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The Cuba Effect on U.S.-DPRK Relations

Brookings Institute Blog - Thu, 12/18/2014 - 14:50

Many Korea observers were surprised and excited by the news that President Barack Obama is redirecting U.S. policy toward Cuba from Cold War enemy to neighborly reconciliation. The dramatic change itself is big news, but people wonder if more reconciliation might be in the works—with North Korea. Unless there is substantial action by Pyongyang toward denuclearization and the dismantling of the police state, people should not get their expectations up that U.S.-DPRK relations might improve in any historic, dramatic way in the near future. A Cuba effect that is positive is highly unlikely.  Rather, the impact may be negative one for U.S.-DPRK relations. Here’s why. 

President Obama publicly stated from early on in his presidency that he wants to improve relations with Cuba. There has been no such clear, explicit statement regarding North Korea. (Statements of desire or intent are important as a way to prepare the public, even if something is to take place in the long run or even as a wish.) More important, the White House has been working toward normalization with Cuba for the last year and a half at least. That is very different from ‘strategic patience,’ and the lack of bold, creative efforts regarding North Korea. Even more important, the Obama administration has been focused on predicting, preventing, and containing aggressive actions by Pyongyang. Cuba, by contrast, has not been testing missiles and nuclear devices. 

The U.S. business community has been hampered by the embargo and other restrictions on economic activity with or in Cuba while Latin Americans, Europeans, Russians, and Chinese have been engaged with Cuba. Business communities played an important role in pushing for normalization with Vietnam during the Clinton administration, and the same is true regarding Cuba. But, we have no defined business community in the U.S. that advocates for economic access to North Korea, at least not yet.

Cuban-Americans, although for many decades since the 1960s to late 2000s, were strongly anti-Castro and were/are an important demographic group in U.S. elections, especially in the swing state of Florida, they have transformed over time to support the relaxation of bans on travel, remittances, etc. One reliable university poll finds that in 2014 a large majority — 71% — believe that the U.S. embargo of Cuba has not worked at all or has not worked very well, and 68% of those surveyed support the restoration of diplomatic relations with Cuba. What’s interesting is that younger generations of Cuban-Americans have moved away from their parents’ and grandparents’ hardline stance against Cuba and have formed moderate views and organizations. The same poll showed that 90 % of the younger generation support normalization. There is no Korean-American organizational activity or voting activity that can pressure Washington to reconcile with the DPRK, and the White House can’t depend on any ethnic Korean bloc to support a controversial move as the one President Obama made today, December 17, 2014. 

Some Republican congressional leaders are very angry about Obama’s action and will fight tooth and nail against the White House’s efforts to improve relations with Cuba. The Senate has to vote on the lifting of the embargo, and a big fight is guaranteed to happen. And members of Congress have been quick to exclaim that the United States should never recognize Cuba until it takes on democratic reforms and improve human rights. Cuba’s record is better relative to North Korea’s, but viewed as deplorable by many in Washington. The bar is much higher for Pyongyang on democratic reform and human rights. 

The Obama administration will have its hands full making today’s declaration of reconciliation and peace become reality through changes in laws and regulations that have kept the U.S. and Cuba far apart in spirit, despite the geographic proximity. It is doubtful that it can take on an even bigger challenge of reconciling with the DPRK. Some members of Congress would don full battle gear in such a case, especially since their blood is boiling with anger over the Mr. Obama’s about-face policy regarding Cuba. And reconciliation and peace with Pyongyang is not a bilateral affair, as it is with Cuba. It is mired in a web of historical, diplomatic, military, and legal complexities involving South Korea, China, Japan, Russia, and other countries. For the United States, normalizing relations with Cuba does not change the geopolitical structure of the Americas. Reconciling and normalizing relations with North Korea requires fundamental restructuring of U.S. military, economic, and political interests and assets in East Asia. The Cold War with North Korea will likely continue while the United States’ relations with Cuba undergo a major thaw.  

Authors Image Source: Handout - Jill Zuckman / Reuters         
Categories: Blog

The Cancellation of South Stream is a Pyrrhic Victory, At Best

Brookings Institute Blog - Thu, 12/18/2014 - 14:15

For months, pundits and policymakers in North American and European capitals have put pressure on countries in Central and Eastern Europe to abandon their support for South Stream, a major gas pipeline planned to run from Russia to Europe. From a Russian point of view, South Stream was the final piece in a decade-long tug-of-war with unreliable transit state Ukraine, which repeatedly blackmailed both Russia and its European clientele. In order to reduce these transit risks, Gazprom invested billions to construct the Yamal pipeline through Belarus and Poland, and most recently built the Nord Stream pipeline through the Baltic Sea, straight to Germany.

South Stream would have brought a maximum capacity of 63 billion cubic meters (bcm) of natural gas across the Black Sea, into Bulgaria, and then the pipeline would have split, supplying the Balkans and Austria, with the other branch eventually supplying northern Italy. On December 1, amidst western sanctions and continued anti-Russian rhetoric in Europe, Russian President Vladimir Putin, while on a visit to Turkey, announced that South Stream would not be built. Notwithstanding some back peddling by European politicians, on December 9, Gazprom confirmed that the decision to abandon the project was final. Whether that is actually the case remains to be seen, and in the long-term, a Turkish route to supply southern Europe may well emerge.

Regardless of the final outcome, what does this decision tell us?

First, we have to establish that this move is unlikely to have direct repercussions in terms of available gas supplies in Europe. South Stream was only going to become operational in late 2015, and that was probably an optimistic date. Moreover, it has long, and rightly, been debated as to what extent Gazprom truly needed this pipeline to supply its European customers. The Russian argument has always been that by bypassing Ukraine, the company could honor its existing contracts in European markets. Similarly, Gazprom has invested in gas storage facilities in Italy, so that in the event of a supply disruption it could still honor its contractual agreements. In fact, Gazprom currently owns the largest share of gas storage facilities in the EU. However, there were also concerns that by constructing South Stream, Gazprom would lock-in some of its customers, particularly in Central and Eastern Europe, and that after completion these customers would be easy victims to market power abuse and arbitrary pricing.

Second, it confirms that President Putin continues to surprise most observers and policymakers. As my colleague Fiona Hill explains, Putin cleverly made a sacrifice by ending a project that had become politically and financially too expensive. In my view, by abandoning this project, Putin has sent a message that he has had enough of Europe’s continued complaints and critiques about its role in Ukraine, an issue that both sides continue to be divided over. With these actions, Putin is attempting to stay ahead of his adversaries, though his country is increasingly being backed into a tough corner, fuelled partly by economic sanctions, but overwhelmingly by tanking oil prices, the devaluation of its currency and skyrocketing interest rates.

Third, in less than two weeks, governments in European and North American countries have received two fresh pieces of evidence that Russia’s oft asserted isolation is a farce. In May of this year, China made clear that it had no problem doing business with Russia despite it being a pariah, as the two countries concluded negotiations to construct a 38 bcm gas pipeline from Russia to China. These negotiations had lasted over a decade and are part of Russia’s long-standing desire to diversify its markets; the situation in Ukraine and the geopolitical fall-out created a context in which China and Russia could consummate the deal. Then, in early December, President Putin visited Turkey, where he announced the cancellation of South Stream and instead proposed a reinforcement of existing energy relations with Turkey. Many uncertainties remain as to what form, route or volume this reinforcement will take. Nevertheless, assuming Turkey realizes its ambitions to develop a gas trading hub, and assuming the Trans Adriatic Pipeline from Turkey to southern Europe is eventually built, this agreement may turn out to be an alternative supply route for Russian gas to Europe.

Only days later, President Putin travelled to India where he concluded a series of trade agreements, as my colleague Tanvi Madan describes. Russia has major disagreements with all of the aforementioned countries in other areas, and there is surely mutual suspicion and historical baggage, but that has not gotten in the way of conducting trade. Though arguably none of these agreements have been ironed out and many obstacles remain, the overarching message is the same: pragmatism over idealism. In China, there are certainly concerns about increased gas trade with Russia, but concerns over air quality require the authorities to attract more natural gas to replace coal, and several years of successful oil deliveries (in 2013, about 30 percent of Russian oil was exported to Asia) have created some confidence in China. Whether relations are extended beyond resources is uncertain at this point.

Virtually all the anticipated growth in energy consumption in the coming decades is expected to take place in non-OECD countries and rising economies like Turkey. It thus makes sense that Russia is looking at some of these countries as increasingly important trading partners, while at the same time making clear that western sanctions have not isolated it. Earlier this year, a wide range of countries abstained from voting on the U.N. resolution that condemned the annexation of Crimea. Among these countries were China, India, Argentina, Brazil, South Africa, Egypt and others. Together these countries represent over 60 percent of the world’s population and have governments which are increasingly dissatisfied with existing institutions and power configurations. At the same time, their economic clout is increasing.

From a European point of view, the cancellation of South Stream cannot be a reason for celebration. Negative short-term consequences of the decision are unlikely at this point, as Gazprom does not have reasonable alternative markets in which to sell its hydrocarbons. That is likely going to change though in the coming years, even though it will take considerable time before gas trade with countries like China and Turkey can begin or be expanded, and later maybe with India, Korea, and Japan, as each will need infrastructure to materialize, financial arrangements set in stone, and new supplies developed. Regardless, it is unclear how it can be in Europe’s interest that relations with its major trade partner, largest external energy supplier and neighbor, have turned as sour as they currently have. The European Commission currently focuses on increasing gas supplies through the Turkish route, albeit with gas originating in Azerbaijan, Turkmenistan, Kurdistan or, one day, Iran. That is fine, though it is important to keep in mind that all these alternatives have their own obstacles to overcome, and the contribution of the alternatives to Russian natural gas should not be overestimated, as we concluded in an earlier study. Moreover, if Russia and Turkey increase their gas trade, and Turkey realizes its ambition to become a gas hub (Turkey has explicitly said it is not interested in becoming a transit state), then Russian gas may just enter that cocktail before it reaches Europe, assuming that the EU is able to maintain a normal working relationship with President Recep Tayyip Erdoğan. Thus, the cancellation of South Stream is a Pyrrhic victory at best. Europe struggles to get an energy policy in place, to complete its internal gas market and to make natural gas more competitive to start with, as its emissions trading scheme requires drastic reforms. It is heavily divided over nuclear energy, shale gas, renewables and the future use of coal, and who pays what for critical energy infrastructure. In that context of broad European energy challenges, one would think that European policy makers would have more important issues to deal with than quarreling about a pipeline.

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Categories: Blog

New U.S.-Cuba Policy Will Revitalize Hemispheric Relations

Brookings Institute Blog - Thu, 12/18/2014 - 13:32

The steps announced by the White House yesterday to re-establish diplomatic relations with Cuba and move towards normal travel and trade between the two countries are remarkable. There have been many false starts during the past 50 years of back channel negotiations seeking to improve U.S.-Cuba relations. In recent years, Cuba had already been playing a more positive role in regional and global relations, for example by hosting the Colombian peace negotiations, a process that the United States supports, and by sending medical personnel to combat the spread of Ebola in West Africa. Although pressure in the United States for a change in Cuba policy had been building, the president’s announcement goes beyond what had been discussed in the past and beyond what many thought possible. Easing the restrictions on trade, travel, investment and financial relations between United States and Cuban citizens also builds on the process of economic restructuring that has been underway in Cuba in recent years. This has already produced remarkable transformations in Cuban society, such as an emerging middle class and a growing non-state sector that is offering new opportunities for hundreds of thousands on the island.

