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Taiwan’s Elections and United States Interests

Brookings Institute Blog - Mon, 09/15/2014 - 12:09

On Friday, September 12, Brooking’s Center for East Asia Policy Studies convened a conference on China-Taiwan relations, in cooperation with Taiwan’s Association on Foreign Relations. The presentations were stimulating and the audience participation was good (a transcript of the event should be posted soon).

As it happened, I received a lot of coverage in the Taiwan media for some remarks I made at the end of my presentation, concerning how the United States government would approach the 2016 Taiwan presidential election. I suppose I should be flattered by all the attention my remarks evoked. I did appreciate the mature and measured response from Dr. Joseph Wu, secretary-general of the Democratic Progressive Party (DPP). I have absolutely no objection to the quite accurate comment of the spokesman of the American Institute in Taiwan that I am no longer a government official and was speaking for myself. I was not surprised that some reporters didn’t get their facts exactly right; that’s not unheard of in either the Taiwan or the American media. But what I’ve seen from the Taipei Times is truly puzzling.

Before I address why I’m puzzled, here is what I said:

What I am prepared to say with some confidence [about the 2016 Taiwan election] is that the U.S. government, at some time and in some way, will express itself on the implications of the 2016 election for U.S. interests. Now, I recognize, because I lived this at one time, that Washington is caught in a bit of a dilemma here. On the one hand, we have a general principle that it’s the voters of friendly democratic countries who should be the ones to pick their leaders at the ballot box, and that the United States should not try influence their votes by expressing a preference for one candidate or the other. On the other hand, the United States does have interests in the policies of any elected leadership, whether it’s Taiwan or a lot of other places.

So, in spite of this dilemma Washington has not been quiet. And let me just let me give you a few examples. 1996: the Clinton Administration, through its actions, made a statement of sorts. In December 1999, I myself made a public statement in Taiwan where I sort of laid out both sides of our view about Taiwan’s democratic election. Almost exactly four years later, another person named Bush made his statement and that was clearly critical of Chen Shui-bian’s policies. In September 2007, actually seven years ago yesterday, my friend Tom Christensen made a long and detailed critique of the Chen Administration’s policies and the DPP’s strategy for the 2008 election. Almost exactly four years later, September 2011, the Obama Administration conveyed its views through the Financial Times. So this is something we do. We feel there is a need for us to express our views on how our interests will be affected by Taiwan’s elections. And to say nothing, as some in Taiwan might want us to do, is actually to make a statement as well.

One story, filed from Washington, reported that I said that “the U.S. was likely to try to ‘influence’ Taiwan's 2016 presidential elections. While he did not speculate about what might happen, Bush indicated that Washington would declare a preference for the Chinese Nationalist Party (KMT) candidate because there were lingering doubts about the Democratic Progressive Party's (DPP) cross-strait policies.” Another story claimed I said that Washington might “try to sway vote in the 2016 presidential election.”

As can be seen from the text of my remarks, the U.S. government clearly understands the tension between not stating support for a particular candidate and expressing itself on the U.S. interests at stake, when there are interests at stake (I have felt that tension myself). I provided the examples where we have expressed views in the past on the implications of the election for U.S. interests, by way of predicting that it would happen again. It was up to Taiwan voters in the past to decide what those statements meant and how to weight them in their voting decisions. It will be up to Taiwan voters to do so in the future, which is as it should be. But I don’t see any basis for extrapolating from my actual remarks to conclude that I was predicting that the U.S. government would side with one party over another.

Authors Image Source: © Stringer Taiwan / Reuters         
Categories: Blog

Happy Neighbors are Good for You, Wealthy Ones are Not: Some Lessons from a Far-Away Country

Brookings Institute Blog - Mon, 09/15/2014 - 11:08

Editor's Note: In this blog, Carol Graham discusses the impact of inequality on well-being, particularly in Mongolia, which has experienced a dramatic economic and political transition in recent years. For a more detailed look at Mongolia's well-being trends, see Graham's latest paper

After years of being a back-burner issue, inequality is on the U.S. public agenda, big time. America’s long-held reputation as the land of opportunity—the Horatio Alger society where anyone who worked hard could get ahead and where inequality was a sign of where these entrepreneurial individuals could go—is under duress. Study after study, including several by my Brookings colleagues Isabel Sawhill and Richard Reeves, show that not only has inequality increased, but social mobility is stagnating—at least for those cohorts at the bottom of the income distribution. And the fact that a book by French economist, Thomas Piketty, which warns of the dangers of increasing inequality but is also 700-plus pages, highly technical, and based on tax return data, has become a best-seller, says a great deal. 

A stark view of two Americas has replaced that of the Horatio Alger society. Even the language of the two differs, as was described in a recent Upshot column by David Leonhart. The words that dominate poor places reflect short-time horizons and daily survival challenges, and range from “diets” and “diabetes” to “guns,” “hell” and “video games.” Those in rich places reflect vastly different opportunity sets and knowledge bases, and range from “iPads” and “baby joggers” to exotic travel destinations. My research on well-being finds large gaps in the levels of stress and life satisfaction experienced by the rich and the poor in the U.S. Indeed, we also find that the gaps in the stress levels of the U.S. rich and poor—as well as in their levels of confidence that hard work can get you ahead—are significantly larger than they are in Latin America—hardly a continent known for its equitable distribution or lack of poverty challenges. 

Experienced Stress — United States vs. Latin America and the Caribbean 



Belief in Hard Work — United States vs. Latin American and the Caribbean

Until recently, most studies on the effects of inequality on individual well-being found that the effects in the U.S. were either nil or rather surprising. A paper written a decade ago by Alberto Alesina and colleagues found that the only group in the U.S. that was made unhappy by inequality was left-leaning rich people! My earlier work with Andrew Felton finds that the welfare effects of inequality depend on what it signals. If it is a sign of potential future progress and opportunity, then it either has no effect or even positive ones. Yet when it is a sign of persistent advantage for some cohorts and disadvantage for others, then it leads to unhappiness and even social unrest in some contexts. Yet we still need to know more about how these channels operate.

Tuugi Chuluun, Sarandavaa Myanganbuu and I recently conducted the first extensive study of well-being in Mongolia, a country that has experienced a dramatic transition in both its economy and polity, including, in recent years, record levels of economic growth. We explicitly explored the role of inequality. The basic determinants of well-being in Mongolia are no different than they are in most countries in the world, with individual income, health, marital status and exercise, among other things, positively associated with life satisfaction. As in many other contexts, we found that average community income is negatively correlated with life satisfaction once respondents’ own incomes are accounted for. In other words, the higher the average income in your community is compared to yours, the less happy you are. The effect is particularly strong for respondents below median levels of income. Inequality in this instance is not a sign of future progress, but rather of being left behind at a time of dramatic economic change and progress.

In contrast, average community-level well-being (both life satisfaction and happiness in the daily experience sense) was positively associated with individual well-being across the board. While being around wealthier people may generate envy among some, being around happier people has positive externalities. This is an intuitive finding and fits with an increasing body of work on well-being that shows that higher levels of well-being are associated with better labor market outcomes, health, and social behaviors and interactions. In contrast, some of the same studies show that very low well-being levels—in particular high levels of stress and difficulties with daily life—lead to short-time horizons and obstacles to investing in the future. Thus, while wealthier neighbors are not necessarily good for you, happier ones surely are.

At a time that we are at loss for solutions to the increasing divide between the rich and the poor in the United States, maybe we can take a lesson from a far-away country and focus a bit more on the overall well-being of our citizens, including but beyond its material dimensions. 

Authors         
Categories: Blog

Trip Report: Mid-September Impressions from Kyiv

Brookings Institute Blog - Mon, 09/15/2014 - 11:02

Overview

Ukraine clings to a shaky ceasefire, with uncertain prospects for a durable peace process ahead, leaving many in Kyiv unsure about what will happen next. While a marked sense of national identity has taken hold (thanks to Vladimir Putin), people express frustration that the government has done little on domestic reform. The Rada (parliament) elections are set for October 26. They hopefully will produce a coalition that can support an active government reform effort; the risk is that they will result in a divided, muddled body that will hinder Ukraine’s ability to meet the challenges before it.

