ia888EG9

11929 or 1989?
2PARIS – As the economic crisis deepens and widens, the world has been searching for historical analogies to help us understand what has been happening.
3At the start of the crisis, many people likened it to 1982 or 1973, which was reassuring, because both dates refer to classical cyclical downturns.
4Today, the mood is much grimmer, with references to 1929 and 1931 beginning to abound, even if some governments continue to behave as if the crisis was more classical than exceptional.
5The tendency is either excessive restraint (Europe) or a diffusion of the effort (the United States).
6Europe is being cautious in the name of avoiding debt and defending the euro, whereas the US has moved on many fronts in order not to waste an ideal opportunity to implement badly needed structural reforms.
7For geo-strategists, however, the year that naturally comes to mind, in both politics and economics, is 1989.
8Of course, the fall of the house of Lehman Brothers has nothing to do with the fall of the Berlin Wall.
9Indeed, on the surface it seems to be its perfect antithesis: the collapse of a wall symbolizing oppression and artificial divisions versus the collapse of a seemingly indestructible and reassuring institution of financial capitalism.
10Yet 2008-2009, like 1989, may very well correspond to an epochal change, whose unfolding consequences will be felt for decades.
11The end of the East-West ideological divide and the end of absolute faith in markets are historical turning points.
12And what happens in 2009 may jeopardize some of the positive results of 1989, including the peaceful reunification of Europe and the triumph of democratic principles over nationalist, if not xenophobic, tendencies.
13In 1989, liberal democracy triumphed over the socialist ideology incarnated and promoted by the Soviet Bloc.
14For many of his supporters, it was President Ronald Reagan who, with his deliberate escalation of the arms race, pushed the Soviet economy to the brink, thereby fully demonstrating the superiority of liberal societies and free markets.
15Of course, there are obvious differences between 1989 and now.
16First, and perhaps above all, the revolutions of 1989 and the subsequent collapse of the Soviet Union put an end to global bipolarity.
17By contrast, 2009 is likely to pave the way to a new form of bipolarity, but with China substituting for the Soviet Union.
18Second, whereas democracy and market capitalism appeared as clear – if more fragile than expected – winners in 1989, it is difficult in 2009, with the spread of the global crisis, to distinguish winners from losers.
19Everyone seems to be a loser, even if some are more affected than others.
20Yet, history is unfair, and the US, despite its greater responsibility for today’s global crisis, may emerge in better shape than most countries from the morass.
21In better shape, but not alone.
22As a visiting professor at Harvard and MIT, I am getting a good preview of what the world could look like when the crisis finally passes.
23One senses something like the making of an American-Asian dominated universe.
24From the incredible media lab at MIT to the mathematics and economics departments at Harvard, Asians – Chinese and Indians, in particular – are everywhere, like the Romans in Athens in the first century BC: full of admiration for those from whom they were learning so much, and whom they would overcome in the coming decades.
25But before this new order appears, the world may be faced with spreading disorder, if not outright chaos.
26What, for example, will happen to a country as central and vulnerable as Egypt when hundred of thousands of Egyptians working in the Gulf are forced to return to their homeland as a result of the crisis in the oil-producing countries?
27When the rich get less rich, the poor get poorer.
28And what about the foreign workers who have reached for the “European dream” and are now faced with potential explosions of xenophobia in Europe’s supposedly open countries?
29The consequences of 1989 ended up being less enduring than many observers, including me, would have assumed.
30We can only hope that, in the end, the consequences of 2009 similarly prove to be far less dramatic than we now – intuitively and in our historical reflexes – feel them to be.
31One Hundred Years of Ineptitude
32BERLIN – The global financial and economic crisis that began in 2008 was the greatest economic stress-test since the Great Depression, and the greatest challenge to social and political systems since World War II.
33It not only put financial markets and currencies at risk; it also exposed serious regulatory and governance shortcomings that have yet to be fully addressed.
34In fact, the 2008 crisis will most likely be remembered as a watershed moment, but not because it led to reforms that strengthened economic resilience and removed vulnerabilities.
35On the contrary, leaders’ failure to discern, much less act on, the lessons of the Great Recession may open the way for a series of fresh crises, economic and otherwise, in the coming decades.
36However serious those crises turn out to be, historians a century from now will likely despair at our shortsightedness.
37They will note that analysts and regulators were narrowly focused on fixing the financial system by strengthening national oversight regimes.
38While this was a worthy goal, historians will point out, it was far from the only imperative.
39To prepare the world to confront the challenges posed by globalization and technological development in a way that supports sustainable and equitable growth, governance institutions and regulations at both the national and international levels must be drastically improved.
40Yet not nearly enough has been invested in this effort.
41Beyond regional bodies like the European Union, international financial governance has remained largely untouched.
42Worse, because the partial fixes to the financial system will enable even more globalization, they will end up making matters worse, as strain on already-inadequate governance and regulatory frameworks increases, not only in finance, but also in other economic and technological fields.
43Meanwhile, enormous financial investments focused on securing a higher rate of return are likely to fuel technological innovation, further stressing regulatory systems in finance and beyond.
44Major technological advances fueled by cheap money can cause markets to change so fast that policy and institutional change cannot keep up.
45And new markets can emerge that offer huge payoffs for early adopters or investors, who benefit from remaining several steps ahead of national and international regulators.
46This is what happened in the run-up to the 2008 crisis.
47New technology-enabled financial instruments created opportunities for some to make huge amounts of money.
48But regulators were unable to keep up with the innovations, which ended up generating risks that affected the entire economy.
49This points to a fundamental difference between global crises of the twenty-first century and, say, the Great Depression in the 1930s or, indeed, any past stock-market crashes.
50Because of the financial sector’s growth, more actors benefit from under-regulation and weak governance in the short term, making today’s crises more difficult to prevent.
51Complicating matters further, the systems affected by today’s crises extend well beyond any one regulatory body’s jurisdiction.
52That makes crises far unrulier, and their consequences – including their long-term influence on societies and politics – more difficult to predict.
53The next crises – made more likely by rising nationalism and a growing disregard for science and fact-based policymaking – may be financial, but they could also implicate realms as varied as migration, trade, cyberspace, pollution, and climate change.
54In all of these areas, national and international governance institutions are weak or incomplete, and there are few independent actors, such as watchdog groups, demanding transparency and accountability.
55This makes it harder not only to prevent crises – not least because it creates opportunities for actors to game the system and shirk responsibility – but also to respond to them.
56The 2008 crisis cast a harsh spotlight on just how bad we are at responding quickly to disasters, especially those fueled by fragmented governance.
57To be sure, as the Hertie School’s 2018 Governance Report shows, there have been some improvements in preparing for and managing crises.
58But we must become more alert to how developments in a wide range of fields – from finance to digital technologies and climate change – can elude the governance capacities of national and international institutions.
59We should be running crisis scenarios and preparing emergency plans for upheaval in all of these fields, and taking stronger steps to mitigate risks, including by managing debt levels, which today remain much higher in the advanced economies than they were before the 2008 crisis.
60Moreover, we should ensure that we provide international institutions with the needed resources and responsibilities.
61And by punishing those who exacerbate risks for the sake of their own interests, we would strengthen the legitimacy of global governance and the institutions that are meant to conduct it.
62As it stands, inadequate cross-border coordination and enforcement of international agreements is a major impediment to crisis prevention and management.
63Yet, far from addressing this weakness, the world is reviving an outdated model of national sovereignty that makes crises of various kinds more likely.
64Unless we change course soon, the world of 2118 will have much reason to regard us with scorn.
65What Failed in 2008?
66BERKELEY – To solve a problem, it is not enough to know what to do.
67You actually have to implement the solution – and be willing to change course if it turns out that you did not know quite as much as you thought.
68That is the message of two recent books that, together, tell you everything you need to know about the 2008 financial crisis: what caused it, what can be done to prevent it from recurring, and why those things have yet to be done.
69The first book is The Shifts and the Shocks, by the conservative British journalist Martin Wolf, who begins by cataloguing the major shifts that set the stage for the economic disaster that continues to shape the world today.
70His starting point is the huge rise in wealth among the world’s richest 0.1% and 0.01% and the consequent pressure for people, governments, and companies to take on increasingly unsustainable levels of debt.
71Meanwhile, policymakers were lulled into complacency by the widespread acceptance of economic theories such as the “efficient-market hypothesis,” which assumes that investors act rationally and use all available information when making their decisions.
72As a result, markets were deregulated, making it easier to trade assets that were perceived to be safe, but were in fact not.
73As a result, systemic risk proliferated beyond central bankers’ wildest imagination.
74Untested – and ultimately incorrect – assumptions created a policymaking environment defined by what can only be called hubris.
75Officials underestimated tail risks.
76They set inflation targets at around 2% – leaving little room for maneuver when the water got choppy.
77And, most audaciously of all, the European Union introduced the euro as a common currency.
78Indeed, wrongheaded policymaking continued long after the crisis began.
79Politicians responded to worsening economic conditions by hewing as closely as possible to failed prescriptions, making sure to do no more than absolutely necessary to address the biggest economic disaster since the Great Depression.
80Wolf’s prescription for countering the crisis is simple, smart, and unassailable.
81In the short term, he suggests that countries with reserve currencies spend more (especially to finance public-sector investments) and issue more debt.
82Their central banks, he argues, should raise inflation targets to 3% or even 4% per year.
83Over the medium term, according to Wolf, countries need to put in place regulatory measures that lower debt levels and discourage overleveraging.
84The eurozone, too, must resolve its internal contradictions, either by disbanding or by introducing “a minimum set of institutions and policies” that allow the monetary union to function properly.
85Wolf’s long-term solutions include tackling inequality, “more global regulation,” a greater degree of “freedom for individual countries to craft their own responses,” and economic analysis that is less in thrall to the free-market ideologues that led us into the crisis in the first place.
86And yet, as recommendable as Wolf’s proposals may be, little has been done to implement them.
87The reasons why are found in the second book: Hall of Mirrors, by my friend, teacher, and patron, Barry Eichengreen.
88Eichengreen traces our tepid response to the crisis to the triumph of monetarist economists, the disciples of Milton Friedman, over their Keynesian and Minskyite peers – at least when it comes to interpretations of the causes and consequences of the Great Depression.
