Gaza: No Safe Place for Civilians

Brookings Institute Blog - 9 hours 48 min ago

“There is literally no safe place for civilians in Gaza,” said the spokesperson for the UN’s Office for the Coordination of Humanitarian Affairs in this morning’s daily briefing following increased conflict between Israel and Hamas in the Gaza Strip.

While there have been many news reports on the number of people who have been killed (over 500) and wounded (over 3,000) in the Israeli offensive, far larger numbers of people are being forced from their homes. In fact, displacement may turn out to be the defining characteristic of this terrible conflict. As the United Nations Relief and Works Agency for Palestine Refugees (UNRWA) spokesperson Chris Gunness said today, “This is a watershed moment for UNRWA, now that the number of people seeking refuge with us is more than double the figure we saw in the 2009 Gaza conflict. We are seeing a huge wave of accelerated displacement because of the Israeli ground offensive.”

Gaza is one of the most densely populated areas on Earth, with 1.8 million people squeezed into a territory only 25 miles long and 7 miles wide. In comparison with some of the world’s major cities, it is very, very small. The Israeli ground offensive has led to an exponential increase in the number of people fleeing their homes. As of yesterday afternoon, 100,000 displaced persons were living in 69 UNRWA schools while tens of thousands of others had taken refuge elsewhere in Gaza. This equals almost 6% of the entire Gazan population and the figures are only likely to increase in the coming days. UNRWA planning figures are now at least 150,000 and today the agency launched an emergency appeal for $115 million in support.  

People are warned to evacuate by the Israeli forces, but there are not many places to go as Gaza’s borders are all but closed. Some have taken shelter with family or friends, some have even sought protection in a Greek Orthodox Church, but many have turned to U.N. facilities for protection.

Yet UNRWA’s facilities are close to capacity and, as numbers increase, conditions are likely to worsen.  According to Doctors Without Borders, unhygienic conditions and overcrowding at UNRWA facilities “are extremely worrying.” UNRWA also may not be able to provide the protection which internally displaced persons (IDPs) are seeking. In fact, the agency reports that 64 of its buildings have been damaged in the offensive. The revelations that rockets have been found in two abandoned UNRWA schools could also well jeopardize the safety of IDPs seeking shelter nearby.  In the second such case in a week, UNRWA today reported that its staff had discovered rockets which were hidden in a vacant school – a school located between two other UNRWA schools each currently housing 1,500 IDPs. When schools are used for military purposes, people’s lives are put at risk.  

The humanitarian needs in Gaza are many. Children are traumatized, 1.2 million Gazans have no or limited access to water, homes have been destroyed, medical supplies are scarce, there are reports of damaged sewage systems and the list goes on. The international community is being asked to provide immediate humanitarian assistance for those affected by the conflict in Gaza.

A few months ago, the Internal Displacement Monitoring Centre reported that the number of internally displaced persons had reached an all-time high of 33.3 million people in 2014. And since then, more people, many more people, have been displaced – in Syria, Iraq, Central African Republic, South Sudan – and now Gaza. One sad thing we’ve learned about internal displacement is that it can take far longer to resolve than anyone expects. 

Authors Image Source: © Finbarr O'Reilly / Reuters         
Categories: Blog

Euro Area: An Unbalanced Rebalancing?

IMF blog - 12 hours 26 min ago

By John Bluedorn and Shengzu Wang

Since the financial crisis, the euro area current account, made up mostly of the trade balances of the individual countries, has moved from rough balance into a clear surplus. But the underlying rebalancing across economies within the euro area has been highly asymmetric, with some debtors, like Greece, Ireland, and Spain, seeing large current account improvements (sometimes into surplus), while creditors, like Germany and the Netherlands, have basically maintained their surpluses (Chart 1). A set of new staff papers look at the drivers of the improvements in debtor current accounts and the persistence of creditor current accounts, and whether these developments are a cause for concern.

A turning point in competitiveness?

Many debtor economies have seen their unit labor costs decline, improving competitiveness and boosting their current accounts. We looked in detail at recent competitiveness gains in euro area debtor economies, finding them to be largely driven by declining unit labor costs (Tressel and others, 2014 and Tressel and Wang, 2014). But Greece and Ireland’s labor cost declines have been due to a roughly equal mix of declining wages and employment, while Spain’s has been due to declining employment (Chart 2). In other words, the bulk of competitiveness improvements in debtor economies has been accompanied by declining domestic demand and rising unemployment. This raises questions about the durability of the current account improvements in these economies: when domestic demand recovers in these economies, will current account deficits re-emerge?

Too much thrift?

At the same time, many creditor economies have had large and persistent surpluses, driven by both higher saving and lower investment. We looked at the composition of surpluses and deficits in the euro area (Bluedorn, Wang, and Wu, 2014). Both private (corporate and household) and public saving in Germany rose over the past decade, contributing to an overall saving rise of 4 percent of GDP (Chart 3).

Meanwhile, overall investment declined by about 3 percent of GDP, from 20 percent of GDP in 2001 to about 17 percent in 2012. The Netherlands (another large surplus economy) though has seen declines in both overall saving and investment, but the investment decline has been larger (from about 21 percent of GDP in 2001 to about 17 percent in 2012). Breaking it down by sectors, it becomes clear that the Netherlands’ larger surplus is entirely due to the corporate sector. Restrained domestic demand (high saving and low investment) is part of the story behind the persistent surpluses in the creditor economies.

Towards a more “balanced” rebalancing…

Large and persistent surpluses in creditor economies contribute to a stronger euro, making it tougher for euro area debtor economies to adjust. A stronger euro exacerbates the external competitiveness gap facing debtor economies and also contributes to weak euro area inflation (see blog on “lowflation” in the euro area).

Taken together, these features suggest an “unbalanced” rebalancing—it seems to largely rely on anemic domestic demand in debtor economies and restrained domestic demand in creditor economies. They also point to a truism: appropriate adjustment is about undertaking policies to achieve both internal (reducing output gap and unemployment) and external balance (a more sustainable current account).

To make the rebalancing more robust, policies are needed to boost investment in creditor economies and structural reforms to raise productivity in all euro area economies (through further liberalization of product and service markets and reforms to make labor markets more flexible). These would raise potential growth across the board and help output gaps close faster. Breaking out of the current “lowflation” environment would also ease adjustment, by opening up space for faster relative price changes within the euro area.


Categories: Blog

Asia’s Seismic Shift: How Can the Financial Sector Serve Better?

IMF blog - Mon, 07/21/2014 - 11:00

By Min Zhu

Asia is set to be the powerhouse for growth in the next decade, just as it was in the last one. The size of its economy is expected to expand more rapidly than the other regions of the world, and its share in the world output is expected to rise from 30 percent to more than 40 percent in the coming decade. The structure of the economy is expected to continue to transform from a narrower manufacturing hub to a group of vibrant, diverse and large markets with a rising middle-class population.

The role of the financial sector is critical in the success of this seismic transformation. Let me explain by focusing on three areas:

  1. Serving the real economy and structural change. With urbanization, growing trade, and rising demand for communications and travel, Asia needs to invest a lot to meet infrastructure needs—road networks need upgrading, and electricity generating capacity and telecommunications infrastructure lag other regions such as Latin America. Asia has a large pool of savings but—despite potential high returns in the region—most of these currently leave the region. And so a critical challenge is to ensure that there are no impediments to the healthy flow of capital across the region so that savers can find the best returns for their investment and infrastructure financing needs can be met. Securing small and medium sized enterprises access to finance would also support investment.
  1. Serving the demographic shift. Efficient financial systems recycle savings to where they are most needed—for example from aging populations who are typically saving for retirement to younger ones who have investment needs. For Asia this is particularly important as China, Korea, and Japan have rapidly aging populations, even more so than the rest of the world. Yet others, for example India and Indonesia, have younger working age populations and large investment needs. A growing middle class will also lead to demands for a greater range of financial services. Increasing access to basic financial services by households and firms can also help promote saving, enable investment by households in health and education, assist the market entry of new firms, help improve employment opportunities and so help to create the conditions to reduce income inequality.
  1. Managing interconnections and integration. As Asia’s financial systems become bigger they are also likely to become more complex and interconnected than they are today. Market development, including shadow banking, and increased complexity can also raise risks with a potential for problems to spread across borders with an impact beyond Asia.  At the same time big changes are being made to the global regulatory environment that are likely to  create a number of challenges for markets and regulators alike, affecting financial flows and the size of banks and shadow banks, as well as prudential ratios and resolution frameworks.

