Does Moving Across International Borders Boost Migrants' Incomes, Happiness and Freedom Satisfaction?

Brookings Institute Blog - Fri, 10/17/2014 - 08:52

The recent economic crisis and subsequent lagging economic recovery have renewed the immigration debate in the United States and beyond. However, while the effect of migration on the well-being of native populations is important, so is the question of how migrants fare once they reach their destination countries.

Citizens of destination economies often argue that there are potential costs of migration for them, ranging from increasing strains on welfare systems to threats to the jobs of natives to the difficulties of assimilation. Despite these fears, on balance, migration’s benefits for the these destination economies outweigh the costs: Immigrants are net contributors to public coffers, and complementarities between low-skilled immigrants and natives exist—particularly when new migrants take low-skilled jobs that native workers eschew.  

But what about the welfare of the migrants themselves once they have reached their new homes? This is an important issue, largely due to the sheer magnitude of migration stocks: About 232 million people lived outside their country of birth in 2013.

Most migrants move across international borders to maximize their earnings and to gain opportunities, and most do make significant income gains. Whether these earnings gains are mirrored by improvements in reported well-being and broader quality of life is still largely an open question, however.

Higher levels of immigrant well-being can be instrumentally important for social outcomes such as public health and productivity, as happier individuals are typically more productive and healthier.  Immigrant dissatisfaction may reflect social exclusion and a lack of assimilation, and even extremist attitudes among natives, all of which can result in social unrest and lower economic output. From the point of view of the home countries, emigrant well-being is important as migrants send remittances and contribute to the well-being of their home countries through investments, the spread of ideas and technology.

Understanding the well-being consequences of migrating is challenging, as comparing the well-being of migrants with that of those who stayed behind in the sending countries or with natives in the destination countries is methodologically flawed. Such comparisons may simply reflect the traits of those who choose to migrate, and who may have differences in ability, risk tolerance, aspirations and motivation, among other traits. The direction of causality between well-being and migration is also unclear: While migration may influence well-being, well-being might well influence migration. A recent paper using South American data finds that respondents who intend to migrate in the next year are wealthier and more educated than the average respondent in the region, but are also less happy and more critical of their current and future economic opportunities.  

Despite the large income gains typically associated with migration, the move can also be accompanied by declining happiness because of adaptation to new income levels at the same time that aspirations are rising. While migrants’ (absolute) incomes increase (see Figure 1), so do their expectations as they compare themselves to the high-earning natives in their host countries. In a recent paper, we use Gallup World Poll data and statistical techniques to understand the consequences of migration for the well-being (income and non-income dimensions) of movers from transition economies to advanced nations. Like other studies, we find unequivocal income increases due to migration. More importantly, we find that there are significant gains in life satisfaction (Figure 2) and in perceptions of freedom (Figure 3).

Source: Nikolova and Graham, (2014) based on Gallup World Poll Data.    

Source: Nikolova and Graham, (2014) based on Gallup World Poll Data.

Source: Nikolova and Graham, (2014) based on Gallup World Poll Data.

We studied migrants from transition and post-transition societies as these are the predominant sources of migration for the OECD countries in Europe. For example, in 2012, Poland and Romania were among the top three migrant sources of OECD migrants. It is important to note that the migration experience of those who leave the transition economies and go to Europe, which is culturally very similar, is likely quite different from that of movers Asia, Africa and Latin America, for example.

We find that migrants from transition countries achieve a better quality of life after they go abroad. The average household income premium from migration for our sample is about 21,000 international dollars (about 10,500 ID per household member). And even if reference norms and aspirations change, migrants’ life satisfaction improves. The average benefit is substantively and statistically significant: an increase of about 1.0-1.2 (on a life satisfaction scale 0-10). Perhaps most importantly, migration positively affects perceptions of freedom (based on a question which asks whether or not respondents are satisfied with their freedom to choose in life), with migrants from the most recent European Union enlargements being nearly 40 percent more satisfied. Data from around the world show that freedom to make choices in life is a pivotal element of human well-being.

At a time when there is ample reason to be concerned about the state of world affairs, our research findings are a “happy story:” By voting with their feet, migrants from transition economies can improve their well-being. Surely migration does not solve the problems in the countries the migrants left, nor can we be confident at this stage that our results apply to migrants from other parts of the world or those going to destinations outside the OECD. Yet it does suggest that win-win outcomes are possible from increasing mobility in global labor markets. That is a story worth learning more about. 

Categories: Blog

Sponsored Journalism May Transform Journalists into Commodities

Brookings Institute Blog - Fri, 10/17/2014 - 08:30

Editor's Note: This blog post is in response to the newest Brookings Essay, "The Bad News About the News," by former Washington Post Editor Robert G. Kaiser.

Robert Kaiser's essay admirably surveys the problems facing journalism. I want to add a few thoughts about where the replacement for lost ad revenues may come from—and about some potentially troubling implications, including for Kaiser’s great paper, The Washington Post.

Over the past 50 or more years, we journalists have had the luxury of thinking of journalism as our product, and of readers as our customers. It was a great ethic to maintain, but from an economic point of view it was never right. In the newspaper business, our real customers were our advertisers, who paid the bills; our product was our readers, whose eyeballs we sold to advertisers; our journalism was our marketing hook, luring readers. Now that our marketing hook can no longer deliver our product competitively to our customers, our customers—advertisers—are going away.

The question now is: who is our next customer, if in fact we have one? I suspect part of the answer will be: corporations, investors, and other business interests that can harness journalistic methods and talent to promote their interests and brands.

One example, emerging rapidly, is so-called “native content” (aka “sponsored content” or “branded content”), which Wikipedia nicely defines as “a form of online advertising that matches the form and function of the platform on which it appears”: in other words, paid-for content that mimics the surrounding journalism but is produced for and placed by advertisers seeking to burnish a brand or disseminate a message. This stuff is often written by accomplished journalists to high professional standards, so it’s readable and interesting, sometimes better than the “official” goods. Don’t snicker, purists! In a provocative post recently (“Brace for the Corporate Journalism Wave”), Monday Note’s Frederic Filloux puts traditional journalists on notice that native content will eat their lunch. It will be free; it has a business model; readers will like it; and it will enjoy preferred access to the corporate insiders who are, after all, paying for it.

Or what if, instead of just buying ads that look like content, a corporate chieftain buys a whole newspaper? Every morning I thank Jeff Bezos, the founder and CEO of, for rescuing the Post, a national treasure, but I doubt he did it only for his health. If a giant company is engaged in cutthroat competition with other giant companies, and if it has all kinds of vital interests before the government, the country’s second most powerful newspaper might be a handy thing to have. I have no reason to think Bezos would slant the Post’s coverage of, say, electronic retailing or antitrust regulation, but how can the public be sure? And bundling Post content with Amazon's dominant Kindle platform would give the Post a leg up: good for the Post, but potentially not good for other outlets that lack comparable access.

This new age is already here. I hear stories from friends in PR about ostensibly independent bloggers who, under the pressure of time, reword corporate press releases and post them online as news, or even ask PR people to write news items for them. I don’t know that the cultural wall between traditional journalism and corporate PR will come down completely, but I do know that “down” is the direction it’s going.

Categories: Blog

Can the U.S. Army Win In A Complex World?

Brookings Institute Blog - Fri, 10/17/2014 - 08:00

Winning is not a singularly American concept, but from our sports teams to our military we expect a winner.

The Army Operational Concept

At the Association of the United States Army Symposium this week in Washington, D.C., U.S. Army Chief of Staff General Raymond Odierno unveiled the Army’s new concept for operating in our ever-changing world. This new Army Operational Concept (AOC) characterizes the environments of conflict for the future. It does not try to determine where our next fight will be, but instead anticipates the threats of the future operating environment and recaptures a term that has arguably been missing from our defense and security vernacular for the last several years–winning.

After 13 years of war, policymakers and military leaders alike have tread lightly on the concept of winning. Conflicts like Iraq and Afghanistan, and many of the conflicts that our nation will face in the future, are not and will not be contests of pure military might among nation-states. Rather than a series of force-on-force combat operations that result in enemy capitulation and eventually surrender, winning in the future environment will be much harder to qualify.

The Army is unique in its ability to deliver a powerful strategic message. While the appearance of a U.S. Navy carrier in troubled waters or U.S. Air Force combat patrols in contested airspace is meaningful and can have coercive effects, the AOC suggests that only “the arrival of Army forces demonstrates to partners and adversaries U.S. resolve and sustained commitment to achieving security objectives.” From the Normandy invasion to the Thunder Run for Baghdad, history demonstrates that only boots on the ground defeats our adversaries.

New Challenges And A New Concept of Winning

As the Army considers an environment that will present unique challenges, it must be prepared to prevent conflict, shape the security environment to facilitate national objectives and ultimately defeat adversaries across the full range of military operations. The Army Operating Concept will provide the roadmap for advancing technologies that ensure a comparative advantage–complementing the joint team, integrating special operations and focusing on the development of agile and adaptable leaders who can scope the problem and find a solution.  

To achieve these objectives the AOC will focus on critical tenets and core competencies, from demonstrating simultaneity across the military domains to shaping the security environment with critical multinational and interagency partners. Innovation and adaptability become as important as lethality and mobility. 

How will we define winning in the future security environment? Preventing conflict before it occurs, like bringing aid to those suffering from Ebola in West Africa, is winning. Shaping the security environment with regionally aligned and globally responsive forces, like an airborne infantry battalion in the Baltic states, is winning.

