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Five Reasons Why India Will Welcome Putin

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

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

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

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

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

Defense

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

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

Energy (and Economics)

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

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

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

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

Global and Regional Issues and Institutions

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

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

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

China

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

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

Diversification

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

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

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

Conclusion

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

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

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

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

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

Emerging Markets & Volatility: Lessons from the Taper Tantrum

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

By Ratna Sahay and Preya Sharma

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

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

Reading the taper tantrum tea leaves

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

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

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

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

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

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

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

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

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

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

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

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

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


Categories: Blog

Three Breakthrough Agreements Will Underpin the Post-2015 Global Agenda

Brookings Institute Blog - Tue, 12/09/2014 - 07:25

Last week U.N. Secretary-General Ban Ki-moon issued his long-awaited report, “The Road to Dignity by 2030.” The report frames the beginning of the end-game for negotiations in 2015 on what will replace the Millennium Development Goals (MDGs). It suggests six “essential elements” as a way of simplifying and communicating the 17 goals and many dozen targets recommended by the intergovernmental Open Working Group (OWG).

While many observers hoped the text would somehow prioritize and slim down the comprehensive package crafted as a political compromise by the OWG, Mr. Ban welcomed the outcome and took “positive note” of the General Assembly decision to make it the basis of negotiation. In addition to giving prominence to themes such as justice, dignity and prosperity, he also presents a strong message on the need for a new and ambitious financing strategy that takes note of the business sector’s potential for a more developed monitoring and accountability structure compared to the MDGs. Many countries appreciated the secretary-general’s approach in their first official responses. The months ahead will see how they carry forward the various elements, goals, and targets.

Amidst the policy complexities, it is worth stepping back to consider the nature of the most fundamental high-level political agreements essential to advancing the agenda.  As a reference point, the Millennium Development Goals were set in 2000, but only came to life after the March 2002 Monterrey Consensus forged two overarching global deals. One was the agreement that markets are the driver of long-term economic growth, and public sectors have a responsibility to support them. This resolved a decades-long battle over the role of state versus markets. The other was an agreement that developing country governments have primary responsibility for their own destiny, but the poorest countries need active support from the richest countries in order to meet major development goals.

Similarly, over the coming year, the sustainable development agenda can be boiled down to the need for countries to converge around three breakthrough global political agreements. 

The first breakthrough agreement is to provide every human being with the minimum basic services required to permit them to participate in and benefit from globalization. These minimum standards—which have been described elsewhere as “leaving no one behind” and “global social floor”—would provide dignity for all, end extreme income poverty and hunger, provide minimum levels of schooling and healthcare, and ensure access to basic infrastructure services like energy, water, road transport and bank accounts. They would eliminate the most pernicious forms of exclusion. They imply a new global social contract based on meeting people’s needs and aspirations, not those of countries.

The second breakthrough agreement is a new global approach to infrastructure—one that ramps up the investments required to boost prosperity, ensure resilience, and reduce global carbon emissions.  In dollar terms, infrastructure investments—to build planet-friendly energy networks, transport systems, information highways, and urban habitats—require the most financing in the global sustainable development agenda, estimated at roughly $3 trillion a year in developing countries alone. Most, but not all, of these investments will be funded from domestic savings. Foreign savings will also need to be mobilized, but the current international development finance system falls orders-of-magnitude short in intermediating foreign savings and long-term investments in developing countries. Consider that the World Bank Group’s financing for infrastructure was just $24 billion in 2014, a drop in the bucket of what is required. Moreover, the majority of the world now lives in cities, so a huge share of infrastructure investments need to take place at the municipal level. But there is no systematic approach to helping developing countries’ sub-sovereign entities access finance.

Infrastructure is usually considered to be more a technocratic subject than a topic for global political bargains. But without new agreements at the highest political level, many countries will be unable to meet their sustainable development needs. Most pressingly, in most of the world, low-cost energy is high-carbon energy, and low-carbon remains high-cost. This must change. What can be done? Advanced countries need to develop and support the expansion of new low-carbon technologies, especially for electricity generation, transmission and distribution. They can also help prepare specific projects, as the G-20 Global Infrastructure Hub proposes to do. They can encourage the multilateral institutions they control to lend more for low-carbon infrastructure and provide more guarantees to leverage private capital. Meanwhile developing countries can take on more responsibility for funding infrastructure themselves, which is why the new BRICS bank and the Asia Infrastructure Investment Bank have been created. They can also ensure that infrastructure projects are efficiently planned, get properly used and maintained, avoid corruption, and use high environmental and social standards.

The third breakthrough agreement is about enhanced accountability among governments and industry.  There will be no legal international enforcement of the sustainable development goals so—to a vastly greater extent than under the MDGs—countries will need to apply their own specific targets to commonly identified global challenges. The secretary-general has rightly recommended regional peer reviews as one way of holding country governments accountable, but real teeth will only come from a compact between governments and their own citizens.

Businesses, too, need to be held more accountable if the sustainable development goals are to be met. This does not have to be done in a contentious way. Major companies like Unilever and DuPont have pioneered new approaches to long-term, multi-dimensional corporate reporting that already makes management and other stakeholders aware of the social and environmental footprint of their activities.  More than 1300 companies have signed on to the Principles for Responsible Investment. From Hong Kong to Johannesburg, many stock exchanges around the world are requiring sustainability reporting from their listed companies, while U.S. regulators are asking companies to report on their sourcing of conflict minerals. Multiple pension funds, especially in Europe, have leveraged their public mandates to apply long-run environmental and social accounting standards.

It is time for a more assertive approach to business accountability. Mr. Ban asks countries to require mandatory sustainability reporting for companies, along with regulatory changes to make sure that profit-maximizing competitive behavior promotes sustainable business activities. In the simplest terms, Coca-Cola will be more willing to implement new reporting standards if PepsiCo and India’s Tata Tea do too.

There will be lots of heated debate over the shape of the post-2015 agenda in coming months. But stepping back from the details, if the process results in an agreement to establish minimum services for humanity, develop new global mechanisms for financing infrastructure, and define new accountability standards for governments and businesses, it would be a dramatic change from business-as-usual. Mr. Ban’s report challenges countries to forge fast consensus on these breakthrough areas for agreement.

Authors         
Categories: Blog

Short-Sighted Challenges to Evidence-Based Policy

Brookings Institute Blog - Mon, 12/08/2014 - 12:30

Something revolutionary is happening: Evidence-based policy is taking hold in Washington. As described in two new books – Moneyball for Government and Show Me the Evidence – the Obama administration has made a series of strategic moves to increase the use of evidence by federal agencies and state and local programs. In other words, these programs are being assessed to see if they actually work – not a common occurrence inside the Beltway. 

These efforts build on similar steps initiated in the Bush administration. First, many federal agencies are using new competitive grant programs to award funds to organizations if they adopt program models and practices (“interventions”) that have rigorous evidence of success – and then to carefully evaluate the interventions to find out if they are working and if not, to make changes to improve them. In this way, more and more federal grants will employ taxpayer dollars to support interventions that have strong evidence of success.

This approach does not address the hundreds of pre-existing federal grant programs that together spend tens of billions of dollars on interventions that either have not been evaluated or, if evaluated, have little or no evidence of success. Thus, the second element of the Administration’s strategy is to change the way these existing grant programs allocate their dollars to encourage the rigorous evaluation of existing interventions as well as innovative new interventions to grow the number that are proven effective. The goal is to use rigorous evidence to evolve these existing programs toward greater effectiveness over time.  Sound controversial?  It shouldn’t be.  But it is – because Washington tends to run on financial interests and political ideology.

A recent episode shows the challenges in making even modest improvements in grant programs in which the money has already been allocated to state or local providers.

The program in question is Student Support Services, administered by the U.S. Department of Education. In operation since 1968, Student Support Services provides academic tutoring, counseling, and financial aid information to around 200,000 disadvantaged students at about 1,000 colleges and universities once they arrive on campus. Survey data show that these students have extraordinarily high college dropout rates, so programs like Student Support Services have the potential to fill an important purpose.

The Department recently proposed a modest change in the program’s funding criteria to encourage grant applicants to adopt interventions that have evidence of effectiveness. What a concept!  As the Department’s draft notice to applicants, issued on September 29, puts the matter: “We believe that encouraging applicants to focus on proven strategies can only enhance the quality of our competitions. Accordingly … we give additional competitive preference to applications that submit moderate evidence of effectiveness that supports their proposed strategies for providing individualized counseling.” The additional preference is worth 2 additional points in an applicant’s score out of a possible 100.

As an illustrative example, such an approach might encourage grant applicants to adopt evidence-based interventions such as InsideTrack College Coaching, a mentoring program for college students that has been shown in a randomized controlled trial to increase the likelihood of college completion by 13 percent over a four-year period compared to the control group. 

Unfortunately, the Department’s modest and sensible step is being strongly opposed by the Council for Opportunity in Education (COE) – the lobbying group that represents organizations delivering interventions that support college attendance and completion by students from poor families. On October 21, the COE President issued an alert attacking the Department of Education for, among other things, reducing the weight given to incumbency of the existing grantees and “emphasizing the importance of evidence-based practices.” Really?  The notice also stated that the Department is “not seeking to partner with colleges and universities nor to recognize the expertise of educators working there.” Subsequently, the COE Vice President of Communications issued a notice for a Capitol Hill briefing entitled “New Policy Changes Threaten Continuation of Federal Program that Helps Low-Income, First Generation Students Complete College.”

Contrary to these misleading claims, the Department is not proposing to cut the program’s funding, let alone threaten its continuation. Rather, its action is designed precisely to improve the program by providing a modest incentive for grantees to adopt interventions with evidence of success. In fact, the purpose is entirely consistent with COE’s own goals of helping disadvantaged youth succeed in college and obtain a degree.

