As the crises in Europe’s neighborhood mount, the European Union (EU) is once more consumed by an important but fundamentally internal issue. The current struggle involves the EU’s effort to select a trio of leaders for its main institutions: specifically the president of the European Commission, the president of the European Council and the high representative for foreign affairs and security policy (a sort of foreign minister). The selection of Luxembourg’s former Prime Minister Jean-Claude Juncker as president of the European Commission proved extremely divisive. Worse, EU member states failed to select people for the other two posts, punting the decision until after Europe’s long August break.
These perennial brawls over the selection of EU leaders reflect a broader divide over what the purpose of the European project actually is. At stake is the balance between member states and EU institutions, as well as the democratic legitimacy of the EU.
To a degree, this divide tells a story which has been told over and over again since the European integration project started over 60 years ago. But today’s disagreements are playing out in a context shaped by the effects of a devastating economic crisis which shattered the public’s trust in the EU’s ability to deliver prosperity, and amid crises in Europe’s neighborhood that threaten its security. With EU member states also mired in a poisonous debate over the merits of austerity and a referendum on the United Kingdom’s EU membership looming, the EU may soon face existential challenges. This would have very serious consequences not only for all European countries, but also for the United States.The Deeper Divide
The story begins with very distinct understandings of the meaning of last May’s European Parliament (EP) election results. All agree that anti-establishment forces cumulatively got around 30 percent of the votes, but there the agreement ends. According to Euro-skeptics, particularly British Prime Minister David Cameron, the strong electoral showing of non-mainstream parties, all openly critical of the EU, has conveyed a clear message that the European public is sick of an "ever closer" Union built over their heads by unaccountable elites. In this reading, the appointment of a quintessentially EU insider such as Juncker flies in the face of the public’s demand for "reform."
Supporters of Juncker’s appointment took precisely the opposite lesson from the EP election. They point out that most EP parties had put forward their spitzenkandidat, or "lead candidate," for the commission top post prior to the election in an attempt to bolster the Commission’s democratic legitimacy. Juncker was nominated by the group that won the most seats, the European People’s Party (EPP), the Europe-wide coalition of mainstream center-right parties. Hence, his appointment should be viewed as expressing the European public will. By adopting this line of reasoning, supporters of Juncker implicitly accept the Europhile argument that votes in the EP election convey public views on European, as opposed to national, issues – a proposition which runs counter to most understandings of European voter behavior.
In fact, the picture is more nuanced than either view admits. A large section of the European public, extending well beyond the electorate of anti-EU parties, undoubtedly perceives the EU as a distant, opaque and scarcely accountable decision-making machine. Yet, to infer from this general sense of disenchantment a demand for transferring powers back to national capitals, as Euro-skeptics do, is a stretch. Seventy percent of Europeans, however disillusioned they might be, voted for pro-EU parties. It is not unreasonable to assume that they crave greater transparency and accountability rather than more national sovereignty. But is the spitzenkandidat method really a step in that direction, given that only 8 percent of Europeans polled could even name Juncker?The New Risks
According to its critics, the spitzenkandidat process expropriates the right to select the commission president from EU leaders, thereby illegitimately making the EP the kingmaker. This is a legitimate concern. By inventing the spitzenkandidaten, the EP parties have seized upon the wording of the Lisbon treaty to somewhat improperly increase the EP’s role. While the text does state that the result of the EP elections should be taken into account, it says nothing about EP parties indicating their candidates in advance, keeping the ultimate say on the matter in the hands of the council (even though the commission president needs a vote of confidence by the EP).
EU leaders are aware of this and have announced plans to review the way the Commission president is chosen. Still, there is no doubt that the EP has succeeded in creating a precedent that the council may find hard to ignore in the future. Having tasted real power, the EP is unlikely to give up on it without a fight.
There are good arguments to support the EP’s as well as the council’s prerogatives. The EU is designed to share prerogatives among these bodies in a search for balance between its conflicting intergovernmental and supranational personalities. Finding that balance may ultimately be impossible, but (as so often with the EU) the end result is less important than the process itself. While imperfect, a governance system based on constant intergovernmental and inter-institutional bargaining keeps the EU boat afloat and enables cooperation between member states on a scale otherwise unachievable. A dynamic according to which the EP defines EU interests in a "communitarian" manner while the council does it in intergovernmental terms should therefore be bounded and a sense of co-ownership fostered. Manichean assertions as to where the "democratic legitimacy" of the EU lies – be it in the member states or in empowered communitarian institutions such as the EP – should also be put to rest.
The risk is that open warfare between the EP and the council, as well as between integrationist and anti-integrationist camps, would catch the commission in the middle, reducing its ability to devise solutions acceptable to all EU countries. With the European economy reeling from the eurozone crisis, EU member states cannot afford to waste time or energy on institutional infighting, nor can they afford a subdued commission. On the contrary, the new commission’s ability to take the initiative and broker compromises among the member states will be critical, as its inauguration next fall will almost certainly coincide with a renewed "pro vs. anti-austerity" debate within the EU.