War is a contest of wills. America expects its military forces to win no matter what challenges lie in store. The AOC, by recognizing the demands of future armed conflict and underscoring the merits of leader development, ensures that the Army has the will to win in a complex world.

  • John R. Evans, Jr.
Image Source: © Jonathan Ernst / Reuters         
Categories: Blog

Good Governance Curbs Excessive Bank Risks

IMF blog - Thu, 10/16/2014 - 08:44

By Luis Brandão-Marques, Gaston Gelos, and Erik Oppers 

The global financial crisis reminded us that banks often take risks that are excessive from society’s point of view and can damage the economy. In part, this is the result of the incentives embedded in compensation practices and of inadequate monitoring by stakeholders.  Our analysis found the right policies could reduce banks risky behavior. 

Our findings

In our latest Global Financial Stability Report we take stock of recent developments in executive pay, corporate governance, and bank risk taking, and conduct a novel empirical analysis.

Using a sample of 830 banks from 72 countries, several definitions of risk, and four different empirical methods we  found that when banks align their compensation practices with long-term performance (for example, by paying bonuses with restricted stock), they also show lower levels of risk taking.

Policies to make banks safer

Recently, President Obama urged top regulators in the United States “to consider additional ways to prevent excessive risk-taking across the financial system, including as they continue to work on compensation rules and capital standards.”

Our analysis supports some of the policy measures currently being implemented in that area, and recommends new ones.

First, banks should better align compensation with risk. Banks could link compensation better to their overall financial health by paying managers partly with long-term bank bonds. Tying compensation to the bank’s default risk that way may help prevent managers and shareholders making risky bets when banks are financially weak.

 Second, banks should make sure variable compensation becomes available to executives only with a lag. They should also include clawback provisions that would force managers to return past bonuses if, for example, their decisions cause losses over the longer term.

Third, the boards of directors of banks need to be independent of bank management and should establish risk committees.

Finally, policymakers should consider measures to ensure that boards effectively represent not only the interests of shareholders but also those of the creditors of the bank. For instance, they could consider granting board representation to certain types of bond holders. This could improve the ability of these creditors to monitor bank managers.

Measures can have an impact

How much can these types of measures contribute to prudent risk taking by banks and foster financial stability? Apparently quite a lot.

Policymakers so far have required increases in bank capital to make the financial system safer, and this has indeed had the effect of reducing the amount of risk that banks are willing to take.

Our data show that an increase in the Tier 1 Capital (the predominant form of regulatory capital under Basel III) of 2 percentage points generally leads to a decrease in risk taking of about 5 percent.

We then compare this decrease in risk with that which would result from the changes in governance structures and compensation practices that we propose. Our figure below shows that the associated risk changes are of similar magnitude. Still, we should keep in mind that capital requirements and improvements to governance and compensation practices should be seen as complements, not substitutes, and are best implemented together.

We are not done yet

We also found evidence that a bank’s risk culture matters. According to our study, banks where the CEO has a professional background in retail banking or risk management—where the risk culture is usually seen as more conservative—also show lower levels or risk.  Figure 3.5 in the report shows this in more detail. The opposite is true for banks where the CEO comes from investment banking (where risk taking is more ingrained), even after controlling for bank specialization and other firm-level characteristics.

It is therefore important that bank supervisors complement their evaluation of the risk management function with a qualitative evaluation of a bank’s culture.

For instance, supervisors may inquire whether managers are setting the right “tone at the top” and whether this tone actually trickles down to the rest of organization. Does the organization reward responsible behavior? Does the staff understand the core values of the bank and are employees (including senior management) held accountable?

However, while we know that risk culture matters, we still do not fully understand why and how exactly. Academics and policymakers should make it a priority to find out.

Categories: Blog

Hutchins Roundup: Debt Restructuring, Mitigating Loss from Sudden Shocks, Inflation Expectations, and More

Brookings Institute Blog - Thu, 10/16/2014 - 08:01

What’s happening in fiscal and monetary policy right now? The Hutchins Roundup is a new feature to help keep you informed on the latest research, charts, and speeches. We hope you will find it useful.

Debt restructuring boosts economic conditions

In an analysis of debt restructurings in both emerging markets (between 1979 and 2010) and advanced economies (between 1920 and 1939), Carmen Reinhart of Harvard University and Christoph Trebesch of the University of Munich argue that these episodes led to higher growth, lower debt servicing burdens, and improved international capital market access.

Fiscal stimulus is an effective response to natural disaster shocks

Using the 2009 “Aquilano” earthquake as a natural experiment, Francesco Porcelli of the University of Exeter and Riccardo Trezzi of the Federal Reserve Board of Governors conclude that fiscal policies can effectively mitigate (PDF) the output loss from sudden negative shocks. While the multipliers on reconstruction grants were relatively loww—between 0.14 and 0.36—these grants prevented a fall in economic activity. The estimated multiplier on tax cuts was much higher, at 2.56.

Inflation expectations shaped by a combination of statistics and inaccurate memories

Alberto Cavallo of MIT, Guillermo Cruces of the Universidad Nacional de La Plata, and Ricardo Perez-Truglia of Microsoft find that individuals' inflation expectations are highly influenced by both price changes of certain goods and by published inflation statistics. They note that consumers form inflation expectations based on their own memories of price changes in supermarket goods, but those memories are highly inaccurate. These findings have implications for central bankers as they attempt to influence household decisions on consumption and investment.

Chart of the Week: Bank trading books down 34% from mid-2011.

Speech of the Week: Fed’s priority is U.S. economy, but it has to consider feedback effects of its actions on rest of the world, too

"[T]he U.S. economy and the economies of the rest of the world have important feedback effects on each other. To make coherent policy choices, we have to take these feedback effects into account. The most important contribution that U.S. policymakers can make to the health of the world economy is to keep our own house in order—and the same goes for all countries. Because the dollar is the primary international currency, we have, in the past, had to take action—particularly in times of global economic crisis—to maintain order in international capital markets, such as the central bank liquidity swap lines extended during the global financial crisis. In that case, we were acting in accordance with our dual mandate, in the interest of the U.S. economy, by taking actions that also benefit the world economy. Going forward, we will continue to be guided by those same principles."
– Stanley Fischer, Vice Chairman, Federal Reserve Board

Categories: Blog

Was Kim Jong-un’s Disappearing and Reappearing Act Ever a Mystery?

Brookings Institute Blog - Wed, 10/15/2014 - 13:00

An informed understanding of North Korean leadership stymies analysts and policy makers alike. Isolated, idiosyncratic, and intensely secretive, Pyongyang seldom reveals much about its decision making. However, there are occasional moments when the closed world of North Korean politics opens ever so slightly. But speculation and rumor also thrive under such circumstances, making it very difficult to view the North’s situation with clarity or certainty.

An Unexplained Absence

The past month and a half provides a telling example of this challenge. On September 3, Kim Jong-un, the North’s peripatetic young leader, appeared at a concert in Pyongyang, and then disappeared from view, not reappearing in official media until October 14. His prolonged, unexplained absence triggered intense interest in his whereabouts, health, and political standing, and in the stability of the regime.

What best explains Kim’s absence from public view for nearly six weeks? We need to begin with known facts.  On July 8, Kim walked with a pronounced limp in a memorial service commemorating the 20th anniversary of the death of his grandfather, Kim Il-sung. Videos of this event and of several subsequent political occasions did not obscure his physical condition, though there was no official explanation. On September 26, there was a single cryptic reference in official media that Kim was experiencing “discomfort.”  His absence from the anniversary of the founding of the Korean Workers Party on October 10 appeared to confirm continued, if undisclosed, physical problems.

Rumors of Political Infighting and Health Concerns Spread

Kim’s extended absence triggered a torrent of rumors and speculation, much of it emanating from elite defectors from the North now living and working in South Korea.  While conceding that Kim might have some serious physical problems, these defectors insisted that his larger problems were political. They offered a steady stream of claims, all purportedly based on sources in the North. One group contended that Kim had been ousted in a quiet coup by leaders in the Party’s Organization and Guidance Department; others argued that unnamed senior generals had overthrown him. Some defectors claimed that there was an ongoing power struggle at the top, all while Kim was suffering from numerous debilitating medical conditions, including gout, diabetes, renal failure, and severe ankle and leg problems.

There was (and is) no way to definitively prove or disprove these arguments. But they provided catnip for newspapers and broadcast media in South Korea and beyond. Sensational claims appeared in numerous publications and on U.S. news networks. Moreover, Kim’s increasing obesity and his smoking and drinking habits lent credence to assertions about Kim’s health problems. Several leading South Korean media outlets, for example, reported that German and French doctors had visited the North to address Kim’s purported medical issues (kidney failure in the case of an unidentified German doctor, and surgery on both ankles in the case of an unidentified French doctor).

There was at least superficial plausibility to some of these reports. The Kims have relied in the past on European doctors to address serious maladies afflicting members of the ruling family, including Kim Jong-un’s father, Kim Jong-il, who suffered from kidney failure and from heart disease. But elite defectors, being deeply alienated from the North Korean system, were predisposed to seize on reports of Kim’s health problems, believing that his days (and perhaps the regime’s days) were numbered.

Examining the Evidence

Various elite defectors emphasized the inherent implausibility of a young, untested, and impetuous leader wielding absolute power in Pyongyang.  To some, this suggested that Kim was a figurehead, albeit the “next of Kim” selected by his father. Others argued that senior figures near the center of power had grown increasingly disenchanted with Kim’s repeated purges of senior officials and his disruptive and destructive policies, thereby undermining the internal stability on which this most Confucian of systems has long rested.