89When the 2008 financial crisis erupted, policymakers tried to apply Friedman’s proposed solutions to the Great Depression.
90Unfortunately, this turned out to be the wrong thing to do, as the monetarist interpretation of the Great Depression was, to put it bluntly, wrong in significant respects and radically incomplete.
91The resulting policies were enough to prevent the post-2008 recession from developing into a full-blown depression; but that partial success turned out to be a Pyrrhic victory, for it allowed politicians to declare that the crisis had been overcome, and that it was time to embrace austerity and focus on structural reform.
92The result is today’s stagnant economy, marked by anemic growth that threatens to become the new normal.
93The United States and Europe are on track to have thrown away 10% of their potential wealth, while the failure to strengthen financial-sector regulation has left the world economy exposed to the risk of another major crisis.
94Wolf and Eichengreen would agree that the main shortcomings that led to the 2008 financial crisis – and that continue to underpin our inadequate response to it – are intellectual.
95Indeed, the only true lesson of the crisis so far seems to be that its lessons will never truly be learned.
96A Comeback Strategy for Europe
97STOCKHOLM/MADRID – When Pope Francis addressed the European Parliament last November, he compared the European Union to a grandmother – pleasant and rich with experience, but lacking the vitality and energy of the past.
98It is high time, Francis argued, that EU leaders shed their dozy image, recognize the strategic challenges that Europe faces, and forge a clear policy for tackling them.
99Admittedly, the pope’s characterization was alarmingly accurate in some respects.
100But, despite its seeming lassitude, Europe retains significant strengths.
101It is a hub of high-level thought and innovation; it is home to some of the world’s most competitive regions and industries; and, perhaps most impressive, it has built a community and market encompassing a half-billion people.
102But the world is changing: the Asia-Pacific region is increasingly influencing global developments, economic and otherwise.
103The Trans-Pacific Partnership – by which the United States and 11 other countries would create a mega-regional free-trade zone – would most likely accelerate this shift (all the more so if China eventually joins).
104Though the TPP faces no shortage of hurdles to clear before an agreement is finalized, its potential to augment Asia’s economic power cannot be underestimated.
105Europe must work to secure its position in the new world order – beginning by enhancing its own trade and investment ties with the US.
106The problem is that, as the TPP negotiations progress, talks on the EU-US Transatlantic Trade and Investment Partnership (TTIP) have become so deeply mired in domestic controversies that the entire project may well be scuttled.
107Business leaders on both sides of the Atlantic are convinced that a successful TTIP agreement would bring substantial economic benefits – a perception that many studies reinforce.
108Yet trivial issues – for example, the use of chlorinated chicken and settlements of investor disputes – continue to dominate the debate.
109The TTIP’s goal is to unleash the power of the transatlantic economy, which remains by far the world’s largest and wealthiest market, accounting for three-quarters of global financial activity and more than half of world trade.
110(If the TTIP was opened to other economies – such as Turkey, Mexico, and Canada – the benefits would be even greater.)
111Even more compelling than the benefits of achieving an agreement, though, are the potentially catastrophic consequences of failure.
112For starters, a breakdown of TTIP talks would give considerable ammunition to those in the United Kingdom who advocate withdrawal from the EU; conversely, if the TTIP were implemented, the UK would be unwise – and thus unlikely – to leave.
113Moreover, the perception that the EU’s internal squabbles had led it to squander a strategic opportunity would probably drive the US to accelerate its disengagement from the continent.
114And Russian President Vladimir Putin would invariably regard the EU’s failure as a major opportunity to exert more influence over parts of Europe.
115All of this contributes to a starkly fundamental strategic risk: If the TTIP stalls or collapses, while the TPP moves forward and succeeds, the global balance will tip strongly in Asia’s favor – and Europe will have few options, if any, for regaining its economic and geopolitical influence.
116When the TTIP was first proposed, Europe seemed to recognize its value.
117Indeed, it was the EU that pushed the US, which initially doubted Europe’s commitment, to launch the negotiation process in June 2013.
118The ambition was to complete the negotiations on “one tank of gas.”
119No one wanted to endure protracted talks – or the associated political pain.
120But EU leaders essentially abandoned the project, seemingly confirming American fears.
121Trade negotiators struggled to make headway, while anti-globalization groups seized control of the public discourse, presenting the TTIP as a threat to everything from Europe’s democracy to its health.
122This is dangerously inaccurate talk, and EU leaders must prevent it from gaining any more traction by making the strategic case for the agreement.
123And they must revive their commitment to conclude the talks successfully in 2015.
124This is not to say that resolving the remaining issues in the TTIP negotiations will be simple.
125But establishing a trade agreement, especially one that entails so many regulatory issues, is always difficult, as it must account for the complexity and changeability of modern economies.
126The fact is that the challenges inherent in completing the TTIP are no more intractable than those that EU leaders have faced in the last few years of crisis.
127When the TTIP negotiations resume next month, EU leaders must push for genuine progress, with the goal of completing a deal by the end of the year.
128The good news is that the recent midterm elections in the US might have improved their chances.
129President Barack Obama now might get so-called fast-track negotiating authority from Congress.
130If he does, Congress would simply approve or reject any negotiated agreement, rather than picking it apart.
131The US presidential election season is starting, and other issues in the new year could easily take over the EU agenda.
132That is why Europe’s leaders have no time to waste.
133They must seize economic opportunity – and avert strategic disaster.
134The Year That Ended an Epoch?
135MADRID – As 2016 comes to an end, the outlook for 2017 is shrouded in uncertainty.
136Tensions in the Middle East are rising, and populist movements have appeared in Europe and the United States.
137In the Middle East, the tragic conflict in Syria continues, despite several fruitless attempts at rapprochement, which were marred by the fundamental disagreement about Syrian President Bashar al-Assad’s future role in any peace process or political transition.
138Meanwhile, over the past week, Syrian government troops, backed by Russia and Iran, have retaken almost all of Aleppo – once Syria’s largest city, now utterly devastated by the war.
139The world’s priority for the coming year must be to achieve peace in Syria, which will require close regional and international cooperation.
140On December 27, Iran, Russia, and Turkey will hold a tripartite meeting in Moscow to discuss a political solution for the Syria conflict.
141That meeting, if it takes place, is likely to be overshadowed by the fallout from the assassination of Russia’s ambassador to Turkey.
142But it is nothing if not surprising that these parties, and not the US and the European Union, would be negotiating such an agreement.
143One positive development this year came in March, when the EU and Turkey signed an agreement to address the refugee crisis.
144Turkey has now taken in some three million Syrian refugees since the beginning of the conflict.
145Although EU-Turkey relations are currently not at their best, the dialogue between the two sides must continue in 2017, not least because of their common interests, which are based not only on economic interdependence, but also on the refugee crisis and the collective fight against terrorism.
146European politics next year, meanwhile, will be consumed by the Brexit negotiations.
147In March, the United Kingdom will likely invoke Article 50 of the Treaty of Lisbon, triggering the formal procedure for withdrawal from the EU.
148The challenge will be to reach an agreement that guarantees the wellbeing of future EU-UK relations.
149This will not be easy, and EU negotiators have already set a timeline of only 18 months.
150While much remains uncertain, what is clear is that if the UK wants to retain access to the European single market, it will have to accept the EU’s four freedoms, including the free movement of workers.
151In 2017, several European countries will hold general elections, and there is a risk that isolationist, anti-European populist movements will make a strong showing.
152For the EU to lose a country as militarily and economically important as the UK is bad enough; but to lose a founding EU member state, such as France, would be tragic.
153Fortunately, many Europeans’ views toward the EU actually improved in the aftermath of the Brexit referendum.
154But this will not lessen the challenge for EU governments in the year ahead.
155They must unite societies divided by powerful global forces, such as globalization and rapid technological innovation.
156The Brexit referendum, followed by Donald Trump’s victory in the US presidential election, signaled the rise of populism in the West.
157But now that Trump is filling his cabinet with oligarchs and former military men, we have reason to doubt that he will keep his promise to govern without the Washington “establishment.”
158Trump’s incoming administration is full of unknowns, but there can be no doubt that his rejection of multilateral institutions will endanger international efforts to cooperate on solutions to the world’s biggest problems.
159This holds peril for US-EU relations.
160In previous years, the Paris climate agreement and the nuclear agreement with Iran were rays of light in a world closing itself off to multilateralism.
161In the coming years, such rays may become scarcer still.
162Now more than ever, we need the kind of dialogue that builds strategic trust between great powers.
163And yet, Trump’s statements casting doubt on continued US adherence to a “One China” policy vis-à-vis Taiwan could severely damage relations between the world’s two largest economies.
164Similarly, notwithstanding the pro-Russian leanings of some among Trump’s team, the US-Russian relationship also lacks strategic trust, owing to Russia’s military intervention in Syria, its invasion of eastern Ukraine, and its alleged interference in the US election.
165The coming year will be particularly important for Europe.
166Relations between the EU and the US must remain strong, rooted in mutual respect for democracy, freedom, and human rights.
167After a turbulent 2016, and with little positive news in international politics, 2017 is shaping up to be a year of challenges and uncertainty.
168But the biggest uncertainty of all is whether this is simply the end of another year, or the end of a geopolitical epoch.
169Another Slow Year for the Global Economy
170WASHINGTON, DC – Last April, the International Monetary Fund projected that the world economy would grow by 3.5% in 2015.
171In the ensuing months, that forecast was steadily whittled down, reaching 3.1% in October.
172But the IMF continues to insist – as it has, with almost banal predictability, for the last seven years – that next year will be better.
173But it is almost certainly wrong yet again.
174For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007.
175Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same.
176Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%.
177The question is why.
178According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years.
179The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis.
180And, indeed, the financial dislocations of 2007-2008 have largely receded.
181So what accounts for the sluggish economic recovery?
182One popular explanation lies in the fuzzy notion of “secular stagnation”: long-term depressed demand for goods and services is undermining incentives to invest and hire.
183But demand would remain weak only if people lacked confidence in the future.
184The only logical explanation for this enduring lack of confidence, as Northwestern University’s Robert Gordon has painstakingly documented and argued, is slow productivity growth.
185Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured by an illusory sense of prosperity in much of the world.
186In some countries – notably, the United States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking were mutually reinforcing.
187At the same time, countries were amplifying one another’s growth through trade.
188Central to the global boom was China, the rising giant that flooded the world with cheap exports, putting a lid on global inflation.
189Equally important, China imported a huge volume of commodities, thereby bolstering many African and Latin American economies, and purchased German cars and machines, enabling Europe’s largest economy to keep its regional supply chains humming.
190This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank, Bear Sterns, from collapse.
191With the eurozone banks also deeply implicated in the subprime mortgage mess and desperately short of US dollars, America and much of Europe began a remorseless slide into recession.
192Whereas in the boom years, world trade had spread the bounty, it was now spreading the malaise.
193As each country’s GDP growth slowed, so did its imports, causing its trading partners’ growth to slow as well.
194The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system.
195Eurozone policymakers, by contrast, rejected monetary stimulus and implemented fiscal austerity measures, while ignoring the deepening distress of their banks.
196The eurozone thus pushed the world into a second global recession.
197Just when that recession seemed to have run its course, emerging economies began to unravel.
198For years, observers had been touting the governance and growth-enhancing reforms that these countries’ leaders had supposedly introduced.
199In October 2012, the IMF celebrated emerging economies’ “resilience.”
200As if on cue, that facade began to crumble, revealing an inconvenient truth: factors like high commodity prices and massive capital inflows had been concealing serious economic weaknesses, while legitimizing a culture of garish inequality and rampant corruption.
201These problems are now being compounded by the growth slowdown in China, the fulcrum of global trade.
202And the worst is yet to come.
203China’s huge industrial overcapacity and property glut needs to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption networks have to be dismantled.
204In short, the factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year.
205Emerging economies will remain weak.
206The eurozone, having enjoyed a temporary reprieve from austerity, will be constrained by listless global trade.
207Rising interest rates on corporate bonds portend slower growth in the US.
208China’s collapsing asset values could trigger financial turbulence.
209And policymakers are adrift, with little political leverage to stem these trends.
210The IMF should stop forecasting renewed growth and issue a warning that the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth.
211Such an effort is long overdue.
212Trumpian Uncertainty
213NEW YORK – Every January, I try to craft a forecast for the coming year.
214Economic forecasting is notoriously difficult; but, notwithstanding the truth expressed in Harry Truman’s request for a one-armed economist (who wouldn’t be able to say “on the other hand”), my record has been credible.
215In recent years, I correctly foresaw that, in the absence of stronger fiscal stimulus (which was not forthcoming in either Europe or the United States), recovery from the Great Recession of 2008 would be slow.
216In making these forecasts, I have relied more on analysis of underlying economic forces than on complex econometric models.
217For example, at the beginning of 2016, it seemed clear that the deficiencies of global aggregate demand that have been manifest for the last several years were unlikely to change dramatically.
218Thus, I thought that forecasters of a stronger recovery were looking at the world through rose-tinted glasses. Economic developments unfolded much as I anticipated.
219Not so the political events of 2016.
220I had been writing for years that unless growing inequality – especially in the US, but also in many countries throughout the world – was addressed, there would be political consequences.
221But inequality continued to worsen – with striking data showing that average life expectancy in the US was on the decline.
222These results were foreshadowed by a study last year, by Anne Case and Angus Deaton, which showed that life expectancy was on the decline for large segments of the population – including America’s so-called angry men of the Rust Belt.
223But, with the incomes of the bottom 90% having stagnated for close to a third of a century (and declining for a significant proportion), the health data simply confirmed that things were not going well for very large swaths of the country.
224And while America might be at the extreme of this trend, things were little better elsewhere.
225But, if it seemed clear that there would be political consequences, their form and timing were far less obvious.
226Why did the backlash in the US come just when the economy seemed to be on the mend, rather than earlier?
227And why did it manifest itself in a lurch to the right?
228After all, it was the Republicans who had blocked assistance to those losing their jobs as a result of the globalization they pushed assiduously. It was the Republicans who, in 26 states, refused to allow the expansion of Medicaid, thereby denying health insurance to those at the bottom.
229And why was the victor somebody who made his living from taking advantage of others, openly admitted not paying his fair share of taxes, and made tax avoidance a point of pride?
230Donald Trump grasped the spirit of the time: things weren’t going well, and many voters wanted change.
231Now they will get it: there will be no business as usual. But seldom has there been more uncertainty.
232Which policies Trump will pursue remains unknown, to say nothing of which will succeed or what the consequences will be.
233Trump seems hell-bent on having a trade war.
234But how will China and Mexico respond?
235Trump may well understand that what he proposes will violate World Trade Organization rules, but he may also know that it will take a long time for the WTO to rule against him.
236And by then, America’s trade account may have been rebalanced.
237But two can play that game: China can take similar actions, though its response is likely to be more subtle.
238If a trade war were to break out, what would happen?
239Trump may have reason to think he could win; after all, China is more dependent on exports to the US than the US is on exports to China, which gives the US an advantage.
240But a trade war is not a zero-sum game. The US stands to lose as well.
241China may be more effective in targeting its retaliation to cause acute political pain.
242And the Chinese may be in a better position to respond to US attempts to inflict pain on them than the US is to respond to the pain that China might inflict on Americans.
243It’s anybody’s guess who can stand the pain better.
244Will it be the US, where ordinary citizens have already suffered for so long, or China, which, despite troubled times, has managed to generate growth in excess of 6%?
245More broadly, the Republican/Trump agenda, with its tax cuts even more weighted toward the rich than the standard GOP recipe would imply, is based on the idea of trickle-down prosperity – a continuation of the Reagan era’s supply-side economics, which never actually worked.
246Fire-breathing rhetoric, or raving three a.m. tweets, may assuage the anger of those left behind by the Reagan revolution, at least for a while.
247But for how long?
248And what happens then?
249Trump might like to repeal the ordinary laws of economics, as he goes about his version of voodoo economics. But he can’t.
250Still, as the world’s largest economy leads the way into uncharted political waters in 2017 and beyond, it would be foolhardy for a mere mortal to attempt a forecast, other than to state the obvious: the waters will almost certainly be choppy, and many – if not most – pundit ships will sink along the way.
2519/11 and the New Authoritarianism
252Five years after the attacks on the Twin Towers in New York and the Pentagon in Washington, “9/11” is no longer a mere date.
253It has entered the history books as the beginning of something new, a new era perhaps, but in any case a time of change.
254The terrorist bombings in Madrid and London and elsewhere will also be remembered; but it is “9/11” that has become the catchphrase, almost like “August 1914.”
255But was it really a war that started on September 11, 2001?
256Not all are happy about this American notion.
257During the heyday of Irish terrorism in the UK, successive British governments went out of their way not to concede to the IRA the notion that a war was being waged.
258“War” would have meant acceptance of the terrorists as legitimate enemies, in a sense as equals in a bloody contest for which there are accepted rules of engagement.
259This is neither a correct description nor a useful terminology for terrorist acts, which are more correctly described as criminal.
260By calling them war – and naming an opponent, usually al-Qaeda and its leader, Osama bin Laden – the United States government has justified domestic changes that, before the 9/11 attacks, would have been unacceptable in any free country.
261Most of these changes were embodied in the so-called “USA Patriot Act.”
262Though some of the changes simply involved administrative regulations, the Patriot Act’s overall effect was to erode the great pillars of liberty, such as habeas corpus , the right to recourse to an independent court whenever the state deprives an individual of his freedom.
263From an early date, the prison camp at Guantánamo Bay in Cuba became the symbol of something unheard of: the arrest without trial of “illegal combatants” who are deprived of all human rights.
264The world now wonders how many more of these non-human humans are there in how many places.
265For everyone else, a kind of state of emergency was proclaimed that has allowed state interference in essential civil rights.
266Controls at borders have become an ordeal for many, and police persecution now burdens quite a few.
267A climate of fear has made life hard for anyone who looks suspicious or acts suspiciously, notably for Muslims.
268Such restrictions on freedom did not meet with much public opposition when they were adopted.
269On the contrary, by and large it was the critics, not the supporters, of these measures who found themselves in trouble.
270In Britain, where Prime Minister Tony Blair supported the US attitude entirely, the government introduced similar measures and even offered a new theory.
271Blair was the first to argue that security is the first freedom.
272In other words, liberty is not the right of individuals to define their own lives, but the right of the state to restrict individual freedom in the name of a security that only the state can define.
273This is the beginning of a new authoritarianism.
274The problem exists in all countries affected by the threat of terrorism, though in many it has not become quite as specific.
275In most countries of continental Europe, “9/11” has remained an American date.
276There is even a debate – and indeed some evidence – concerning the question of whether involvement in the “war against terrorism” has actually increased the threat of terrorist acts.
277Germans certainly use this argument to stay out of the action wherever possible.
278This stance, however, has not prevented the spread of something for which a German word is used in other languages, too: Angst .
279A diffuse anxiety is gaining ground.
280People feel uneasy and worried, especially when traveling.
281Any train accident or airplane crash is now at first suspected of being an act of terrorism.
282Thus, 9/11 has meant, directly or indirectly, a great shock, both psychologically and to our political systems.
283While terrorism is fought in the name of democracy, the fight has in fact led to a distinct weakening of democracy, owing to official legislation and popular angst.
284One of the worrying features of the 9/11 attacks is that it is hard to see their purpose beyond the perpetrators’ resentment of the West and its ways.
285But the West’s key features, democracy and the rule of law, have taken a far more severe battering at the hands of their defenders than by their attackers.
286Two steps, above all, are needed to restore confidence in liberty within the democracies affected by the legacy of 9/11.
287First, we must make certain that the relevant legislation to meet the challenge of terrorism is strictly temporary.
288Some of today’s restrictions on habeas corpus and civil liberties have sunset clauses restricting their validity; all such rules should be re-examined by parliaments regularly.
289Second, and more importantly, our leaders must seek to calm, rather than exploit, public anxiety.
290The terrorists with whom we are currently at “war” cannot win, because their dark vision will never gain broad popular legitimacy.
291That is all the more reason for democrats to stand tall in defending our values – first and foremost by acting in accordance with them.