The broader lesson here is that the Administration’s efforts to advance evidence-based program reforms will face challenges from incumbent funding recipients who want program dollars to continue flowing the way they always have – with little regard to evidence about what works. For the evidence-based agenda to succeed, we need to find ways to convince program operators and their lobbyists in Washington that improving their programs based on scientific evidence is in not only in their long-run best interests but can also help ensure continued or even expanded funding. More to the point, it is in the best interests of the students they serve.

Authors         
Categories: Blog

The First Wealth

IMF blog - Mon, 12/08/2014 - 08:00

By Jeff Hayden

“The first wealth is health,” American philosopher Ralph Waldo Emerson wrote in 1860.­

Emerson’s quote, cited by Harvard economist and health expert David E. Bloom in Finance and Development’s lead article, reminds us that good health is the foundation on which to build—a life, a community, an economy.­

Humanity has made great strides, developing vaccines and medical techniques that allow us to live longer, healthier lives. Other developments—such as increased access to clean water and sanitation—have helped beat back long-standing ills and pave the way for better health.

But the story is not one of endless progress. As we went to press with our December issue of Finance and Development, the world was dealing with the worst outbreak of the Ebola virus on record, a grim reminder of our vulnerability and of the distance yet to go. And, though not often the subject of headlines, the great disparities in health—evident, for example, in the a 38-year gap in life expectancy between Japan (83 years) and Sierra Leone (45 years)—raise issues of equity and point to the need to press forward on multiple fronts.

In this issue of F&D, we’ve assembled a lineup of accomplished authors to look at global health from a variety of angles. They look at today’s health systems—the amalgam of people, practices, rules, and institutions that serve the health needs of a population—and at the economics behind them.

In his broad-ranging article, Bloom underscores the role good health plays in an individual’s or household’s ability to rise, or stay, above the poverty line. Several articles explore health care spending: Victoria Fan and Amanda Glassman examine the shift in public health spending from central governments to states and cities; and Benedict Clements, Sanjeev Gupta, and Baoping Shang take a look at whether the recent slowdown in public health spending in advanced economies is permanent.­

We offer several reports from the front lines: health ministers from Colombia and Rwanda discuss major challenges in their jobs, and the CEO of a pharmaceutical company looks at impediments to developing drugs to fight emerging diseases. Another special feature considers four major health threats of the 21st century

Elsewhere in this issue, Maureen Burke profiles 2012 Nobel Prize winner Alvin Roth, and Picture This offers insight into our increasingly urbanized world.­


Categories: Blog

The Long-Run Outlook for the Federal Budget: Do We Know Enough to Worry?

Brookings Institute Blog - Mon, 12/08/2014 - 07:38

Charts in the periodic updates of the federal fiscal outlook by the Congressional Budget Office and the White House trace the ups and downs of federal debt with a single line. The line rises sharply during the Great Recession, levels off for the next several years and then begins to turn up again. That one simple line is intended to convey the magnitude of the nation’s fiscal challenges.

In fact, that line is likely to be far off the mark. It turns on factors that are hard to predict: How fast will health-care spending climb? How rapidly will the economy grow? What will interest rates be a decade or two from now?

The White House budget office projects that, even if President Obama’s tax and spending policies are embraced by Congress, the federal deficit will be 2.3% of the gross domestic product in 2019. But based on the magnitude of its past forecasts, the budget office says there’s a 90% change that the actual deficit in 2019 will fall somewhere between a surplus of 4.6% of GDP and a deficit of 9.1% of GDP.

For the longer horizon, the Congressional Budget Office says that if productivity, interest rates, health care costs and mortality rates all break the right way (from a budget point of view, that means more people die younger.) then it will take sustained tax increases and/or spending cuts equal to 0.1% of GDP immediately to prevent the federal debt from rising as share of GDP over the next 25 years.. If they all break the wrong way, it’ll take much more belt-tightening – about 2.5% of a GDP.

There is, in short, a lot of uncertainty. “Prediction is very difficult, especially about the future,” physicist Niels Bohr supposedly said.

But given that uncertainty – the sort one can measure probabilistically and the sort one can’t – what is the right course for the federal budget? After all, there’s not much reason to worry about the size of the federal deficit today. If there’s a problem, it’s only a problem in the future.

Should we enact more spending cuts and/or tax increases now to avoid possibility fiscal catastrophe later, even if that might mean unnecessary pain? Or should we do less now and see how things, such as the pace of health-care spending, turn out?

It’s a live debate.

Erskine Bowles, who co-chaired a presidential deficit commission, has argued that waiting is dangerous. If we continue to kick the can down the road, duck the tough choices, shirk our responsibilities, then America is well on its way to becoming a second rate power,” he said a couple of years ago.

But Larry Summers, the former Treasury secretary, says that basing fiscal policy on projections longer than 10 years out is “a crazy thing to do” because “we do not know what the long-run deficit is going to be.” Better to focus on quickening the pace of economic growth now than on reducing future deficits, he says.

Politicians – and many of the rest of us – prefer our forecasts to be simple and precise. Either we have a problem or we don’t, they say.

But life isn’t that simple. There is a difference between projections that we’re pretty confident about (the number of people who will be turning 65 in 2034) and projections that are, at best, educated guesses (is the current slowdown in the pace of health spending going to persist?)

It may be human nature to prepare for things about which we’re certain. We buy hats and gloves because we know winter is coming. And it may be human nature to prepare for things when the probability of bad outcomes can be calculated, if not by us then at least by insurance companies. We buy homeowners insurance just in case a tornado blows off our roof or a fire starts in the basement. But if we really aren’t sure what outcomes are likely, we may be more likely to ignore the problem or delay acting. Perhaps that’s why consensus on a response to climate change is so elusive.

The smart way to think about and respond to uncertainty is the focus of our Hutchins Center on Fiscal and Monetary Policy conference on December 15, The Long-Run Outlook for the Federal Budget: Do We Know Enough to Worry?.

We’ve asked Alan Auerbach of the University of California at Berkeley, who has long pondered these questions, to think about how fiscal policy should respond to uncertainty. His view is that the more uncertainty about the future, the more the government should be saving now. Peter Diamond, the MIT Nobel laureate, and Charles Manski, a Northwestern University economist who has thought a lot about uncertainty, will join him in conversation.

We’ll then turn to the more practical. Are there policies we can enact now that can be undone if they prove to be unnecessary? Are there ways to build credible flexibility into today’s legislation that will automatically trigger spending cuts or tax increases in the future only if they’re necessary to meet some pre-set debt objective?

We’ve asked David Kamin, an Obama White House veteran now on the faculty New York University law school, to evaluate mechanisms that Congress might build into legislation to anticipate (as opposed to ignoring) uncertainty, such as provisions in law that are triggered only if the economy takes a turn one way or the other. To talk about the political reality and credibility of such devices, we’ve invited Rep. Jim Cooper (D, Tenn.); Gene Sperling, who coordinated economic policy in the Clinton and Obama White Houses and Bill Hoagland, a former Senate Republican senior budget staffer now at the Bipartisan Policy Center.

Finally, we’ll hold a conversation about the art and science of communicating uncertainty to politicians with two experts who have had to do just that: Doug Elmendorf, director of the Congressional Budget Office, and Robert Chote, director of the new U.K. Office for Budget Responsibility.

It’s easy to get headlines either by preaching doom-and-gloom about the federal budget or by beseeching politicians to ignore the deficit altogether. To figure out which of those is the best advice, one has to understand how much uncertainty lurks beneath projections of federal deficits and debt and one has to decide how best to respond to that.

Authors Image Source: © Mary Calvert / Reuters         
Categories: Blog

Not Taking Chances: The Philippines Weathers Typhoon Hagupit

Brookings Institute Blog - Mon, 12/08/2014 - 07:17

The scene is all too familiar for many Filipinos. Just over a year ago, Typhoon Haiyan tore through the Philippines, displacing millions and leaving 7,300 dead or missing. On Saturday, Typhoon Hagupit made landfall in Eastern Samar, one of the provinces hardest hit by Haiyan, with gusts of up to 130 miles per hour.

For all their distressing similarities, this is a different storm and has prompted a very different response. While Haiyan was the strongest typhoon recorded over land, by the time Typhoon Hagupit hit Eastern Samar it has slowed to the equivalent of a category three hurricane. The potential for devastation remains as the storm is moving slowly across the country, bringing with it torrential rains, and the risk of floods and landslides. But despite early fears this is, thankfully, a much weaker storm. Even more importantly, this time round most Filipinos and their government were not taking any chances. In advance of Hagupit’s landfall, some 1.2 million people left their homes to take shelter in evacuation centers, in one of the largest peacetime evacuations in history. Across the Philippines, schools, churches and community centers often double as evacuation centers, and in towns and villages that were hard-hit by Typhoon Haiyan, many of these buildings have not yet been reconstructed. Nonetheless residents have crowded into the safe spaces that remain, following the government’s urging to make this a “zero casualties” disaster.

I’ve been following Typhoon Hagupit’s track with particular interest as I arrived in the Philippines last week to conduct some fieldwork for a study on the challenge of supporting “durable solutions” to displacement crises after massive natural disasters such as Typhoon Haiyan.

I’ve been following Typhoon Hagupit’s track with particular interest as I arrived in the Philippines last week to conduct some fieldwork for a study on the challenge of supporting “durable solutions” to displacement crises after massive natural disasters such as Typhoon Haiyan. Our research team had intended to travel to Tacloban (a city devastated by Typhoon Haiyan) a few days ago to conduct interviews and focus groups on post-Haiyan recovery with local leaders and community members. But with Hagupit bearing down and attention rightfully focused on disaster preparedness, we decided to sit tight in Manila.