While President Poroshenko seems committed to seeking a peaceful settlement, and virtually everyone agrees that Kyiv cannot resolve the conflict in eastern Ukraine by military means, no one showed great optimism about securing a settlement. There is a general sentiment that the United States should do more to support Ukraine, including by providing arms, and a bitter sense that the Budapest memorandum on security assurances turned out to be an empty piece of paper.

A September 11-13 visit to Kyiv to attend the Yalta European Strategy (YES) conference and hold sidebar conversations produced a number of impressions regarding developments in Ukraine and the challenges confronting that country.

A Stronger National Identity

On a warm late summer’s day, Kyiv hardly seemed like the capital of a country that has fought a bitter conflict against separatists and their Russian allies. People, young and old, crowded the streets, and sidewalk cafes ran a brisk business. That makes a point that sometimes gets lost in the West: the conflict over the past five months has been confined to the eastern regions of Donetsk and Luhansk.

One noticeable change in Kyiv was the explosion of blue and yellow, the colors of the Ukrainian flag, on fences, buildings and flagpoles. As one Ukrainian scholar put it, “Mr. Putin has fulfilled the dream of Ukrainian nationalists” by forging a strong sense of Ukrainian national identity, infused with a heavy dose of anti-Russian sentiment. Speaking on a YES panel, former Prime Minister Tymoshenko called Putin the “best integrator” of Ukrainian opinion in favor of joining the European Union and NATO.

A Ukrainian official privately commented that public sentiment was not just anti-Putin, but anti-Russian. Ukrainians bitterly noted that the Russian population did not oppose or speak out against what the Russian president had done. (That cannot be healthy for Ukraine-Russia relations in the long run.)

There was no consensus on the motives behind Russia’s actions. At one end of the spectrum, Prime Minister Yatseniuk told the YES conference that Mr. Putin’s goal was to recreate the Soviet Union. Others saw a more modest objective: Mr. Putin sought to have leverage over Kyiv, in particular, to affect Ukraine’s foreign policy choices.

A Ceasefire and What Next?

The week-old ceasefire appeared to be holding in many places, though reports of shooting came daily. Some felt that Mr. Poroshenko had no choice but to accept a ceasefire, given that regular Russian army units had invaded in August and dramatically turned the tide on the battlefield. One official thought that Mr. Putin also welcomed the ceasefire, as Russian dead numbered in triple digits, which presented the Russians a delicate question at home.

The ceasefire appears fragile. Mr. Poroshenko’s focus nevertheless is on getting a settlement process underway. He told the YES gathering that his special status law to be introduced in the Rada the week of September 15 would incorporate decentralization—transferring some power, budget authority and the right to give language an official status to regional and municipal governments—but would protect Ukraine’s sovereignty and territorial integrity. Key issues of military and national policy would stay at the national level. The public will follow these questions closely. Some thought that a more nationalist electorate could be a factor that would limit the president’s freedom of maneuver, e.g., he had to avoid anything that looked like a “bad” deal for Ukraine.

A number of people expressed unease about the “Normandy format” (Ukraine, Russia, France and Germany) that Mr. Poroshenko has used with Mr. Putin, French President Hollande and German Chancellor Merkel. While Ukrainian confidence in Ms. Merkel has grown, several would prefer that the United States and European Union participate, as they had in the mid-April Geneva ministerial meeting.

With Mr. Poroshenko’s attention centered on stabilizing the situation in eastern Ukraine, Crimea has been deferred to the longer term. Ukrainian officials publicly pledged that they would regain Crimea. But Mr. Poroshenko said Kyiv would use an “economic, democratic competition” to win back the minds of the Crimean population.

Several people privately questioned whether Ukraine should consider letting Donetsk and Luhansk go, perhaps as the result of a second referendum, this time conducted under the Organization for Security and Co-operation in Europe auspices. That would be a longer-term question; neither Mr. Poroshenko nor any other serious politician could suggest the idea now. (If Mr. Putin’s goal is leverage over Kyiv, he presumably would not be satisfied with Crimea, Donetsk and Luhansk if the remainder of Ukraine continues drawing closer to the European Union.)

More Expected from the United States

There was a general feeling that the United States, as a signatory to the Budapest memorandum, which gave Ukraine security assurances in return for giving up its nuclear weapons, should do more to assist Ukraine. In his YES talk, former President Kuchma (who signed the memorandum for Ukraine) said that Ukraine had been “cheated.” Mr. Yatseniuk referred to the “notorious” Budapest memorandum.

The question of U.S. arms transfers arose in several private conversations. Virtually all Ukrainian interlocutors who addressed the topic felt that Washington owed that to Ukraine. Asked about the risk of Russian escalation in response, they noted that Ukraine would run that risk. Mr. Putin had already escalated the conflict significantly. Several expressed confidence that, if it had to, Ukraine could successfully resist Russia; Mr. Putin “might be able to get into Kyiv in two weeks, but he would not be able to get out.”

European Union and NATO

The European Union and Ukraine-EU association agreement enjoy broad support in Kyiv. The surprise announcement that implementation of part of the free trade agreement would be postponed until December 2015 caught almost everyone by surprise. Mr. Yatseniuk explained it as advantageous to Ukrainian companies, as the European Union would lower its tariffs shortly after ratification (scheduled for a vote in both the Rada and European Parliament on September 16), while Ukraine could maintain tariffs on EU imports for another 15 months.

Public support for NATO is rising in Ukraine, and several YES panelists addressed NATO membership. Ms. Tymoshenko said Ukraine should have made NATO membership a part of the Budapest memorandum. Mr. Yatseniuk noted that, with Russia’s invasion, NATO offered the only vehicle for defending Ukraine, though he understood that the Alliance was not ready for Ukraine to apply—an understanding that others privately acknowledged.

Where’s the Reform?

Businessmen and civil society leaders at YES panels and in private conversations expressed great frustration with the lack of progress on economic reform and anti-corruption efforts. The government on its own could abolish a number of unneeded regulatory bodies that only created red tape and corruption opportunities, but it had not, just as there had been no major corruption prosecutions.

Mr. Poroshenko acknowledged the point, saying he would try to accelerate reform efforts. Mr. Yatseniuk agreed that the government had not yet advanced major anti-corruption reform but stoutly defended the government’s record.

Mr. Yatseniuk painted an (overly?) optimistic picture of Ukraine’s energy situation as winter loomed. He said Ukraine had 17 billion cubic meters in storage (the country recently has burnt about 50 billion cubic meters per year) and had begun importing coal from as far away as South Africa to make up for lost coal production in Donetsk.

The Rada Elections and What Comes After

Rada elections are scheduled for October 26. Mr. Poroshenko told his audience that Ukraine could prevail only if united but would stay united even with the Rada elections. Perhaps, but there is some reason for concern that the elections could produce a divided or muddled parliament. Mr. Poroshenko and Mr. Yatseniuk failed to agree on running together in a single party, though the prime minister said he was ready to sign a coalition agreement even before the elections.

There are a number of wild cards. According to opinion polls, Oleh Lyashko’s Radical Party will have little trouble clearing the five-percent threshold for the party list vote. It is not clear how Donetsk and Luhansk will be handled in the elections; one former official expressed concern that Mr. Putin could use elections there to form “his” bloc in the Rada. Another official pointed out that leaders of the volunteer battalions could trade on their hero images and reputations for straight talk to do well in individual constituency votes.

Ukraine needs a strong, stable Rada coalition following the October elections that will work with a president and prime minister who are on the same page to implement key reforms and anti-corruption measures, as well as to manage the conflict in eastern Ukraine and a settlement process. If Mr. Poroshenko and the prime minister are not in sync, or if a divided Rada falls back into the petty political in-fighting and non-transparent dealings that characterized so many Radas before it, Kyiv will have a difficult time addressing the many challenges confronting it. And it will have a much harder time securing stronger support from the United States and Europe if the West feels that it has seen the movie before … and already knows the unhappy ending.

Note: The YES conference is sponsored by the Victor Pinchuk Fund, which is a Brookings donor.