2929/11 in Perspective
293NEW YORK – It was a decade ago that 19 terrorists took control of four planes, flew two into the twin towers of the World Trade Center, hit the Pentagon with a third, and crashed the fourth in a field in Pennsylvania after passengers resisted and made it impossible for the terrorists to complete their malevolent mission.
294In a matter of hours, more than 3,000 innocent people, mostly Americans, but also people from 115 other countries, had their lives suddenly and violently taken from them.
295September 11, 2001, was a terrible tragedy by any measure, but it was not a historical turning point.
296It did not herald a new era of international relations in which terrorists with a global agenda prevailed, or in which such spectacular terrorist attacks became commonplace. On the contrary, 9/11 has not been replicated.
297Despite the attention devoted to the “Global War on Terrorism,” the most important developments of the last ten years have been the introduction and spread of innovative information technologies, globalization, the wars in Iraq and Afghanistan, and the political upheavals in the Middle East.
298As for the future, it is much more likely to be defined by the United States’ need to put its economic house in order; China’s trajectory within and beyond its borders; and the ability of the world’s governments to cooperate on restoring economic growth, stemming the spread of nuclear weapons, and meeting energy and environmental challenges.
299It is and would be wrong to make opposition to terrorism the centerpiece of what responsible governments do in the world.
300Terrorists continue to be outliers with limited appeal at best.
301They can destroy but not create.
302It is worth noting that the people who went into the streets of Cairo and Damascus calling for change were not shouting the slogans of Al Qaeda or supporting its agenda.
303Moreover, measures have been implemented to push back, successfully, against terrorists.
304Intelligence assets have been redirected. Borders have been made more secure and societies more resilient.
305International cooperation has increased markedly, in part because governments that cannot agree on many things can agree on the need to cooperate in this area.
306Military force has played a role as well.
307Al Qaeda lost its base in Afghanistan when the Taliban government that had provided it sanctuary was ousted from power.
308Osama bin-Laden was finally found and killed by US Special Forces in the suburbs of Islamabad.
309Drones – unmanned aircraft that are remotely steered – have proven to be effective in killing a significant number of terrorists, including many of the most important leaders.
310Weak governments can be made stronger; governments that tolerate or support terrorism must be held accountable.
311But progress is not to be confused with victory.
312Terrorists and terrorism cannot be eliminated any more than we can rid the world of disease.
313There will always be those who will resort to force against innocent men, women, and children in pursuit of political goals.
314Indeed, terrorists are advancing in some areas.
315Pakistan remains a sanctuary for Al Qaeda and some of the world’s other most dangerous terrorists.
316A mixture of instability, government weakness, and ideology in countries such as Yemen, Libya, Somalia, and Nigeria are providing fertile territory for terrorists to organize, train, and mount operations – much as they did in Afghanistan did a decade ago.
317New groups constantly emerge from the ruins of old ones.
318There is also a growing danger of homegrown terrorism.
319We have seen it in Great Britain and the US.
320The Internet, one of the great inventions of the modern Western world, has shown itself to be a weapon that can be used to incite and train those who wish to cause harm to that world.
321The question raised in October 2003 by then US Secretary of Defense Donald Rumsfeld is no less relevant today: “Are we capturing, killing, or deterring and dissuading more terrorists every day than the madrassas and the radical clerics are recruiting, training, and deploying against us?”
322All things being equal, we probably are.
323But even small terrorist successes are costly in terms of lives, money, and making open societies less so.
324What is to be done?
325Alas, there is no single or silver bullet.
326The establishment of a Palestinian state will not be enough for those terrorists who want to see the elimination of the Jewish state, any more than reaching a compromise over Kashmir will satisfy those Pakistan-based terrorists with bigger agendas vis-à-vis India.
327Reducing unemployment is desirable, of course, but many terrorists do not come from poverty.
328Helping to make societies in the Middle East and elsewhere more democratic might reduce the alienation that can lead to radicalism and worse, but this is easier said than done.
329Of course, we want to continue to find ways to make ourselves less vulnerable and terrorists more so.
330But what may be most important, particularly in the Arab and Islamic communities, is to end any acceptance of terrorism.
331The Nigerian father who warned the US embassy in Lagos that he feared what his own son might do – before that same young man attempted to detonate a bomb aboard a flight to Detroit on Christmas Day 2009 – is an example of just this.
332Only when more parents, teachers, and community leaders behave likewise will recruitment of terrorists dry up and law-enforcement authorities receive full cooperation from the populations they police.
333Terrorism must lose its legitimacy among those who have historically supported or tolerated it before it will lose its potency.
334Transatlantic Trade for All
335WASHINGTON, DC – The negotiations to create a Transatlantic Trade and Investment Partnership between the European Union and the United States are being widely welcomed.
336British Prime Minister David Cameron has called the TTIP a “once-in-a-generation prize,” citing potential gains of £80 billion ($125.5 billion) each for the EU and the US and £85 billion for the rest of the world.
337For a world weary of waiting for the World Trade Organization’s interminable Doha trade round to conclude, even a bilateral trade initiative may seem like a boon, especially when, as a recent Financial Times editorial pointed out, “bilateral” covers half of the world’s economy.
338But there is a serious downside: The deal could hurt developing-country exporters, unless the EU and the US make a concerted effort to protect these actors’ interests.
339The feature of the proposed pact that elicits the most excitement – its focus on regulatory barriers like mandatory product standards – should actually incite the greatest concern.
340Given low tariffs in the EU and the US – less than 5%, on average – further preferential reductions will not seriously handicap outsiders.
341But, when it comes to standards – such as those governing safety, health, and the environment – the market-access requirements are brutal and binary: either you meet the established standard or you do not sell.
342As a result, third-country firms’ options will depend on how TTIP standards are established: through harmonization (adoption of a common standard) or mutual recognition (acceptance of goods that meet one another’s established standards).
343The first option would enable producers everywhere to take advantage of economies of scale.
344But, in some cases, the harmonized standard could be more stringent than some countries’ original standards.
345Even though new standards would apply to suppliers from all exporting countries, compliance costs usually vary, meaning that those less equipped to meet higher standards could suffer.
346In the late 1990’s, when the EU decided to harmonize standards for aflatoxins (a group of toxic compounds produced by certain molds), eight member states – including Italy, the Netherlands, and Spain – raised their national standards substantially, which is likely to have caused African exports of cereals, dried fruits, and nuts to Europe to decline by as much as $670 million.
347With mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area.
348If the policy were extended to third-country firms, it would have a powerful liberalizing impact.
349For example, Malaysian television producers could choose to comply with, say, America’s easier-to-meet safety standards, then sell the same product in both markets, reaping the benefits of economies of scale while lowering compliance costs.
350If, however, the TTIP excluded third-country firms from the mutual recognition policy, their competitiveness vis-à-vis European and American companies would diminish substantially.
351Indeed, our research shows that when mutual-recognition agreements include restrictive rules of origin, intra-regional trade increases – at the expense of trade with other countries – and that developing countries tend to suffer most.
352In fact, excessively constraining rules of origin have proved problematic for some of the EU’s previous recognition agreements, such as those governing professional-services standards.
353While a Brazilian orange admitted for sale in Portugal can be sold throughout the EU, a Brazilian engineer or accountant licensed in Portugal must fulfill separate licensing requirements to work elsewhere in the EU, hampering much-needed labor mobility by forcing non-European workers to endure costly and inefficient bureaucratic procedures.
354Furthermore, when it comes to tariffs and standards, WTO rules are not created equal.
355While they protect countries excluded from bilateral or regional tariff agreements, thereby ensuring that integrated markets do not receive additional advantages, few safeguards exist to shield third countries from the fallout of agreements on mandatory standards.
356Even in the absence of international rules, the EU and the US could take two actions to ensure that the TTIP does not have adverse consequences for developing economies.
357First, they could allow all countries to reap the benefits of a bilateral mutual-recognition deal by agreeing not to impose restrictive rules of origin.
358Second, where they do consider harmonization, they could favor the less stringent of the original standards, unless there is credible evidence that it would not support the relevant regulatory objective.
359This is akin to a WTO test for departures from established international standards.
360If the EU and the US made these two commitments, the rest of the world could follow the TTIP negotiations with hope, rather than trepidation.
361A Balanced Look at Sino-American Imbalances
362BEIJING – Before July 2007, most economists agreed that global imbalances were the most important threat to global growth.
363It was argued that the United States’ rising net foreign debt-to-GDP ratio – the result of chronic current-account deficits – would put a sharp brake on capital inflows, in turn weakening the dollar, driving up interest rates, and plunging the US economy into crisis.
364But this scenario failed to materialize. Instead, the crisis stemmed from the US sub-prime debacle, which quickly dragged the global economy into its deepest recession since the 1930’s.
365Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt.
366Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.
367In particular, they should have paid greater attention to the sustainability of US mortgage and consumer debt.
368In 2007, the mortgage and consumer debt-to-GDP ratio was more than 90%, compared to 24% for net foreign debt.
369Of course, the various components of debt differ considerably in their character and sources of financing – and thus in their sustainability.
370But all parts of a country’s total debt and how it is financed are interconnected.
371This means two things. First, funds from different sources of finance are interchangeable to a certain degree: deficiency of funds for one component of total debt can be supplemented by surplus funds originally aimed at financing other components.
372Second, troubles in any single component of total debt will have an impact on all the other components.
373After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.
374The fall in US total debt, and the narrowing of the financing gap between total debt and domestic funds, led to a significant improvement in the US current-account deficit in 2008-2009, disproving US Federal Reserve Board Chairman Ben Bernanke’s claim that the deficit was caused by a global “saving glut.”
375Indeed, America’s current-account position strengthened despite the dollar’s appreciation in the face of safe-haven demand.
376Unfortunately, as a result of the private-sector deleveraging and an increase in household savings, the US economy, driven by debt and consumption, slid into recession.
377To offset the negative impact of private-sector deleveraging on growth, the US government has maintained expansionary fiscal and monetary policies.
378Now, with household debt sustained on a knife-edge after feverish government intervention, the fiscal position has deteriorated dramatically and the current-account balance has worsened again.
379Sustainability of public debt has replaced sustainability of private debt as the biggest threat to financial stability, and the focus of debate about the US current account has shifted from the sustainability of foreign debt to the impact of reducing the external deficit on growth and employment.
