Lurking conjures up images of spies, flashers and other dodgy types. The IMF’s chief economist Olivier Blanchard takes readers into the dark corners of the financial crisis in his latest article ‘Where Danger Lurks’ in our recent issue of Finance & Development Magazine, and looks at small shocks, sudden stops and liquidity.
“We all knew that there were ‘dark corners’ — situations in which the economy could badly malfunction,” Blanchard said. “The main lesson of the crisis is that we were much closer to those dark corners than we thought — and the corners were even darker than we had thought too.”
Economists and their profession suffered a black eye when all but a handful of the relatively few economists who attempt to forecast the future missed the onset of the financial crisis and the Great Recession that followed. This was just a worse example of a problem that has plagued economic forecasters since this particular branch of the profession became established after World War II: both the formal economic models and their less formal counterparts have trouble foreseeing turning points in the economy, whether positive or negative.
But forecasting is not what the vast majority of economists do for a living. Most attempt to understand how "the economy" and its constituent actors—businesses, consumers, and government—work. Others develop ideas to help firms work even better, by being more efficient or by discovering better ways to price their products and services. Those of us at Brookings and at other think tanks focus especially on policy prescriptions to improve the functioning of the overall economy, but we cannot function effectively without being aware of and using the insights from theoretical and empirical economists who spend their time theorizing or conducting empirical studies.
Over the summer I was fortunate to be asked by the organizers of TedEx of Kansas City, an independent TED spinoff like many other TedEx’s around the world, to talk about how economists helped build the Internet economy, both directly (through their design of ad auctions on website) and indirectly (through their impacts on the deregulation of transportation and the breakup of AT&T). Yes, it’s all true, and for those readers who have not previously seen the video highlighted on the Brookings website, they can see on Youtube.
The talk in the video is based on a much larger project in which I have been involved over the past two years: documenting the hugely positive impact that economists have had on U.S. business. The results are contained in a new book, Trillion Dollar Economists, published on September 23.
Without giving away the contents of the book—why would I want to do that?—here are a few takeaways that readers can find discussed in much greater detail in the book:
- Economists have been instrumental in implementing and designing auctions in a variety of companies that collectively have market values in the hundreds of billions of dollars
- Economists built the mathematical backbone for minimizing costs in much of the transportation industry
- Statistical techniques developed and refined by economists are increasingly being used throughout the sports industry
- Economists have contributed to a growing "matchmaking" industry, of human organs, of people in jobs, and in marriage.
- Economists and their insights helped spawn the growth of index investing and financial options contracts (collectively involving several trillion dollars)
- Without the deregulation of the transportation industry and the breakup of AT&T, events in which economists played prominent roles, Internet retailing would not exist on nearly the scale that it does today, if at all
- Economists also played prominent roles in encouraging the deregulation of the prices of oil and natural gas without which energy firms would not have had the financial incentives to make the technological breakthroughs that have dramatically increased U.S. oil and gas production, reversing the "energy pessimism" that overshadowed the country and world since the early 1970s.
And this is not at all. Economics ideas, already developed, are waiting in the wings to be applied in business and to be implemented as policy, which as economist-inspired policy changes in the past have done, will serve as future platforms for new businesses and the growth of existing ones.
The great British economist John Maynard Keynes famously wrote “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” That statement remains as true today as it was when it was written roughly eight decades ago—with one amendment: many of the economists who have had and are still having important impacts on U.S. business are still very much alive.Authors
The Alliance’s Challenges
When NATO Commander and U.S. Air Force General Philip Breedlove addressed a group of foreign policy experts at the Atlantic Council on September 15th, he reassured the audience that despite significant challenges, the NATO Alliance is dedicated through its “shared values” to keeping Europe and NATO “whole and committed to collective security.” He surmised that Europe could not be whole, stable and at peace without the cooperation of Russia, a country he characterized as having “broken world morals.”
Discussing the outcomes of the NATO Summit in Wales earlier this month, Gen. Breedlove focused on the essential elements of success for the NATO Readiness Action Plan and the important role it will play in the stability of eastern Europe moving forward. His plan calls for a three tiered approach: the existing NATO Response Force must be more responsive and agile; a NATO “forward presence” force must be established, and if rotational forces are used to man it, they must execute rotations of sufficient length to ensure force continuity and stability; and finally, NATO requires an operational level (i.e. Corps) headquarters that can focus on the collective defense aspects of NATO’s mission under Article 5, which Gen. Breedlove contends does not exist at the operational level.A Sad Twist Of Irony
It is a sad twist of irony that the headquarters best suited to fulfill the NATO operational headquarters requirement, the U.S. Army’s V Corps, was deactivated last June. The U.S. Army Corps is, by design, manned, equipped and trained to function as an operational or Joint Task Force headquarters. For recent successes in setting up such multi-national command elements, one need only look to the International Security Assistance Force (ISAF) Joint Command (IJC) in Kabul, Afghanistan. It has successfully served as the operational headquarters for ISAF for nearly five years, bringing the capability, versatility and unity of command resident in a U.S. Army Corps.
The deactivation of V Corps is symptomatic of broader fiscal realities within the U.S. Department of Defense that are requiring significant reductions to service force structure across the board. Nowhere are these force structure reductions more prominent than within the U.S. Army. As the Army recedes from nearly 575,000 during the height of the Iraq and Afghanistan conflicts to an active end strength of 490,000 by the end of fiscal year 2015, it finds itself with only three remaining Corps Headquarters (I, III and XVIII). With I Corps firmly committed to the rebalance in the Pacific and XVIII Corps serving as the Army’s expeditionary and contingency headquarters, this leaves only one U.S. Corps uncommitted within the Army. Even now, XVIII Corps is deployed to Afghanistan as the IJC headquarters as III Corps recovers and refits from its deployment last year.Rotate In The Army Corps
The U.S. Army, in conjunction with European Command, needs to consider rotating a Corps headquarters to Europe. As U.S. force structure retrogrades to the continental U.S. and the Army draws down, Corps headquarters cannot afford to be tied to one region or selected contingency plans. Today’s Corps must be expeditionary, agile, capable and able to rapidly build into multinational combined joint task forces. It would be the height of hubris to suggest that U.S. Army Corps are superior to those of our allied partners, but as many European nations have suffered a slower economic recovery than the United States, they are contracting their military capacities, not expanding them. With no European NATO nations meeting their promised level of spending on defense, the U.S. still provides the most effective military command and control capability to the alliance.
NATO’s civilian and military leaders have high hurdles to overcome to realize the NATO Commander’s concept. With the U.S. focused squarely on ISIS, a new commitment to the Ebola epidemic in western Africa and an ongoing commitment to the war in Afghanistan, bandwidth is narrow. But all are in agreement, accelerating NATO’s military preparedness is essential to addressing the threat of Russian opportunism. An Army Corps headquarters in Europe is the best way to ensure that preparedness.Authors
- John R. Evans
After years of warnings from the public health community about the growing threat of antibiotic resistance, yesterday the White House announced a national strategy to combat the growing problem of antibiotic resistance within the U.S. and abroad. The administration’s commitment represents an important step forward, as antibiotic-resistant infections are responsible for 23,000 deaths annually, and cost over $50 billion in excess health spending and lost productivity. The administration’s National Strategy on Combating Antibiotic-Resistant Bacteria includes incentives for developing new drugs, more rigorous stewardship of existing drugs, and better surveillance of antibiotic use and the pathogens that are resistant to them. President Obama also issued an Executive Order that establishes an interagency Task Force and a non-governmental Presidential Advisory Council that will focus on broad-based strategies for slowing the emergence and spread of resistant infections.