This is not the first time my research on displacement and natural disasters has been upended by further storms. In 2012, I was in New Orleans conducting interviews on obstacles to the return of residents uprooted by Hurricane Katrina, when Hurricane Isaac arrived just in time for Katrina’s seventh anniversary. My own bad timing aside, these repeated disasters raise questions about what it means to “resolve” displacement in communities that remain deeply vulnerable to disaster because of their geographic location and the increasingly severe effects of climate change. In the Philippines as in Louisiana, massive disasters such as Haiyan have been met with the suggestion that the residents of low-lying coastal communities should be relocated to higher ground, for their own long-term safety. In some instances relocations may indeed be a necessary step for public safety, but in others forced relocation can represent a form of displacement in itself, cutting people off from their livelihoods and community networks.

After the massive floods in metro Manila in 2012 – another of the many disasters to hit this hazard-prone country – an expression went viral: “The Filipino spirit is waterproof.” Yesterday I came across a collection of posters celebrating this theme, and was reminded of the “Soul is waterproof” slogan that was promoted after Hurricane Katrina. The fighting spirit of communities that must struggle to recover from disasters at the same time as new storms bear down on them is indeed remarkable, and yet it is no substitute for systematic disaster preparedness, prudent evacuations and equitable, nuanced reconstruction plans that respond to communities’ diverse needs. So far the response to Typhoon Hagiput has been characterized by careful planning, with evacuations avoiding massive casualties and reducing the need for Filipinos to once again draw heavily on their famously resilient national spirit. Let’s hope it stays that way.

Authors Image Source: © Erik de Castro / Reuters         
Categories: Blog

Four Charts Explaining Latin America’s Decade of Development-less Growth

Brookings Institute Blog - Fri, 12/05/2014 - 13:12

Editor’s Note: In the report “Think Tank 20: Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summit” experts from Brookings and around the world address interrelated debates about growth, convergence and income distribution, three key elements that are likely to shape policy debates beyond the ninth G-20 summit that was held on November 15-16 in Brisbane, Australia. The content of this blog is based on the chapter on Latin America. Read the full brief on Latin America's growth trends here.

A figure says a thousand words. And, looking at Figure 1, which shows the population-weighted average income per capita in emerging economies relative to the U.S., there could be no doubt in anybody’s mind that since the late 1990s something rather extraordinary happened—a phenomenon with no antecedents in the post-WWII period—that propelled emerging economies into an exponential process of convergence.

Needless to say, this phenomenon had enormous consequences for the welfare of millions of citizens in emerging economies. It lifted more than 500 million people out from poverty and extreme poverty, and gave rise to the so-called emerging middle class that grew at a rate of 150 million per year.

So, it seems that something rather extraordinary happened in emerging economies. Or did it? Let’s look again. When China and India are removed from the emerging markets sample, Figure 1 becomes Figure 2a.

In Figure 2a, one can still discern a period of convergence starting in the late 1990s. But convergence here was not nearly as strong—relative income is still far below its previous heights—and it occurred after a period of divergence that started in the mid-1970s after the first oil shock, in the early 1980s with the debt crisis, and in the late 1980s with post-Berlin Wall meltdown in Eastern European economies.

This pattern is actually characteristic of every emerging region including Latin America (see Figure 2b). Only Asia differs markedly from this pattern—with China and India displaying exponential convergence since the late 1990s, while the rest of emerging Asia experienced a sustained but much slower convergence since the mid-1960s. 

From a Latin American perspective, the relevant question we need to ask is whether the recent bout of convergence that started in 2004 after a quarter of a century of relative income decline is a break with the past or just a short-lived phenomenon?

In order to address this question from a Latin American perspective, we study the arithmetic of convergence (i.e., whether mechanical projections are consistent with the convergence hypothesis) and the economics of convergence (i.e., whether income convergence was associated with a comparable convergence in the drivers of growth).

According to our definition of convergence,[1] since 1950, growth-convergence-development miracles represent a tiny fraction of emerging countries. Only five countries managed to achieve this: Japan, South Korea, Taiwan, Hong Kong and Singapore. In other words, convergence towards income per capita levels of rich countries is an extremely rare event.

But where does Latin America stand? Based on growth projections for the period 2014-2018, not a single Latin American country will converge to two-thirds of U.S. income per capita in two generations. Unfortunately, the arithmetic does not seem to be on the side of the region.

What about the economics? To answer this question, we analyze whether Latin America’s process of income convergence in the last decade was also associated with a similar convergence in the key drivers of growth: trade integration, physical and technological infrastructure, human capital, innovation, and the quality of public services. Figure 3 illustrates the results.

In contrast to relative income, during the last decade, LAC-7 [2] countries failed to converge towards advanced country levels in every growth driver. The overall index of growth drivers—the simple average of the five sub-indexes—remained unchanged in the last decade relative to the equivalent index for advanced economies. By and large, the latter holds true for every LAC-7 country with exceptions like Colombia (the only country that improved in every single growth driver in the last decade) and Chile (the country in the region where the levels of growth drivers are closer to those of advanced economies). 

Latin America had a decade of uninterrupted high growth rates—with the sole exception of 2009 in the aftermath of the Lehman crisis—that put an end to a quarter of a century of relative decline in income per capita levels vis-à-vis advanced economies. However, high growth and income convergence were largely the result of an unusually favorable external environment, rather than the result of convergence to advanced-country levels in the key drivers of growth. Fundamentally, the last was a decade of “development-less growth” in Latin America.

With the extremely favorable external conditions already behind us, the region is expected to grow at mediocre rates of around 2 percent in per capita terms for the foreseeable future. With this level of growth, the dream of convergence and development is unlikely to be realized any time soon.

To avoid such a fate the region must make a renewed effort of economic transformation. Although the challenges ahead appear to be huge, there is plenty of room for optimism. First, Latin America has built a sound platform to launch a process of development. Democracy has by-and-large consolidated across the region, and an entire generation has now grown up to see an election as the only legitimate way to select national leaders. Moreover, it is for the most part a relatively stable region with no armed conflicts and few insurgency movements threatening the authority of the state. Second, a sizeable group of major countries in Latin America have a long track record of sound macroeconomic performance by now. Third, the region could be just steps away from major economic integration. Most Latin American countries in the Pacific Coast have bilateral free trade agreements with their North American neighbors (11 countries with the U.S. and seven countries with Canada). Were these countries to harmonize current bilateral trade agreements among themselves—in the way Pacific Alliance members have been doing—a huge economic space would be born: a Trans-American Partnership that would comprise 620 million consumers, and have a combined GDP of more than $22 trillion (larger than the EU’s, and more than double that of China). Were such a partnership on the Pacific side of the Americas to gain traction, it could eventually be extended to Atlantic partners, in particular Brazil and other Mercosur countries.

In the last quarter of a century democracy, sound macroeconomic management and an outward-looking development strategy made substantial strides in the region. If these conquests are consolidated and the same kind of progress is achieved in key development drivers in the next 25 years, many countries in the region could be on the road to convergence.

[1] We define convergence as a process whereby a country’s income per capita starts at or below one-third of U.S. income per capita at any point in time since 1950, and rises to or above two-thirds of U.S. income per capita.

[2] LAC-7 is the simple average of Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, which account for 93 percent of Latin America’s GDP.

Authors
  • Ernesto Talvi
  • Santiago García da Rosa
  • Rafael Guntin
  • Rafael Xavier
  • Federico Ganz
  • Mercedes Cejas
  • Julia Ruiz Pozuelo
        
Categories: Blog

The Problem of Uncertain Federal Budget Forecasts

Brookings Institute Blog - Fri, 12/05/2014 - 12:11

David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy, offers a regular economic update for the Brookings Cafeteria Podcast. In this edition, Wessel discusses the problem of uncertain forecasts about the federal budget, and previews an upcoming event, The Long Run Outlook for the Federal Budget: Do We Know Enough to Worry? (December 15.)

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Categories: Blog

Hyun Shin’s Warning: The Next Crisis May Not Be Like the Last One

Brookings Institute Blog - Fri, 12/05/2014 - 08:24

Future bouts of financial disruption may not follow the same pattern as prior crises, cautioned Hyun Song Shin, Economic Adviser and Head of Research of the Bank for International Settlements. In a presentation delivered to the Hutchins Center on Fiscal and Monetary Policy at Brookings, Shin highlighted two potential threats to financial stability which merit further study:

Changing pattern of financial intermediation: Shin pointed to a shift away from bank-intermediated credit towards capital markets, and postulated that we have entered a new phase of global liquidity. Since 2010, the bond market has led global credit growth, with long-term investors, particularly asset managers, lending directly to corporations, especially in emerging markets. Shin cited evidence that in today’s environment, with short rates at zero and a flattening yield curve, asset managers who are concerned with their relative performance rankings tend to reach for yield. This “leverage-like behavior without leverage” of the asset management industry could exacerbate large price movements and pose risks to financial stability. The last crisis revolved around leveraged financial institutions; the next crisis may not.

Global Perspective: Illustrating the increased role of the U.S. dollar globally, Shin noted that of the $9 trillion in dollar-denominated credit extended to borrowers outside the United States, $7 trillion came from banks and investors outside the U.S. He warned that in today’s increasingly globalized financial markets, local currency depreciation can amplify lending contractions, leading to further depreciation—creating a negative feedback loop. He concluded that a stronger U.S. dollar could constitute a tightening of global financial conditions, becoming particularly painful for non-financial companies in emerging markets who have borrowed in dollars and, thus, could hamper global growth.

Download audio of the event »
Download Shin's presentation slides »

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Categories: Blog

How to Launch the Country's First-Ever Medical Device Tracking System

Brookings Institute Blog - Thu, 12/04/2014 - 22:00

In a landmark step toward improving patient safety, the U.S. Food and Drug Administration (FDA) is establishing a national database to tag and track medical devices for the tens of millions of Americans that require pacemakers, artificial joints, heart defibrillators and the like. A new report from the Engelberg Center for Health Care Reform titled, Unique Device Identifiers (UDIs): A Roadmap for Effective Implementation, outlines how this system should be designed and implemented. It includes several recommendations and action steps for providers, payers, medical device manufacturers, regulators and patients.