However, if there had been an intense, ongoing struggle for power at the top of the system, was there evidence to substantiate it? Some sources alleged that Pyongyang was in virtual lock down in recent weeks, but visitors to the North Korean capital reported nothing to substantiate this claim. At the same time, leading South Korean and American officials detected no signs of internal upheaval such as troop redeployments or unusual activities of internal security personnel.  The chairman of the Republic of Korea (ROK) Chiefs of Staff, Admiral Choi Yun-hee, informed Korean parliamentarians that Kim “[did] not have major problems in ruling the country.” Admiral Choi also stated that South Korean military intelligence disputed claims that Kim was in a vegetative state, though he demurred from responding to a query about the overall status of Kim’s health. Similarly, the spokesman of the Ministry of Unification has declared that “Kim Jong-un’s rule is in normal operation.”

Another reputed North Korean source informed a leading newspaper in Seoul that Kim underwent ankle and foot surgery in mid-September and was recovering at a villa away from Pyongyang. But this source claimed that senior party and army officials were visiting Kim regularly and receiving orders directly from him. These purportedly included Vice Marshal Hwang Pyong-so, Kim’s closest aide at present and one of three senior figures who traveled on one day’s notice to Incheon last week for the closing ceremonies of the Asian Games, where he also met with senior South Korean officials. Hwang and his colleagues flew to the ROK on Kim Jong-un’s personal aircraft, the first time it had ever been flown outside North Korea. Even more important, it defied rationality that three ranking officials would leave Pyongyang even for 12 hours if the capital was in the midst of an intense power struggle.

Kim’s Reappearance

But the longer Kim remained absent, the more it raised doubts about his well-being. Kim’s recent reappearance while relying on a cane suggests that his immediate physical problems concern one or both legs and ankles. The new photographs appearing in North Korean media suggest tentative, somewhat awkward bodily movements; Kim seems far from fully recovered from what ails him. It is also possible that he confronts other undisclosed conditions. But Kim must have decided that it was better to resurface (albeit in a somewhat diminished state) than remain absent from the political scene. Even within a hermetically sealed leadership process, visibility matters.

Kim Jong-un’s return does not mean that all is settled in Pyongyang.  North Korea remains an acutely damaged society confronting prodigious problems, overseen by a young, self-important leader who seems unable or unwilling to grasp the enormity of the longer-term crisis that the regime confronts. But understanding North Korea must begin with what is known, not with what those outside the North hope for or imagine.

Authors Image Source: © KCNA KCNA / Reuters         
Categories: Blog

A Systematic Use of Performance Based Logistics Will Save DoD Money

Brookings Institute Blog - Wed, 10/15/2014 - 11:45

On Tuesday October 14, the national security industrial base working group at Brookings held an event on the arcane-sounding topic of performance-based logistics or PBL.  This idea is a way of making the Department of Defense more efficient and more economical in how it maintains equipment.  The results of the discussion were encouraging, because while they promised no easy relief from the pain associated with sequestration—due to return in just a year if no way can be found around it—they did suggest that at least several billion dollars a year can ultimately be saved in Pentagon maintenance accounts, perhaps within half a decade or so, through this innovative concept. 

I organized and moderated the panel, which included Jay DeFrank of Pratt and Whitney, George Mitchell of Sikorsky Aircraft, and Alan Banghart of Deloitte.  All three are heavily involved in PBL programs.  DeFrank and Mitchell work for companies that already perform these services for DoD; Banghard studies the programs and advises DoD on how to make optimal use of them. 

The basic logic of PBL is fairly simple, and rather elegant from the point of view of theoretical economics—and it has also now been proven in the real world, as it is already employed in 5 to 10 percent of all Pentagon maintenance contracts. Traditionally, the Department of Defense has paid contractors to repair equipment on a transactional basis—that is, fee for service. When something breaks, it is fixed.  Contractors make more money the more work they do to maintain and repair equipment.  This system gives contractors no direct financial incentive to make repairs more efficient, and also often reduces the availability of key equipment since much of it is frequently in the shop. 

By contrast, a PBL contract pays a contractor per successful flight-hour, steaming day, or mile driven of a plane, ship, or vehicle.  It leaves it to the contractor to figure out the optimal schedule for doing not only repairs but preventive maintenance. It also therefore encourages the contractor to bundle maintenance activities into a single visit to the shop, so that many things can be done efficiently and economically at the same time.  As Mitchell, Banghart, and DeFrank explained, this system also leads contractors to do more detailed studies on which parts tend to break most often, so that they can perhaps be reengineered or otherwise made more durable. 

Savings from this approach typically range in the vicinity of 5 percent to 20 percent though, as Banghart noted, they can be even greater.  Mitchell cited a University of Maryland independent study making  the same basic point.  There can also be second-order savings from other effects of successful PBLs.  For example, if aircraft are available a higher percentage of the time, the Department of Defense will not need to buy as many to ensure that a given number are ready to go on any given day. As such, not only maintenance costs (funded in the Department of Defense’s Operations and Maintenance or O&M budget) but also equipment purchase costs (funded in Procurement) can be reduced. 

There are some cases where PBL may not be applicable—for brand new systems using new technology (since no dependable baseline exists for knowing likely maintenance costs, making a PBL a gamble for all parties), or for systems about to be retired (since it takes time to set up a PBL and make it efficient).  But on balance, the panel tended to agree that, over time, up to $70 billion or $80 billion of annual O&M costs could be addressed through the PBL approach, meaning that by 2020 or so, a systematic use of this approach might yield the Department of Defense annual recurring savings in excess of $5 billion.

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

A Mirage, Not An Oasis: Easy Money and Financial Markets

IMF blog - Wed, 10/15/2014 - 08:09

By Fabio Cortes, David Jones and Evan Papageorgiou

Low interest rates and other central bank policies in the United States have sent investors looking for higher returns on their investments. Money is pouring into mutual funds and exchange-traded funds, which is fueling a mispricing of credit and a build-up of risks to liquidity in the markets—the ability to trade in assets of any size, at any time, and to find a ready buyer.

Mutual funds and exchange-trade funds are the largest owners of U.S. corporate and foreign bonds (Chart 1). This means they provide a lot of credit to grease the wheels of the financial system because they have taken investors’ money and lent it to corporates.

In our latest Global Financial Stability Report, we analyze this trend, which can create an illusion of liquidity. It turns out what we face is really a liquidity mismatch because investors can sell their mutual funds or exchange-traded fund investments almost anytime, but these funds have in turn invested their money in instruments that don’t trade quite as often, such as high-yield bonds.

While this is not a problem in good times, markets can turn volatile when the U.S. Fed starts to raise interest rates, particularly if this happens in an unexpected way. If that were the case, there is a risk that many investors would want to start selling all their holdings at once, causing asset prices to drop, which would then lead to further selling by investors, which may in turn create a vicious circle of further losses and more selling.

All this would complicate the task of a smooth exit from these monetary policies because of the risk of a bumpier exit associated with greater losses and volatility in fixed income markets.  We’ve already seen an increased sensitivity of financial markets to price shocks since the crisis (Chart 2), especially for credit products, which can lead to faster selloffs.

More ingredients

To complicate matters, all this money flowing into mutual funds and exchange-trade funds may have created this illusion of liquidity at a time of other changes across financial markets:

  • Inflows into these vehicles have enhanced “inflow’ liquidity, or the capacity to trade assets cheaply, but other structural measures of liquidity in markets, such as its depth and breadth, have deteriorated.
  • A few fund managers hold large amount of assets, and there is what we call a “brand risk” stemming from high concentration in the decision making across funds, as well as increasing concentration of holdings of individual bond issuers.
  • There is a reduction in the liquidity available from banks, which are traditional “shock absorbers,” as well as increasing sensitivity of hedge funds to asset price changes, and institutional investors playing less of a countercyclical role.

$3.8 trillion up in smoke

The result of a rapid switch to highly volatile markets would drive a faster rise in term premiums, and widening credit spreads would spill over to global markets. For example, we estimate that an unexpected market adjustment that causes term premia in bond markets to revert to historic norms (a 100 basis points increase) and credit risk premia to normalize (a repricing of 100 basis points) could rapidly push up bond yields (Chart 3), reducing the market value of global bond portfolios by over 8 percent—that’s $3.8 trillion.

These risks to exit mean officials need to address the existing liquidity mismatches.  They can do this through prudential policy measures such as removing incentives of asset owners to run—by aligning redemption terms of funds with the underlying liquidity in the assets invested.


Categories: Blog

Engaging North Korea: Calls for Leadership

Brookings Institute Blog - Wed, 10/15/2014 - 08:08

In September, the Center for East Asia Policy Studies held weekly events on key issues related to the Korean peninsula and the Northeast Asia region. Topics of discussion included:

  • the evolving purpose and feasibility of the U.S. rebalance toward Asia, with a special focus on whether the rebalance might improve Korea-Japan relations;
  • regional and national preparedness for unification led by South Korea and the differing scenarios for unification;
  • critiques of the current U.S. “strategic patience” policy toward North Korea;
  • new rationales for putting the reins of leadership for engagement with the DPRK in South Korea’s hands;
  • successful Track II efforts by Americans and others around the world in contrast to official U.S. stasis; and
  • ROK leadership in green economic development and climate change.

