eco TV

EcoTV – May 2021


TRANSCRIPT // EcoTV – May 2021 : May 2021

François Doux: Hello and welcome to the May 2021 edition of EcoTV and our special on the Americas. Joe Biden has just completed his first one hundred days in office. In our Focus, Jean-Luc Proutat will talk with us about the President’s infrastructure plan. Spread over eight years and equivalent to nearly 10 points of US GDP, the vast stimulus plan will also have an impact on the neighbouring countries. In our Chart of the Month, Salim Hammad will talk about Central America and the transmission channels between economic conditions in the United States and the region’s economies. We will end the emission with Three Questions for William De Vijlder, who will look back on the 1970s to help put things in perspective. What lessons can be drawn from this period? We will talk more about all this at the end of the show.




François Doux: 2.3 trillion dollars, the equivalent of 10 points of US GDP. That is the size of President Biden’s proposed infrastructure plan. Spread over eight years, the plan will probably be financed through higher taxes. We are here with Jean-Luc Proutat to tell us more on this recovery plan. Hello Jean-Luc.

Jean-Luc Proutat: Hello François.

François Doux: Before diving into the details of this stimulus package, can you describe the US economic environment in spring 2021. How do things look?

Jean-Luc Proutat: The economy is very vibrant. For someone nicknamed “Sleepy Joe” by his predecessor, President Biden has hit the ground running as summer 2021 approaches and he completes his first 100 days in office. The 1.9 trillion dollar American Rescue Plan was approved in March, and it has already begun to have an impact on the economy just as the pandemic begins to ease. Now that nearly 50% of the population has been vaccinated, Americans are circulating more freely, with more money in their pockets, thanks to the stimulus checks many have recently received from the US Treasury. Households are also benefiting from tax credits. All of this has given consumption a big lift in the US, and full-year growth is estimated at 6% at the least. That said, President Biden will not settle for simply stepping on the gas to rev the engines. He also intends to strengthen and consolidate America’s economic growth engine. 

François Doux: Let’s talk more about this famous recovery plan to modernise the US economy. What all is in the plan? And do you think it will be effective?

Jean-Luc Proutat: This plan begins with the rather paradoxical observation that even though the US is one of the world’s wealthiest nations, it does not invest much in infrastructure.

The US does not score very highly on the OECD rankings on infrastructure or the energy transition, which is also advancing rather slowly. The infrastructure plan focuses on these two objectives: to strengthen and renovate infrastructure, notably for transport and utilities, such as water and electricity; and to promote green energy, including higher taxes on fossil fuels. Virtually two-thirds of the plan are devoted to these two areas. This leaves a non negligible part of the plan that is steeped in economic patriotism. It consists of promoting America’s strategic interests and to invest in America in areas where it is losing ground to Asia, and China in particular. A lot of money has been pledged to support supply chains for such things as semiconductors, batteries, wind turbines and active drug ingredients. And when it comes to their feasibility, the Federal government must absolutely count on the support of the local authorities, because the United States is built on a Federal system in which the power over infrastructure lies in the hands of the state, municipal and county governments. Their cooperation is vital if the plan is to succeed. Whereas the 1.9 trillion dollar American Rescue Plan was financed through debt and deficits, this time taking on more debt is out of the question. Instead, the plan relies on the contribution of companies, who should also benefit from the infrastructure programme.

François Doux: Getting companies to pay their fair share is the famous tax proposal of this stimulus plan. It will be hard to get companies to swallow this part of the plan.

Jean-Luc Proutat: That’s right. The plan starts with the observation that the corporate tax revenues have fallen considerably over the past ten years, especially after Donald Trump’s 2018 tax reform. The tax burden needs to be shared better. Several measures come to mind. The biggest is the proposed increase in the corporate tax rate to 28% from 21%. There is also the application of a 21% minimum tax rate on corporate earnings generated abroad. Of course, these measures mainly concern major corporations. The first that come to mind are the Big Tech companies, who will be hit hardest by this fiscal tightening. The reform is currently being debated in the US Senate. It will have to win unanimous support from the Democrats, which is far from certain. President Biden has already said that he is open to compromise. We will see what that really means, but one thing is certain, we have probably reached the beginning of the end of “whatever it takes” in the United States.

François Doux: Jean-Luc Proutat, thank you for this detailed analysis of the US infrastructure plan. We are sure to talk more about all this. We will be back in a moment to talk about the impact of this plan on the economies of Central America with Salim Hammad and our Chart of the Month.




François Doux: The US is not the only economy that will benefit from the country’s massive stimulus package. Neighbouring countries also stand to benefit. We are here with Salim Hammad to talk about Central America. Hello Salim.

Salim Hammad: Hello François.

François Doux: Can you tell us about the channels through which Central American economies stand to benefit from more dynamic economic conditions in the US.