While antibiotics are crucial for treating bacterial infections, their misuse over time has contributed to a rather alarming rate of antibiotic resistance, including the development of multidrug-resistance bacteria or “super bugs.” Misuse manifests throughout all corners of public and private life; from the doctor’s office when prescribed to treat viruses; to industrial agriculture, where they are used in abundance to promote growth in livestock. New data from the World Health Organization (WHO) and U.S. Centers for Disease Control and Prevention (CDC) confirm that rising overuse of antibiotics has already become a major public health threat worldwide.
The administration’s announcement included a report from the President’s Council of Advisors on Science and Technology (PCAST) titled “Combatting Antibiotic Resistance,” which includes recommendations developed by a range of experts to help control antibiotic resistance. In addition, they outline a $20 million prize to reward the development of a new rapid, point-of-care diagnostic test. Such tests help health care providers choose the right antibiotics for their patients and streamline drug development by making it easier to identify and treat patients in clinical trials.
The Need for Financial Incentives and Better Reimbursement
A highlight of the PCAST report is its recommendations on economic incentives to bring drug manufacturers back into the antibiotics market. Innovative changes to pharmaceutical regulation and research and development (R&D) will be welcomed by many in the health care community, but financial incentives and better reimbursement are necessary to alleviate the market failure for antibacterial drugs. A major challenge, particularly within a fee-for-service or volume-based reimbursement system is providing economic incentives that promote investment in drug development without encouraging overuse.A number of public and private stakeholders, including the Engelberg Center for Health Care Reform and Chatham House’s Centre on Global Health Security Working Group on Antimicrobial Resistance, are exploring alternative reimbursement mechanisms that “de-link” revenue from the volume of antibiotics sold. Such a mechanism, combined with further measures to stimulate innovation, could create a stable incentive structure to support R&D. Further, legislative proposals under consideration by Congress to reinvigorate the antibiotic pipeline, including the Antibiotic Development to Advance Patient Treatment (ADAPT) Act of 2013, could complement the White House’s efforts and help turn the tide on antibiotic resistance. Spurring the development of new antibiotics is critical because resistance will continue to develop even if health care providers and health systems can find ways to prevent the misuse of these drugs. Authors
- Gregory W. Daniel
- Derek Griffing
- Ahimsa Govender
Under the rules of the Westphalian international system—where sovereign nation-states are the central players—states have complete authority over citizens within their territory (without legal obligation to behave in a particular fashion toward them), and are to avoid interference in the internal matters of other “juridically equal” sovereign entities. This system was in place for three centuries before being upended by post World War II innovations such as human rights law, standards of international cooperation, and cross-border humanitarian and development assistance. But even these norms ultimately rely on sovereignty to operate since the networks of treaties, conventions, agreements, and compacts that support these norms rely on the acquiescence of states.
A new collection of essays, edited by Mark P. Lagon and Anthony Clark Arend, examine some contemporary developments in international affairs that seek to “break through the veil of state sovereignty to support individuals.” Our contribution to this anthology argues that private development aid advances the centrality of human agency rather than state sovereignty as the analytical centerpiece of relationships between donors and recipients. It does this in two separate but related ways: by shortening the “long route” between donor and recipient; and by relying on peer-to-peer relationships abetted by the Internet and social media. Channeling aid through official state agencies removes the ability of individuals to make choices about resource allocation—both taxpayers and aid recipients are denied a direct role in determining the end uses to which funds are put. Private aid, by contrast, can be applied to projects and sectors selected by the donors themselves. Moreover, the spread of Internet platforms for private aid often enables recipients themselves to identify their own needs and funding amounts.
Our essay looks at new partnerships and actors promoting poverty alleviation and economic development, notably private sector actors who use social media and “crowdsourcing” to mobilize microloans to developing countries. We highlight some institutional arrangements that not only advance the agency private sector actors moved by a dignity-based rationale to provide assistance, but of the loan recipients themselves.Authors
Editor's Note: This post is the first in a new series looking into the inner workings and complex bilateral relationships of the United States, China and India – which contain two-fifths of the world’s population and two-fifths of its GDP.
When Xi Jinping arrived in Gujarat on Wednesday, the world’s two largest nations began a meeting noteworthy in two regards – somewhat in tension with one another.
On the one hand, the meeting symbolized the return of strongmen at the helm of Asia’s giant nations. In 2013 China’s Xi Jinping effectively consolidated power, after a decade of internal divisions in China’s leadership. And in May 2014, Narendra Modi’s electoral landslide produced the first single-party parliamentary majority in India in over thirty years. Both China and India seem willing, again, to experiment with a more top-down, streamlined approach to governing—wiping away decades of creeping decentralization and drift.
That also seems to contradict the noteworthy selection of Gujarat for the meeting. To understand Modi’s vision for India, you must understand it from the “inside out.” Modi’s bottom-up, local economic success in Gujarat will be the model for success in the rest of India – just as it was the engine of Chinese economic growth in the last two decades.
Yet it is also possible that the rise of strongmen and the persistent importance of local governments could be compatible with one another—or to modify F. Scott Fitzgerald’s famous statement, "The test of a first-rate leader is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." Xi Jinping and Narendra Modi ostensibly embody powerful centralized leadership, but if they are to accomplish great things for their countries, they will need to effectively channel local government -- indeed, even working to foster local innovation and autonomy.
The paradox of power in both India and China is that central governments must selectively give away power, yielding economic freedom to the private sector and political responsibility and accountability to localities. This applies to most complex multilayered systems, particularly ones as massive as India and China.
The fact that both Xi Jinping and Narendra Modi have been local leaders will help. Both men know this. Both know that steering out of an economic skid means getting traction from the power of the private sector—and reducing the role of government in the economy. Both men know that they will have to share power more effectively with massive states and provinces as well as with megacities and other local governments. Indeed, Modi and Xi both used local political autonomy to unleash local economic dynamism. And both are currently in the process of renegotiating the compact that connects them to far-flung states and provinces.
Getting that negotiation right is also important if either leader wants to address a wider range of challenges. Vexing problems such air and water pollution, housing shortages, migrant workers, and endemic corruption all require effective local governments. So do global challenges, such as attracting foreign investment, exporting goods and services, and fighting climate change.
In China’s case, local leaders already have surprising autonomy, contributing significantly to China’s three decades of success. What they lack is accountability to match that autonomy—accountability not only to Beijing but also to local residents and the private sector. Xi’s challenge is close that accountability gap.
China’s local governments have used central resources to build gleaming cities, wide highways, and impressive subway and high-speed train networks. By time Xi took office in early 2013, the goals for that approach to urbanization had evolved, with plans to move nearly 200 million people from countryside to cities by 2022, or about 1.5 million people per month.
That style of urbanization has had a significant downside, of course. It has created mountains of local debt, hundreds of millions of unsatisfied workers, dozens of cities with unbreathable air and undrinkable water, and rampant and intolerable local corruption. China’s next great challenge is to address the various side-effects of urbanization while still growing the economy. Yet none of these problems can be fixed solely by a strong, centralized government. Action—and accountability—must be localized.
In India the opposite is the case. A myriad of elected officials are formally accountable to electorates, but only a few have seized the responsibility to which they are entitled. Modi was one of those few who had done so successfully, and his challenge will be to encourage others to do the same without creating greater fragmentation.
On some national issues, Modi can act swiftly – but only where action does not require new legislation. His parliamentary majority means avoiding the complications of coalition politics when appointing ministers or managing intra-cabinet rivalries. That is a major step forward from previous governments, which were a hodgepodge of ministers from coalition parties.