Authors Image Source: © Valentyn Ogirenko / Reuters         
Categories: Blog

What’s Lurking in the Shadows of China’s Banks

IMF blog - Mon, 09/15/2014 - 08:54

By Steven Barnett and Shaun Roache

(Versions in 中文)

“Shadow” banking: a surprisingly colorful term for our staid economics profession. Intended or not, it conjures images of dark, sinister, and even shady transactions. With a name like “shadow banking” it must be bad. This is unfair. While the profession lacks a uniform definition, the idea is financial intermediation that takes place outside of banks—and this can be good, bad, or otherwise.

Our goal here is to shine a light on shadow banking in China. We at the IMF have used many terms. Last year, we had a descriptive one, albeit a mouthful—off-balance sheet and nonbank financial intermediation. The April 2014 Global Financial Sector Report (GFSR) called it nonbank intermediation. This year our China Article IV report used the term shadow banking.

What’s in a name

“That which we call a rose, by any other name would smell as sweet.” Taking a cue from Shakespeare’s Juliet, let us not worry about the label and instead focus on the facts.

Interest in China’s shadow banking…eh, nonbank intermediation…stems mainly from its rapid growth since the global financial crisis in 2008. This is the pink part in Figure 1 which has more than tripled since 2008, albeit from a low base. It has also accounted for half of the increase in overall credit to the economy or total social financing—even more than bank loans.

Shadow banks have dominated total credit growth since 2009

In China, shadow banking is often defined as total social financing less bank loans. We tend to exclude equity issuance—firms raising money by selling stock (as this is not credit)—which is the green part in Figure 1. Thus, we focus on the pink part.

Trusts, which seem to play a “bank-like” role in lending, have grown assets quickly

The pink part—that is shadow bank or nonbank intermediation—consists of the four components in Figure 2:

  • Corporate bonds. Yes, corporate bonds are the largest component of so-called shadow banking.
  • Entrusted loans. These are corporate to corporate loans, administered by a bank. Company A has excess cash, it lends to company B. The bank is just a necessary bookkeeper with no “skin in the game,” but a needed one, since in China’s system, A cannot directly lend to B.
  • Bankers’ acceptances. These are letters of guarantee issued by a bank that its customers can use to finance a transaction. These are “undiscounted” as the bank is issuing a guarantee rather than an actual loan. Once “discounted,” this form of credit is recorded in bank loans.
  • Trust loans. This is lending by trust companies. Unlike a bank loan, though, on paper the trust company just brings the borrower and investor together for a fee.

Size of China’s Shadow banking

The Financial Stability Board suggests that China’s shadow banking sector is quite small, as in many other emerging market economies. Figure 3 shows that shadow banking in China is relatively low both as a share of GDP and as a share of financial intermediation. But the Financial Stability Board filters out of its estimates those parts of the nonbank financial system that are not formally involved in “credit intermediation.”  And there’s the rub. In China, it is often not clear whether shadow banks, such as trusts, really are just loan arrangers or whether they are lending like a bank and taking on credit risk. Reflecting this uncertainty, shadow banking in China could be measured more broadly. Specifically, the pink area in Figure 1 (55 percent of GDP). The forthcoming October Global Financial Stability Report uses an estimate of 35 percent of GDP, as it subtracts corporate bonds (nearly 20 percent of GDP) from the pink area.

China’s shadow banks, while expanding fast, are still modest in size when compared internationally

Bottom-line: is Shadow Banking a Sweet Smelling Flower or a Thorny Bush?

Both. On the plus side, the expansion of nonbank intermediation marks progress in financial development. It benefits companies by providing alternative ways to borrow. And, it benefits households, by giving them more investment opportunities, which is especially important given the ceiling on deposit interest rates. Therein, however, also lays the thorn.

Shadow banking provides an opportunity to circumvent regulations, such as the deposit interest rate ceiling (but there are many others). For example, rather than putting money in a deposit, a bank’s customer could buy a wealth management product from the bank that offers a higher return. This wealth management product, in turn, may invest in equities and bonds but can also, subject to a limit, invest through shadow banks in assets that look a lot like bank loans.

More broadly, shadow banking moves intermediation outside of formal banking—which has safeguards such as capital requirements, provisions against loan losses, loan to deposit ratios, well-established supervision and regulation—to more uncharted territory. The regulators and supervisors are trying to keep up with this fast-moving sector, with some recent success, but it remains a huge challenge.

At the same time, investors appear to have been largely protected from the inevitable losses that should come with risky lending. It is hard to find a case, for example, of investors in a fixed income trust or wealth management product incurring any losses. This perpetuates the perception that the trust company and/or selling bank, perhaps for reputational reasons, is implicitly guaranteeing the investment. Meanwhile, investors may not appreciate the underlying risk of such products and invest too much of their saving in them.

And, this is just the tip of the iceberg in assessing the benefits, costs, and risks of shadow banking, which is a topic for another day.

The forthcoming October issue of the Global Financial Stability Report will have a broader discussion of shadow banking in China and elsewhere. You can also listen to this recent podcast on shadow banking.


Categories: Blog

Việt Nam phải đối mặt với những thách thức gì khi tiến tới bảo hiểm y tế toàn dân?



Trong tuần này, Việt Nam sẽ chủ trì tổ chức Hội nghị các Bộ trưởng Y tế ASEAN lần thứ 12 tại Hà Nội. Bảo hiểm y tế toàn dân  (BHYTTD) sẽ là một trong những chủ đề chính của hội nghị, cả trong các diễn đàn chính thức và không chính thức, giữa các nhà hoạch định chính sách của khu vực. Dù thế nào thì mục tiêu tiến tới BHYTTD, được hỗ trợ bởi việc tăng chi tiêu của nhà nước để trợ cấp cho các đối tượng tham gia bảo hiểm, cũng là một trong những nội dung có sự thống nhất cao nhất trong chính sách y tế của khu vực ASEAN hiện nay.
  
Có thể nói, Việt Nam đã phần nào đi trước khu vực nhờ tăng đều độ phủ bảo hiểm y tế trong suốt những năm 1990. Với Luật Bảo hiểm Y tế ban hành năm 2008, Việt Nam đã hợp nhất các chương trình bảo hiểm y tế hiện hành, áp dụng chính sách một bên chi trả duy nhất, trước cả một số nước lớn trong ASEAN khác như Inđônêxia và Philipin. Hiện nay, không những có tới 68% dân số đã tham gia bảo hiểm y tế mà nhà nước cũng đã đầu tư đáng kể vào cơ sở hạ tầng bên cung và nâng cao năng lực nguồn nhân lực y tế trong nước để đáp ứng nhu cầu khám chữa bệnh ngày càng tăng của người dân.

Categories: Asia, Blog

What lies ahead in Vietnam’s path towards Universal Health Coverage?



This week, Vietnam will host the twelfth ASEAN Health Minister’s Meeting in Hanoi. Universal Health Coverage (UHC) is likely to take center-stage in discussions, both formal and informal, among the region’s policymakers. After all, the drive for UHC, backed by large increases in public spending to subsidize coverage, is one of the most uniting features of health policy in the ASEAN region today.

Vietnam is somewhat forerunner in the region, having steadily expanded health insurance coverage through the 1990s. Through the Law of Social Health Insurance in 2008, Vietnam consolidated existing health insurance programs and adopted a single payer design ahead of some other larger ASEAN countries such as Indonesia and the Philippines. Today, not only is 68% of the population enrolled in health insurance but significant public sector investments have also been made to the supply side infrastructure and health human resource capacity of Vietnam in order to meet the growing demand for health care.

Categories: Asia, Blog

Why Internal Devaluation is Not Leading to Export-Led Growth in Greece

Brookings Institute Blog - Fri, 09/12/2014 - 11:04

While all labor cost and competitiveness indexes somehow reflect the fall of employee compensation in Greece, reflecting the success of the Troika policy to internally devalue incomes, the revival of export-led growth anticipated by the Troika has, so far, failed to materialize.