The events featured 19 speakers and 13 additional participants from the U.S. and the ROK, and a total of 350 guests attended the three events. Presenters and audience alike expressed great satisfaction with the generous time provided for discussion and debate among experts and with the audience.

Although the events covered a wide landscape of issues and policies, analysis of the current state of humanitarian and human rights challenges were absent. We address these issues at the end of this piece.

September 18: The Seventh Seoul-Washington Forum, jointly organized and sponsored with the Korea Foundation in Seoul, featured panel discussions on the rebalance to Asia, Korean unification and South Korea’s new leadership role in green growth and climate change. While many agreed that the United States rebalance to Asia was strategically and economically beneficial for South Korea’s interest, participants were skeptical of its sustainability and practical contributions to enhanced security cooperation and stability in the region. Opposed to the view that the rebalance is intended to contain China, Gary Clyde Hufbauer of the Peterson Institute for International Economics (PIIE) stressed the mutual economic advantage of the rebalance, especially if China is included in the Trans-Pacific Partnership. Contrasting visions of unification by the DPRK and the ROK were highlighted in the discussion. Debate also focused on China’s concerns over what kind of political and economic arrangements on the peninsula would accord with its own security interests and its likely opposition to a continued U.S. troop presence on the peninsula. The debate elicited a fundamental question by Sook-Jong Lee, president of the East Asia Institute and former Brookings Visiting Fellow, whether there could ever be a unification structure agreeable to both the United States and China. David Maxwell from Georgetown University responded that the certain inevitability of unification will force China to support it as long as their core objectives are met. Experts on South Korea’s role in green growth and climate change were the most diverse in background and analytical focus. So-Min Cheong from the University of Kansas compared the soft laws of South Korea and France on adaptation planning to the environment. Although soft laws, such as international declarations or conventions, are important in signaling a change in behavior and serving as a source of information, Cheong emphasized that deeper discussion is required to turn these into binding laws due to the complexity of climate change. Jay Koh, partner of Siguler Guff & Company and member of the Private Sector Advisory Group to the UN Green Climate Fund (GCF), assessed South Korea’s new role as host country of the GCF Secretariat and its leadership over the international process of establishing governance structures and fundraising.

September 23: “People-to-People Outreach, Americans and North Koreans: A Conversation with Ambassador Donald Gregg” featured a conversation between former U.S. Ambassador to the ROK Donald Gregg and CEAP’s Katharine Moon, SK-Korea Foundation Chair in Korea Studies. Moon posed important questions about the role of Track II engagement between the United States and North Korea and how to assess progress and impact, as well as some lessons Track II interactions might offer to governments. Gregg provided candid and informative assessments of his Track II activities with North Koreans including English education programs, training for economic development, and study of international business law. He emphasized the importance of continuously engaging North Koreans in order to dispel both countries’ negative views of each other and cultivate mutual trust. As chairman of the Pacific Century Institute, Gregg organized the first-ever meeting between the two countries’ Korean War veterans, who resolved to prevent such devastation from occurring again. Gregg observed that North Koreans displayed a sincere desire to learn about the larger world and admitted their urgent need for technical training in the English language, the workings of international institutions, trade, and business management.

September 29Gi-Wook Shin and David Straub from Stanford University unveiled their recent study, titled “Tailored Engagement,” for the first time to the U.S. public. Just weeks prior to this event, the scholars presented their study at the ROK National Assembly where it received bipartisan support. Guided by the principles of mutual interests, application of market principles, international collaboration, and flexibility, the study argues for a realistic policy approach toward North Korea. They emphasized the following:

  • South Korea should lay down the groundwork for reunification with a focus on strengthening the ROK itself;
  • South Korea should de-link future interactions on non-nuclear issues from the North’s nuclear program; and
  • The ROK should fine-tune its sanctions, especially the May 24th Measures, to allow room for engagement opportunities.

This last view was also supported by both ruling and opposition parties at the National Assembly, as members believe the measures should be relaxed in order to resume Inter-Korean dialogue.

The timeliness of this event as well as the points raised in the study were highly significant, considering North Korea’s “surprise diplomacy” on October 4 when both Koreas took a bold step toward a more independent, Inter-Korean diplomacy.

Important for U.S. policymakers and think tanks is the fact that many of the speakers in these three events, American and Korean, shared skepticism and disappointment with the United States’ “strategic patience” approach toward North Korea. Experts believe this strategy has produced little to no progress over the past two years and that it has amounted to neglect. And although it is necessary for the United States to implement bilateral and multilateral sanctions to impede North Korea’s nuclear capabilities, experts worry that the lack of simultaneous efforts at positive engagement will prolong tensions on the peninsula. Discouraged by perceived inaction by the U.S., many speakers shared the view that South Korea is no longer a “shrimp among whales” in the international community and must now take over the leadership role when approaching North Korea, with the United States playing a supporting role.

Absent was discussion of the impact of sanctions on the humanitarian needs of common Koreans, especially the most vulnerable—children, pregnant women and new mothers, and the elderly. Food shortage, inadequate healthcare, poor sanitation and lack of clean water are grave concerns. Currently, UN humanitarian programs in North Korea face serious problems due to low funding. One of the reasons for the low funding is due to the unintended consequences of international sanctions. Sanctions targeting North Korea’s Foreign Trade Bank, the country’s main route for money transfer, have prevented the flow of earmarked funds by foreign aid groups. In 2013, UN agencies in North Korea received only 34.8 percent of the $150,090,000 needed to address critical humanitarian needs of North Koreans. More recently, the World Food Program (WFP) warned that its program in the DPRK is on the verge of shutting down as early as January 2015 if additional funding is not secured. Dangerous consequences for the North Korean people are foreseeable for the program’s targeted 1.63 million of the most vulnerable populations.

Missing also was China’s role in the forced repatriation of North Korean border-crossers by the Chinese government. China has been violating international law despite being a state party to the UN Refugee Convention. However, China recently has shown signs of a policy shift when a group of North Korean defectors detained on the border of Laos and China were reportedly released rather than being sent back to the DPRK. Given the increasing importance of ROK-Sino relations, coupled with China’s frustrations with Pyongyang, both the ROK and United States should promptly pick up on this positive momentum to induce China to comply fully with its UN treaty commitments.

The surprise visit by the trio of top North Korean governing elites to Incheon on October 4 may signal potential improvements in Inter-Korean relations. In light of this development, tailored engagement and increased people-to-people interactions with North Korea may be the appropriate and effective approaches at this time to decrease tensions on the peninsula.

Authors Image Source: © Kim Kyung Hoon / Reuters         
Categories: Blog

Aristotle & the Archbishop of Canterbury: Overheard at the IMF’s Annual Meetings

IMF blog - Tue, 10/14/2014 - 08:07

By iMFdirect editors

What a week it’s been.  Practical and existential questions on how to do good and be good for the sake of the global economy and finance dominated the seminars at the IMF’s Annual Meetings in Washington.

Our editors fanned out to cover what the panelists, moderators, and audiences said in a variety of seminars, and two big themes caught our eye.

Jobs & growth

With the global economy stuck in a low growth, high unemployment rut, how to reverse these trends is a hot topic.

The average unemployment rate in developed economies stands at 8.5 percent, and among young people it’s 13 percent, Christine Lagarde said in a day-long seminar on jobs and growth.

Inequality has reached critical levels.

“The world’s richest 85 individuals control as much wealth as the world’s poorest 3.5 billion people,” she said, citing research from Oxfam.

Even economists know money can’t buy happiness, but it can buy a country bridges and roads.  While spending on infrastructure is a good for growth, who pays and what it means for the public purse is another matter.

And more important, can it over come the world economy’s lethargy, particularly in Europe?

“Yes, yes, yes”, affirmed Larry Summers of the University of Harvard.

Others were a bit wary.

“Will it come at the expense of something else that is valuable for growth, such as education, or research and development?” said Christina Romer of the University of California at Berkeley.

Ngozi Okonjo-Iweala Minister of Finance of Nigeria, speaks during the Challanges of Job-Rich and Inclusive Growth seminar during the 2014 IMF/World Bank Annual Meetings on Wednesday, October 8th. Drawing on the first three sessions, this concluding session brings together policy makers to discuss the important dilemmas and tradeoffs that countries grapple with as they seek to implement reforms to deliver job-rich and inclusive growth. Photo by Ryan Rayburn/IMF

“When you have a limited purse, it is tough,” said Ngozi Okonjo-Iweala, Nigeria’s Finance Minister.

Even the idea the purse could be limited was up for grabs.  Paul Krugman, columnist for the New York Times and professor at Princeton University said the phrase “fiscal space” disturbs him a little.

“The idea that we can adequately say how much a country can really take on is not necessarily right,” said Krugman. “The notion that there are hard limits is simply not borne out by events. Fiscal space should not be a reason to not spend at a time when you should be spending.”

Still, Stanley Fisher, vice chair of the U.S. Fed, said in terms of what can be done ”much depends on the politics of each country.”

Jeroen Dijsselbloem, President, Eurogroup participates in a CNN Debate at the 2014 IMF/World Bank Annual Meetings at George Washington University, Lisner Auditorium October 9, 2014 in Washington. IMF Staff Photograph/Stephen Jaffe

Jeroen Dijsselbloem, president of the Eurogroup said that while growth in the eurozone is lagging, the European Central Bank has taken a number of measures, while a couple of countries (France and Italy) need to do more and have the “political stamina” to get it done.

“We should expect a little less from the central banks and a little more from the politicians,” he said.

