IM Yearbook 2023

IM YEARBOOK
years will also depend on second-round
effects such as the response of wages
to previous price hikes as well as price
adjustment policies by governments.
A key player in the future evolution
of inflation are central banks. Nowadays,
around the world, monetary authorities
are tightening monetary policy through
higher interest rates to reduce inflation.
The sources of inflationary pressures
vary across economies. While there is
some consensus that inflation in the US
is largely associated with an ‘overheated’
economy’ due to exaggerated levels of
demand in both the goods and the labour
market relative to the potential supply,
it is an open question whether this is an
accurate description of the economic reality
of America. Low unemployment is used
as an argument to back the hypothesis
of “excess demand in America”.
For Europe, the diagnosis is different,
and it focuses on the very sharp increases
in the price of gas and oil, imported from
abroad, mostly Russia. Thus, a supplyshock
story describes the inflationary
situation in Europe better while a demandside
story is more plausible for America.
Among emerging economies, inflation is
closely related to the energy price and food
price shocks coming from international
markets, so we are dealing with a mix of
supply-shock and imported inflation.
An impending recession?
As mentioned, the IMF, the World Bank,
the OECD, and the European Central
Bank have all adjusted downwards
their GDP growth forecasts for 2022 and
2023. In turn, recessions are anticipated
in 2023 for Germany, Italy and Russia,
while the two major powerhouse
of the world economy – the US and
China – will experience slowdowns.
The causes of the global slowdown
are related to the effects of higher interest
rates to fight inflation, compounded by
supply energy and food price shocks
and the effects of increased uncertainty
affecting private investment and
consumption, two main drivers of aggregate
spending and economic activity.
In addition, world trade has
declined due to supply disruptions
and new geopolitical realities, shaped
by embargoes and a shift to ‘secure
sources’ of supply – a major change when
compared to the previous rule of “cost
minimisation” that governed globalisation
in the last three decades. All these
factors are affecting global growth.
The risk of a debt crisis
During the Covid-19 crisis of 2020-21 many
governments were forced to increase
their levels of foreign borrowing. They
needed financing to fund Covid-related
support programmes set up to protect
the living standards of their people who
could not go to work and generate the
necessary income to sustain themselves.
Importantly, this borrowing was
contracted, mainly in US dollars and
took place at generally low interest rates.
However, during 2022, macroeconomic
and financial conditions have
changed dramatically. A sharp rise
in interest rates, a very strong dollar
and portfolio capital outflows from
developing nations at the periphery to
advanced economies at the centre may
eventually trigger a new debt crisis.
For context, in the early 1980s, a very
similar combination of economic factors
affected the world economy following
inflation stabilisation policies in the US
pursued by the Federal Reserve: interest
rates increased, the dollar appreciated
against main world currencies and
currencies of the periphery. In addition,
capital flight was the norm with money
flowing from economies of the global
south to the US and other advanced
economies. The result was the onset of a
debt crisis in several large economies of
Latin America, Turkey and the Philippines
including forced debt rescheduling, debt
cancelations and debt defaults. These
episodes were also accompanied by
currency crashes, recessions, dwindling
investment and portfolio capital outflows.
We have seen several debt crises in
the last three to four decades: the East
Asian crisis in 1997-98, the convertibility
crisis in Argentina in 2000-01, debt
stresses in Brazil in the late 1990s and
the global financial crisis of 2008-09.
Yet, history does not need to repeat
itself. After four decades of repeated debt
crises around the world there are better
mechanisms to anticipate them and cope
with them if they take place. Exchange
rates regimes in developing countries are
more flexible now than then, international
reserves in the hands of central banks are
higher and fiscal policy has become more
ordered and predictable. Moreover, today,
the IMF has in place a set of new financing
instruments, several of quick disbursement,
that could help avert the repeat of debt
crises. However, there is little space for
complacency as financial conditions are
fragile even in large mature economies. Just
think of the sharp decline in the value of the
pound and bond prices following the Truss-
Kwarteng regressive tax cut and spending
increase package of late September in the
UK, a policy mix that was later reversed.
Investment migration
An important consequence of the current
economic difficulties is that the global
economy is becoming more fragmented,
risky, and unpredictable. How can these
developments affect investment migration?
Two main channels are relevant: First, in a
world of heightened economic, geopolitical
and security risks, an increase in the
demand for investment migration is likely
to follow. Option theory predicts that a
vehicle, programme, or policy – think of
investment migration – that enhances
opportunities in risky environments carry
a positive price, or insurance value.
Second, governments in tough times
are in increased need of foreign capital,
talent, entrepreneurial capacities, and
cash, and therefore will view investment
migration more favourably. This already
happened after the 2008-09 global financial
crisis and is bound to happen again in the
current circumstances. Even though, the
golden years for investment migration of
the 2010s might be largely over for various
reasons, the economic need of countries for
foreign financing, along with a personal/
household demand for geographic risk
diversification, remains. Therefore, it is
very likely that investment migration will
continue to thrive for quite a while.
Dr Andrés Solimano holds a
BIO Ph.D. in Economics from the
Massachusetts Institute of Technology
(MIT). He is the chairperson of the
Investment Migration Council, as
well as founder and chair of the
International Centre for Globalisation
and Development (CIGLOB). Previously,
he served as country director at
the World Bank, executive director
at the Inter‐American Development
Bank and director of the project on
International Mobility of Talent with
the United Nations University ‐ World
Institute of Economic Research.
Investment Migration Yearbook 2O23 - 21