380The dilemma facing US policymakers is how to stimulate growth while lowering the level of total debt.
381The most important way to achieve both objectives is to increase exports by strengthening US competitiveness.
382But where will increased competitiveness come from?
383Devaluation of the dollar could improve US competitiveness in the short run, but it is not a solution.
384Because rapid fiscal deterioration now has investors worrying about capital losses on US government securities, devaluation would make foreigners more hesitant to finance America’s budget deficit.
385If foreign financing is not forthcoming, yields on US government debt will rise and the US economy will fall back into recession.
386In the long run, America’s growth pattern must undergo a structural shift from reliance on debt and consumption one based on Americans vaunted capacity for creativity and innovation.
387Only then will America improve its competitiveness enough to allow the government to reduce both private and public debt to sustainable levels while maintaining a respectable growth rate.
388But neither improved competitiveness, nor reduction of total debt, can be achieved overnight.
389In the short run, the US current-account deficit will remain, regardless of which country runs bilateral surpluses.
390Thus, China’s continued reinvestment of its current-account surplus in US government securities is of utmost important for US growth and financial stability.
391Given that America benefits mightily from China’s purchases of US government securities, it is difficult to understand why the US government and Congress have been complaining so much about the bilateral current-account deficit.
392It is also difficult to grasp why China is so reluctant to reduce its bilateral surplus, given meager returns on its massive holdings of US government securities and a sustained risk of large capital losses in the future.
393The good news is that, following President Hu Jintao’s recent visit to Washington, both America and China have been taking positive steps to resolve their differences over the bilateral current-account balance.
394That augurs well for a more rational and constructive Sino-American dialogue on global imbalances, which would certainly benefit the global economy.
395A Banking Union Baby Step
396BRUSSELS – At the beginning of the financial crisis, it was said that banks were, in Charles Goodhart’s crisp phrase, “international in life, but national in death.”
397At the time (2008-2009), large international banks had to be rescued by their home countries’ governments when they ran into trouble.
398But the problem now in Europe is the opposite: banks are “national in life, but European in death.”
399In Spain, for example, local savings banks (cajas) financed an outsize real-estate boom.
400As the boom turned to bust, the losses threatened to overwhelm the capacity of the Spanish state, and the problem became European, because it threatened the very survival of the euro.
401The Spanish case is symptomatic of a larger problem.
402National supervisors always tend to minimize problems at home.
403Their instinct (and their bureaucratic interest) is to defend their countries’ “national champion” bank(s) abroad.
404But their resistance to recognizing problems at home runs even deeper.
405Until recently, the Spanish authorities maintained that the problems in their country’s real-estate sector were temporary.
406To acknowledge the truth would have meant admitting that for years they had overlooked the build-up of an unsustainable construction boom that now threatens to bankrupt the entire country.
407In the case of Ireland, the situation was initially not much different.
408When problems started to surface, the finance minister at the time initially claimed that the country would carry out “the cheapest bank rescue ever.”
409Given national supervisors’ predictable tendency not to recognize problems at home, it seemed natural that the cost of cleaning up insolvent banks should also be borne at the national level.
410It thus seemed to make sense that even in the eurozone, banking supervision remained largely national.
411The recently created European Banking Authority has only limited powers over national supervisors, whose daily work is guided mainly by national considerations.
412But reality has shown that this approach is not tenable.
413Problems might originate at the national level, but, owing to monetary union, they quickly threaten the stability of the entire eurozone banking system.
414At their June summit, Europe’s leaders finally recognized the need to rectify this situation, transferring responsibility for banking supervision in the eurozone to the European Central Bank.
415Given that financial integration is particularly strong within the monetary union, putting the ECB in charge was an obvious choice.
416Moreover, the ECB already bears de facto responsibility for the stability of the eurozone’s banking system.
417But, until now, it had to lend massive amounts to banks without being able to judge their soundness, because all of that information was in the hands of national authorities who guarded it jealously and typically denied problems until it was too late.
418Putting the ECB in charge should also help to stop the creeping disintegration process, which is not publicly visible, but is very real nonetheless.
419Just ask any of the large international banking groups headquartered in financially stressed eurozone countries.
420Consider the case of a bank headquartered in Italy, but with an important subsidiary in Germany.
421The German operations naturally generate a surplus of funds (given that savings in Germany far exceed investment on average).
422The parent bank would like to use these funds to reinforce the group’s liquidity.
423But the German supervisory authorities consider Italy at risk and thus oppose any transfer of funds there.
424The supervisor of the home country (Italy) has the opposite interest.
425It would like to see the “internal capital market” operate as much as possible.
426Here, too, it makes sense to have the ECB in charge as a neutral arbiter with respect to these opposing interests.
427But, while putting the ECB in charge of banking supervision solves one problem, it creates another: can national authorities still be held responsible for saving banks that they no longer supervise?
428Economic (and political) logic requires that the eurozone will soon also need a common bank rescue fund.
429Officially, this has not yet been acknowledged.
430But that is often the way that European integration proceeds: an incomplete step in one area later requires further steps in related areas.
431This incremental approach has worked well in the past; indeed, today’s European Union resulted from it.
432But a financial crisis does not give policymakers the time that they once had to explain to voters why one step required another.
433They will have to walk much more quickly to save the euro.
434The Renewed Promise of Abenomics
435TOKYO – Japan’s Liberal Democratic Party scored a decisive victory in the December 14 parliamentary election, with Japanese voters demonstrating their overwhelming approval of Prime Minister Shinzo Abe’s macroeconomic policy agenda.
436Though voter turnout was relatively low, owing largely to the somewhat technical nature of the issues, the election’s message was clear: most Japanese abhor the prospect of a return to the grim economic trajectory that prevailed in Japan before “Abenomics.”
437When the first “arrow” of Abenomics – a fiscal stimulus program – was launched nearly two years ago, asset markets' immediate response was positive.
438The second arrow of Abenomics – monetary easing – intensified these effects.
439In the last two years, Japan’s stock market has almost doubled in value, increasing the wealth of Japanese consumers.
440Moreover, the yen has fallen by nearly one-third against the US dollar, from around ¥80 to nearly ¥120 per dollar, invigorating Japan’s export industries.
441Even more encouraging are developments in the labor market, which, unlike those in asset markets, reflect outcomes, not expectations.
442Here, too, the news is good.
443The labor market has tightened, with unemployment standing at 3.5% and the job-to-applicant ratio above parity.
444To be sure, there have been some setbacks: Japan’s GDP shrank in the second and third quarters of 2014.
445But the downturn, which resulted from April’s consumption-tax hike – from 5% to 8% – cannot be blamed on Abenomics.
446Indeed, Abe was honoring a law enacted by the previous government, led by the Democratic Party of Japan.
447The first two arrows of Abenomics were aimed at stimulating demand – and they were extremely effective.
448The consumption-tax hike was needed to sustain them in flight. Unfortunately, the hike was too large to keep them aloft.
449The good news is that the tax hike’s impact is temporary. Soon, it will begin to taper off, and industrial output will approach full capacity.
450When demand begins to exceed supply, demand-side stimulus policies will become increasingly ineffective, and it will be time to launch the third arrow of Abenomics: growth-enhancing structural reforms.
451Such reforms are essential to raise productivity growth and improve the Japanese economy’s competitiveness.
452Four imperatives stand out.
453The first task should be to eliminate – or, at least, reduce – the thicket of government regulations that is stifling economic dynamism.
454The current system is so convoluted and complex that it took more than three decades to open a new medical school in Tokyo.
455Likewise, flights to Haneda airport, a convenient connection to the Tokyo city area, have been rationed.
456This is no formula for long-term economic success.
457Furthermore, Japan’s government should push to complete negotiations for the Trans-Pacific Partnership, which is currently being negotiated among 12 countries, from Mexico to the United States to Vietnam.
458The TPP would improve Japan’s trade prospects considerably, including in sensitive sectors like agriculture, where exports of fast-moving consumer goods like flowers and vegetables would benefit.
459Japan’s leaders must also work to expand the workforce, which faces severe constraints, owing largely to the country’s rapidly aging population.
460In the absence of large-scale immigration, to which Japanese remain unamenable, one relatively simple solution would be to integrate more women into the labor force.
461A 10% increase in Japan’s female labor-force participation rate – an entirely attainable goal – would translate into an almost 5% gain in total labor-force participation.
462Finally, Abe’s government must reduce the corporate-tax rate to align it more closely with international standards.
463Amid increasingly intense international competition to attract foreign investment, reducing the corporate tax would actually increase Japan’s tax revenues, by spurring companies to invest their vast cash stockpiles in more productive activities.
464Now that Abe’s government has a renewed mandate from Japanese voters, it must deliver on its promises – and that means decisive and comprehensive implementation of structural reforms.
465Of course, this will require some sacrifices.
466Indeed, households have already endured some hardship, brought about by the consumption-tax hike.
467The next step is for Abe’s government to use its political capital to overcome vested interests, both in the bureaucracy and the business community.
468This means compelling businesses to give up some of the special tax benefits they now enjoy.
469For their part, politicians must participate in the taxpayer identification system.
470And bureaucrats must forego some of the power that excessive regulation affords them.
471If all of these groups join the Japanese public in accepting reasonable sacrifices, Abe’s government can fulfill its promise and build a thriving economy.
472For the sake of all Japanese – not to mention a world economy in need of a new source of dynamism – that promise deserves to be met.
473The Missing Arrow of Abenomics
474TOKYO – In his drive to kick-start the Japanese economy, Prime Minister Shinzo Abe, shortly after taking office in 2012, introduced a large fiscal stimulus and put in place a bold program of monetary easing.
475Since then, Japanese policymakers have been working to launch what Abe calls the third “arrow” of his agenda: arduous reforms of key industries and the demolition of structural barriers to growth.
476But the focus on public policy has left a “fourth arrow” – the private sector – untouched and seemingly ignored.
477This is unfortunate, because the government cannot fix Japan’s ills on its own.
478Annual productivity growth has been stubbornly sluggish, rarely rising above 2% for much of the past two decades, reflecting both missed opportunities and declining cost competitiveness.
479Japan’s productivity slump permeates the entire economy; labor and capital productivity gains have nearly stalled in almost every sector – even in Japan’s signature advanced manufacturing industries.
480Labor productivity in the transport-equipment sector, for example, is barely half that of Germany.
481This trend puts annual GDP growth on course to average only 1.3% through 2025, implying a third consecutive decade of stagnation.
482Such an outcome would coincide with – and exacerbate the effects of – an adverse demographic shift that will constrain fiscal revenues and drive up costs for universal health care and pension benefits.
483Japan’s ability to alter its trajectory depends on individual companies making decisions to invest, change workplace policies, deploy new technologies, and test untried business models.
484Abe’s structural reforms will take time and political will to enact, but Japanese companies cannot afford to sit still.
485They can and must act, without waiting for the government to change its policies.
486In many cases, the economy’s bottlenecks are not regulatory in nature, but stem from entrenched ways of doing business.
487New research by the McKinsey Global Institute examines Japan’s advanced manufacturing, retail, financial services, and health-care industries in detail – and finds substantial untapped productivity potential in every area.
488For starters, Japanese firms must become more globally integrated.
489Exporting to the fastest-growing overseas markets is one obvious route to overcoming sluggish demand growth at home.
490But, rather than just selling products abroad, Japanese enterprises need to expand operations beyond their borders and cast a wider net for international talent.
491Japanese companies have formidable R&D operations, but most will need to reconfigure them to obtain better returns and impact.
492The process must start with an understanding of what the customer wants and a determination to deliver solutions accordingly.
493Closed and tightly managed R&D operations must be transformed into more fluid, open processes involving collaboration with customers and suppliers.
494Japanese companies will also need to improve their capabilities in areas such as marketing, pricing, and talent development.
495While there are some pockets of excellence, most Japanese firms are severely lacking in these areas.
496To compete in global markets, they will need to achieve the same consistency in these areas that they have in their traditional areas of strength.
497Many Japanese companies have yet to digitize paper-based processes and replace outdated information-technology systems.
498Others would benefit from moving beyond basic digitization to next-generation technologies, such as big-data analytics.
499Companies can also head off looming labor shortages with intelligent software systems and robotics.
500Manufacturers can augment or replace their assembly lines with technologies such as the Internet of Things and 3D printing.
501More broadly, Japanese companies have to organize for performance and discipline.
502As policy changes unleash market forces, businesses will face greater competition.
503Some may need to reorganize or exit unprofitable markets; others may have to undertake mergers and acquisitions to achieve economies of scale.
504Finally, shareholders and senior executives should tie performance goals to incentives.
505Some of Japan’s corporate giants have already begun shifting from traditional seniority-based advancement toward merit-based pay structures.
506Others should follow their lead.
507Promoting younger and more diverse talent can create agile organizations with fresh ideas.
508If Japan’s private sector rises to the challenge, it can move the economy onto a path of faster growth.
509Innovations in one company would cascade across its entire industry by forcing competitors to raise their game.
510In the 1950s and 1960s, for example, Toyota introduced more efficient production processes that were eventually adopted by the entire automobile industry.
511Instead of settling for a future of 1.3% annual GDP growth, Japan could attain roughly 3% annual growth through 2025.
512Doing so would require the growth rate of labor productivity to more than double, but this is an attainable goal.
513More than half of this growth increment can be met by adopting best practices that companies around the world already use, while technology can close much of the remaining gap.
514Japanese business leaders need to combine big thinking with a focused attention to detail.
515They will need to create innovative products, penetrate new markets, and make bold investments in equipment, technology, and talent, while simultaneously scrutinizing every aspect of their operations for inefficiency and waste.
516Traditional ways of doing business may have to be abandoned.
517But there is ample scope to make progress and spur faster economic growth.
518Immense trade flows, the rise of billions of new consumers in the emerging world, and technology breakthroughs are rapidly transforming the global economy.
519Japan can shift its current trajectory by turning this wave of disruption into opportunity.
520From Russia With Unrequited Love
521NEW DELHI – Japanese Prime Minister Shinzo Abe has assiduously courted Russian President Vladimir Putin, meeting with him more than a dozen times in four years.
522This month he hosted Putin in Tokyo and in his hometown of Nagato (famed for its onsen, or natural hot springs).
523But Abe’s courtship has so far yielded little for Japan, and much for Russia.
524Abe’s diplomatic overtures to Putin are integral to his broader strategy to position Japan as a counterweight to China, and to rebalance power in Asia, where Japan, Russia, China, and India form a strategic quadrangle.
525Abe has already built a close relationship with India, and he sees improved relations with Russia – with which Japan never formally made peace after World War II – as the missing ingredient for a regional power equilibrium.
526But Abe’s trust-building efforts with Russia are not aimed only at checking Chinese aggression.
527He also wants Russia to return its southernmost Kuril Islands – a resource-rich area known as the Northern Territories in Japan – which the Soviet Union seized just after the United States dropped nuclear bombs on Hiroshima and Nagasaki in August 1945.
528In exchange, Abe has offered economic aid, investments in Russia’s neglected Far East, and major energy deals.
529Abe has, however, encountered several obstacles.
530For starters, Japan is a participant in the US-led sanctions that were imposed on Russia after it annexed Crimea in March 2014.
531These sanctions have pushed Russia closer to its traditional rival, China; and Putin has publicly identified the sanctions as a hindrance to concluding a peace treaty with Japan.
532In response to Abe’s overtures, Putin has doggedly tried to drive a hard bargain.
533Russia has bolstered its defenses on the four disputed islands, and, just prior to this month’s summit, he told the Japanese media that the current territorial arrangement suits Russian interests.
534“We think that we have no territorial problems,” he said. “It’s Japan that thinks that it has a territorial problem with Russia.”
535The US-led sanctions regime and low oil prices have battered the Russian economy, which is expected to contract by 0.8% in 2016.
536Thus, Putin is more reluctant than ever to offer territorial concessions, lest it tarnish his domestic image as a staunch defender of Russian national interests.
537Against this backdrop, it is not surprising that Abe left the recent “onsen summit” with dashed hopes of resolving the territorial dispute, while Putin returned home with 68 new commercial accords.
538Many of the new agreements are symbolic, but some are substantive, including deals worth $2.5 billion and an agreement to set up a $1 billion bilateral-investment fund.
539Under the latter agreement, Japan and Russia are supposed create a “special framework” for joint economic activities on the disputed islands.
540But the plan has already run into trouble.
541Peter Shelakhaev, a senior Russian official who leads the government’s Far East Investment and Export Agency, has indicated that there are legal hurdles to establishing such a framework, and that Japanese firms doing business on the Kurils would have to pay taxes to Russia.
542If Japan did that, however, it would effectively be recognizing Russia’s jurisdiction over the islands.
543Abe has thus been denied the legacy that he sought, while Putin has succeeded in easing Russia’s international isolation.
544Abe was the first G7 leader to hold a summit with Putin after Russia annexed Crimea, and now Russia has won Japan’s economic cooperation, too.
545Japan is the only G7 country that has a territorial dispute with Russia, and it is clearly more eager to reach a deal than the Kremlin is.
546But this has only strengthened Russia’s hand.
547While Japan has softened its position, and signaled that it may accept only a partial return of the islands, Russia has grown only more intransigent.
548After the recent summit, Abe revealed that Putin now seems to be reneging on a 1956 agreement between Japan and the Soviet Union, which stipulates that the smaller two of the four islands will be returned to Japan after a peace treaty is signed.
549As it happens, this year marks the 60th anniversary of that joint declaration, which was widely viewed as a breakthrough at the time.
550The Kremlin is now suggesting that its commitment to fulfilling the declaration was conditional on Japan not joining any security alliance against Russia.
551And Putin has expressed concerns that the 1960 Japan-US Security Treaty would extend to the disputed islands if they were returned, thus allowing the US to establish a military presence there.
552Japan is in no position to address Russia’s concerns.
553It cannot opt out of the US-led sanctions regime; and it cannot exempt the disputed Kurils from its security treaty with the US, especially now that it has been urging the US to provide an explicit commitment to defend the Japanese-controlled Senkaku Islands, over which China claims sovereignty.
554Putin, for his part, appears smugly content with his negotiating position.
555Not only did he arrive almost three hours late to the onsen summit, in keeping with his habit of leaving foreign leaders waiting; he also declined a Japanese government gift – a male companion for his native Japanese Akita dog, which Japan gave him in 2012.
556There is little hope now that Abe will see tangible returns on the political capital he has invested in cultivating Putin.
557And Japan’s dilemma will only deepen.
558US President-elect Donald Trump’s desire to improve relations with Russia may give Abe leeway to continue wooing Putin; but if Russia gets the US in its corner, it won’t need Japan anymore.
559A Berlin Consensus?
560HONG KONG – A recent trip to Berlin brought back memories of an earlier visit in the summer of 1967, when I was a poor student who marveled at the Wall that would divide and devastate an entire society for another two decades.
561Berlin today is vibrant and rejuvenated, rebuilt by the German peoples' hard work and sacrifice to unify the country, and an apt setting for the conference of the Institute for New Economic Thinking (INET), which I was there to attend.
562The conference’s theme was “Paradigm Lost,” with more than 300 economists, political scientists, systems analysts, and ecologists gathering to rethink economic and political theory for the challenges and uncertainty posed by growing inequality, rising unemployment, global financial disarray, and climate change.
563Almost everyone agreed that the old paradigm of neoclassical economics was broken, but there was no agreement on what can replace it.
564Nobel laureate Amartya Sen attributed the European crisis to four failures – political, economic, social, and intellectual.
565The global financial crisis, which began in 2007 as a crisis of US subprime lending and has broadened into a European sovereign-debt (and banking) crisis, has raised questions that we cannot answer, owing to over-specialization and fragmentation of knowledge.
566And yet there is no denying that the world has become too intricate for any simple, overarching theory to explain complex economic, technological, demographic, and environmental shifts.
567In particular, the rise of emerging markets has challenged traditional Western deductive and inductive logic.
568Deductive inference enables us to predict effects if we know the principles (the rule) and the cause.
569By inductive reasoning, if we know the cause and effects, we can infer the principles.
