The Unassuming Economist

From the remarks by Managing Director Christine Lagarde:

“As of now, I see the contours of this agenda revolving around the following three priorities.

Priority 1: How to create a vibrant private sector for higher growth and more jobs

The old model where the state is employer of first resort is no longer viable. The private sector needs to step in and step up, and in some aspects government actions can help. This means leveling the playing field for private firms by combating corruption, increasing competition, and taking advantage of global trade and new technologies.

It also means firms investing more within the region, paying their fair share of taxes, and collaborating with the public sector to improve infrastructure.

Priority 2: How to support excluded groups

Integrating youth, women, rural populations, and refugees requires targeted policies. This means preparing people for jobs in the economy – through better education and active labor market policies that help youth and women find meaningful employment.

Financial inclusion can also be an important empowering agent, especially for women. And as I have said so often, including women financially and economically is a potential global game-changer.

I look forward to my conversation after lunch with remarkable women from across the region, and to discussing practical solutions to close gender gaps.

Priority 3: How to use fiscal policy to invest in people and infrastructure

Fiscal policy can and must be redesigned to support inclusive growth in the region. Today, social spending – on social safety nets, health and education services – is less than 11 percent of GDP. This compares to 19 percent in emerging Europe. Infrastructure needs are also large in many countries.

The question is then how to increase spending on social services and infrastructure when budgets are so tight? A key priority is building broader and more equitable tax bases. All must pay their fair share, while the poor must be protected.

And if countries can make progress in moving away from the state being the employer of first resort, as mentioned above, this too can help make room for high-return social and infrastructure outlays.”

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From the latest IMF’s report on Malta:

“Strong momentum in the housing market may increase financial stability risks. Household balance sheets are generally sound with a low default rate and financial wealth exceeding peer levels. However, given the high exposure of core domestic banks to property-related loans, a sharp drop in house prices or increases in interest rates may lead to a negative spiral of low lending and investment and adverse macro-financial repercussions. Future unwinding of real estate investments by successful IIP applicants may also put downward pressure on housing prices. While staff does not see immediate financial stability risks, persistent strength in mortgage lending and sustained demand for properties without a corresponding increase in household income could lead to significant imbalances. Staff’s analysis—although subject to uncertainty—indicates that housing prices have entered a modest overvaluation territory by several metrics (…). Moreover, about 80 percent of the respondents to a recent central bank’s survey viewed residential properties as overpriced in 2016.

Steps to pre-empt a potential buildup of risks in the housing market are therefore warranted, including by:

• Deploying targeted macro-prudential limits for mortgages (e.g. limits on loan-to-value and debt service-to-income ratios) to enhance the resilience of bank and household balance sheets to a possible sharp reversal in market conditions. Closing the remaining data gaps on borrower characteristics would help calibrating these measures effectively.
• Ensuring that fiscal incentives do not amplify the housing cycle by aligning the tax rate on rental income with the tax rates on other sources of income. Introducing periodic reviews of the scope and parameters of the IIP, including the minimum real estate investment or leasing values, could help curb housing demand and may improve fiscal revenues’ predictability.
• Repairing corporate balance sheets in the construction sector to increase housing supply.

Accelerated delivery of social housing would mitigate the impact of rising housing prices on the poor. The government has taken measures to increase the availability of social housing units to low-income groups, including by incentivizing private investment through tax exemptions, and provision of financial incentives for the restoration of old properties to be loaned for social housing. Ensuring that eligibility criteria for rent subsidies and social home loans are prudently assessed and means-tested is important.

The authorities regarded property prices as broadly in line with fundamentals, but acknowledged strong demand pressures. They indicated that inflows of foreign workers and tourists are the key demand drivers in the housing market, with acute impact on rents. The reduced tax rate on rental income and the IIP were not viewed as major demand-side factors. The authorities emphasized that risks related to bank exposure to the property market are mitigated by the small fraction of buy-to-rent loans, the diversification of credit risk among many small borrowers, and conservative lending practices, including prudent haircuts on collateral values. However, they agreed that closing further data gaps is necessary, as they are evaluating possible macroprudential policies to mitigate financial stability risks. They intend to publish a White Paper with a view to strengthen the legal framework in the rental market, including through registration of rental contracts. They highlighted that several measures in the 2018 Budget will increase the availability of social housing.”

A new IMF working paper “assesses the effects of foreign direct investment (FDI) on gender development and gender inequality. In fact, FDI through increased labor demand, technological spillovers but mostly through corporate social responsibility and economic growth, can potentially influence women’s welfare. Using a panel dataset of 94 developing countries from 1990 to 2015, we find that FDI inflows improve women’s welfare and decrease gender inequality. However, the impact is lower in countries where women have low access to resources and face a heavier burden to open a business. This suggests that for countries to fully benefit from FDI inflows, they should ensure that women can enjoy free access to the labor market and associated income.”

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On cross-country:

• 14th Annual Demographia International Housing Affordability Survey: 2018 – Demographia
• Global House Prices Will Rise, but Ideal Conditions to End – FITCH

On the US:

• Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures? – Federal Reserve Bank of Philadelphia
• Perspectives: Practitioners Weigh in on Drivers of Rising Housing Construction Costs in San Francisco – Terner Center

On other countries:

• [Australia] The changing institutions of private rental housing: an international review – AHURI
• [Belgium] Belgian house prices continue to rise, despite falling demand and weak economy – Global Property Guide
• [Bulgaria] Bulgaria’s house prices rising rapidly, due to strong economic growth – Global Property Guide
• [India] Rent Control in Mumbai – Marginal Revolution
• [Ireland] Update on the progress of the Central Bank of Ireland’s Tracker Mortgage Examination – Central Bank of Ireland
• [Latvia] Latvia’s housing market remains robust – Global Property Guide
• [New Zealand] Quantifying the costs of land use regulation: Evidence from New Zealand – University of Canterbury
• [Portugal] Great value and good yields in Portugal, where house prices continue to rise – Global Property Guide
• [United Kingdom] Empty homes, longer commutes: The unintended consequences of more restrictive local planning – Journal of Public Economics
• [United Kingdom] UK Housing: Something Concrete to Dwell On – Roubini Global Economics

Photo by Aliis Sinisalu

A new IMF working paper “describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.”

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