There were also seminars on Asiawomen, Latin America, inequality and fiscal policy, and  the future of capacity development that you can watch online.

Ethics, banks & finance  

The faithful packed the proverbial pews Sunday morning to participate in a day’s discussion of the future of finance.  First up: ethics.

Ever since bankers lit a match under the global economy, they have had a hard time getting back people’s trust.

The ethical failures that led to the crisis included mercenary and greed-driven behavior, and a disembodiment of finance from the economy, according to panelists.  The structure of bankers’ compensation also played a role (more from the IMF on this here).

“Confidence builds over time and dies overnight,” said Christine Lagarde, and getting it back is important because finance fuels and oils the economy.

The Most Reverend Justin Welby, Archbishop of Canterbury speaks in the panel discussion The Future of Finance: Ethics and Finance at the George Washington University Jack Morton Auditorium as part of the 2014 IMF / World Bank Annual Meetings in Washington, D.C. on Sunday, October 12th. Photo by Ryan Rayburn / IMF

“The heart of reconstruction of confidence is in ethical and worthwhile banking, which has at its heart ambition for heroism, not only for internal rate of return,” said the Most Reverend Justin Welby, Archbishop of Canterbury.

Next up were banks and shadow banks.  How the former will adapt to a new environment including the rise of the latter remains unclear.  Panelists had more questions than answers.

“What would you like the system to look like? No one has told us that yet,” said Douglas Flint, chairman of HSBC.   “If you define the system, then you can use the regulation to shape that outcome.”

“Where are the living wills?” said Simon Johnson of MIT.  “How will we handle the failure of a large, complex, global bank?” (Earlier in the day Mark Carney said we could expect big news on too-big-to-fail at the upcoming G20 Summit in Australia).

While there is still a lot we don’t know about shadow banking, there is a silver lining according to some.

“They serve the real economy, which is the most important part of shadow banking in emerging markets,” said Nor Shamsiah Mohd Yunus, deputy governor of Bank Negara Malaysia.   “They serve those who have trouble getting loans from traditional lending, so they promote financial inclusion.”

The day wrapped up with cyber risks, who should own your data, and how technology can make finance both more risky and democratic.

The rapid rate of technological innovation means we can pay for anything electronically.

“There is something scary about someone taking a cell phone, hitting four buttons, and getting money,” said Dean Karlan of Yale University.

Can regulators hope to keep up with the pace of innovation?

“Regulation is like a moat around a castle: effective when the enemy shows up as knights on horseback, but totally ineffective when they show up with cannon,” said Peter Sands of Standard Chartered Bank.

In the face of so much uncertainty, we turn to the Archbishop and Aristotle for guidance.

“We need heroism as it was in the classical sense: that causes us to leave a mark on the world that contributes to human flourishing.”

Amen to that.

Contributors: Gita Bhatt, Maureen Burke, Jacqueline Deslauriers, Lika Gueye

Categories: Blog

Don’t Play Games with New START

Brookings Institute Blog - Mon, 10/13/2014 - 07:50

Writing on October 8 for The Washington Post’s “PostEverything” site, Stephen Rademaker proposed that President Obama penalize Russia for its aggression against Ukraine by suspending reductions to be made under the 2010 New Strategic Arms Reduction Treaty (New START). The president should do more to assist Ukraine, including providing greater military assistance. But tampering with New START is not in the United States’ interest: it could cause the treaty to unravel, at a time when Russia is building new strategic weapons—and the United States is not.

Rademaker wrote that President Jimmy Carter asked the Senate to suspend consideration of the 1979 Strategic Arms Limitation Treaty (SALT II) to punish the Soviet Union for its invasion of Afghanistan and cited that as an example Obama should emulate. Actually, Carter had no choice. Under the circumstances, the Senate would have refused to ratify SALT II.

Carter launched a diplomatic "press" on Moscow and armed the Afghan resistance, policies that President Ronald Reagan continued. Rather than suspend arms control, however, Reagan abided by the SALT II limits for six years and launched new negotiations with the Soviets to reduce strategic arms and intermediate-range missiles.

The U.S. and EU Response to Russian Aggression

Over the past six months, the United States and European Union have responded to Russia’s aggression against Ukraine with tough economic sanctions. They have caused capital flight from Russia to soar, brought the ruble to new lows and forced Russian companies to turn to their government for tens of billions of dollars of credit financing. The sanctions go far beyond what the West imposed on the Soviet Union in the 1980s.

In proposing to suspend New START reductions, Rademaker asserted that the treaty forces only the United States to reduce. True, Russian strategic forces in the 1990s and 2000s steadily declined in numbers as the Russian defense budget was starved of funds.

The Kremlin’s Strategic Force Modernization

That began changing some years ago, as greater budget revenues enabled the Kremlin to spend more on strategic force modernization. Today, the Russians are deploying new Borey-class ballistic missile submarines, new Bulava submarine-launched ballistic missiles and new Topol-M and Yars intercontinental ballistic missiles.

Those who claim that New START requires only the United States to come down to the treaty’s limit of 1,550 deployed strategic warheads should check the most recent New START data exchange: as of September 1, Russia had 1,643 deployed strategic warheads—one more than the United States. (The treaty’s limits are to be reached by February 2018.)

The United States still holds a lead in deployed strategic missiles and bombers. But serious analysts would agree that the number of what goes up—missiles—matters far less than what comes down—warheads. Indeed, the George W. Bush administration in which Rademaker served sought to limit only warheads, not missiles (or bombers).

Suspending New START Reductions is a Risky Game

Suspending New START reductions would make little sense. Such a move could set in motion a risky and potentially dangerous game. The Kremlin might well retaliate. One Russian official last spring raised the prospect of suspending treaty inspections. It is not in the United States’ interest to start down a path that could lead to New START unraveling.

The treaty’s data exchanges, notifications and inspections provide critical transparency about Russian strategic forces, while its limits provide hard caps on their size. It is in both sides’ interest to keep the strategic arms competition constrained and predictable. That becomes more important now, when Washington and Moscow find themselves in a more confrontational relationship over Ukraine.

Were New START to come undone, Russia could well continue its ongoing strategic production lines. A new strategic arms race is not an inviting prospect. While the Pentagon has its strategic modernization plans, new American ballistic missile submarines and long-range bombers will only begin to appear in the late 2020s.

Moscow thus would enjoy a running head-start in any new strategic arms race. And doubts have already arisen about whether the U.S. defense budget can afford even the current modernization plans.

So Carter’s handling of SALT II does not offer a good example for Obama. He should look instead to Reagan. Obama should maintain sanctions on Moscow until it becomes part of the solution rather than the source of the problem for Ukraine, and he should provide Kyiv with defensive weapons. But he should not play a risky game with the New START Treaty, whose implementation remains very much in the U.S. national interest.

Authors Image Source: © Kacper Pempel / Reuters         
Categories: Blog

A More Complete Picture of Pioneer ACO Results

Brookings Institute Blog - Mon, 10/13/2014 - 07:08

The Centers for Medicare and Medicaid Services (CMS) recently released more detailed ACO-level data for participants in first two years of the Pioneer ACO Model. The program, which is designed for health systems with more experience assuming financial risk for patient populations, has generated savings and improvements in quality measures, but has also struggled to retain participants. The program began with 32 provider organizations; following a series of recent announcements there are now 19 total participants.

Last month, CMS announced that the Pioneer Program was able to yield total program savings of $96 million in its second year and resulted in ACOs sharing in savings of $68 million. CMS also reported that the Pioneers were able to improve mean quality scores by 19 percent and increased performance on 28 of 33 measures between performance year one and performance year two.

Financial Results

The latest financial results provide more participant-level data and allow for a new level of analysis of performance across all these ACOs. In year one of the program, financial performance for individual Pioneers ranged from a gross loss of $9.31 million to a gross savings of $23.34 million. Thirteen Pioneers reduced costs enough to qualify for shared savings, with an average of $5.85 million returned to the ACOs, ranging from $1.00 million to $14.00 million. One ACO owed shared losses of $2.55 million. The remaining eighteen ACOs were within the minimum savings or loss rate and did not earn shared savings or owe money to Medicare due to losses.

Following year one, nine Pioneer ACOs either left the Medicare ACO program entirely, or moved to the lower risk Medicare Shared Savings Program (MSSP). Eight of the nine Pioneers that left the program failed to reduce spending in their first year. Out of the remaining 23 participants in the second performance year, three of these ACOs opted to defer reconciliation until the end of Performance Year 3. The 20 Pioneers with final Performance Year 2 data had financial performance ranging from a gross savings of $24.59 million to gross losses of $6.26 million. Fourteen ACOs reduced spending in Performance Year 2, eleven of which reduced enough to qualify for shared savings. The average shared savings for these ACOs was $6.55 million, ranging from $1.22 million to $13.41 million. Three Pioneers shared losses, averaging $2.33 million back to the Medicare program.

The table below shows the breakdown of ACOs according to whether they reduced spending, increased spending, shared in savings, or owed money back to Medicare due to losses. More than half of the Pioneers were able to reduce spending in year one (18/32) and year two (14/23), with more than one-third of total ACOs earning shared savings in each year as well.

The data also suggest that those ACOs that were most successful in reducing spending in the first year were also more likely to reduce spending in their second year. As the chart below shows, three ACOs that earned shared savings in year one owed money back to Medicare due to losses in year two, while no ACO that had shared losses in year one was able to attain shared savings in year two.  

