Yesterday, the White House announced that President Obama will meet with China’s President Xi Jinping on June 7-8 in California. The announcement said that the two will hold “in-depth discussions on a wide range of bilateral, regional and global issues, . . . review progress and challenges in U.S.-China relations over the past four years and discuss ways to enhance cooperation, while constructively managing our differences, in the years ahead.”
Yet the purpose of this meeting is not to bargain or to solve specific problems, but to set a tone and create a sense of shared fate between the two leaders by allowing Obama and Xi to firmly establish a good personal relationship, a precondition for the successful conduct of their bilateral relations. The two got a start on that task last February, when Xi visited Washington as China’s vice-president. Two days in California allows both more time and an informal environment for each to talk about his domestic challenges and visions for the future, about his country’s role in the international system and how US-China relations fits with all of this.
Such an interchange is particularly important because each president sits atop a complex and sprawling governmental system that is not easy to monitor or control. This is one of the reasons for recent frictions between the two countries. Their California encounter meeting provides Xi and Obama the opportunity to identify and enlarge the areas of overlap in the interests of their two countries, and then, when they return to their capitals, to set priorities in their systems accordingly. Having seen the value of creating this opportunity, they should seize it.Authors
Commodity exporting countries in Latin America have benefited strongly from the commodity price boom that began around 2002. And the accompanying improvements in public and external balance sheets have fed a sense that this time the macroeconomic response to the terms-of-trade boom has been different (and more prudent) than in past episodes. But, has it?
In our recent work, we analyze the history of Latin America’s terms-of-trade booms during 1970–2012 and quantify the associated income windfall (i.e., the extra income arising from improved terms-of-trade). We also document saving patterns during these episodes and assess the extent of the “effort” to save the income windfall.
Our findings suggest that, although the additional income shock associated to the recent terms-of-trade boom is unprecedented in magnitude, the effort to save it has been lower than in past episodes.
The recent terms-of-trade boom in historical perspective
A historical comparison of episodes of large terms-of-trade shocks—found only in the 1970s and the 2000s—shows that, while sizable, Latin America’s recent boom has not been much larger than those seen in the 1970s (see Figure 1). However, it has been quite larger than in other regions, and only comparable to those experienced by the oil-exporting countries in the Middle East and North Africa region (see Working Paper for regional comparisons).
At the same time, the associated income windfall has been much larger in the recent episode than in the past (see Figure 2), due to a higher degree of trade openness and a longer duration of the boom. Furthermore, the effect of the recent boom has been quite sizable in absolute sense, with an increase in income close to 15 percent per year. In other words, income has been 15 percent higher than what it would have been had no terms-of-trade shock occurred.
Within the region, Bolivia, Chile, and Venezuela, stand out as having benefited the most, with increases of 30 percent per year for Venezuela and 20 percent for the other two. Again, these measures are only comparable to those seen in some Middle East countries. Brazil stands at the other extreme of the distribution, with significantly lower windfall estimates, while terms-of-trade changes in Mexico and Uruguay during the last decade do not qualify, under our definition, as booms.
Saving more of the income windfall this time?
A comparison of aggregate saving rates suggests that, compared to the past, the region’s response to the recent boom has been more prudent. The median saving rate increased by about 4-5 percentage points of GDP, as opposed to 2-3 percentage points in past episodes. This has been accompanied by a remarkable increase in investment (about 5 percentage points), in clear contrast with the past, but leading to a gradual weakening of current account balances.
Does this mean the region made a greater effort to save the windfall this time? Not necessarily. In fact, estimates of marginal saving rates—a measure of the increase in saving as a proportion of the estimated windfall—suggest that commodity exporters have saved less of the windfall this time (see Figure 3). Latin America’s saving effort is also low compared with countries with a similar income windfall (the oil exporting countries in the Middle East). And efforts to save the windfall have gradually declined following the 2008–09 crisis.
Also, a growing share of the windfall is being devoted to domestic (physical) capital formation rather than to improving countries’ international asset position (via increasing saving abroad), which has affected post-boom real income differently in the past. This has resulted in a gradual weakening of current accounts.
Saving the extra does pay off
What can we learn from saving patterns during past boom episodes, in terms of their implications for post-boom income? A simple econometric exercise points to a high pay off from saving the windfall during the boom, in terms of raising post-boom income. More importantly, the composition of the windfall saving matters as allocating the extra income to foreign asset accumulation appears to deliver higher post-boom income than when invested domestically. Whether this reflects the benefits of having a stronger net foreign assets position or a cost of misallocating domestic resources during the boom remains an open question. What we do see is that this result seems to have been especially true for Latin America in the past.
Overall, these results suggest that the improved balance sheets in the region may reflect mainly the sheer size of the income windfall of the latest terms-of-trade boom, rather than a greater effort to save it. And, with signs of further softening of saving rates and weakening external current account balances, a closer look into saving/investment patterns may be desirable.
On Sunday, Chinese premier Li Keqiang heads out from Beijing for his first visit abroad in that role. His first stop: India. He’s probably wishing the trip had taken place about a month and a half ago. At that time, there was a sense in India that the new leadership in China was reaching out to India for a number of reasons. Over the last month, however, temperatures rose in the Himalayas, as the long festering China-India boundary dispute flared once again. The good news for those interested in stable Sino-Indian relations: the two governments seem to have got past the recent incident. They continued to communicate throughout the crisis. Pre-scheduled China-India talks on Afghanistan were held in the midst of the crisis—their first such dialogue focused on the subject. Chinese and Indian military officers held a border meeting. The Indian foreign minister traveled to Beijing. And Li’s visit is going ahead. The bad news: The border incident reinforced the mistrust that many in India feel toward China and its intentions. Furthermore, it was a reminder that despite increased engagement, bilateral differences have the potential to stall, if not, reverse progress toward more stable relations. Li’s challenge: to get the relationship back on a positive trajectory and begin to convince a skeptical Indian public that the border incident was not representative of the new Chinese leadership’s approach toward India. Overall, the premier has his work cut out for him.
Before mid-April, many observers of Sino-Indian relations noted that under the new Chinese leadership there seemed to be an “upswing in relations.” Chinese president Xi Jinping proposed a five-point formula to improve ties with India. The two countries agreed to discuss Afghanistan. “Positive vibes” were detected at Xi’s subsequent meeting with Indian prime minister Manmohan Singh on the sidelines of the BRICS summit in Durban. The Chinese government indicated that Li soon planned to travel to India.
This trend did not surprise observers. After all, there were enough reasons for Beijing to seek a stable relationship with India: economic ties, cooperation in the multilateral realm and a desire to limit India’s burgeoning relationships with the U.S. and Japan (reports indicated that Chinese officials were eager for the premier to visit India before the Indian prime minister headed to Tokyo in late May), as well as other countries in the region. There were also reasons for the political leadership not to want the relationship with India to deteriorate: such as preoccupation with China’s eastern maritime disputes and the North Korean situation, as well as the need for stability in the region with the impending American withdrawal from Afghanistan.
What did surprise observers was the border incident. Former U.S. deputy secretary of state James Steinberg, who was in India as the crisis played out, said “I don't know what the Chinese leadership is up to…confronting India and Japan, especially when they have been trying to build strong bilateral relations...The Chinese leadership should understand, it will not benefit them in the long run.” The opacity of Chinese decision-making meant that various theories were floated about why Chinese troops had taken the unusual step of setting up camp across the Line of Actual Control (LAC): differing perceptions of the LAC; “a rush of testosterone by local officers;” in response to India building up its border infrastructure; the desire of the People's Liberation Army to assert authority; the result of an internal political power struggle; Chinese expansionism; or Chinese strategic designs against India. One observer contended that a clear motive was near impossible to pinpoint: that “Chinese foreign policy is an enigma wrapped in a mystery.”
Since the resolution of the crisis, Beijing has tried to press a “reset” button, trying to return the relationship to its pre-crisis trajectory. The Chinese ambassador to India unusually took to the editorial pages of an Indian newspaper to emphasize, “To strengthen good-neighbourly and friendly cooperation with India is China’s strategic choice and established policy which will not change.” Chinese officials indicated that greater efforts should be made toward a boundary settlement.