We only need to look at wages in each sector to see that the competitive parts of the economy never suffered from excessive wages in the first place: Reducing private sector wages did little to make the Greek economy more competitive because this was never the real problem.[1] Rather, the main issue to have held back the competitiveness of the private economy centered on rent-seeking regulation that preserved oligopolistic structures in product markets, stifled competition-creating rents, and increased the cost of introducing innovations in production and supply lines, all of which would allow productive ecosystems[2] to evolve and research based innovation to increase.[3]

Ultimately, however, the failure of the internal devaluation to improve Greece’s export performance resulted from increasing costs and placing new risks and burdens on the productive economy that cancelled out any competitiveness gained from the fall in labor costs. For example, as part of the adjustment program Greece had proceeded to significantly increase excise taxes[4] on energy used in productive activities (Figure 1). After increases in energy prices for industrial use of over 60 percent since 2009, according to Eurostat data, Greece is now a country that has a unique combination of high prices in both electricity and natural gas for industrial use, as a result of the unique combination of high taxes (Figure 2) and the politically sanctioned price increases of the state-controlled dominant electricity producer.

Consequently, industry in Greece has to pay up to 80 percent more for energy than companies pay in other EU countries, meaning labor costs would have to fall 80 percent in energy intensive exporting sectors like steel (Figure 3) if competitiveness levels are to be preserved.

Given the rise in the cost of energy has been greater than the fall in wages through internal devaluation, coupled with the low intensity with which the Greek economy used salaried employment, these sectors faced a net decline in total competitiveness.  

The resulting evolution of exports in energy intensive sectors like steel and textiles is most revealing. In spite of the large fall in wages, the rapid increase in energy costs meant that exports of these commodities, price takers on the international market, plummeted (Figure 4). It is also useful to compare available data on the export performance between Greece and Portugal. Portugal, which has much lower taxes on energy prices for industry, showed a strong export performance after 2009, such as in iron and steel products (Figure 5), while in Greece the rapid rise of energy prices, after all taxes are added, coincided with a stagnation of the related exports after the lag of existing contracts is taken into account. Available data for textiles and apparel shows a similar picture: the sector added significantly to the strong export performance of Portugal, whereas in Greece in the wake of the energy price increases the sector effectively ceased to exist and exports were all but eliminated. These two sectors largely account for the stagnation of Greek non-fuel exports, both as an absolute measure and when compared for example with countries like Portugal (Figure 6), and thus exemplify the failure of the implemented policy mix. 

At the same time, the increasing cost of financing corporate loans[5] in Greece (Figure 7) further undermined the so-called aim for an export led recovery.

The reluctance of the Greek government to adhere to the agreed reform agenda raised the risk of Greece’s exit from the euro area; this risk was pushed entirely on the productive sector in the form of restricted and expensive financing, putting Greek companies at an acute and persistent competitive disadvantage. The high cost of money and the need to deleverage corporate balance sheets created an uneven playing field in export markets as companies within the euro area were facing a fraction of the costs Greek companies were facing.[6]

 If Greece is to benefit from an export-led recovery, policymakers need to tackle all these bureaucratic obstacles and implement progressive structural reforms in critical sectors such as the energy sector. So far, by increasing costs, they have only succeeded in putting sand in the wheels.

[1] Interestingly, the facts here presented are not taken into account in the work of key opinion influencers that comment on the weak performance of Greek exports, like Cinzia Alcidi and Daniel Gros, Why is the Greek economy collapsing? A simple tale of high multipliers and low exports (Brussels: Centre for European Policy Studies, 2012), and U. Böwer, V. Michou and C. Ungerer, The Puzzle of the Missing Greek Exports. Economic Papers 518 (Brussels: European Commission Directorate-General for Economic and Financial Affairs, 2014). 

[2] Existing loans up to 1 million euros. ECB data. 

[3] See T. Pelagidis and M. Mitsopoulos, Greece. From Exit to Recovery? (Brookings Institution Press 2014), Chapter 2.

[4] M. Mitsopoulos, “Manufacturing, Competition and Business Environment. Removal of Obstacles—Opening to International Competition.”, in C. Gortsos and M. Massourakis, eds., Competitiveness for Growth: Policy Proposals (Athens: Hellenic Bank Association, 2014).

[5] See T. Pelagidis and M. Mitsopoulos, Greece. From Exit to Recovery? (Brookings Institution Press 2014), Chapter 3.

[6] The reading of Eurostat data on energy prices, which include data on excise taxes, has also led to inaccurate conclusions in many cases. The reason is that large industrial energy consumers in most European countries reach individual agreements with energy suppliers, and these agreements include, among others, highly reduced tariffs and special agreements on how to manage operations during times of high energy demand in the system. The prices of these agreements are considered industrial secrets, and are thus not revealed and therefore they do not affect the data published by Eurostat, even though in many countries such agreements cover over 50 percent of industrial energy consumption. In Greece, on the other hand, all consumption of energy is priced at the officially set prices published by Eurostat.

Authors         
Categories: Blog

Hutchins Roundup: Health Care Spending by State, How Unemployment Benefits Impact Joblessness, the Beige Book

Brookings Institute Blog - Thu, 09/11/2014 - 11:00

What’s happening in fiscal and monetary policy right now? The Hutchins Roundup is a new feature from the Hutchins Center on Fiscal and Monetary Policy to help keep you informed on the latest research, charts, and speeches. Sign up to have the Hutchins Roundup delivered to your inbox, or email us with your suggestions for items to include in the next Roundup.

Variations in state-level health care spending don’t tell us much about quality 

In a new paper for this week's Brookings Panel on Economic Activity (BPEA), Hutchins' own Louise Sheiner finds that geographic variation in health care spending can largely be accounted for by underlying health characteristics of states. This finding is counter to one suggested by researchers at Dartmouth and elsewhere that attributes the variation in spending to differences in efficiency or quality. Sheiner’s paper is one of six new BPEA papers now available on the Brookings website.

Extended unemployment benefits have a modest impact on the unemployment rate

Regis Barnichon of the Universitat Pompeu Fabra and Andrew Figura of the Federal Reserve Board find that over the past 35 years emergency and extended unemployment benefits have had only a small impact on the unemployment and participation rates in the United States. According to their findings, extended benefits increased the unemployment rate by only one-third of a percentage point during the Great Recession and had next to no impact on the participation rate.

The Beige Book remains a useful tool 

Using data collected from businesses in a survey conducted in conjunction with gathering anecdotes for the Federal Reserve’s Beige Book, the Federal Reserve Bank of Chicago has constructed an index to illuminate current and future economic conditions—particularly at the regional level. 

Chart of the Week

In the aftermath of the Great Recession, Americans are more pessimistic about the future.

 

Quote of the Week: Wholesale short-term funding remains a risk 

We believe that more needs to be done to guard against short-term wholesale funding risks. While the total amount of short-term wholesale funding is lower today than immediately before the crisis, volumes are still large relative to the size of the financial system. Furthermore, some of the factors that account for the reduction in short-term wholesale funding volumes, such as the unusually flat yield curve environment and lingering risk aversion from the crisis, are likely to prove transitory.” – Daniel K. Tarullo, member, Federal Reserve Board

Authors         
Categories: Blog

Health Spending Rebounds from First Quarter, but No Evidence of Any Changes in Recent Trend

Brookings Institute Blog - Thu, 09/11/2014 - 09:44

Health spending rose 13 percent at an annual rate in the second quarter, after having declined about 7 percent in the first quarter, according to today’s release of the Census Bureau’s Quarterly Services Survey (QSS).   Smoothing through the quarterly gyrations, health spending continues to rise at a subdued pace.  Many analysts had been expecting health spending to pick up sharply, both because of the continuing economic recovery (which is expected to affect health spending with a lag) and because of the potential surge in demand for health care coming from the millions of newly insured Americans under the ACA.  But so far, the data don’t show it. 

The same story is true of health prices.  Health price inflation, which has typically exceeded overall inflation by a wide margin, has been muted in recent years, and the most recent data suggest no change in that trend.

Taken together, today’s data from the QSS and the recent data on prices suggest that the Bureau of Economic Analysis will revise its estimate of inflation-adjusted health spending growth in the second quarter to about 4.5 percent , up from the modest 0.5 percent they estimated prior to the QSS release.   In itself, this could lead to an upward revision in GDP growth of up to 0.5 percentage point.

Authors         
Categories: Blog

Obama’s Plan for ISIS: A Slippery Slope Enabling U.S. Partners

Brookings Institute Blog - Thu, 09/11/2014 - 07:51

During President Obama's address to the nation last night, he displayed decisiveness and conviction in laying out the American strategy for addressing the growing regional and national security threat presented by the Islamic State of Iraq and the Levant (ISIL). Gone was the equivocation of last Thursday when he shocked some foreign policy experts by telling reporters "we don't have a strategy yet."  