But streamlining of federal agencies cannot be done by administrative fiat. Where real legislation is required, Modi still will have to come to terms with the upper house of parliament, which represents the enduring authority of states.
Because of that, Modi has hinted that he will solicit state leaders to endorse his initiatives directly. Since the BJP only controls five states, and Congress still controls eleven states, Modi is keen to partner with chief ministers from regional parties, such as J. Jayalalitha in Tamil Nadu, or N Patnaik in Orissa, or Chandrababu Naidu in Andhra Pradesh. In addition to getting them to support national efforts, he also will encourage those leaders to continue to take direct local responsibility.
Mr. Modi and Mr. Xi would be well served to encourage state and provincial officials to work with one another to build deeper ties than can be managed from New Delhi and Beijing. Chinese provinces such as Zhejiang, home of online giant Alibaba, can learn from south Indian states that have effectively managed the world’s software revolution. And Indian manufacturing hubs can learn from Guangdong how to become export giants, while also learning the lessons of runaway urbanization.
For both Mr. Modi and Mr. Xi, local success have been pivotal to their rise. Each man will need to invest locally – and perhaps do so together.
This post is excerpted from the updated paperback edition of Inside Out, India and China (Brookings Institution Press, 2014).
Vietnam has achieved remarkably high and inclusive GDP growth since the late 1980s. GDP growth per capita increased three-and-a-half-fold during 1991-2012, a performance surpassed only by China. The distribution of growth has been as remarkable as its pace: the bottom 40% of the population’s share in national income has remained virtually unchanged since the early 1990s, ensuring that the rapid income gains got translated into shared prosperity and significant poverty reduction.
GDP growth, however, has been operating on a lower trajectory since 2008. This has led to questions regarding the sustainability of the growth process, and, with it, Vietnam’s ability to bounce back to about 7-8% per capita growth. Analysts have voiced concerns over declining total factor productivity growth and growing reliance on capital accumulation. Moreover, a number of competitiveness issues routinely get raised by private investors, including: a widening skills gap, limited access to finance, relatively high trade and transport logistics costs, an overbearing presence of the SOEs, and heavy government bureaucracy that makes it difficult for businesses to operate in Vietnam.
What’s happening in fiscal and monetary policy right now? The Hutchins Roundup is a new feature from the Hutchins Center on Fiscal and Monetary Policy to help keep you informed on the latest research, charts, and speeches. Sign up to have the Hutchins Roundup delivered to your inbox, or email us with your suggestions for items to include in the next Roundup.Monetary policy has oomph even at zero lower bound
Even though short-term interest rates hit the zero lower bound, Eric Swanson of the University of California at Irvine and John C. William of the Federal Reserve Bank of San Francisco find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to macroeconomic news through 2010. Only beginning in late 2011—around the time the Fed promised to hold short-term rates near zero until “mid-2013”—did yields on these intermediate-maturity Treasuries turn impervious to news. This, they say, suggests the efficacy of monetary and fiscal policy was likely close to normal in 2008–10.A new model for capital regulation
In this International Monetary Fund working paper, Connel Fullenkamp of Duke University and Céline Rochon of the IMF propose a new system of capital regulation that:
- Considers only common equity as capital in a regulatory sense, and abandons risk weighting of assets.
- Assigns capital requirements on an institution-by-institution basis.
- Adopts a standard for corrective action.
Kevin Milligan of the University of British Columbia and Michael Smart of the University of Toronto estimate the effect of tax rates on reported income for high earners in Canada. Using cross-provincial variation in tax rates, they find that, for those in the top 1%, reported income increases sharply when tax rates fall but the responsiveness is much lower for other high earners. They note that the long-run trend of higher income concentration in Canada is largely unrelated to changes in taxes.Chart of the week: Official poverty rate falls for the first time since 2006 Speech of the week: Central banks are responsible for reaching inflation goals
“If one is talking about the perspectives of growth it is true that monetary policy cannot do it alone. It's mostly up to governments, especially structural reforms. But if one is talking about inflation it is different: It is the responsibility of monetary policy to reach the inflation goal - that is the fundamental creed of monetary theory and of central banks. We cannot shift this responsibility to others, but if others can help, it is even better.” – Vítor Constâncio, vice-president , European Central BankAuthors
- Brendan Mochoruk
- David Wessel
By Sweta Saxena
1. Are emerging markets slowing down? Yes. They have been slowing down for some time now. GDP growth has declined from 7 percent during the pre-crisis period (2003-8) to 6 percent over the post-crisis period (2010-13) to 5 percent, in our projections, over the next 5 years (2014-18). This path is illustrated below in Chart 1. This last point stands out. Despite an uneven recovery, growth in advanced economies is projected to eventually recover. Not so for emerging markets.
More worrisome is the medium—term outlook, where projections have been revised down serially since 2010 (Chart 2). This feature of repeated downward revisions to future growth is unique to the current downturn. In the past, we expected growth to bounce back (and it did). This time seems different. And, to some extent, weaker productivity and lower potential growth may be to blame.
The slowdown is broad based. Growth rates are lower than the pre crisis average in more than 70 percent of emerging markets since 2012 (see the red bars in Chart 3). This “head count” indicates that slower growth extends well beyond the largest emerging markets like China and India.
2. Will this have implications for the world economy? Yes. See the IMF’s 2014 Spillover Report. The report highlights several key spillover channels and what we can expect.
- Expect lower growth in trading partners: A 1 percentage point slowdown in emerging market economies lowers growth in advanced economies by ¼ percentage point, on average, through reduced trade.
- Expect lower commodity prices. Emerging markets account for the bulk of commodity demand globally. A slowdown means a fall in demand which would lead to a fall in prices. Whether it is good or bad for incomes depends on whether a nation mainly consumes (good) or produces (bad) those commodities.
- Expect bank losses. A slowdown usually triggers problems in the repayment of loans and could lead to capital losses for banks, including those in advanced economies exposed to Emerging Market borrowers.
- Expect slower growth if you live in the same neighborhood. For example, a slowdown in China and Brazil would impact emerging Asia and Southern Cone countries, respectively, through trade. Russia would have an impact on its Central Asian neighbors through remittances, while Venezuela would affect its Central American neighbors through financing and energy cooperation agreements.
3. Can anything be done to reduce risks associated with the slowdown? Yes. The report also talks about how international coordination and policy preparedness will be key.
- More collaboration between advanced and emerging market economies to manage both spillovers and the possible consequences for the original spillover source economies themselves, known as spillbacks.
- Renewed attention to structural reforms for emerging economies to boost productivity and medium-term growth. While national priorities differ, common threads include addressing infrastructure needs, improving education and addressing skill shortages, and enhancing competition and improving business climate.
Kể từ cuối thập kỷ 80 của thế kỷ trước, Việt Nam đã có tốc độ tăng trưởng kinh tế cao với lợi ích bao trùm. GDP bình quân đầu người tăng 3,5 lần trong giai đoạn 1991-2012 — chỉ sau Trung Quốc. Cùng với tốc độ tăng trưởng, phân bố tăng trưởng cũng là một thành tích rất đáng ghi nhận: phần thu nhập quốc gia dành cho nhóm 40% dân nghèo nhất hầu như không thay đổi kể từ đầu thập kỷ 1990 tới nay, điều này đảm bảo rằng tăng trưởng kinh tế được phân phối cho mọi tầng lớp và giảm nghèo một cách đáng kể.