The Chinese government also signaled that the choice of India as the premier’s first stop was very deliberate and a sign of the importance Beijing placed in the Sino-Indian relationship. Hosting an Indian youth delegation, Li put a personal spin on the choice, noting the “the seeds of friendship sown” when he visited India 27 years ago—a trip that he said left a “lasting impact.” Beyond trying to win hearts and minds, he also seemed to want to appeal to Indians’ pocketbooks, talking about the economic benefits of greater ties. Finally, he pointedly mentioned experiencing the “warmth and hospitality of Indian people.”
That hospitality will certainly be forthcoming on the part of key policymakers in the Indian government. Delhi has its own reasons for seeking stable relations with Beijing. Thus, Indian officials had joined their Chinese counterparts in playing down the border incident and seeking to resolve it speedily. Since it’s been resolved, both sides have sought to highlight their success in defusing the crisis, pointing to that as a sign of progress in the relationship. During that visit, they will work toward agreement on certain issues. Expectations are that there will be developments on the economic front. China-India watchers will also be looking for any sign of progress on the border and Brahmaputra river issues.
Among the Indian public, the welcome for Li is likely to be cooler. The recent tensions at the border—heavily covered in the Indian media—reinforced negative impressions of China among many in the Indian public. Many—even beyond the public—will take with a larger grain of salt the new Chinese leadership’s assurance that it intends for China to rise peacefully, be a responsible state, and seek good relations with India. The crisis has reinforced the narrative that has prevailed in many quarters since the 1962 China-India war: that China only understands strength; that while Beijing’s leaders say China and India “must shake hands,” they cannot be trusted—that one hand held out might just be a precursor to the other stabbing one in the back.
The border incident has also kept the focus on bilateral differences and even beyond the border issues there are many of those: China’s growing political and economic ties with India’s neighbors, its Indian Ocean ambitions, the overall lack of trust, cyber-security concerns, Tibet, the diversion of the waters of the Brahmaputra, a trade imbalance and restricted market access in China for Indian companies, the sense that China does not respect India and/or that it will seek to prevent India’s rise and, significantly, China’s relationship with Pakistan, which, of course, is Li’s second stop.
The incident also seemed to strengthen the hands of those inside and outside government who are skeptical of China’s intentions towards India and weakened the voices of those urging engagement with that country. Furthermore, the crisis negatively affected the credibility of the Indian government on issues related to security broadly and China in particular. This matters because significant bilateral progress on crucial fronts will require concessions from both sides—concessions that might now be harder for the Indian government to sell on its side.
Overall, that’s a lot of mistrust and skepticism to turn around in one visit. But if Li Keqiang wants to see the relationship prosper, the trip is a good time to start trying on two fronts. First, substance: progress on key issues will go a long way in building trust. Second, style: Li should take the opportunity to introduce himself and reintroduce the new Chinese leadership not just to Indian government officials and private sector leaders, but also to the Indian public—for it might be tempting to dismiss public sentiments, but they will play a key role in setting the limits of the relationship.Authors
Earlier this May in Cape Town, South Africa, economists at the World Economic Forum reaffirmed that regional integration will play a key role in unleashing the continent’s growth potential. More than 10 regional economic communities (RECs) are working toward this goal in Africa, but the main framework behind this effort is the African Economic Community (AEC). The AEC was established by the Abuja Treaty in 1991 and ratified in 1994. The treaty aims to build the AEC gradually through harmonization, coordination and effective integration of Africa’s RECs, eight of which have been chosen as “pillars” of the AEC. It proposes the establishment of a continental free trade area (CFTA) by 2017, and integration of the RECs into a single customs union with a common currency, central bank and parliament by 2028. The Abuja treaty does not lay out precise, top-down steps for achieving this goal, but the African Union (AU) and the RECs have defined their relationship in working toward the AEC in the 2007 Protocol on Relations between the AU and the RECs. Towards this end, the Africa Union has embarked on various programs at the regional and sub-regional level to promote integration. Indeed, at the January 2012 AU Summit, heads of state from around the continent renewed this mission by agreeing to speed up plans for economic integration. The tone of the 2012 Summit implied an ambitious AU agenda of promoting and coordinating African integration and its accompanying benefits more quickly than before.
Like the European Union, the AEC would enjoy increased intra-African trade, improved self-sufficiency in meeting Africa’s import demand, lower poverty levels and a more peaceful interdependent existence. However, in contrast with these grand plans to move toward a CFTA, Africa’s RECs are grappling with numerous challenges. Though it is the responsibility of the RECs and individual countries to implement protocols and integrate, the AU Commission is charged with monitoring the continent’s integration process. The integration process has remained slow despite numerous efforts and working committees formed by the AU to coordinate the RECs, suggesting more work remains to be done. Now, many RECs have missed their target dates for implementing customs unions and common market requirements. For the RECs to achieve integration objectives and a CFTA to still take hold by 2017, the AU may have to play a more active role. Indeed, as the AU celebrates its 50th anniversary this May, the progress made and challenges encountered by Africa’s RECs offer valuable lessons as to how the AU can best act to improve integration, development and growth moving forward. Consider the progress of two RECs from Central and East Africa.
The East African Community (EAC) is composed of five countries in East Africa: Kenya, Uganda, Tanzania, Rwanda and Burundi. The EAC has achieved considerable milestones, having established a customs union in 2005 and a common market in 2010. It is scheduled to move to a monetary union by November of this year and ultimately to a political federation by 2017. In addition, the EAC has taken steps towards further economic integration by signing a free trade agreement with two other RECs, the Common Market for Eastern and Southern Africa (COMESA) and the Southern Africa Development Community (SADC). This progressive tripartite agreement eases the transitional problem of states’ memberships in multiple RECs and therefore multiple sets of requirements and regulations. Despite this progress, the EAC has not fully implemented their Common Market Protocol. While the EAC has made tremendous progress in eliminating tariffs, poor infrastructure and other non-tariff barriers remain. Lack of roads, railways and energy networks add to cost of doing business and make it difficult to increase intra-African trade and attract investment in the region. Moreover, neither the EAC nor the AU has effectively explained the benefits of economic integration to citizens, so the democratic leaders of member states do not feel pressure to improve their progress. In addition, national governments fear a loss in tax revenue, and, despite the elimination of border tariffs, different domestic tax rates still exist within the EAC. Indeed, harmonizing the various economic policies in the EAC has been challenging. As a result, member states are struggling to converge their macroeconomic policies in the prescribed time. Most notably, as the EAC has achieved its successes and struggled with its challenges, the AU’s efforts have barely influenced the integration process in the region.
Another REC, the Economic Community of Central African States (ECCAS), was first formed in 1983 and remained mostly dormant for 16 years until 1999. The group suffered first from states’ unwillingness to pay much-needed fees, and later from a war between some of its member states. Once the ECCAS began operating, it faced renewed challenges from competing economic communities—Rwanda left the group in 2007 to focus on its COMESA and EAC memberships. Unlike the EAC, which includes Kenya, the ECCAS lacks a high-growth country to provide leadership and capital in supporting regional infrastructure and pushing trade liberalization efforts. As a result, the ECCAS remains a group of states of varying levels of development focused on their own self-interests. The AU has an opportunity to educate the member states and apply informal pressure to make progress. In spite of these challenges, the ECCAS has achieved some successes. Many ECCAS members utilize a single currency, and capital moves freely across borders. Steps have been taken to eliminate tariffs as well, though these have yet to be fully implemented. The ECCAS has enjoyed more success in tackling peace and security—leading peace operations in the Central African Republic on two occasions and laying the foundation to host one of the AU’s planned Standby Forces. Indeed, the AU has been effective and proactive in assisting with these security gains (and also throughout the continent), yet the role of the AU in assisting with ECCAS’s economic integration successes has not been visible.