With UDIs operating as the standard for communicating information about each device across major health care sectors, they can unlock important opportunities to improve and ensure patient safety, enhance patient-provider communication and offer insights on the performance and effectiveness of certain devices.

The system relies significantly on the adoption of Unique Device Identifiers (UDIs), a new coding system that assigns a unique number to each medical device, much like vehicle identification numbers (VINs) for automobile. Just like VINs, UDIs will be used to ensure proper surveillance, track safety and recall information, and even evaluate the performance of specific devices over time. Perhaps most importantly, for the first time, providers and manufacturers will have a universal system to communicate critical, and often life-saving information, to patients and caregivers.

Recommendations for Moving Forward
The report provides over a dozen recommendations for adopting UDIs across three major intersections of the health care system. In order to spread the use of UDIs immediately, two efforts can begin right away with little to no regulation or oversight: doctors can begin capturing UDIs and patients can begin asking for their UDI. The report also recommends that:

  • UDIs should be captured in provider systems, such as electronic health records (EHRs), hospital inventory management and billing systems and even required in meaningful use criteria.
  • UDIs should be captured in administrative transactions, including claims data and payment information.
  • Finally, UDIs can be used across a variety of patient-directed tools, such as personal health records (PHRs), mobile applications, public awareness campaigns and through federal databases.

The report is available for download here.

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Categories: Blog

The Budapest Memorandum and U.S. Obligations

Brookings Institute Blog - Thu, 12/04/2014 - 13:57

December 5 marks the 20th anniversary of the signing of the Budapest Memorandum on Security Assurances for Ukraine. Russia has grossly violated the commitments it made in that document. That imposes an obligation on Washington to support Ukraine and push back against Russia. This is not just a matter of living up to U.S. obligations. It is also about preserving the credibility of security assurances, which could contribute to preventing nuclear proliferation in the future.

As many analysts note, Vladimir Putin may have more at stake in Ukraine than does the West. The United States, however, has a strong interest. That stems not just from twenty-three years of bilateral relations with Kyiv but from U.S. commitments in the Budapest memorandum.

When the Soviet Union collapsed in 1991, nuclear arms lay in sites scattered across the former Soviet republics. Ukraine inherited the third largest nuclear arsenal in the world, including some 1,900 strategic nuclear weapons designed to strike the United States.

Nothing in the post-Soviet space commanded more attention from the Bush 41 and Clinton administrations than making sure that the Soviet Union’s demise did not increase the number of nuclear-armed states. Washington brokered with Kyiv and Moscow the terms under which Ukraine agreed to eliminate the strategic missiles, missile silos and bombers on its territory and transfer the 1,900 nuclear warheads to Russia for disassembly.

A key element of the arrangement—many Ukrainians would say the key element—was the readiness of the United States and Russia, joined by Britain, to provide security assurances. The Budapest memorandum committed Washington, Moscow and London, among other things, to “respect the independence and sovereignty and existing borders of Ukraine” and to “refrain from the threat or use of force” against that country.

The Kremlin has violated those commitments. Using soldiers in Russian combat fatigues without identifying insignia, whom Mr. Putin later admitted were Russian, Moscow seized Crimea in March.

Russia subsequently encouraged and armed separatists in eastern Ukraine. When the Ukrainian military appeared to gain the upper hand against the separatists, regular Russian army units entered Donetsk and Luhansk to support them.

What part of its commitments to “respect the independence” and “refrain from the threat or use of force” do the Russians not understand?

Since the Ukraine-Russia crisis erupted, Washington has provided political and economic support to Kyiv, as well as non-lethal military assistance. It has worked with the European Union to put in place increasingly tough sanctions on the Russian economy.

Washington should do more. It is time to provide the Ukrainian military defensive arms, such as light anti-tank weapons. That would raise the costs to the Russian army of any further fighting and help deter it. Washington should also be prepared, if Moscow does not alter course and facilitate a peaceful settlement, to work with Europe to impose additional economic sanctions.

These are actions that the United States owes Ukraine for giving up the nuclear arms on its territory. In 1994, Washington wrote Kyiv a check for U.S. support in the Budapest memorandum—albeit hoping that it would never be cashed. Unfortunately, it has.

This is not just a matter of assisting Ukraine in fulfillment of U.S. obligations. It is also about preserving the credibility of security assurances for the future.

Security assurances such as those in the Budapest memorandum do not carry as much weight as NATO security guarantees or the guarantees in the mutual security treaties that the United States has with Japan and South Korea. Still, security assurances have played a role in the effort to freeze and end North Korea’s nuclear program.

These kinds of assurances may not by themselves offer major leverage. However, when looking for ways to prevent nuclear proliferation, Washington and its partners should marshal every possible tool. The problem is that Russia’s actions against Ukraine have discredited security assurances.

If a North Korean diplomat were to ask his or her Ukrainian counterpart how the Budapest memorandum worked out, the response would not be a happy one. At a September conference in Kyiv, former President Leonid Kuchma, who signed the Budapest memorandum for Ukraine, said that Ukraine had been “cheated.” Prime Minister Arseniy Yatseniuk referred to the “notorious” Budapest memorandum. Such comments do not make good advertisements for future security assurances.

Washington cannot undo Russia’s violations. It can and should, however, do more to fulfill its obligations under the Budapest memorandum by doing more to bolster Ukraine and penalize Russia until Moscow alters its policy. Such U.S. action could also change the Ukrainian narrative in the hypothetical conversation with a North Korean diplomat to “the Russians violated the memorandum, but the Americans backed us to the fullest and made Moscow pay.” That would help restore credibility to security assurances as an element in the toolkit of America’s non-proliferation diplomacy.

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

What the New MSSP Proposed Rule Means for ACOs

Brookings Institute Blog - Thu, 12/04/2014 - 11:02

Earlier this week CMS released the long awaited Notice of Proposed Rulemaking (NPRM) for the Medicare Shared Savings Program (MSSP), which, when finalized, will impact new Accountable Care Organizations (ACOs) entering the program in January 2016, as well as those MSSP ACOs  renewing their agreements for another three year performance period. We summarize these changes in an Executive Summary. While there are a number of smaller programmatic changes included in the NPRM, there are also some major changes proposed that could significantly impact the course of the MSSP into the future. Above all, CMS appears to recognize the significant challenges that many ACOs have faced in MSSP, as acknowledged in the link to the contributions of The Brookings Institution in the preamble to the NPRM. CMS is seeking comments on all of their proposals over the next 60 days, due February 6th, 2015. We can expect a number of changes and adjustments to be made to the regulation prior to finalization.

Proposed Changes to Financial Performance Models
Among the most important course changes noted in the NPRM, CMS has proposed a number of changes to the financial performance tracks for ACOs participating in the MSSP Program (see Figure 1 below) CMS recognizes that many organizations are struggling to meet the requirements and competencies necessary to succeed as an ACO, particularly for moving to increasingly levels of risk. They have proposed to allow MSSP participants in Track 1, which involves only up-side risk or shared savings without shared losses, to remain in Track 1 for additional 3-year performance periods, while receiving a smaller proportion of savings. Currently, MSSP participants are required to transition into Track 2 in subsequent performance periods, where they are held to two-sided risk and would share in losses if their expenditures exceeded the designated minimum loss rate. Many smaller and less experienced ACOs, particularly those that are physician led, have continued to express concern about being required to assume two-sided risk and threatened to leave the program after their first performance period. We have previously highlighted some of the challenges for physician practices implementing accountable care, and steps that the practices are taking to address these challenges, in a toolkit produced through the ACO Learning Network.

Figure 1: Overview of Proposed Revisions to Shared Savings Financial Model: Track 1, 2 and 3

* This an abbreviated version of Figure 1. For the complete table click here.

These proposed changes to Track 1 may in fact help to retain some of these current participants and encourage new applicants to enter the program with the assurance that they can remain in a one-sided risk model for more than three years. The major trade-off for ACOs that opt to remain in Track 1 is that their maximum attainable level of shared savings would decline by 10 percent, from 50 percent to 40 percent. Nonetheless, this proposed change will allow many current ACOs to remain in Track One for an additional performance cycle in order to build their capacities and experience to better transition to two-sided financial risk. 

At the same time that CMS has proposed ACOs be able to remain in Track 1, they also remain firm in their commitment to move more organizations over time into two-sided risk models. In order to spur this movement, they have proposed to create a new Track Three options for MSSP participants. Both current and new MSSP participants would be able enter Track Three. The Track 3 option increases both the risks and rewards for ACOs that are ready to make the transition to greater risk assumption. Unlike Track 1, where the maximum shared savings rate is 50 percent in the first performance year, and Track 2 where the maximum savings rate is 60 percent, those ACOs entering Track 3 would be eligible for up to a 75 percent shared savings rate. CMS has also proposed to set the MSR (minimum savings rate) and MLR (minimum loss rate) at a flat 2 percent, which would make it easier to attain both shared savings and shared losses. Track 1 will remain on a sliding scale for MLR and MSR rate that goes from 2 percent to 3.9 percent based on the number of attributed patients, and CMS has proposed that Track 2 move to the sliding scale calculation as well.

Another notable change in the proposed Track 3 is that beneficiaries would be assigned prospectively, rather than an initially prospective assignment approach followed by retrospective reconciliation for Tracks 1 and 2. CMS would remove any beneficiaries at the end of the year that became ineligible for attribution over the course of each performance year. Prospective attribution should give these ACOs a much better idea of what patients they are accountable at the beginning of each performance year, a point that many ACOs have made in the lead up to the proposed rule. Increased certainty about attributed patients may be one determining factor for ACOs deciding to between moving to two-sided risk in Track 2 versus Track 3.