Navigating the transition

Achieving these objectives require careful planning and policy implementation. The good news is that there is rich experience and lessons we can bring from other regions. These experiences suggest a focus on the following areas: 

  • Broaden the investor base. To ensure economic and structural transformation Asia needs a more diversified financial system with deeper and more liquid markets, which will require a broader and more diverse investor base, greater involvement of long term investors.  Supporting social stability and meeting the financial service needs of a growing middle class in the region, including their retirement and real estate planning, requires longer-dated assets and an asset management industry with a longer horizon. Encouraging a long term investor base would also help build up a stable source of finance for infrastructure projects (for example through unlisted funds) and it would require the development of an appropriate back office support infrastructure.  With institutional investors relatively small in most countries, and barriers to investment across borders still high, this will be a long-term process.
  • Build more liquid markets. Local currency bond markets have grown since the Asian financial crisis in the late 1990s and have proved resilient even through recent bouts of financial market turbulence. Even deeper and more liquid bond markets would enhance financial stability, and could reduce the corporate and sovereign risk premia lowering the cost of capital and helping to support economic and structural transformation. A more active role for market makers, development of hedging instruments, including derivatives, and repo and securities lending markets would also help generate turnover and improve liquidity. Improvements in the regulation of securities markets could also enhance the role of equity markets as stable and reliance sources of financing in the future. Other impediments include an embryonic legal and regulatory framework for nonbank financial institutions— shadow banks—and a lack of information provision including pricing transparency. 
  • Enhance regional and global perspectives. Increasingly, a regional perspective will be key to address rising regulatory and supervisory challenges as financial systems deepen and become more integrated and complex.  Possibilities include forming and strengthening supervisory colleges. Looking more widely, the development of the Asian financial system is likely to increase the potential for impact beyond Asia. So regulators and supervisors, while encouraging innovation, will need to ensure they have good cross border cooperation, adequate regulatory powers to act and stay alert to the risks. And the IMF, with its increased focus on interconnections and global impact, can help to identify the risks including any emerging from changes in global regulatory policy.

There are many unknowns, and what we have learned from other regions need to be applied to Asia with care, recognizing many unique characteristics of the region. The IMF is seeking to help policymakers in the region navigate the transition, bringing our cross-country expertise to the table.  We hosted a joint IMF–Hong Kong Monetary Authority conference, The Future of Asia’s Finance, in February 2014, and now plan to publish a book.  We will drill down more deeply into these topics and  give them our continuing attention.

Categories: Blog

A New Tragedy in Ukraine: The Shootdown of Malaysian Airlines Flight 17

Brookings Institute Blog - Thu, 07/17/2014 - 15:26

The continued fighting in eastern Ukraine was marked today by a horrible new tragedy: the apparent shoot-down of Malaysian Airlines Flight 17 (MH-17) over eastern Ukraine near the town of Torez. MH-17 was Boeing 777 bound from Amsterdam to Kuala Lumpur with some 300 people on board. Vice President Biden, presumably on the basis of U.S. intelligence, has said that the MH-17 was shot down. Pending a thorough investigation, the details of what exactly happened are not yet known. But early indicators suggest that pro-Russian separatists fighting in eastern Ukraine shot the flight down by mistake.

The most damning evidence so far: shortly after MH-17 fell out of the sky, separatist leader Igor Strelkov wrote on his VKontakte page that “In Torez Raion [county], an Antonov-26 has just been shot down, crashing somewhere near the mine called ‘Progress.’ We have warned you—do not fly in ‘our airspace.’” The Ukrainian Air Force flies AN-26 transport aircraft and Strelkov’s VKontakte posting is consistent with the time and location of the MH-17 downing.

The Ukrainian Security Service has released audio tapes of intercepted phone calls reportedly of conversations between separatists. In the first, the separatists believe they have shot down an airplane of the kind they had downed before—an AN-26 aircraft. In the second, they discuss the fact that the downed aircraft is civilian, with Malaysian Air markings.

The situation in the Torez region has been increasingly fraught as the Ukrainian military has pushed hard against the pro-Russian separatists, including by using airpower. The separatists have stepped up their attempts to shoot down Ukrainian transport and fighter aircraft, as well as helicopters. Writes the Moscow Times:

“On Wednesday, the insurgents claimed to have hit two Su-25 attack jets near Horlovka in the Donetsk region. On Tuesday they claimed to have downed another Su-25 near Snezhnoye in the same area. On Monday, they shot down a transport plane that was carrying food and water for government troops fighting in the east… Earlier, insurgents claimed to have downed several other military and transport aircrafts, including at least seven Su-25 attack jets, three Su-24 attackers, one Su-27 fighter jet, an Il-76 military transport aircraft, and at least 17 Mi-8 and Mi-24 military helicopters.”

Only days earlier, Strelkov had bragged, again on VKontakte, that the separatists had a “Buk” surface-to-air missile (SAM) system. He said that gave the separatists the capability to shoot down planes at altitudes higher than the 4,000 meters (13,000 feet. MH-17 reportedly was flying at an altitude of more than 30,000 feet, out of reach of man-portable air defense systems (MANPADS) but well within the range of Buk SAMs.

Although the Ukrainian military does have SAMs, there have been no reported use of those SAMs as the separatists thus far have not operated military aircraft.

Media reports indicate that the separatists have already gained access to MH-17’s black boxes and intend to hand them over to Russian authorities. There needs to be an immediate international investigation as to what brought down MH-17. This means that the separatists should allow Ukrainian authorities and an international investigation team access to the crash site and give them the black boxes.

Right now, the finger points at the separatists as responsible for this tragedy, a fact they seem to confirm by removing Strelkov’s earlier social media postings about today’s presumed “AN-26” shootdown. If it is confirmed that separatists are responsible, the next question is: how did they get—or who gave them—a sophisticated Buk SAM system?

This tragedy also underscores the need to steer the conflict in eastern Ukraine toward a ceasefire and negotiated settlement. The Kremlin has continued to feed the conflict with a stream of supplies and arms across the Russian-Ukrainian border. If it really wants to help stop the conflict—which thus far appears to be questionable—Moscow must end this flow and use its considerable influence with the separatists to get them to stop fighting.

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

The BRICS Safety Net

Brookings Institute Blog - Thu, 07/17/2014 - 07:57

Editor’s note: Bruce Jones and Thomas Wright examine the BRICS strategy to diversify their relationships and the safety net they are developing against the risk of U.S. sanctions.

Foreign policy experts love the straw man. And over the past decade, the fattest and most inviting straw man has been the BRICS (Brazil, Russia, India, China and South Africa). Created by Goldman Sachs, the BRICS was an investment gimmick that somehow became a formal international grouping. At first glance, it is a geopolitical absurdity. Russia is a declining power while the others are rising. China and India are geopolitical rivals. All differ on fundamental issues. The most durable thing about the BRICS is the acronym, or so the joke goes.

No question of expelling Russia

However, after the BRICS Fortaleza Summit it may be time for a rethink. Remember that President Obama trumpeted his achievement in supposedly isolating Russia in the international community. Russian President Vladimir Putin should have been cowering in his Sochi villa, friendless and worried. The BRICS should have expelled their “R” and opened the era of the “BICS,” and inspired new jokes about how the BICS have no ink.

Instead, Putin was welcomed with open arms in Fortaleza by Modi, Xi, Rousseff and Zuma. There was no question of expelling Russia. The other BRICS seemed not to have raised concerns on Ukraine with Putin. The communique only referred to the crisis in a passing manner that contained no criticism whatsoever of Russia. Previously, Brazil, India, China and South Africa all abstained in the vote on the U.N. General Assembly resolution to condemn the annexation. This summit will be perceived as lending legitimacy to Russia’s actions and badly undermines U.S. claims to have successfully isolated Russia on Ukraine.

Has Russia gotten a free pass because the other BRICS support the annexation of Crimea? Not necessarily. Most of them viewed Russia's move on Crimea with concern—and China even refrained from voting with Russia in the U.N. Security Council vote on the issue. So why the silence?

Insurance against the risk of U.S. sanctions

The BRICS may not be allies but they all see a common interest in preventing the United States from calling the shots and isolating one of their own. All but one of the BRICS have been subjected to U.S. sanctions and others to strict IMF conditionality. Indeed, for some it is personal—Modi was barred from the United States up until his recent election. And, they see the U.S. sanctions on Russia as a test run for a strategy that may be used on others that incur Washington’s displeasure in the future.

Thus, the BRICS want to diversify their relationships beyond western dominated institutions and have a safety net if they get pushed out. The BRICS development bank, the currency swap arrangement aimed at reducing the dominance of the U.S. dollar and the recent China-Russia gas deal should be seen in this context. The BRICS are not looking to replace the western led order. They are purchasing an insurance policy against the risk of U.S. sanctions. This sentiment is amplified by the recurrent recalcitrance of the West in opening up the governance structure of key institutions. 

For its first decade, the BRICS lacked a compelling strategic rationale. It was a collection of countries that offered a significant return on investment. Today, the BRICS economies are much weaker and more troubled. Investors are fleeing, not flocking, to them. But they have acquired what they lacked before—a common diplomatic purpose. Ironically, they may be more geopolitically consequential as they struggle economically than they were as rapidly rising powers.

Impact on the international order

The BRICS embrace of Russia and its acquiescence to Putin’s goal of cushioning the cost of illegal annexations raises troubling questions, especially about the democracies in the group—Brazil, India and South Africa. These three nations have frequently criticized the United States and Europe for the use of military force, especially on the Iraq invasion which they all vigorously opposed as illegal, but they are disturbingly quiet in the most egregious violation of international law since Iraq’s annexation of Kuwait in 1990.