As the African Union reflects on its achievements 50 years since its creation, it should balance its successes in minimizing African conflict with the importance of doing more to promote economic integration. While addressing flashpoints of violence is an important short-term necessity, increasing intra-African trade, building an African consumer base, and networking African interdependence may offer great long-term promise. These are all steps toward the same goal of a prosperous and peaceful Africa. While the AU does not have the authority to overcome poor capacity, a lack of political will, or other challenges that African countries and RECs may face or bring to the table, it can and should better follow its mission in encouraging integration.
Under the 2007 Protocol, the AU is directly charged with working to facilitate and implement regional integration. If the AU hopes to realize its goal of a united Africa by 2028, it must better engage the continent’s RECs and assist in resolving the numerous obstacles they face. It should consider expanding its efforts to coordinate regional initiatives within low-capacity countries and work to ensure that future programs are better targeted and more visible. Further, the AU should exercise leadership in countries that seem not to have the domestic political will to move towards integration. It could also move from biannual meetings to more common ones and more vigorously assist in mobilizing resources and coordinating their application toward regional infrastructure projects to boost trade. The AU could even consider launching voluntary international governance initiatives, such as a two-term limit for political leaders or the teaching of a common language base. It can also more closely oversee and facilitate the long and difficult negotiations of protocols, and may use scorecards and penalties while monitoring their implementation to ensure that states feel pressure to meet their benchmarks. A continental free trade area in Africa holds as much potential as the one seen in Europe, but achieving success of this goal by 2017 will require the African Union to engage its regional economic communities more robustly.Authors
- Michael Rettig
- Anne W. Kamau
- Augustus Sammy Muluvi
The United Nations Secretary-General Ban Ki-moon has appointed Dr. Mukhisa Kituyi to be the next secretary-general of the United Nations Conference on Trade and Development (UNCTAD). An UNCTAD press release on May 16, 2013 stated that Dr. Kituyi will serve a four-year term beginning September 1, 2013. Dr. Kituyi has held several senior positions including Kenya’s minister of trade from 2003-2008. He is currently a nonresident fellow in the Africa Growth Initiative (AGI) at the Brookings Institution and was a resident scholar in 2011. Dr. Kituyi is well versed in the global trading system and, in the past, was considered a potential candidate to head organizations such as the World Trade Organization (WTO) and UNCTAD, but instead opted to join politics. A dynamic politician and intellectual, Dr. Kituyi is an excellent choice to head UNCTAD.
For AGI, the appointment of Dr. Kituyi is significant not only because he is one of our fellows but also because AGI has been emphasizing the need to increase informed African voices in global governance. We believe that African interests are not effectively represented in major global institutions, and this deficiency has contributed to the broader marginalization of the continent in global affairs. Dr. Kituyi should be an effective voice in representing Africa and other developing countries. And, as I know him, I believe this is one informed voice that the international community is unlikely to ignore.
But it will not be a smooth ride for the new secretary-general; a host of challenges await him in Geneva. First, more than in most global organizations, UNCTAD requires effective management and intellectual leadership. An internal report published last year—the Joint Inspection Unit Report—showed that UNCTAD has been suffering from a lack of effective governance. It is important that Dr. Kituyi focus on raising the bar in terms of professionalism at UNCTAD. This task will require looking into the recruitment and promotion of employees strictly based on merit. Dr. Kituyi will need to carefully evaluate personnel issues and provide the necessary motivation to ensure that the organization delivers on its mandate. Most importantly, he will have to steer the organization towards more transparency, rewarding performance instead of simple loyalty to senior management. The new secretary-general will also need to offer the intellectual leadership necessary to guide the institution through a time of major global economic change and a shifting of economic power to the South. He must therefore lead intellectually in offering alternative ideas to those emerging from traditional development institutions.
An even a more daunting challenge that the new secretary-general will face is to ensure that UNCTAD remains relevant and credible. Over the past few years, questions have been raised as to what should be the institution’s focus. Some have gone to the extent of insisting that UNCTAD should not be involved in macroeconomic and financial areas. But as its name suggests, UNCTAD was created to deal with issues relating to trade and development with a particular emphasis in developing countries. There is no doubt, therefore, that macroeconomics and finance squarely fit in the institution’s mandate. Indeed, UNCTAD used to be the forum where these issues would be negotiated in order to ensure some balance in the global economy. However, since the creation of the WTO, UNCTAD has experienced a progressive erosion of its voice. It will be the responsibility of Dr. Kituyi to reverse this trend so that UNCTAD can play its rightful role in the global economic policy scene. The new secretary-general must also position UNCTAD to better address the imbalance and unfairness in the multilateral trading rules that have shaped globalization. In UNCTAD, it is often the case that developing countries feel bullied by their developed country partners. It will be imperative for Dr. Kituyi to identify the best way to navigate issues that have come to divide developed and developing regions.
The secretary-general must also position UNCTAD so as to assist developing countries in seizing the opportunities presented by the global economy. With all the changes taking place in the world, UNCTAD has to focus on how developing countries can reap the benefits and minimize the negative effects arising from trade and globalization. This focus requires that UNCTAD take on the hard topics that are of particular interest to developing countries, including investment policy, trade in services and commodities—which it has always done—but it should also come out clearly on what path developing countries should follow. Likewise, we are likely to see an acceleration of regional trade arrangements. Most challenging are agreements involving Northern and Southern partners who cannot be considered equal partners when they negotiate. The jurisprudence on the rules governing such agreements is not commonly agreed upon. Hence, there is a need for UNCTAD to demonstrate, based on evidence, how to ensure that balanced development is achievable, especially in respect to North-South agreements.
With an incoming director general at the WTO and Dr. Kituyi at UNCTAD, the global environment offers an opportunity for the two institutions that drive trade and development to establish the missing dialogue. For this to happen, UNCTAD needs to be credible when articulating its voice in this changing global economy. This is the greatest challenge that Dr. Kituyi faces.Authors
Billboards announcing the arrival of high-speed
broadband internet being installed in downtown
Nukua'lofa, the capital of the Kingdom
Hoko (‘connect’ in Tongan) is the current buzzword on the streets of the Kingdom of Tonga.
With May 17th recognized around the world as World Telecommunication and Information Society Day, the Tongan capital Nuku’alofa is a hive of activity as telecommunications providers set up their activities to mark the day. The billboards have gone up, teenagers have been lining up at auditions to become the new public face of the marketing campaign for Tongan internet, and the Prime Minister, Lord Sialeʻataongo Tuʻivakanō is planning a public Skype session with Tongan soldiers currently serving in Afghanistan.
If there is any year the Kingdom of Tonga would be justifiably excited about its telecomms story, 2013 is it. As one of the most remote island nations on the planet, the impending arrival of high-speed, fiber-optic broadband internet – made possible through the World Bank-supported Pacific Regional Connectivity Project, an 830km-long cable being connected between Fiji and Tonga – means that everyone is talking of hoko.
I spoke to a number of people about the experience with internet in Tonga and how broadband internet would affect their lives.
has access to some form of modern
Recently my 10 year old son invited me to be friends with him on Facebook. “Hi mum I’m here too, can we be friends?” was the message I got. I was shocked and worried at the same time, and my initial reaction was fear of the perceived harm social media could do to a person as young as he.
We finally agreed that his father would have access to his Facebook account to monitor his online activities until he reaches 18. But the moment he gets or posts something inappropriate, the deal is off. That’s a fair deal, I told myself and interacting through social media could actually enrich my son’s life.
What I’m going through is also experienced by other families in the Solomon Islands. It started when mobile phone technology began revolutionizing the lives of ordinary Solomon Islanders in the last five years, when the telecommunications industry was opened for competition. Previously, only business executives and senior government officials owned or had access to mobile phones – a luxury only the rich and the influential would enjoy.
Note: On Monday, May 20, Elaine Kamarck, director of the Management and Leadership Initiative at Brookings, will moderate a public forum on "Implementing the Affordable Care Act: Organizational and Political Challenges."