Tuy nhiên, kể từ 2008, tăng trưởng GDP đã đi theo một quỹ đạo thấp hơn. Qua đó đã nảy sinh một số câu hỏi về mức độ bền vững của tăng trưởng và liệu Việt Nam có thể khôi phục mức tăng GDP bình quân đầu người 7-8% hay không. Các nhà phân tích quan ngại về xu thế giảm tăng trưởng năng suất nhân tố tổng hợp và mức độ phụ thuộc ngày càng nhiều vào tích tụ vốn. Thêm vào đó, các nhà đầu tư tư nhân cũng thường xuyên nêu các vấn đề liên quan đến năng lực cạnh tranh như kỹ năng ngày càng thiếu, khó tiếp cận vốn, chi phí thương mại và kho vận tương đối cao, độc quyền của các doanh nghiệp nhà nước và bộ máy hành chính cồng kềnh gây cản trở hoạt động của doanh nghiệp.
This week’s meetings between the leaders of China and India occur at an important juncture in relations between Asia’s two largest powers. Sino-Indian relations have advanced over the past decade, especially through bilateral trade and more regular exchanges between senior officials. But the longer term potential in bilateral ties remains largely unrealized. Xi Jinping and Narendra Modi must now decide whether each is prepared to undertake a larger and more durable partnership. This will require transcending a half century legacy of mutual suspicion and geopolitical rivalry, contested territorial claims and (for India) the lingering effects of New Delhi’s humiliating defeat in the border war of 1962.
The most promising possibilities concern India’s prodigious infrastructural needs. Modi, drawn to China’s economic reforms and their relevance to India, visited China on three occasions prior to his election as Prime Minister. He sought with ample success to emulate Chinese achievements in his home province of Gujurat, where he long served as chief minister. As a testament to the province’s economic advancement, Xi began his visit in Ahmedabad, Gujurat’s largest city. For added measure, China’s leader arrived on the Prime Minister’s 64th birthday.
The possibilities of large-scale Chinese investment, especially in addressing India’s infrastructural needs, will dominate much of the discussion. Xi is accompanied by other senior party officials, numerous government ministers and by a large contingent from the business sector. Various reports suggest that China might be prepared to invest in excess of $100 billion over the next five years, and some estimates range much higher. Numerous memoranda of understanding will be signed during Xi’s visit, encompassing industrial parks, railways, highways, power grids, port facilities, banking operations and other project possibilities. Regardless of the precise numbers, China’s potential commitments seem certain to dwarf pledges of $35 billion made during Prime Minister Modi’s recent visit to Japan.
New Delhi is acutely aware of the asymmetries in Chinese and Indian economic and military power, and hopes to be able to narrow these gaps without triggering acute tensions. It also remains very wary of China’s larger ambitions, including China’s maritime interests and activities in the Indian Ocean. Some in India are no doubt uncomfortable with large-scale Chinese investment, though these concerns are counterbalanced by India’s prodigious requirements in economic development. In addition, India has long sought increased respect from Beijing. The election of a powerful, determined new Indian leader helps ensure that Beijing will take New Delhi more seriously. In his initial discussions with President Xi, Prime Minister Modi called attention to the need to address the interests and concerns of both countries, an oblique reference to long festering border disputes, Beijing’s long-standing ties with Pakistan, and an array of parallel challenges, including terrorism, climate change and energy security.
As emergent major powers, China and India are both in quest of more autonomous and diversified political identities. The relationship with one another must be part of a larger strategic conversation. Without much fuller understandings across the full spectrum of bilateral and regional issues, the possibilities for a lasting accommodation between both countries cannot be realized. A much expanded Chinese role in India’s future development endorsed by both leaders is a necessary and appropriate place to begin. But this week’s deliberations will begin to suggest whether Xi and Modi are also prepared to grasp larger possibilities and pursue them in earnest.Authors
By Ian Parry
The time has come to end hand wringing on climate strategy, particularly controlling carbon dioxide (CO2) emissions. We need an approach that builds on national self-interest and spurs a race to the top in low-carbon energy solutions. Our findings here at the IMF—that carbon pricing is practical, raises revenue that permits tax reductions in other areas, and is often in countries’ own interests—should strike a chord at the United Nations Climate Summit in New York next week. Let me explain how.
Ever since the 1992 Earth Summit, policymakers have struggled to agree on an international regime for controlling emissions, but with limited success. Presently, only around 12 percent of global emissions are covered by pricing programs, such as taxes on the carbon content of fossil fuels or permit trading programs that put a price on emissions. Reducing CO2 emissions is widely seen as a classic “free-rider” problem. Why should an individual country suffer the cost of cutting its emissions when the benefits largely accrue to other countries and, given the long life of emissions and the gradual adjustment of the climate system, future generations?
From burden to benefits
This argument crucially ignores immediate domestic environmental benefits from reducing CO2. Fossil fuel combustion, especially coal, is a leading cause of local outdoor air pollution which, according to World Health Organization figures, is estimated to cause over 3 million premature deaths a year worldwide—through increasing the risk of heart disease, lung cancer, and so on. Taxing the carbon content of coal will increase its price, and decrease its use, leading to both fewer CO2 emissions and better public health due to cleaner air. A carbon tax would also increase motor fuel prices, which will reduce traffic congestion and accidents as people economize a bit on their use of vehicles. This again spurs domestic economic benefits, at least in countries where people are not already fully charged for these adverse effects through existing motor fuel excises. These health and other “co-benefits” from reducing fossil fuel use add to the gains in economic efficiency that start with pricing CO2 emissions.
Ideally, governments would use other policies to address domestic environmental problems, like charges for local air pollution. However, until these policies are fully implemented (likely a long time), policymakers should look at how the indirect impact of CO2 pricing can help alleviate these problems when they consider shorter-term climate policies.
So how important are these domestic co-benefits? A new IMF working paper assesses how much CO2 pricing is in countries’ own national interests by looking at the domestic co-benefits alone—before even counting the climate benefits. The findings, summarized in the chart below, are striking in two regards.
First, a substantial carbon tax (or CO2 pricing through trading systems) is justified by national interests, on average $57.5 per ton of CO2 across the top twenty emitters. This is several times the recent prices in the European Union’s Emissions Trading System, and 60 percent higher than the climate damages per ton of CO2 estimated by an inter-agency group for the U.S. government. The implication is that countries need not wait on an international agreement to move ahead with their own CO2 pricing schemes.
Second, prices that are efficient from a national perspective vary considerably across countries. For example, they are relatively high in China and Poland—where most of the CO2 reduction would come from less reliance on coal and there is high population exposure to coal pollution—and they are relatively low in Australia, where population exposure is far more limited. The implication here is that any international regime should be flexible, allowing some countries (with high co-benefits) to set higher CO2 prices than others (similar to value-added and excise taxes in the European Union, for which member states can set tax rates higher than the agreed upon floor).
A Message for Finance Ministers
CO2 pricing through carbon taxes or trading systems with allowance auctions would also raise significant new government revenues. And, as with any new tax, it is important to use these revenues productively—most obviously to lower the burden of other taxes. Environmental tax reform is generally about smarter taxes not higher overall taxes.
This last point underscores the potentially pivotal role of finance ministries, which to date have largely taken a back seat in climate negotiations, in integrating carbon pricing into broader fiscal reforms. They have good reason to urge effective carbon pricing, and this may not happen without their strong advocacy. And carbon taxes, in particular, would represent a straightforward extension of existing motor fuel excises, which are well established in many countries and among the easiest of taxes to administer, by building a carbon charge into them and applying similar charges to other fossil fuel products.