It also goes without saying that this is an important story for U.S. domestic politics. U.S. policy towards Cuba has always been controversial, and there is considerable resistance to change even today, particularly in the U.S. Congress. On the other hand, U.S. public opinion towards Cuba has been shifting, particularly across generational and demographic lines. In early 2014, 56 percent of all Americans and 63 percent of Floridians were found to be favorable to improved relations.

President Obama’s use of executive authority to push for restored diplomatic relations with Cuba and liberalization of economic ties creates a historic opportunity to revitalize hemispheric relations, but there are also some potential pitfalls ahead.

New Space for Productive Regional Engagement

Since the 1990s, Latin America’s support for U.S. policy towards Cuba in the hemisphere has dwindled. Even the once-shared consensus on the defense of democracy and human rights, embodied in institutions such as the Inter-American Commission on Human Rights and the Inter-American Democratic Charter, has weakened in recent years. This meant that most Latin American states no longer accepted a lack of democracy as a valid rationale for excluding Cuba from hemispheric institutions, such as the Organization of American States or the Summit of the Americas. Leaders of the region made this clear to President Obama at the Cartagena Summit of the Americas in 2012, and until yesterday, there was a real possibility that U.S.-Cuba relations might be the focus of another acrimonious Summit in Panama in 2015.

As Richard Feinberg argued yesterday, there is a major opportunity to reframe U.S. participation in the upcoming Summit of the Americas. By re-establishing diplomatic relations with Cuba, the United States has removed a contentious issue that has been a thorn in U.S.-Latin America relations and has diverted attention from more productive areas of collaboration in the hemisphere. This policy change creates a space for the U.S. to engage more productively with Latin America on a broad agenda, including on key Summit topics of democracy and human rights, as well as on global competitiveness, energy and environment, and social inclusion. All of this serves to enhance U.S. soft power in the region, which has eroded in the past decade.

Divergent Interests vis-à-vis Venezuela

However some states in the region, particularly Venezuela, are likely to be quietly concerned by the implications of normalized U.S.-Cuba relations. Venezuela has been a major supplier of oil to the United States historically, although this role has declined in recent years. U.S.-Venezuela relations have been quite poor for over a decade, and Venezuela has led a coalition of countries, known as ALBA (Bolivarian Alliance for the Peoples of Our America), that have adopted generally anti-U.S. foreign policies. Starting in the early 2000s, Venezuela has supplied oil to Cuba on very generous terms in return for Cuban technical, medical and political support. So while President Maduro eventually welcomed the historic news on U.S.-Cuban relations, initial reactions in Caracas suggest that Venezuela was never informed of the negotiations with the United States. If true, this is a telling indicator of the state of Cuba-Venezuela relations.

Venezuela’s economy is rapidly deteriorating, and the Cuba-U.S. policy shift highlights its increasing isolation in the region. Venezuela depends on oil for close to 95 percent of its foreign exchange and it imports over 70 percent of basic consumer goods. The decline of oil from an average of $111 per barrel in 2012 to less than $60 today represents a dramatic decline in the government’s ability to satisfy basic consumer needs, let alone fund Venezuela’s international petrodiplomacy in the region. Even President Maduro has admitted that his regime needs oil at $100 per barrel, and other estimates put Venezuela’s breakeven point even higher. The rapid deterioration of Venezuela’s economy is also a blow for whatever soft power its Bolivarian regime had accumulated internationally.

The United States and Cuba have both invested considerable prestige and diplomatic effort in securing the present agreement, and it opens up a new panorama for inter-American relations. In addition to the themes of democracy and human rights that will be discussed at the Summit of the Americas, there are important areas for cooperation between the two countries on security and energy in the Caribbean. But both the United States and Cuba are part of a triangular relationship with Venezuela, a regime whose economic fortunes are rapidly deteriorating and whose political future looks increasingly troubled. Cuba and the United States will inevitably have differences of opinion over how to handle Venezuela, given their very different historical experiences and government-to-government relations with this country. Managing these tensions will be an important part of successfully completing the agenda that President Obama has set out.

Authors Image Source: © Carlos Barria / Reuters         
Categories: Blog

U.S. Normalization with Cuba: Is North Korea Next?

Brookings Institute Blog - Thu, 12/18/2014 - 12:57

President Obama’s decision to normalize relations with Cuba is an historic development that's been long overdue.

The reality is that U.S. policy over the years has not proven effective in changing things inside Cuba. In fact, that policy has only served to isolate the United States in the region and in the United Nations. There was a real prospect that continuing on the path adopted many years ago would not only not have worked, but might also have led to continuing difficulties for the United States in the hemisphere.

At the same time, U.S. public opinion has also shifted on Cuba, including among Cuban-Americans and the business community. It was clearly time for a change -- a change that was hinted at by Candidate Obama before he became president.

Unlike North Korea, Cuba did not slap away the "outstretched hand" of the Obama Administration in 2009. Pyongyang responded to President Obama's outreach with a missile test and a nuclear test. Also unlike North Korea, Cuba has not posed a threat to the United States for some time. Cuba is also not threatening the region with nuclear holocaust. Cuba is not developing weapons of mass destruction, and there have been numerous signs that Cuba is interested in pursuing serious reform, again unlike North Korea. For all those reasons, and more, Pyongyang has received the near-universal opprobrium of the international community.

It is ironic that Cuba, a country on America's doorstep within easy reach of American military power, and with a 55-year history of antagonistic relations with the United States has been willing to reciprocate the good will of Washington. Today's developments reflect considerable wisdom and courage on the parts of both the United States and Cuba, and impressive leadership on the part of Pope Francis.

Many times over the years, the DPRK has had an opportunity to demonstrate similar wisdom and courage, but instead has opted for a tragic course of confrontation and duplicity. Twenty years ago this month, North Korea and the United States agreed to open liaison offices in each others' capitals. I was supposed to open that office in Pyongyang. It is interesting to reflect on where bilateral relations might be today had Pyongyang not reneged on that agreement, as it has with so many other agreements.

Today's move by the United States and Cuba, together with the ongoing delicate talks between the United States and Iran, serve only to highlight the degree to which the DPRK is an outlier in contemporary international society. What a tragedy for the DPRK and its people.

Authors Image Source: Carlos Barria / Reuters         
Categories: Blog

Hutchins Roundup: Retirement Savings, Government Bond Spreads, and More

Brookings Institute Blog - Thu, 12/18/2014 - 08:05

Workers don’t reduce retirement savings when contributions aren’t tax deductible
John Beshears, David Laibson, and Brigitte C. Madrian of Harvard and James J. Choi of Yale, find that employees of 11 companies contributed the same amount to retirement plans after employers introduced Roth 401(k) plans, the kind that offer no upfront tax deduction, as they did when employees were offered only 401(k) plans for which contributions are tax deductible. They speculate that employees don’t understand the difference, and suggest government might consider making more retirement saving non-deductible up front but tax exempt in retirement.

Favorable fiscal outlooks reduce government bond spreads

Using surveys of private forecasts from 1993 to 2011 for France, Italy, and the United Kingdom, Jacopo Cimadomo of the European Central Bank, Peter Claeys of Vrije Universiteit Brussel, and Marco Poplawski-Ribeiro of the International Monetary Fund find that improving forecasts for government budgets – not just actual improvement -- shrink sovereign interest rate spreads, particularly for Italy.

The rich played a larger role in the Great Recession than previously suggested

Bas B. Bakker and Joshua Felman of the International Monetary Fund suggest that, contrary to what some have claimed, the behavior of the rich played a significant role in the Great Recession. Specifically, the authors point to the decline and subsequent surge in the savings rate of the rich in the pre- and post-crisis years, which likely played a critical role in the aggregate consumption boom-bust.

Chart of the week: Russian ruble in the midst of a historic depreciation

Speech of the week: Allowing competitive forces to flourish is “essential for future economic growth”

“It should be clear by now that I am a big fan of market forces. The returns from successful financial innovation in market-based finance and P2P finance are likely to be very large, from the perspectives of both the innovator and the macroeconomist. Allowing those competitive forces to flourish, within principles-based regulation aimed at protecting the financial system, is essential for future economic growth… But all of these market structures exist already, so speculating on their future is not that much of a stretch. That makes me wonder if we are missing something big. How blue-sky do we want to get? Does anybody besides me wonder what the banking system looks like in the background of Star Trek? Or, what about the corporatist model of finance, which lies in the background of Margaret Atwood's novel, The Year of the Flood? Now that's blue-sky thinking: people work for a massive corporation, live in the corporate compound, go to corporate restaurants and events, and bank with a financial intermediary wholly-owned by their own employer, which in turn invests the funds in growth for the corporation.”
– Stephen S. Poloz, Governor of the Bank of Canada

Finally, if you didn’t catch our event The Long Run Outlook for the Federal Budget: Do We Know Enough to Worry?, watch a a video of the full event, along with the discussion papers and response materials »

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Categories: Blog

Around the Halls: Brookings Scholars React to the Fall of the Ruble

Brookings Institute Blog - Wed, 12/17/2014 - 15:30

Very early Tuesday morning, after the ruble had plummeted to new lows, the Russian Central Bank (CBR) raised interest rates from 6.5 percent to 17 percent. Why didn’t the Russian government choose to use their massive currency reserves to try and stablilize the ruble instead of taking the path they did? Should we expect high inflation in Russia? What is the Russian Central Bank’s next move? Putin’s? Brookings scholars react to news about the ruble and attempt to answer some of these pertinent questions.

Clifford Gaddy, Senior Fellow, Center on the United States and Europe, Foreign Policy Program:
Its foreign exchange reserves—and its nukes—are Russia’s ultimate lines of defense. If they are gone, or negated, Russia is defenseless. As long as the West keeps its sanctions (and they are expected to continue), it is essential in Putin’s mind that Russia keep the reserves.

That leaves a central banker with no good option. This rate hike won't help, and since it is drastic but still doesn't help, it just makes things worse in terms of expectations.

How far down can the ruble fall? There is always some equilibrium level. But now there's panic. Psychology trumps market fundamentals, just like in a bank run. Unless there is a break fairly soon in the oil price fall or a signal that sanctions may be eased, the ruble will continue to weaken. Whatever else is left to do—and capital controls are an obvious, almost inevitable, option—to avoid drawing down the reserves will further harm the economy.

Western observers gloat. But we should instead be worrying about Russia reaching a tipping point where they feel that it's clear the West is aiming to destroy them, that time is against them and that they have nothing to lose by acting in a drastic way and acting sooner rather than later. We should hope they find more things to try in the financial sphere before they say 'stop' and turn to military (and nonmilitary, “hybrid war”) options.

I can't help thinking about the 2009 paper by Jeffrey Record, "Japan's Decision for War in 1941: Some Enduring Lessons." Oil to Japan then is foreign exchange to Russia today. Japan got 70 percent of its oil from the United States before we imposed the embargo in 1941. In late summer 1941, Japan's oil reserves amounted to less than a year's consumption, even with "strict wartime controls," as the high command wrote in a memo. From the outside point of view, it made no sense for Japan to start a war with the United States, which economically was 10 times Japan's size. But if they did nothing, they would be destroyed. And they thought the United States did not have the stomach for war. But the main thing was the perceived alternative of losing all sovereignty.