CMS has also proposed to waive some existing program rules to make the transition to two sided risk easier and more appealing.  Specifically, CMS proposes waiving requirements that a patient have a three-day hospital stay before received covered care at a skilled nursing facility (SNF), certain telemedicine payment restrictions, the homebound requirement under the home health benefit, and the prohibition on qualified providers referring patients to post-acute care providers with whom they have financial and clinical relationship.  While CMS is proposing these waivers for Track 3, they remain open to consideration that Track 2 ACOs should be availed of these waiver opportunities as well.  The Medicare SNF coverage requirement has already been waived for the Pioneer ACO Model and MA plans.

CMS has also acknowledged the significant issue of patient churn from year to year, which averages 24% across the ACO program under current attribution rules. In order to address this issue, CMS is seeking comment on whether a patient attestation process would be appropriate for ACOs that assume two-sided risk in MSSP. Again, the Pioneer ACO Program is currently conducting a test of beneficiary attestation for the 2015 performance year.

As these proposals indicate, a major issue to analyze during the comment period is the extent to which the proposed Track Three will induce more ACOs to transition to taking on two-sided financial risk, and what modifications to these or other MSSP proposals may help achieve this goal.

Setting, Updating, and Adjusting Financial Benchmarks
Another critical issue that CMS raises, but clearly does not have a definitive approach to address, at this point is the process for setting, updating, and adjusting financial benchmarks. ACOs and other stakeholders have expressed their concern that resetting ACO benchmarks at the start of each agreement period may disadvantage ACOs, particularly those that have generated shared savings. Furthermore, some have expressed concern that the existing benchmarking methodology does not sufficiently account for the influence of cost trends in the surrounding region or local market for a given ACO. CMS acknowledges these issues, but does not propose any specific changes to benchmark methodology. CMS is seeking comment on some proposals that may begin to address these issues: equally weighting the 3 performance years; accounting for shared savings payments in benchmark; using regional FFS expenditures (as opposed to national factors) to trend and update the benchmark; implementing an alternative that uses the initial historical benchmark in the beginning and then constant relative costs for region in subsequent years; and use just regional FFS costs over multiple periods. CMS seeks comment on which of these proposals are best and if a combination of them should be used going forward.

Given the time and effort CMS undertakes to articulate these challenges and potential paths in the proposed rule, it is evident that comments on the proposed rule can have a substantial impact on the ultimate benchmark methodology that will be used in the next phase of the MSSP program. Subject to public comment, CMS appears ready to move forward to at least some adjustments. Like some of the other critical issues raised in the proposed rule, the resolution of this issue will have an impact on whether ACOs enter the MSSP program or continue in it, and whether they transition to sharing in financial risk.

Finally, one issue that will directly impact the financial performance of ACOs, but is not included in the proposed rule, is their performance on quality measures. In November, CMS included some changes to the quality measures for MSSP in the Final Rule for the 2015 Physician Fee Schedule. Although the total number of quality measures remains at 33, CMS removed eight measures and added eight new measures, including additional ones on stewardship of patient resources, all-cause admissions for specific conditions, depression remission, and adjustments to the composite measures for diabetes. The performance of ACOs on these quality measures directly impacts the percent of shared savings that they are eligible to receive, so these organizations must ensure that they remain focused on both cost reduction and quality improvement.  It is possible that CMS will continue to revise and refine the quality measures for ACOs in future physician payment regulations.

Next Steps
CMS has not been as aggressive on some issues as many ACOs had hoped they would, especially with regard to further refinements to the benchmark methodology and strategies to increase patient engagement, due to concerns about downsides of such proposals, such as higher costs to Medicare without driving reforms in care.  Rather, the proposed rule lays out key issues and potential paths forward, opening the door to significant further revisions to the final rule based upon the public comments. Thus, the upcoming comment period is a critical period for shaping the future of the Medicare ACO programs.

Authors Image Source: © Jim Bourg / Reuters         
Categories: Blog

Hutchins Roundup: Spending Multipliers, Income Inequality, and More

Brookings Institute Blog - Thu, 12/04/2014 - 08:46

Government multipliers were no higher than average during the Great Recession

Valerie A. Ramey of the University of California, San Diego and Sarah Zubairy of Texas A&M University find that government spending multipliers are generally unaffected by the level of economic slack, and that interest rates near zero have an empirically ambiguous effect on these multipliers. This suggests that government -spending multipliers were not necessarily higher than average during the Great Recession, contrary to what others have suggested.

Lower taxes on top incomes contributing to income inequality

Vito Tanzi, formerly the head of the International Monetary Fund’s Fiscal Affairs Division, argues that lower tax rates on high incomes have been a primary contributor to rising income inequality in the United States.  Tanzi is skeptical that higher earners “deserve” their higher incomes because of their contributions to the economy, and doubts individuals respond in a “robot-like fashion” to monetary incentives.

Geographic variation in service use not a great indicator of the extent of overuse in healthcare

In a comparison of cancer-related imaging between Veterans Affairs patients and Medicare patients, a group of researchers led by Harvard Medical School’s J. Michael Mcwilliams concludes that [geographic variation may not be a particularly good indicator of the extent of overuse in the healthcare system].  They find that the use of imaging was significantly lower for Veterans Affairs patients, but that the lower use was not associated with less geographic variation.

Learn about our own Louise Sheiner’s take on the geographic variation in health care spending »

Chart of the week: Major entitlements accounted for nearly half of the federal budget in 2013

Speech of the week: To avoid financial instability, the Federal Reserve may turn to higher interest rates more readily than other central banks

“If, in the future, the United States did face… financial imbalances… growing rapidly against a backdrop of subpar economic conditions, the Federal Reserve may consider monetary policy for financial stability purposes more readily than some foreign peers because our regulatory perimeter is narrower, the capital markets are more important, and the macroprudential toolkit is not as extensive.”
Lael Brainard, Member, Federal Reserve Board of Governors

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Categories: Blog

Hyun Song Shin: Where Are the Financial Stability Risks Now?

Brookings Institute Blog - Thu, 12/04/2014 - 07:30

Speaking at the Hutchins Center on Fiscal and Monetary Policy at Brookings on “Where are the financial stability risks now?” Hyun Song Shin, economic adviser and head of research for the Bank for International Settlements, emphasized the significance of changing patterns of finance in the quest to maintain global financial stability.

Financial intermediation, he said, is evolving away from traditional banking to capital markets even as many regulatory instincts continue to be shaped by banking-related concerns. Future financial crises, he cautioned, may not follow the same course at the recent one, he said.     

Audio of his presentation can be listened to and downloaded, and his presentations slides are available for download.

Before joining the BIS staff in May 2014,, Mr Shin was the Hughes-Rogers Professor of Economics at Princeton University. In 2010, on leave from Princeton, he served as Senior Adviser to the Korean president, taking a major role in formulating financial stability policy in Korea and developing the agenda for the G20 during Korea's presidency. From 2000 to 2005, he was Professor of Finance at the London School of Economics.

Shin holds a DPhil and MPhil in Economics from Oxford University (Nuffield College) and a BA in Philosophy, Politics and Economics from the same university.

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Categories: Blog

Sarkozy’s Long March Back to the Presidency

Brookings Institute Blog - Tue, 12/02/2014 - 12:03

On November 28th, Nicolas Sarkozy was elected leader of the center-right party Union pour un Mouvement Populaire (UMP) exactly ten years after he won the job the first time. The former French President, who lost the 2012 election to his Socialist Party opponent, François Hollande, is clearly attempting a comeback.

He joins the ranks of the numerous former French presidents, prime ministers and senior politicians who all chose to exit what they had once called “retirement” and rejoin the political arena. Sarkozy’s predecessor Jacques Chirac was elected president in 1995 after two consecutive failures against François Mitterrand in 1981 and 1988. Valéry Giscard d’Estaing, who was elected president of France in 1974, failed to be re-elected in 1981. Giscard attempted a long-shot return in 1986, first by winning a parliamentary seat, then by getting himself elected leader of his old party, the Union pour la Démocratie Française (UDF), in 1988. However, he failed to win enough consensus from his own camp to run for president in the following elections.

Today, it is 59-year-old Sarkozy’s turn to step out of retirement, less than three years after announcing he was “quitting political life.”

Second Chances

How is it that so many senior French politicians never actually leave national politics? In modern times, most other democracies do not give their leaders a second chance. With its current constitutional set-up and political elite, France remains peculiar in that respect.

The Constitution of France’s Fifth Republic was designed around post-war figure Charles de Gaulle, and thus created a unique, immensely powerful chief executive role. Since 1959, the French public has always held a fascination with the position, which has been occupied by only seven men. Unlike other Western nations, the French electorate seems to be sensitive to the appeal of the ‘providential man’, the statesman above party politics capable of taking decisions in the interest of the nation and not only of one party.

Sarkozy believes he can be that man again. A political fighter who won the French presidency in his first attempt in 2007 (taking 53 percent of the votes in the run-off against socialist Ségolène Royal), he had never experienced failure in his political life before 2012.

Complications to Sarkozy’s Plans

Now, as he engineers his comeback, Sarkozy says he wants the French right to be unified again under a renamed UMP party and to set up a “committee of wise men”—all former center-right prime ministers—to advise him on how to steer the country. However, two of them—François Fillon and Alain Juppé—have declared their intention to compete in the UMP’s primary election. That contest is expected to produce the center-right candidate for the 2016 presidential election. Understandably, joining Sarkozy’s wise men committee does not top the list of their priorities. Fillon, who served under Sarkozy, is having difficulties positioning himself in the race. But Juppé (who did not participate in last week’s election for the UMP leadership), has emerged as a credible candidate and will likely be more at ease than his opponents in the role of the elder statesman (he will turn 71 in 2017).

It is not only other UMP contenders that complicate Sarkozy’s plans. The path to the Elysée is full of other obstacles for the former president:

• The French people are unlikely to warm at the prospect of another Sarkozy-Hollande contest in 2017. In a country where political elites often appear disconnected from the public, fresh blood is in high demand. Sarkozy is planning to include as many members of the young generation as possible in the UMP ruling bodies. That notwithstanding, some of them will certainly confront him in the 2016 party primaries, most notably former agriculture minister Bruno Le Maire, who won almost 30 percent of the votes in the UMP leadership race.