New York, Paris, and beyond
These findings complement other important work in the area, such as the report recently issued by the Global Commission on the Economy and Climate. They should also hearten participants at next week’s Climate Summit, which is set to catalyze commitments ahead of the pivotal December 2015 meetings in Paris, at which policymakers hope to finalize an international climate agreement. There is no need for action to await coordinated measures adopted by many countries—a lot can be achieved simply by looking at national self-interest.
Most of the work on civ-mil relations has focused on how civilian and military actors can collaborate more effectively in responding to humanitarian emergencies. But there’s another connection which deserves greater attention: the role of the military and police in supporting durable solutions for those displaced by conflict. Those of us working with refugees and internally displaced persons (IDPs) know that lack of security is usually the main reason that the displaced don’t return to their communities or find other durable solutions. But security sector reform efforts – while crucial to resolving displacement – are usually undertaken without thinking about their particular impact on IDPs and refugees. A series of four case studies, conducted with the support of the Australian Civil-Military Centre, suggest that such relationships are complex. In Kosovo, a key challenge was to replace the Kosovo Liberation Army with new military and police institutions which were trusted by the population. The study found that trust-building measures, such as vetting, inclusivity and the multi-ethnic nature of the new institutions played a positive role in supporting durable solutions for IDPs, including settlement in their communities of displacement. In contrast, the case of Liberia – where displacement was almost universal during the fourteen years the country endured civil war – illustrates some of the difficulties which result when the government decides to ‘close the IDP file’ without ensuring that they had found durable solutions. The Timor Leste study concluded that the 2006 crisis could have been averted if more attention had been paid to making sure that the 450,000 IDPs who returned to their homes in 1999 had indeed found a durable solution. Finally, even in cases where the conflict is ongoing, as in Colombia measures can be taken that can reassure IDPs and perhaps support them to find solutions when the conflict ends. These measures include introducing anti-corruption measures and purging criminal elements within the military and police forces.
The relationship between finding durable solutions for those displaced by conflict and building sustainable peace is a close one. As we found in a study on displacement and peace processes when refugees or internally displaced persons are unable to find solutions, stability and peace are more difficult to sustain. At the same time, durable solutions for the displaced usually depend not only on ending the conflict, but also on the establishment of security in areas where the displaced are living or to which they hope to return. While there is thus a common interest between those working on displacement and those working on peacebuilding, in practice organizations working in these areas tend to operate in isolation from one another. We hope that the experiences outlined in these studies will support effects to effectively ‘join up’ those humanitarian and development actors working on durable solutions for the displaced with those working on peacebuilding, conflict prevention and security sector reform. They have a lot to learn from one another.Authors
Venezuela’s deep economic crisis is now drawing greater international attention with the prospect that the Maduro administration might default on Venezuela’s international debt. Approximately $5.2 billion in payments are due to international creditors in October 2014, and Venezuela’s currency reserves and export earnings are under stress. Ricardo Hausmann and Miguel Angel Santos, scholars at Harvard University, raised the possibility in an op-ed on September 5, which prompted a veritable bubble of reactions on the markets and in the press, and even rebuttals. In a very typical reaction from the Venezuelan government, President Maduro ordered the investigation and prosecution of Ricardo Hausmann as a "financial hitman." This goes to show that an old Latin American saying, originally attributed to former Peruvian President Oscar Benavides (1914, 1933-1939), still applies in Venezuela: “For my friends, anything; for my enemies, the law.”Continued Economic Decline
Venezuela is really no closer or further from default because Ricardo Hausmann and Miguel Angel Santos wrote their op-ed. Hausmann and Santos were not predicting an imminent Venezuelan default on international obligations, they were making a moral argument that the government should default because its current policies have failed to ensure that Venezuelan citizens have access to basic necessities, such as food and medicine. Venezuela’s economic troubles have been brewing for years, but there has been no fundamentally new news on the economic front. Venezuela depends on oil exports for almost all of its foreign exchange, yet Venezuela’s oil production has been slowly declining. Moreover, over 42 percent of its oil exports are not sold commercially but rather through special arrangements for which Venezuela receives less than market value. Nationalization of domestic consumer goods industries had led to declining productivity and an increase in imports to make up the difference. The government established control over foreign currency exchange rates in 2003, and the current multi-tier system effectively subsidizes access to dollars for those that are politically well-connected. As of September 16, they can buy dollars as low as 6.3 bolívares fuertes for a dollar, and resell them on the black market for 97 bolívares fuertes to the dollar. This has created a surge in demand for dollars and put downward pressure on foreign currency reserves. Additionally, the Venezuelan government appears to have exhausted most of the special funds set up with extraordinary oil rents and Chinese loans during the past decade which acted as a stop-gap measure as foreign exchange reserves dwindled.
Reduced foreign currency earnings, increasing dependence on imports, and subsidized currency exchange rates have produced steady reductions in Venezuela’s foreign currency reserves, which is what prompts fear of a default. The attempt to sell Petróleos de Venezuela, S.A. (PDVSA)’s U.S. subsidiary, CITGO, suggests a need for additional cash. Moreover, the fact that Venezuela’s international debt is the most expensive in the world to insure against default means that markets are well aware of the risks associated with Venezuela’s current economic strategy.
President Maduro’s recent cabinet shake-up indicates that the Venezuelan government is not yet ready to take needed economic reforms. Instead, economics super-minister and president of the state oil company, Rafael Ramirez, was removed from his posts and shifted to the foreign ministry. He had been the only government minister publicly discussing measures that might start to rationalize the economy, such as unification of Venezuela’s multiple foreign currency exchange rates to more closely track market value. Other proposals included reducing the gasoline subsidy (Venezuela has the cheapest gasoline in the world at less than $0.02 per liter), and liberalizing imports, especially those needed by Venezuela’s domestic industries to produce basic necessities. Instead, the Venezuelan government has resorted to fingerprint scans of customers at supermarkets to ration consumer goods and closing the Colombian border to prevent smuggling of subsidized Venezuelan products abroad. Such policies are illustrative of a consistent bias toward increasing government control of the economy, the very policy that has led to the present crisis.
Is there a more active role for the international community as it observes Venezuela’s deterioration? As Hausmann and Santos note, any normal government facing Venezuela’s present crisis would resort to international financial institutions for support and advice, but the Maduro administration has chosen to double down on government control of the economy. There is very little that can be done proactively by outside actors to address Venezuela’s economic situation unless the government asks for help. The present crisis is the responsibility of the regime, and only it can adopt the measures required to rationalize the economy and forestall a default.Looking Ahead to Political Implications
Venezuela’s economic crisis has led to speculation that the 2015 legislative elections will be the next flashpoint in its ongoing domestic political conflict. Support for the government in Venezuela tracks closely with economic performance and domestic consumption (PPT), both of which have tanked in the past year. In fact, the Venezuelan government was only able to reverse negative public opinion trends before the December 2013 elections through a forced-sale of private inventories of consumer electronics and home appliances. Former planning minister Jorge Giordani admitted that the government had spent vast amounts in 2011 and 2012 to ensure the re-election of Hugo Chavez in 2013. Current economic indicators do not bode well for the regime’s electoral prospects, and the Maduro administration lacks the financial reserves to use public spending to increase domestic consumption next year. Importantly, this is not a regime that has reacted well to losing elections in the past. Both Venezuelans and outside observers should therefore pay particularly close attention to what can be done to support free and fair elections that produce binding results in the coming year. Increasing government responsiveness through democratic means is a necessary step in serving notice to the Maduro administration that its policies are failing to address the economic crisis at the heart of Venezuela’s woes.Authors
On Friday, September 12, Brooking’s Center for East Asia Policy Studies convened a conference on China-Taiwan relations, in cooperation with Taiwan’s Association of Foreign Relations. The presentations were stimulating and the audience participation was good (a transcript of the event should be posted soon).