None of this makes the BRICS what some of its boosters and some scare-mongers would have it be: a strategic alliance against the United States, or a bloc dedicated to breaking the existing order. To varying degrees, all the members of the BRICS have an important stake in key planks of the international order remaining stable. They're looking to shape, not break, the international financial and economic rules of the game. On security and territorial questions, however, Russia and China are playing a dangerous game, pushing the boundaries, testing what they can get away with; and risking both military clashes and a wider breakdown of the international security order. The rest of the BRICS acquiesce to this at a cost. 

They may have incentives not to listen to the United States, but other democracies should make plain to Brazil, India and South Africa that they expect them to live up to their oft-touted commitment to the multilateral order—not just in Europe but also in the maritime disputes in the South China Sea. Those nations that facilitate modern day revisionism should at least pay a reputational cost for their position. Meanwhile, the United States and Europe should redouble their efforts to reform international institutions, like the IMF, so responsible emerging powers can have a greater say in global governance.

Authors Image Source: © Paulo Whitaker / Reuters         
Categories: Blog

Fiscal Policy’s Evolving Role

IMF blog - Thu, 07/17/2014 - 07:30

Fiscal policy makers have faced an extraordinarily challenging environment over the last few years. At the outset of the global financial crisis, the IMF for the first time advocated a fiscal expansion across all countries able to afford it, a seeming departure from the long-held consensus among economists that monetary policy rather than fiscal policy was the appropriate response to fluctuations in economic activity. Since then, the IMF has emphasized that the speed of fiscal adjustment should be determined by the specific circumstances in each country. Its recommendation that in general deficit reduction proceed steadily, but gradually, positions the IMF between the fiscal doves (who argue for postponing fiscal adjustment altogether) and the fiscal hawks (who argue for a front-loaded adjustment).

All this is highlighted in a  recently released book Post-Crisis Fiscal Policy, edited by Carlo Cottarelli, Philip Gerson and Abdelhak Senhadji,  that brings together the analysis underpinning the IMF’s position on the evolving role of fiscal policy.  The book underscores how the global financial crisis has reshaped our understanding of the role of fiscal policy with topics that include a historical view of debt accumulation; the timing, size, and composition of fiscal stimulus packages in advanced and emerging economies; the heated debate surrounding the size of fiscal multipliers and the effectiveness of fiscal policy as a countercyclical tool and more.

Check out this book, which is written for a wide audience, and watch the webcast of the book launch hosted by the Peterson Institute for International Economics on July 14 .

Categories: Blog

Liability insurance for climate change

Our response to climate change at the global level clearly needs improving. While some governments are managing to set and enforce limits on the emission of greenhouse gases, an international agreement that is both enforceable and meaningful remains elusive. Measures undertaken by private individuals and organizations, though plentiful, largely fail to connect to the political process and continue to fall short in aggregate. Is there a way to combine these public and private efforts? We think there is, as we’ve explored in a recent NZZ article and ETH blog post: a new type of liability insurance.

Looking to the insurance industry for addressing climate change is not new (see, for example, Nobel Laureate Robert Shiller’s column; the Geneva Association’s statement; and the climate change and insurance links discussed at the World Bank’s recent Understanding Risk conference). What has been lacking, however, are ideas for employing insurance instruments at scale, across national boundaries, and in a way that maximizes existing capacities and market mechanisms.

Categories: Asia, Blog

Health Spending 25 Years Out

Brookings Institute Blog - Tue, 07/15/2014 - 12:47

Health spending growth is one of the key drivers of the nation’s long-term fiscal outlook. It also is one of the most uncertain, a point emphasized in the Congressional Budget Office’s latest report on the long-term budget outlook.

Although the continuing slowdown in health care costs led CBO to mark down its estimate of underlying health cost growth a bit, other changes in methodology were offsetting. That left the 25-year projections of total federal health spending largely unchanged from last year.

Nonetheless, those projections are sharply lower than those CBO made just five years ago, despite the coverage expansions enacted in the Affordable Care Act (ACA). The most recent estimates show federal spending on the major health programs (Medicare, Medicaid, Children’s Health Insurance Program, and the subsidies for those eligible who buy insurance on the new exchanges ) rising from 4.9 percent of GDP in 2014 to 7.5 percent in 2035. That is about 2.2 percentage points lower in 2035 than CBO projected in 2009. The outlook for Medicare has improved even more, with projected Medicare expenditures in 2035 about 2.6 percentage points lower than projected in 2009.

Today’s CBO report puts great emphasis on the uncertainty surrounding the health care projections. Budget wonks will notice a change in CBO methodology: the long-term health spending projections are now more mechanical, and CBO no longer offers different scenarios based on whether future Congresses will overrule the ACA’s cost-cutting measures. Clearly, CBO is trying to signal how little is actually known about future health cost growth.

The critical importance of health spending to the long-run fiscal future is brought home by projections of federal imbalances under alternative assumptions about cost growth. Under the assumption that future per person health care costs rise only at the pace of potential GDP (zero excess cost growth), federal health spending reaches 6.8 percent of GDP in 2039, about 15 percent lower than in the baseline. Using CBO’s data, we calculated the federal health spending under an alternative assumption that health spending growth over the next 25 years rises at its recent historical rate (1.4 percentage points faster than potential GDP, according to CBO). Under this assumption, federal health spending reaches about 9 percent of GDP by 2039.

A key question for economists and policymakers is how to think about this uncertainty: how should recognizing how little we know about the future affect our policy choices today? Some analysts believe that we should take action now to insulate us against the risk of larger-than-expected budget imbalances in the future. Others—particularly those who are very hopeful about future health cost growth—prefer “watchful waiting.”

Categories: Blog

Six Takeaways from CBO’s New Long-Term Budget Outlook

Brookings Institute Blog - Tue, 07/15/2014 - 12:00

The newest Congressional Budget Office long-term budget outlook, released today, is more evidence that the long-term federal budget problem may be forgotten, but it is not gone

Here are six takeaways.

  1. The size of the budget deficit today isn’t a problem, and it’s not much of a problem for the next few years either. “If current laws governing taxes and spending stayed generally the same…the anticipated further strengthening of the economy and constraints on federal spending built into law would keep deficits between 2.5% and 3% of GDP from 2015 through 2018,” CBO said. But after that, CBO projects the deficit gets bigger again, reflecting an aging population and rising health costs even if Congress surprises outside analysts and sticks to the caps on annually appropriated spending it has written into law.
  2. The federal debt, measured as a percentage of GDP, is a historically high 74 percent today. It’ll rise to 106 percent of GDP over the next 25 years, which would be tied for the highest in U.S. history, the level attained as a result of World War II. Back then, the debt-to-GDP ratio fell steadily from the peak; this time, CBO projects it’ll keep climbing unless Congress does something.
  3. There is significant uncertainty around these long-term projections, but that is not a reason to ignore them. CBO examines the effects of variation in four items -- mortality rates, productivity, interest rates, and health spending. CBO finds that if all four items move in the same direction in terms of their impact on the budget by a moderate amount, the debt-GDP ratio could be as low as 75 percent in 2039, roughly where it is today, or as high as 160 percent.
  4. The magnitude of the changes in policy needed to ensure that the debt-GDP ratio in 2039 returns to its historical average over the last 40 years – around 39 percent – depends on when corrective policies are initiated. If policies were initiated next year, then it would take a cut non-interest spending or an increase in taxes or a combination equal to 2.6 percent of GDP on an annual basis – about $465 billion in today’s economy. If we wait until 2020, it would require annual cuts of 3.5 percent of GDP. Twenty-five years may seem like a long time from now, but the longer we wait, the larger the changes will need to be.
  5. All of these numbers are based on what CBO calls its “extended baseline,” which is predicated on a number of “optimistic” assumptions (from the perspective of debt reduction), namely that all expiring tax provisions are allowed to expire, that tax revenues are allowed to rise continually as a share of GDP that economic growth pushes people into higher tax brackets over time, that there are no major wars, that Medicare reimbursement rates are allowed to drop significantly and spending other than Social Security, health care, and a few refundable tax credits (that is defense, education, infrastructure, research) falls continually as a share of the economy, hitting its lowest share of the economy in more than 70 years.
  6. In an “alternative” scenario that adjusts for these assumptions, one might term it a more realistic view of current policies, CBO finds that the debt-GDP ratio would rise to 163 percent by 2039 – and to 183 percent if the economic ill effects of very high government borrowing is factored in.
Authors Image Source: © Gary Cameron / Reuters         
Categories: Blog

New Afghanistan Deal: Secretary Kerry's Diplomatic Gem

Brookings Institute Blog - Mon, 07/14/2014 - 11:58

Secretary of State John Kerry, frustrated by various peace efforts in the Middle East in recent months, may finally have accomplished a major diplomatic breakthrough—saving the Afghanistan project from the jaws of defeat.  Had former finance minister Ashraf Ghani and former foreign minister Abdullah Abdullah each claimed victory in the June 14 presidential election and formed their own respective governments, the country could have collapsed into civil warfare and thus made possible a return of the Taliban.