Record wrote (p. 21) that: "The United States was, in effect, demanding that Japan renounce its status as an aspiring great power and consign itself to permanent strategic dependency on a hostile Washington. Such a choice would have been unacceptable to any great power."

Jeremy Shapiro, Fellow, Center on the United States and Europe, Project on International Order and Strategy, Foreign Policy Program:
If, as Cliff implies, the Russian government prefers Russian poverty to Russian dependence on the West, then the Russian economy, and by extension global stability, are in for a rough ride. Reserves are usually the first line of defense to prevent a currency crisis, but in the Russian case they seem to have become more of a strategic asset to hoard than an economic tool to deploy. The Russian Central Bank’s signal to the market that the reserves are not in play has both worsened the currency crisis and limited the efficacy of other economic tools. In general, the subservience of Russian economic policy to perceived security imperatives means that we should not expect Russian economic policymakers to find a graceful path through this crisis even if one exists.

None of this is good news. Many neo-Cold Warriors in the West are experiencing an almost hormonal level of schadenfreude and expecting the Russians to bow to economic reality in Ukraine. But having sacrificed the Russian economy on the altar of strategic independence, Russian leaders are unlikely to concede on core security issues simply because of a devastating currency crisis. And in any case, even grudging Russian concessions on Ukraine at this point would not likely reassure markets that Russian-Western relations are on a good long-term trajectory. More likely, Russian leaders will count on the famous Russian capacity for hardship, as well as a healthy dose of repression, to preserve domestic stability and the Russian regime through what might easily be a prolonged recession and (yet another) epic destruction of Russian savings. The presence of a foreign enemy to blame for the economic crisis will certainly help. As Cliff says, Russian aggression in some form seems a natural accompaniment to this policy.

If, as the West has claimed all along, the goal of economic sanctions has not been to destroy the Russian economy or bring hardship to ordinary Russians, then we are suffering from a catastrophic success. No one anticipated a coincident nearly 50 percent drop in the oil price in just a few months, but it has happened and the combination has been deadly to the Russian economy. Sanctions have once again proven to be hard to adjust to circumstances or to calibrate. But we need to at least try. The last Russian economic crisis in the late 1990s gave us the Putin regime; the next will not be any more satisfying. We cannot build a better relationship with Russia or create a more stable Europe on the rubble of the Russian economy. That means Western policymakers should think about how to prevent rather than encourage the Russian economic crisis we are witnessing. Without underestimating the difficulties of doing so, the best way to do that is to seek a genuine security compromise with Russia over its neighborhood that treats Russia as a great power even though it is in the midst of a serious economic crisis.

Steven Pifer, Director, Arms Control and Non-proliferation Initiative; Senior Fellow, Center on the United States and Europe, Center for 21st Century Security and Intelligence Foreign Policy Program:
Putin and the Kremlin may have persuaded themselves that the goal of the economic sanctions is regime change, but is not. The goal is a change in Russian behavior toward Ukraine. I still believe that the sanctions have a chance of moving the Russians toward a settlement on eastern Ukraine. While Jeremy and I differ on the particulars of a compromise, I agree that now would be a good time for the West to signal to the Kremlin that: 

  1. The sanctions would be eased if Russian policy toward Ukraine changed and; 
  2. The West would be prepared to work with Kyiv and Moscow to find a face-saving way out for all. Putin might not believe it, but he would have the option of testing the proposition … or not.

Fiona Hill, Director, Center on the United States and Europe; Senior Fellow, Foreign Policy Program:
The news that the president intends to sign the congressional sanctions bill and the ruble’s freefall will simply harden Putin’s assumptions that the United States and the West are targeting him and trying to implement regime change. As far as Putin is concerned, Russia is already at war with the West and he is thus now operating in a wartime scenario where Russia’s security and ultimate survival as a great power are uppermost in his mind, not salvaging economic competitiveness. The U.S. and EU sanctions have been damaging, but combined with the precipitous drop in oil prices (which, as Cliff and Jeremy note, we did not anticipate), they are ruinous.

If nothing happens to halt the fall of the ruble, and the CBR cannot get things under control, the nature of the Russian economy will be changed forever, along the lines of the kinds of dislocations we saw in the 1990s, with all the political knock-on effects. The effects will not be limited to Russia—they will reverberate across all the economies that have ties to the Russian economy, both inside the Eurasian Union (Armenia, Belarus, Kazakhstan), and outside, including in the European Union. This will weaken an already faltering neighborhood even further. Putin will not back down on his current policy (geopolitical and economic)—running the risks Jeremy and Cliff highlight above.

Absent some alternative signal from the United States, we are in a dangerous escalatory dynamic with Russia. The challenge is how all of us can test the proposition of finding a mutual face-saving way out of this crisis. We need some formula that goes beyond Ukraine and addresses Putin’s desires for Russia’s great-power status to be recognized and respected in some way in the European and global context, on the one hand, and that cedes no ground, on the other, on the fundamental principles of post-World War II security that Russia has violated. We also need a mechanism for engaging with Russia that keeps the United States and its European partners working together on this, perhaps in a format similar to the arrangements we have for dealing with Iran and its nuclear program.

Unfortunately, we may be close to the tipping point Cliff fears, which means we do not have the luxury of time to get our act together. The markets will not wait around while diplomats dither and deliberate about new Minsk or Geneva processes for engaging with Russia.

Jeremy Shapiro:
Steve and I do differ on the particulars of compromise, but those differences are very significant. Indeed, Steve’s use of the word “compromise” recalls to me this a classic Inigo Montoya line from The Princess Bride. It is not a compromise at all to remove our punishment (sanctions) in return for the Russians conforming to our policy demands, even if we allow some face-saving. That is a victory, even if in the 1990s we often told the Russians (and even believed ourselves) that such deals were compromises. I don’t think the Russians will accept that any more. And even if, because of economic difficulties, they had no choice but to accept, they would be resentful and we would simply find ourselves in similar difficulties when they eventually recover from their economic crisis—no doubt at the moment we are considering Belarussian membership in NATO. In this regard, I think Inigo Montoya also neatly encapsulates the basis of our post-Cold War Russia policy.

Fiona Hill:
This, in fact, is Putin’s own personal tactic for dealing with adversaries. Threaten, and then follow through on the threats and punish; and then lift the punishment once the adversary has backed down and conformity is reached (all without having compromised on Russia’s position). Just like the six-fingered man, Putin will be wise to that approach before we even get around to adopting it.

Steven Pifer:
We are clearly on a different wavelength, Jeremy (not for the first time!). Putin got himself and Russia into the sanctions mess by invading a sovereign country, albeit one in a deep political crisis. We should not forget that.

Decentralization, status for the Russian language, a channel to ameliorate the Ukraine-EU association agreement implementation’s impact on Ukraine-Russia economic relations, a Ukrainian decision to kick any consideration of NATO years down the road (and tie it to a referendum), NATO respect for that decision, plus deferring the resolution of Crimea’s status to the future are a reasonable basis for a settlement of eastern Ukraine. The Russians clearly don’t want the Donbas; they are using it as leverage to pressure and destabilize Kyiv. The points I just laid out would answer what Moscow has said it wants the past 10 months. They could be dressed up in a way that would allow the Russians to claim that they had protected their position.

Putin may believe we are about regime change, not a change in policy. But this is a proposition that he could test.

I do not believe we should let Russia break the fundamental rules of European security, construct an alternate reality about what they think is happening and what motivates Western actions, and then make concessions to that alternate reality. If the West does so, we should not be surprised when the Kremlin repeats the gambit.

Furthermore, if the United States maintains that it must not allow Putin to play by 19th century rules, then we must make sure that the Ukrainians are fully engaged. This is not just an issue between the West and Russia. The Ukrainians should get a vote in determining their own future.

Lilia Shevtsova, Nonresident Senior Fellow, Center on the United States and Europe, Foreign Policy Program:
This exchange demonstrates the key narratives in the Western approach to the current crisis in the relationship between Russia and the West, the war in Ukraine and the Russian internal developments.

Here are a couple of points in a way of brushstrokes in response from the Russian liberal perspective.

 

  1. On the Russian elites—will they rebel and replace Putin? Conformism and cowardice are still their nature, but the elites are definitely worried and are gradually becoming more and more nervous. They already understand that Putin does not guarantee their wellbeing and security. They will start–and have already started—looking for the new ways of survival. But they will hardly voice their desperation openly before the tide of protest rises. I believe that change in the the regime and leadership as a way to preserve the system of personalized power (which has a broad base of support) is becoming a very feasible option.
  2. On the current Central Bank response to the economic situation. The CBR is now under severe criticism for the rate hike and lack of consistency. But whatever they do, they can't change the logic of the economic recession. They try to cure the consequences of the disease. Moreover, they make the things worse—by saving Rosneft they have triggered only a new wave of hysteria. Psychology, desperation and total paralysis of the Kremlin are running the show now.
  3. Fiona is right that Putin is at war and that this is a "wartime scenario". This is the right diagnosis of the Russian situation. The war paradigm explains a lot. But the real question is this: what has forced the Kremlin to push Russia into a war paradigm? It seems that some participants of this discussion believe that the key reason has been "security" consideration that became "uppermost" to economics. Really? What exactly has changed in the security area? Has NATO suddenly awoken? Did Obama stop his retrenching? Or has Merkel started to threaten Putin? Pro-Kremlin experts would support the "security" explanation which has been often used by Putin himself and which justifies the Kremlin's shift towards the militarist consolidation. Meanwhile, we are dealing with the old tradition of Russian personalized power turning to a war model at the stage of decay. Thus, this is not about security—this is about survival.
  4. The irony is that by turning to the war model, the Kremlin has activated the law of unintended consequences, and one of these consequences is the ruin of economy. Another is despair among the elites. One more consequence: TV as the main mobilizer of people has been replaced by the refrigerator and stomach.
  5. Someone has argued here that the Western sanctions could only strengthen the convictions among Russians that the "West is destroying Russia". The historical analogy (the case of Japan) has been used to prove that the West should avoid humiliation of the nation with great power longings. My observations here in Russia allow me to conclude that despite the Kremlin’s powerful propaganda and brain washing, there are a lot of savvy people in Russian society who see the Kremlin as responsible for the current economic downfall. True, the Kremlin and its propaganda are trying to beef up the "Weimar complex" among Russians. But the polls say that the "humiliation syndrome" has started to wear off. According to the Levada Center, Russians are not eager to pay for the military actions in Ukraine and to send their sons to fight there. Should Western analysts base their conclusions on the "humiliation saga"? To do so would help the Kremlin's survival mechanisms. One more thing: I wonder whether Putin and the Kremlin folks really feel any humiliation, even now, at the moment of downfall. I would say that the Kremlin revisionism is rather the outcome of another state of mind: cockiness and self-assuredness.
  6. I am definitely with Steve on the issue of "compromises" with the Kremlin. In fact, this is the Kremlin that, through various rhetorical exercises, offers the compromise "over the neighborhood", that is to return to the Yalta-Potsdam division of the areas of interests. We have to specify what this compromise would mean: rejection of many international laws and agreements that guarantee territorial integrity and sovereignty (in Europe too!), including the Helsinki process. This will be the surrender of the liberal democracies before the blackmail of the militarist regime. But will it guarantee that the other side will observe the new deal if the key reason for its expansionism and revisionism has an internal (not external!) nature? What a great example for China to experiment with compromises further! In any case, Western acquiescence during the last decade did not prevent the Kremlin from kicking over the global chessboard.
  7. But the compromise would always mean that two sides should make some concessions, you would say. My answer will be: why do you advise the West to surrender the principles? By the way, any compromise that link between the EU-Ukraine association agreement with the Russian agenda and the Ukrainian guarantee that it will not ask for NATO membership—is limitation of the Ukrainian sovereignty! Let Ukrainians decide how they will see their role in the world.
  8. Whatever tactical compromises are considered, Ukrainians have to decide about its nature and how they will build their future trajectory. I don't think that any state outside should advise Ukraine on the nature of any compromise. Let's not play with the Munich ghosts!