As it happened, I received a lot of coverage in the Taiwan media for some remarks I made at the end of my presentation, concerning how the United States government would approach the 2016 Taiwan presidential election. I suppose I should be flattered by all the attention my remarks evoked. I did appreciate the mature and measured response from Dr. Joseph Wu, secretary-general of the Democratic Progressive Party (DPP). I have absolutely no objection to the quite accurate comment of the spokesman of the American Institute in Taiwan that I am no longer a government official and was speaking for myself. I was not surprised that some reporters didn’t get their facts exactly right; that’s not unheard of in either the Taiwan or the American media. But what I’ve seen from the Taipei Times is truly puzzling.
Before I address why I’m puzzled, here is what I said:
What I am prepared to say with some confidence [about the 2016 Taiwan election] is that the U.S. government, at some time and in some way, will express itself on the implications of the 2016 election for U.S. interests. Now, I recognize, because I lived this at one time, that Washington is caught in a bit of a dilemma here. On the one hand, we have a general principle that it’s the voters of friendly democratic countries who should be the ones to pick their leaders at the ballot box, and that the United States should not try influence their votes by expressing a preference for one candidate or the other. On the other hand, the United States does have interests in the policies of any elected leadership, whether it’s Taiwan or a lot of other places.
So, in spite of this dilemma Washington has not been quiet. And let me just let me give you a few examples. 1996: the Clinton Administration, through its actions, made a statement of sorts. In December 1999, I myself made a public statement in Taiwan where I sort of laid out both sides of our view about Taiwan’s democratic election. Almost exactly four years later, another person named Bush made his statement and that was clearly critical of Chen Shui-bian’s policies. In September 2007, actually seven years ago yesterday, my friend Tom Christensen made a long and detailed critique of the Chen Administration’s policies and the DPP’s strategy for the 2008 election. Almost exactly four years later, September 2011, the Obama Administration conveyed its views through the Financial Times. So this is something we do. We feel there is a need for us to express our views on how our interests will be affected by Taiwan’s elections. And to say nothing, as some in Taiwan might want us to do, is actually to make a statement as well.
One story, filed from Washington, reported that I said that “the U.S. was likely to try to ‘influence’ Taiwan's 2016 presidential elections. While he did not speculate about what might happen, Bush indicated that Washington would declare a preference for the Chinese Nationalist Party (KMT) candidate because there were lingering doubts about the Democratic Progressive Party's (DPP) cross-strait policies.” Another story claimed I said that Washington might “try to sway vote in the 2016 presidential election.”
As can be seen from the text of my remarks, the U.S. government clearly understands the tension between not stating support for a particular candidate and expressing itself on the U.S. interests at stake, when there are interests at stake (I have felt that tension myself). I provided the examples where we have expressed views in the past on the implications of the election for U.S. interests, by way of predicting that it would happen again. It was up to Taiwan voters in the past to decide what those statements meant and how to weight them in their voting decisions. It will be up to Taiwan voters to do so in the future, which is as it should be. But I don’t see any basis for extrapolating from my actual remarks to conclude that I was predicting that the U.S. government would side with one party over another.Authors
Editor's Note: In this blog, Carol Graham discusses the impact of inequality on well-being, particularly in Mongolia, which has experienced a dramatic economic and political transition in recent years. For a more detailed look at Mongolia's well-being trends, see Graham's latest paper.
After years of being a back-burner issue, inequality is on the U.S. public agenda, big time. America’s long-held reputation as the land of opportunity—the Horatio Alger society where anyone who worked hard could get ahead and where inequality was a sign of where these entrepreneurial individuals could go—is under duress. Study after study, including several by my Brookings colleagues Isabel Sawhill and Richard Reeves, show that not only has inequality increased, but social mobility is stagnating—at least for those cohorts at the bottom of the income distribution. And the fact that a book by French economist, Thomas Piketty, which warns of the dangers of increasing inequality but is also 700-plus pages, highly technical, and based on tax return data, has become a best-seller, says a great deal.
A stark view of two Americas has replaced that of the Horatio Alger society. Even the language of the two differs, as was described in a recent Upshot column by David Leonhart. The words that dominate poor places reflect short-time horizons and daily survival challenges, and range from “diets” and “diabetes” to “guns,” “hell” and “video games.” Those in rich places reflect vastly different opportunity sets and knowledge bases, and range from “iPads” and “baby joggers” to exotic travel destinations. My research on well-being finds large gaps in the levels of stress and life satisfaction experienced by the rich and the poor in the U.S. Indeed, we also find that the gaps in the stress levels of the U.S. rich and poor—as well as in their levels of confidence that hard work can get you ahead—are significantly larger than they are in Latin America—hardly a continent known for its equitable distribution or lack of poverty challenges.Experienced Stress — United States vs. Latin America and the Caribbean
Until recently, most studies on the effects of inequality on individual well-being found that the effects in the U.S. were either nil or rather surprising. A paper written a decade ago by Alberto Alesina and colleagues found that the only group in the U.S. that was made unhappy by inequality was left-leaning rich people! My earlier work with Andrew Felton finds that the welfare effects of inequality depend on what it signals. If it is a sign of potential future progress and opportunity, then it either has no effect or even positive ones. Yet when it is a sign of persistent advantage for some cohorts and disadvantage for others, then it leads to unhappiness and even social unrest in some contexts. Yet we still need to know more about how these channels operate.
Tuugi Chuluun, Sarandavaa Myanganbuu and I recently conducted the first extensive study of well-being in Mongolia, a country that has experienced a dramatic transition in both its economy and polity, including, in recent years, record levels of economic growth. We explicitly explored the role of inequality. The basic determinants of well-being in Mongolia are no different than they are in most countries in the world, with individual income, health, marital status and exercise, among other things, positively associated with life satisfaction. As in many other contexts, we found that average community income is negatively correlated with life satisfaction once respondents’ own incomes are accounted for. In other words, the higher the average income in your community is compared to yours, the less happy you are. The effect is particularly strong for respondents below median levels of income. Inequality in this instance is not a sign of future progress, but rather of being left behind at a time of dramatic economic change and progress.
In contrast, average community-level well-being (both life satisfaction and happiness in the daily experience sense) was positively associated with individual well-being across the board. While being around wealthier people may generate envy among some, being around happier people has positive externalities. This is an intuitive finding and fits with an increasing body of work on well-being that shows that higher levels of well-being are associated with better labor market outcomes, health, and social behaviors and interactions. In contrast, some of the same studies show that very low well-being levels—in particular high levels of stress and difficulties with daily life—lead to short-time horizons and obstacles to investing in the future. Thus, while wealthier neighbors are not necessarily good for you, happier ones surely are.
At a time that we are at loss for solutions to the increasing divide between the rich and the poor in the United States, maybe we can take a lesson from a far-away country and focus a bit more on the overall well-being of our citizens, including but beyond its material dimensions.Authors
Ukraine clings to a shaky ceasefire, with uncertain prospects for a durable peace process ahead, leaving many in Kyiv unsure about what will happen next. While a marked sense of national identity has taken hold (thanks to Vladimir Putin), people express frustration that the government has done little on domestic reform. The Rada (parliament) elections are set for October 26. They hopefully will produce a coalition that can support an active government reform effort; the risk is that they will result in a divided, muddled body that will hinder Ukraine’s ability to meet the challenges before it.