• There is at least one investigation under way over Sarkozy’s 2007 presidential campaign finances that the new UMP leader may have to answer to. He is accused of having overstepped campaign spending limits (in France, presidential candidates are under legal obligation to keep their expenses under a certain threshold) and of having forced the UMP to foot the bill. The scandal is serious enough to have prompted Sarkozy’s predecessor as UMP leader to resign.

• Early this year, the far-right Front National (FN) received the strongest results in the European Parliament election. That outcome only confirmed a trend that led it to take control of several French towns and has paved the way for a strong performance in 2017. The FN challenge is particularly worrisome for Sarkozy, as dissatisfied UMP voters may well turn to it instead of granting the former president a second chance.

• Sarkozy remains popular among UMP voters, but significantly less so than he was 10 years ago. In 2004, he won the UMP leadership with 85 percent of the votes of party members. This year, he was unable to get above 64.5 percent, a much weaker result than his team had expected.

• President Hollande and his socialist government may now seem in very poor shape, but there are still two and a half years to go until the presidential election. Asked to comment on the UMP election, a leading Socialist party member was quick to say that, “Looking at his program, Sarkozy’s return is bad news for France, but good news for the left which now has an official opponent,” implying that the reasons which led to Sarkozy’s defeat in 2012 are still there—his ideas have failed to woo the French, and his leadership style may well not be what the French are looking for in their president.

• As for Sarkozy’s new political ideas, he has yet to produce a platform which might help the public understand why he would do a better job as president this time around.

In conclusion, today Sarkozy looks a weaker candidate than he was at the time he first embarked on the path to the Elysée. To win the trust of the French a second time, he has still a long way to go.

Authors Image Source: © Vincent Kessler / Reuters         
Categories: Blog

Grexit Deja Vu? Political Uncertainty Could End Greece’s Economic Recovery

Brookings Institute Blog - Tue, 12/02/2014 - 10:48

Last week, Joerg Sponer, a partner at Capital Fund, is said to have sent a memo (subsequently leaked to the Greek media) describing in hilarious terms the London meetings between the economic advisers of  A. Tsipras, the leader of the radical left ‘Syriza’ party in Greece,[1] and members of the financial industry in the City. The content is amusing as it depicts the distance between the people of the Greek ‘left’ from the reality of the global markets. Since then, reports from other financial institutions such as BofA-ML, have confirmed, more or less, the content of the Syriza’s adviser’s presentations and the negative reactions [2]. This hasn’t come as a surprise for those familiar with the ideology of Syriza as well as the dramatic, atavistic situation of the Greek political market in general. However, it may serve as a warning for those believing that Syriza is just another idealistic, romantic, partisan leftist European party which will adjust to the reality as soon as it takes over power and become, either gradually or violently, opportunistic. Syriza remains a serious political risk both to Europe and to Greece and, as the meetings show, to markets that have again sent Greek bond spreads sky-high. Ironically, it also represents the worst consequence of the failures of the type of last-minute internal devaluation policies that the troika has imposed on Greece, in cooperation with successive, incompetent Greek governments.[3]

Things are getting serious: The latest polls put Syriza ahead by 5-7 points, as angry voters from across the political spectrum get behind the party. It’s not surprising. This “supermarket” party promises almost everything to anyone, masking its policies with romantic pledges to stop humanitarian crises, to make the black market and bureaucracy disappear, to increase the minimum wage and minimum pension by around 40 percent (despite the fact that the social security system is in bad shape) and, last but not least, to negotiate a huge amount of debt forgiveness, mainly by having--sorry, ordering—the European Central Bank to buy most of it.

This is of course a “dream come true program.” The troika, by enforcing wage cuts for everybody during the last four years and accepting “tax anything that moves policies,” has pushed even educated voters to the extremes of the political spectrum. Indeed, it is absurd that now that there are some “growth shoots” in the economy, it is again pushing for wage-restricting policies instead of pressing the government to continue to reform heavily on the product and political market fronts.

This has important repercussions on growth, incomes and employment in the short- and in the long-term, by increasing political uncertainty again by destabilizing the government and strengthening the arguments of an untried Syriza ready to take over power. The creditors currently seem content to clash with Syriza, if and when this party takes over power, as a Syriza defeat by the creditors might be instructive for all of the eurozone.

In the meantime, political risk is killing the economy (again). Need proof?

Figure 1 correlates unemployment and political uncertainty. It shows a positive correlation meaning that when political risk is high, unemployment rises. While it is not the only reason, it certainly contributes to decreasing employment. Data from the last couple of months, during which time political risk skyrocketed, show that an increase in employment observed in the first two quarters of 2014 has now been reversed.

Source: Eurostat (employment)

Figure 2 adds the cost of money that is critical to the recovery of the economy. It shows again a positive correlation between interest rates and political uncertainty. Low interest rates are critical for the internal devaluation solution to succeed as exports are decisively helped by low financial costs, -along, of course, with low energy costs, low taxes and social security contributions. But, importantly, costs are currently exceedingly high for Greek exporters compared to their competitors. Now, add to all these impediments the Syriza advisers assertions in London that they intend to stop reforms, terminate the program and start a socialist transformation of both Greece and Europe with the help of Podemos and Die Linke. It’s no laughing matter.

Source: ECB, Eurostat

So, is this a “2012 Grexit deja vu”? If, naively, both the creditors and the government believe that nothing will happen if we repeat the same mistakes again, the answer is yes.

[1] http://en.protothema.gr/capital-group-everybody-coming-out-of-the-meeting-with-stathakis-milios-wants-to-sell-everything-in-greece/ 

[2] http://www.sofokleous10.gr/greek-news/287713-bofa-merrill-lynch-executive-on-syriza-deputy-stathakis-contacts-in-london

[3] See Pelagidis, T. & Mitsopoulos, M., Greece. From Exit to Recovery?, Brookings 2014.

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Categories: Blog

Unlocking Latin America’s Huge Potential

IMF blog - Tue, 12/02/2014 - 08:19

By Christine Lagarde

(version in Español and Português)

I am looking forward to being in Peru this week to discuss economic and social developments with the government and a wide range of stakeholders—and also to follow up on the preparations for the next IMF–World Bank Annual Meetings, which will be held in Lima in October 2015. Later this week, I will participate in the Santiago Conference in Chile, where I will meet policymakers and influential representatives from Latin America and the Caribbean to discuss economic approaches to strengthen the entire region.

As I travel to the land of the Andes, I am reminded of the natural beauty of the region, the richness of its culture, and its incredible diversity. Despite its current challenges—growth continues to slow, as global economic and financial conditions are shifting and economies run up against capacity limits—I remain decidedly optimistic about the region’s potential to raise living standards while protecting its unique heritage and precious environment.

And I am also optimistic about the IMF’s partnership with Latin America. The Santiago Conference will be an opportunity to showcase our effective collaboration in many areas, and together with the Annual Meetings next year will cement our relations for years to come.

Great strides, but more to be done

During the past two decades, most countries in Latin America made great strides, including my host countries Peru and Chile. They were able to deliver strong growth, helped by sound policies and well-managed economies. Think about how Latin American countries fared during the “stress test” of the 2009 global financial crisis: many were able to recover quickly without suffering their own crises, and with policy responses that helped to dampen the hit to growth and employment.

These countries are well aware that in our increasingly interconnected world, economies must be adaptable. This resilience will be all the more tested as growth slows. Our latest projections show that Latin America will grow by 1.3 percent in 2014 and 2.2 percent in 2015.

As countries in the region work to make their economies more productive and competitive, they are also seeking to ensure that the gains are shared more equally.

There is no question about it: Latin America has made significant advances in reducing poverty and inequality. A decade or so ago, the proportion of people in poverty was about 2.5 times those in the middle class; today they are about the same. There is broad recognition, however, that more needs to be done.

Despite the striking decline in inequality in Latin America, it remains high relative to comparable economies elsewhere in the world. The rising middle class is placing increasing demands on public services like education, health care, and infrastructure. Making progress in these areas will be more difficult than in recent years, as commodity prices decline and global interest rates pick up from unusually low levels.

To its credit, Latin America recognizes that these challenges need to be met while keeping a firm grasp on macroeconomic stability, which has been hard won with better policies.

The Santiago Conference presents a timely opportunity to discuss these kinds of issues. The two-day event will focus on three key themes:

  • changes in global and regional economic conditions;
  • social progress in Latin America and its implications for economic policy; and
  • the potential role of region-wide solutions to long-standing problems.

First and foremost, however, the IMF wants to listen and learn. I am looking forward to exchanging views not only with the region’s top policymakers, but also with women leaders, youth, students, the press, and those dedicated to building more inclusive economies.

We are united in the common cause of making a better future for all of the region’s people.

I hope that you too can join us in this dialogue. Follow the discussions on the conference website and send us your thoughts and questions by using the Twitter hashtag #imfsantiago2014.


Categories: Blog

Social Programs that Work

Brookings Institute Blog - Mon, 12/01/2014 - 13:11

What would you nominate as an effective government program? Enter our contest! Winner to receive a copy of Ron Haskins’ new book, Show Me the Evidence. Enter your nominee in the blog comments below.

As I argue in my new book, Show Me the Evidence (co-authored with Greg Margolis), the last six years have seen the most impressive expansion of evidence-based policy in the history of federal social programs. The Obama administration has launched a series of evidence-based initiatives that have the potential to revolutionize the way the federal government funds social programs and what program sponsors at the state and local level must do to win and retain federal dollars. Specifically, grantees must show they are spending their federal dollars on programs that have evidence from rigorous evaluations of producing positive impacts on children’s development or achievement as measured by outcomes such as teen pregnancy, educational achievement or graduation rates, performance at community colleges, employment and earnings as young adults, or reducing rates of incarceration. Second, they must evaluate their programs using scientific designs to ensure that they are continuing to have impacts and to reform the programs if they are not.