It's been a long time since the federal government had to implement a large, new, federal program. Ten years ago we saw the implementation of Medicare Part D and the creation of a new cabinet department, the Department of Homeland Security. In each instance there were predictions of disaster and substantial growing pains. In the case of Medicare Part D implementation exceeded expectations and costs have not been nearly as high as feared. In the case of DHS, implementation was bumpier, nonetheless, ten years later both operate more or less smoothly and, in retrospect, the crisis now seems overblown.
This year, the Obama administration needs to finalize implementation of the Affordable Care Act—a historic piece of legislation and the most significant domestic policy achievement of the Obama administration to date. And the question of how it goes is front and center. Even the president has admitted that there will be “hiccups” along the way. Compared to earlier pieces of health care legislation, the ACA is incredibly complex, involving activity by fifty states, the jurisdiction of fifty state insurance regulators and changes in the entire health care industry. Added to the inherent complexity of the bill is the fact that it had no Republican support and is still adamantly opposed by the Republican party and by half of all those polled.
So the question is: how bad will it be? Imagine a continuum that goes from “hiccup” on one end to repeal on the other end. With plenty of points in the middle. What would that look like?
The hiccup scenario is the most optimistic. Hiccups are more or less normal. If the implementation is successful, the exchanges will be up and running. There will be glitches. Some people who qualify won’t get their subsidies; some who don’t will. The number of companies on the exchanges won’t be as big as hoped for but will grow. Premiums for health care will rise only modestly and the enhanced services in the new health care plans will make most people okay with the price increase.
The delay scenario is not really good nor is it fatal. A less successful outcome is one where the feds and states find they have to pull back from key provisions in the bill at least for a while. There may be delays in opening exchanges which would necessitate delays in enforcing the mandate that everyone buy insurance. The federal hub may not be able to interface with statewide data and eligibility could become a lengthy bureaucratic process. HHS might adopt a generous waiver policy while states work out their systems. Premiums may rise, leading to complaints from the public but no substantial drops in insurance buying.
The repeal scenario is fatal. Obviously Republicans, especially in the House, are rooting for this one. In fact they seem to like taking the repeal vote so much that they’ve done it 37 times in the past three years. So the question is: what would it take to move support for repeal beyond the Republican base? In 1989 Congress repealed the Medicare Catastrophic Coverage Act a short sixteen months after it was passed. Why? It increased costs to seniors and offered them things that they didn’t want. In the context of ACA the repeal scenario is feasible if premium prices rise so high that people who don’t qualify for subsidies (there are more of them than those who do) decide that they really don’t want the enhanced packages envisioned in the law and then get really mad and let their representatives know it.
Where will we end up? Stay tuned.Authors
The U.S. Navy recently made history with its flight of the X-47B UCAS, the first unmanned carrier drone (unmanned systems) to launch from an aircraft carrier. In 2009 and 2011, the Center for 21st Century Security and Intelligence at Brookings had the pleasure of hosting then Chief of Naval Operations, ADM Gary Roughead, to discuss the future of unmanned operations. The vision he laid out is well on its way to fruition, making it especially useful to place what happened today in the context of the larger U.S. defense strategy and to look at what lessons have been learned in the development of unmanned systems. As I explored in a look at the past and future of naval aviation after 100 years of flight, this success is only one part of a much bigger story.
What this history tells us is that, now that the Navy has crossed yet another step that the naysayers said could never be done, the challenges are as much organizational and political, as they are technical. For example, now that unmanned systems have shown they can fly off a carrier, what will be their exact role? Whether they will be delegated to take on tasks on their own or paired with manned planes, for a package that is greater than the sum of its parts, is a crucial question of naval air combat doctrine moving forward. It is akin to the questions that early warplanes faced as to whether they were to be tethered to the existing surface force of battleships as scouts or serve as their own, as a new form of a battle fleet.
We are only at the start of this robotic revolution at sea, just around the World War I stage of things, if manned airplanes are a parallel. Just as the first Navy planes started out doing only observation, but soon began to be used for everything from bombing runs to carrier onboard delivery (COD), so we are seeing a similar expansion in the roles of unmanned systems. UCAS originally started out being just in the observation ISR role, but clearly has a more lethal future, while the Marines are already using robotic helicopters for roles like cargo delivery in Afghanistan. But just like back then, we don’t yet have all the answers as to the optimal doctrine. Even the basic design of this technology remains to be learned and adopted.
A second lesson is that despite its relentless advancement, there are no signs that technology will end the central role of humans in war and at sea any time soon. However, not “ending”, isn’t the same thing as not “changing.” The specifics of the human roles will be altered, but again, this is nothing new. Most Navy warplanes today don’t have tail gunners or navigators. The skill sets and ranks of those who wear the wings of gold might be altered, which opens up the kind of internal identity and qualification questions in the Navy that have also recently challenged the Air Force. Does the remote operator (note: “operator,” not “pilot” is the terminology so far in the Navy, as opposed to how the Air Force views the requirement) of a plane that can take off and land on its own, who is sitting behind a computer screen, actually need 20/20 eyesight or the ability to do 50 sit-ups? Do they even need to be an officer (akin to how the Army has handled UAS versus the Air Force)? The next few decades will be an exciting time, with new paths being forged, much like they were by the first generation of naval aviation pioneers.
This leads to a third challenge that may be the most vexing to the Pentagon in the years ahead. In an article entitled U-Turn, I explored how there are a series of speed bumps that loom for unmanned systems, not so ironically just as they are making their mark. These range from internal cultural resistance to budgetary battles, in which the new is often disadvantaged against the old. We are seeing this play out here again. Few realize that (according to figures from the DoD UAs office), at the very same time the X-47 knocked down yet another technical barrier, the Navy’s planned UAS budget is being cut by 24%, several times greater than the rest of the budget cuts. Indeed, the tension that the successful UCAS test created for F35’s longer term buy numbers is much like Voldemort in the Harry Potter books, not to be spoken about, but palpable.
Bottom line: Congrats to the Navy and the team behind the X-47B on yet again making history, but this history tells us we have an array of questions to explore in the years ahead.Authors
The global regulatory landscape governing banks has changed from its pre-crisis status quo.
In addition to the Group of Twenty advanced and emerging economies led global regulatory reforms, like Basel III, the United States and the United Kingdom have decided to directly impose limits on the scope of banks’ businesses. The European Union is contemplating a similar move.
We discussed these structural banking reforms a few weeks ago with officials from finance ministries, central banks, and supervisory authorities from around the world during the IMF and World Bank Spring Meetings. The design and implementation of these measures will have implications for global financial stability and sustainable growth, so we wanted to bring people together for the first global debate of the issue with G20 and other countries.
Our analysis suggests that structural constraints on banks’ activities, well designed and implemented, can usefully complement traditional tools. As a first best strategy, a targeted approach, where structural measures—such as “living wills”—are tailored to the specific risk profiles of individual banks at a global, group-level would be preferable to an across-the-board approach. However, sufficient confidence in supervisors’ capacity to design and implement the targeted approach, along with strong political support, are key to the ultimate success of structural measures to reduce risks in the financial system. If this confidence is lacking then, as a second best, across-the-board measures, in addition to bank-specific measures, would be appropriate, provided their global benefits are assessed to match or exceed their costs.
A tandem tactic to reduce risk
The crisis has made many skeptical of the ability of traditional prudential tools, such as risk based capital requirements, to keep under control the risk transmitted to financial institutions and the system as a whole by trading and certain investment banking activities. The crisis has strengthened the argument for excluding these activities from banks and hence impeding their access to taxpayer-funded backstops enjoyed by deposit-taking financial institutions.
The structural measures to reform banks such as the U.S. Volcker rule, the U.K.’s Vickers ring-fence, and the EU’s Liikanen proposal, which would create functional separation of businesses, all reflect a deep sense of unease with the risk culture engendered by the assumption of trading and speculative investments by deposit taking banks.
Looking back, however, restrictions on proprietary trading or investments in private equity alone would not have prevented major bank failures such as Lehman Brothers. Nor would reorganizing the bank into separate subsidiaries in each host and home country have facilitated its global, group-wide resolution. Legally, Lehman had a subsidiary structure, yet its resolution has been long and costly.