His four tenet plan calls for increased support to Iraq forces on the ground through additional U.S. airstrikes, the deployment of an additional 475 servicemen to support training, intelligence and logistics requirements, a commitment to draw on the nation's "substantial counterterrorism capabilities to prevent ISIL attacks" and a promise to continue support of humanitarian efforts for innocent civilians displaced by ISIL. The president reaffirmed U.S. commitment to lead a broad coalition of regional and non-regional partners against this terrorist threat and cited recent examples of American leadership roles in addressing the Russian incursion into Ukraine and the Ebola outbreak in western Africa.

He was resolute in his promise to hunt down terrorists wherever they are, making it clear that this includes territories in Iraq as well as Syria. Perhaps his strongest statement was the promise that if terrorists threaten America, they will find no safe haven. The president also took special care to point out that the servicemen who will deploy to Iraq "will not have a combat mission."

For a soldier, it is counterintuitive to enter a declared theater of conflict with a mindset that is anything short of combat-focused. Regardless of how policy language is crafted, it will be difficult to put the American public at ease regarding this emerging mission. Nearly 500 servicemen and women will deploy to Iraq to conduct "non-combat," enabling operations with Iraqi forces. It is a slippery slope to assume that U.S. personnel on the ground can neatly excise themselves from the risks that are inherent in the combat theater. Their force protection becomes not only a priority, but an attractive vulnerability to an enemy whose fundamentalist appeal grows in direct proportion to the brutality of their tactics.

By declaring that U.S. personnel will not have a combat mission, we risk increasing the stakes for their success and increasing the burden of their mission by ensuring that force protection will override every other concern. A chief aspect of partnership in any alliance is sharing the risk with the partner; this will be difficult to achieve given the president’s promise to keep these service personnel out of combat operations.

The president closed his remarks by acknowledging the inherent risks of military service and the precarious nature of the mission these personnel will undertake. It remains to be seen whether or not our servicemen and women can accomplish this mission without once again firing shots in anger on Iraqi soil.

Authors
  • John R. Evans
Image Source: © POOL New / Reuters         
Categories: Blog

Kohn Sees Eventual British Rate Hike as Test of Macroprudential Tools

Brookings Institute Blog - Thu, 09/11/2014 - 06:17

Central banks’ impeding exit from unconventional monetary policies will test new macroprudential policies that were crafted after the global financial crisis, said Donald Kohn, Robert S. Kerr Senior Fellow at Brookings and a member of the Bank of England’s Financial Policy Committee.

Speaking in London Thursday to the British Bankers Association, Kohn expressed confidence that Britain’s financial system is sufficiently strong that it won’t be an impediment to the Bank of England’s Monetary Policy Committee raising interest rates from current low levels when the time comes.

“But exit is not without its risks and dangers,” he said, “especially after a long period of very low interest rates and low market volatility…The question is whether  the long period of low rates and low volatility has led to a mispricing of risks through reaching for yield, herding or other types of behavior.”

Kohn listed three types of risks that might be mispriced:

  1. Credit risk: the possibility that business and household borrowers will have trouble repaying loans when interest rates rise.
  2. Interest rate risk:  the possibility that financial institutions may have taken on more interest rate risk “than they will be easily be able to cope with as rates rise,” such as trades that will lose money when short-term rates rise.
  3. Liquidity risk: the possibility that market participants may not be able to get out trades and positions in “a timely and predictable way.”

“Never before have the monetary authorities engaged in the sorts of unconventional policies that have been widely utilized over the past six years,” Kohn said. “So none of us has any experience with the asset price movements….that could occur as they are exited.”

 “Most likely all will go well,” he said. “Unconventional policies will be unwound with only the sorts of gains and losses that usually accompany policy shifts and don’t threaten financial stability. But this is an unusual challenge for both the authorities—including new macroprudential authorities like the FPC—and the private sector. One that we must get right.”

In an earlier speech in Athens, Kohn said he favors using regulatory policy—as opposed to higher interest—to counter emerging financial stability risks wherever possible.  “But,” he said, “we need be aware of the current limits of our knowledge of the effectiveness of macroprudential policy. It is untested…in the highly developed financial centers of global integrated markets; international cooperation and coordination will be required.”

Kohn, a former vice chair of the Federal Reserve Board, is affiliated with the Hutchins Center on Fiscal and Monetary Policy at Brookings. 

Authors         
Categories: Blog

Is It Necessary to Destroy Iraq to Save It?

Brookings Institute Blog - Wed, 09/10/2014 - 19:10

As the forces of the Islamic State consolidate power in Syria and threaten to expand further in Iraq, President Obama is proposing a cautious but serious plan to push it back. In general terms the president’s approach – reforming the Iraqi government, building up national and local military forces like Sunni tribes and Kurdish militias, working with allies and using limited force in both Iraq and Syria – may be the most realistic option out there. With dedication and some luck, a Somalia and Yemen type approach may move things forward and at least degrade the Islamic State. Yet many of the necessary steps the United States must take to save Iraq from the Islamic State and disintegration work against the longstanding U.S. objective of a secure Iraq that is friendly to the West and has its territorial integrity intact.

One U.S. effort is to increase federalism. By devolving power to the regional level, both Sunnis and Kurds will have more rights and feel less threatened by the Shia-dominated central government. However, such a shift increases their power relative to the central government and strengthens the separate identities of these groups. This makes Iraq less cohesive and, should problems arise in the future, they will be better able to oppose the central government.

Helping the Kurds help themselves militarily poses similar dilemmas. The Kurdish "peshmerga" suffered some significant defeats at the Islamic State’s hands, but it still remains one of Iraq’s better fighting forces. With the help of U.S. airpower, the Kurds have reversed Islamic State gains in parts of Iraq, and by arming and training the Kurds, the United States can make them more effective. But the Kurds, who have long flirted with independence, will demand more support from Baghdad as the price of their cooperation, and their greater power will make them more able to declare independence in defiance of Baghdad. The Kurds also may take territory in mixed-populated areas, displacing Sunni Arabs whom the Kurds regard as interlopers.

A coup is another risk. The government of Haidar al-Abadi, with all its flaws, does at least have some shreds of popular legitimacy. But by building up military forces, the United States risks creating strongmen who have more credibility than elected politicians and can threaten force to increase their political influence or even seize power for themselves.

Finally, the United States will further empower Iran in Iraq. Although actual on-the-ground coordination is unlikely, Tehran and Washington share an enemy in the Islamic State. For now, Iraq needs all the help it can get and Iran, unlike the United States, is more willing to put its forces at risk on the ground. And because the United States favors working with Sunnis and Kurds, while Iran prefers that its Shia allies advance, Iran’s help will be especially welcome by the Abadi regime.

Such tradeoffs are inevitable: not acting would leave Iraq even worse off. Yet the Obama administration should realize that even if its plan succeeds in staving off the threat from the Islamic State, Iraq will face a host of troubles, some of them worsened by the anti-Islamic State effort. If U.S. policy is to succeed in the long-term, it must recognize these risks and adjust accordingly in the years to come. This is going to be a long slog.

Authors Image Source: © Ahmed Jadallah / Reuters         
Categories: Blog

Obama Changed His Mind about Syria, Now He Needs to Explain Why

Brookings Institute Blog - Wed, 09/10/2014 - 12:40

Editor's note: William McCants details what should be included in President Obama’s speech tonight on defeating the Islamic State in Syria and Iraq (ISIS). He suggests the president be clear on the threat posed by ISIS and realistic about the difficulty of destroying them, and explain how to prevent similar groups from emerging in the aftermath of their defeat.

A year ago today, President Obama addressed the American public. In his speech, the president explained why the United States should attack Syria to punish its ruler for ignoring Obama’s warning not to use chemical weapons. But a war-weary American public balked and the president ultimately decided against military action. Today, the president is again going to argue for military action inside Syria and this time the American public supports him. But instead of initiating attacks on a sovereign state, we contemplate extending a weeks-old war against an insurgent pretender to statehood.