Of course, nightmare outcomes are still possible.  But the deal that now requires international oversight for the recounting and review of ALL ballots, with both candidates committed in advance to recognize the results, is far more promising that the previous circumstances (in which suspected Karzai cronies or Pashtun chauvinists were believed to be responsible for certifying the results, and in which planned ballot auditing procedures were much less thorough or transparent).

In addition, the new plan to create a true parliamentary system of government with a strong prime minister offers a suitable consolation prize to whoever loses the presidential race.  It also makes sense for Afghanistan at this stage in its development, since the previous system created a too-powerful president.  The United States made a mistake in how it helped devise the Afghan Constitution in 2003-2004, even if it was an understandable mistake at the time.  The current proposal for a stronger parliamentary system, as well as can be deduced from preliminary reports, provides a sounder basis for power sharing and for inclusive governance.

As noted, much could still go wrong.  The ultimate loser in the election could decide to challenge the UN-certified results after all.  Or the winner might find some excuse to revisit his earlier promise to appoint the runner-up as prime minister.  President Karzai might throw a monkey wrench into the process in some way.  One of the candidates could be wounded or killed in an assassination attempt.  Most likely of all, intense disagreement might occur over how to structure the new prime ministerial position and how much power to afford it.

In addition, the Obama administration needs to revisit its zero option for 2016—the plan to have all U.S. combat troops out of Afghanistan by the end of President Obama’s presidency.  There is no compelling reason to go to zero, as opposed to an enduring force of a few thousand for years to come.  In addition to the good it could still do for Afghanistan's military, which continues to need improvement and mentoring, such a force could help ensure American influence in addressing any future Afghan political crises.  And it would provide us with bases for drones and commandos should al Qaeda pop up its head again in the tribal areas of western Pakistan or eastern Afghanistan.

But make no mistake, the recent breakthrough is big news at a time when the Obama administration—and the world in general—needed a boost.

Authors Image Source: © Mohammad Ismail / Reuters         
Categories: Blog

Philippines: Drones and spreadsheets to the rescue

A multipurpose building in Bantayan Island in Northern Cebu, collapsed after typhoon Haiyan (Yolanda). Photo: Justine Letargo/World Bank
Categories: Asia, Blog

Improving Communication with ACO Patients

Brookings Institute Blog - Mon, 07/14/2014 - 07:16

We are entering a new era of consumerism in health care: highway billboards promote hospitals that own state-of-the-art MRI machines; television ads advertise urgent care clinics with minimal wait times; and magazines capture state-of-the-art surgical centers with the latest robotic technology. Perhaps most importantly, the rise of high deductible health plans and the emergence of health insurance exchanges are causing consumers to be far more cost conscious about where, when and from whom, they seek their care.

Appropriately, the healthcare marketplace is beginning to respond. Multiple states now have price transparency initiatives through which patients and caregivers can learn how much certain hospitals and providers charge for services. Earlier this year, Medicare released a large volume of health claims data revealing provider utilization and costs of services, and several commercial health plans are expected to follow suit.  In addition, quality reporting programs such as the Centers for Medicare and Medicaid Services (CMS) Hospital Compare  and Nursing Home Compare can provide basic information to help guide consumer decision-making.

Efforts to reign in health costs have accelerated the development of narrow network and managed care insurance plans where patients are limited to providers pre-specified by their insurance plan. Accountable Care Organizations (ACOs) are also proliferating as mechanisms to bend the health care cost curve. A recent analysis identified over 600 ACOs in the United States, and that number continues to grow at a rapid rate. As of January 2014, within the Medicare program alone, there are 366 ACOs that serve over 5 million patients.

Unlike commercial payers who often combine narrow (or tiered) networks and accountable care arrangements, Medicare ACO patients are not limited to specific providers. By allowing patients freedom of choice, Medicare preserves this highly valued commodity of patient autonomy. However, the downside in preserving patient choice is leakage. A recent study found that over a two-year period, only 66% of Medicare ACO patients are consistently assigned to the same ACO. This level of inconsistency can severely impede an organization’s efforts to identify and target patients using important tools like population health management and care coordination.

Barriers to Engaging Patients

A major  challenge in educating patients about ACO benefits  is  CMS’ strict regulation of patient outreach materials.  For example, upon entering a Medicare Shared Savings ACO, all patients receive a standardized letter from CMS indicating their provider’s ACO participation and allowing patients to opt out of sharing claims data.. Yet, many patients report that they do not remember receiving the letter, or they didn’t understand the letter. While Medicare does provide an  informational FAQ brochure for patients,  CMS must review any additional promotional or marketing materials.

Educating patients about the benefits of accountable care is a tricky proposition, as patients often believe that more expensive care equates with better care, and are thus reluctant to make personal medical decisions based on cost. For example, patients may care about the overall cost of health care when it comes to others, but when it comes to their own care, they often want everything done – and that means MRIs for back pain and antibiotics for viral infections – treatments that are not recommended using evidence-based guidelines.  Thus, marketing value-based care could backfire for a provider organization, as patients could claim that they are being denied care by physicians who are trying to save money;  a common refrain from the HMO era.

Crystal Run Healthcare

Through effective patient engagement and outreach, an ACO can effectively streamline patient care and provide a comprehensive range of services, while reducing redundancies, unnecessary visits and procedures, and eventually—unnecessary costs. Those who do so will benefit from additional services that are not provided (because they are not reimbursed) in non-ACO practices, such as population health and care management services.  

Crystal Run Healthcare is a Medicare Shared Savings ACO that is leading the way in promoting the benefits of value-based-care. The multi-specialty practice achieved NCQA ACO designation, and is supporting providers in their efforts to adopt Choosing Wisely guidelines ( Crystal Run providers are creating a data warehouse with monthly report cards that help identify areas for improvement; embedding care managers within each primary care clinic; providing home visits for complex patients; and launching a telehealth program.

Few, if any of these offerings are reimbursed in fee-for-service arrangements, but Crystal Run has already seen reductions in hospitalizations, and improvements in diabetes control and patient satisfaction. Despite the challenges of discussing costs with patients, Crystal Run Healthcare has decided that reorienting patient attitudes about value is not only important, but is also essential for the success of accountable care. The theme of Crystal Run’s most recent advertising campaign, “On This We Can Agree” is that more isn’t necessarily better when it comes to health care.

Through a series of television, radio and print advertisements, the advertisements present statements such as:

  • Healthcare should be judged on whether it makes you healthier
  • Your goal is more health, not more tests and procedures
  • Healthcare should cost what it needs to cost, and no more

Dr. Hal Teitelbaum, CEO of Crystal Run, feels that until patients actually believe the mantra that “less is more,” it will be very difficult to bend the cost curve in US health care. However, there are pathways forward. The movements for transparency of both cost and quality data could help show patients that cheaper care may actually be better care. Public quality reporting of meaningful outcomes can go a long way towards achieving such goals. According to Dr. Teitelbaum, “If the public saw that higher quality care could be had at lower cost, that would make a difference.”

Categories: Blog

Euro Area – Q&A on QE

IMF blog - Mon, 07/14/2014 - 07:05

By Reza Moghadam and Ranjit Teja 

As inflation has sunk in the euro area, talk of quantitative easing (QE)—and misgivings about it—have soared. Some think QE is not needed; others that it would not work; and yet others that it only creates asset bubbles and may even be “illegal.” In its latest report on the euro area, the IMF assesses recent policy action positively but adds that “… if inflation remains too low, the ECB should consider a substantial balance sheet expansion, including through asset purchases.” Given all the reservations, would the juice be worth the squeeze?

Q1.      What is QE and how would it differ from other ECB balance sheet expansions?

A1.      QE at heart is a sustained expansion of a central bank’s balance sheet—something all major central banks have done since the onset of the crisis. Against a backdrop of reduced wholesale funding, the European Central Bank (ECB) launched 3-year Long Term Refinancing Operations (LTROs) in 2012, which significantly expanded reserve money as the ECB offered funding to banks against eligible collateral. The hope was that stable multi-year funding would encourage banks to restart lending and support activity.

While they did not vanish, concerns about stable funding and liquidity did ease—enough to prompt banks, eager to signal financial health, to start pre-paying LTROs. This undid much of the initial expansion in reserve money. Overall, LTROs prevented worse outcomes but did not actually lift private credit and broad money.

QE would differ from LTRO-type expansions in that the ECB would: (1) make outright purchases of longer-term assets (longer than 3 years), which have wider and larger effects on interest rates, asset prices and spending; (2) expand its balance sheet at its own discretion (not that of banks or others); and (3) sustain those purchases until inflation goals are met.

Q2.      What assets would the ECB buy—public or private, core or periphery? 

A2.      For now, there are too few liquid private assets to sustain QE. The market for securitized bank assets is small, as is the one for corporate bonds. Bank bonds are plentiful and liquid but concentrated. Central banks rarely venture into equities. That leaves sovereign bonds the only viable option. (It would be desirable to further develop markets for securitized assets like mortgages and loans to small and medium-size enterprises; the mere fact of QE can give the needed impetus.)

ECB purchases should be across the board, not just core or periphery, because the problem of low inflation is across the board. So long as the ECB buys sovereign bonds in pursuit of its mandate and in a way that has nothing to do with fiscal outcomes (e.g., neutrally buying the bonds of all countries according to their share in ECB capital), it can rebut the oft-heard charge that QE violates the prohibition against “monetary financing of fiscal deficits.”