Looking forward, structural constraints on banks can work in tandem with strengthened capital requirements to limit banks’ excessive risk taking. Combining these prudential tools can make a banking group easier to resolve and attenuate the too-important-to-fail problem.
For example, if the investment bank is systemically important, ring-fencing deposits and credit will not necessarily resolve the too-important-to-fail problem. The temptation to bail-out creditors of the non-ring-fenced businesses will still be present. This suggests the salience of combining structural measures with higher capital requirements on all the systemically important subsidiaries.
Combining the requirement for higher capital (for the ring-fenced entity) and leverage ratio (for trading activities of the non-ring fenced entity) under each of the Vickers and Liikanen proposals would result in a more robust policy to counter too-important-to-fail.
If successfully implemented, these structural measures would make banks and banking systems safer in the United States, the United Kingdom, and the European Union, which would have a positive effect on global financial stability.
Three things to think through
But our analysis also suggests these policies will exert global costs given that they will be imposed on internationally active and systemic financial institutions. This is due to a number of factors.
First, structural measures will be challenging to implement. How are supervisors to consistently and correctly identify the intent behind bankers’ trades? While difficult in practice, enhanced supervisory collaboration in banks’ home and host countries is critical to the success of the Volcker rule. A broad restriction on banks’ trading activities in these countries could end up inhibiting their ability to make markets and hedge risks, activities that are not restricted under the Volcker rule. This could have adverse implications on liquidity and costs in capital markets.
Second, as authorities reduce banks’ ability to take excessive risk through structural measures, they must recognize that such risks could migrate to other parts of the financial system, including shadow banking entities. Policymakers may need to judiciously enlarge the regulatory perimeter and enhance the monitoring of shadow banks and their interactions with regulated entities for structural measures to reduce—and not simply redistribute— systemic risk.
Third, imposing constraints on banks’ activities at a global level, and on group-wide risk management tools, could make banks more resolvable. But this would potentially come at a cost in terms of loss of diversification benefits and efficiencies in risk management. And these costs may be felt globally.
Our analysis highlights the need for a global cost-benefit exercise that would encompass the extra-territorial implications of structural measures. The case for introducing these policies at the national or regional level would be strengthened by confirming whether their global benefits match or exceed their global costs, given the potential for the spillover of both benefits and costs to many countries and areas other than the United States, the United Kingdom, and the European Union.
Subjecting a global institution to different structural measures in different jurisdictions could exert further pressure on consolidated supervision and cross-border resolution. The more resources are taken up policing compliance with multiple rules, the less is available for monitoring risk, which could increase the cumulative costs of these national initiatives.
Our view is that, as a first best, a targeted approach, where structural measures—such as “living wills”—are tailored to the specific risk profiles of individual banks at a global, group-level would be a more effective than an across-the-board approach.
However, sufficient confidence in supervisors’ capacity to design and implement the targeted approach, along with strong political support, are key to the ultimate success of structural measures to reduce risks in the financial system. If this confidence is lacking then, as a second best, across-the-board measures, in addition to bank-specific measures, would be appropriate, provided their global benefits are assessed to match or exceed their costs.
We suggest development of principles to evaluate the global implications of these measures. These principles would facilitate corrections by policy makers and thus mitigate adverse implications. These principles may also be useful for future measures that may be contemplated by other jurisdictions.
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Is a college degree worth it? Not for everyone, according to our newly-released Center on Children and Families policy brief. The value of a college degree can vary dramatically, depending on factors such as field of study, type of college, graduation rate and future occupation. Here’s our final follow-up blog post, where we take a closer look at the conclusions we come to in the brief. (Read the first, second, and third parts here.)
Last week, the Center on Children and Families released a policy brief on making smarter decisions about higher education. We have welcomed the ensuing spirited debate from policymakers, students, colleges, and fellow researchers. The title of our policy brief, “Should Everyone Go To College,” is intentionally provocative and was chosen to start a conversation around the question. In favor of simplicity, we used the blanket term “college” to argue that a traditional four-year bachelor’s degree is not for everyone. We do think that some sort of postsecondary training is a good idea for almost everyone. This includes associate’s degrees, technical and vocational certification, apprenticeships, and worker training programs.
Some suggest that encouraging marginal students to pursue some of these non-academic paths creates a tracked system that keeps low-income and minority kids out of the upper echelons of our society. For that reason, vocational education has largely fallen out of favor in the United States, but gaps in academic performance between rich and poor and blacks and whites have persisted or, in the case of income, even grown. Closing these gaps has been one goal of the research done by the Center on Children and Families at Brookings, and we agree strongly that more needs to be done to prepare students to be college ready at the end of secondary school. But for the students we focus on in our brief—teenagers and young adults planning their educational and career paths—it is often too late to make up this lost ground.
The goal should be to help them make the choices that will turn out best for them given their individual strengths at the end of high school. For a student who has performed poorly in the classroom, the most bang-for-the-buck may come from a vocationally-oriented associate’s degree or career-specific technical training or from a period of work before returning to school with stronger motivation to learn what academic institutions teach. Think of the alternative: this student’s poor grades and possible ambivalence about classroom learning means he is likely to never finish his degree, and will have wasted time and money that could have been spent learning an employable skill. On the other hand, there are plenty of low-income students who are smart enough to succeed in college but who tend to choose schools that are beneath their ability and are more likely to drop out. The correlations of family background with college entry, persistence, and graduation have been rising, meaning it is especially important to help low-income students with the requisite abilities and preparation to enroll in a high-quality institution. Those individuals could benefit from better information about financial aid, graduation rates, and expected earnings.
Unfortunately, that information is not currently available: no one single comprehensive dataset containing information on earnings by school (let alone by major or program) exists. The Student Right to Know Before You Go Act, which we mention in our brief, has bipartisan support and would be an improvement on the status quo. The PayScale dataset we used for our brief has significant limitations, including questions about the reliability of its calculations and its representativeness.
Finally, some have rightly pointed out that our findings are descriptive, and should not necessarily be interpreted causally. It is likely true that smarter students self-select into engineering majors, so not every student will do better if she studies engineering rather than English. The same logic applies to more selective schools: part of why students at elite schools do better later on is that they are more talented before they ever enter college. Even so, careful economic research suggests that students do best when they attend the best school they can get in to, and that certain majors have real benefits.
Ultimately, higher education decisions are made by individual students and their families, and are based on their unique interests, strengths, and personal values, not only income and career prospects. Students need to have realistic expectations about what they’re likely to get out of pursuing higher education. Rigorous economic research has found that there is a sizeable proportion of people who experience a negative return to their education. That doesn’t mean they may not excel at other pursuits. It just means that one size doesn’t fit all high school students.Authors
- Isabel V. Sawhill
- Stephanie Owen
The race to replace Iran’s deeply polarizing president, Mahmoud Ahmadinejad, officially opened last week with the registration of prospective candidates, and already the campaign promises an utterly fascinating ride through the unpredictable politics of the Islamic Republic. The shock and awe surrounding the last-minute decision by Iran’s iconic former president, Ali Akbar Hashemi Rafsanjani, to throw his hat into yet another race has only been topped for drama by the latest antics of the current incumbent aimed apparently at elevating a controversial protégé to succeed him. At least at the outset, these sensational developments have overshadowed the emerging shape of the real race among an array of regime functionaries, most notably nuclear negotiator Saeed Jalili.
With 686 would-be candidates and an array of insidious regime mechanisms for influencing the outcome, it is literally impossible to predict today who the ultimate contenders will be, much less who will win the race. However, what is clear is that Iran’s presidential election represents the opening salvo in another historic turning point in the volatile evolution of the revolutionary theocracy.