Indeed, getting past the austerity debate is the EU’s most urgent political task. We underline the term "political" because, whatever the (highly disputed) economic merits of the austerity course, it might soon become politically unsustainable. German-led austerity champions still hold the higher ground, while debtor countries have little leverage. Yet, whatever the Germans and their partners think they are gaining in the present circumstances might get easily lost. If anti-establishment parties continue to gain, the EU could, in a few years, become unworkable.Implications for the U.S.
The U.S. clearly has a great deal at stake in the EU’s leadership decisions. Public comment would be both impolite and unwise, but U.S. officials are assumedly quietly making U.S. views known to their EU partners. They would likely express three core U.S. interests that might be affected by the EU leadership decisions:
- EU economic decision-making – For both economic and geopolitical reasons, the U.S. effort to conclude a Transatlantic Trade and Investment Partnership (TTIP) with the EU is a critical priority for the Obama administration. The U.S. will want negotiating partners in the commission who believe strongly in the TTIP process, but are sensitive enough to the member states’ positions that they can adequately represent them at the negotiations and thus persuade them to accept the outcome. The U.S. also supports a relaxation of austerity conditions within Europe, in part because it believes the resulting stronger growth will provide the necessary economic and political breathing space for national leaders to support TTIP.
- EU Foreign Policy – As the U.S. attempts to shift its attention to emerging dynamics in East Asia and continual crises in the Middle East, it is (and has been for some time) looking for a Europe (EU or otherwise) that is willing to step up and take responsibility for its own region. The Ukraine crisis has not appreciably changed that desire but it has sharpened the necessity. At the same time, the clear leadership and public opinion struggles within the EU in recent years have largely led the U.S. to despair that the EU as an institution can take responsibility for its own region. The U.S. has by necessity fallen back on a more intergovernmental approach to European leadership whereby a coalition of interested states might serve as a vanguard for organizing European foreign policy on specific issues. The U.S. wants an EU and particularly a new high representative that can provide both institutional support and political cover for this process, particularly in regards to the Eastern neighborhood but also on issues like Iran and North Africa.
- Britain future’s in the EU – The U.S. has made clear that it believes that it is important for the U.K., the EU and transatlantic relations that the U.K. remains within the EU. From an American perspective, the U.K. anchors in the EU in the transatlantic alliance, provides an important liberal economic perspective for a club that harbors some protectionist tendencies, and helps to maintain British standing in the world. There is a great deal of worry in the U.S. that, as a result of British tactics on EU questions (and arguably as a result of the German response), the British are being increasingly isolated in the EU, potentially setting the stage for a disastrous departure decision in 2017.
The results of the EU appointments process (so far) are a long way from satisfying these desires. The outward manifestation of these divides have been the apparently endless effort to find balances in the job selections among the EU’s many competing interests – right and left; east and west; male and female; small country and large country. But beyond that almost impossible math problem, the process has reflected the increasingly polarized debate between the intergovernmental and supranational visions of the EU. The divide threatens not only to weaken EU decision-making, but also to contribute to further alienation of the European and especially the British public and thus to continue the steady trend of increasing vote shares for anti-systemic parties.
As a result of this particular appointment process, the new leadership begins with weak legitimacy and an inbox of very serious geopolitical and economic challenges. There are now much greater risks in this process, for both Europe and the U.S. The EU is under enormous strain from its continuing economic problems, from its inability to formulate strong, unified to problems in its neighborhood, and from the threatened defection of the U.K. The new EU leaders might wish therefore to begin simply by considering how next time this process can enhance rather than reduce the EU’s troubled image at home and abroad.Authors
Timbuktu. To many, the name evokes a place of mythic remoteness. To others, it connotes an ancient crossroads of trade, exotic goods and culture. And still others know it as the sacred intellectual capital of the Muslim world, synonymous with universities, debate and religious tolerance. Tragically, Timbuktu most recently conjures memories of the 2012 occupation when armed groups, including al Qaeda-linked jihadists, committed grave human rights abuses, damaged mausoleums and shrines, torched manuscripts and banned music, the very lifeblood of Mali. Thanks to the resilience and ingenuity of the local population, and an international military intervention supported by the U.N. and led by the French, the extremist occupation failed.
A UNESCO World Heritage site, Timbuktu symbolizes both the challenges and the potential of Africa, themes that have drawn 50 heads of state to Washington for the first U.S.-Africa Leaders Summit. The renaissance of Timbuktu as a beacon of tolerance, wisdom and innovation – all signature characteristics of its Golden Age – has immeasurable symbolic power in the Sahel and Middle East and North Africa (MENA) regions, where sectarianism and brutal intolerance are on the rise.