570Eastern thinking, by contrast, has been abductive, moving from pragmatism to guessing the next steps.
571Abductive inference is pragmatic, looking only at outcomes, guessing at the rule, and identifying the cause.
572Like history, social-scientific theory is written by the victors and shaped by the context and challenges of its time.
573Free-market thinking evolved from Anglo-Saxon theorists (many from Scotland), who migrated and colonized territories, allowing fortunate individuals to assume that there were no limits to consumption.
574European continental thinking, responding to urbanization and the need for social order, emphasized institutional analysis of political economy.
575Thus, the emergence of neoclassical economics in the nineteenth century was very much influenced by Newtonian and Cartesian physics, moving from qualitative analysis to quantifying human behavior by assuming rational behavior and excluding uncertainty.
576This “predetermined equilibrium” thinking – reflected in the view that markets always self-correct – led to policy paralysis until the Great Depression, when John Maynard Keynes’s argument for government intervention to address unemployment and output gaps gained traction.
577By the 1970’s, the neoclassical general-equilibrium school captured Keynesian economics through real-sector models that assumed that “finance is a veil,” thereby becoming blind to financial markets’ destabilizing effects.
578Economists like Hyman Minsky, who tried to correct this, were largely ignored as Milton Friedman and others led the profession’s push for free markets and minimal government intervention.
579But then technology, demographics, and globalization brought dramatic new challenges that the neoclassical approach could not foresee.
580Even as the world’s advanced countries over-consumed through leveraging from derivative finance, four billion of the world’s seven billion people began moving to middle-income status, making huge demands on global resources and raising the issue of ecological sustainability.
581New thinking is required to manage these massive and systemic changes, as well as the integration of giants like China and India into the modern world.
582A change of mindset is needed not just in the West, but also in the East.
583In 1987, the historian Ray Huang explained it for China:
584“As the world enters the modern era, most countries under internal and external pressure need to reconstruct themselves by substituting the mode of governance rooted in agrarian experience with a new set of rules based on commerce.…This is easier said than done.
585The renewal process could affect the top and bottom layers, and inevitably it is necessary to recondition the institutional links between them.
586Comprehensive destruction is often the order; and it may take decades to bring the work to completion.”
587Using this macro-historical framework, we can see Japanese deflation, European debt, and even the Arab Spring as phases of systemic changes within complex structures that are interacting with one another in a new, multipolar global system.
588We are witnessing simultaneous global convergence (the narrowing of income, wealth, and knowledge gaps between countries) and local divergence (widening income, wealth, and knowledge gaps within countries).
589Adaptive systems struggle with order and creativity as they evolve.
590As the philosopher Bertrand Russell presciently put it: “Security and justice require centralized governmental control, which must extend to the creation of a world government if it is to be effective.
591Progress, on the contrary, requires the utmost scope for personal initiative that is compatible with social order.”
592A new wave of what the economist Joseph Schumpeter famously called “creative destruction” is under way: even as central banks struggle to maintain stability by flooding markets with liquidity, credit to business and households is shrinking.
593We live in an age of simultaneous fear of inflation and deflation; of unprecedented prosperity amid growing inequality; and of technological advancement and resource depletion.
594Meanwhile, existing political systems promise good jobs, sound governance, a sustainable environment, and social harmony without sacrifice – a paradise of self-interested free riders that can be sustained only by sacrificing the natural environment and the welfare of future generations.
595We cannot postpone the pain of adjustment forever by printing money.
596Sustainability can be achieved only when the haves become willing to sacrifice for the have-nots.
597The Washington Consensus of free-market reforms for developing countries ended more than two decades ago.
598The INET conference in Berlin showed the need for a new one – a consensus that supports sacrifice in the interest of unity.
599Europe could use it.
600Accepting Japan at Its Word
601TOKYO – In recent years, the number of tourists visiting Japan has been increasing rapidly, reaching a record 13.4 million last year, a 29% increase from 2013.
602Japan seems to be making great strides toward its goal of recapturing the position as an Asian cultural center that it held a century ago, when the Indian Nobel laureate poet Rabindranath Tagore lived in Tokyo.
603Chinese revolutionary leaders Sun Yat-sen and Chiang Kai-shek, along with many other prominent Asians, moved there as well.
604Anyone visiting Japan today would do well to learn two key words: domo, meaning “hello,” “thanks,” or “well,” and sumimasen, which can carry any of the meanings of domo, as well as “sorry” or “excuse me.”
605Ordinary Japanese say sumimasen countless times each day, to apologize to friends or strangers for even the most trivial accident or mistake.
606But, as Japan’s leaders have experienced firsthand since World War II, expressing regret to other countries is not so simple.
607Yet that is precisely what Prime Minister Shinzo Abe must do in his upcoming statement marking the 70th anniversary of the end of the war.
608The statement will be based on consultations with many of Japan’s, and the world’s, leading WWII historians, as well as – and more important – with himself, his conscience, and his heart, because he understands the significance of his words on this highly fraught topic.
609Of course, Abe is far from the first Japanese leader to confront this challenge.
610His statement will follow a long line of declarations by prime ministers and chief cabinet secretaries expressing sincere remorse over the events of WWII.
611Twenty years ago, Prime Minister Tomiichi Murayama, the head of the Socialist Party, acknowledged that “Japan, through its colonial rule and aggression, caused tremendous damage and suffering to the people of many countries,” particularly in Asia.
612He went on to express “feelings of deep remorse” and offer a “heartfelt apology” to the victims.
613Ten years later, Prime Minister Junichiro Koizumi reiterated Murayama’s words, adding that since the war, Japan had been “manifesting its remorse for the war through actions,” especially development assistance and humanitarian activities.
614Koizumi also pledged that “Japan, as a peace-loving nation, will work to achieve peace and prosperity for all humankind with all its resources.”
615Despite these straightforward declarations of regret, some governments and citizens continue to demand more, giving the impression that nothing a Japanese leader says or does will convince them of the country’s remorse.
616This intractability is, in some cases, understandable; the pain of survivors and their descendants remains acute.
617But in many other cases, the unwillingness to move beyond history is driven by political interests.
618Indeed, political motivations are behind claims that Abe does not agree with past official apologies, despite his repeated assurances that he does, as well as suggestions that he is seeking to revise history, even though he has never denied Japan’s colonial aggression.
619Moreover, some have produced portrayals of Japan, as a whole, as an unrepentant country – or, worse, as one that is hell-bent on remilitarization.
620Such depictions are breathtaking in their audacity, given Japan’s seven-decade record as a peaceful and constructive member of the international community.
621This is not lost on those in Japan who ask for how long their country will have to apologize, with some even suggesting that after 70 years, a “tweet” on the subject should amount to adequate acknowledgement by Abe.
622The prime minister, however, remains committed to issuing a strong and sincere statement on the subject.
623Early this year, Abe announced his intention to use the 70th anniversary statement to communicate Japan’s remorse for the war, describe the progress the country has made in upholding peace, and describe the contributions that Japan can make to Asia and the rest of the world in the coming decades.
624In fact, it is the third component of the announcement that inspires fear in some observers: By helping to build a strong security architecture in the Asia-Pacific region, Japan could undermine the ability of some actors to advance their own interests.
625That is why they launched a whisper campaign against Abe’s statement months before he even began to write it.
626But, of course, Asian security and prosperity is in everyone’s interest.
627Given this, not even the language of Abe’s statement is particularly important; what matters is the determination he expresses, and the actions he takes to follow through – with appropriate humility – on his pledges.
628And it seems that Abe is, indeed, determined to make real contributions to peace, based on effective cooperation with Japan’s friends and allies.
629But if Asia is to move beyond its past, the victims of Japan’s wartime aggression must recognize that the Japan of 2015 is not the Japan of 1931, 1941, or even 1945, and that, as many Asian leaders have realized over the years, forgiveness benefits everyone.
630In 1998, South Korean President Kim Dae-jung responded positively to a statement by former Japanese Prime Minister Keizo Obuchi.
631The governments of Indonesia, the Philippines, Vietnam, and other countries have done the same, and now welcome Japan’s commitment to act with its allies to protect regional security.
632These countries’ openness to reconciliation have enabled Japan to recast itself as a key arbiter of regional peace and prosperity, not to mention an increasingly dynamic cultural hub.
633It is time for the rest of the region to follow suit, accepting at face value Japan’s sincere apologies and working with the country to build a better future.
634At a time when Asia is facing serious security challenges, this stance could not be more urgent.
635A Big Chance for Small Farmers
636NEW YORK – The G-8’s $20 billion initiative on smallholder agriculture, launched at the group’s recent summit in L’Aquila, Italy, is a potentially historic breakthrough in the fight against hunger and extreme poverty.
637With serious management of the new funds, food production in Africa will soar.
638Indeed, the new initiative, combined with others in health, education, and infrastructure, could be the greatest step so far toward achieving the Millennium Development Goals, the internationally agreed effort to reduce extreme poverty, disease, and hunger by half by 2015 .
639During 2002-2006, I led the United Nations Millennium Project, which aimed to achieve the Millennium Development Goals, for then-UN Secretary General Kofi Annan.
640One cornerstone of the project was “smallholder farmers,” meaning peasant farm families in Africa, Latin America, and Asia – working farms of around one hectare (2.5 acres) or less.
641These are some of the poorest households in the world, and, ironically, some of the hungriest as well, despite being food producers.
642They are hungry because they lack the ability to buy high-yield seeds, fertilizer, irrigation equipment, and other tools needed to increase productivity.
643As a result, their output is meager and insufficient for their subsistence.
644Their poverty causes low farm productivity, and low farm productivity reinforces their poverty.
645It’s a vicious circle, technically known as a poverty trap.
646The UN Millennium Project’s Hunger Task Force, led by two world-leading scientists, M. S. Swaminathan and Pedro Sanchez, examined how to break this vicious circle.
647The Hunger Task Force determined that Africa could substantially increase its food production if help was given to smallholder farmers, in the form of agricultural inputs.  The Millennium Project recommended a big increase in global funding for this purpose.  Drawing on that work and related scientific findings, Annan launched a call in 2004 for an African Green Revolution, based on an expanded partnership between Africa and donor countries.