The application period is a deliberately chaotic process, designed to justify the pretense behind the clerical vetting process and bolster the credibility of the nominees who are ultimately tapped by Iran’s Guardians’ Council, a 12-member unelected clerical oversight body. There is also a keen dimension of political theater, as the prospective candidates seek to gauge their relative prospects and the leadership endeavors to maintain an uneasy balance between galvanizing popular interest in the campaign and inciting the kind of electoral exuberance that has generated instability in the past. Over the course of the next 10 days, the field will be narrowed from several hundred to a mere handful who are assessed to meet the constitutional standards for the office.
This time around, the chaos has been intensified by the lingering memories of the upheaval that ensued in 2009, when an implausibly rapid vote-count and wide margin in favor of Ahmadinejad’s reelection instigated the largest and most sustained protests in Iran’s post-revolutionary history. The ensuing crackdown left Iran’s burgeoning reform movement estranged, imprisoned or scurrying into exile. Predictably, however, no sooner had the conservative wing of the Iranian political spectrum achieved uncontested dominance than deep fissures emerged within them. For the past two years, frictions among Iranian hard-liners have been directed, full bore, at Ahmadinejad himself, which greatly heightens the significance of the current contest to succeed him.
Cue Ahmadinejad’s first electoral adversary, Rafsanjani, whose entrance has sparked an intense debate about his motivations as well as about the competition to come. In a prospective field comprised mostly of second-tier Iranian political figures, mostly former ministers and parliamentarians, he is vastly better known and boasts a political machinery that spans factions and decades. For many within Iran’s dispirited reformist and opposition ranks, the former president offers their best hope of political redemption and national salvation, a hint of their own marginalization given their past differences with him. Rafsanjani’s reputation for pragmatism is well-earned; he was tasked by Ayatollah Khomeini, the revolution’s founder, with ending the futile war with Iraq and later endeavored against stiff opposition to rehabilitate the country and reform its economy. He has carefully navigated fidelity to the system while critiquing both Ahmadinejad and the 2009 election, and his return to the presidency would likely revive now-dormant diplomatic fantasies in Europe and perhaps even Washington.
However, the former president faces powerful impediments that had persuaded many observers that his recent hints about the race were just a tease. Mostly notable is his age – almost 79 – which raises questions of capacity but also may undermine his appeal in a country with a disproportionately young population. More problematic is the unfortunate reality that he appears to have a more effusive constituency in the Western media than in Iran. Among the Iranian establishment, Rafsanjani is widely perceived as wildly corrupt and ideologically untrustworthy, and the population at large rejected his bid for a parliamentary seat in 2000 and favored Ahmadinejad in the 2005 presidential run-off. Now his unexpected entrance has incited a firestorm among the most doctrinaire of the hardliners, who have accused him of conspiring to delegitimize the system by daring the clerical supervisors to reject his candidacy.
Whatever happens, though, the calculations of the politician nicknamed “The Shark” (a reference to his lack of facial hair as well as his wily political skills) have already upended a race expected to rely on a motley array of second-tier Iranian political figures. His close ally, former nuclear negotiator Hassan Ruhani, had previously pledged to quit if Rafsanjani ran; Ruhani is a sharp-elbowed politician who has been an early and consistent critic of Ahmadinejad’s nuclear diplomacy and economic policy. So far that withdrawal has not come, despite much Twitter speculation to the contrary, and other similar pacts among conservative contenders also appear to be fraying under the weight of a suddenly reconfigured competition.
The Rafsanjani wild card is only one novelty in a race replete with interest. The other aspirant whose registration on Saturday has electrified Iranian poll watchers is Esfandiar Rahim Mashaei. Mashaei, a close advisor to Ahmadinejad, has long been the focus of fierce clerical ire as a result of his eclectic religious and political views. He was forced out of a vice presidential slot in 2009 and is routinely scorned as the mastermind of a ‘deviant current’ that has infiltrated the Islamic Republic in an effort to undermine it. Mashaei’s ambitions have been telegraphed over many months through increasingly unsubtle efforts of Ahmadinejad to stack the deck in his favor, culminating in the tandem appearance at Mashaei’s registration. That move prompted a legal complaint against the president – either a quaint nod at legalism in a patently manipulated electoral framework or the first step in a process of silencing the unpredictable Ahmadinejad via intimidation or imprisonment.
The calculations of Rafsanjani, Mashaei and Ahmadinejad are compelling in their own right, and they will no doubt influence Iran’s future. However, the drama associated with them has diverted attention from the likely electoral landscape, which features a less thrilling but still significant roster of contenders. For several months, some speculation has centered on former foreign minister Ali Akbar Velayati, a pediatrician by original training whose entire 32-year political career is the product of patronage by Iran’s supreme leader, Ayatollah Ali Khamenei. Others have long fixated on Tehran mayor Mohammad Baqr Qalibaf, a former Revolutionary Guards commander who has assiduously restyled himself as a moderate, modernist problem-solver. Another dark horse to watch closely Gholamali Haddad Adel, a parliamentary leader and literature professor whose daughter is married to Khamenei’s powerful son Mojtaba.
The real heavyweight in the pack, however, is Jalili, who was virtually unknown beyond a small circle of the Iranian leadership until his appointment as secretary of the Supreme National Security Council in 2009. In leading the contentious negotiations with the international community over Iran’s nuclear program, he has personified Iran’s quixotic mix of defiance with occasional bursts of pragmatism. One of his early forays in the high-stakes talks featured a discursive lecture on the Prophet Mohammad’s diplomacy, the subject of his doctoral dissertation. But Jalili was also responsible for signing onto a Western confidence-building step in 2009 that was quickly disavowed by Tehran. He survived the ensuing outcry among conservatives unscathed, a testament to his primary patron, Khamenei, whose office he directed for four years. Of all the would-be aspirants for the presidency in this round, Jalili appears to benefit from an air of ordination, and already talk has emerged among other conservatives of withdrawing in order to bolster his competitiveness.
Setting aside the personality politics, the most astonishing, and important, dimension of the campaign is simply that we care at all. Four years ago, many observers – including myself – argued the blatant orchestration of Ahmadinejad’s reelection had all but extinguished the relevance of the electoral dimension of Iran’s convoluted governing system. Then-Secretary of State Hillary Clinton and many academics forecast that Iran was descending into a military dictatorship. So many of these predictions now appear off the mark, as external analysts and politicians all too often find when interpreting Iran.
Let’s be clear – the 2013 ballot will be rigged to a greater or lesser extent depending on how the campaign evolves, and the winner will undoubtedly benefit from unabashed assistance from the institutions, including the Guard. However, as the initial maneuvers of the 2013 presidential race underscores, politics in Iran remain competitive, unpredictable, and captivating. So stay tuned, and watch this space. One week from today, Brookings will be launching Iran @ Saban, a new blog that will focus on political and economic developments within Iran as well as the threats posed by its current policies and the strategic responses of the international community. The blog will showcase the deep bench of Brookings scholarship on the Middle East and issues such as proliferation, terrorism and, of course, electoral politics and the future of Iran.Authors
At about this time last year, we saw President Obama and Republican challenger Mitt Romney engage in a pandering contest on student loan interest rates. Cheap political theater produced a shortsighted political solution—a one-year extension of the 3.4% interest rate on subsidized federal student loans.
That one-year “fix” is due to expire on July 1, setting up another round of debate about whether to extend the lower rate once again or come up with a permanent solution. Under current law, Congress sets the interest rates on loans (which are then fixed for the life of the loan). This leads to political fights over the interest rate on a regular basis, especially when market rates become out-of-sync with the rate set by Congress.
This time around, the Obama administration and several members of Congress have produced serious proposals, most of which propose allowing the interest rates on federal student loans to vary with market conditions rather than having a fixed rate that is set by Congress. An excellent summary of these proposals appears in today’s Inside Higher Ed. The key elements of each of the proposals (and current law) regarding the federal Stafford loan program are:
1) Obama administration proposal: interest rate varies with market rates (10-year Treasury rate plus 0.93% for subsidized loans and 2.93% for unsubsidized loans) but is fixed for the life of the loan. There is no cap on interest rates.
