The world economy was beginning to come out of the shock caused by the pandemic, which put half the world in an induced coma, when a war that seemed impossible for many, improbable for most, has blown up the entire road map of the Recovery. The International Monetary Fund has held its spring meetings at half-staff – still under strong restrictions due to covid 19 that remind us of the recentness of that crisis – and has made a gloomy forecast of the effects of the Russian invasion of Ukraine: less growth, more inflation and governments with little fiscal cushion to respond, given the arsenal of stimuli from the pandemic. For Gita Gopinath (Calculate, 50 years old) it is the second storm in just three years at the institution, first as chief economist (2019-2022) and now as number two of the Washington-based institution. This time, one of its member countries is the one that has lit the match and the tension in the environment can be cut with scissors. When Gopinath speaks with EL PAÍS, the Secretary of the Treasury, Janet Yellen, has just left the G-20 meeting when the Russian delegate began to speak.
Ask. These are some extraordinary spring meetings. How are the discussions going?
Response. Well, these are difficult times. Understandably, there are emotions and yes, there have been some of those dropouts. But the good news is that all finance ministers and central bank governors are participating and we are having good discussions about the challenges ahead. Of course, we are emphasizing that the most important thing for the economy would be to end this war. There are many things that we need to work on together, such as high debt levels, food security or inflation, and I think we are making some progress.
P. But can we say that the IMF is a neutral institution in this conflict?
R. Well, the Fund is an institution that deals with economic aspects for the global economy. That is our role and we have 190 members who are legally bound by a treaty and as long as they are members we work with everyone. We have been very clear about the consequences of the invasion in the world and the economies. We recognize that this is a huge humanitarian crisis and we help Ukraine as best we can. For example, we are moving very fast to deliver $1.4 billion in emergency funding.
P. They have made a gloomy forecast of the effect of this war on the economy (less growth, more inflation, all the uncertainty), but their baseline scenario does not even contemplate possible European sanctions on oil…
He knows in depth all the sides of the coin.
subscribe
R. We’re looking at a crude oil price of $106 a barrel in 2022 and about $93 a barrel in 2023, which is already very high, but obviously it would be more difficult with a more severe gas supply disruption from Russia. We believe that Europe, which is the most affected by this, could replace two thirds of the Russian supply with alternative sources that would help avoid shortages in summer, but if that problem continues in winter, the cost of crude oil would be much higher. In that scenario, Europe would be the most affected region and we calculate a reduction in GDP of 3%, in addition to what we have already calculated.
P. Beyond this slowdown, what transformations can this war bring about? Do you fear a return to a geopolitical bloc economy?
R. It’s not just this war, the pandemic that preceded it has already prompted many countries and companies to rethink how to build resilience to potential supply shocks or hostile trading partners. We are going to see it in the energy. But, as one of the studies we featured this week shows, the way to build that resilience you need is, in fact, with more global trade. Not less. What you need is to diversify your sources of production among many countries. And, aside from commerce, even before the war we had begun to see fragmentation in payment systems, due to the diversity of platforms, that is another challenge for integration. We are worried that countries are divided into blocs, it would be detrimental to prosperity and, immediately, also to inflation.
P. There are companies that, however, have done well with these crises and you suggest an extraordinary tax for them.
R. This is a temporary tax on extraordinary business profits that some countries are studying. I think it is an interesting idea and we have mentioned it in our report. However, if you want to think about taxing the significant profits of companies, I would say that there are already three areas where you could obtain significant income [fiscales]. One is, of course, to tax the big companies and make sure they implement the global minimum tax of 15% that they have committed to. And do it, moreover, based on where your customers are, not where your workers are. The second is to share information about groups in tax havens. And, thirdly, the taxes on carbon. It is not only something important environmentally, but also a good source of income for the countries.
P. Many of these environmental policies, such as carbon or fuel taxes, or the commitment to electric vehicles over combustion vehicles, which are cheaper, have a particularly negative impact on working families. Don’t you think that this transformation can generate rejection, in the same way that globalization generated rejection for not paying enough attention to those affected?
