBA Business Intelligence. [julianama@aldeotaglobal.com]

Brazilian import tax reduction for ITC and industrial equipment and machinery

Through its International Trade Chamber (CAMEX), the Brazilian government has released new resolutions reducing the import tax rates of 217 different types of industrial equipments and machinery not produced nationally.

As an attempt to promote domestic industrial and production growth, capital goods such as engines, pumps and machines, and several products for the ITC sector have had their import tax rates reduced from 16% down to 2% through the special customs regime Ex-Tarifário.

The special regime allows temporary import rates reduction of manufactured items which are not produced by the national industry. Private initiative can also file requests for specific products.

The complete list of the applicable NCMs and further legislation are available in the Portuguese language through the following links: