By Doris Ross
Three months ago African leaders and policymakers assembled in Mozambique under an “Africa Rising” banner to assess the continent’s strong economic performance. But while the outlook for the continent remains strong, individual countries have faced problems and the uncertain global outlook continues to pose risks. Against this backdrop, what are the policies that Africa should pursue to sustain the positive momentum for the continent?
In reality, Africa Rising has never been about unbridled optimism; it has been a tale of strong growth tempered by serious challenges. And rising in economic terms is as much about sustaining expansion as about the dimensions of growth itself. The extended process of African development also requires increased resilience to shocks, and it is this resilience that may be tested by economic problems in some African nations.
Strong growth—and increased resilience—were the focus of the Africa Rising conference organized in May by the IMF and the government of Mozambique in Maputo. The nearly 1,000 officials, corporate executives, civil society representatives, and journalists who gathered for the two-day event discussed the difficult issues that must be addressed if Africa is to maintain its upward trajectory of the past two decades.
These issues have parallels across sub-Saharan Africa as each country pursues its own path to development. It is by examining individual countries in detail that we gain a clearer understanding of what has been achieved and what remains to be accomplished. For this reason, the IMF African Department compiled a book on Mozambique called Mozambique Rising: Building a New Tomorrow, which is available in English, French and, most recently, Portuguese.
The book examines Mozambique’s macroeconomic accomplishments, from its emergence from civil war in 1992 to its current efforts to build on discoveries of massive reserves of coal and natural gas. But it also describes the myriad of challenges that must be addressed if the country and its people are to achieve their potential.
Mozambique’s immediate priorities are to share the benefits of two decades of strong growth more broadly, and to shepherd the economy through the transformation from a traditional agricultural base to one centered on mining, agro-business and processing, and services.
As the book makes clear, reaching these objectives will require continued institutional and capacity building in public administration to further improve the foundations and structures of economic policymaking and governance, and adapt them to a fast-changing world. It will also require further efforts to create an environment conducive to private sector development since this will need to be the primary source of future employment. It also calls for the government to work with small and large enterprises to make Mozambique more business friendly and competitive.
As with several other emerging African nations, Mozambique’s future is inextricably tied to the development of natural resources and foreign-financed megaprojects that are capital intensive and export oriented. There is no doubt that these projects will make a significant contribution to growth, but so far they have generated only limited employment opportunities and government revenues. To fully benefit from this strategy Mozambique will require a more dynamic business climate and changes to its tax regime.
Resource development also requires substantial changes to the formulation of fiscal policy. Mozambique’s resource revenues, while modest to date, are likely to become sizable in a few years, thus affording a unique opportunity to close infrastructure gaps, invest in priority sectors such as health and education, support more inclusive growth, as the economy radically transforms. However, capacity constraints seem high, and the pace at which resource wealth is anticipated and used should be gradual.
To reap the full returns on scaled-up public investment, reforms would also need to enhance the efficiency of investment through strengthened investment planning and coordination; project assessment, selection, and monitoring; better governance; and provision of complementary infrastructure.
There are many other challenges, not the least of which is inclusive growth. While poverty in Mozambique has fallen significantly, a 2009 household survey showed that overall poverty rates had stagnated since 2003 at around half the population. Policies to ameliorate this have focused on improving agricultural productivity; creating jobs through improvements in the business environment and training; developing more focused and better designed social protection programs; and preserving macroeconomic stability.
However, work remains to be done to refine policy priorities, derive policy actions and sequencing, and measure results. Also, policy coordination to ensure accountability has been lacking in areas that cut across ministerial jurisdictions, and there are significant data gaps that weaken analytical capacity and thus the basis for policy decisions.
All of these issues raise questions about how fast and how high Mozambique can rise, but at the same time they point the way to the policy path that could transform the country to realize its tremendous potential.
Six years into the crisis, the eurozone remains the sick man of the world economy. Its GDP today is barely at the pre-crisis level, deflation looms and the difference between the healthier core and a struggling periphery is not resolved. Moreover, even Germany may be slowing down, and Finland is in persistent recession.
By announcing the Outright Monetary Transactions (OTM) back in 2012, Mario Draghi defused the financial crisis by promising to act as a de facto lender of last resort for troubled southern economies. Then, last June, the European Central Bank (ECB) embarked on its own version of quantitative easing, promising credit to eurozone firms and households. The ECB has been blamed in some quarters for doing too little, too late. It is probably true that the deflationary threat had been underestimated by ECB officials. It should be recalled, nevertheless, that the ECB fought the crisis, facing resistance from some of its most influential members. It saved the eurozone from disintegration but it has not been able to help launch growth. On the contrary, it is increasingly evident today that the impact of monetary policy on growth is limited. Balance sheet recessions increase the propensity to hoard among households, firms and financial institutions. In a liquidity trap monetary policy loses traction. Today, stagnant income and high unemployment in most eurozone economies, and uncertainty about the future, all contribute to compress private spending and demand for credit across the eurozone, while they increase the appetite for liquidity. At the end of 2013, private spending was 7 percent lower than in 2008 (a figure that reaches a staggering 18 percent for peripheral countries). In such a situation there is only so much the ECB can do.
Monetary policy has been given almost obsessive attention, but there has been much less debate about the nature of fiscal policy. That may be changing, however, as Mario Draghi’s speech in Jackson Hole signals. True, the European Commission and Germany have insisted that fiscal consolidation should be strengthened further. Yet, the argument for boosting public investment seems to have gathered strength and is likely to be discussed at the next European Council meeting. This is long overdue: Since the Maastricht Treaty, cutting public investment has been the preferred instrument for fiscal consolidation by many countries, because it is generally less immediately painful than other cuts. The result is that in almost all eurozone countries public investment as a share of public spending decreased dramatically compared to the 1970s and 1980s.
Thus, renewed attention to public investment is welcome news. Stronger public investment would sustain aggregate demand in the short run and, in conjunction with supply side structural reforms, crowd in private investment and increase potential output. Substantial Europe-wide investment programs seem today to be politically unfeasible. The solution must therefore be found at the national level. What is currently proposed is that countries negotiate with the commission on a bilateral basis to gain increased room for investment in exchange for vague “structural reforms.” This process is unlikely to yield significantly higher levels of investment.
We believe that European countries should take a bold step, and introduce a golden rule of the type adopted by the United Kingdom in the late 1990s. Requiring countries to balance their current budget over the business cycle, while financing public capital accumulation through debt, is inter-generationally fair, and it would focus efforts of public consolidation on less productive items of public spending.
The adoption of a golden rule has been proposed several times in the past. The main criticism raised against its implementation is that it would yield over-investment in physical capital to the detriment of other items at least as “productive,” like spending on education. In addition, a grey zone in the definition of public investment would lead to creative accounting by governments, who would have the incentive to classify as investment expenditures not strongly linked to the creation of future productive capacity.
These are real difficulties. But to give up altogether on trying to distinguish between growth- supporting expenditures and current public consumption, is throwing the baby out with the bath water. The former will tend to reduce long-term indebtedness, particularly given the existing very low real interest rates environment, whereas spending for immediate consumption, however pressing it may be at times, increases indebtedness. The solution to the problem, as is the case in other areas, requires greater cohesion in the eurozone.
The Eurogroup, based on the work of the commission, could agree on detailed guidelines regarding golden rule related fiscal accounting and update them periodically. The distinction will never be perfect, but the quality of the golden rule accounting could improve over time and allow a much more appropriate implementation of a long-run growth and debt reduction strategy.
The implementation of a golden rule of this kind would serve the purpose of focusing on the nature and quality of public spending in relation to the growth objective. It would also force European policymakers jointly to have a periodic and transparent discussion on the investment needs of their economies, and to coordinate policies as part of a process that would increase participation, cohesion and legitimacy in the eurozone.Authors
- Kemal Derviş
- Francesco Saraceno
A founding principle of The Hamilton Project’s economic strategy is that long-term prosperity is best achieved in a changing global economy by promoting sustainable, broadly shared economic growth. One important way to fulfill the goals of this strategy is to encourage the efficient use of our nation’s natural resources. This fall, The Hamilton Project will release new papers and host forums on this topic, with a specific focus on U.S. fisheries in September, and on America’s water crisis in October.
With regard to fishing, the economic importance of this sector extends well beyond the coastal communities for which it is a vital industry. Commercial fishing operations, such as seafood wholesalers, processors, and retailers, all contribute billions of dollars annually to the U.S. economy. Recreational fishing—employing both fishing guides and manufacturers of fishing equipment—is a major industry in the Gulf Coast and South Atlantic. Estimates suggest that the economic contribution of the U.S. fishing industry is nearly $90 billion annually, and supports over one and a half million jobs.
A host of challenges threaten fishing’s viability as an American industry. Resource management, in particular, is a key concern facing U.S. fisheries. Since fish are a shared natural resource, fisheries face traditional “tragedy of the commons” challenges in which the ineffective management of the resource can result in its depletion. In the United States, advances in fishery management over the past four decades have led to improved sustainability, but more remains to be done: 17 percent of U.S. fisheries are classified as overfished, and even those with adequate fish stocks may benefit economically from more-efficient management structures.
In a new policy memo, “What’s the Catch: Challenges and Opportunities of the U.S. Fishing Industry,” The Hamilton Project considers the economic challenge of ocean fishery management, which has important implications for the commercial and recreation fishing industries, and to the economic viability of myriad coastal communities around the country. The full policy memo can be found here.
On September 10th, The Hamilton Project will host a forum to discuss new opportunities for improving the economic prosperity and long-term sustainability of the U.S. fishing industry. The Project will also release a new paper by economist Christopher Costello of UC Santa Barbara proposing that fisheries meeting certain criteria undertake a transparent comparison of the economic, social, and ecological trade-offs between status quo management and alternative management structures, including catch shares. Costello contends that such a comparison would provide fishermen and other stakeholders with the necessary information to better advocate for management approaches that reflect their diverse goals and promote the long-term prosperity of the U.S. fishing industry.
Former U.S. Treasury Secretary Robert E. Rubin will open the forum, followed by a roundtable discussion on the new proposal. Costello will be joined by Lee Crockett, Director of U.S. Oceans at the Pew Charitable Trusts; Amanda Leland, Vice President of Oceans at the Environmental Defense Fund; John Pappalardo, Executive Director of the Cape Cod Commercial Fisherman’s Alliance; and Captain Steve Tomeny of Steve Tomeny Charters.
For the full agenda and to register for the forum, please click here. For updates on the event, follow @hamiltonproj and join the conversation using #CastTheNet. Authors
Beijing has spoken. On August 31, the Standing Committee of the National People’s Congress, China’s legislature, issued a “decision” that has the force of law and sets new parameters for electing Hong Kong’s Chief Executive. Under the old system, the CE was picked by an election committee with 1,200 members, most of whom happened to be loyal to or sympathetic with Beijing. Consequently, Hong Kong’s ultimate Chinese rulers could control the selection outcome.
For the 2017 CE election, Beijing pledged to institute universal suffrage, so that all of Hong Kong’s several million voters could express their preferences. It has honored that pledge but only in a narrow sense. If its new parameters are adopted, Hong Kong voters will indeed pick the chief executive in 2017. There is a catch, however. The NPC-SC decision dictates candidates for the contest can only be selected by a nominating committee, and that the new nominating committee will be modeled on the old election committee. Consequently, candidate selection will be in the hands mainly of people who are sympathetic to Beijing. In addition, over half of the members of the nominating committee would have to approve each candidate, which means that no pan-democrat could get nominated if Beijing disapproved of him or her.
By making this decision, Beijing has missed a significant opportunity to broaden its support in Hong Kong. Before today’s decision, there remained at least a theoretical possibility that a genuinely democratic system could emerge. In an op-ed in the August 18th Wall Street Journal, I discussed what was required to permit a competitive election in which the voters would decide whether to select a pro-establishment figure or a member of the democratic camp. The crux, I said, were the rules that allowed for a nominating committee that was broadly representative of Hong Kong society, permitted a reasonable number of candidates; and set a low threshold for the number of committee members needed to nominate a candidate (so that a pro-democracy individual could be picked). I argued that if Beijing was willing to be creative on that point, it would be sufficient to facilitate negotiations with moderate members of the democratic camp (and because any reform plan required two-thirds of Hong Kong’s Legislative Council to pass, at least some pan-democrats would have to support it). [For the text of my WSJ op-ed, request one at email@example.com.]
The NPC-SC decision makes this compromise impossible, but it also ensures that Beijing’s plan will not get adopted. No member of the democratic camp will support it, so a two-thirds majority will be impossible, and the system for 2017 will be the same, “small-circle” arrangement that was used in 2012. China will blame the pan-democrats for denying the vote to Hong Kong people, but the true reason is Beijing’s rigidity and unwillingness to compromise. In the short-term, the prospect is for a new round of popular protests, even the civil disobedience campaign promised by the Occupy Central movement. The more extreme elements of the Hong Kong system, both pro-establishment and pro-democracy, continue to control the agenda, at the expense of a compromise crafted by moderates.
In the end, Chinese leaders were unwilling to risk the uncertainty of a truly competitive process, even though the odds are that Hong Kong citizens, who are generally conservative and pragmatic, would not have supported a democrat with a radical, anti-China, soak-the-rich platform. No doubt Beijing did not want to appear weak and create a precedent for democracy elsewhere in China. And it feared, without justification, that an elected democratic Chief Executive, backed by “foreign forces,” would seek to destabilize Communist Party rule in China. As a result, however, Beijing has bought itself the uncertainty of sustained political disruption in Hong Kong and deeper public alienation and frustration.Authors
The political noise surrounding the Affordable Care Act (ACA), or “ObamaCare”, makes it difficult to get a good sense of what is really happening on the ground as states implement the legislation with varying degrees of enthusiasm and success. That difficulty underscores the importance of a project being undertaken jointly by the Brookings Institution, the Rockefeller Institute of SUNY, and the Fels Institute of Government at the University of Pennsylvania. The project draws on a network of researchers to track the implementation of the ACA in 35 states.
In late August, at a televised event in Washington, the project released a group of reports on Alabama, Florida, Kentucky, Maryland, South Carolina, Texas and West Virginia. When it comes to expanding Medicaid or managing exchanges under the ACA, the summary report on these southern states characterizes the general mood as “turbulent opposition”, ranging from strident resistance to just a preference to keep Washington at arm’s length. The opposition has not always been simply partisan or ideological, notes the report. Concerns about a state’s financial and managerial capacity to expand coverage have often been a key factor.
So looking ahead, how might implementation of the ACA evolve in the South? Well, let’s bear in mind that there will be changes in Washington over the next few years. The November election could alter the balance of power in critical ways that will influence regulatory and possible statutory amendments to the ACA. Moreover the 2016 election will result in a new White House that – at the very least – has no pride of authorship regarding the ACA. In this environment, we could see at least three important patterns developing.
First, there will likely be several “private option” proposals for Medicaid expansion, in which states seek waivers to use federal Medicaid expansion funds to enroll beneficiaries in private exchange plans rather than traditional Medicaid. In addition to the Arkansas version of the private option, such other southern states as Florida, South Carolina, Tennessee and Texas have explored the approach. So have states in other regions, with Pennsylvania recently winning approval from the Obama Administration for a version.
Private option waivers of this kind could well become an acceptable way for southern states technically to expand Medicaid while in practice achieving wider private coverage for lower-income families by subsidizing the purchase of private plans. Depending on future national elections, this pattern could help lead to broader reforms of Medicaid that would permit much greater use of private plans within an exchange framework.
A second pattern might be the greater customization of federal exchanges, such that the “federal” and “state” distinction becomes fuzzier. Some southern states defaulted to a federal exchange more because of worries about their own capacity to design and manage an exchange than because of an opposition to exchanges in principle. As the federal exchanges settle down and states become more comfortable with them, some states may seek a greater role in running and modifying “federal” exchanges, perhaps with some of these exchanges essentially becoming state operations.
And third, let’s remember that, in 2017, Section 1332 of the ACA takes effect. This provision permits states to apply for sweeping waivers from the ACA, including exemptions from the individual mandate, the employer mandate, many constraints of the essential benefits, and even the requirement to have an exchange, provided that the state can achieve the broad coverage goals of the law. Little wonder that former Ted Kennedy senior adviser John McDonough describes the provision as “state innovation on steroids” and as “a significant and unpredictable game changer” for future reform.
True, some sponsors of the 1332 saw it as a way to sneak in a single payer system down the road in Vermont and possibly other states. But the same provision could allow more conservative southern states to craft very different health systems in the future under the loose framework of the ACA.
Does this mean today’s foot-dragging South could become the pace-setter for a radically altered ACA? Maybe so. Stay tuned.Authors
By Jeff Hayden
You can call this edition of F&D magazine our Bob Dylan issue. It may seem odd for an economics magazine to draw inspiration from the legendary singer/songwriter, but one of his most famous lines, “The times, they are a-changin,’” reverberated through our corridors as we put together this special issue on the global economy’s past and future.
We weren’t humming the tune to pass the time. The lyrics seemed especially relevant to us this year, as we mark the 70th anniversary of the IMF and World Bank and the 50th anniversary of F&D. The world has seen a staggering amount of change in the past seven decades.
So, with these two anniversaries in mind and with Dylan’s ode to changing times in the air, we focused our attention on the transformation of the global economy—looking back and looking ahead. We wanted to address the question, what will the global economy look like in another 70 years?
To help us, we turned to some of the sharpest minds in economics. We asked five Nobel laureates—George Akerlof, Paul Krugman, Robert Solow, Michael Spence, and Joseph Stiglitz—to share their thoughts on which single “frontier” issue promises to shape the economic landscape in the years ahead. Their responses might surprise you.
Elsewhere, IMF Chief Christine Lagarde charts a course for the IMF in the next decade in a Straight Talk piece, and IMF Chief Economist Olivier Blanchard distills the lessons of the most jarring economic event in recent memory—the 2008 global financial crisis—and underscores the need for economists to change the way they look at the world. Dylan was on the minds of Ayhan Kose and Ezgi Ozturk, who begin their chart-article on economic transformations of the past 70 years with words from the singer himself.
Other articles on the global economy’s past and future include a piece on the perils and promise of globalization by Martin Wolf of the Financial Times; a look at economic trends that can help us prepare for future challenges by Kalpana Kochhar, Yan Sun, Evridiki Tsounta, and Niklas Westelius; and a primer on the postwar monetary system by Rex Ghosh. Articles on the future of energy in the global economy by Jeffrey Ball and on measuring inequality—the most hotly debated economic issue of recent days—by Jonathan Ostry and Andrew Berg round out the package.
In keeping with our “change” theme, we sought to try a few things for the first time: cartoonist Nick Galifianakis and Joe Procopio tell the story of the IMF’s origins in a way that’s never been done before in the pages of F&D—a seven-page comic. And to press the music theme a bit further, our Picture This looks at the Beatles and their role as an export earner.
Finally, we profile a giant in economics—Nobel winner and Stanford professor Ken Arrow, who built on an early passion for math and work in meteorology during World War II to launch a storied career in economics. To paraphrase Mr. Dylan, Ken Arrow certainly knows which way the wind blows.
China’s rise presents the United States with a series of difficult challenges, including disputes in the South China Sea. If and when it is peaceful, the U.S. should welcome it. Management of major global issues or areas of tension, such as nonproliferation, rivalry in the western Pacific, terrorism, the Iranian and North Korean nuclear program, frictions across the Taiwan Strait, climate change and energy security, will be immeasurably more difficult if U.S.-China relations become basically hostile. But if and when China’s rise takes a coercive turn, the U.S. needs to push back. In the coming years, China’s rise is likely to present many specific cases that require U.S. judgment on how to react. The maritime territorial disputes in the South China Sea currently highlight this challenge.
In a Brookings Foreign Policy Brief, Jeffrey Bader, Kenneth Lieberthal and Michael McDevitt discuss the significance of the South China Sea disputes and make recommendations for U.S. principles and practice. They argue that the U.S. must clearly define what are its interests in the area, namely protecting civilian and military freedom of navigation, preventing coercive resolution of disputes, preserving the international rules established by the U.N. Convention on the Law of the Sea (UNCLOS) determining claims to maritime rights and maintaining good relations with all of the six claimants to South China Sea land features. They also contend that the U.S. needs to understand what is not in its interest, namely taking a position on who has superior rights to any particular land feature, choosing sides rather than defending principles, treating the South China Sea as a venue for strategic rivalry with China or staking U.S. credibility on matters where the U.S. has no intention of, or interest in, acting decisively.
Pursuant to these interests, the authors propose a series of recommendations for the U.S. government, including:
• U.S. ratification of UNCLOS,
• Basing diplomacy on international law, including encouraging clarification by China and Taiwan of “nine-dash line” that is consistent with UNCLOS,
• Support for expeditious agreement on a Code of Conduct between ASEAN countries and China,
• Encourage all claimants to avoid new military construction in disputed land features,
• Partial relaxation of the U.S. arms embargo against Vietnam,
• Adopt a favorable attitude toward joint development of energy resources in disputed waters and encourage acceptance of traditional fishing rights for claimants until Exclusive Economic Zones enjoying international recognition can be negotiated, and
• Lowering the volume of U.S. government rhetoric over unilateral actions in the South China Sea that produce minor alterations in the status quo.
By Deniz Igan
(Version in Español)
Something unusual happened this year. For the first time in almost ten years, a book by an economist made it to Amazon’s Top 10 list. Thomas Piketty’s Capital in the Twenty-First Century captured the attention of people from all walks of life because it echoed what an increasing number of Americans have been feeling: the rich keep getting richer and poverty in America is a mainstream problem.
The numbers illustrate the troubling reality. According to the U.S. Census Bureau, 1 in 6 Americans—almost 50 million people—are living in poverty. Recent research documents that nearly 40 percent of American adults will spend at least one year in poverty by the time they reach 60. During 1968–2000, the risk was less than 20 percent. More devastatingly, 1 in 5 children currently live in poverty and, during their childhood, roughly 1 in 3 Americans will spend at least one year living below the poverty line.
Also worrisome is that the poverty rate increased sharply during the recession and has not come down. The rate still hovers above 15 percent despite the ongoing recovery (see Chart 1).
Unless the economic benefits of an improving economy are felt more widely, this recovery may well prove neither economically nor socially sustainable. The United States needs more jobs that pay decent wages. In our recent report on the U.S. economy, we argue that extending certain tax credits, together with increasing the minimum wage, are effective and efficient ways to help the working poor.
Statistics with consequences
Poverty has a self-sustaining nature. People who have been sucked into poverty in the past are more likely to fall back below the poverty line in the future. And, the longer they spend below the poverty line, the harder it is to exit.
Poverty also becomes ingrained across generations. Children growing up in poverty often lack the advantages of sufficient nutrition and a stable home. They underperform in school, have limited access to quality health care or education, are less likely to go to college, and find themselves less prepared to compete for the high-skilled jobs that the modern U.S. economy demands.
This becomes a vicious cycle that leaves the poor lacking the resources or opportunities to exit. Stuck in low-paying jobs and faced with economic insecurity, the poor become more likely to get detached from the labor market and less likely to make investments in education and job training—which could help them break the cycle.
At a macroeconomic level, both labor force participation and productivity suffer as a consequence. Poverty reduction is therefore important for long-term growth, and is essential for both economic and social sustainability in the United States.
Supporting the poor
A good chunk of the poor are unfortunately among the ranks of the unemployed. To lift them above the poverty line will require, at a minimum, greater job creation and stronger economic growth.
But this is not enough. There are 10.6 million poor people who have a job, and often head households with children. Modest policy efforts can help change the negative dynamics that poverty creates. Luckily, there are tools that can help and which have a proven track record.
In particular, the earned income tax credit program is a well-targeted mechanism to address poverty by offering tax refunds to those workers that earn below certain income levels. Eighty percent of the tax credit resources accrue to those in the bottom 40 percent of the income distribution. This tax credit, together with the child tax credit, helps reduce poverty rates among the nonelderly more than any other program (see Chart 2). Expanding the tax credit, especially to those without children, would help lift more workers out of poverty (see Chart 3). And the fiscal costs are very manageable—we estimate less than 0.1 percent of GDP per year.
An increase in the minimum wage would complement the expansion in the earned income tax credit. One negative side effect of a more generous tax credit is that it has the potential to lower pre-tax wages of low-income workers, causing workers to see a reduction in their take-home pay (a more generous tax credit would entice more people to enter the labor force, increasing the supply of labor and pushing wages down). To short-circuit this effect, a higher minimum wage could effectively limit the degree to which the tax credit is able to drive down pre-tax wages. It would also shift some of the fiscal costs of a broader tax credit onto companies (rather than being paid for by the budget).
Today, a single parent working full time at the federal minimum wage rate earns $15,080 a year, a level that is well below the official poverty line of $16,057. Moving the minimum wage up somewhat from its current level seems justified. While there is a chance that a higher minimum wage would discourage some employers from hiring low-wage workers, research shows a relatively small effect on employment.
Time for action
The belief that anyone can make it if they get a good education and work hard has been a cornerstone of the American identity. By helping poor families make ends meet, a combined expansion of the earned income tax credit and a modest increase in the minimum wage would bring the United States a step closer to realizing that aspiration.
According to multiple press reports, European Union leaders are poised to choose Italy’s Foreign Minister Federica Mogherini as the EU’s next foreign policy chief at a summit on Saturday. A previous summit to discuss the position ended in deadlock in July when the Baltics and several Eastern European states objected to Mogherini due to concerns that she was too soft on Russia and lacked foreign policy experience, as she has only been in her position since January.
Now decision day has arrived and Italy’s Prime Minister Matteo Renzi is determined to push her candidacy through even if some disagree. As one EU diplomat told the Financial Times, “You still have a group of countries who will be quite unsatisfied, but they don’t have a blocking minority.” In a comment that could have been made by Stringer Bell in “The Wire,” Italian Minister Sandro Gozi previewed this strategy in July, saying, “The possibility of a majority vote ... is part of the game and cannot be ruled out.”
This highly consequential foreign policy decision is being made on the basis of criteria that have nothing to do with foreign policy. No one claims that Mogherini is the best person to deal with Russia but asking who is is not seen as a relevant question. The sharing of the spoils of several top jobs between the parties means that it must go to a socialist and Europe’s socialist leaders want to help Renzi. There is pressure to appoint a woman because EU leaders have failed to nominate women for other top posts or for the rest of the commission. Merkel had concerns but she is apparently willing to let it slide if it means stopping Italy from diluting the EU’s budget rules. Others are doing their own deals. The bottom line is that foreign policy is almost entirely absent from the discussion.
In normal times, this would be a bit unseemly but not outrageous. These are not normal times however. It is easily forgotten in Rome and Paris but Russia poses a real and near-term threat to some EU members—Latvia, Estonia and maybe even Lithuania. These states have asked for more assistance and support from their allies in NATO and from other EU members. They are deeply concerned by Mogherini’s nomination. Italy has strong economic ties with Russia and has frequently opposed tougher sanctions. Mogherini’s visit to Moscow early this year and her language of respecting Russian interests raised concerns about exactly what those interests are and whether she understands where the fault lies.
In a clear reference to Mogherini, Lithuania's President Dalia Grybauskaitė said that the EU must not pick someone who is “pro-Kremlin”—an exaggerated charge, perhaps, but indicative of the sensitivity and concern her candidacy has caused. But above all is the view that others are better qualified to deal with the Russian challenge—not just in terms of years clocked on the foreign policy beat but in the substance of what they say and do about it. Carl Bildt, Sweden’s foreign minister, is a leading example. Polish Minister of Foreign Affairs Radek Sikorski is another. Bulgaria’s Kristalina Georgieva, currently EU commissioner for humanitarian aid, would be a good compromise candidate.
One would think that the views of these member states would be taken extremely seriously by the rest of the EU. Instead, isolating and defeating them is just another “part of the political game.” Needless to say, this is not a game. It is the most serious security threat Europe has faced in over two decades. Two hundred and twelve EU citizens were killed by a Russian missile fired by Russian backed separatists in July. Thousands have died in Ukraine as a result of the war Russia started. And in recent weeks, Russian forces have begun a formal invasion of Ukraine.
It is mind-boggling that in a week when Russia opened a third front in Ukraine, European leaders are even considering appointing anyone other than someone with a proven track record of understanding and meeting Russia’s challenge, let alone a person who has consistently underestimated the risk. It’s as if a climate skeptic from the oil industry was to be appointed as environment minister.
It is true, of course, that the foreign policy chief, whoever he or she is, will not make EU policy. That will continue to be the domain of individual member states, especially Germany. But appointing the wrong person will do no good and may do some harm. Appointing the right person could serve the purpose of rallying the member states, pressuring them to stick to their previous declarations, and being a powerful voice for Europe’s values and its interests in a peaceful and free continent.
The EU owes it to its own citizens to make a decision of this magnitude solely on foreign policy grounds. It should not sell out the Baltics to keep the gravy train flowing. This is no time for business as usual.Authors
A picture can tell a thousand words but the stunning photos we usually associate with the Pacific Islands often overlook the reality for many who live there. Faced with natural hazards such as cyclones, droughts and earthquakes alongside geographical remoteness and isolation, Pacific Island countries, which make up over a third of small island developing states (SIDS), are some of the most vulnerable nations in the world.
Already this year the Pacific region has been hit by two major disasters; Tropical Cyclone Ian in Tonga in January, followed by flash flooding in Solomon Islands in April. Both disasters had devastating impacts on the economy and livelihoods of local communities. Situated within the cyclone belt and Pacific Ring of Fire, earthquakes, tsunamis and cyclones are frequent. Around 41 tropical cyclones occur each year across the region as well as numerous earthquakes and floods.
The Congressional Budget Office this week took the federal budget in for a routine check-up, as it does every six months or so. The bottom line: The federal deficit outlook for the next decade has gotten a little better—provided Congress sticks to the spending caps it has written into law.
The CBO projections show two basic points about the fiscal health of the U.S. :
- The federal deficit really isn’t a big problem today. CBO now estimates that the deficit (the gap between government spending and revenues) for the current fiscal year will come in at 2.9% of the nation’s gross domestic product (the value of all the goods and services produced in the U.S. in a year.). That is below the average for the past 40 years and a long way from the nearly 10% point hit during the worst of the recession in 2009.
- The accumulation of government borrowing due to deficits past and present will push the federal debt (how much the U.S. Treasury owes) to 74% of GDP by the end of this fiscal year on Sept. 30, CBO projects. That’s more than double the pre-recession level and higher than any year since 1950. CBO expects that important measure of fiscal health to stabilize over the next few years, and then begin climbing towards 77% of GDP in 2024 and higher beyond that. See my three-minute animated version of all this:
That’s worrisome for a couple of reasons. It doesn’t give the government much maneuvering room if it needs to borrow a lot to fight another recession or a war. And it means the government will be spending increasingly large sums on interest, much of it paid to foreigners. Interest rates are very low now. This year, CBO expects interest to amount to $231 billion, or 6.6% of all federal spending or 1.3% of GDP. But interest rates are sure to rise over the coming years (although CBO says they won’t rise quite as much as it previously thought.) By 2024, given projected deficits and borrowing, CBO projects the government will shell out $799 billion in interest, or 13.8% of all federal spending or 3% of GDP.
CBO expects the U.S. economy to heal over the next few years—and sees unemployment continuing to fall until it hits 5.6%, its estimate of full employment, at the end of 2017. But it cautioned that it sees “lingering negative effects” from the Great Recession, in part because of sluggish business investment and in part because some idle workers will never go back to work. It said it now expects total wages and salaries “to recover from recent recessionary lows less fully than previously projected.”
CBO, which has been criticized by some for having an interest-rate forecast inconsistent with its growth forecast, said it has rethought all that and marked down its rate projections. In February, it projected that the three-month Treasury bill would yield 3.3% on average in 2017 and the 10-year Treasury note would be at 4.8%. In the new forecast, it puts the three-month bill at 2.1% and the 10-year at 4.8%. Over the ensuing six years, it has moved down its projections for both of those by 0.3 percentage points. This has an impact on projected deficits, given the dimensions of the government’s borrowing. CBO said its updated interest-rate and inflation forecasts reduced its projections of government spending for net interest by $469 billion over the 2015-2024 period, an 8% decline that works out to a decline equal to about 1% of all federal spending over the decade.Authors
One of the missions of the new Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution is to improve public—and congressional—understanding of major budget issues confronting the U.S. To that end, we’ve boiled the facts about the outlook for the federal debt down to a three -minute animated video in which I trace the recent ups and downs (yes, downs) of the projections for federal borrowing over the next decade.
It’s tough for people to understand that the debt is a problem—but not now. Yes, we ran up a big debt to fight the recession, but the U.S. economy is not yet fully recovered and the U.S. Treasury is able to borrow hundreds of billions of dollars every month at very low interest rates. The problem lies in the future after the economy and the job market and interest rates return to normal: The trajectory of government borrowing after the economy simply isn’t sustainable. We’re looking for ways to help people understand both the short-term and the long-term picture.
The animation shows the 10-year forecast for the federal debt made before the recession, how it rose when the recession hit and how it rose still higher after Congress enacted President Obama’s American Recovery and Reinvestment Act, the fiscal stimulus of 2009. But then the outlook actually brightened a bit as Congress raised taxes on upper-income Americans in 2013 and the pace of federal spending on health care, particularly Medicare, slowed a bit. Yes, sometimes things in Washington do get better. Still, we’re not out of the woods. The federal debt measured as a percentage of the gross domestic product is twice what it was before the recession and likely will continue to climb unless there is a change in government tax and spending policy and/or a substantial quickening of the pace of economic growth.
The video relies on projections of the federal debt made by William Gale, the Arjay and Francis Miller Chair in Federal Economic Policy at Brookings, and Alan Auerbach, Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. George Burroughs was the producer, Sareen Hairabedian was the lead animator, and Mark Hoelscher the animator.
For more on the Hutchins Center, see www.brookings.edu/hutchinscenterAuthors
As the United States widens its battle in Iraq against the Islamic State and contemplates strikes against it in Syria, the policy debate at home surrounding the intervention is heating up. Here are five myths circulating in the media that are clouding the discussion.1. The Islamic State was never al Qaeda.
Recently, Andrew Sullivan has been flogging the idea that the Islamic State in Iraq and Syria (ISIS or now just “The Islamic State”) was never subordinate to al Qaeda based on the short essay, “A Closer Look at ISIS in Iraq,” by Evan Perkoski and Alec Worsnop. The authors claim ISIS pledged its loyalty to al Qaeda but retained its autonomy “at all times.” It was never “directly a part of AQ” (al Qaeda). Aside from the obvious contradiction between pledging one’s loyalty and doing whatever one wants, there are two problems with the authors’ claim. First, ISIS itself asserts it never pledged loyalty to al Qaeda. Second, al Qaeda disputes ISIS’s claim, contending ISIS had privately pledged its allegiance. It is a complicated issue that will eventually be settled when captured al Qaeda documents or U.S. intelligence on the group come to light. In the meantime, Aaron Zelin, a fellow with the Washington Institute for Near East Policy, has compiled what we know about the issue from publicly-available sources. And chew on this: why would Zawahiri issue a direct order to the head of ISIS, Abu Bakr al-Baghdadi, and Baghdadi so loudly refuse to follow it if there was never any organizational tie between the groups?2. International relations scholars agree arming the Syrian rebels is a bad idea.
In response to Hillary Clinton’s argument that the United States should have armed the Syrian rebels to thwart the rise of the Islamic State, Marc Lynch wrote a thoughtful essay explaining why the policy was always a bad idea. In making his case, Marc appeals to the academic literature, which “is not encouraging.” But read the literature itself and you’ll find that it doesn’t lead to an obvious policy conclusion. Want proof? Afshon Ostovar, a Middle East analyst at CNA Strategic Studies, and I read the same literature in early 2013 and came to the opposite policy conclusion.3. Qatar funds the Islamic State.
Qatar is everyone’s favorite boogeyman these days, responsible for all the Islamist ills facing America’s allies in the Middle East. There is some ground for the gripes given that Qatar gives safe haven and help to the Muslim Brothers, including the U.S.-designated terrorist group Hamas, and backs Salafi militias in Syria that either work with al Qaeda’s Nusra Front or include al Qaeda members. Some of Qatar’s citizens have also funded U.S.-designated terrorist groups. But the recent (and later walked-back) charge by a German minister that the state of Qatar directly funds the Islamic State has no foundation based on publicly-available knowledge. Until the U.S. intelligence community says otherwise, criticism of Qatar for funding Islamists should exclude the Islamic State.4. The so-called Caliphate was established in June.
The self-declared Caliph Ibrahim may have officially declared the reestablishment of the caliphate in June 2014, but the group has hinted since its 2006 founding of the Islamic State in Iraq that the caliphate was already established. Because the group knew its claim would be controversial in the jihadi community at the time, it chose the ambiguous name of “The Islamic State in Iraq” to communicate its intent while maintaining plausible deniability. The term “dawla,” translated as “state” today, is also the name of Islam’s greatest caliphate, the Dawla `Abbasiyya. The Islamic State was “in” Iraq but not “of” Iraq, indicating the state was not contiguous with Iraq and would not always confine itself to the country of that name.5. There is an easy, obvious and quick solution to the Islamic State problem.
As Brian Fishman, a fellow at the New America Foundation, wonderfully gripes in his profanity-laced “cri de cœur” last week, the pro- and anti- intervention camps in the United States have used simplistic and uninformed arguments to support their favorite policies in Syria and now Iraq. But even those who offer complex and informed policy analysis like Brian can’t come up with a clear policy recommendation. Disagree with Obama’s Syria policy (I do) but don’t pretend the alternatives are obvious or would necessarily work better.Authors
At the conclusion of the 2014 Brookings Blum Roundtable, Kemal Derviş, vice president and director of the Global Economy and Development program, sat down to offer his reflections on this year’s discussion. For an in-depth look at the topics discussed at the roundtable, see our related policy briefs.
Q: The theme for this year’s Brookings Blum Roundtable was “Jump-starting Growth in the Most Difficult Environments.” Why is that such an important issue to development?
We have seen massive progress over the last two decades or so in terms of lifting people out of poverty in both low income and middle income countries. But where poverty is most persistent and where progress has been very slow or entirely absent, is in the most difficult governance circumstances, conflict areas, or state failure scenarios. So, fighting extreme poverty is a major priority for all of us, and doing that in the most difficult environments is probably the most important thing in terms of that priority.
Q: What do you think were the key takeaways to emerge from this year’s roundtable?
It was a very rich discussion, and particularly impressive were the many very concrete examples of technological advances and products that could help fight poverty in difficult environments in a very practical and fairly low cost way. At the same time, however, there was a consensus that while these technological products were hugely important and have great potential, in order for them to have their full impact the overall environment—the marketing, the payments system—complementary things have to happen. Now, sometimes these complementary things involve other technological progress, such as the use of the mobile phone system for payments is facilitating the spread of mini-solar technology. So while these products are very important, it is also important to have an ecosystem where they can actually show their effect.
Q: If there is one issue that participants should consider in greater detail following the roundtable, what would it be?
I think developing the network between each other and knowing what’s happening so that the various advances, ideas, products, approaches can be leveraged and can become complementary, I think that was probably one of the biggest intuitions we all had around the table.