Q3.      How would QE work?

A3.      QE is not a panacea or substitute for reforms. But it can push up inflation by raising consumption and investment across the euro area, and support that trend by reviving the supply and demand for bank credit. How?

For starters, growth and inflation expectations would rise as the ECB signals resolve to achieve its inflation objective. The ECB’s Outright Monetary Transaction announcement has demonstrated the potency of whatever-it-takes signaling. Current demand and asset prices also would be lifted by the prospect of lower real interest rates (as QE reduces nominal interest rates and raises inflation expectations).

QE would also trigger important valuation effects. ECB sovereign bond purchases directly raise their prices. The sellers of sovereign bonds—banks, pension funds, asset managers—would need to reconstitute their portfolios with other long-term assets, over time raising asset prices more widely. European equity prices, for one, remain well below pre-crisis levels.

The significance of higher asset valuations would extend beyond the usual wealth effects:

  • Household and corporate balance sheets. Before the crisis, additional debt was used to buy housing and other assets whose values subsequently crashed. Ever since, households and firms have been cutting back consumption and investment in order to pay down debt. This balance sheet recession is illustrated in the charts below, which relate pre-crisis balance sheet stress (an index of the level and growth of debt) to post-crisis demand contraction. Higher asset values from QE, and a lower real carrying cost of debt, can reverse this dynamic.

  • Supply of bank credit. Banks are major holders of sovereign bonds. Higher sovereign bond prices mean higher bank valuations—i.e., higher bank capital. (A back-of-the-envelope calculation: a 50 basis point fall in long-term yields could raise the banking system’s core tier 1 capital ratio by 1½ percentage points). Further, higher private asset prices mean higher values of household and firm collateral. Together, these increase the willingness and ability of banks to supply credit.
  • Demand for bank credit. The increase in aggregate demand from higher asset values and growth expectations would increase credit demand. Unlike other ECB measures to date, QE also works to restore the demand for bank credit.

Q4.      Can QE be effective if interest rates are already low and the system bank-based?

A4.      As noted above, QE works via banks too. It worked in Japan even though Japanese finance is almost as bank-based as in Europe (83% and 89% respectively). And Japan had even lower interest rates when the Bank of Japan (BOJ) launched its successful qualitative and quantitative monetary easing (QQE) program last year. There is much more space for the yield curve to fall in Europe than there was in Japan. A decline in European yields of 50 basis points at mid-maturities, and more at the longer end, is entirely plausible.

Q5.      So why did the ECB stop short of QE?

A5.      The ECB has been clear that it is open to unconventional measures but also that circumstances do not as yet justify QE. And indeed it would not help if the ECB went for QE with anything less than full conviction. The BOJ’s QE program in the early 2000s ended prematurely (before inflation and inflation expectations were durably raised), while that in 2010-12 was too guardedly implemented (in small steps and no clear link to the inflation goal). By contrast, its QQE since 2013 has been whatever-it-takes on size, pointed on goals and timeframe, and has yielded a strong response in inflation expectations.

Q6.      What about side effects—asset bubbles and currency depreciation?

A6.      QE will push banks and others out of safe government bonds to lending to the rest of the economy. That is riskier but it is also the point. While risk-taking and credit growth may grow excessive, this is not an immediate risk, certainly not next to that of too low inflation. So far, credit is still contracting in the euro area (barely positive even in Germany) and there is no evidence of housing/asset bubbles (not even in Germany). If bubbles are blown, targeted macro-prudential measures, which need further development, can be deployed.

On the currency, QE would likely weaken the euro. Insofar as this raises demand and traded goods prices, it helps tackle the threat from low inflation. This could be an important channel. But depreciation is not inevitable: rising asset prices/economic prospects due to QE may draw capital and appreciate the euro.

With thanks to Petya Koeva Brooks, Pelin Berkmen and Ali Al-Eyd for their contribution to this blog post.

Categories: Blog

When, what, and how to survey after a disaster strikes – an experience from Tonga

Winny, an elementary teacher enumerating for the household survey (Uiha Island, Tonga, April 10, 2014). With the support from the Ministry of Education, 35 teachers from Ha'apai participated during the survey.

Back in March 2014, I had the opportunity to be part of a World Bank team supporting the Tongan government to develop a reconstruction policy after Tropical Cyclone Ian hit earlier this year. To implement the policy, the Ministry of Infrastructure led a series of surveys to inform housing reconstruction. This post, which does not intend to be scientific or exhaustive, is to share some of the key lessons I learned from this experience.

Damage assessments are routine in the aftermath of disasters, but they differ depending on their objectives (Hallegatte, 2012 - pdf). A rapid survey in the wake of a disaster event could help to estimate grossly the direct human and economic losses and damages. This type of survey is best to capture the amplitude and the severity of the disaster. However, such survey could present some flaws, often because the survey will be conducted in a very short time frame with minimal design. On the other hand, a survey conducted a few months after the event is best to understand better the context of the disaster. It also allows a better design and better preparation. But, equally, such survey could include biases. For instance, the time lag between the event and the survey itself could create some level of challenges. Most likely, people would have started to fix their houses or have moved away from the affected area, and that will add a layer of complexity to the survey.

Categories: Asia, Blog

A Transoceanic Canal for Nicaragua?

Brookings Institute Blog - Wed, 07/09/2014 - 10:00

Earlier this week the government of Daniel Ortega revealed a detailed route for the proposed Chinese-Nicaraguan transoceanic canal. If completed, the massive construction project would transform and uplift the Nicaraguan economy. It would also slice the Central American nation – and the Americas – right down the middle. Precisely one century after the President Theodore Roosevelt proudly opened the Panama Canal, a Chinese grand canal in the middle of the Americas would graphically symbolize the accelerating shifts in geopolitics.

The proposed canal would be 278 kilometers long – considerably longer than the Panama Canal – transiting through Lake Nicaragua for 105 kilometers, and would include two huge locks. Ambitious designs imagine two major seaports, an airport, a free trade zone and a tourism complex. During the construction phase the project would directly employ over 50,000 workers, and once in operations it would generate 200,000 jobs, some 10 percent of the current Nicaraguan workforce.

McKinsey & Company has been retained to draft a feasibility study, but it has yet to be released. Nevertheless, the canal’s proponents argue that global commerce will grow fast enough over the coming decades to overload the Panama Canal and provide sufficient business for the Nicaraguan venture. Moreover, unlike the Panama Canal, the Nicaragua passageway will be broad enough to accommodate the next generation of super-wide container ships.

Daniel Ortega granted an extraordinarily generous 50-year concession, renewable for another 50 years, to a Chinese firm to construct and operate this second ditch connecting the Pacific and the Atlantic oceans. The lead Chinese investor, Wang Jing, an unknown figure even in China, is a 41-year old billionaire entrepreneur with interests in mining, infrastructure and telecommunications. The big question is whether he can raise the estimated $40-50 billion and quite possibly much more to realize Nicaragua’s long-standing dream. It will be a challenge to raise the long-term financing required for a project that would not earn any income for six to 10 years during construction. Some officials working the Nicaragua canal project are proposing equity financing, but the project profile makes this unlikely. So will Chinese government-backed entities – state banks and state-owned enterprises – be willing to finance the mega-project?

So far the U.S. administration has remained quiet, privately assessing the project’s likelihood as low, and “not wanting to fan the flames,” in the words of one senior U.S. official. But as the project gains traction, Washington will surely react. Several large issues are at stake:

• Security Will the Nicaragua canal include guarantees of “neutrality,” of openness to the shipping of all countries? What other security guarantees might the U.S. seek?

• U.S.-China geopolitics Chinese economic presence in the Western Hemisphere has increased dramatically, but so far the U.S. has taken a “wait and see” attitude, acknowledging the mutuality of commercial benefits and not pre-judging political or geopolitical opportunities that China might seize. But a Chinese-Nicaraguan canal would signal a much higher level of Chinese assertiveness.

• Contracts If Chinese entities provide the bulk of the financing, they are likely to tie their support to Chinese equipment and quite possibly Chinese workers. Can there be open and fair bidding, allowing for contracts with U.S. firms such as Caterpillar and Bechtel, as well as for Mexican and Brazilian construction companies?

• Latin American geopolitics The Canal would provide a powerful business boost to Nicaragua, helping to ease the transition away from fading Venezuela financing. But if successful, the Ortega-championed project, which has captured the popular imagination, could solidify one-party politics in Nicaragua for the foreseeable future. In light of the instability in the northern-tier Central American states (Honduras, Guatemala, El Salvador) and Costa Rica’s extra-regional prism, a strong unified Nicaraguan state could become the dominant power in the isthmus.

• Environmental consequences What will be the impacts on Central America’s largest lake and on the bio-diversity of Nicaraguan forests? How will the requisite energy be generated?

In the coming months, we should know more about the McKinsey assessment as well as the results of a commissioned environmental study. We may also hear more about the critical financial component – and whether China is ready to reveal its hand.