Finally, I would agree with Steve: "the Kremlin could repeat the gamble." And not because Putin has a bad and aggressive character; this is the nature of the system at the stage of degradation that wants to prolong its life.

Fiona Hill:
Lilia nails the difficulties here. We have to find ways of sticking to our principles and giving Ukraine agency in whatever approach we take. Cockiness and self-assuredness can also accompany a sense of humiliation—they are ways of over compensating. And Putin has enjoyed sticking it to the United States and the West at every opportunity to make up for all the times he and those around him feel that we stuck it to them. There is a tit-for-tat quality that is not just rhetorical in everything that has happened over the last year. Putin still wants to punish the West, and Ukraine along with it, to make a point and get us to back down. But as the saying goes you can cut off your nose to spite your face, and here we are. Perhaps what we need to do is look for some temporary or interim proposition (as we have been doing with Iran on the nuclear program), rather than try to thrash out any long-term arrangement. Like in the case of Iran, Putin wants the sanctions lifted, but he doesn’t want to do anything that will really constrain his room for maneuver and preclude other gambits. We are in for a long-hard slog here.

Steven Pifer:
In response to Lilia’s point about compromises on the EU-Ukraine association agreement and Ukraine putting off NATO ambitions to the future infringing on Ukrainian sovereignty, she is right that Kyiv should have a voice on these. But the Ukrainian government has suggested these kinds of ideas going back to June. The problem is that Russia has not picked up and engaged on them, which feeds my concern that, to date, Moscow is not interested in a compromise that could be accepted in Kyiv, but simply wants to sow chaos and instability in eastern Ukraine as a means to make things difficult for the Ukrainian government and slow, if not derail, its effort to draw closer to the European Union.

Authors Image Source: © MAXIM ZMEYEV / Reuters         
Categories: Blog

Obama Demonstrates Visionary Leadership in Refashioning U.S. Relations with Cuba

Brookings Institute Blog - Wed, 12/17/2014 - 14:00

Editor’s Note: Richard Feinberg is on the ground in Havana, Cuba this week. Stay tuned for fresh insights and analysis as the situation develops.

In today's historic announcement, President Obama demonstrated visionary leadership in refashioning U.S. relations with Cuba. His new measures advance U.S. long-term interests by supporting the opening of the Cuban economy to international trade and investment, the growth of the emerging private sector and the decentralization of business decision making—all policies that the United States supports worldwide. In addition, Obama's bold initiative repositions the United States in relations with our hemispheric neighbors and potentially transforms the atmosphere at the upcoming Summit of the Americas in Panama in April, from an atmosphere of confrontation where the United States would have been a besieged minority, to one of inter-American cooperation and renewed respect for U.S. leadership.

The president framed his initiative in very broad terms, noting the geographic proximity of Cuba and the United States, the need to remove the shackles of history and—anticipating anger from hard-line Cuban-American exiles—asserting that decades of U.S. hostilities intended to isolate Cuba have obviously failed. He placed the initiative in the context of U.S. diplomacy in the Americas, where the United States has been increasingly isolated on a number of important issues, with Cuba being the most emblematic. And the new policy has enjoyed the endorsement of the Pope, the conservative government of Canada and from a surge of announcements around the hemisphere, of many other governments. In Cuba, the streets are filling with spontaneous joyful celebrations—and the anticipation of strong relations with their close northern neighbor.

The president's new course includes a long list of very specific initiatives that many in the U.S. policy community have been advocating in recent months, including easing of travel restrictions, various measures in support of the Cuban private sector, including trade and capital transfers, initiating new efforts to increase Cubans' access to telecommunications and the Internet and smarter ways to promote civil society and human rights on the island. And American citizens will be permitted to enjoy Cuban cigars and rum (up to $100 per returning traveler)!

The high-profile announcement and the surprise decision to move toward normal diplomatic relations assures White House commitment to the implementation of these and other measures, to institutionalize a new bilateral relationship and to protect the president's initiative against any congressional counter-attack.

Related Cuba readings:
Brookings Scholar Ted Piccone reacts to President Obama's announcement about Cuba »
Brookings Scholar Harold Trinkunas reacts to the news of Alan Gross' release »

Authors Image Source: © POOL New / Reuters         
Categories: Blog

Coping with Budget Uncertainty: Gleanings from a Hutchins Center Conference

Brookings Institute Blog - Wed, 12/17/2014 - 13:08

We weren’t sure what answers we’d get when the Hutchins Center on Fiscal and Monetary Policy posed the question: What’s the smartest response from Congress and the president to the uncomfortable fact that today’s projections about future budget trends are surely going to be off?

And, to be frank, we ended the day with as many questions as answers, as you can tell if you read the papers, watch the video or skim the transcript. For the rest of you, here a few things I gleaned.

The economist’s approach. Alan Auerbach of University of California at Berkeley made the academic economist’s case that it’s not enough to find a way to restrain spending or raise taxes so the U.S. doesn’t continue to pile up debt under best-guess projections. Uncertainty about those projections means the government should do even more, essentially taking out insurance against unlucky breaks, or as he put it, “economic disaster.” That argument derives from economic theorists’ view of how individuals should behave when confronting uncertainty, he said. “Uncertainty means our policy choices will always turn out to be wrong in some sense. We’re going to have to make adjustments.” And it’s better to do more now to “lessen the consequences of uncertainty than simply to ignore it and let things happen.”

Not all economists are convinced. Peter Diamond, the MIT Nobel laureate challenged the argument that economic theory of individuals makes always applies to the government. Diamond, deviously citing earlier work by Auerbach and Kevin Hassett, argued that “in some circumstances it may turn out that more uncertainty about projections is a reason to delay legislative action and so to save less currently.” Brookings’ Henry Aaron argued that there is so little useful information in long-run projections that, most of the time, they can and should be ignored altogether. But as I listened closely, the academic economists really were challenging Auerbach less on his economic logic and more by invoking political reality. Indeed, Aaron’s concern is that long-run projections become ammunition in political fights rather than actually contributing to better decisions.

The political reality. Those who have played in Washington’s big leagues doubt politicians will ever take Auerbach’s advice. (And so does he: “I understand there’s a political problem whenever our theory says you should be putting resources aside, but yet, the resources are there and it’s tempting to spend them.) It’s hard enough to persuade politicians to do enough to narrow the gap between projected spending and projected revenues; it’s almost impossible to contemplate doing more in response to uncertainty. Rep. Jim Cooper (D, Tenn.) accepted the Auerbach prescription. “It’s almost a hallmark of civilized people to be able to delay gratification,” he said. “But that is very unpopular speech material. We seem incapable of doing that today.” No one challenged that view.

There was, however, a repeated distinction between Social Security and Medicare. There were frequent references to past decisions to make changes to Social Security far in advance (including the 1983 legislation to raise the age at which individuals qualify for full benefits and the general comfort with automatically adjusting benefits for inflation.) There was agreement that it’s easier to make credible long-run forecasts for Social Security as well as to fashion changes to that program. Health care is tougher. Credible long-run forecasts are much harder to make. It’s far from clear how to slow the growth of health care spending in the future without causing adverse effects on health. And legislating changes today that take effect later either aren’t credible or require delegating more authority to technocrats or boards of outsiders than is palatable to Congress.

Outside observers and inside-the-Beltway insiders agreed that it’s hard for Congress to deal with long-run deficits at times when the government is flush or running surpluses but also to legislate future spending cuts and tax increases when the economy is sick and in need of the opposite. When the economy is lousy, as it has been, White House veteran Gene Sperling said, “The sweet spot on fiscal policy is to have a single piece of legislation that both expands demand in the short run, but gives confidence on long-term fiscal policy.” That requires building automatic on-off switches into law.

Automatic pilot. Given the obvious inability of Congress to respond swiftly – or, sometimes, to respond at all – when the economy takes an unexpected turn, there is widespread interest in building automatic adjustment mechanisms into legislation though not much agreement on which sorts of mechanisms work best. NYU’s David Kamin noted that Congress failed to increase the amount of fiscal stimulus even when it became clear that the 2007-09 recession and subsequent recovery were worse than predicted, and suggested that a self-aware Congress could have anticipated that possibility and designed a mechanism in advance that would have automatically injected more fiscal stimulus. Sperling favored a provision that would automatically send more money to the states if the economy disappoints; Congress simply moves too slowly, he said. But Harvard’s Martin Feldstein emphasized the recent recession was unusual; most recessions are shorter so automatic mechanisms risk putting more fiscal stimulus after the recession has ended.

For Social Security, one often-discussed option is to automatically adjust the age at which Americans are eligible for full Security benefits for changes in life expectancy; the British are about to do that. Several suggested that policy is unfair because the rich tend to live longer than the poor. Feldstein said that’s a problem could be addressed by adjusting the age more for higher-wage workers and less for lower-wage workers, though that may be easier to describe to economists than explain to Americans.

The communications challenge. Those charged with supplying budget projections to politicians – Doug Elmendorf of CBO and Robert Chote of the U.K.’s new Office for Budget Responsibility – think long and hard about how best to convey uncertainty to politicians, who aren’t much interested in it. There are fan charts, probability distributions, confidence interval and ranges. But injecting a dose of reality, Bill Hoagland, who spent a quarter-century on the Senate staff, recalled one member of Congress telling him: “Young man, we don’t appropriate in ranges.”

Chote offered an intriguing approach to conveying the uncertainty around his agency’s estimates of the cost of particular proposals (known as “scoring” in the trade.) It qualitatively describes its confidence in the data, models and predictability of behavior underlying the estimates are on a six-grade scale (very high, high, medium-high, medium, medium-low or low.) Such judgments can, of course, be more politically treacherous than a best-we-can-do numerical estimate, but they do convey a lot of information.

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Categories: Blog

Historic Moves to Normalize Relations with Cuba

Brookings Institute Blog - Wed, 12/17/2014 - 10:30

Editor's note: Ted Piccone is on the ground in Havana, Cuba this week. Stay tuned for fresh insights and analysis based on his recent trip upon his return.

President Obama's announcement today of a comprehensive package of measures to normalize relations turns the page from a failed policy of isolation and punishment to constructive engagement with Cuba. It builds on the president's steps in his first term to ease travel and remittances but goes much further, to include a prisoner exchange, restoration of diplomatic relations, expansion of trade and travel for more Americans, easing of financial and telecommunications restrictions and other measures to support the Cuban people.