The Timbuktu Renaissance (TR) Initiative aims to leverage Mali’s and, particularly, Timbuktu’s heritage and living culture to promote peace and prosperity. The TR’s integrated strategy will boost Mali’s creative industries (e.g. tourism, literature, architecture, music, film and artisan crafts) and mobilize investment for sustainable economic development initiatives ranging from education and agriculture to renewable energy and transparent natural resource development.
The Government of Mali fully supports this initiative under the leadership of the Minister of Culture Mrs. N’Diaye Ramatoulaye Diallo, whose motto upon taking office was to place “culture at the heart of socioeconomic development.”
Leading representatives of the Malian government including President Ibrahim Boubacar Keita and his ministers of culture, foreign affairs, investments and religion joined members of the Timbuktu Renaissance Action Group which convened artists, scholars, diplomats, philanthropists, investors and technologists, for three days of meetings at Brookings’s 2014 U.S.–Islamic World Forum. The group explored how best to revive Timbuktu as an educational, cultural and spiritual center of Africa. The consensus was that Timbuktu not only can lead Mali’s reconciliation and recovery, but can also provide a model for post-conflict recovery, sustainable development, and countering violent extremism (CVE) that can be scaled and replicated trans-Sahel and MENA.
To lay the groundwork, the Timbuktu Renaissance co-directors recently returned to Timbuktu with Minister of Culture Diallo, social entrepreneurs and representative of the Google Cultural Institute. With Manny Ansar, producer of Timbuktu’s famed Festival Au Désert, and Salem Oud Elhaj, Timbuktu’s venerable sage and historian as our guides, we were able to maximize the daylight hours the MINUSMA flights allowed. (Commercial flights have yet to return to Timbuktu.)
For Manny Ansar, his first return to Timbuktu since he’d fled for his life to a Burkina Faso refugee camp in the spring of 2012 was bitter sweet. He noticed the relative trickle of people in the streets (a large percentage of the population remains in exile). The main square, which once hosted a bustling market, stood empty save for the scar of the blasted monument at its center. However, Manny also recognized the familiar smiles and waves, the warm Malian hospitality…the resilience.
Everywhere people asked Manny if he was bringing the Festival Au Désert back to Timbuktu. Why would locals care so much about a music festival? In the last decade, the festival has become the most celebrated musical pilgrimage on the continent, drawing musicians and fans the world over. Banned from holding the festival in Timbuktu, Ansar has taken worldwide as a Festival in Exile.
Back in Timbuktu, the return of music and the expulsion of the occupiers restored hope, joy and pride. For culture lies at the very heart of Timbuktu’s identity, and is vital not only to the population’s spirit, but also to its sustenance.
To quote the mayor of Timbuktu, during our visit, “Culture is not just for pleasure (‘un divertissement’), it is essential for the economy.“ He went on to detail the economic devastation after tourism disappeared. “Timbuktu has 70 guides; each supports 10 people. None has been employed since 2012.”
The same themes dominated our meetings with the mayor, the governor and the imam of the Djingareyber Mosque:
- Gratitude for the attention to Timbuktu’s challenges.
- A recognition of the importance of culture for social cohesion and economic recovery.
- The resilience of the people of Timbuktu and their determination to preserve their way of life, including a tolerant and pluralistic approach to Islam.
The meeting with Timbuktu’s grand imam produced a moment of levity when he perked up at the mention of Google representatives in our midst. “Google?! I was the first person in Timbuktu to go online,” he declared with a grin, before leading us on a personalized tour of the 600 year old Mosque.
From the Mosque we caravanned to “La Maison,” a boutique hotel where dignitaries and international music stars alike stayed while attending the Festival au Désert. Weeks after the festival in 2012, the occupiers overran the building and began dispensing their brutal “justice” in those very rooms, executing summary judgments, lashings and amputations.
In TR’s strategy, La Maison will be transformed into Timbuktu’s Center for Culture and Innovation – providing much needed recording artist and TV studios, computers with white space connectivity, university exchange and training programs and NGO support facilities. The center will help alleviate the lack of professional training, as well as gathering places for youth, all lamented by the Timbuktu officials we met.
The TR’s additional priorities are: the return and live stream of the Festival au Désert to Timbuktu; and until then, its continued touring incarnation as a Festival in Exile; an accompanying feature documentary film and film-festival tour; star-infused compilation albums; the restoration and traveling museum exhibition of the famed manuscripts (in the context of a larger Treasures of Timbuktu exhibition); and a virtual Timbuktu website and content aggregator.
The touring museum exhibition, allied with a robust online experience, will help tell the story of Timbuktu until refugee populations and, ultimately, tourists can safely return. Even then, the story of Timbuktu resonates far beyond its remote geography.