This strategy requires a pipeline of social programs that have been tested and shown to be effective by rigorous evaluations. However, experience shows that most social programs, including some of the most celebrated such as DARE and Head Start, produce modest or no impacts that last when subjected to rigorous evaluations. An important virtue of focusing on evidence is not simply that the public will have reliable information about whether programs work, but that the evidence places pressure on programs to change and improve when they are not working.

In addition to improving existing programs, government and foundation research dollars are being used to develop and obtain evidence on new programs, some of which have been found to produce significant benefits for children or adolescents by rigorous evaluations. The most important claim of the Obama evidence-based initiatives is that if government spends its intervention dollars on programs shown by rigorous evaluations to work while simultaneously using rigorous evaluations to improve existing programs and develop new programs that work, in the long run federal spending on social programs can produce more benefits for more children and move the needle on the nation’s most important social programs.

But do we really have examples of social programs that produce these hefty impacts on social problems? The answer is a resounding yes. What follows are overviews of five of my favorite programs, all of which have produced big and lasting impacts on social problems (most of the overviews were adapted from the website of the Coalition for Evidence-Based Policy; the summary of the Small Schools of Choice program was taken from the website of MDRC, a prominent program evaluation firm):

Career Academies

Career Academies are high school education programs that have three distinguishing characteristics:

  • They are organized as small learning communities (150 to 200 students) to create a more supportive, personalized learning environment; 
  • They combine academic with career and technical curricula around a career theme; and
  • They establish partnerships with local employers to provide career awareness and work-based learning opportunities for students. 

Each Academy typically focuses on a specific field (e.g., health care). Students enter a Career Academy in 9th or 10th grade, and are taught by a single team of teachers through grade 12. The most powerful evidence of the impact of Career Academies is provided by a large, multi-site, randomized controlled trial. The trial evaluated nine Career Academies in high schools located in or near large urban school districts across the United States. These Academies had each implemented and sustained the core features of the Academy model for at least two years. They represented a variety of the career themes that Academies typically offer (e.g., technical, service-oriented, or business-related). The effects summarized here were obtained 8 years after the students’ scheduled high school graduation:

  • 11% increase in average annual earnings – i.e., $2,460 per year – over the previous eight years ($24,560 in annual earnings for the Career Academy group versus $22,100 for the control group).
  • The earnings effect was sustained over the full eight years, and showed no sign of diminishing.
  • The earnings effect was concentrated among men, who experienced a 17% increase in annual earnings over the follow-up period. There was no statistically significant effect on women’s earnings.
  • 23% increase in the likelihood of living with a child and partner.
  • 35% decrease in the likelihood of being a non-custodial parent (5% for the Career Academy group versus 8% for the control group).
  • The approximate 3-year cost of $2,300 per student was at least partly (and perhaps fully) offset by the increased tax revenue resulting from the gain in earnings of Career Academy students and perhaps by reduced use of social programs as well.
Nurse-Family Partnership

The Nurse-Family Partnership (NFP) program provides nurse home visits to pregnant women with no previous live births, most of whom are low-income, unmarried, and teenagers.  The nurses visit the mothers approximately once per month during pregnancy and the first two years of their children’s lives. The nurses teach positive health related behaviors, competent care of children, and maternal personal development (family planning, educational achievement, and participation in the workforce).  The program costs approximately $13,600 per woman over the three years of visits.

The evidence supporting NFP is contained in three randomized controlled trials (RCTs) of the program (see here, here, and here). The three trials – each carried out in a different population and setting – all found the program to produce sizable, sustained effects on important mother and child outcomes.  The replications of the NFP intervention program in multiple sites (in New York, Tennessee, and Denver) provide confidence that the program would be effective if faithfully replicated with other, similar populations and settings.  However, the specific types of effects often differed across the three studies.  The specific effects that were replicated, with no countervailing findings, in two or more of the trials – and thus are the most likely to be reproducible in a program replication – are: 

  • reduction in measures of child abuse and neglect (including injuries and accidents);
  • reduction in the number of subsequent births during the mothers’ late teens and early twenties;
  • reduction in prenatal smoking among mothers who smoked at the start of the study; and
  • improvement in cognitive and/or academic outcomes for children born to mothers with low psychological resources (i.e., low intelligence, mental health problems, lack of self-confidence).

Of special note because of its long-term follow-up is the original RCT, conducted in Elmira, NY, beginning in the late 1970s. Women were randomly assigned either to a group given the opportunity to participate in the Nurse-Family Partnership, or a control group that was provided developmental screening and referral to treatment for their child at ages 1 and 2 and, in some cases, free transportation to prenatal and well-child care. Approximately 90% of the women were white, 60% were low income, and 60% were unmarried.  Their average age was 19. Here is an overview of the results for the Elmira trial at the final follow-up study after 15 years:

  • 48% fewer officially-verified incidents of child abuse and neglect as of age 15 (an average of 0.26 incidents per nurse-visited child versus 0.50 per control-group child).
  • 43% less likely to have been arrested, and 58% less likely to have been convicted, as of age 19 (21% of nurse-visited children had been arrested versus 37% of control-group children, and 12% versus 28% had been convicted, according to self-reports).
  • 57% fewer lifetime arrests and 66% fewer lifetime convictions (an average of 0.37 versus 0.86 arrests, and 0.20 versus 0.58 convictions, according to self reports).
  • 20% less time spent on welfare (an average of 53 months per nurse-visited woman versus 66 months per woman in the control group).
  • 19% fewer subsequent births (an average of 1.3 births versus 1.6).
  • 61% fewer self-reported arrests (an average of 0.13 versus 0.33).
  • 72% fewer self-reported convictions (an average of 0.05 versus 0.18).

The cost of three years of home visits by a trained nurse using the Nurse-Family Partnership model is $13,600. There are numerous outcomes found in one or more of the trials that save government spending. These include a 20–50 percent reduction in child abuse and neglect, a 10-20 percent reduction in subsequent births in the late teens and early 20s, and reduced welfare payments.

Carrera Adolescent Pregnancy Prevention Program

Sponsored by the Children’s Aid Society, the Carrera Adolescent Pregnancy Prevention program is a comprehensive youth development program for economically disadvantaged teens who enter the program at ages 13-15 and usually participate for three years.  The program is provided after school at local community centers, and runs for about three hours each weekday after school.1 The program includes five main activities:

  • Daily academic assistance (e.g., tutoring, homework help, assistance with college applications);
  • Job Club 1-2 times per week, including such activities as learning to complete a job application and interview for a job;
  • Family life and sex education 1-2 times per week, led by a reproductive health counselor;
  • Arts activities 1-2 times per week (e.g. music, dance, writing, or drama workshops); and
  • Individual sports activities 1-2 times per week (e.g. tennis, swimming, martial arts).

The program also provides free mental health and medical care through alliances with local health care providers.  A key component is reproductive health care, including physical exams, testing for sexually transmitted infections, a range of contraceptive options, and counseling.  Carrera program staff schedule the teens’ health appointments and accompany them on their visits. The program costs approximately $4,750 per teen per year to implement (2009 dollars).

The evidence to support the program comes from a large, multi-site RCT (linked above).  This trial evaluated the program as implemented in 12 well-managed community youth agencies in 6 states during the period 1997-2004; 1,163 teens aged 13-15, who were not parenting or pregnant, participated in the evaluation; 45% of the teens were African American or Caribbean black, and 29% were Hispanic.  58% were from single or no-parent households, and 54% lived in households that had no employed adult and/or received entitlement benefits (e.g., public assistance, Medicaid).

On average, Carrera group teens attended program activities for 12 hours per month during the three years after random assignment.  At the end of the third year, 70% of the Carrera group teens were still involved in the program. Here is overview of the program impacts at the end of the program:

  • For Carrera group females:
    • 40% less likely to have ever been pregnant (15% of Carrera group females had been pregnant vs. 25% of control group females).
    • 50% less likely to have ever given birth (5% vs. 10%).
    • More than twice as likely to be using Depo-Provera — a highly effective hormonal contraceptive — at last intercourse (22% vs. 9%).
    • For Carrera group males, there were not significant effects.
    • For the full sample (males + females):
      • 7% reduction in likelihood of having had teen sex (statistically significant at the 0.10 level but not the 0.05 level).
      • 16% more likely to have had some work experience (89% of the Carrera group vs. 77% of the control group).
      • Positive effects on some educational outcomes (PSAT scores and college visits) but not others (e.g. grades).
  • Effects at 7 years after random assignment, at average age 21:
    • 30% more likely to have graduated high school or obtained a G.E.D. (86% of the Carrera group had graduated or obtained G.E.D. vs. 66% of the control group).
    • 37% more likely to be enrolled in college (63% vs. 46%).

The Carrera program produced many outcomes that reduce government spending. These include substantial reductions in teen pregnancy rates, a 30 percent increase in high school graduation or GED achievement, and a 37 percent increase in college enrollment. Just the increased enrollment in college is likely to offset all the program costs in the long run.

Success For All

Success for All is a comprehensive school-wide reform program, primarily for high-poverty elementary schools, with a strong emphasis on early detection and prevention of reading problems before they become serious. Key program elements include daily 90-minute reading classes, each of which is formed by grouping together students of various ages who read at the same performance level; a K-1 reading curriculum that focuses on language development (e.g., reading stories to students and having them re-tell), teaching students the distinct sounds that make up words (i.e. phonemic awareness), blending sounds to form words, and developing reading fluency; daily one-on-one tutoring (in addition to regular classes) for students needing extra help with reading; and cooperative learning activities (in which students work together in teams or pairs) starting in the grade 2 reading classes.