While President Poroshenko seems committed to seeking a peaceful settlement, and virtually everyone agrees that Kyiv cannot resolve the conflict in eastern Ukraine by military means, no one showed great optimism about securing a settlement. There is a general sentiment that the United States should do more to support Ukraine, including by providing arms, and a bitter sense that the Budapest memorandum on security assurances turned out to be an empty piece of paper.
A September 11-13 visit to Kyiv to attend the Yalta European Strategy (YES) conference and hold sidebar conversations produced a number of impressions regarding developments in Ukraine and the challenges confronting that country.
A Stronger National Identity
On a warm late summer’s day, Kyiv hardly seemed like the capital of a country that has fought a bitter conflict against separatists and their Russian allies. People, young and old, crowded the streets, and sidewalk cafes ran a brisk business. That makes a point that sometimes gets lost in the West: the conflict over the past five months has been confined to the eastern regions of Donetsk and Luhansk.
One noticeable change in Kyiv was the explosion of blue and yellow, the colors of the Ukrainian flag, on fences, buildings and flagpoles. As one Ukrainian scholar put it, “Mr. Putin has fulfilled the dream of Ukrainian nationalists” by forging a strong sense of Ukrainian national identity, infused with a heavy dose of anti-Russian sentiment. Speaking on a YES panel, former Prime Minister Tymoshenko called Putin the “best integrator” of Ukrainian opinion in favor of joining the European Union and NATO.
A Ukrainian official privately commented that public sentiment was not just anti-Putin, but anti-Russian. Ukrainians bitterly noted that the Russian population did not oppose or speak out against what the Russian president had done. (That cannot be healthy for Ukraine-Russia relations in the long run.)
There was no consensus on the motives behind Russia’s actions. At one end of the spectrum, Prime Minister Yatseniuk told the YES conference that Mr. Putin’s goal was to recreate the Soviet Union. Others saw a more modest objective: Mr. Putin sought to have leverage over Kyiv, in particular, to affect Ukraine’s foreign policy choices.
A Ceasefire and What Next?
The week-old ceasefire appeared to be holding in many places, though reports of shooting came daily. Some felt that Mr. Poroshenko had no choice but to accept a ceasefire, given that regular Russian army units had invaded in August and dramatically turned the tide on the battlefield. One official thought that Mr. Putin also welcomed the ceasefire, as Russian dead numbered in triple digits, which presented the Russians a delicate question at home.
The ceasefire appears fragile. Mr. Poroshenko’s focus nevertheless is on getting a settlement process underway. He told the YES gathering that his special status law to be introduced in the Rada the week of September 15 would incorporate decentralization—transferring some power, budget authority and the right to give language an official status to regional and municipal governments—but would protect Ukraine’s sovereignty and territorial integrity. Key issues of military and national policy would stay at the national level. The public will follow these questions closely. Some thought that a more nationalist electorate could be a factor that would limit the president’s freedom of maneuver, e.g., he had to avoid anything that looked like a “bad” deal for Ukraine.
A number of people expressed unease about the “Normandy format” (Ukraine, Russia, France and Germany) that Mr. Poroshenko has used with Mr. Putin, French President Hollande and German Chancellor Merkel. While Ukrainian confidence in Ms. Merkel has grown, several would prefer that the United States and European Union participate, as they had in the mid-April Geneva ministerial meeting.
With Mr. Poroshenko’s attention centered on stabilizing the situation in eastern Ukraine, Crimea has been deferred to the longer term. Ukrainian officials publicly pledged that they would regain Crimea. But Mr. Poroshenko said Kyiv would use an “economic, democratic competition” to win back the minds of the Crimean population.
Several people privately questioned whether Ukraine should consider letting Donetsk and Luhansk go, perhaps as the result of a second referendum, this time conducted under the Organization for Security and Co-operation in Europe auspices. That would be a longer-term question; neither Mr. Poroshenko nor any other serious politician could suggest the idea now. (If Mr. Putin’s goal is leverage over Kyiv, he presumably would not be satisfied with Crimea, Donetsk and Luhansk if the remainder of Ukraine continues drawing closer to the European Union.)
More Expected from the United States
There was a general feeling that the United States, as a signatory to the Budapest memorandum, which gave Ukraine security assurances in return for giving up its nuclear weapons, should do more to assist Ukraine. In his YES talk, former President Kuchma (who signed the memorandum for Ukraine) said that Ukraine had been “cheated.” Mr. Yatseniuk referred to the “notorious” Budapest memorandum.
The question of U.S. arms transfers arose in several private conversations. Virtually all Ukrainian interlocutors who addressed the topic felt that Washington owed that to Ukraine. Asked about the risk of Russian escalation in response, they noted that Ukraine would run that risk. Mr. Putin had already escalated the conflict significantly. Several expressed confidence that, if it had to, Ukraine could successfully resist Russia; Mr. Putin “might be able to get into Kyiv in two weeks, but he would not be able to get out.”
European Union and NATO
The European Union and Ukraine-EU association agreement enjoy broad support in Kyiv. The surprise announcement that implementation of part of the free trade agreement would be postponed until December 2015 caught almost everyone by surprise. Mr. Yatseniuk explained it as advantageous to Ukrainian companies, as the European Union would lower its tariffs shortly after ratification (scheduled for a vote in both the Rada and European Parliament on September 16), while Ukraine could maintain tariffs on EU imports for another 15 months.
Public support for NATO is rising in Ukraine, and several YES panelists addressed NATO membership. Ms. Tymoshenko said Ukraine should have made NATO membership a part of the Budapest memorandum. Mr. Yatseniuk noted that, with Russia’s invasion, NATO offered the only vehicle for defending Ukraine, though he understood that the Alliance was not ready for Ukraine to apply—an understanding that others privately acknowledged.
Where’s the Reform?
Businessmen and civil society leaders at YES panels and in private conversations expressed great frustration with the lack of progress on economic reform and anti-corruption efforts. The government on its own could abolish a number of unneeded regulatory bodies that only created red tape and corruption opportunities, but it had not, just as there had been no major corruption prosecutions.
Mr. Poroshenko acknowledged the point, saying he would try to accelerate reform efforts. Mr. Yatseniuk agreed that the government had not yet advanced major anti-corruption reform but stoutly defended the government’s record.
Mr. Yatseniuk painted an (overly?) optimistic picture of Ukraine’s energy situation as winter loomed. He said Ukraine had 17 billion cubic meters in storage (the country recently has burnt about 50 billion cubic meters per year) and had begun importing coal from as far away as South Africa to make up for lost coal production in Donetsk.
The Rada Elections and What Comes After
Rada elections are scheduled for October 26. Mr. Poroshenko told his audience that Ukraine could prevail only if united but would stay united even with the Rada elections. Perhaps, but there is some reason for concern that the elections could produce a divided or muddled parliament. Mr. Poroshenko and Mr. Yatseniuk failed to agree on running together in a single party, though the prime minister said he was ready to sign a coalition agreement even before the elections.
There are a number of wild cards. According to opinion polls, Oleh Lyashko’s Radical Party will have little trouble clearing the five-percent threshold for the party list vote. It is not clear how Donetsk and Luhansk will be handled in the elections; one former official expressed concern that Mr. Putin could use elections there to form “his” bloc in the Rada. Another official pointed out that leaders of the volunteer battalions could trade on their hero images and reputations for straight talk to do well in individual constituency votes.