Consider its historic significance. Gold, salt and literature held equal value in Timbuktu, once the largest university town in the world. The birthplace of the Blues, or, to quote Bono, “the big bang of all the music we love,” Timbuktu has an unparalleled festival and music legacy. Its treasured manuscripts, peppered with the acceptance of diversity and plurality that is Timbuktu’s calling card contain prescient analyses of issues from human rights to corruption, to debates on the efficacy and ethics of slavery.
With its unique significance, Timbuktu has the capacity to disrupt sectarianism and radicalization, and within the context of a renaissance, to transform the image of Mali, Africa and Islam.
Cheick Abdel Kader Haidara, to sneak hundreds of thousands of manuscripts out of occupied Timbuktu, explained that he has devoted his life to preserving these unique historical documents, “not for myself; not only for Mali, but for all of humanity.”
The challenge for Mali, and, arguably, for “all of humanity” is this: will the attack on Timbuktu serve as a wake up call to revive this great center of learning and culture, with its timely model of tolerance and plurality? Or, will the fabled city of gold continue to spiral with its beacon as a spiritual center of science, justice, philosophy, commerce and the arts fading to black?
Yes, Timbuktu evokes remoteness. But, taking into account the universality of its wisdom, in fact, this city of 333 saints, to quote its music icon Ali Farka Touré, sits “right at the heart of the world.”
- Cynthia P. Schneider
- Mohamed Ali Ansar
- Salif Romano Niang
- Christopher Shields
(Version in Русский)
The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian financial markets (Chart 1). A deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels.
What would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn? To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties. See also separate blog on Russia-Caucasus and Central Asia links.
We find that Eastern European countries have the closest links with Russia and some of them could be seriously affected by a sharp slowdown of the Russian economy or a ratcheting up of sanctions and countersanctions. Western European countries are relatively less linked but some could also see significant effects. These conclusions, of course, are based broadly on the potential channels rather than a quantification of the potential impact, which anyway could be dominated by confidence effects from geopolitical tensions.
For most European countries, Russia is not a major export market (Chart 2). Therefore, slower growth in Russia would probably not hurt them too much. However, for many of Russia’s immediate neighbors such as Belarus, Ukraine, Moldova, and the Baltics, whose exports to Russia exceed 5 percent of their respective GDP, the impact could be substantial.
But European countries depend more on Russia on the import side—particularly gas and oil (Chart 3). Moreover, in some countries certain industries—such as chemicals and minerals, metals, and manufacturing equipment—rely heavily on inputs from Russia. These industries stand to face a disproportionate impact if there are trade disruptions or price increases on energy imports from Russia.
Europe relies on Russian gas, importing over one third of its natural gas from Russia through several major pipelines (the dotted line on the map is the planned South Stream gas pipeline). Russian gas accounts for over 50 percent of total gas consumption in virtually all countries in Eastern Europe and several advanced economies in Europe as well (Chart 4). However, as a share of total energy—rather than gas—consumption, Russian gas is somewhat less critical but still very important for several countries and especially so for Belarus and Moldova (Chart 5).
In the event of a price increase or disruption in gas supplies from Russia, countries’ ability to access alternative suppliers or energy sources will vary. For some countries, particularly those whose energy infrastructure is less nimble and whose gas inventories are relatively low, the transition could take longer and be more consequential. For example, the pipeline via Ukraine has the largest capacity and transports almost half of Europe’s gas imports from Russia, and so any disruption in the flow through that particular pipeline would have potentially serious effects on countries whose energy infrastructure relies heavily on it. Many European countries also depend heavily on oil imports from Russia, but those are easier to substitute from other suppliers than gas imports.
Foreign direct investment (FDI) from Russia, in industries such as banking, energy, and metal and mining, exceeds 5 percent of GDP for Belarus, Bulgaria, Moldova, and Montenegro (Chart 6).
A number of advanced economies, notably Netherlands and Ireland, have significant FDI in Russia as well (Chart 7). Financial centers, such as Cyprus, Luxembourg, also report high two-way FDI flows.
Many Western banks have sizable exposures to Russia. Notably Austrian, Hungarian, French, and Italian banks have subsidiaries in Russia and also lend directly to customers in Russia from their branches outside Russia (Chart 8). For some of these banks, their Russian operations have accounted for a large share—in some cases over one third—of their profits in the last few years.
The same Western banks also lend to other countries in Central, Eastern and Southeastern Europe (CESEE). In Chart 9, the outer ring shows the largest common creditor countries (and their major financial institutions) which account for 60 percent of the total cross-border lending to the CESEE region. In the middle are the recipients, with Russia accounting for about one third of the region’s total borrowing from these creditors. Hence, if a large shock to Russia triggers a reassessment of regional risks by common creditors, it could result in a broad pullback in lending to other countries too.
Foreign portfolio investments to Russia are also sizable, given that Russian assets account for 6–12 percent of emerging market benchmark indices. But there has been little sign of contagion to other Eastern European markets so far,even as Russia’s spreads widened sharply following developments in Ukraine, spreads of most other CESEE sovereigns drifted lower (see Chart 1).
