How Countries Should Respond to the Strong Dollar
Policy responses to currency depreciation pressures should focus on the drivers of the exchange-rate moves and signs of market disruptions.
The dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the Euro and 6% against emerging market currencies since the start of 2022.
Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance.
While the US share in world merchandise exports has declined from 12% to 8% since 2000, the dollar’s share in world exports has held around 40%.
For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder.
On average, the estimated pass-through of a 10% dollar appreciation into inflation is 1%.
Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.
China’s GDP is flagging. Where might growth come from?
Research suggests coastal cities, such as Hangzhou, will continue to have the greatest potential.
In 1980 less than 20% of China’s population lived in cities; by 2020, that share had soared to more than 60%. The same increase in America took more than 80 years. China’s rapid economic growth pulled people to cities, and as cities boomed, even more growth followed.
But today that virtuous cycle is in jeopardy. China’s zero-covid policy has stilted economic growth. The latest growth numbers showed GDP grew by 3.9%, well below the Communist Party’s growth target. Meanwhile a property-sector crisis is hurting local-government finances. Faced with these challenges, how will Chinese cities fare?
A recent set of rankings compiled by the EIU, provides some clues. Its “China Emerging City Rankings”, launched last year, and assesses cities according to their growth potential. Scores are calculated using a combination of historical data and forecasts. They pull together variables covering the local economy, demography, environment, infrastructure and local-government finances. Based on the data, the EIU ranks 108 cities that are predicted to have a population of more than 1m by 2025.
Most of the cities with the highest potential for growth are unsurprisingly on the coast, the engine of China’s development during the 1980s and 1990s.
• For instance, Shanghai, China’s biggest city and the mainland’s financial hub, is ranked third.
• Shenzhen, a tech centre that borders Hong Kong, is second.
• But it is Hangzhou, a city of 11.9m about 170km from Shanghai, that tops the ranking. It too is a big tech hub.
Hangzhou’s healthy economy is expected to attract more people, which could stabilise the property market and push up prices. That in turn could bolster the local government’s fiscal position, rated as the second-best among all cities. It also fares well because it has a large middle class. As part of his campaign for “common prosperity”, China’s president wants an “olive-shaped” distribution of income that is fat in the middle but thin at the bottom and top. Hangzhou ranks sixth on this front.
The ranking focus is on the medium- and long-term, so it excludes the effects of ongoing covid-19 outbreaks and city-wide lockdowns. But the future impact of China’s zero-covid policy is unknown. Any forecast of cities’ growth potential is fraught with uncertainty. China’s approach to the pandemic only adds to the unpredictability.
Source: The Economist
Investment Policy Developments: Key takeaways from the latest UNCTAD World Investment Report
Why is the report important?
It tracks global and regional investment trends, allowing policymakers to easily understand how investment flows and investment rules and policies are growing or changing.
Investment Policy Developments summary
In 2021, the pace of investment policymaking returned to pre-pandemic levels, with 109 new measures.
This signalled an end to the emergency investment policymaking that characterized the first year of the pandemic; however, the crisis still affected the nature of the measures.
Developed countries expanded the protection of strategic companies from foreign takeovers, bringing the share of measures less favourable to investment to an all-time high.
Four new countries adopted FDI screening mechanisms (including one developing country), and at least twice as many tightened existing mechanisms.
Together, countries that conduct FDI screening account for 63% of global FDI inflows in 2020.
Conversely, developing countries continued to adopt primarily measures to liberalize, promote or facilitate investment, confirming the important role that FDI plays in their economic recovery strategies.
Investment facilitation measures constituted almost 40% of all measures more favourable to investment, followed by the opening of new activities to FDI (30%) and by new investment incentives (20%).
Q1 2022 registered a record number of new investment policy measures, mainly in response to the war in Ukraine.
Sanctions and countersanctions affecting FDI to and from the Russian Federation, Belarus and the non-government-controlled areas of eastern Ukraine constituted 70% of all measures adopted in Q1 2022.
Several notable developments accelerated the reform of the international investment agreement (IIA) regime in 2021.
They included the conclusion of new-generation megaregional economic agreements and large-scale terminations of old-generation bilateral investment treaties (BITs).
Greater policy attention to investment facilitation, climate change and human rights will also affect international investment governance.
For the second consecutive year, the number of terminations exceeded the number of newly concluded IIAs.
In 2021, countries concluded 13 IIAs and effectively terminated at least 86 IIAs, bringing the size of the IIA universe to 3,288.
In line with UNCTAD’s policy recommendations, IIAs signed in 2021 continue to feature many reform-oriented provisions aimed at preserving regulatory space while promoting investment for development.
Trends in the taxation of investment
Tax policy is used around the world as an instrument to promote international investment.
Countries rely on a variety of fiscal incentives to attract investors to priority sectors or regions.
An analysis of tax-related investment policy measures adopted worldwide over the last decade shows that profit-based incentives, such as tax holidays and reduced corporate income tax (CIT), are among the most frequent and widespread.
Incentives are typically not time-bound, nor allocated on the basis of transparent criteria.
Although the governance of incentives varies greatly across countries, on average, 70% of incentives are allocated on the basis of discretion, criteria not available to the public or negotiation with individual investors.
In addition, only about half of all tax incentives introduced worldwide over the last decade were time-bound, with lower shares in Africa (35%) and Asia (40%).