2) House Republican proposal: interest rate varies with market rates (10-year Treasury plus 2.5% for subsidized and unsubsidized loans) and varies over the life of the loan (as the Treasury rate increases or decreases). Interest rates are capped at 8.5%.
3) Sens. Reed and Durbin proposal: same as House Republican proposal, except market rate is defined as the 91-day Treasury rate plus a percentage determined by the Education Secretary to cover administrative costs, and the cap is 6.8%.
4) Sen. Warren proposal: one-year fix in which the rate on subsidized loans is set at the rate the Federal Reserve changes to banks (currently 0.75%).
Sen. Warren’s proposal should be quickly dismissed as a cheap political gimmick. It proposes only a one-year change to the rate on one kind of federal student loan, confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.
Setting aside this one embarrassingly bad proposal, the remaining proposals raise a set of questions that need to be answered in order to select the ideal policy:
First, should the interest rate on federal student loans be set by Congress or allowed to fluctuate with the market? Market rates reflect the cost of borrowing to the government. Consequently, rates below-market rates indicate a subsidy to students. In our view, subsidies of college-going should be administered through programs that bring about the greatest changes in enrollment behavior, such as grant programs, and not through subsidies to interest rates that are much less transparent. Indexing the interest rate to the market also has the advantage of lessening the role of politics in student loan programs.
Second, should the interest rate be fixed for the life of the loan or allowed to vary with the market? In the market for other kinds of loans, such as home mortgages, consumers can choose between fixed- and variable-rate loans. But many students are not sophisticated consumers of financial products. In our view, the federal program is best operated with a fixed-rate model because it shields the student from the risk that the rate will increase in the future (usually at the cost of a higher interest rate to make up for that risk). Although the actual risk associated with a variable rate loan may be small, fear of this uncertainty might discourage some students from taking the loans that they need to enroll in postsecondary education.
Third, should there be a cap on student loan interest rates? One of the criticisms of a move to market-based interest rates is that times of extraordinarily high market rates will make college inaccessible to many students (by making it prohibitively expensive to borrow). In our view, a cap on interest rates is a reasonable approach to ensure student access to college and to make a market-based system politically feasible.
Where does that leave us? It turns out the ideal policy is also a political compromise: it takes the market-based proposal of both President Obama and the House Republicans, the fixed-rate proposal of the President, and the interest rate cap of the House Republicans and Senate Democrats. Of course there are still details to be worked out, such as how much should be added to market interest rates to finance the administrative costs and default risk of the federal student loan program. But this is a rare example where proposals from our two political parties seem close enough that compromise on a good policy should be possible.Authors
Is a college degree worth it? Not for everyone, according to our newly-released Center on Children and Families policy brief. The value of a college degree can vary dramatically, depending on factors such as field of study, type of college, graduation rate and future occupation. Here’s the last in a three-part blog post series, where we take a closer look at findings from the policy brief. (Read the first part and second part here.)
Even though we often talk about college as a monolith, the truth is that not all college degrees are created equal. There is huge variation in the return to a bachelor’s degree, depending on choice of major and occupation; school type and selectivity level; and likelihood of graduating. All of this suggests that it is a mistake to unilaterally tell young Americans that going to college—any college—is the best decision they can make. If they choose wisely and attend a school with high graduation rates, generous financial aid, and high expected earnings, they can greatly improve their lifetime prospects. The information needed to make a wise decision, however, can be difficult to find and hard to interpret.
We lay out a three-pronged approach that would help every young person make a smart investment in their future: better information, performance-based scholarships, and better alternatives to a traditional four-year degree.Authors
- Isabel V. Sawhill
- Stephanie Owen
The United States spends about 17 percent of GDP annually on health care, a figure that is projected to grow substantially in the years ahead, despite the recent slowdown in health care spending growth. Rising costs mean insurance coverage keeps getting more difficult to afford. Those rising costs, plus the aging demographics of the nation, account for most of the spending side of our nation’s long-term fiscal challenges at both the federal and state level. They mean higher expenditures on Medicare and Medicaid, and the tax subsidies for employer-provided coverage and the new subsidies for private insurance in the individual marketplaces. At the same time, biomedical innovation using genomics, systems biology, information technology, and innovative and convenient ways to deliver care holds the potential for much more effective, personalized care – if we can afford to develop and use it. That’s not the case so far: patients often do not get treatments we know to be effective, innovative treatments and ways of delivering care are hindered by payments that are tied more to the site of services and what we’ve paid for in the past than the value of these treatments for particular patients, and we often pay more for complications than for the coordination of care and person-focused support that could help health care providers and patients get much better results for the money they spend. Something has to change, not just to make sure that healthcare costs can be contained, but also to make sure that the quality of health care gets better by providing better support for what patients need.
Our new report, “Person-Centered Health Care Reform: A Framework for Improving Care and Slowing Health Care Cost Growth” is a system-wide framework to address our cost problems by improving care – by leveraging the large and growing opportunities for more person-focused care. We have developed a set of proposals for saving $1 trillion over 20 years and improving care at the same time. Written in collaboration with leading experts from across the academic and political spectrum, our report proposes a framework for how to improve health care financing and regulation so that we can achieve better, higher-value care for each person. The report describes a specific series of steps to improvement the way care is delivered in each part of our health care system, including Medicare and Medicaid, the employer and individual insurance markets, antitrust enforcement and other regulatory reforms. Focusing on person-level quality of care as the fundamental strategy for addressing health care cost growth is in some ways new, but it builds on promising ideas and trends throughout our health care system. It is an idea whose time as come, and which we should start to adopt as our long-term approach to addressing the health care quality and cost problems now.
This report is the third in our “Bending the Curve” series. While building on the past reports, it also differs from our previous work in some very important ways. First, we have broadened our group of authors. Still with us is the core group of experts who participated in previous reports – people like Joe Antos from AEI, Mike Chernew and David Cutler from Harvard, Mark Pauly from University of Pennsylvania, Dana Goldman from USC, Steve Shortell from UC Berkeley, and others who have a tremendous amount of health policy expertise and experience. We’ve also benefitted from some new expert perspectives, including Kate Baicker from Harvard. And along with that expertise, our group now includes some other experts with extensive policy and political experience – including NGA director Dan Crippen, former Senate Majority Leader Tom Daschle, former CEA chair and Columbia dean Glenn Hubbard, former Utah Governor and former HHS Secretary Mike Leavitt, former HHS Secretary and University of Miami President Donna Shalala, and former budget directors Peter Orszag and Alice Rivlin. Together, this unique group sparked a new and welcome level of discussion about reform. In particular, as Mike Leavitt put it, if Republicans and Democrats were at the point where they had to reach an agreement on reforming care and addressing the challenge of rising costs, what would they agree on – and how could we make sure it would work?
As we worked to answer these very practical questions, we were forced to consider the full range of key technical and political issues involved in health reform. We reviewed the kinds of reforms that we have considered before to improve quality and lower costs, along with new evidence on how those reforms and others being implemented now are working (with different degrees of success) in the public and private sectors. We combined that with consideration of how best to move forward in a way that avoids the need for disruptive short-term payment cuts, provides the policy certainty needed to accelerate the trends toward the availability of much better, more personalized care, and addresses serious short-term weaknesses in in Medicare, including unstable physician payments and a lack of support for beneficiaries to save money when they get better care These considerations led to a plan that involves implementing reforms that are not disruptive in the short term while supporting better quality and coordination of care, leading to a large impact over time on supporting improvements in care that can sustain slower cost growth in the years ahead. Our conclusion is that enacting these health care reforms will not be easy, but we agree that this is the best path forward.
We do need to act now. If enacted, our framework is able to avoid the more aggressive steps that will almost certainly be needed in the years ahead to achieve more urgent reductions in federal spending, like cuts in payment rates as in sequestration, or restrictions in coverage for vulnerable populations and in access to new types of innovative care. And even more importantly, it will speed up the innovations in health care and biomedical technology that lead to better results and lower costs for patients. The bottom line is that the best way to control health care costs is to have health care policies now that do as much as possible to support better care for each patient.