Quality Results

CMS also released ACO-level performance on all 33 measures for Pioneer participants in year one and year two. The 23 ACOs that remain in the Pioneer Program showed overall improvement in average quality scores from the first to second performance year. The ACOs also improved overall on 28 of 33 measures, as the chart below shows.

The quality domain with the greatest improvement in year two was Domain 4 (At Risk-Populations) which saw an overall improvement from 67.5% to 83%. The marked improvement in this domain suggests that ACOs are making progress at better coordinating and delivery care for high-risk patients, many of whom have multiple chronic conditions. Chronic care management for conditions such as diabetes, coronary artery disease, and hypertension is critical for the continued success of accountable care efforts. All other domains saw average quality improvement as well, summarized below.

Likewise, almost all of the individual Pioneer ACOs improved their performance on quality measures from year one to year two. Of the ACOs that remained in the program for year two, all but one ACO was able to improve its overall quality score in its second year.

Additionally, the percentage of Pioneer ACOs performing in the 80th or 90th percentile in quality scores also increased from year one to year two, as shown in the chart below.

Putting Together Financial and Quality Results

In year one of the Pioneer Program there appeared to be no direct correlation between average quality scores and gross savings or losses for individual ACOs. This may not be unexpected, especially since Pioneer ACOs in their first year are eligible for shared savings simply by reporting their quality. In subsequent years, however, the ACO’s quality score impacts the level of shared savings that the Pioneers are eligible to receive, so we might expect a bit more alignment between quality and financial performance. Average quality scores and level of savings or losses for each of the 32 first year Pioneer ACOs is below.

After year two, there still does not appear to be a direct relationship between higher quality scores and level of savings or losses in the Pioneer Program. Further examination of results begs additional questions about why certain ACOs clustered in different parts of the grid relative to others.

Of those ACOs in the red circle above— higher total savings and relatively average quality scores—two of the ACOs are from the Boston area and the remaining ones from other large metropolitan areas (New York City; Orange County, CA; Phoenix, AZ; and Detroit, MI). The average per capita Medicare spending for the counties corresponding to these ACOs is $11,544, compared to an average of $10,384 for counties corresponding to all 23 of the Pioneer participants.

Meanwhile those ACOs within the yellow circle had the highest quality scores, but also experience financial losses or slight savings. Many of these ACOs are from less densely populated areas, such as Maine, Wisconsin, and Illinois. There are a number of factors that could be contributing to their quality success, but little financial savings—healthier patient populations, a smaller or more engaged patient population, financial baselines impacted by lower per capita spending in these areas, or other factors driven by their region. Further analysis of these ACOs and the other public and private ACO programs, including both their characteristics and regional market characteristics, will provide needed further insights on the factors most likely to drive success.

Next Steps

These ACO-level data reflect the range of experiences across Pioneer participants. Some ACOs have sustained positive performance to date, while others have seen diminishing rates of return. Those organizations more committed to clinical transformation, patient outreach, and organizational change may be more likely to do better, but further analysis of differences in performance could enable the Pioneer Program and ACOs to achieve bigger impacts over time.

It is hard to know what the third performance year of the Pioneer program will show, but as noted earlier, the Pioneer Program has already lost over a third of its original 32 participants. Despite the decline in participation and mixed results so far, CMS remains optimistic and committed to the program, and the overall number of Medicare, Medicaid, and privately-insured individuals in ACO arrangements continues to rise. We can anticipate a proposed rule impacting the MSSP, likely later this Fall, which will impact elements of the Pioneer ACO program. Regulatory changes that may help increase the ability of the Medicare ACO programs to support better care while ensuring sustainability include: adjustments to attribution methods, benchmark calculations, collection and sharing of data with ACOs, updating performance measures, linking to other ongoing payment and delivery reforms, and creating more financial sustainability for program participants. The current Pioneer program can be a key step toward effective payment reform, but further steps are needed to assure long-term success.

Categories: Blog

Billionaires Must Balance the Treacherous Line between Advocacy and Political Involvement in Nondemocratic Regimes

Brookings Institute Blog - Sun, 10/12/2014 - 21:00

Jack Ma is one of China’s wealthiest men. With his company, Alibaba, having raised billions in its recent public offering, the firm is one of the world’s leading e-commerce sites and he is an extremely rich person. According to Forbes magazine, Ma already is worth $10 billion and this stock offering will raise that figure even higher.

Looking at the Ma success story is illuminating because China is becoming a land of billionaires. With 152 billionaires, China is minting ultra-wealthy individuals at a brisk pace. Currently, the country ranks second in the world in number of billionaires, according to the Forbes compilation of billionaires. This is below the 492 in the United States, but ahead of Russia (with 111), Germany (85), Brazil (65), and India (56).

But the broader question is what impact Ma and other billionaires will have on Chinese society and government. Extreme wealth is contentious in many nations around the globe. In Russia, for example, activist billionaires got into serious trouble when they used their wealth to move into politics. Oligarch Mikhail Khodorkovsky, for example, paid a heavy price after he funded opposition political parties during parliamentary elections. On what generally is considered trumped up political charges, he was convicted of tax evasion, lost control of his Yukos energy company, and spent several years in jail before being released this year.

So far, Ma has been careful not to position himself as an oppositional political figure. For example, he has set up a charitable trust with an estimated $3 billion in assets and announced plans to address China’s environment and health care problems. The wealthy billionaire is concerned about environmental pollution and has told reporters that “somebody has to do something. Our job is to wake people up.” But in announcing his charitable venture, he reassured government authorities about his long-term intentions. “I’m not political,” he told the Wall Street Journal. “We don’t want to confront [government officials]; we want to sit down and work with them.”

Living in a one party state, Ma is not likely to follow the Khodorkovsky model of direct confrontation. Since Ma has business dealings with the children of the Chinese political elite and wants to protect his fortune, he almost certainly will be very pragmatic in the public postures he takes.

A model that he should consider is the policy advocacy path of American billionaire Bill Gates.  Two decades ago, the federal government sued Gates’ company, Microsoft, over predatory software practices. Officials demanded that the business debundle its software so that other competitors would have a reasonable shot with consumers. Chastened by the experience, Microsoft settled the case and Gates went on to form the world’s largest foundation. Through that vehicle, he stays outside of direct elective politics, but uses his fortune to push for policy change in American education and global health.

With Ma’s environmental interests, all eyes will be on Chinese authorities to see how much advocacy they tolerate. How much of a social change agent will Ma become? Will the government let him and his foundation propose policy solutions to environmental problems? Will political leaders get upset if he speaks out about domestic polluting plants? 

In thinking about his options, Ma should be cognizant of the case of Chinese billionaire Wang Gongquan. That businessman attracted unfavorable government attention when he spoke out about his desire for greater citizen involvement in his country’s decision-making. He was arrested on charges of “assembling a crowd to disrupt order in a public place”, and his case is pending in the legal system. The line between billionaire policy advocacy and political involvement can be very treacherous in nondemocratic systems.

Categories: Blog

Pacific Island Youth taking Action4Climate

The onslaught of climate change in the Pacific Islands that look like tiny spots from space, is a big wake-up call for the youth of these nations. Young Pacific Islanders are taking a proactive stance by raising their voices on this issue.

Categories: Asia, Blog

It’s Unofficial!

IMF blog - Sun, 10/12/2014 - 13:38

By Sabina Bhatia 

I know it might sound odd, but I actually like the IMF-World Bank Annual Meetings. I know the traffic snarls on Pennsylvania Avenue are terrible, Washington cabbies ruder than ever, lots of men in dark suits (and sadly, they are still mostly men), and there is the constant rush from meeting to meeting.

But beyond the long lines, long hours, cold coffee and the constant buzz of communiqués, press releases, and scores of official meetings, I find my place in the  rich and stimulating discussions among the non-official community.

This year, over 600 civil society organizations, including members of parliament, academics, and several youth and labor groups, came to the meetings. They deliberated, discussed and debated some thorny issues. The burning issues close to their hearts? Not that different from what officials are also debating.  Here is some of what I heard:

International Monetary Fund Managing Director Christine Lagarde speaks at a seminar on “Challenges of Job-Rich and Inclusive Gorwth” at Jack Morton Auditorium at George Washington University during the 2014 IMF/World Bank Annual Meetings October 8, 2014 in Washington.

Jobs, Jobs, Jobs! With the jobless recovery and unemployment persisting in many parts of the world, it was no surprise that this was on the minds of labor and youth.  IMF Managing Director Christine Lagarde noted that if the unemployed formed a country, they would be the world’s 5th largest country (sobering thought).

The ILO’s Guy Ryder noted that “a major policy effort is needed to reverse the slide into persistent low growth…the priority must be to lift aggregate global demand.” On the corridors, there was broad support for the IMF’s recommendations to increase public investment in infrastructure. See related chapter in the WEO (This rings a bell for those of us who reside in DC!)

The conversations on jobs inevitably led to discussions on inequality…. This is a topic that resonates widely with civil society and the IMF’s recent work (see Ostry/Berg and Gupta/Keen) surfaced in many conversations. Justin Wolfers  remarked “In the 1980s, the IMF was all about fiscal austerity—today, its focus on inequality marks an astonishing transformation.” But both Oxfam and the ITUC called on the Fund to pay greater attention to what was happening on the ground—at the country level.

…and gender.  Ambassador Melanne Verveer, in a panel on women and the work force, summed it up nicely when she said women face “a sticky floor, a glass ceiling, and lots of men in the middle.” Lagarde noted bringing more women into the workforce would be an “economic game changer.”  Many of the young women I spoke to were surprised and heartened by the IMF’s emphasis on women in the workforce. 