The evidence of Success for All’s effectiveness is based a research design in which 41 schools across 11 states were randomly assigned to an experimental or control group. Grades K-2 but not grades 3-5 were included in the evaluation Prior to random assignment, at least 80% of the schools’ teachers had voted in favor of adopting Success for All and the schools had agreed to allow data collection over the course of the study. The schools contained a total of 2,694 entering kindergarten students administered a pretest at the start of the study. The student population in these 41 schools was 56% African-American and 10% Hispanic, and 72% of students were low-income (i.e., eligible for federally subsidized lunches). Approximately three years after random assignment, the study assessed reading outcomes for all 2nd-grade students in the sample schools.  Sixty-nine percent of these students had been exposed to Success for All, or the control condition, for all three years of the study (i.e., in grades K-2); the other 31% had enrolled in the Success for All or control schools during the study, and so had received partial exposure.

Here is an overview of the effects of Success for All on school-wide second-grade reading outcomes, three years after random assignment (versus the control schools):

  • On average, 2nd-graders at Success for All schools –
    • Passage comprehension:  From an effect size of -0.10 in year 1, to 0.12 in year 2, to 0.21 in year 3.
    • Word identification skills:  From 0.09 to 0.19 to 0.24.
    • Word attack skills:  From 0.32 to 0.29 to 0.36.
    • Scored higher in passage reading comprehension than approximately 58% of their counterparts at control group schools (this equates to a standardized effect size of 0.21).
    • Scored higher in word identification skills than approximately 60% of their counterparts at control group schools (this equates to a standardized effect size of 0.24); and
    • Scored higher in word attack skills than approximately 64% of their counterparts at control group schools (this equates to a standardized effect size of 0.36).
  • To express these effects as grade level equivalents: On average, 2nd-graders at Success for All schools score approximately 25-30% of a grade level higher in reading ability than their counterparts at the control schools.1
    • The program’s effects generally grew in size from the first to the third year of the study:
  • This was a large, multi-site study evaluating Success for All as it is typically implemented in high-poverty elementary schools, thus providing evidence about the program’s effectiveness in real-world public school settings.
  • The study had a reasonably long-term follow-up, and low-to-moderate attrition:  Three years after random assignment, reading test scores were obtained for students in 85% of the sample schools – i.e., 35 of the original 41. (Of the six schools lost at follow-up, five closed due to insufficient enrollment and one dropped the Success for All model due to local political problems and refused to participate in data collection.)  The number of schools lost in the Success for All versus control group was the same (3 each).

Success for All costs about $510 per student for the 3-year program. The major impacts shown to date are on school achievement, primarily reading skills. This increase in skills is likely related to high school graduation and college enrollment rates, both of which have been shown to produce reductions in government spending in the long run. Whether Success for All has impacts on long-term measures such as these remains to be seen.

Small Schools of Choice

In 2002 New York City closed 31 large, failing high schools and replaced them with small schools of choice (SSC) that featured specialized curriculums, close associations with outside groups such as businesses and non-profit organizations, and teachers and principals who developed their school philosophy together and advertised it to students and parents. Students entering high school (at grade 9) were allowed to apply to several schools. As a result of student (and parent) self-selection, 105 of the SSCs were oversubscribed. This overflow of students caused the New York school system to randomly assign students to the SSCs and other types of schools. This procedure was repeated for four consecutive years, creating the opportunity to study four cohorts with a total of about 21,000 students who were assigned randomly to either an SSC or a different type of school. Nearly 95% of the students were black or Latino and nearly 85% of the students were from low-income families as measured by eligibility for free or reduced-price school lunches.

As shown in several reports by the research firm MDRC (see here and here), the SSC schools have produced substantial impacts on two measures that have been difficult to impact in previous education evaluations:

  • Students in SSC’s had significantly higher graduation rates than control students (71.6% vs. 62.2%).
  • Students in SSC’s had significantly higher rates of enrollment in colleges (49.0% vs. 40.6%).

These impacts are achieved despite the finding that “the cost per high school graduate is substantially lower for the small-school enrollees than for their control group counterparts.” This favorable cost result is achieved because although the per-pupil cost of control schools is about the same as SSCs, students at control schools are more likely to require a fifth year of schooling to graduate and they are less likely to graduate at all. Beyond this finding, which shows cost savings for government at the time the program takes place, the increased high school graduation rate and the higher college entry rate will likely produce benefits to the individuals involved, especially in their lifetime earnings, and to government in the form of increased taxes and reduced payments for welfare programs in the future.

Authors Image Source: © Jim Urquhart / Reuters         
Categories: Blog

Around the Halls: What You Need to Know About the UN Climate Conference in Lima (COP 20)

Brookings Institute Blog - Mon, 12/01/2014 - 12:29

For the next two weeks, negotiators from more than 190 countries will convene in Lima, Peru, for the United Nations Climate Conference (COP 20). Brookings experts Timmons Roberts, Joshua Meltzer and Charles Frank offer their thoughts on the negotiations and key stakeholders.


Timmons Roberts on what’s on the line in Lima

After the Copenhagen talks in 2009 faltered and nearly brought down the United Nations-led negotiations to muster the world’s nations to address this trickiest of issues, the multilateral system is finally rising again to its feet. Many issues are coming to a head this month as thousands of officials, experts and activists converge on Lima, Peru for the 20th annual U.N. climate change negotiations, called the COP, or Conference of the Parties.

There will be debates on who is doing enough to reduce their emissions, focusing on the big emitters like the U.S., China, the EU, India, Brazil, Japan, Russia and Indonesia. There will be technical debates about what countries should actually be required to promise, whether it is just emissions, or also should include issues like financial pledges, new technology to be shared, assistance with adapting to climate impacts, and so on.

On emissions reductions, the joint announcement by the U.S. and China was quite well-timed to show a way forward. It showed that pledges can be quite different for nations at different stages of their national development, and that they can be ambitious in their own ways.

All of what comes out of Lima will not be enough. But it will be a start. The best idea swirling around these days is that we will all have to get together again in five years to make a new round of promises for the next five years of actions. The thinking is that the need to act will become clearer by then, and the means to do so will also become more plentiful.

Some despairing climate policy observers used to gasp at the idea that 20 years of negotiations had gone by since the first Conference of the Parties back in Berlin in 1995. Now the consensus is that more years are exactly what we need, to get to ever more ambitious pledges.


Joshua Meltzer on why the recent U.S.-China climate agreement at APEC is a crucial step for Lima 2014 and Paris 2015

From December 1-12, 2014, all nations will convene in Lima, Peru for the U.N. climate change meeting. This is the last U.N. meeting before the meeting in Paris in 2015, where countries have agreed to reach agreement on greenhouse gas (GHG) targets that will apply from 2020 onward. Getting to a climate change agreement in Paris will require maximizing the opportunity of leaders’ meetings in forums such as the G-20 and APEC to discuss the key elements of what can be agreed. 

In this regard, the U.S. and China climate change agreement at the recent APEC meeting in Beijing is a crucial step. The U.S. has now committed to reducing its GHG emissions by 26-28 percent by 2025 and China has agreed to peak its CO2 emissions around 2030.

These are ambitious targets for the U.S. and China. Coming from the world’s first and second largest GHG emitters that collectively represent around 40 percent of global GHG emissions, it also signals to the rest of the world that the U.S. and China are serious about reaching an ambitious agreement in Paris to address climate change.

For instance, for the U.S. to meet its target will require a doubling of its GHG emission reductions from 2020. For China’s CO2 emissions to peak will require significant structural reforms. In addition, China’s target includes a commitment to a 20 percent share of its energy coming from non-fossil fuels. Some of this will be made up from the large nuclear build that is underway, but significant increases in solar energy and wind will also be needed.  

The fact that China has now agreed to a target is also a significant step for climate change diplomacy. This is the first time that a large developing country has agreed to accept an economy-wide cap on its emissions. It stands in contrast to the principle of common but differentiated responsibility, included in the UNFCCC and the Kyoto Protocol, and which developing countries have used to argue that they should not be required to cap their emissions. This position has gummed up climate diplomacy, particularly as it became clear that large developing economies like China, which were accounting for ever larger shares of GHG emissions, had to cap their emissions if the world was to reach the goal of keeping temperature increases below 2 degrees Celsius over pre-industrial levels.

The expectation now is that the U.S.-China climate change deal will change the negotiating dynamics at this U.N. climate change meeting in Lima. Governments from the developed world and the large emerging economies contributing the most to climate change should now be busily determining their own post 2020 GHG targets and using this meeting in Lima to make progress on the range of other issues under discussion. 


Charles Frank on whether the U.S.-China climate accord is a breakthrough for Paris 2015

The recent climate change accord between the United States and China raised hopes that agreement on emission targets could be reached in the Paris negotiations in December 2015. While clearly a breakthrough, the Chinese commitment is weak. It makes 2030 the year of maximum greenhouse gas emissions, but places no limit on growth between now and then. Over the last decade, greenhouse gas emissions by China have been growing at nearly 10 percent each year. If they grow half as fast between now and 2030, or an average of 5 percent per year, they will have more than doubled from about 10 billion to about 24 billion tons per year. China’s per capita emissions will then be about 70 percent greater than those of the U.S.

A credible global climate agreement requires some commitment from India as well as China. Yet India could reasonably argue that its target date for peak emission should be much later than 2030. India’s per capita GDP is less than half of that of China’s on a purchasing power parity basis. India could argue that its target year should be extended beyond 2030 until such time as its per capita GDP is expected to be the same as China’s in 2030. For sake of illustration, if the per capita of both China and India grow at 6 percent per year, China’s per capita GDP would reach approximately $32,000 in 2030, while India would not reach that level until 2043.

The Copenhagen negotiations established a target maximum 2.0 degrees Celsius increase in average global temperatures by 2100. Under the best of circumstances, this target will be extremely difficult, if not impossible, to meet. Most scenarios designed to reach this target require complete decarbonization of electricity production and in many instances zero or even negative global annual emissions, achieved by combining biomass fuels for electricity production with carbon capture and sequestration. Without some limits on growth of emissions between now and some future peak emissions year, the 2.0 C degree target will be much more difficult than it is already.

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