This is precisely the kind of bold presidential leadership needed to move our relations not only with Cuba but with the region and the world to a more positive and constructive place. This is very welcome news for the widening coalition of voices in the United States and around the world—religious leaders, business groups, human rights organizations, academics, members of Congress and a growing majority of Cuban Americans—calling on the president to take serious and positive unilateral steps to move from the Cold War past to a modern and more effective approach to reconcile relations with Cuba. Additionally, it will pave the way to revive U.S. leadership in the region in time for the Summit of the Americas next April.

Related Cuba readings:
Brookings Scholar Harold Trinkunas reacts to the news of Alan Gross' release »
Brookings Scholar Richard Feinberg reacts to President Obama's announcement about Cuba »

Authors Image Source: © POOL New / Reuters         
Categories: Blog

Alan Gross’ Release is Good News for U.S.-Cuba Relations

Brookings Institute Blog - Wed, 12/17/2014 - 09:30

The release of Alan Gross from his imprisonment in Cuba is good news, both for humanitarian reasons and because of what his freedom means for possible progress in U.S.-Cuba relations. Shifting public opinion in the United States shows the tide is turning in favor of engagement with Cuba, including in critical constituencies. But Alan Gross’ detention over the past five years has been a major impediment to more normalized U.S.-Cuba relations. Gross’ release can pave the way for a number of steps forward by both governments. Depending on how the United States and Cuba react, this may have important implications for the region as a whole, particularly since Cuba has been invited to participate in the Summit of the Americas in Panama later this spring.

At Brookings, scholars have been closely monitoring the process of economic restructuring underway in Cuba. The process has already produced remarkable transformations in Cuban society, including an emerging middle class and a growing non-state sector that is offering new opportunities for millions, though much remains to be done. Our policy research has examined the obstacles to deeper liberalization in Cuba created by the present policy environment. We have long recommended a number of steps that the Obama administration can take to allow this process to move forward more quickly. We look forward to President Obama’s remarks on U.S.-Cuba relations later today.

Related Cuba readings:
Brookings Scholar Ted Piccone reacts to President Obama's announcement about Cuba »
Brookings Scholar Richard Feinberg reacts to President Obama's announcement about Cuba »

Authors Image Source: © Gary Cameron / Reuters         
Categories: Blog

Opportunities to Transform Rural Health Care

Brookings Institute Blog - Wed, 12/17/2014 - 08:56

Rural communities face significant challenges to health care delivery: long distances to many medical services; shortages of health professionals (65 percent of all Health Professional Shortage Areas are in rural areas); and populations that are older, have lower incomes, and tend to be in poorer health.1,2 Many payment initiatives have sought to address these challenges, including additional payments to support local hospitals and bonuses for physicians practicing in rural shortage areas, yet despite these initiatives, rural populations continue to experience substantial problems of access to high-quality care.

Many clinical leaders are pioneering innovations to enhance rural health care delivery through new technologies that provide the means to enhance communication and dissemination of knowledge.  The Merkin Initiative on Payment Reform and Clinical Leadership recently hosted: MEDTalk: Transforming Rural Health through Telehealth and Education, where clinical leaders and payers discussed these emerging opportunities to improve health care for rural Americans, the payment reforms that would support these changes, as well as means of overcoming barriers to meaningful payment reform.  The event featured leaders from two innovative programs: Project ECHO, which facilitates remote provider education by connecting specialists and primary care practitioners to improve rural health care; and ANGELS, which applies telemedicine and education to treating high-risk pregnancies, perinatal bereavement, stroke, and spinal cord injuries.

Innovating the Primary Care-Specialist Relationship
Due to geographic isolation, rural primary care providers (PCPs) often lack close connections to a network of other providers, which can leave them frustrated as they watch their patients travel long distances to see a specialist only after waiting months for an available appointment.3,4 Many delivery system transformations that aim to reduce these barriers for rural patients modernize the traditional relationship between PCPs and specialists.  Instead of traveling to see a specialist, rural patients can receive care within their community from a PCP that obtained education or guidance from a specialist, or through a live connection with a specialist practicing remotely through audio and/or video conferencing.

Rural providers also face financial and technological constraints.  While consultations with specialists at an urban academic medical center can be easily facilitated via “on-campus” in-person interactions with among frequently interacting colleagues, a reliable means of remote communication and newly established professional networks are required for rural providers.  Further, current payment structures and financial pressures on rural hospitals5 may place an innovation like provider education at odds with the lost revenue of additional appointments during provider education activities.

Actions to Support Improved Rural Health Care
The MEDTalk discussions focused on key opportunities for using new technologies, especially communication technologies, to improve rural care, alongside feasible reforms in health care payments.

Leverage high- and low-tech innovations to provide optimal care: Advances in technology, like broadband, create new opportunities to address many of the gaps in rural access and quality of care. Telemedicine, electronic consultations, and virtual provider education focus on linking rural primary care providers to remote specialists based in distant locations to better care for patients.  This gives rural patients more convenient and timely access to care and, in many cases, provides opportunities to reduce health care costs.

Align payment models to support delivery changes that optimize care: Traditional fee-for-service (FFS) health care payments generally cover in-person physician and specialist services, but they are not well suited to these new models of care.  FFS payments often do not cover many of these transformations---including remote specialist services, telemedicine, and care coordination.  While many of these services are high-value when delivered as part of an efficient process of care transformation, Medicare and other payers are concerned that broad new payments for “virtual” services may not be targeted well and thus may add to costs without improving health.

Alternative payment models such as per-member per month or partially bundled payments shared between rural and distant health care provider teams can support these delivery system changes while encouraging their use only in cases where they add value.  For example, rural and specialist providers jointly receiving a partially bundled payment for the care of a patient’s chronic disease, could be used to cover the costs of effective data exchange and care coordination between them.  Some aggregation of payment across providers would improve the support given to delivery transformations that strengthen inter-provider communication and education while encouraging accountability for the care teams to improve results.

Conclusion
Until payment models reinforce innovative delivery system reforms which optimize care and resources, isolated rural providers will continue to struggle even as their patients--- often friends and neighbors---have to travel long distances to get access to specialty care. Rural hospitals are facing increasing pressures to identify payment and delivery transformations that improve and sustain care, as many rural hospitals are closing their doors.6 With ongoing demands on the rural health care workforce and a rapidly growing base of medical knowledge, supporting care transformations that leverage rather than isolate rural health care delivery will remain a critical area of health care reform.

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Categories: Blog

Moving On Up: The Growth Story of Frontier Economies

IMF blog - Tue, 12/16/2014 - 09:28

By Min Zhu

The growth story for frontier economies isn’t the same as China’s in the last two decades, or the United States a hundred years ago.  These fast growing, low-income countries have their own story, and it’s not what you might think.

In May of this year, I wrote about who they are and how they are different, and now I want to go into a bit more detail about how their economies have been on the rise and how they have moved themselves to the frontier.

Not your grandfather’s growth story

Although the countries’ economic paths vary like snowflakes— no two are the same—their growth stories have two distinct features.

First, frontier economies like Bangladesh, Tanzania, and Mozambique, to name just a few, have a different growth story from the United States or China because they are not growing by moving their economy from agriculture, to manufacturing, then to services: they are growing across all of them, as you can see in this chart:

Second, despite this different growth path, frontier economies have made progress when you compare their economic size relative to an advanced economy like the United States—a process known as convergence.

This is due in large part to more stable and predictable fiscal and monetary policies, strong investment and exports, better debt management, less red tape, stronger institutions, strong productivity gains, and access to capital markets.

The next chapter 

Looking ahead, a number of factors will help these economies continue to achieve strong growth. They will reap the benefits of a large, young, working-age population for years to come. They are well endowed with natural resources. They are making inroads in global ties. They have a growing middle class, which creates potential for new markets.

All well and good, you’re thinking, but weak global demand, tumbling oil prices and the expected end to the unconventional monetary policies in the United States could pose risks for frontier economies. All true.

Indeed, many frontier economies are established or prospective commodity exporters and have benefited from high commodity prices. A sharp decline in commodity prices could adversely affect export earnings, derail investment programs, and raise the risks associated with foreign borrowing.

Also, the recent surge in sovereign bond issuances by frontier economies could leave the latter vulnerable to roll over risks when the bonds mature, particularly given their large size relative to the countries’ reserve and other foreign assets.

We see two additional vulnerable spots to keep an eye on. Frontier economies have historically depended on a narrow range of primary products for export to make money, so they need to diversify to make themselves less vulnerable to the whims of the rest of the world, including commodity price movements.   This chart shows their progress on this issue over the last few decades:

They also need to increase the quality of what they produce and move up that proverbial ladder because faster growth in quality is associated with higher per capita incomes and higher economic stability.  Opportunities for countries to upgrade the quality of their products are strongest in manufacturing but also exist in agriculture. This is particularly important because a large portion of the population in these countries is often employed in the agricultural sector.

Chance favors the well prepared

At this point the question is how will frontier economies prepare for what happens next?

First, they need to continue to implement appropriate monetary and fiscal policies to maintain stability and weather what lies ahead. Economic stability is particularly important to manage risks associated with foreign borrowing.

Second, they need to implement the difficult next generation of reforms, such as improvements in public finance management, while they move away from policies that can exacerbate a downturn, such as cutting back on spending.  They should also deepen the linkages between their economic sectors, such as agriculture and manufacturing.

Continued efforts to improve public finance management will also help ensure that public investments are efficient and balanced against debt sustainability risks. Also, they will help improve the quality of products across all sectors as well as their exports.


Categories: Blog

Turkey’s Recipe to Escape the Middle-Income Trap

IMF blog - Mon, 12/15/2014 - 09:00

By Gregorio Impavido and Uffe Mikkelsen

(Version in Türk)

Turkey is going through a time of economic transition, with slowing growth that risks the country being caught in a “middle-income trap,” unable to join the ranks of high income economies. 

The country grew at 6 percent per year on average in the period 2010-13, with policies supportive of domestic consumption. This has generated a large current account deficit, mostly financed by short-term capital flows. The reliance on consumption at the expense of investment, slow export growth, and sizable investment needs have hurt potential growth, with the economy already growing more modestly. Moreover, Turkey’s low domestic savings and competitiveness challenges have limited investment as well as exports, which have also suffered from the slow growth in Europe.

With current policies, Turkey’s economy is expected to grow only 3.5 percent annually over the next five years. Going forward, the economy must be rebalanced to make it more competitive and to restore output and employment growth.

Four areas for rebalancing the economy 

The Turkish government’s economic policy agenda incorporates the right diagnosis of the economic needs, with macroeconomic policies and structural reforms that will need to be carefully sequenced:

  • More public savings. The tighter fiscal policy in the government’s medium term program is correctly focused on reducing current spending while preserving public investment. This will increase national savings in the medium term by about 1.3 percent of GDP. Analysis by IMF staff (see Chart 1 and chapter on the “External Imbalance: Boosting National Savings Will Limit the Burden of Adjustment”) shows that policies that directly increase national savings reduce the external imbalance without weakening private investment. Thus, such adjustment has the least negative impact on growth, and therefore on employment. If instead the adjustment were to be left to monetary policy only or to the markets, the negative effect on growth and private investment would be much larger.

  • Renewed focus on the inflation target. The Central Bank of the Republic of Turkey (CBRT) has missed its inflation target in the past (see Chart 2 and chapter on “Credibility of the Inflation Targeting Regime”). At present, the markets do not believe the 5 percent inflation target can be met in the short term. With the envisaged tighter fiscal stance, the burden on monetary policy to meet the inflation target will be lower, facilitating the authorities’ disinflation objective.