Ukraine needs a strong, stable Rada coalition following the October elections that will work with a president and prime minister who are on the same page to implement key reforms and anti-corruption measures, as well as to manage the conflict in eastern Ukraine and a settlement process. If Mr. Poroshenko and the prime minister are not in sync, or if a divided Rada falls back into the petty political in-fighting and non-transparent dealings that characterized so many Radas before it, Kyiv will have a difficult time addressing the many challenges confronting it. And it will have a much harder time securing stronger support from the United States and Europe if the West feels that it has seen the movie before … and already knows the unhappy ending.
Note: The YES conference is sponsored by the Victor Pinchuk Fund, which is a Brookings donor.Authors
(Versions in 中文)
“Shadow” banking: a surprisingly colorful term for our staid economics profession. Intended or not, it conjures images of dark, sinister, and even shady transactions. With a name like “shadow banking” it must be bad. This is unfair. While the profession lacks a uniform definition, the idea is financial intermediation that takes place outside of banks—and this can be good, bad, or otherwise.
Our goal here is to shine a light on shadow banking in China. We at the IMF have used many terms. Last year, we had a descriptive one, albeit a mouthful—off-balance sheet and nonbank financial intermediation. The April 2014 Global Financial Sector Report (GFSR) called it nonbank intermediation. This year our China Article IV report used the term shadow banking.
What’s in a name
“That which we call a rose, by any other name would smell as sweet.” Taking a cue from Shakespeare’s Juliet, let us not worry about the label and instead focus on the facts.
Interest in China’s shadow banking…eh, nonbank intermediation…stems mainly from its rapid growth since the global financial crisis in 2008. This is the pink part in Figure 1 which has more than tripled since 2008, albeit from a low base. It has also accounted for half of the increase in overall credit to the economy or total social financing—even more than bank loans.
In China, shadow banking is often defined as total social financing less bank loans. We tend to exclude equity issuance—firms raising money by selling stock (as this is not credit)—which is the green part in Figure 1. Thus, we focus on the pink part.
The pink part—that is shadow bank or nonbank intermediation—consists of the four components in Figure 2:
- Corporate bonds. Yes, corporate bonds are the largest component of so-called shadow banking.
- Entrusted loans. These are corporate to corporate loans, administered by a bank. Company A has excess cash, it lends to company B. The bank is just a necessary bookkeeper with no “skin in the game,” but a needed one, since in China’s system, A cannot directly lend to B.
- Bankers’ acceptances. These are letters of guarantee issued by a bank that its customers can use to finance a transaction. These are “undiscounted” as the bank is issuing a guarantee rather than an actual loan. Once “discounted,” this form of credit is recorded in bank loans.
- Trust loans. This is lending by trust companies. Unlike a bank loan, though, on paper the trust company just brings the borrower and investor together for a fee.
Size of China’s Shadow banking
The Financial Stability Board suggests that China’s shadow banking sector is quite small, as in many other emerging market economies. Figure 3 shows that shadow banking in China is relatively low both as a share of GDP and as a share of financial intermediation. But the Financial Stability Board filters out of its estimates those parts of the nonbank financial system that are not formally involved in “credit intermediation.” And there’s the rub. In China, it is often not clear whether shadow banks, such as trusts, really are just loan arrangers or whether they are lending like a bank and taking on credit risk. Reflecting this uncertainty, shadow banking in China could be measured more broadly. Specifically, the pink area in Figure 1 (55 percent of GDP). The forthcoming October Global Financial Stability Report uses an estimate of 35 percent of GDP, as it subtracts corporate bonds (nearly 20 percent of GDP) from the pink area.
Bottom-line: is Shadow Banking a Sweet Smelling Flower or a Thorny Bush?
Both. On the plus side, the expansion of nonbank intermediation marks progress in financial development. It benefits companies by providing alternative ways to borrow. And, it benefits households, by giving them more investment opportunities, which is especially important given the ceiling on deposit interest rates. Therein, however, also lays the thorn.
Shadow banking provides an opportunity to circumvent regulations, such as the deposit interest rate ceiling (but there are many others). For example, rather than putting money in a deposit, a bank’s customer could buy a wealth management product from the bank that offers a higher return. This wealth management product, in turn, may invest in equities and bonds but can also, subject to a limit, invest through shadow banks in assets that look a lot like bank loans.
More broadly, shadow banking moves intermediation outside of formal banking—which has safeguards such as capital requirements, provisions against loan losses, loan to deposit ratios, well-established supervision and regulation—to more uncharted territory. The regulators and supervisors are trying to keep up with this fast-moving sector, with some recent success, but it remains a huge challenge.
At the same time, investors appear to have been largely protected from the inevitable losses that should come with risky lending. It is hard to find a case, for example, of investors in a fixed income trust or wealth management product incurring any losses. This perpetuates the perception that the trust company and/or selling bank, perhaps for reputational reasons, is implicitly guaranteeing the investment. Meanwhile, investors may not appreciate the underlying risk of such products and invest too much of their saving in them.
And, this is just the tip of the iceberg in assessing the benefits, costs, and risks of shadow banking, which is a topic for another day.
The forthcoming October issue of the Global Financial Stability Report will have a broader discussion of shadow banking in China and elsewhere. You can also listen to this recent podcast on shadow banking.
Trong tuần này, Việt Nam sẽ chủ trì tổ chức Hội nghị các Bộ trưởng Y tế ASEAN lần thứ 12 tại Hà Nội. Bảo hiểm y tế toàn dân (BHYTTD) sẽ là một trong những chủ đề chính của hội nghị, cả trong các diễn đàn chính thức và không chính thức, giữa các nhà hoạch định chính sách của khu vực. Dù thế nào thì mục tiêu tiến tới BHYTTD, được hỗ trợ bởi việc tăng chi tiêu của nhà nước để trợ cấp cho các đối tượng tham gia bảo hiểm, cũng là một trong những nội dung có sự thống nhất cao nhất trong chính sách y tế của khu vực ASEAN hiện nay.
Có thể nói, Việt Nam đã phần nào đi trước khu vực nhờ tăng đều độ phủ bảo hiểm y tế trong suốt những năm 1990. Với Luật Bảo hiểm Y tế ban hành năm 2008, Việt Nam đã hợp nhất các chương trình bảo hiểm y tế hiện hành, áp dụng chính sách một bên chi trả duy nhất, trước cả một số nước lớn trong ASEAN khác như Inđônêxia và Philipin. Hiện nay, không những có tới 68% dân số đã tham gia bảo hiểm y tế mà nhà nước cũng đã đầu tư đáng kể vào cơ sở hạ tầng bên cung và nâng cao năng lực nguồn nhân lực y tế trong nước để đáp ứng nhu cầu khám chữa bệnh ngày càng tăng của người dân.
This week, Vietnam will host the twelfth ASEAN Health Minister’s Meeting in Hanoi. Universal Health Coverage (UHC) is likely to take center-stage in discussions, both formal and informal, among the region’s policymakers. After all, the drive for UHC, backed by large increases in public spending to subsidize coverage, is one of the most uniting features of health policy in the ASEAN region today.
Vietnam is somewhat forerunner in the region, having steadily expanded health insurance coverage through the 1990s. Through the Law of Social Health Insurance in 2008, Vietnam consolidated existing health insurance programs and adopted a single payer design ahead of some other larger ASEAN countries such as Indonesia and the Philippines. Today, not only is 68% of the population enrolled in health insurance but significant public sector investments have also been made to the supply side infrastructure and health human resource capacity of Vietnam in order to meet the growing demand for health care.