So what next on jobs, inequality and gender? Lagarde told civil society that the Fund would be operationalizing jobs, inequality, and gender into its work. We are on it, but working to do even more…

On a different note, Sovereign Debt was another hotly debated topic at the civil society forum. Coming on the heels of the paper that the IMF released last week on collective action clauses, civil society reminded us that the IMF could not, in fact should not try to do everything. CIGI’s  Brett House and Jubilee USA convened a panel where discussants debated the benefits of a statutory approach and the contractual approach. This is an ongoing conversation…

International Monetary Fund Managing Director Christine Lagarde speaks a a conference on Ebola as she is joined United Nations Secretary General Ban Ki-Moon, World Bank President Jim Yong Kim and President of the African Development Bank Donald Kaberuka during the 2014 IMF/World Bank Annual Meetings at the World Bank October 9, 2014 in Washington.

The long shadow. Ebola and the tragic toll it is taking lent a note of sadness to the Meetings. The IMF and the World Bank, and other donors, met with the leaders of the three affected countries  and pledged the international community’s help. Many participants from the region said they really hoped that the international community would step up efforts—a sentiment echoed by Jeremy Lefroy, UK member of parliament, who led a delegation of parliamentarians to the Meetings. The IMF provided additional and immediate financing of $130 million to the three affected countries.

The beacon of hope—the young. The highpoint of the meetings for me was the participation by the youth. In a fantastic panel on innovation, entrepreneurship, and the prospects for youth, five promising men and women spoke about their dreams, aspirations and how they got to where they are.  Gulalai Ismail said “to assert change, the youth need to engage in the decision making process, but they also  need good mentors to make a head start.”

And making a head start for next year’s Annual Meetings were the winners of the Latin America youth essay contest! I was inspired and moved by their essays that lay out their aspirations and dreams. So it was only fitting that as the week closed, the Nobel committee announced that the Nobel Peace Prize was being given to India’s Kailash Satyarthi and Pakistan’s Malala Yousafzai for their struggles for young people’s rights, including the right to education.

Last but not least, three big dates to watch for in 2015. Civil Society is looking ahead at three big events in 2015. The Financing for Development Conference in Addis Ababa in July, the High Level Stocktaking Event on the Post 2015 Development Agenda  in New York in September, and the Climate Summit in Paris in December. As Managing Director Lagarde aptly put it “2015 is shaping up to be a make or break year.”

Categories: Blog

USAID Public Private Partnerships: A Snapshot

Brookings Institute Blog - Fri, 10/10/2014 - 12:28

Editor’s note: In this blog, George Ingram provides a snapshot of the United States Agency for International Development's (USAID) dataset of its public private partnerships. For a more detailed look at public-private partnerships, read Ingram's fact sheet, A Data Picture of USAID Public-Private Partnerships: 2001-2014.

In September, USAID released for the first time a dataset of its public-private partnerships since 2001. While the data set is not complete, reporting on about 90 percent of an estimated total of 1,600, it is the most comprehensive information yet available and provides a reasonable overview of the extent and nature of USAID’s public private partnerships.

I have sorted through the data and just released a report of data tables: A Data Picture of USAID Public-Private Partnerships: 2001-2014. The report sorts through the data to present a quantitative picture of USAID’s partnerships.

The data reveals that during the period of 2001 to early 2014:

  • There was a total of 1,393 partnerships, or an average of 100 a year
  • The total lifetime value of these partnerships is $14.3 billion, $3.8 billion from USAID and $10.3 billion from partners
  • Each dollar invested by USAID has leveraged partner contributions valued at $3.74
  • A quarter of PPPs have a duration of three years and 85 percent span one to five years
  • Some 3,000 organizations have been involved in USAID PPPs; Sixty-four have been involved in 5 or more
  • Africa has been the locus for the most partnerships (423), followed by Latin America (394) and Asia (340)
  • PPPs have been carried out in 91 countries, 54 of which hosted 10 or more
  • Economic Growth is the sector that has attracted the most public private partnerships (375), followed by health (314) and Agriculture (202)
  • But the most value has been in health ($7.2 billion), followed by agriculture ($2 billion) and economic growth ($1.5 billion)

This data release by USAID is welcomed. It advances the administration’s commitment to open, accessible data and open government.  Such data provides citizens in America and in developing countries a better understanding of how the U.S. is investing its development dollars. I look forward to using this data and other information to analyze the nature and value of USAID’s PPPs.

Categories: Blog

Heat Wave: Rising Financial Risks in the United States

IMF blog - Fri, 10/10/2014 - 07:28

By Serkan Arslanalp, David Jones, and Sanjay Hazarika

Six years after the start of the global financial crisis, low interest rates and other central bank policies in the United States remain critical to encourage economic risk-taking—increased consumption by households, and greater willingness to invest and hire by businesses. However, this prolonged monetary ease also may have encouraged excessive financial risk-taking. Our analysis in the latest Global Financial Stability Report suggests that although economic benefits are becoming more evident, U.S. officials should remain alert to excessive financial risk-taking, particularly in lower-rated corporate debt markets.

Bullish financial risk-taking bears monitoring

Persistently low global interest rates have prompted investors to search for higher returns in a wide range of markets, such as stocks, and investment-grade and high-yield bonds. This has resulted in escalating asset prices, and enabled issuers to sell assets with a reduced degree of protection for investors (we give you an example below). The combined trends of more expensive assets and a weakening quality of issuance could pose risks to stability.

To track the changes in financial risk taking since the crisis, particularly in the lower-rated corporate debt market, we developed a heat map that looks at signs of financial risk taking from three angles: valuation, issuance trends, and redemption risks.

The heat map shows that financial risk taking in corporate debt markets is rising and markets have begun to overvalue many assets. Spreads in the high-yield and leveraged loan markets are not far from levels seen before the financial crisis. The quality of new loans issued is also declining, especially in the leveraged loan market where the amount of leverage in new deals is rising. The number of “covenant-lite” deals which give lenders less control over issuers has increased. For example, many new deals allow borrowers to issue more debt in the future without obtaining prior permission from lenders.

Meanwhile, the risk that many investors could sell their holdings all at once is now even higher than before the crisis.  Mutual funds, exchange traded funds, and households hold about 30 percent of corporate bonds  as of the end of June 2014.The worry is that such  “retail” investors could start selling suddenly if the value of their assets deteriorates unexpectedly.

For example, high-yield corporate and emerging market bond markets saw large retail outflows in May and June 2013, when investors panicked during the “taper tantrum” episode. That event was relatively short-lived and did not involve institutional investors.

A more severe episode of flight from risk by retail investors could lead to even greater financial volatility with wider systemic repercussions than were suffered during the 2013 event.

What to do 

Officials have acknowledged some of these risks, most recently in U.S. Fed Chair Yellen’s testimony to Congress in July in which she noted some potential financial stability effects of sustained unconventional monetary policy. While U.S. officials have already taken some measures to restrain excessive risk-taking, for example in the leveraged loan market, we believe more could be done. Macroprudential policies designed to keep the overall financial system safe could be deployed as the first line of defense against rising financial stability risks.  The IMF’s assessment of the U.S. financial system is looking closely at these and other policies to keep the system safe.

The United States is getting closer to ending six years of policies designed to stave off the worst effects of the crisis. The U.S.  banking system is now much more resilient, and economic risk taking by households and corporations is taking hold. For the sake of a smooth exit and a durable recovery, not only in the United States but gobally, it is critical that officials continue to respond to rising financial stability risks.

Categories: Blog

Confronting the Global Threat Posed by Ebola by Investing in Global Public Goods

Brookings Institute Blog - Fri, 10/10/2014 - 06:38

The first Ebola death in the United States makes clear that global health challenges in the 21st century can no longer be considered local problems. While the United States government just moved to require airport screening for fevers for passengers travelling from West Africa this is unlikely to be an effective strategy. Given the extended incubation period of the virus, even travelers who might have Ebola are likely to be asymptomatic. As the Director of the Centers for Disease Control and Prevention (CDC) Thomas Frieden explained, “The plain truth is we can’t make the risk zero until the outbreak is controlled in West Africa.”  The only effective strategy for the United States and other countries to defend against Ebola is to invest in the global public goods needed to defeat Ebola in Liberia, Sierra Leone, and Guinea.

The Ebola catastrophe did not have to happen but instead was a result of multiple failures when it comes to disease surveillance, vaccine innovation, and the emergency public health response. It reveals that we need different strategies to prevent the next outbreak and to deal with the exponential growth of the current pandemic.  As I have found in my research, effective global health responses require distinct approaches to solving collective action failures—the same type of failures that are at the root of the current crisis. Without these failures, the world would already have an Ebola vaccine, the initial outbreak would not have festered for three months without anyone figuring out what was happening, and a serious global response would not have been delayed by as much as nine months as the epidemic spun out of control.

The first failure that gave rise to the current Ebola crisis is the failure of adequate disease surveillance. It looks like the first victim of this outbreak was a 2-year-old boy in a remote Guinean village. His mysterious death in December 2013 was followed by similar deaths within that region and across the country before experts from Doctors Without Borders identified the culprit as Ebola. If Guinea’s extremely weak health system had a more robust system of surveillance this disease could have been stopped in its tracks before it ever reached Liberia or Sierra Leone. This weakest-link challenge resulting from limited disease surveillance capacity within Guinea reveals that without strengthening health systems in many of the poorest countries in the world, global health responses will continue to be behind the curve.