Authors Image Source: © Jose Gomez / Reuters         
Categories: Blog

Kyiv’s Atrocities? A More Nuanced Look at the Ukraine Crisis

Brookings Institute Blog - Tue, 07/08/2014 - 12:29

Stephen F. Cohen published an article in The Nation on July 1 entitled “The Silence of American Hawks about Kyiv’s Atrocities.” It makes for an interesting read, though it places virtually all the blame for the distressing crisis in Ukraine on the Ukrainian government and Washington. That situation, however, cannot be painted in the black and white strokes used by Dr. Cohen; there are many shades of gray. I try to see the grays, though I should note at the outset that Dr. Cohen would likely lump me with the hawks. Much of his article, however, paints a black and white picture that omits crucial context and detail. Some examples.

Dr. Cohen’s article equates the actions of the armed separatists in the eastern Ukrainian regions of Donetsk and Luhansk with the protests on the Maidan Square in Kyiv. The Maidan demonstrations were overwhelmingly peaceful until the police assaults on February 18. To be sure, buildings around the Maidan were seized (and one rented)—mainly to provide shelter given the bitter winter temperatures. And a small group of protestors (which included ultranationalists) started clashes with police in mid-January, but their number never amounted to a small fraction of the peaceful demonstrations a couple of blocks away.

What took place in Donetsk and Luhansk was different. There were no peaceful demonstrations on the scale of the Maidan. Instead, armed separatists seized local administration and police buildings. In some cases, they were led by “little green men”—the term Ukrainians applied to the soldiers in Russian-style combat fatigues but no identifying insignia who seized Crimea (later acknowledged by Vladimir Putin to have been Russian troops). Equating such activities in black and white terms with the Maidan is a very long stretch.

I agree with Dr. Cohen about the horrific nature of what transpired in Odessa on May 2, when dozens perished in a trade union building fire, though I would not be so quick to draw analogies to Nazi exterminations. There should be a full investigation, and the Ukrainian government would be wise to invite forensic experts from countries such as Finland to participate.

But Dr. Cohen’s description of the Odessa tragedy omits relevant information. First, by most accounts, the clashes began when a pro-Russian group attacked a peaceful pro-unity parade. Second, many reports say that some in the pro-Russian group used firearms. Third, while there is no doubt that pro-Ukraine demonstrators threw Molotov cocktails into the building, there is also evidence of people on and in the building with their own Molotov cocktails. Finally, once the fire broke out, there is footage of some from the pro-Ukraine group helping people escape the burning building. None of this justifies the inexcusable attack on the building, but it paints a grayer picture than Dr. Cohen’s account.

Dr. Cohen’s narrative of the government’s anti-terrorist operation implies that Kyiv started the conflict in the east. In fact, beginning on April 6, armed pro-Russian separatists seized numerous buildings before Ukrainian military and security forces began their operations on April 12. He suggests indiscriminate attacks on civilian population centers when most Ukrainian military operations appear aimed at a foe who is well-armed, including with tanks and sophisticated surface-to-air missiles (as witnessed by the shoot-downs of Ukrainian military aircraft, including a transport plane with 49 aboard).

The role of the Right Sector organization is of concern, and Ukraine’s government should act to disarm it. Some in the West, however, believe that Svoboda has made an effort to move away from its uglier roots. Dr. Cohen is right about their relatively large representation in the cabinet. But his account does not mention a major reason for that: the Party of Regions and the UDAR party, the first and third largest factions in the Ukrainian parliament, chose not to take positions when the new cabinet formed in February.

Dr. Cohen’s narrative too easily dismisses what the May 25 presidential election says about support among the Ukrainian people for right-wing ultra-nationalists. The leaders of Right Sector and Svoboda together garnered less than two percent of the vote. Even that overstates their support: armed separatists prevented voting in much of Donetsk and Luhansk, where 14 percent of the Ukrainian electorate resides, few of whom would have favored the Right Sector or Svoboda leaders. Dr. Cohen suggests that “small, determined movements can seize the moment” to imply the ultra-nationalists command authority beyond their poll numbers. Perhaps. But could the same concern not be raised about the armed separatists in Donetsk and Luhansk, where polls have shown that most people wish to remain a part of Ukraine?

Dr. Cohen writes that the anti-terrorist operation can only be halted in Washington and Kyiv. By most accounts, Ukrainian forces significantly ratcheted down operations during the ten-day ceasefire that ended on June 30. It is not clear the separatists did. Surely they have some voice in whether a ceasefire can be made to hold?

Dr. Cohen lets Russia entirely off the hook, noting that, after the annexation of Crimea, Putin showed “remarkable restraint.” Even setting aside the seizure of Crimea—the most blatant land-grab in Europe since the end of World War II—it is difficult to describe Russian actions since then as restraint. Moscow over the past three months has sought to destabilize Ukraine. Among other things, it blocked Ukrainian exports to Russia; dramatically raised the price of gas it sold to Ukraine (to levels far above what Germany and Austria pay, despite their higher transit costs); kept tens of thousands of troops mobilized on Ukraine’s eastern border; and allowed fighters, supplies and equipment, including tanks, to cross from Russia into Ukraine. Restraint?

Dr. Cohen expresses concern that inflamed Russian elite and public opinion may force Mr. Putin to take stronger actions, including military intervention. That is indeed a concern, but his article could and should have noted why Russian opinion is inflamed: the one-sided Soviet-style propaganda campaign carried out by Mr. Putin’s own state media.

The situation in Ukraine is complex and gray shaded. There is plenty of blame to go around. But Dr. Cohen’s article fails to capture that and instead paints a misleading black and white picture that masks the more nuanced reality.

Authors Image Source: © Gleb Garanich / Reuters         
Categories: Blog

Explaining Success at the World Cup: Money or Governance?

Brookings Institute Blog - Mon, 07/07/2014 - 13:25

It is no secret that FIFA has been mired in governance and corruption scandals for many years.  The challenges keep piling up as the man at the helm, Sepp Blatter, clings to power indefinitely, illustrating the extent to which some international sports organizations lag behind many countries in terms of democratic governance standards. As I argued in 2010 during the World Cup held in South Africa, FIFA is a multibillion dollar organization that profits handsomely at the expense of development of host countries.

Fortunately, the absence of governance in FIFA itself has not fatally damaged the fun and beauty of the game. Most of the World Cup games in Brazil have been exciting and raised enormous interest and passions around the world, even in unexpected places like the United States, where its first round game against Germany drew more online viewers than the NBA finals.

Yet skeptics remind us that, ultimately, it is all about money. And, yes, plenty— including FIFA’s lack of governance and its head’s perpetuation of his own power—may be about money. But is money the main driver of soccer success for a national team in the World Cup?

Money Doesn’t Always Talk

A number of analysts and organizations making predictions about the World Cup say that it is. In fact one prominent financial firm, ING, utilized the monetary market value of the national team (aggregating the market value of each player) to predict that the World Cup winner would be Spain, the highest valued national team at close to $1 billion!

Or perhaps money matters in other ways, such as how large the country’s economy is, how well paid the team manager is, or whether the national team was able to recruit a foreign manager. We also hear that oil riches might have bought the right to host the World Cup, as has been said of Qatar, or can buy a top European football club. But do national teams from resource-rich countries perform better at the World Cup?

Beyond money matters, we read about population size as a critical determinant (much larger potential pool of soccer players), and also about the "luck of the draw." When the lottery took place to assign the 32 World Cup teams to the eight groups for the first stage, many bemoaned that their national teams had been assigned to a "group of death," while others were placed with weaker contenders and, thus, seemingly easy groups.

Analyzing the statistical evidence provides some surprising insights. It turns out that in looking at what differentiates success from failure in advancing to the second stage (round of 16) of this year’s World Cup, money does not seem to make a difference. Neither the monetary value of a team, nor the salary of the team’s manager (nor whether the manager is a national or foreigner) matter statistically. Controlling for other factors, the size of a country’s population or economy does not make much of a difference either. In addition, whether the country is resource-rich or not has no impact on the performance of the national team whatsoever.

Some of these statistical results would not shock those who watched the modestly valued Costa Rica advance by sending wealthy Italy home, or those who witnessed highly paid powerhouses such as England, Spain and Portugal also exit the World Cup early.

Interestingly, the "luck of the draw" regarding the caliber of the rivals each country faced in their first stage groupings of the World Cup, does not matter statistically at all either.

Governance Matters

If none of these commonly mentioned factors make a difference in explaining World Cup success, then what does matter? Our statistical analysis points to two relevant determinants.

First, the quality of democratic governance of the country is significant. Whether the country exhibits high levels of voice and democratic accountability—namely protecting civil society space, media freedoms, and civil and political liberties—matters significantly, controlling for other factors. If, among its World Cup peers, a country rated in the top third in the voice and accountability indicator of the Worldwide Governance Indicators (WGI), it had a 70 percent chance of advancing to the round of 16, while if it ranked in the bottom third it only had a 30 percent probability of advancing.

Second, we find that home field advantage and the extent of the fan base at the World Cup (number of fans traveling to the Cup to cheer for their national team) also matters, explaining part of the success of teams from North, Central and South America in advancing to the second stage (see Figure 1).