Q: You have presided over a number of Brookings Blum Roundtable gatherings. For you, what is the most important contribution the roundtable makes to the development discourse?
It brings together groups that don’t necessarily meet in a relaxed, focused environment. At the Brookings Blum Roundtable we have senior policymakers from government, we have social and private entrepreneurs from both small-scale and from big firms. We have NGO communities represented, and we have some serious academic input, particularly evident in this year’s policy briefs. So bringing all of that together in a way which makes people focus on solutions and breaks down barriers that often exist between these various groups, I think, is what makes the Brookings Blum Roundtable unique.Authors
Recent studies by Thomas Piketty and others have told us a lot more about income among the richest 1 percent in America. But doing the same for America’s poorest is a much murkier proposition. Laurence Chandy and Cory Smith weigh in on five key questions raised by their latest research. For a more detailed look at $2 poverty in the United States, read the latest paper by Chandy and Smith.What percentage of Americans live on under $2 a day?
This question was posed in an important study of U.S. poverty last year by Luke Shaefer and Kathryn Edin. The authors found that millions of Americans live on less than $2 a day.
This finding is striking. The $2 threshold has traditionally been used to measure poverty in the developing world and is far below the official U.S. poverty line, which is equivalent to around $16 per person per day.
In a new study, we reexamine this question from multiple vantage points. We obtain estimates of the $2 a day poverty rate in the U.S. for 2011/12 that range from 4 percent (12 million people) to zero depending on the definition of resources and the data source used (Figure 1). Obtaining a definitive estimate of $2 a day poverty would require an uncontested definition of poverty and a data source with no flaws—neither of which we have. While the estimates we obtain vary, the fact that even some have millions of Americans living under $2 a day is alarming.
Figure 1: Different estimates of $2 a day poverty rateWhat does the range of estimates tell us?
First, a significant portion of $2 poverty appears to be temporary, as evidenced by the lower poverty rates recorded when we extend the duration over which individuals’ welfare is assessed. Such spells may be accounted for by life events such as moving between jobs that are not necessarily indications of diminished welfare. Second, social protection programs play a critical role in the welfare of many of America’s poorest households. Programs such as food stamps (SNAP) and the Earned Income Tax Credit mean the difference between living above the $2 threshold or below it for millions of people according to some estimates. Third, a significant share of consumption for the $2 poor likely occurs out of resources that don’t count as income: savings and assets, borrowing, and in-kind government assistance. Poverty estimates based on income (money earned) and consumption (money spent) differ widely. This discrepancy is in keeping with the higher variability of income from month to month.If by some measures millions of Americans live on under $2 a day, doesn’t that make their condition equivalent to the poor in the developing world?
Not so fast. If we used the exact same criteria to measure poverty in the U.S. as is used by the World Bank to obtain official poverty estimates for the developing world, we would conclude that no-one in the U.S. falls under the $2 threshold. Part of the reason for this is that even the poorest people surveyed in America appear to find a way to meet their most basic material needs (valued above $2 a day) even if their reported income is zero or close to zero. Furthermore, the poor in America have access to public goods—public education, criminal justice and infrastructure—that would be the envy of the poor in the developing world.
However, poverty is manifested in different ways in the U.S. and developing countries. Focusing narrowly on material needs means missing other critical components of welfare that may be especially lacking among America’s poorest people. For instance, those whose survival depends on in-kind assistance may be assured that their most basic material needs are met, but the absence of a reliable source of income makes it extremely difficult to cope with the unexpected, such as replacing broken or stolen assets or emergency travel. These individuals face a virtual exclusion from the cash economy implying a dearth of agency that directly affects their welfare.If comparisons of poverty in the U.S. and the developing world are so complicated, are they worth the bother?
Two developments over the past 12 months would suggest they are—or at least that they deserve further exploration.
First, a new global effort is underway to end extreme poverty (defined using the $1.25 poverty line) around the world by 2030. This will be the overarching objective of a set of Sustainable Development Goals which will guide the efforts of the global development community in tackling collective action problems over the next generation. While it is unclear precisely how this framework will develop, it will raise the demand for approaches to poverty measurement that can be meaningfully applied across different settings. On this issue, it is notable that while the official $2 a day global poverty rate has been cut by a third since 1996, by at least one measure, $2 poverty in the U.S. has incurred a sharp increase over the same period, albeit from a low base.
Second, the methodology by which the World Bank compiles official global poverty estimates has recently changed. Whereas in the past the estimate was in practice just a measure of poverty in the developing world, the new method incorporates the populations of rich countries. For now, the entire population of these countries is assumed to not be poor. However going forward the assumption that extreme poverty does not exist in the developed world is likely to face greater scrutiny.How can estimates of the welfare of America’s poorest people be improved?
Obtaining a robust understanding of the extremes—or tails—of the income distribution is notoriously difficult. Due to the pioneering work of Thomas Piketty and others, information about the upper tail of the distribution in rich countries has been greatly advanced in recent years through analysis of tax data. This leaves the lower tail as the least explored and understood part of the distribution in rich countries.
There is a sad irony in the fact that the analytical tools used to assess welfare in the U.S. are poorly equipped to capture those whose lives are most precarious. However, adapting existing surveys to more accurately identify and assess living standards of the poorest members of society is possible. Steps could include oversampling those on very low incomes, addressing low response rates, and incorporating the homeless and institutionalized who are traditionally excluded from survey respondents. Such changes would provide a stronger evidence base to inform poverty programs.
If we accept a shared concern for the poor in society, then it follows by an unstoppable logic that we have an even greater responsibility for the very poorest. Without reliable estimates of their welfare, this responsibility is too easily ignored.Authors
- Laurence Chandy
- Cory Smith