Even after Ebola was identified, another six months passed before any country with the resources to adequately respond to the pandemic stepped up to the plate in a major way. In September, President Obama committed the United States to building Ebola treatment units and training health care workers. Despite this important effort, the global response still faces a shortfall of over $300 million even as the cost of the epidemic continues to grow dramatically. Only three countries have committed more than $20 million and most countries have contributed nothing at all. This problem of aggregate effort is central to the challenge of financing a sufficient emergency public health response in the affected countries to contain the virus.

Perhaps the most dramatic failure is the fact that nearly 40 years after the discovery of the Ebola virus there is still no effective vaccine. Leading scientists suggest that the technical challenges to creating a vaccine are relatively modest and two potentially promising vaccine candidates already exist. Yet the lack of a sufficient financial incentive for drug manufacturers meant that neither vaccine candidate was pushed forward to human trials until very recently. In the face of this dramatic market failure, a “single-best effort” investment by the United States in vaccine innovation can make a dramatic difference for the entire world.

Despite the many failures which contributed to the current catastrophe, there are some important signs that Ebola can be defeated. The spread of Ebola to Nigeria was quickly contained in Africa’s most populous country thanks to a rapid response that included strict quarantines for suspected cases, the temporary closing of schools, and screening for thousands of others. The survival of courageous health workers from the United States and elsewhere suggests there may be promise in new treatments that the United States is now investing in bringing to human trials. The possibility of blood transfusions from those who have survived may be the most effective treatment at present. The development of a rapid diagnostic to detect Ebola, which is within reach, could dramatically simplify the process of identifying those suffering from the virus and implementing appropriate public health responses.

The reality remains, however, that none of this will be possible without a dramatically ramped up global response. Liberia alone needs hundreds of additional foreign medical staff just to treat those now infected. More than 8,000 people have been infected so far and without extraordinary efforts, the CDC estimates that this number could grow to as many as 1.4 million by January. Thousands of others are now dying from untreated malaria or other illnesses as a consequence of a pandemic that is devastating the economies of the region and causing significant food insecurity. In the short term, a global aggregate effort to finance an emergency response and provide trained health care workers is essential to prevent Ebola from reaching many more countries. In the long-term, only by strengthening the health care systems and disease surveillance capacity in West Africa and other low-income regions and by investing in innovation to catalyze effective vaccines for potentially devastating viruses such as Ebola can the United States and the rest of the world be protected.

Categories: Blog

The Poverty of Poverty Data

Brookings Institute Blog - Fri, 10/10/2014 - 06:33

Earlier this week, the World Bank published its latest estimate of global poverty, reporting that 1.01 billion people lived under $1.25 a day in 2011. Such estimates typically receive a good deal of attention and this time is likely to be no different. A goal to end extreme poverty is expected to feature as the cornerstone of a successor agenda to the Millennium Development Goals. In theory, the new poverty numbers should give a clear indication of how far we stand away from that mark, which is crucial to assessing the goal’s feasibility. Yet, in our view, the new poverty estimate fails to do this.

We are pleased to see global poverty numbers receiving greater attention. Ending extreme poverty is not the endgame of development, nor does the simple indicator of income poverty capture all aspects of well-being, but it remains a communicable and critical measure of human progress.

We also commend the World Bank for adopting its own institutional target to reduce the global poverty rate to 3 percent by 2030, and for thinking seriously about how poverty data can be improved. The World Bank, more than any other institution, understands the conceptual and empirical issues involved in monitoring poverty, as demonstrated in yesterday’s release of an impressive policy research report.

One change already in place is the bank’s commitment to report on progress against global poverty on an annual basis, where previously such updates only occurred around every 3 years. This commitment was made by President Jim Kim at his Georgetown speech in April 2013 when the bank’s “twin goals” were first unveiled. Updating global estimates every year means that new information can more rapidly inform and improve our understanding.

A good example of this is provided by India. Until Wednesday, the most recent global poverty estimates drew from India’s 2009-10 National Sample Survey, which was conducted at the height of a drought. That survey gave the impression that poverty reduction had been sluggish over the preceding 5 years, despite this being a period of record economic growth in the country. This week’s new estimates use data from India’s 2011-12 National Sample Survey, conducted when conditions were more representative. It reports about 100 million less people living under $1.25. One result is that the oft-repeated claim that the number of extreme poor living in India exceeds that in Africa can finally be put to rest. (As a counterexample, we are baffled by the bank’s decision to continue to use Nigeria’s 2010 Harmonized Living Standards Survey whose data are riddled with inconsistencies, when more recent estimates from the 2011 and 2013 General Household Survey Panel are available. Whereas the 2010 survey reports a poverty rate of over 60 percent, the more recent surveys suggest the rate is closer to 30 percent.)

At the same time, it is hard to come away from the new global estimates without feeling underwhelmed and frustrated by their limitations.

First, it is disappointing to see that the World Bank continues to generate poverty estimates based on 2005 Purchasing Power Parity (PPP) data rather than the new 2011 PPP data published earlier this year. As we pointed out in May, the new PPPs suggest that prices in developing countries are far lower than previously thought, which has a dramatic bearing on poverty numbers.

The bank has put off incorporating the new price data into its poverty calculations until it has had time to explore the changes and their causes more carefully. Such research is undoubtedly of value. Yet everything we know about the design and implementation of the 2011 International Comparison Program (the source of the new PPP data) suggests it is superior to the previous round. Choosing to delay the adoption of the new PPPs means consciously opting to employ inferior data. It also effectively puts in limbo the bank’s institutional poverty goal (including its interim 2020 target to reduce the global poverty rate to 9 percent) and more importantly, the forging of the post-2015 development agenda, which is actively being negotiated.

There is a second respect in which the World Bank’s new estimates have the feeling of immediately being old: we are furnished with global poverty estimates for 2011 as we near the end of 2014.

There is no reason why the bank could not generate provisional poverty estimates for the current year that can later be revised as and when additional data comes in. This is the approach taken with almost every other time-series of important economic data. World Bank country economists are well positioned to generate such estimates and in fact have done so in some bank regions for some time. Alongside its release of 2011 global poverty estimates, the bank has published projections of poverty for 2015 and other outer years. It is absurd that the bank is willing to provide estimates of poverty in the past and poverty in the future, while refusing to estimate poverty today. 

One of the innovations introduced by President Kim is the creation of a “Delivery Unit” specifically charged with generating real-time data on key performance indicators. Shouldn’t poverty data be held to the same standard?

Finally, it is disappointing that the World Bank chose to wait so long before updating PovcalNet: the online repository of survey data which serves as the source of global poverty estimates. This update includes the addition of data from several dozen national household surveys that the bank has obtained since the last revision 18 months ago.

In recent years, PovcalNet has become an indispensable resource for poverty researchers around the world; indeed it has played its part in a mini-revolution within development research, in which more open data and social media have reduced barriers and increased accountability. The delay in updating the public version of PovcalNet, while bank staff had access to an updated internal version, certainly goes against the bank’s claim to be a leader in the open data movement.

The World Bank is charged with promoting evidence for policymaking, not data for economic historians. Yet its institutional culture seems to steer it more towards the latter than the former. As the steward of global poverty data, this has to change.

Categories: Blog

The Hutchins Roundup: Big Impacts from Lower Mortgage Rates, Small Biz Loans Hurt Income Growth, and More

Brookings Institute Blog - Thu, 10/09/2014 - 11:04

What’s happening in fiscal and monetary policy right now? The Hutchins Roundup is a new feature to help keep you informed on the latest research, charts, and speeches. We hope you will find it useful.

Lower mortgage rates have big impacts

Benjamin Keys and Amit Seru of the University of Chicago, Tomasz Piskorski of Columbia University, and Vincent Yao of Fannie Mae argue that a reduction in mortgage interest rates has a significant beneficial effect on the economy. They find that when monthly payments are decreased by $150 per month, there is a substantial drop in mortgage defaults, a roughly 10% boost to sales of consumer durable goods, primarily autos, and an improvement in household credit standing.

Increased Small Business Administration loans hurt income growth

Using data for 3,035 counties for 1980 through 2009, Andrew Young and Donald Lacombe of West Virginia University and Matthew Higgins and Brianna Sell of the Georgia Institute of Technology suggest subsidizing small businesses may hurt a local economy by diverting resources  from more profitable or innovative firms. They find that a 10% increase in Small Business Administration loans per capita is associated with a 2 percentage point drop in per capita income growth rates.

World economic growth projections edge down

In an update to World Economic Outlook forecasts made in April, the International Monetary Fund downwardly revised year-over-year world output growth rates by 0.1 percentage points in 2014 to 3.3%, and by 0.2 percentage points in 2015 to 3.8%. The outlook for U.S. growth in 2015 was left unchanged, while the Euro Area, Japan, and Emerging Market outlooks each deteriorated slightly. The outlook for Brazil experienced the sharpest revision, down a combined 1.6 percentage points over 2014 and 2015.

Chart of the week: Inflation is expected to remain flat through 2015


European Central Bank to take a “more active and controlled” approach to balance sheet management

“And, with our asset purchase program – this is a pretty important point – we are transitioning from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of our balance sheet. We expect our measures to have a sizeable impact on our balance sheet, and ultimately, through their impact on all channels of monetary transmission, on inflation.”
– Mario Draghi, President, European Central Bank

Categories: Blog
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