The Islamic State has been around for a while and, despite sharing the global jihadi ideology that calls for the destruction of the United States, the president and the American public were not too worried about it previously. What changed the president’s calculations and those of the public are the Islamic State’s actions this summer. The group took over large swathes of territory in Iraq, prompting the president to launch airstrikes to halt their advance on the capital of our allies in Baghdad. When the group responded by beheading American journalists, American support for military action against them soared.

President Obama may have the wind at his back now but the fight against the Islamic State will be a long one, which means public support for it will wane. To ensure the public continues to support the war on the Islamic State, here is what Obama should do tonight:

1. Level with the American people about the nature of the threat.

The Islamic State threatens our allies in the Middle East, not the United States. As the president and his intelligence chiefs have said, the Islamic State has not yet targeted the United States. Even if it did, the group would have an awfully hard time getting past our defenses. Our defensive measures are much stronger than they were on 9/11, and there is an ocean that separates us from Europe and Asia, making it much more difficult for would-be attackers to enter this country undetected. In contrast, the Islamic State and other Sunni rebels nearly overthrew the government in Baghdad and they operate close to the borders of Jordan and Saudi Arabia, two of our closest allies in the region whom we have pledged to protect.

2. Emphasize how hard it will be to actually destroy the Islamic State.

Despite the Islamic State’s gains in Iraq, its real powerbase is in Syria, which the United States cannot destroy by airpower alone. There is no public support for putting American boots on the ground so we need a capable proxy; so far there isn’t one. We could build a proxy out of existing rebel forces, something Obama has been reluctant to do because of extremists in their midst. Or we could build a new force from scratch outside Syria, which would take years. Either way, we are committing ourselves to a long, expensive war waged by brutal men on our behalf.

3. Explain how we make sure it won’t happen again.

Assad’s counterinsurgency, our Gulf allies’ intramural competition, Turkey’s insouciance to militants crossing its border into Syria and outside private donations to extremists all contributed to the rise of the Islamic State. Obama will need to put forward a plan, even in rough outline, of how the administration will ensure another group doesn’t take its place once the United States and its allies get rid of it.

Whatever President Obama says, he will not be able to sway the skeptics who are against military intervention in Syria. But since he was once among their number, he should at least make a convincing case for why he changed his mind.

Authors Image Source: © Kevin Lamarque / Reuters         
Categories: Blog

What's Missing From The Islamic State Discussion

Brookings Institute Blog - Wed, 09/10/2014 - 07:53

The swift and alarming rise of Islamic State’s self-proclaimed “caliphate” across portions of Syria and Iraq has justifiably led to bipartisan calls for a strong American military response. Sadly, Islamic State represents just one of the escalating security challenges unfolding this summer. Russian-stoked armed conflict in Ukraine, extremist and militant violence in Libya and Nigeria, escalating tensions in the South China Sea and a serious Ebola outbreak in Africa threaten stability, order and economic prosperity across the globe.

American Political Gridlock

Not since 9/11 have leaders in both parties and in Europe been more galvanized to face these emerging threats through a combination of bold American leadership, diplomacy and coalition building, and of course U.S. military forces. But despite general bipartisan consensus for action, the Department of Defense remains ironically saddled with the devastating 2011 Budget Control Act, or “sequester.” These budget cuts are denying the armed forces the resources needed to sustain global readiness as well as the capital and research and development investments required for continued technological superiority in an increasingly networked and advanced world.

To be fair, Congress passed limited near term defense budgetary relief in late 2013, and both the president and House Republicans have offered plans to modestly increase defense spending above sequestration levels as part of the 2015 budget process. The congressionally-appointed National Defense Panel, chaired by General John Abizaid (Ret.) and former Secretary of Defense William Perry, concluded that budget cuts have “precipitated an immediate readiness crisis” across the Department of Defense, and that the proposed 2015 increases “are nowhere near enough to remedy the damage which the Department has suffered and enable it to carry out its missions at an acceptable level of risk.”

European Economic Woes

The state of readiness among our NATO allies is arguably much worse. NATO Secretary General Anders Fogh Rasmussen has appropriately characterized the Russian aggression in Ukraine as a “wake up call,” adding that “it is now obvious we cannot take our security for granted, and we will have to invest more in our defense and security.” European leaders responded at last week’s NATO summit by agreeing, at least in principle, to increase member defense spending to 2 percent of GDP over the next 10 years. At present, only the United States, United Kingdom, Greece and Estonia are achieving this goal. 

With several major European economies still struggling with weak growth, stubbornly low inflation, aging populations, large debt loads and associated austerity measures, it is unlikely that modest increases in security spending will be achievable in the medium or long term without significant structural reforms.

Rising Entitlement Spending: A National Security Threat

While the economic recovery and associated national fiscal outlook is somewhat more promising in the United States, domestic structural reforms are also needed. The current state of defense funding is indicative of a much broader failure across government to address the nation’s most pressing fiscal challenges. Although defense spending constitutes by far the largest portion of the federal discretionary budget, it pales in comparison to the drivers behind the nation’s long term fiscal woes: the rising costs of Medicare, Medicaid and Social Security. Political posturing continues to keep any meaningful discussion of entitlement reform off the table, and Congress and the president are left instead to target vital discretionary programs for more politically expedient savings.

As the events of this summer have shown, demands for U.S. military power are dynamic and unpredictable. Sustaining the readiness and capabilities needed to prevent and respond to global threats like the Islamic State requires a stable and predictable commitment of significant national resources. To that end, rolling back the sequester should be an immediate national priority, as should taking strong and balanced action to address the most important long-term national security imperative facing this and future generations: the rising cost of entitlements. If not now, when?

Authors
  • Jason Tama
Image Source: © Youssef Boudlal / Reuters         
Categories: Blog

U.S. Monetary Policy: 3-2-1, Interest Rate Liftoff!

IMF blog - Tue, 09/09/2014 - 22:40

By Francesco Columba and Jarkko Turunen

(Versión en español)

photo: Patrick H. Corkery/DoD/Sipa USA/Newscom

After more than five years of exceptionally low interest rates, the U.S. Fed is getting closer to the point of managing a liftoff of policy interest rates from close to zero. As of today, liftoff is expected to take place by around mid-2015.

But this is not set in stone. The Fed has repeatedly emphasized that the timing will depend on the state of the U.S. economy. If things look better, policy rates may increase earlier. Conversely, weaker than expected data may well mean that interest rates will move up later.

In our view, based on our most recent economic projections, there is some scope for policy rates to stay at zero for a little while longer than mid-2015, given the remaining slack in the labor market and still low inflation.

Moving onto the launchpad

Although the Fed has to deal with multiple areas of uncertainty, the decision of when to move monetary policy onto the launchpad depends on two main factors:

First, how much “labor market slack” there is in the economy. The unemployment rate has declined faster than anyone had expected even a year or so ago. It stood at 6.1 percent in August, which suggests that the economy may soon hit the speed limit created by labor force constraints (see Chart 1). Short-term unemployment is even lower—at 4.2 percent—and below its long-run average. However, there are still almost 3 million Americans who have been jobless for at least 27 weeks, more than 7 million part-timers that would like to work more, and close to 2 million others that have stopped looking for work. This points to more slack in the labor market than the headline unemployment numbers would suggest. At current rates of job growth, it may take 3 or 4 more years for the economy to fully absorb these workers.                   

     

Second, to what extent this slack translates into future wage and price inflation. The Fed’s preferred measure of inflation has been moving up (personal consumption expenditure inflation was 1.6 percent in July) but is still well below the Fed’s 2 percent target. Also, there is little sign of a concerted increase in wage costs, particularly when measured alongside productivity (see Chart 2).

Taken together, this means the Fed can remain patient before proceeding with the countdown toward higher policy rates. 

The dark side of the moon 

At the same time, keeping policy rates at zero raises the likelihood that financial markets get ahead of themselves and investors start to over-reach. Nobody wants to repeat the financial excesses that led to the Great Recession. Concerns about financial stability may tilt the balance in favor of raising rates sooner rather than later.

Indeed, there are some vulnerabilities developing in various parts of the financial system and in some sectors, such as lower-rated corporate debt that account for a bit less than a quarter of the corporate bond market, valuations appear stretched, and issuance has been brisk (see Chart 3). The authorities are also monitoring developments in the leveraged loan market and are working to enhance the effectiveness of supervisory guidance as underwriting standards deteriorate.