R. The energy transition is not the main reason for the rise in costs that we are seeing. The main factor is what has been happening in the last year [temperaturas extremas, problemas de suministro, fenómenos como la sequía de Brasil] and now the war in the Ukraine. But there is a very important lesson to keep in mind and that is that, although in this transition you want to make carbon more expensive to favor the change to renewable energies, you cannot do it too quickly without protecting those affected. That’s the problem. That’s why our advice has always been to raise costs over the course of a decade. Depending on the development of your economy, it will be more or less, but you want to encourage this transition in a gradual and predictable way. And you have to use those carbon revenues to shield the most vulnerable people from higher prices, and train workers in the energy-intensive industry so they can relocate to greener sectors. You have to do things smoothly, with a multiple approach and pay close attention to how everything turns out.
P. What do you think of Spain’s shock plan in the face of the crisis?
R. Unfortunately, all countries are facing this crisis when the economy was recovering from the pandemic. In the case of Spain, high energy prices are combined with slow growth in its trading partners and it has taken steps to help people deal with it. Some of the aid is direct to households, others are in the form of tax relief, and so on… In the current environment, we see temporary measures as reasonable, but, of course, if we are in an environment in which prices prices are going to be high for a very long period of time, it is necessary that prices also reflect this and that people adjust their spending behavior to this new environment of higher costs.
P. There is also an intense political debate on the advisability of reducing taxes to respond to this crisis in Spain. Do you think it would be positive?
R. Spain has a fiscal deficit of around 7% of GDP and a public debt of around 120%, so we do not recommend a general reduction in corporate taxes. We see reasons and scope for more specific support measures, for more precise objectives, which is what the Government is doing. You identify the sectors most affected by the crisis and help them, but we see no basis for a general reduction in corporate taxes.
P. About the United States, what is your vision of the failure of Biden’s social plan [Build back better] in Congress? What should concern the first world power?
R. There are a lot of positives to that plan that we haven’t seen happen yet. For example, increasing the active population in the labor market thanks to public aid for childcare was one of them. Investment in education, another. Also the additional infrastructure, but clearly this plan is not going to get the green light from Congress, at least not at this time. In terms of risks, I think the number one risk in the US is inflation, which is well above the 2% target. On the positive side, we have that the economy is doing solidly, we project an expansion of 3.7%, which is well above its average growth and the labor market is very strong, households have a lot of savings… But it is going to be a challenge to return inflation to that 2%. It is a great risk for the country and I would say for the rest of the world as well, because the monetary policy of the United States affects everywhere.
P. And do you think that, even if this crisis passes, that 2% has ceased to be a taboo forever?
R. It is good to ask whether we are headed for a regime of higher inflation permanently. Our projections for the euro zone, for example, point to it coming back close to 2% sometime next year and the year after. Many of the factors that kept inflation low in the past are going to be there in the long run, but if we have more shocks that keep inflation high, people’s expectations change and that affects their demands for salary increases, which which can fuel a price spiral. That is exactly what central banks are trying to avoid, which is regime change.
P. In the case of Latin America, what is the best way to combat such rampant inflation?
R. Our latest forecast puts inflation at 11.2% this year and 8% next year. This means that most of the countries are outside their objectives and we have heard these days how they are affecting the family budgets of almost all of them. Central banks in the region have earned credibility in their ability to fight inflation, despite the current rise. Not only in Latin America, I think that, in general, central banks have credibility, but there is a margin of time during which they can rely on that accumulated credibility if they fail to bring down inflation. That means they must continue with their stimulus rollback measures. I think his intention is to do that and to communicate very clearly what is happening with inflation.
P. What do you think of the rejection of the energy reform in Mexico?
R. It provides a good opportunity to reconsider plans. We are concerned that some important elements of the bill are not helpful. Why are we worried? For two reasons, mainly. First, the bill would amount to a reversal of the 2014 energy reform, which had boosted private investment. The reversal of the reform, especially a reform that was widely seen as a boost to the energy sector and the growth potential of the economy, creates political uncertainty and hampers private investment. Second, the bill favors state-owned companies that rely on non-renewable energy over greener private companies. And this is likely to hamper competition and innovation.
Exclusive content for subscribers
read without limits
#Gita #Gopinath #number #IMF #recommend #Spain #taxes #companies