The color-coded maps above can be summarized as follows:
(Version in Русский)
The countries of the Caucasus and Central Asia (CCA) are closely linked with Russia through trade, financial, and labor market channels. These ties have served the region well in recent years, helping it make significant economic gains when times were good. But how is the region affected when Russia’s economy slows down?
Underlying structural weaknesses have reduced Russia’s growth prospects for this year and over the medium term. Tensions emanating from developments in eastern Ukraine—including an escalation of fighting, the downing of Malaysian Airlines Flight 17, and new sanctions—have led to renewed market turbulence in Russian markets.
Experience has shown that lower growth in a large country can inflict significant collateral damage on neighboring countries with strong linkages of the type that the CCA has with Russia. (See also separate blog on Russia-Europe links.) We took a closer look at these connections to see how they transmit shocks, with particular attention to the impact on the region’s two main categories of economies—hydrocarbon importers and hydrocarbon exporters (see map).
Greater impact on oil importers
The links between Russia and the CCA are strong and multi-dimensional, we discovered (see figure):
- A special characteristic of the oil and gas importers is their reliance on remittances for household income and foreign currency. Russia accounts for at least 90 percent of remittances to Armenia, the Kyrgyz Republic, and Tajikistan—and in the case of Tajikistan, remittances are equivalent to half of GDP. Slower growth in Russia means lower remittances: our calculations suggest that a 1 percentage point fall in Russia’s GDP could reduce remittance flows to households in oil- and gas-importing countries by 1½ percent. The presence of very large numbers of workers from the CCA and the remittance channel also means that changes in Russia’s visa regimes or labor regulations could have a significant impact.
- Russia also exports goods to the CCA’s hydrocarbon-importing countries, especially oil and gas. As in Western and Central Europe, Russia has a big influence on CCA countries through changes in gas prices or deliveries. After a recently-negotiated 30 percent price discount, Armenia will save about 1½ percent of GDP annually on its gas bills, a big benefit for the country.
- Although CCA commodity exports are targeting the global market, Russia is still the main destination for goods from job-creating industries like agriculture, garments, and spirits. IMF calculations suggest a 1 percentage point fall in Russia’s GDP could reduce CCA non-oil exports by ¾ percent. Moreover, exports may be vulnerable to changes in Russia’s application of food safety standards or other non-tariff trade barriers.
- FDI and banking links with Russia are relatively small, suggesting smaller spillovers via these channels. However, CCA countries do not have particularly strong or diverse FDI or financial sector links with other regions, and the slowdown in Russia and concerns with escalating fighting in eastern Ukraine and sanctions could contribute to region-wide confidence impacts that may also affect the CCA.
All of these linkages transmit macroeconomic shocks that would have a bigger impact on the region’s oil- and gas-importing countries than on its oil- and gas-exporting countries. Our analysis suggests that a 1 percentage-point fall in Russian GDP growth would reduce the oil and gas importers’ growth by about ½ percentage point and the oil and gas exporters’ growth by less than a ¼ percentage point.
Policy implications for the near term
As a short-term response to a temporary shock, such as lower Russian growth this year and next, some CCA countries can reduce interest rates and sustain government spending in order to support the economy. However, the oil- and gas-importing countries have limited resources with which to cushion shocks. Should the need arise, countries could seek policy advice and financial support to help mitigate these potential effects. (Two of the region’s oil-importing countries—Armenia and Georgia—currently have programs supported by IMF financial assistance.)
Lower medium-run growth in Russia, however, means that CCA growth—and hence tax revenues—will be lower than previously expected. As a result, policymakers in all countries in the region would do well to spend prudently—to avoid a spike in debt in some oil- and gas-importing countries and to limit the drawdown of oil savings in the oil- and gas-exporting countries.
Greater economic independence in the long term
Although the CCA countries have enjoyed strong growth in the past propelled in part by Russia, they’ll need to find a new growth impetus as they seek to transition to dynamic emerging markets (see a recent paper on the CCA). Greater openness to FDI, enhanced connectivity, and more diversified trade are part of the answer.
The CCA countries are among the least integrated in the world due to geographical and policy barriers. While the current tensions in the region underscore potential complications to deeper integration, a multilateral approach in which trade barriers are reduced with all countries remains the best option.
With thanks to Brian Hiland and Greg Hadjian for their contribution to this blog post.
In 2005, I had the great fortune of being in Indonesia just as its major teacher reform effort was beginning to take off. Indonesia’s parliament had passed a comprehensive law on teachers, along with its ambitious agenda. Its signature program of certification intended to dramatically improve both teacher welfare and quality. Certified teachers would receive a doubling of salary, and certification was to require that teachers hold a four-year degree and demonstrate possession of competencies necessary to provide good quality education.