Linked to the potential frothiness of credit markets, we are also seeing asset managers increasingly investing in some of the riskier and less liquid credit markets. An unexpected reassessment of when and how fast the Fed will raise interest rates or an abrupt unwinding of investors’ current high tolerance for risk could well lead to a rush for the exits and a sudden re-pricing of assets. This would almost certainly have macroeconomic costs both in the United States and abroad.

There is scope to tackle these risks now with macroprudential policies. For example, there could be more demanding underwriting standards for banks that extend intermediate leveraged loans, regulators could tighten the limits on large exposures to riskier assets, prudential rules could be made tougher for regulated entities that hold riskier assets, and actions could be taken to address the mismatch between the liquidity promised to fund owners in good times and the ability of asset managers to provide liquidity in times of stress.

Overall, our current assessment is that monetary policy should remain committed to achieving the Federal Reserve’s mandate of price stability and maximum employment, while macroprudential policies should be the first line of defense against financial excesses, which can threaten systemic stability.

Ground control to Major Tom

Timing is everything—but so is communication. Certainly, for NASA, the key to a successful mission is highly dependent on a functioning system of communications. The same is true for the Fed’s efforts at guiding the economy onto a stronger growth path. The Fed’s communications toolkit should continue to evolve, as it has done, to update Wall Street and Main Street about how it views the evolution of the economy toward its objectives of full employment with price stability. This could involve more frequent press conferences, a regular monetary policy report that gives the Fed policymakers’ majority view on the outlook, and providing clarity about the role of financial stability in monetary policy decisions.

All in all, timing the liftoff is a tough call to make. It will, inevitably, depend on how well the U.S. economy does in the next several months. While there are tangible risks, we remain optimistic that a solid period of economic growth ahead will facilitate a Fed interest rate lift-off.


Categories: Blog

Why Education Policies Matter for Equality

IMF blog - Mon, 09/08/2014 - 07:51

By Era Dabla-Norris

Much of the debate on inequality focuses on its deleterious social and political effects and its impact on growth. But an equally important issue is what policies play a clear role in reducing income inequality.

The results of our new study suggest that improvements in education—even more than factors such as government expenditure or financial sector development—have contributed in an important way to reducing income inequality within countries.

Growth-equality nexus

In our study, we first explore whether a country’s income distribution becomes more equal as it grows richer—a question that has intrigued economists as far back as Simon Kuznets. Is income inequality reduced as countries grow more prosperous? Does this relationship depend on the country’s stage of economic development? What factors affect it?

Examining historical data, we found that increased prosperity, on average, leads to lower inequality. A one percent increase in GDP per capita reduces the Gini coefficient—a measure of income inequality that ranges from 0 for perfect equality to 1 for absolute inequality—by around 0.08 percentage points.

Further, we found that growth in a country’s GDP boosts the relative income share of the poor and the middle class at the expense of the richest 20 percent. In other words, not only do the poor and the middle class benefit from growth, they actually benefit proportionately more than the rich. These results hold true across regions and across different stages of development.

We tried to pinpoint exactly how increased prosperity helps reduce inequality. We discovered that education plays a key role.  Indeed, our results suggest that education policies—particularly those that concentrate on equity and skills—can be among the most potent levers countries have to reduce income disparities over the longer term.

Role of technology

If growth reduces inequality, how does this square with the increase in labor income and earnings inequality that has been observed in many countries over the past few decades?

Technology and globalization are two possible ways to explain this phenomenon. Technological change has conferred an advantage to those adept at working with computers and information technology. And global supply chains have moved low-skilled jobs out of advanced economies, depressing prospects of workers who previously held these jobs. Even in countries to which these jobs relocate, the initial beneficiaries are often the more skilled workers.

Education matters because educated individuals are better able to cope with technological and environmental changes that directly influence productivity levels. Indeed, better education is the best policy to help countries avoid the increase in income inequality that often results from technological change and globalization.

Policy implications

So what can be done? For many advanced economies, including the United States, bringing down inequality in the future means increasing the supply of highly educated workers. Too many youth drop out of high school; too many high school graduates are not college-ready. Then there is the cost of higher education, which in the United States is prohibitively expensive for many families. These are problems that could be solved by better government policies.

In many developing countries, levels of educational attainment still remain uncomfortably low, with access to even basic education constrained by market failures and inefficient policies.

While the precise focus of policies necessarily varies across countries, a number of broad areas can sketched out. Education policies that help students achieve strong academic outcomes, continue on to higher levels of education, and acquire skills needed to succeed in a globally competitive economy can foster greater intergenerational earnings mobility and help reduce income inequality over time.

In developing countries, policies that promote equal access to basic education—such as cash transfers aimed at encouraging better attendance at primary schools or spending on public education that benefits the poor—could reduce inequality by helping build human capital and making educational opportunities less dependent on socioeconomic circumstances.


Categories: Blog

Accountable Care: A Global View

Brookings Institute Blog - Fri, 09/05/2014 - 08:31

Accountable care has long been viewed as an American phenomenon, yet accountable care principles are now being applied around the globe. On September 8th, at the National Press Club, Health Affairs will host a briefing to discuss global health policy, including a recent publication demonstrating how accountable care reforms can reinforce ongoing payment and delivery changes in a diverse group of health systems. In a 2013 report, we developed a common definition and conceptual framework for accountable care based on the experiences of 10 countries. In the Health Affairs article, we illustrate global accountable care through two main examples: Ribera Salud, a public-private partnership in Valencia, Spain, and two elderly-focused programs in Singapore.

Global Challenge

Around the world, federal and regional governments are facing a common reality: medical advances and improved access to health care, coupled with higher costs to treat the chronically ill, have resulted in increasing private and public expenditures on health. The problem is that this spending increase has not necessarily resulted in comparable improvements in quality or population health.

In response, many policy makers are incorporating the goals of better quality care, better population outcomes, and lower costs into health care reform efforts. Notably, many nations, such as Singapore, the United Kingdom, and Spain, are experimenting with accountable care reforms to better align health care payments with delivery reform goals.

For the last 15 years, Ribera Salud has provided health care to residents in Valencia, Spain, with accountable care type features increasingly embedded in its financing and care structure. The local government pays a capitated fixed amount and Ribera Salud supports financial incentives to all staff members to encourage achieving established health outcomes. Recent evidence shows that outcomes of patients attributed to Ribera Salud have outpaced those of patients who see other providers and capitation costs are lower than other providers in the region. Overall, Ribera Salud patients also benefit from shorter wait times and lower readmission rates than other comparable providers in the region.

In Singapore accountable care principles are built into two programs for the elderly population: the Singapore Programme for Integrated Care for the Elderly (SPICE) that provides community care to elude the use of hospitals and the Holistic Care for Medically Advanced Patients (HOME) that provides palliative care at home. Singapore has reduced thirty-day hospital readmission rates by 40 percent, emergency room visits by 50 percent, and realized patients’ preference to die at home by 70 percent. The savings amounted to more than US$11 million.

Action Steps for Policy Makers: What Next?

Through our work, we found that many countries with a diverse set of health systems are pursuing accountable care strategies. We believe that there is a benefit to sharing experiences around accountable care to accelerate financial alignment to promote sustainability and effectiveness of other health care reforms around the world. We have distilled four recommendations that policy makers can begin or continue to implement to advance accountable care in their own health system.

Take a broader perspective than illness. Instead of solely focusing on illness and activity-based services, the health care system should focus on wellness and outcomes, placing a greater emphasis on preventative or public health services that primary care physicians can provide at the community level. This also requires a shift away from a disease based paradigm to a holistic health paradigm that values social and behavioral care. To accomplish this objective, policy makers can: realign funding streams, establish outcomes relevant for all stakeholders, foster data transparency and interoperability, create team-based care, increase competitiveness and refine treatment protocols.   

Start to pay for outcomes. The shift away from an activity-based payment model to a person-centered approach involves rewarding outcomes rather than the volume of services. This movement does not have to be abrupt; it can be accomplished in incremental steps. An initial step could be a modest risk transfer to providers, with a subsequent change to risk sharing and partial or full capitation. Policy makers could also begin by establishing episode-based models for measuring quality, outcomes and resource use for specific diseases.