  • An expanded macroprudential toolkit to preserve financial stability. Ample capital inflows intermediated by local banks have led to rapid leveraging in foreign currency (FX) in the financial sector and increasing wholesale funding (see Chart 3 and chapter on “Containing Wholesale FX Funding and Risk in the Banking Sector”). This has complicated the task of the CBRT to meet the inflation target while safeguarding financial stability. While capital inflows have allowed financial deepening and supported growth, they have also put upward pressure on the exchange rate, promoted leveraging in FX, and fuelled excessive credit growth, potentially exposing the banking sector to direct rollover and indirect FX risk. The authorities have successfully introduced tools to reduce excessive consumer lending in the first half of 2014. More recently, they introduced additional measures to contain foreign exchange risk and promote the banking sector’s reliance on core funding.

  • More private savings. While the right macroeconomic policy mix is important, in the longer run, rebalancing the economy will depend on structural reforms. Thus, the authorities need to accelerate the ambitious structural reform program included in the 10th Development Plan. Priority should be given to policies that encourage higher private sector savings, which has the highest impact on the external imbalance with the least negative impact on growth.

For more details, see the IMF’s latest assessment of Turkey’s economy.

 

 


Categories: Blog

Transatlantic Trade and Investment Partnership: A Fresh Start for 2015

Brookings Institute Blog - Fri, 12/12/2014 - 14:06

In her first visit to Washington this week in her new role, European Union Commissioner for Trade Cecilia Malmström came to the Brookings Institution for a luncheon discussion of her trade priorities and next steps on the Transatlantic Trade and Investment Partnership (TTIP).  

Throughout her meetings with U.S. government officials, members of Congress and others, the commissioner made clear her commitment to reinvigorate the negotiations. 

This is welcome news, particularly with the new commission just in place, a new congressional session about to begin and no shortage of challenges ahead on both sides of the Atlantic. The time is ripe to formulate a plan for a fresh start to make as much progress as possible on TTIP in the new year. The task of reaching a transatlantic agreement will only get harder as the U.S. 2016 presidential election heats up.

The next period of negotiations will not be easy, and both Commissioner Malmström and U.S. Trade Representative Michael Froman have pledged to assess the progress their teams are making after each negotiating round. The next  round will take place in February, with several negotiating groups meeting beforehand to lay the groundwork for more substantive outcomes.

A central challenge facing both the commissioner and the U.S. trade representative is appropriately balancing transparency—and generating greater public support for TTIP—with the ability of negotiators to be able to freely explore potential areas of compromise. In recent speeches, the commissioner has spoken eloquently about transparency, noting its link to the essence of trade as opening up markets and ideas. At the same time, both sides recognize that conducting a negotiation in front of the cameras is not a viable way to reach an agreement.

There are also many substantive challenges ahead  of a deal.  These include investor-state dispute settlement mechanisms (“ISDS”), cross-border data flows, regulatory cooperation, financial services, agriculture and government procurement, to name a few.

Successfully addressing these issues in the search for common ground will require a strong, clear vision of the many benefits of an agreement—not just economically, but also politically and strategically. As with any trade agreement, a heavy dose of pragmatism will be needed to address the nuts and bolts of market access issues. Finally, it is increasingly important that the political leadership of the United States and all 28 EU countries, as well as the new European Commission, speak persuasively to articulate why TTIP should matter to people on both sides of the Atlantic.

Notwithstanding the magnitude of the current U.S.-EU economic partnership—both economies together  account for nearly half of global GDP and about one-third of all international trade—a TTIP done well has the potential to be about much more than reducing tariffs or tackling regulatory barriers. It is about establishing new rules of the road that reflect U.S. and EU core values and high standards. It also has the potential to cement an even stronger U.S.-EU partnership that could, over time, create a platform to embrace new TTIP members that qualify and thereby enhance broader Euro-Atlantic stability and prosperity. 

Authors         
Categories: Blog

Obesity Costs Evident at the State Level

Brookings Institute Blog - Fri, 12/12/2014 - 08:48

The High Cost of Obesity on Government Budgets
America’s struggles with obesity are well-documented. Over the past 50 years, the share of obese adults gradually climbed from just one-in-eight in 1960 to over one-in-three today. In 2011–2012, obesity plagued 17 percent of American children and a shocking 35 percent of American adults—the highest adult obesity rate among developed countries. Unfortunately, the obesity epidemic shows no signs of abating: one report estimated that 44 percent of American adults will suffer from obesity by 2030.

One chief concern with our nation’s soaring obesity rates is the enormous pressure it places on health care spending. Although the magnitude of the estimated costs varies, a host of studies found the impact to be large. A study published by the Journal of Health Economics found that 20.6 percent of U.S. national medical spending—roughly $200 billion in 2005 dollars—was due to obesity, equal to over $2,700 in additional spending per person per year. Another article in Health Affairs estimated that over a quarter of the per capita growth in health care spending between 1987 and 2001 was due to obesity.

The high cost of obesity on medical spending has serious implications for federal and state budgets. One study found that in 2006 the additional Medicare spending due to obesity was estimated at over $1,700 per beneficiary (in 2008 inflation-adjusted dollars), while Medicaid spending due to obesity was measured at $1,021 per beneficiary—a more than three-fold inflation-adjusted rise since 1998.

These high obesity-related costs have materialized at a time when public spending on health care is soaring. Between 1974 and 2014, federal spending on major health programs rose from 1.0 percent of GDP to 4.8 percent and the Congressional Budget Office projects that this spending will rise to 6.1 percent of GDP by 2024. The high share of fiscal resources devoted to health spending suggests that investment in initiatives to curb the growth in obesity-driven health costs may be one strategy for reducing government deficits.

Obesity-Attributable Medicare and Medicaid Spending By State

In this brief, we highlight the shares and levels of adult obesity-attributable Medicare and Medicaid spending across states. First, we report shares of Medicare and Medicaid spending calculated by a team of researchers— Justin Trogdon, Eric Finkelstein, Charles Feagan and Joel Cohen—who used data from the 2006 Medical Panel Expenditure Survey to estimate the fraction of Medicare and Medicaid spending attributable to adult obesity. Then, we calculate the amount by which obesity raises Medicare and Medicaid spending by multiplying the Trogdon et al. estimated shares by the program spending in each state.[1] The results are presented in the maps below.

At the state-level, a substantial share —between 6 percent and 20 percent—of Medicaid spending goes to adult obesity-related expenditures. In 2006, Oregon (18.8 percent), Arizona (17.0 percent) and Colorado (16.2 percent) saw the highest shares, while Kansas (6.5 percent), Virginia (6.8 percent) and North Dakota (7.5 percent) devoted the smallest shares of Medicaid spending to obesity-related expenditures. On a state-by-state basis, Medicare spending due to obesity was substantial, too, with shares varying from 5.2 percent to 10.2 percent in 2004. The highest percent of obesity-attributable spending was found in Ohio (10.2 percent), Michigan (10.0 percent) and West Virginia (9.9 percent), while the lowest was in Hawaii (5.2 percent), Arizona (6.2 percent), and New Mexico (6.6 percent).

These adult obesity-attributable shares, coupled with high expenditures for Medicare and Medicaid, translate into $91.6 billion in federal outlays for obesity-related expenses through federal health programs. Medicare and Medicaid spending on obesity are driven largely by aggregate expenditures in each state, with the combined cost for these programs ranging from $119.4 million in Wyoming to $10.4 billion in California. Obesity-attributable Medicaid spending was highest in California ($6.1 billion), New York ($5.9 billion), and Texas ($2.7 billion), while Medicare spending was highest in California ($4.2 billion), New York ($3.2 billion), and Florida ($3.1 billion).

Conclusion

One major cost stemming from the obesity epidemic is higher spending on Medicare and Medicaid. In these programs combined, obesity raised expenditures by over $90 billion in 2012, making obesity-related spending an important driver of state and federal fiscal pressures. These high fiscal costs also suggest that initiatives to prevent and reduce obesity should be a public-sector priority, as lower obesity can not only improve Americans’ health but also substantially lower government spending on health programs.





[1] To estimate state-level Medicare spending in 2012, we inflate Centers for Medicare and Medicaid Services data from 2009 by the Personal Consumption Expenditure Price Index for Health Care. State-level Medicaid spending data were derived from the Kaiser Foundation [http://kff.org/medicaid/state-indicator/total-medicaid-spending/].

Authors         
Categories: Blog

Hutchins Roundup: Capital Controls, Fiscal Multipliers, and More

Brookings Institute Blog - Thu, 12/11/2014 - 08:08

Capital controls increase the cost of capital and reduce investment

Laura Alfaro of Harvard University, Anusha Chari of the University of North Carolina at Chapel Hill, and Fabio Kanczuk of the University of São Paulo find that, following capital control announcements in Brazil, the cost of capital rose, the availability of external finance dropped, and firm-level investment fell.  They note that smaller firms and those firms dependent on external finance were most adversely affected.

Medium-term spending multipliers are much higher during protracted recessions

In a sample of 17 OECD countries, Salvatore Dell’Erba, Ksenia Koloskova, and Marcos Poplawski-Ribeiro of the International Monetary Fund find that during protracted recessions, medium-term fiscal multipliers are significantly above 1.  Specifically, they conclude that a decrease in the deficit of 1 percent of GDP leads to at 2 percentage point reduction in output, a 3 percentage point decrease in the employment ratio, and a 1.5 percent increase in unemployment.

A higher supply of short term, safe assets from central banks can improve financial stability

Mark Carlson of the Bank of International Settlements, Burcu Duygan-Bump, Fabio Natalucci, William Nelson, Marcelo Ochoa, and Skander Van den Heuvel of the Federal Reserve Board, and Jeremy Stein of Harvard University conclude that increasing the amount of short-term, safe instruments supplied by central banks may crowd out similar instruments created by the private sector, and improve the stability of the financial system.

Chart of the week: Increased income inequality in the U.S. reduced GDP growth by about 15 percent between 1990 and 2010

Speech of the week: European Central Bank “unanimous in its commitment” to fight prolonged low inflation

“Taken together, our measures will have a sizeable impact on our balance sheet, which is intended to move towards the dimensions it had at the beginning of 2012… Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures.”
Peter Praet, Member of the Executive Board of the European Central Bank

Authors         
Categories: Blog

Online Campaigning Part 3: Does It Work?

Brookings Institute Blog - Wed, 12/10/2014 - 14:50

Editor's note: Read "Online Campaigning Part 1: Big and Evolving” and “Online Campaigning Part 2: Governments Get Into Online Activism” in this series.

Last week The New York Times carried an opinion piece picking up on one of the most popular online petitions on the White House-hosted We the People platform.

The petition, with some 142,000 signatories, calls on the president to “position yourself against the Bolivarian communist expansion in Brazil promoted by the administration of Dilma Rousseff.”

It was an example of the potential for online petitions to drive public discussion. Intriguingly, it also appeared to be written (and presumably largely supported) by Brazilians rather than U.S. citizens, highlighting the sometimes murky issue of whose constituents are supporting particular causes.