Both determinants of soccer success may be related, reflecting the flip sides of the coin. To an extent, fan support for their national team may be the (bottom-up) counterpart to the (top-down) enabling accountability environment provided by each government. Citizen empowerment and participation does matter in soccer as well, as the free media and fan base passionately encourages their national team, while also holding them accountable.  

This ought not shock us, since these determinants extend well beyond soccer; it is what we find matters enormously for development success in general, and in particular in countries seeking to harness their own natural resources for socio-economic progress. Voice and accountability, as well as citizen feedback, is also found to matter for the success of public institutions and NGOs.

It may not be a coincidence, therefore, that countries like Russia, Cameroon, Honduras and Iran went out during the first round, while Costa Rica, Chile, Uruguay, Switzerland and the United States advanced.

Following the games in the second round, the number of teams left shrunk to eight last week, and, with countries like Algeria and Nigeria exiting at that stage, no team with even relatively low standards of democratic governance (i.e., rating in the bottom half of voice and accountability indicator in the WGI) made it to the quarterfinals. Following this weekend’s quarterfinal games, there are four teams left standing in the semifinal games: Brazil vs. Germany and Argentina vs. the Netherlands, each team harboring high hopes to lift the cup next Sunday. 

While neither Argentina nor Brazil match the quality of democratic governance of their respective European contenders, both have made significant strides since the military regime days of a generation ago, and now rate in the top half of the voice and democratic accountability governance indicator. And, importantly, both South American teams have a significant “home field” and fan base advantage over Germany and the Netherlands: Brazil is the host, and Argentina, its neighbor, has about 100,000 fans crossing the border to support its team (the second largest contingent of visitors after the United States). Hence, in terms of a likely winner, our statistical results would suggest that both quarterfinals could go either way, since the teams with higher governance standards have the lower fan base.

Obviously, even if governance matters, winning games is not all about democratic governance at the national level, and about passionate “civil society” support in the stadium for a team. Governance also matters at an organizational level, namely the cohesiveness and effectiveness of a team beyond the individual quality of each player, can make a big difference.  In fact, in previous writings we have offered one definition of good governance as the ability of a team to be more than the sum of its parts.  During this Cup, Costa Rica, Chile, France and the United States illustrated such good governance at the team level, in contrast to Cameroon, Ghana, Italy or Spain, each producing so little in spite of their individual stars. In the South Africa World Cup four years ago, Ghana exemplified good governance as a team, in contrast with France’s team then, which was the polar opposite, and so was the Argentina team, at the time poorly managed by Diego Maradona.

Heads I Win, Tails You Lose

Beyond national governance and civic space, there are luck factors that make a difference.  An injury like the Brazilian star Neymar’s (now out of the World Cup) may end up mattering for Brazil’s fate, and, conversely, for Argentina, so might one more of those inspired plays by Leo Messi. Another misstep by a referee can also make the difference.

Luck may determine who wins the Cup in other ways, unrelated to the "luck of the draw" in the first rounds’ group assignments (which we found doesn’t make a difference). Instead, what may still matter is the "luck of the coin toss” in penalty shootouts forced by tied games. A paper by Apesteguia and Palacios-Huerta in the American Economic Review that draws on almost 3,000 penalty kicks over roughly 40 years of major international soccer and points to psychological factors, finds that the team that kicks the first penalty has a 60 percent probability of winning the penalty shootout! No wonder their paper also finds that the team that wins the coin toss always opts to kick first. 

And no wonder that, so far during the current World Cup, the chance of the team kicking first during a penalty shootout winning is 66.6 percent. Costa Rica and Brazil—kicking first—won their respective shootouts against Greece and Chile in the round of eight, while the Netherlands won their shootout against Costa Rica in this weekend’s quarterfinals in spite of shooting second (but countered that by opting to substitute their starting goalkeeper with a penalty specialist, who blocked two shots!).

Soccer pundits tend to decry the penalty shootout, claiming that it is tantamount to a lottery. In fact, the above suggests that it is akin to loaded dice instead, where the lottery is actually in the coin toss, which then loads the deck in favor of the team that wins the coin toss.

But there is a fix, also drawn from the paper authors: If the penalty shootout is kept, at least FIFA authorities could organize it like the ordering of the respective serves in tennis tiebreakers. The fair penalty shootout option would be run like this instead: The first penalty is taken by the toss coin winner, then the next two penalties by the other team, then the next two by the coin toss winner, and so on, until 10 penalty kicks are completed. If they are tied at that point, they keep taking two penalties per team, alternating which team kicks first.

Brief Organizational and Policy Implications

These evidence-based insights point to two very different types of recommendations for FIFA.  One refers to the rules in settling a game, namely changing how the game tiebreaker is conducted in order to at least ensure that the ‘dice is not loaded’, as per suggestion described above. That should not be unthinkable; after all, following the last World Cup outcry over the goal denied to England against Germany when the ball had clearly crossed the line, FIFA slowly relented and adopted goal line technology—akin to tennis again.

In addition, this work supports the implied message from successful soccer nations to FIFA: Democratic governance matters and so does the fan base of a country. But the odds of FIFA listening to this message are rather slim, because it would mean that the perennial top leadership in this autocratically run organization would have to exit, for starters, allowing for a semblance of democratic transition.

More broadly, we are reminded that just as we have learned that sending billions of dollars in foreign aid, or being rich in natural resources, doesn’t guarantee socio-economic development for a country and benefits to the people, neither oil riches nor money alone can "buy" national soccer success either. What makes the difference is good governance.

Categories: Blog

Transitions of Power in the Middle East: What the Past Means for the Future of the Region

Brookings Institute Blog - Mon, 07/07/2014 - 13:00

The political uprisings in the Middle East shook the world, but their political transitions have also been tumultuous. As the Middle East changes, it is important to look to the past—whether at other countries having gone through political upheaval or at Islamist movements throughout history—to understand how democracy can be successful in the region. In our new books, we discuss the future of political transitions in the Middle East by looking at the issue through different lenses.

Temptations of Power: Islamists and Illiberal Democracy in a New Middle East examines how Islamist movements have changed over time and what democratization means for the future of the Middle East—arguing that it could lead to greater illiberalism.

Understanding Tahrir Square: What Transitions Elsewhere Can Teach Us about the Prospects for Arab Democracy studies past transitions to democracy around the world and uses those changes to offer insight on prospects for Arab democracy.

We recently engaged in a series of short conversations about main issues in the region. In a series of videos, we discuss the tensions between democracy and liberalism, political Islam and its role over time, successful constitutional drafting, and how culture and ideology affect political transitions, among other topics.

Categories: Blog

Can the Private Sector Really Replace the Export-Import Bank? Beware of the Missing Middle

Brookings Institute Blog - Mon, 07/07/2014 - 09:51

U.S. small and medium enterprises (SMEs) will probably face more challenges to obtain financing for their exports abroad if the U.S. Congress does not reauthorize the charter of the Export-Import Bank (Ex-Im Bank). The argument for not renewing the 80-year old export credit agency’s (ECA) charter in September centers on its support for large U.S. companies to the detriment of SMEs, in some kind of crony capitalism. According to this reasoning, the private sector should be able to pick up the tab after Ex-Im Bank ceases to exist. This outcome seems to make perfect economic sense. After all, why should the government support the private sector (even if Ex-Im Bank makes money in the process)?

One problem with this argument is that when it comes to helping U.S. SMEs export their products abroad, there may actually be a role for the government to work with the private sector. This is because SMEs typically face problems obtaining financing from commercial banks for export purposes.

A recent survey of seven ECAs by the Berne Union (see Mancuso and David, Berne Union Yearbook 2014, page 78-80), the international association of export credit agencies, highlights the challenges that SMEs are facing and how ECAs are trying to address them. For the purpose of the survey SMEs are defined as companies with less than $69.4 million (€50 million) in revenues and/or 250 employees. The results of the survey indicate that most ECAs are being asked to support SMEs and have started to develop tailored products. The top challenge that SMEs face in accessing foreign markets is obtaining financing, either for their buyers or to support their own growth. Others include (i) understanding market opportunities and conditions; (ii) navigating the complexity of market regulation, taxation and legal issues; (iii) supporting the willingness to take risks going abroad; and (iv) grasping the cost of doing business, including double taxation and trade agreements.

The Berne Union held a meeting in March this year specifically to discuss solutions to the challenges of supporting SMEs. Interestingly, the 40 specialists who participated in the meeting agreed that “banks remain necessary to provide working capital and export finance. But it is exactly these banks that over the last few years have become more reserved in providing that financing.” As it happens, during the recent financial crises, ECAs actually increased their business when banks were pulling out of trade finance.

Reasons for the timid involvement of banks include new banking regulations such as Basel III and Know Your Customer requirements. But, perhaps a better explanation is that the relatively high transaction costs and costs of risk banks incur when financing small transactions are why banks are less involved in the business of helping SMEs export their products and services abroad. In less economically advanced countries, the dearth of SME finance is called the “missing middle” problem because, unlike SMEs, very small firms can get microfinance loans and large firms have access to bank loans.