The key ingredients for major change seemed in place. Good legislation, and an effort led by a dynamic champion who headed a newly established directorate in the Education Ministry, with the specific mandate of improving the quality of teachers and of educational staff.
By Ian Parry
Energy plays a critical role in the functioning of modern economies. At the same time, it’s at the heart of many of today’s pressing environmental concerns—from global warming (predicted to reach around 3–4 degrees Celsius by the end of the century) and outdoor air pollution (causing over three million premature deaths a year) to traffic gridlock in urban centers. In a new IMF book, we look at precisely how policymakers can strike the right balance between the substantial economic benefits of energy use and its harmful environmental side effects.
These environmental impacts have macroeconomic implications, and with its expertise in tax design and administration, the IMF can offer sound advice on how energy tax systems can be designed to ensure energy prices fully reflect adverse environmental impacts.
We do this by developing a sensible and reasonably simple way to quantify environmental damages and applying it, in over 150 countries, to show what these environmental damages are likely to imply for efficient taxes on coal, natural gas, gasoline, and road diesel. For example, the human health damages from air pollution are calculated by estimating how many people are exposed to power plant and vehicle emissions in different countries and how this exposure increases the risk of various (e.g., heart and lung) diseases. Although there are some inescapable controversies in this approach (e.g., concerning the valuation of global warming damages or how people in different countries value health risks), the methodology is flexible enough to easily accommodate alternative viewpoints—it is a starting point for debate, not a final point of arrival.
Not all taxes are bad
The world’s finance ministers should recognize they have some fairly potent tools at their disposal. Let’s face it, taxes can be a powerful way to point consumers and firms away from certain products—look at what’s happened with cigarettes in many countries over the past 50 years. Environmental taxes or similar pricing instruments can help in “getting prices right,” that is, reflecting environmental side effects in energy prices. We need to focus on smarter taxes, not higher taxes. If properly targeted at the source of environmental harm, these instruments provide the most effective way to reduce the harmful side effects of energy consumption. And their revenues allow governments to lower other burdensome taxes, or meet fiscal objectives more efficiently, thereby achieving better environmental and health outcomes while limiting any adverse impact on macroeconomic performance.
In short, countries need not wait on international action to move ahead with energy price reforms, given the large domestic environmental and fiscal benefits. Finance ministers have a central role to play in all this, both in administration, and in restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, in favor of carefully designed energy taxes. But we need to pay careful attention to what should be taxed (the “tax base”) and how much should be paid via tax rates.
Getting bases and rates right
As for tax bases, although there are different options, carbon emissions are most easily priced through levies on fossil fuel suppliers in proportion to the fuel’s carbon content, building off existing motor fuel taxes. Similar charges on fuel supply can be levied for local air pollution, though providing credits or refunds for capturing emissions—as sulfur dioxide “scrubbing” technologies do at power plants—is important, because it is net emissions released into the atmosphere that matter for environmental damages. For motor vehicles, charges on kilometers driven (varying with different urban road classes and time of day) can most effectively reduce congestion, and should be feasible for the longer term—but a reasonable interim step is to reflect all harmful environmental effects (most importantly: carbon, pollution, congestion, and accident risks drivers pose for other road users) in fuel taxes.
As regards tax rates, these need to be set in line with environmental damages, to provide an automatic gatekeeper, ensuring that only those environmental improvements are made for which the benefits exceed the costs.
To get it right, price it right
A robust finding in the book is that fuels are pervasively, and substantially, under-taxed. But the degree of undercharging varies considerably across countries. Take coal, for example, which is essentially untaxed at present, but for which carbon charges shown in Chart 1 amount to $3.3 per gigajoule of energy (about two-thirds of the average world price) while air pollution damages (despite regulations) exceed $10 per gigajoule in countries like China and Poland (with high population exposure to pollution), but are less than $1 per gigajoule in Australia and Chile (where the converse applies). Corrective taxes on gasoline are also substantial across advanced, emerging, and developing countries, but more to reflect the costs of congestion and accidents than air pollution and carbon emissions.
There is much at stake here—implementing corrective fossil fuel taxes (relative to the current situation) would generate an estimated reduction in global carbon emissions of 23 percent, save 63 percent of fossil fuel pollution deaths, and provide fiscal benefits averaging 2.6 percent of countries’ gross domestic product.
The 2014 Brookings Blum Roundtable: Jump-starting Inclusive Growth in the Most Difficult Environments
The start of the 21st century has been an auspicious period for global economic development. In the 1990s, a mere 13 emerging economies succeeded in growing at a speed at least twice that of the OECD countries, enabling rapid convergence on Western living standards. By the first decade of the 2000s, this number had mushroomed to 83. Accelerated rates of economic growth lie behind many of the recent success stories in global development, not least the fulfilment of the first Millennium Development Goal to halve the global poverty rate, five years ahead of the 2015 deadline.