Penetrating the legislative sphere

On occasion, online petitions have penetrated through to the legislative sphere. An example is the petition started in January 2013 on We the People calling on the Obama administration to “make unlocking cell phones legal.” The petition gained the requisite 100,000 signatures to generate an official White House response and the administration moved to support it. By July 2014, the Unlocking Consumer Choice and Wireless Competition Act passed both chambers unanimously and was signed by the president in August.

Community level results

More frequently petitions deliver results at a community level. Take the case of Travis Beasley, a parent in Western Australia. In March 2012 he launched an online petition to save three trees the state Education Department was planning to chop down on a public reserve adjoining a local primary school. Travis managed to attract just 399 signatures to his petition, with a community website revealing just how local this campaign was:

Mr. Beasley said he recognized most of the names on the petition. “They’re mostly parents or local community members who are really concerned about this issue,” he said. “Every time the petition is signed, an email is sent to the Education Minister Liz Constable, so the more signatures we get the more she is aware of how strongly the local community want to protect these trees.”

Travis’s local member in the State Parliament also raised the petition with the authorities. The trees survived.

The Travis example is not an isolated instance. Petition behemoth Change.org lists pages worth of successes. While many of these did not occur solely because of a Change.org petition, there are clear examples where this has been helpful.

Most are not successful

Given a lack of research and the multitude of influencers on any political issue, it is hard to assess the precise influence of online petitions. What is apparent is that most are not successful. While We the People has generated more than 350,000 petitions since it launched in 2011, most have not gone anywhere.

A clever analysis of 19,789 petitions that ran on the U.K. Cabinet Office e-petition site between August 2011 and February 2013 found half received only one signature and only 5 percent received more than 500 signatures. A mere 0.7 percent received the 10,000 signatures mandated for an official response and 0.1 the 100,000 needed for a parliamentary debate.

The analysis of U.K. petitions found those that achieved most success did so over a very short time period, supporting the case for limited petitioning periods so the sites do not get cluttered and the importance for petitioners of achieving early traction. The study also revealed the role of social networking sites in disseminating petitions, with 50 percent of those who accessed the petition site coming from Facebook or Twitter.

A new dynamic to democracies

At a collective level, online campaigning has introduced a new dynamic to democracies. What is perhaps most intriguing about this new form of activism is the way it allows people to aggregate their voice to exert influence on decision makers outside traditional structures like trade unions and political parties. By opening petitioning up to anyone with an Internet connection, it offers everyone a new way to petition representatives or call-out a company that mistreats or annoys. The network effects of the petition sites and the ability of non-government run sites to promote a select number of campaigns has enhanced this new power.

Authors Image Source: © Larry Downing / Reuters         
Categories: Blog

Managing House Price Booms in Emerging Markets

IMF blog - Wed, 12/10/2014 - 14:00

By Min Zhu

(Versions in 中文)

For the past decade, house prices have steadily increased in the vast majority of the 30 countries that make up the IMF’s House Price Index for Emerging Markets released today at a conference organized by the IMF and the Indian Institute of Management in Bangalore, India (Figure 1).

The index shows a lull in the aftermath of the global financial crisis, followed by an increase for nine consecutive quarters since 2012. This run-up—four times as fast as that in advanced economies—would be even more pronounced if the larger countries in the group such as China and India receive greater weight in the index.

Housing and credit booms: double trouble?

Is this steady increase in housing prices a cause of worry? History teaches us to be wary when house price surges are accompanied by booms in the availability of credit. Such ‘twin booms’ in house prices and credit are more likely to end in busts, and the recovery from those busts is slower and more costly in terms of lost income.

With this in mind, the IMF has also been monitoring credit growth across the world. Figure 2 shows an increase in overall credit growth in many emerging markets. In particular, since 2009, house price increases have been higher in countries (e.g., China) where there has been a more rapid growth in credit availability; statistically, credit growth can account for nearly half of the variation in house price increases across countries since 2009.

‘Macropru’ to the rescue

Policymakers are of course aware of these developments and are taking active steps to manage housing booms. This reflects a change in attitudes from the past, where the dominant view was that because it is difficult to identify and prick housing bubbles as they are developing, it is just better to clean up the mess after they burst. But policymakers now realize that they may not have a big enough mop to clean up after the fact.  Hence, many countries are trying both to limit the extent of the boom and the likely damage caused by a bust, even though the task remains arduous.

Along with monetary policy and microprudential policies, macroprudential policies form the trinity of policies that are being deployed. They include both broad-based tools—such as countercyclical capital buffers that protect the financial system from overall credit booms—as well as sectoral tools targeted at the housing market. These include:

  • Limits on the loan-to-value (LTV) ratio, which cap the size of the mortgage loan relative to the value of the property associated with the loan.
  • Limits on the debt-service to income (DSTI) ratio, which restrict the size of a debt service payment to a fixed share of household income.
  • Sectoral capital requirements, which force lenders to hold extra capital against loans to a specific sector, such as real estate.
  • Provisioning requirements, which force lenders to build reserves against an eventual nonpayment of loans to particular sectors. 

These measures are ways to try to curb an unsustainable build-up of credit—and thus keep house price bubbles from emerging in the first place—or to make sure that in the event of a bust that lenders have adequate buffers.

Emerging markets are active users of these tools. For instance, as shown in Figure 3, macro prudential tools have been actively used since 2000, including by many Asian economies.

What do we know about the effectiveness of such tools? A speech by IMF staff at the Bangalore conference provides evidence of overall success in curbing both credit growth and house price growth. But there are important nuances. Measures to curb credit growth were less effective when high demand for houses from foreign buyers using cash instead of borrowing from the banking system. Likewise, dampening house price acceleration was not always successful unless the measures were fairly targeted. For example, Korea had to specifically target the Gangnam (yes, that Gangnam) suburb to curb speculative pressures on house prices. 

Stepping out of the bubble

Housing is not all about ‘bubbles’. In many emerging markets, developing housing finance systems and providing affordable housing remain key challenges. In fact, it is often the case (e.g., in many cities in India) that there is an excess supply of homes in the high-end segment of the market and lack of supply in the low and middle segment of the market. That is why the conference in Bangalore brings together not only experts on macroprudential policies, but some of the world’s leading experts on sustainable housing finance systems—including through public-private partnerships—and on managing urbanization.

The size of mortgage markets varies across countries. For instance, Brazil has a small mortgage market (under 5 per cent of GDP) while in Malaysia mortgage loans are over 30 percent of GDP. Analysis by shows that these differences in the size of mortgage markets can be traced to differences in legal systems (one which provides little protection for lenders results in fewer loans being made), the strength of credit information systems, how onerous the property registration process is, and the country’s history of macroeconomic instability.

‘Food, clothing, shelter’ (‘Roti, Kapda, Makaan’ in Hindi)—these are all basic necessities. The challenge for policymakers in many emerging markets is to provide homes for their people but to do so in way that people do not end up losing their shirts.

 The IMF’s Global Housing Watch tracks developments in housing markets across the world on a quarterly basis. It provides current data on house prices as well as metrics used to assess valuation in housing markets, such as house price‑to‑rent and house-price‑to‑income ratios.  See more at: http://www.imf.org/external/research/housing/

 

 


Categories: Blog

Five Reasons Why India Will Welcome Putin

Brookings Institute Blog - Tue, 12/09/2014 - 14:30

On December 10, Russian president Vladimir Putin will head to India for the annual India-Russia summit. This time, Narendra Modi will be on the other side of the table. It is Modi’s first time leading the Indian delegation. However, he is not entirely unfamiliar with Russia, having visited the country three times when he was chief minister of the state of Gujarat. Nor is this his first meeting with Putin; the two leaders have met twice before this year on the sidelines of the BRICS and G20 summits and Modi has also met a couple of times with the Russian deputy prime minister. As Modi and Putin meet this week, however, the contrast in their domestic and global contexts is particularly striking. Modi has spent the last few months being feted around the world. Welcome mats aren’t really being rolled for Putin in too many countries. Sentiment about India is bullish; about Russia bearish. There’s talk of India as a rising power and Russia as a declining one. Though both Modi and Putin remain popular domestically, the Indian prime minister has promised his country that good times lie ahead; Putin, on the other hand, cautioned his people last week about the hard times ahead.

During the trip, there are expectations of agreements being signed, with deals on defense, diamond trade, energy and joint production of civilian aircraft reportedly on the agenda. This will be a short visit; Putin didn’t take up Modi’s request that he spend more than a day in India and travel outside Delhi. While there were reports that Putin would address a joint session of parliament – an honor last given to him when he first visited India as president in 2000 and most recently given to President Obama in November 2010 – this, too, hasn’t materialized. The reason offered for not taking up the invitation: “his tight schedule and pressing engagements.” Instead, there might be a joint Modi-Putin appearance at the World Diamond Congress. This indeed might be a way of demonstrating that the two countries intend to move their commercial relationship forward. Direct diamond trade, in particular, offers a mutually-beneficial opportunity with India by far the largest processor of rough diamonds in the world and Russia the largest producer.

It’s not difficult to see why a good relationship with Delhi continues to be important for Moscow. It doesn’t have too many friends right now and has been hit by sanctions. India offers an option, reiterating as it has that it “cannot be party to any economic sanctions against Russia.” India is a key market for Russian goods, especially military equipment. As India consolidates and expands its relationships with other key countries, the trip also offers Putin an opportunity to demonstrate continuing Russian relevance to India and to maintain or build its foothold, especially in two critical areas for India: defense and energy. 

Why will he be welcomed in India? Because even though India-Russia ties aren’t what they used to be, Russia’s utility for India remains.

Defense

Russia’s share of Indian defense imports has been declining, but it remains the largest supplier of military equipment to India. So, even though Russia doesn’t have the 79 percent share of Indian expenditure on defense imports that it did in 2003, it still had a 68 percent share in 2013 (the U.S. was next in line with an 18 percent share). There are also bilateral co-production and co-development projects in place or being discussed. As a senior Indian official put it bluntly, Russia is India’s “primary defense partner and will remain so for decades.” With a legacy relationship and years of experience in this realm, Russian companies and officials are familiar with the Indian defense acquisition system and process, and have developed networks and habits of cooperation that will ensure they remain critical players in this sphere.

On India’s part, there is a move to diversify away from the heavy dependence the country has had on imports from Russia. However, a number of Indian government officials and analysts continue to see Moscow as more willing to provide India defense technology that others won’t and less likely to subscribe to any potential sanctions against India that might result in a cut-off of spare parts. There are also areas like space cooperation where some see possibilities for the two countries to work together.

Energy (and Economics)

India is the fourth largest energy consumer in the world and imports some amount of its top three energy sources: coal, oil and natural gas. About three-quarters of the crude oil India consumes is imported and this percentage has been growing. Critically, 62 percent of those imports came from the Middle East in 2013. Indian policymakers would like to diversify its sources of supply. Russia, which currently is a source of less than 0.5 percent of oil imports, is seen as part of the answer. While India doesn’t currently import natural gas from Russia, this might be a possibility discussed as well. Russia is also active in India’s civilian nuclear energy space, though its two reactor projects have run into problems (associated with liability concerns) and this has thus far stalled any further development on this front.