It is therefore unlikely that the “missing middle” problem will be solved by the private sector alone. Rather, solutions will probably involve schemes where ECAs like the Ex-Im-Bank will work together with commercial banks. For instance, at the same Berne Union meeting in March, experts identified a number of solutions which include insurance, financing and guarantee solutions tailored to the SME segment. It is true that not all ECAs are state-sponsored, but private ECAs such as AIG and Zurich Global Corporate in North America (whose CEO is the president of the Berne Union) are not commercial banks but private insurers. If private banks are unable to do the same job alone, then it is likely that the public sector will have to remain a partner. At a time when new exporting countries (think China) are stepping up their game and ECAs are working to cater more to SMEs, it would be wise to renew the Ex-Im Bank’s charter to support SMEs.

Categories: Blog

U.S.-China Strategic & Economic Dialogue: What You Need to Know

Brookings Institute Blog - Sun, 07/06/2014 - 21:00

The sixth meeting of the U.S.-China Strategic and Economic Dialogue—or S&ED—takes place July 9-10 in Beijing, with Secretary of State John Kerry and Treasury Secretary Jacob Lew representing the United States and State Councilor Yang Jiechi and Vice Premier Wang Yang representing China. Since 2009, the S&ED has offered a platform for both countries to address bilateral, regional and global challenges and opportunities, and this year’s meeting comes at a critical time to stabilize the U.S.-China relationship. Brookings John L. Thornton China Center scholars Richard Bush, David DollarCheng LiJonathan Pollack and Qi Ye offer insight into this significant meeting.

Richard Bush: Taiwan and Hong Kong Will Cast Shadow Over Proceedings

Neither Taiwan nor Hong Kong will likely be on the formal agenda for the S&ED, but they will hang like rather dark clouds over the proceedings. Tensions in Hong Kong reached a new peak last week as a several hundred thousand people participated in an unofficial referendum in support of a liberal approach to electoral reform and then braved bad weather to march in support of the same goal. The Chinese and Hong Kong governments held firmly to their position that any reform be restrictive. Despite these entrenched positions, there is a sensible compromise that is objectively available. But enacting it will require flexibility on both sides.

Over the last six years, Taiwan and China had made significant progress in normalizing their economic relations. But this process hit a wall this spring as opposition parties and civic activist groups mounted protests against a draft agreement on trade in services. This has forced the governments in Taipei and Beijing to regroup and try to ensure that things don’t get worse. But Taiwan politics remains very fluid, and the possibility exists that the candidate of the opposition Democratic Progressive Party will win the next presidential election, scheduled for January 2016, with unpredictable consequences for cross-Strait relations.

How do these two issues affect U.S.-China relations? On Hong Kong, the United States supports genuine electoral reform that will permit a competitive election for the Hong Kong chief executive. On Taiwan, Washington has supported the improvement in cross-Strait relations but supports Taiwan’s freedom to make its choices free of any coercion and at its own pace. On both issues, Beijing suspects that the United States is acting behind the scenes to prevent it from achieving its political objectives. That perception misstates the U.S. role: the reason that Beijing has not achieved its objective in both Hong Kong and Taiwan is that it has not yet made proposals that meet the wishes and expectations of the publics of each place.

David Dollar: Economic Track Can Stabilize U.S.-China Relations

The storyline going into this year’s S&ED is that the bilateral relationship is deteriorating because of problems on the strategic side: the U.S. indictment of five Chinese officers for cyber-theft of trade secrets and acrimonious statements back and forth on maritime issues.

My experience with the first five S&ED meetings was that the conversation was more important than the outcomes. During those five meetings, problems on the strategic side never interfered with steady, albeit modest, progress on the economic track. This year, the Chinese will want to hear from Janet Yellen about the recovery of the U.S. economy and the Fed’s exit from extraordinary measures and from Jack Lew about the U.S.’s fiscal consolidation and the next round of debt ceiling debate in March 2015. The U.S. side in turn is interested in how the economic reforms outlined in China’s Third Plenum resolution will be translated into concrete measures and the timeline for doing so.

In a session hosted by the U.S.-China Business Council this week, Lew expressed some frustration at the actual pace of reform. Last year the two sides agreed to negotiate a bilateral investment treaty on the basis of a negative list. This would be a big step forward for China’s reform as it would require opening up closed sectors such as financial services, telecom, media, logistics and energy. There seems to be a great deal of internal opposition to these reforms in China, however, so a big breakthrough is not likely anytime soon.

The S&ED conversation should be sufficient to stabilize the relationship and prevent a downward spiral. President Obama is likely to visit China in November for the APEC Leaders’ Meeting. Sustained improvement on the economic front would require that China be ready by then to make some significant market opening moves. If China follows through on its Third Plenum reform intentions, it could provide a foundation for a more balanced and healthy economic relationship.

Cheng Li: Time to Emphasize Track Linkage and Market Opening

By design, the S&ED is intended to link security issues and economic issues in a strategic way. The previous rounds of the dialogue have shown that when the two countries have had irresolvable barriers on one track, they might have a better chance to achieve breakthroughs on the other track. Significant progress on economic cooperation could in turn prevent security tensions from deteriorating further.

Participants in this year’s S&ED should be more engaged in “track linkage” than in the past. In the wake of growing nationalistic sentiment in the region, the U.S. and China are unlikely to resolve any territorial or maritime disputes, nor will they suddenly begin to cooperate on cyber security. Yet, each side has strong incentives – and exceptional opportunities – to push for the market openness of the other.

The Third Plenum blueprint promises to be as consequential as Deng Xiaoping’s economic reforms that began in 1978. President Xi Jinping has embraced the market as the “decisive force” to help the Chinese people realize the “Chinese dream.” As such, leaders have made financial liberalization and service sector development a top priority, especially in public health, education, entertainment, tourism, logistics and green consumption– fields in which American businesses have an advantage and could benefit from market opening.

President Xi’s strong anti-corruption campaign has not only jailed a significant number of corrupt officials, but also undermined state-owned enterprises in various industries such as energy, transportation, telecommunications, finance, steel and mining, thus potentially opening these monopolized sectors to competition. Chinese leaders explicitly claim that like China’s accession to the WTO, foreign companies can help force the implementation of market reforms. At the same time, Chinese enterprises (including some large private firms) have become increasingly interested in investing in the United States—a trend that could lead to infrastructure improvements and job creation in the U.S.

The S&ED dialogue is timely, the stakes are high, the impact is multidimensional, and the opportunities should not be missed.

Jonathan Pollack: S&ED Must Stem Increasing Negativism and Potential Alienation

In June 2013, Barack Obama and Xi Jinping met in Sunnylands, California, where the American and Chinese presidents voiced support for “a new model of major power relations,” hoping to ameliorate potential animosities and to broaden U.S.-China cooperation. A year later, the prospects for larger political and strategic understandings seem far more problematic. A host of contentious issues, ranging from cyber espionage, mounting maritime tensions in the East China Sea and South China Sea, growing complaints from U.S. firms about access into the Chinese market, and fractious internal debate within both countries about each other’s strategic intentions, undermine the possibilities for positive movement.

A principal objective of this week’s S&ED must be to stem the increasing negativism and potential alienation in bilateral relations. If these differences fester or deepen, the capacity of both governments to deal intelligently with a full spectrum of vital policy issues will be undermined. A candid airing of differences should be at the very core of the S&ED process. The presence of senior officials can also provide direction and necessary guidance for policy bureaucracies in advance of President Obama’s November visit to China for the APEC Leaders’ Meeting and the anticipated renewal of face to face discussions between the two presidents.

A two-day dialogue cannot eliminate the underlying differences and suspicions in U.S.-China relations, nor will it mute the cacophony of voices in both systems over the longer-term Sino-American future. But policy makers can reinforce a shared awareness of their mutual responsibilities for what is arguably the world’s most consequential bilateral relationship.

Qi Ye: Reinvigorated Cooperation Needed on Energy and Environment

A major product of President Obama's first visit to China in 2009 was the MOU on U.S.-China cooperation on climate change, energy and environment, which built upon the Ten Year Framework on Environmental Cooperation developed from the Strategic Economic Dialogue (before it evolved into its current form as the S&ED).

A concrete result from the signing of the MOU was the establishment of the joint center for clean energy research (CERC). President Obama’s visit to Beijing this fall for the APEC summit will mark the fifth anniversary of the MOU and CERC. The S&ED presents an opportunity to gauge sentiment on both sides regarding continued cooperation and to push for an assessment of current efforts.

Despite high expectations, the road for cooperation has been bumpy over the last five years, starting with a messy Copenhagen process just a few weeks after the MOU was signed, followed by the anti-dumping, anti-subsidy investigation on solar photovoltaic panels from China. On the operational side, many have questions about CERC. How has it been funded? Has cooperation been sufficient? What are the tangible results?

Preparations have begun for leaders to gather in New York this September for the UN conference on climate change and then in Beijing for the APEC summit, making now the opportune time for the reinvigoration of this critical cooperation. Increased cooperation will be particularly meaningful as the world prepares for a global agreement on greenhouse gas emissions next year in Paris since the U.S. and China are being scrutinized carefully for their rhetoric and actions on climate change.

Categories: Blog
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