Yet in a number of places, growth has failed to take off, has undergone periodic reversals, or has benefited a few while leaving the majority short-changed.
Included here are the poor and stagnant economies Paul Collier had in mind when he coined the term the Bottom Billion. These are countries gripped by structural challenges to growth: handicapped by weak infrastructure and institutions, and prone to disaster, disease or conflict.
In the world’s resource-rich economies, the so-called commodity supercycle has spurred economic activity, but at a pace far exceeding improvements in institutions and governance. Such growth is unlikely to be sustained and, in many cases, its benefits are captured disproportionately by elites.
Even in some of the most dynamic emerging economies, persistent pockets of poverty remain in lagging sub-national regions, or among selected population groups, resulting from market and local governance failures, or discrimination and exclusion.
Ending extreme poverty over the next generation will require inclusive and sustained growth across the developing world, and the private sector—partnering ever more effectively with both donor and developing country governments—has an essential role to play in enabling this growth to occur.
Next week, global leaders, entrepreneurs, practitioners and public intellectuals will come together at the Brookings Blum Roundtable to debate how inclusive growth can be jump-started in the most difficult environments. Among the topics for discussion are: how to improve dialogue between governments and private corporations; what assurances investors look for to operate in high-risk and conflict settings; what promise new technologies hold for leapfrogging physical infrastructure; what it takes to unlock mega investment deals; how to transform and diversify resource-dependent economies; and whether the U.S. government’s new approach to working in partnerships can advance global development prospects.
Information on this year’s roundtable— including associated policy briefs, blogs, tweets and more—can be found at: http://www.brookings.edu/bbr. You can also follow the conversation on Twitter by checking @BrookingsGlobal for live tweets or seeing what roundtable participants are saying at the hashtag #Blum2014.Authors
For those of us who care about Israel and Palestine, the events unfolding in Gaza are especially depressing. There is no doubt that both sides have missed opportunities to avert the disaster that is now unfolding. On the other hand, as David Kirkpatrick says in today’s New York Times, there is more going on here than just another bout of the never-ending Israeli-Palestinian battle. What is going on is – as Tom Friedman has been writing recently – is the latest episode in the battle between some semblance of order and chaos.
Hamas is not the representative of the Palestinian people. It is a terrorist organization that is cynically and opportunistically using the Palestinian people for its own ends. Both Palestinians and other Arabs are acutely aware of this. Kirkpatrick quotes a communiqué from Egyptian President el-Sisi saying that he does not blame – or even mention Israel when condemning Hamas for “the bloodshed of innocent civilians who are paying the price for a military confrontation for which they are not responsible.”
Every time Hamas launches an attack from a Gazan hospital, school, mosque or community center, it abuses the very people it claims to defend. By now, it should be abundantly clear that Israel can and will greet every assault with equal – or greater – retaliation. Its intelligence is sufficiently good and its weapons are sufficiently accurate that most of the time (but not all of the time), its retaliations will indeed strike at the point of origin of the attacks made upon it.
So what is the answer? As someone who believes that the root cause of political instability and unrest is economic, not political, I believe that the answer comes from creating an ordered environment in which both Gaza and the West Bank – in a unified, independent Palestinian State, can begin to build something akin to what Jordan (which is well over half ethnically Palestinian) has done in terms of a relatively strong entrepreneurial/start up ecosystem in the midst of much chaos in the region. Palestinians are notoriously clever, industrious and when given half a chance, successful. The vast majority of Palestinians do not have the political strength to dig out from under the tiny minority that Hamas represents and is driving them – not Israel – into the sea. Israel needs to help by pulverizing Hamas and then helping oversee the creation of truly democratic parties that can compete for the votes of Palestinians, with the aim of creating a functioning state that Israel will shelter in its fragile, earliest days. That is how we turn this horror in to opportunity.Authors
Some observers argue that government policy favors the biggest handful of banks at the expense of all the others, which leads many of them to call for a break up of those mega-banks. The Government Accountability Office (GAO), an arm of Congress, released a report today that is intended to address part of the question – whether the largest banks pay less to raise funds because markets assume taxpayers may bail those firms out. This advantage is often referred to as an “implicit subsidy”, because it effectively subsidizes the operations of the biggest banks, but is based on an implication of government support, not an official policy. (Please see my recent primer on implicit subsidies for a longer explanation of this complicated subject).
The GAO report is far from conclusive, but appears broadly consistent with my own view, based on initial analysis of the report. First, it highlights that it is very hard to define and measure implicit subsidies, which suggests to me that we should be cautious about taking policy actions based on such measurements. The report principally relies for its quantitative conclusions on an extensive econometric model created by the GAO. They emphasize the difficulty of accurately specifying the complex model and therefore they ran 42 variants using different definitions of key variables. Using 2013 data, the most recent available, they found that 8 variations of the model showed a positive implicit subsidy that was statistically significant, 18 showed a negative implicit subsidy that was statistically significant, and 16 could not find a subsidy in either direction that was statistically different than zero. To say the least, this is not a compelling argument that there are substantial positive subsidies today.