Along with potentially broader energy deals, Indian officials would also like to see Indian oil and gas companies get better terms and more investment deals in Russia. Currently, ONGC Videsh Limited (OVL), a subsidiary of India’s largest state-owned oil and gas company, has a 20 percent stake in the Sakhalin-I project and 100 percent ownership of Imperial Energy. In past years, as the energy-hungry consumer, India has found itself on the back foot in negotiating energy deals. It has also found countries like China (and its companies) with more buying power getting better terms. In recent years, with oil and gas producers looking to diversify their markets (or influence Indian decision-makers’ choices on other fronts) and the energy revolution in the U.S. changing global dynamics, India has found itself better placed in negotiations. With Russia now seen as the one on the back foot, Indian policymakers will hope to use that as an advantage. Just as Beijing got itself a nice energy deal recently, Indian officials and companies will be hoping for better terms on energy deals with Russia (though perhaps not to the same extent as China).

While, as is usual, there has been no pre-announcement of the agreements that will be signed during the visit, there is speculation ranging from investment opportunities for Indian oil and gas companies in Russia to an announcement of a feasibility study for a pipeline. However, there have been differences on the right price and terms on the former and doubts about the practicality of the latter. There’s also speculation about a long-term oil and/or gas supply deal. The attraction of such a deal for India at competitive prices (and on a long-term basis): it’ll help the country diversify its current sources of supply, as well as leverage this deal for better terms with other countries. However, such a deal will also perhaps most raise eyebrows in the U.S.

Beyond energy and defense, both India and Russia also want to expand the economic relationshp. There has been disappointment at the relatively stagnant nature of these ties. An Indian official recently stated that trade stands at $10 billion. Indian commerce ministry figures on trade in goods in 2013 to 2014 listed the amount as $6 billion, with India facing a $1.7 billion trade deficit with Russia (compare that with the trade in goods that India has with China or the U.S., which is ten times that between India and Russia). Regardless of which figures you take, the $20 billion target set for 2015 seems long forgotten. The investment relationship has never really taken off either. Of the $6.5 billion of estimated Indian investment in Russia, $4.3 billion is accounted for by two OVL investments (in Sakhalin-I and Imperial Energy).

Global and Regional Issues and Institutions

India has found Russia to have utility on the global stage as well. In the United Nations Security Council, Moscow has exercised its veto for India’s benefit in the past. It has also endorsed a permanent seat for India on the council and supported Indian membership in organizations like the Shanghai Cooperation Organization (SCO). Like India, Russia is a member of the BRICS grouping and in both the SCO and BRICS, Moscow could potentially help off-set some of Beijing’s influence.

India shares some concerns with Russia, including about external support for regime change, U.S. unilateral intervention, and sanctions. The latter is a particularly sensitive subject; India has been on the receiving end of western sanctions and Modi knows intimately what it’s like to be isolated by the U.S. and western countries. The Indian government has also found itself on the same page with Russia on issues like Iran, Libya and Syria in the past. Moreover, India believes it shares with Russia an interest in stability in Afghanistan (and a non-Taliban government there).

Issues related to “sovereignty” (and its protection) were another area of commonality. The Russian annexation of Crimea has, however, made this aspect complicated. While Delhi did not publicly condemn Russia or isolate that country, the previous Indian prime minister emphasized to Putin the Indian position on “the unity and territorial integrity of countries” and Modi has broadly criticized countries with “expansionist mindsets” that encroach on others’ lands and seas.

China

Indian policymakers have watched with wariness Russia seemingly moving closer to the country that that encroachment remark seemed primarily targeted at: China. Indeed, one of the reasons Delhi has been concerned about Russia’s tension with and isolation from the U.S., Europe and others like Australia is that these are seen as pushing Russia toward China. This worries India because for the Indian government, Moscow, too, plays a role in managing China’s rise.

The role that countries like Japan and the U.S. might play in an Indian balancing strategy vis-à-vis China gets a lot more attention. That makes it easy to forget that Russia (and, before it, the Soviet Union) has traditionally been part of the strategy as well. Indian policymakers don’t necessarily expect Russia to take India’s side against China – though that would be a bonus – but they fear Moscow putting its thumb on the scale for Beijing. Sino-Russian (and, previously, Sino-Soviet) tension has been useful for India, either by keeping Moscow neutral or by distracting Beijing or by leading Moscow to aid India. Any Russian movement toward China is seen as having negative consequences for India and potentially requiring India to look too much to the U.S. and its allies to play that balancing role. 

Diversification

Russia is also seen as being a crucial component of India’s diversification strategy. This strategy involves establishing and maintaining relationships with multiple countries in order to maximize benefits and minimize risks to Indian objectives. For Indian policymakers, it allows them to keep their options open, spreads the risk of dependence, minimizes the leverage that any one country can have and facilitates freedom of action. Thus far, the Modi government has stayed with this key element of Indian foreign policy. Even as it has tried to consolidate and expand relations with countries like Australia, Japan and the U.S., it has also worked to maintain and build its relations with China and Russia.

Indian policymakers have reliability concerns about all external actors. Yet in the Indian foreign policy narrative, Russia is seen as more dependable than, say, the U.S. Analysts will particularly invoke Moscow not cutting off supply of spare parts during India’s 1965 war with Pakistan (when the U.S. and U.K. suspended military assistance to India) and Russia coming to India’s assistance during the 1971 India-Pakistan war. Ask policymakers and analysts in the know and they will provide a more nuanced story – that Russia, like other external benefactors, has also been fickle. During the 1962 China-India war, it chose its brother China over friend India, even providing Beijing with intelligence on India. Yet, in relative terms, Russia is seen as more dependable. Thus, policymakers outline Russia’s “unstinting” and “long-standing and steadfast” support for India and Modi has described Moscow as “a time-tested and reliable friend that had stood with India in difficult times.”

The visit will be an opportunity to demonstrate (rhetorically at the very least) to Putin that Delhi won’t jettison Moscow in tough times and that Russia will continue to have a place in Indian foreign policy. But it will also likely give India an opportunity to express concern about Russia’s own diversification plans: not just vis-à-vis China, but also Pakistan. The Russian defense minister’s recent visit to Pakistan in November and the defence deals, after all, did not go unnoticed in India (and it was perhaps designed to be noticed).

Conclusion

These are also some of the reasons that the Indian government has tried to avoid taking a public stance on the Russia-Ukraine situation, with Modi refusing to get drawn into discussing the issue. The Obama administration has stayed relatively silent publicly about this Indian approach—partly because any public condemnation would likely be futile, at best, and counterproductive, at worst. However, Putin’s visit—and particularly any significant deals signed—might elicit a reaction from some quarters of Capitol Hill and the commentariat.

Chances are that some observers will also invoke the word “non-alignment” in response to the Putin visit, but it’s worth keeping this visit—and the India-Russia relationship—in perspective. Even as India has a “special and privileged” partnership with Russia, it has a “strategic and cooperative” one with China, a “special strategic and global” one with Japan, and a “broad strategic and global” partnership with the U.S., which is also a “a principal partner in the realization of India’s rise.”

This is not the Cold War and today’s India-Russia relations are not the India-Soviet relations of then. As observers have noted, the relationship has indeed been “sagging,” with the distance between the two growing. There are indeed strategic elements to and reasons for the relationship, but in recent years it has been mostly a transactional one. The sentimentalism is also missing. While Modi might state that “every child in India knows that Russia is a true friend of India,” it is not clear that younger generations of Indians share or will share that sentiment toward Russia or frankly even give it much thought. With half of India’s population below the age of 25, a significant proportion of Indians were born after the Cold War. Russia is not the country that Indian parents send their children to study and Russian is not the foreign language that students are rushing to learn. India’s strategic elite aren’t found as much in dialogues and conferences in Moscow as they are in Beijing, London, Singapore, Tokyo or Washington. In a Lowy Institute survey, those Indians polled about their feelings of warmth (or not) toward various countries ranked the U.S., Singapore, Japan, Australia and France above Russia.

Moreover, the diversification strategy mentioned above that means that India will continue to maintain its partnership with Russia is also why it will neither ally with nor move closer to that country. One of the main reasons Delhi gravitated as much as it did toward Moscow during the Cold War was that it didn’t have any other options. As long as those other options are available today – and especially if they expand – Delhi will limit its own relationship with Moscow.

Authors Image Source: © RIA Novosti / Reuters         
Categories: Blog

Emerging Markets & Volatility: Lessons from the Taper Tantrum

IMF blog - Tue, 12/09/2014 - 09:51

By Ratna Sahay and Preya Sharma

You may hear a sigh of relief from emerging market watchers as we approach the end of the year. Yet, against the backdrop of a prolonged period of low interest rates in advanced economies, huge capital flows, and a slowdown in emerging market growth, 2015 promises to keep us all on our toes.  Differences in the timing of exit from unconventional monetary policy in advanced economies will have a global impact. The IMF has been keeping a close eye on developments in emerging markets, providing analysis on issues such as how investors’ differentiate between emerging market countries, the impact of volatile markets, and the factors explaining the slowdown in growth.

In a recent paper, we take a look back at what happened before and during the tapering episode to draw out the key lessons for policymakers. Past experience is clear: decisions by major central banks can have sizable global spillovers. Announcements by the U.S. Federal Reserve, in particular, have been strongly correlated with asset price volatility and capital flows in emerging markets. With expectations of Fed tightening to begin in 2015, we think a better understanding of these events can better inform policymakers’ decisions.

Reading the taper tantrum tea leaves

In May 2013, when Fed chair Ben Bernanke began to talk about when and how to reduce the central bank’s bond-buying program, financial markets panicked.  During this initial phase of acute and systemic market volatility, emerging markets were hit indiscriminately. Many emerging markets saw their currencies depreciate rapidly, while external financing premia increased, equity prices fell and capital flows slowed.

Fortunately, markets began to differentiate fairly quickly between countries with good fundamentals and those that had begun to accumulate economic imbalances..

What can emerging market policymakers do during the boom and bust cycles of capital flows?

Our work shows that economic fundamentals and early action by policymakers play a critical role in managing risk and building resilience to external shocks.

After the initial reaction, market pressures were more subdued in countries with:

  • stronger fundamentals
  • financial systems with more domestic services, products and liquid markets
  • fewer foreign holders of domestic debt and
  • better growth prospects.

We define better fundamentals as stronger current and fiscal account positions, lower inflation, and adequate international reserve buffers. Countries with tighter macroprudential policies and capital controls prior to the taper talk also coped better.

There are also actions that emerging markets can take once a shock hits.

Emerging market countries that acted early and decisively to address vulnerable aspects of their economies and financial systems fared better. Raising interest rates where inflation was high, intervening where foreign exchange reserves are adequate, and addressing current account deficits—all of these moves had a soothing effect on markets.

Emerging markets are not in this alone. International organizations such as the IMF have an obligation to help strengthen the global financial safety net through better cooperation with regional financial arrangements, facilitating swap lines between central banks to ensure sufficient liquidity, and directly helping with resources if requested.

Advanced-economy central banks and the broader international community can also play an important role to ensure global financial stability. Clear and effective communication concerning exit from unconventional monetary support is critical to help reduce the risk of excessive market volatility.

The Fed’s communication strategy improved after May 2013. That is one reason why markets have not overreacted to the end of U.S. unconventional monetary expansion.

Nevertheless, the normalization of monetary policy in the United States and other advanced economies is likely to cause some volatility in global markets.  Emerging markets need to continue to strengthen fundamentals and be prepared for a swift and decisive policy response to eventual market jitters.


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