Create a favorable environment for collaboration. Policy makers should create a conducive environment – whether it is technological or regulatory – to exchange data and collaborate across providers. In addition to legislative changes that can ease provider collaboration and data sharing, a key factor for collaboration is strong leadership. Policy makers can support payments that promote outcome-based payments and identify a balance between competition and collaboration.

Encourage adoption of interoperable data systems. To foster multi-provider collaboration, policy makers need to integrate health information systems and aim to ensure interoperability across electronic health records. This is necessary for real-time data sharing. Policy makers can begin small by focusing on specific patient registries that track preventable complications. Ultimately, policy makers need to ensure that there is a balance between keeping personal health records private and enabling an environment for data sharing and collaboration.   

Authors Image Source: Sean Locke         
Categories: Blog

Back-to-School Blogs

IMF blog - Thu, 09/04/2014 - 11:10

By iMFDirect

As you trudge back to the office or cubie with a little sand still crunching in your backpack, you know the holiday is over. To help you catch up, here are some blogs to re-read to get you back into the swing of things.

Remember Europe? I thought so. The European Central Bank is center stage this week as inflation in Europe has hit a trough, which reminded me of our blog about deflation back in March that rattled a few cages.

Which brings us to what will or won’t happen with global interest rates, and their impact on well, pretty much everyone. We’ve analyzed the tea leaves so you don’t have to.

New rumblings in emerging market economies mean it’s probably a good idea for you to have another look at who owns emerging market debt. Just in case.

It’s hard to think about emerging markets without taking a close look at China. The size of China’s economy has a huge impact on many countries. Period.

And speaking of other countries, growth in low-income countries is on the move in ways you might not have expected.

All of this matters because we’re trying to better understand the links between rising inequality and economic growth.

As the days grow shorter and the soon-to-be autumn leaves fall like U.S. interest rates since the crisis, stay tuned for lots more blogs including about our next issues of the World Economic Outlook, Global Financial Stability Report, Fiscal Monitor and all the action from the IMF’s Annual Meetings in October.


Categories: Blog

Hutchins Roundup: CBO Estimate May Be Too Optimistic, Secular Stagnation, the Recovery Act, and More

Brookings Institute Blog - Thu, 09/04/2014 - 06:24

What’s happening in fiscal and monetary policy right now? The Hutchins Roundup is a new feature from the Hutchins Center on Fiscal and Monetary Policy to help keep you informed on the latest research, charts, and speeches. Sign up to have the Hutchins Roundup delivered to your inbox, or email us with your suggestions for items to include in the next Roundup.

Is CBO Estimate Too Optimistic About Growth?

In this NBER working paper, Northwestern University’s Robert Gordon projects that the growth in the gross domestic product will average 1.6 percent per year from 2014 to 2020, 0.6 percentage points below the CBO’s estimate of 2.2 percent.  Gordon’s less optimistic projections imply a baseline debt-to-GDP ratio of 87 percent in 2024, significantly higher than the CBO’s 78 percent projection.

Secular Stagnation: A Self-Inflicted Wound

In a chapter of a VoxEU e-book, Barry Eichengreen of the University of California, Berkeley outlines the competing theories of secular stagnation, concluding that the recent slowdown in growth is not due to slowing rates of innovation or a lack of attractive business investments, but rather to the lack of infrastructure and education investment and a failure to reintegrate the long-term unemployed into the labor market by boosting aggregate demand.

The Recovery Act Created or Saved Three Times More Government than Private Jobs

Using reports from those who received grants, loans or contracts from the 2009 American Recovery and Reinvestment Act, Federal Reserve Bank of St. Louis economist Bill Dupor finds that 516,000 of the 682,000 jobs created or saved in the first year of the Recovery Act were government jobs.

Chart of the Week

Under current law, CBO expects federal tax revenues to increase, driven by higher individual income taxes.

Financial Regulators Have “Learned our Lesson”

"The global financial crisis was, to a large extent, driven by an oversized and overleveraged financial sector whose risk-creating capacity was left unchecked by regulators and supervisors. We believe that we have learned our lesson and the recent flurry of policy initiatives reflect, in large measure, our new understanding of the destabilizing role of an oversized financial sector."  --Benoît Cœuré, Member of the Executive Board of the European Central Bank

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Categories: Blog

In Mozambique—and In Africa—Rising Requires Resilience

IMF blog - Wed, 09/03/2014 - 08:36

By Doris Ross

Three months ago African leaders and policymakers assembled in Mozambique under an “Africa Rising” banner to assess the continent’s strong economic performance. But while the outlook for the continent remains strong, individual countries have faced problems and the uncertain global outlook continues to pose risks. Against this backdrop, what are the policies that Africa should pursue to sustain the positive momentum for the continent?

In reality, Africa Rising has never been about unbridled optimism; it has been a tale of strong growth tempered by serious challenges. And rising in economic terms is as much about sustaining expansion as about the dimensions of growth itself. The extended process of African development also requires increased resilience to shocks, and it is this resilience that may be tested by economic problems in some African nations.

Strong growth—and increased resilience—were the focus of the Africa Rising conference organized in May by the IMF and the government of Mozambique in Maputo. The nearly 1,000 officials, corporate executives, civil society representatives, and journalists who gathered for the two-day event discussed the difficult issues that must be addressed if Africa is to maintain its upward trajectory of the past two decades.

Parallel issues

These issues have parallels across sub-Saharan Africa as each country pursues its own path to development. It is by examining individual countries in detail that we gain a clearer understanding of what has been achieved and what remains to be accomplished. For this reason, the IMF African Department compiled a book on Mozambique called Mozambique Rising: Building a New Tomorrow, which is available in English, French and, most recently, Portuguese.

The book examines Mozambique’s macroeconomic accomplishments, from its emergence from civil war in 1992 to its current efforts to build on discoveries of massive reserves of coal and natural gas. But it also describes the myriad of challenges that must be addressed if the country and its people are to achieve their potential.

Mozambique’s immediate priorities are to share the benefits of two decades of strong growth more broadly, and to shepherd the economy through the transformation from a traditional agricultural base to one centered on mining, agro-business and processing, and services.

As the book makes clear, reaching these objectives will require continued institutional and capacity building in public administration to further improve the foundations and structures of economic policymaking and governance, and adapt them to a fast-changing world. It will also require further efforts to create an environment conducive to private sector development since this will need to be the primary source of future employment. It also calls for the government to work with small and large enterprises to make Mozambique more business friendly and competitive.

Natural resources

As with several other emerging African nations, Mozambique’s future is inextricably tied to the development of natural resources and foreign-financed megaprojects that are capital intensive and export oriented. There is no doubt that these projects will make a significant contribution to growth, but so far they have generated only limited employment opportunities and government revenues. To fully benefit from this strategy Mozambique will require a more dynamic business climate and changes to its tax regime.

Resource development also requires substantial changes to the formulation of fiscal policy. Mozambique’s resource revenues, while modest to date, are likely to become sizable in a few years, thus affording a unique opportunity to close infrastructure gaps, invest in priority sectors such as health and education, support more inclusive growth, as the economy radically transforms. However, capacity constraints seem high, and the pace at which resource wealth is anticipated and used should be gradual.

To reap the full returns on scaled-up public investment, reforms would also need to enhance the efficiency of investment through strengthened investment planning and coordination; project assessment, selection, and monitoring; better governance; and provision of complementary infrastructure.

Social protection

There are many other challenges, not the least of which is inclusive growth. While poverty in Mozambique has fallen significantly, a 2009 household survey showed that overall poverty rates had stagnated since 2003 at around half the population. Policies to ameliorate this have focused on improving agricultural productivity; creating jobs through improvements in the business environment and training; developing more focused and better designed social protection programs; and preserving macroeconomic stability.

However, work remains to be done to refine policy priorities, derive policy actions and sequencing, and measure results. Also, policy coordination to ensure accountability has been lacking in areas that cut across ministerial jurisdictions, and there are significant data gaps that weaken analytical capacity and thus the basis for policy decisions.

All of these issues raise questions about how fast and how high Mozambique can rise, but at the same time they point the way to the policy path that could transform the country to realize its tremendous potential.


Categories: Blog
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