Second, the value of implicit subsidies varies over time. They were significant prior to the financial crisis and became much more important during the crisis itself, as government support became explicit and the value of that backing shot up as credit concerns grew about the banks. Since then, they have fallen sharply due to a combination of: explicit policy against future taxpayer rescues; legislation and regulation to make it much less likely rescues would ever be needed and, if they were, to shift their cost away from taxpayers; and the increase in safety margins of capital and liquidity held by the banks reducing the probability these banks would need a rescue. These subsidies have fallen so far that it is difficult to prove they still exist, as the GAO findings noted above show. My strong intuition is that they are still there, but on a quite modest scale. After all, most market participants think it is still at least a little bit more likely that a very large bank would be rescued by the government, than that a small one would be, and that not all of the costs of that rescue would be recovered from the bank’s funders.
The GAO does not try to quantify the other important piece of the question about government policy – to what extent does legislation and regulation now add greater costs for the largest banks? There is explicit government policy now that puts burdens on the very largest banks that do not exist for all other banks, including some that are still quite large by most standards. The most obvious is that the mega-banks are required to fund themselves more from shareholders and less from debt and deposits, which are cheaper. (There is some academic argument that this balances out on a societal basis, due to higher tax collections, but no argument that the individual bank avoids higher costs.) There are some other notable costs for the largest banks, described in my primer. The costs may total as much as one quarter of a percentage point on assets annually -- larger than most current estimates of the borrowing cost advantage. It is therefore distinctly possible that there is now a net disadvantage from government policy for the largest banks.
Overall, there does not appear to be a sound reason to change current government policy based on worries about implicit subsidies. The net subsidy may actually be negative now. If it is positive, it is now small and hard to measure. Government policy is already focused on avoiding future taxpayer rescues and we should continue down the path of implementing sound approaches to achieve this, such as the FDIC’s work on Single-Point of Entry approaches to dealing with large banks that go under.Authors
Editor's Note: In this blog, George Ingram discusses the key elements of the New Deal. For a more detailed assessment of its implementation, read this latest paper, Implementing the New Deal for Fragile States.
The g7+ is an association of 20 countries afflicted by conflict and fragility that have joined together to share experiences and lessons and advocate for reform. The New Deal, endorsed at the 2011 meeting on aid effectiveness in Busan, is an accord between the g7+ and donor countries that creates a framework for how those countries can move from fragility to sustainable development. Among key elements of the New Deal are: an assessment of the underlying dynamics of a country’s fragility, a single agreed-upon plan on how to move away from fragility, and a focus on specific elements that contribute to sustainability. While the New Deal compact is an agreement between a g7+ country and donors, the emphasis is on country leadership and ownership with donors playing a supporting role.
The components of the New Deal are:
“Implementing the New Deal for Fragile States,” a paper I have recently coauthored with Jacob Hughes, Ted Hooley, and Siafa Hage, is an assessment of the New Deal compact and its results. The paper is based on extensive interviews with lead staff of the seven g7+ pilot countries, donors, and civil society. The overall conclusion is that the New Deal does provide a framework for countries to move beyond fragility, but it has yet to bring the relevant behavior change by either g7+ governments or donors.
A major shortfall in the implementation of the New Deal is that it has proceeded along a technical rather than a political dimension. The New Deal recognizes that conflict and fragility are fundamentally political, but most of the action has been in complying with some of the components by technical experts rather than engagement at the political level. This is true for both the g7+ countries and donors. Countries have not convened and shepherded through the necessary national political dialogue to bring together disparate communities, and civil society, which could facilitate reconciliation, has not been sufficiently involved in New Deal processes. Similarly, donors have relegated the New Deal to the technical and managerial level and senior political leaders seldom attend meetings of the New Deal.
A parallel assessment by the International Dialogue on Peacebuilding & Statebuilding (INDPS) reports findings on the New Deal consistent with findings of our report.
Enthusiasm for the New Deal remains strong, but frustration is growing by all parties on the slow implementation and lack of change by all parties. It is critically important that g7+ leaders extend their political leadership of the New Deal and engagement across their entire government, that civil society be accorded its rightful role and be provide with the support it needs to play a constructive role, and that donors become engaged at the senior leadership level and begin to take more risk in engagement with g7+ countries.
The New Deal empowers political and civic leaders in fragile countries to take charge of their country’s future and focused international attention on how countries can move from fragility to sustainable development, including in the discussions of the post-2015 global goals. It would be a tragedy if this historic initiative failed due to lack of commitment and adequate engagement by g7+ donors, governments, and civil society. It is hoped that this independent assessment, along with that of the International Dialogue, will galvanize renewed commitment and action that will fulfill the promise of the New Deal.Authors