We have a window of opportunity right now for implementing thoughtful health care financing and regulatory reforms that improve care today and promote much better, person-centered health care for the future. This is the best way for the country to achieve its overall deficit reduction targets. We should act now before the window closes, and we are left only with policy options that shift costs, reduce quality, and most importantly, diminish the ability of patients and health care providers to achieve better care and better health.Downloads
What has been the role of foreign banks in financing growth and convergence in Central, Eastern and Southeastern Europe, and how is that role changing? This is discussed in the first issue of a new series of analytical work on the region called Regional Economic Issues, which we launched at a joint IMF/Czech National Bank conference two weeks ago in Prague.
In the 1990s, there were very few foreign banks—state-owned banks were dominant. Many countries went through severe banking crises. When banking systems were opened to foreign investors, foreign ownership quickly became prevalent (Figure 1) and the incidence of banking crises dropped dramatically. And where they still occurred, they were the usually the result of failing domestic banks—not foreign-owned banks.
During the mid 2000s, though, foreign banks fueled and financed tremendous domestic demand booms which in many countries ended in busts. This was because foreign banks had access to large amounts of foreign funding (Figure 2)—mostly from their parent banks in Western Europe, who in turn were tapping wholesale funding markets—which they used to expand credit where demand was strongest and profits were highest. Countries in the region, with their bright growth prospects and relatively low credit penetration to start with, were attractive lending destintations. The ensuing booms were extraordinary in many countries.
When the global crisis hit in 2008, new parent funding dried up and much of the previous inflows reversed, triggering deep recessions. The larger were the inflows during the boom years, the larger have been the outflows since 2008 (Figure 3), and the sharper the economic contraction (Figure 4).
Since late 2008, parent banks have been scaling back funding of their subsidiaries, who are increasingly relying on domestic deposit funding. Over time, this will help reduce boom-bust cycles, since retail deposits tend to be more stable. But the shift bears close watch to make sure it does not go too fast nor too far.
How can policy makers help? Establishing a banking union would facilitate home-host supervisory cooperation which, together with more coordinated use of macro prudential policies, would reduce the magnitude, and possibly also the likelihood, of future credit cycles. And tackling nonperforming loans—which in many countries are still very high—and developing local capital markets as an alternative source for investment finance would offset some of the headwinds to economic growth from less plentiful foreign funding.
Is a college degree worth it? Not for everyone, according to our newly-released Center on Children and Families policy brief. The value of a college degree can vary dramatically, depending on factors such as field of study, type of college, graduation rate and future occupation. Here’s the second in a three-part blog post series, where we take a closer look at findings from the policy brief. (Read the first part here.)
For a young adult shopping for a college, the choices can be overwhelming. That shiny brochure can make College X look like a great place to spend four years. But what do you really get out of choosing one school over another? As it turns out, quite a bit. The return on investment (ROI) of a bachelor’s degree varies widely at different types of schools. For certain schools, according to the online salary information company PayScale, the ROI is actually negative.
But getting into college and choosing a school is only the beginning. College isn’t worth much unless you graduate. Part of what sets certain schools apart is how many of their incoming students actually come out with a degree.
Notice that there is a wide range of completion rates within each school selectivity category, particularly for the less selective colleges. Not every student can get into Harvard, where the likelihood of graduating is 97 percent, but students can choose to attend a school with a better track record within their ability level.Authors
- Isabel V. Sawhill
- Stephanie Owen
Is a college degree worth it? Not for everyone, according to our newly-released Center on Children and Families policy brief. The value of a college degree can vary dramatically, depending on factors such as field of study, type of college, graduation rate and future occupation. Here’s the first in a three-part blog post series, where we take a closer look at findings from the policy brief.
For the past few decades, it has been widely argued that a college degree is a prerequisite to entering the middle class in the United States. We all know that, on average, college graduates earn significantly more money over their lifetimes than those with only a high school education. Brookings’ Hamilton project has estimated that the average bachelor’s degree holder makes $570,000 more over a lifetime than the average high school graduate. What gets much less attention is that the college premium varies widely by the choices students make.
For example, the value of a bachelor’s degree depends heavily on choice of major and later occupation. No surprise here: the highest paid major is engineering. If on the other hand you studied education (but didn’t go on to get a master’s degree), you can only expect to make half of what those engineering majors do. (Stagnant teacher compensation is a whole other topic that we won’t go into here.)
Not everyone ends up working in the field they studied in college, so it’s also useful to look at earnings by occupation. The highest-earning occupation category is architecture and engineering, with computers, math, and management in second place. The lowest-earning occupation for college graduates is service.
Of course, plenty of people choose to study art or become teachers because they derive intrinsic value from those fields that can’t be measured by a paycheck. Personal preferences and noneconomic benefits are important, too. Few among us would want to live in a world with all programmers and no artists, or all investment bankers and no philanthropists.Authors
- Isabel V. Sawhill
- Stephanie Owen
By Anoop Singh
Fiscal management has improved in Asia over the past decade. It has become more responsive to economic conditions and thereby helped stabilize growth, especially during the global financial crisis. While these are important achievements, major challenges still lie ahead—as our latest Asia and Pacific Regional Economic Outlook points out.
What are these key challenges? In a nutshell, fiscal policy can, and should do more to make Asia’s growth sustainable and more inclusive.
In the near term, budget consolidation has to proceed as the recovery takes hold to rebuild the fiscal space needed to respond to future output fluctuations.
At the same time several emerging and low income economies need to create room for higher infrastructure and social spending to support long-term growth, reduce income inequality, and fight poverty.
The role of investment
Public investment and the promotion of public-private partnerships can help more fill the significant infrastructure gaps in some economies. For example, government investment remains relatively low in Indonesia, the Philippines, and Sri Lanka, despite substantial infrast
ructure shortages. At the same time, fiscal risks in some countries, stemming from investment spending conducted outside of the general government budget and from public-private partnerships, need to be countered through enhanced public expenditure management and fiscal transparency.
Public spending on education and health also needs to be scaled up to enhance human capit
How can Asian governments make room for higher spending on infrastructure, education and health, while still maintaining or even strengthening fiscal space?al and living standards in most Asian emerging and low income economies. Indeed, in spite of still relatively poor health conditions, low education levels, and the surge in per capita income of the past decade, government expenditure on health and education has barely increased in Asian emerging and low-income countries since 2001, and remains about 4 percentage points of GDP lower than in peers in other regions.
Spending differently and more efficiently
Spending differently and more efficiently can go a long way. In several Asian emerging economies and low-income countries, subsidies—which are often distortive and not well targeted to the poor— take up a higher share of total government expenditure than in peers in other regions. The average annual budget cost—which does not even fully capture the total fiscal burden— of energy and food subsidies is nearly 2 percent of GDP in Asian emerging and low-income countries. In a few cases, such as Bangladesh, Indonesia, and Malaysia, it is even higher. In Indonesia, at more than 4 percent of GDP, the direct fiscal cost of oil and food subsidies is close to total government spending on health and education.
Energy subsidies, which create distortions and other economic costs, are damaging to the environment, and in practice, often benefit higher income groups more than the poor. Furthermore, the effectiveness of subsidy programs in the region is sometimes compromised by implementation problems, such as targeting errors, illegal diversions, and procurement inefficiencies.
Alleviating the impact on the poor
Any subsidy reform should include compensatory measures to alleviate the adverse impact of price increases on the poor, which could be substantial. Targeted cash transfers or vouchers can be effective instruments in this respect, provided data and administrative capacity are adequate. And indeed, some subsidy reforms along those lines are taking place. India, for instance, has initiated a wide-ranging project to shift many subsidy programs away from in‑kind delivery toward direct cash transfers, and in parallel is enhancing the system to indentify eligible individuals.
Finally, reforms are needed not just on the spending side but also on the tax side. Reducing complex and poorly targeted tax incentives and enhancing tax administration can create space for social and infrastructure spending. And a number of Asian economies could also consider making their current revenue structure more growth-friendly by making greater use of general consumption taxes and property taxes and reducing their reliance on corporate income taxation.