Salim Hammad: There are mainly three transmission channels. The first is a trade channel, which operates via exports from the region to the United States. The second is a financial channel, which operates via investment flows from American entities to the region. And the last one, is a monetary channel, which refers to money transfers sent by migrant workers based in the United States. The chart illustrates the importance of these three transmission channels for each of the economies in the region. We can see in each case, the share that the United States’ represents in the country’s exports, foreign direct investment (FDI), and remittances, which are respectively captured by the green, red and orange bars. For the sake of simplicity, we can see that, on average, roughly 35% of the region’s exports are shipped to the United States. Also, about 1 out of 3 US dollars in foreign direct investment originatesfrom the US. Finally, we see, and this is probably the most striking feature of this chart, that on average about 80% of the remittances that flow back intothe region find their source in the United States. And the amounts being sent are substantial: for countries like Honduras or El Salvador, these transfers represent theequivalent of almost a quarter the size of their economy.  And we have already started to see the impact of a strong US recovery on such transfers. Point in case, remittances in Honduras, were up almost 30% year-on-year in the first quarter.

François Doux: Now let us talk diplomacy. Under the Trump administration, we saw three countries cut their diplomatic ties with Taiwan in order to operate a rapprochement with China. These included Panama, El Salvador and the Dominican Republic. With the Biden administration, what= can we expect in terms of US diplomatic behaviour towards Central America?

Salim Hammad: We expect to see a more active, less antagonistic   and more cooperative foreign policy from the Biden administration. This will likely translate into increased development aid which if you recall was cut during the Trump years.

President Biden has already revoked a number of measures from his predecessor, for instance by stopping the expulsion of unaccompanied children, a phenomenon which witnessed an upward trend in recent years. Above all, the Biden administration has just announced a 4 billion dollar plan to address the “push” factors that drive migration flows from the region to the United States. These are closely linked to issues of poverty, violence, and governance as well as environmental factors, given that many economies in the region are highly dependent on agriculture.

François Doux: Looking at their economic prospects, the horizon is rather favourable for these Central American economies. Of course, they have been shaken by the Covid crisis. Tell us about the risks these economies face in the months ahead. 


Salim Hammad: The main risk is social, with a cocktail of factors that are hardly favourable. Social tensions were rising ahead of the health crisis in certain countries. This is the case for Costa Rica with its public sector reforms, but also with the social demands in other countries, notably Guatemala and Panama. Then there is the rather violent political crisis in Nicaragua. On top of that, the country has very little fiscal manoeuvring room, unemployment is on the rise, especially among youth, and inequality and poverty are both getting worse. The IMF estimated recently that for many countries, per capita GDP would not return to pre-crisis, pre-pandemic levels before 2024. We must also add two aggravating factors to this list: the upturn in oil prices, since most of these countries are net hydrocarbon importers, and the risk of hurricanes and droughts, which are another source of these famous migrant caravans observed in recent years.

François Doux: Thank you, Salim Hammad, for this update on the economies of Central America. We will be back in a moment with Three Questions on the United States and a look back at the 1970s with William De Vijlder.




François Doux: In the late 1960s, the Beatles were singing “Back in the U.S.S.R.”. Today the refrain is more likely to be “Back to the seventies”. In Three Questions, we will talk with William De Vijlder about the 1970s and why they are back in the economic news. Hello William.

William De Vijlder: Hello François.

François Doux: First question: why this reference to the 70s?

William De Vijlder: The reference is inspired by recent opinion pieces, notably by the former US Treasury Secretary Larry Summers. They claim that the United States is now experiencing a paradigm shift in terms of economic policy. It has been the biggest change since Ronald Reagan and Paul Volcker were at the helm. At his inauguration in 1981, it is Ronald Reagan who said that “government is the problem.” Clearly, government was not going to be the solution, but today, the administration has taken a whole new direction with a series of initiatives launched by Joe Biden. Paul Volcker arrived at the end of the 1970s. He too made a fundamental change.

François Doux: Second question William De Vijlder. What was the problem in the 1970s? There was oil and inflation, there were even ideas.

William De Vijlder: Larry Summers’ comments implicitly referred to the major problem of the 1970s, not only in the United States but also in many other countries: runaway inflation that was impossible to control. Several factors were at play. First, by the end of the 1960s, the US economy was already beginning to overheat, which fuelled an upward trend in wage growth and inflation. Second, there were several major shocks. There were two oil price shocks, with more inflation in the economy, and an inappropriate monetary policy. It was clear that in the 1970s, before the arrival of Paul Volcker, the Fed chairman lacked the courage to tighten monetary policy because it was not really in keeping with the times.

François Doux: Third and last question. In 2021, what lessons can we learn from the 1970s? There is currently a lot of talk about inflation expectations.

William De Vijlder: What is feeding fears today is a whole range of factors pointing towards accelerating inflation. It can be seen in the latest surveys of business leaders.

Commodity prices have risen sharply, there is a shortage of semiconductors… Jerome Powell, chair of the Federal Reserve, said: “Yes, we see all that, it will be fleeting and temporary. What is very important is that inflation expectations have not risen. Thus we can continue to be relaxed about it”. This is an extremely important point. In a recent speech, he insisted strongly that the Federal Reserve had learnt the lessons of the 1970s. In other words, it had learnt the lessons of its monetary policy errors. If there were a bigger and more sustained increase in inflation, the Federal Reserve would not hesitate to act and to raise its key rates. This scenario must be monitored closely, notably by keeping an eye on inflationary expectations. One thing that is clear today is that financial markets are not expecting a severe monetary tightening.

François Doux: So we must monitor the statistics that foreshadow inflation, along with the Fed’s communications, of course. Thank you, William De Vijlder, for these Three Questions.

William De Vijlder: Thank you.

François Doux: Tune in again next month for a new edition of EcoTV.

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