648Many of us, notably current UN Secretary General Ban Ki-moon, have worked hard to make this possible, with Ban repeatedly emphasizing the special emergency arising from the global food, financial, and energy crises of the past two years.
649The G-8 announcement reflects these years of effort, and of course the boost from the leadership of US President Barack Obama, Spanish Prime Minister Jose Luis Zapatero, Australian Prime Minister Kevin Rudd, World Bank President Robert Zoellick, European Commissioner Louis Michel, European Parliamentarian Thijs Berman, and others.
650Now the key is to make this effort work.
651The lessons of history are clear.
652Getting seed and fertilizer to smallholder farmers at highly subsidized prices (or even free in some cases) will make a lasting difference.
653Not only will food yields rise in the short term, but farm households will use their higher incomes and better health to accumulate all sorts of assets: cash balances, soil nutrients, farm animals, and their children’s health and education.
654That boost in assets will, in turn, enable local credit markets, such as micro-finance, to begin operating.
655Farmers will be able to buy inputs, either out of their own cash, or by borrowing against their improved creditworthiness.
656A consensus has now been reached on the need to assist smallholders, but obstacles remain.
657Perhaps the main risk is that the “aid bureaucracies” now trip over each other to try to get their hands on the $20 billion, so that much of it gets taken up by meetings, expert consultations, overhead, reports, and further meetings.
658“Partnerships” of donors can become an expensive end in themselves, merely delaying real action.
659If donor governments really want results, they should take the money out of the hands of thirty or more separate aid bureaucracies and pool it in one or two places, the most logical being the World Bank in Washington and the International Fund for Agricultural Development (IFAD) in Rome.
660One or both of these agencies would then have an account with several billion dollars.
661Governments in hunger-stricken regions, especially Africa, would then submit national action plans that would provide details on how they would use the donor funds to get high-yield seeds, fertilizer, irrigation, farm tools, storage silos, and local advice to impoverished farmers.
662An independent expert panel would review the national plans to verify their scientific and managerial coherence.
663Assuming that a plan passes muster, the money to support it would quickly be disbursed.
664Afterward, each national program would be monitored, audited, and evaluated.
665This approach is straightforward, efficient, accountable, and scientifically sound.
666Two major recent success stories in aid have used this approach: the Global Alliance on Vaccines and Immunizations, which successfully gets immunizations to young children, and the Global Fund to Fight AIDS, TB, and Malaria, which supports national action plans to battle these killer diseases.
667Both have saved millions of lives during the past decade, and have paved the way to a new more efficient and scientifically sound method of development assistance.
668Not surprisingly, many UN agencies and aid agencies in rich countries fight this approach.
669All too often, the fight is about turf, rather than about the most effective way to speed help to the poor.
670Obama, Rudd, Zapatero, and other forward-thinking leaders can therefore make a huge difference by following up on their pledges at the G-8 and insisting that the aid really works.
671The bureaucracies must be bypassed to get help to where it is needed: in the soil tilled by the world’s poorest farm families.
672A Black and White Question
673NEW YORK – In the afternoon of July 16 two men appeared to be breaking into a fine house in an expensive area of Cambridge, Massachusetts.
674Alerted by a telephone call, a policeman arrived smartly on the scene.
675He saw one black male standing inside the house and asked him to come out.
676The man refused.
677He was then told to identify himself.
678The man, still refusing to step out, said he was a Harvard professor, showed his ID, and warned the cop not to mess with him.
679He said something about black men in America being singled out, and asked the cop, who was white, for his name and identification.
680The cop, joined by several colleagues, arrested the professor for disorderly conduct.
681We now know that the professor had broken into his own home, with the help of his chauffeur, because the door was jammed.
682What was unusual here was not the cop’s heavy-handedness.
683Most people in the US know that if you talk back to the police, they will get nasty very fast.
684The fact that the man was black might or might not have made the cop go for his handcuffs even sooner than he might normally have done.
685That, too, would not have been unusual.
686What made this case special was that Henry Louis “Skip” Gates is one of the most celebrated professors in the country, famous for his books, his articles, and numerous television appearances.
687He is a grandee, a mover and shaker in the academic and media world, a friend of President Barack Obama.
688That is why he warned the cop, Sgt. James Crowley, a veteran of the Cambridge police force, not to mess with him.
689Class and race overlap in the US.
690In this instance, it is impossible to pry them apart.
691Gates, deeply conscious, indeed a specialist of the terrible history of race relations in his country, instinctively assumed that he was a victim of prejudice.
692From his words it appears that he was equally conscious of not getting the proper respect due to a distinguished Harvard professor and media celebrity.
693As he put it to his daughter in an interview published online: “[Crowley] should have gotten out of there and said, ‘I’m sorry, sir, good luck.
694Loved your [television] series—check with you later!’”
695Alas, Sgt.Crowley had never heard of Professor Gates.
696A local man whose brothers all serve in the police force, a sports fan, and an amateur basketball coach, Crowley does not move in the same social circles as Gates.
697As it happens, the charges were duly dropped, and there the case might have rested if President Obama, tired and frustrated after weeks of fighting for his healthcare bill, had not weighed in on behalf of his “friend” Gates, and called the police “stupid.”
698Both he and Gates then spoke of “learning” from the incident.
699Gates might even be planning a television documentary on racial profiling.
700One thing to be learned, if we didn’t know this already, is how close racial sensitivities are to the surface of US life, despite the election of a black president.
701The complexities of black anger, white guilt, and of black, and white fear, are so vexed that most Americans prefer not to talk about race at all.
702The field is too full of mines.
703One of Obama’s great achievements is that he made it into a serious topic through the brilliance and subtlety of his rhetoric.
704And there remains plenty to talk about: the grotesquely disproportionate number of black men in US prisons; the lack of educational opportunities in poor, mostly black areas; the appalling healthcare system; and the very real brutality used by police officers against blacks, who don’t have the privilege of a Harvard ID.
705It is probably true that many white policemen, even if they are trained to avoid racial profiling, as Sgt. Crowley was, need to be convinced that a black man can be at home in one of the finer houses of Cambridge, or any other American city.
706But is the Gates affair the right way to enter into this discussion?
707One might argue that it was.
708If not Professor Gates, then who?
709Precisely because he is a grandee, he is in the position to draw national attention to a serious issue.
710If the same thing had happened to an unknown man in Harlem, or some other poor, or predominantly black district, no one would ever have heard about it.
711The fact that it happened to a professor in Cambridge makes everyone sit up and take notice.
712There is, however, a danger that it will have an adverse affect on the necessary national discussion about race.
713By having made such a big issue out of what was in fact a relatively minor event Gates could be accused of trivializing much worse instances of abuse.
714Indeed, we don’t even know for certain whether this was such an instance.
715Crowley never mentioned the color of Gates’ skin. There was no question of violence.
716There were just very raw nerves and hypersensitivity to hints of disrespect, on the part of the professor, and of the cop.
717Outrage about a professor who is not to be messed with is not the best way to discuss the plight of countless, poor, anonymous people, whom most of us find it too easy to ignore.
718A Bollywood Bride for Sarkozy?
719PARIS -- Ever since French President Nicolas Sarkozy took himself off his country’s most-eligible-bachelor list by publicly acknowledging his affair with supermodel-turned-pop-musician Carla Bruni during a romantic trip to Euro Disney, he’s run into trouble.
720His ratings have dipped below 50% for the first time.
721Older French citizens don’t find the public spectacle of their leader in love very amusing.
722Abroad, Egyptian lawmakers were so exercised over the prospect of the French head of state sharing a bed with his girlfriend that several vented their disapproval on the floor of the parliament.
723Likewise, India is all in a quandary over how to handle protocol during Sarkozy’s impending visit to the subcontinent as the guest of honor at the country’s Republic Day celebrations on January 26.
724Should the First Girlfriend have her own motorcade, as a first lady would?
725Meanwhile, the same hard-right Hindu groups that protest Valentine’s Day as a decadent Western holiday have warned that if Sarkozy arrives with his girlfriend in tow, they’ll be out in the streets to welcome him.
726This controversy has threatened to cast a pall over a much-heralded summit between two of the world’s great democracies.
727With lucrative deals at stake for the big-ticket products that drive the French economy – military hardware, nuclear power plants, and Airbus planes – France has a strong interest in a successful summit in India.
728So, as rumors fly of secret marriage ceremonies either already concluded or in the works, could the trouble brewing in India over the French president’s very public love life be behind the rush to have the couple legally wed?
729The news in Sarkozy’s favored media outlet Journal du Dimanche that the couple plan to marry touched off a flurry of fevered speculation on when the happy event might occur.
730The couple exchanged significant tokens of their mutual affection: he offered her a heart-shaped pink diamond ring by Dior, she offered him a Swiss watch.
731It’s “serious,” the smitten president admitted.
732But he refused, even under direct questioning by reporters, to reveal an exact date.
733“You’ll probably find out after it’s happened,” he taunted.
734Rumor has it the couple has set February 8 or 9 for the wedding.   Others say that Sarkozy has already outsmarted the media by secretly marrying in the Elysee Palace, even as he was dodging wedding questions.
735If that is true, then Sarkozy missed the romantic opportunity of a lifetime.
736If the couple sizzled for cameras with Luxor and Petra as the backdrop, just imagine how hot things could get at the most romantic spot on Earth, the Taj Mahal.
737And, given the current rage for all things Bollywood in France, a lavish Indian wedding would be fitting.
738Bruni’s own life path closely resembles any number of Bollywood stars who have made the transition from model to actress.
739A comely brunette who sings is perfect for a Bollywood makeover.
740The Indian government will be nothing if not relieved to see the first girlfriend made a wife.
741As one of India’s leading daily newspapers, the Indian Express, spelled it out, lest anyone be confused, “a girlfriend is not a wife or spouse.”
742Once wed, all protocol worries about the French delegation would simply disappear.
743Despite the sometimes downright pornographic on-screen writhing of Bollywood starlets, India is still a deeply conservative society.
744Divorce is anathema. (Sarkozy is now twice divorced.)
745And, while mistresses abound among the privileged classes, they do not strut publicly by their power-mates’ sides.
746Kissing and fondling in public, even by spouses, is taboo.
747In this respect, India more resembles the France with which Sarkozy wants to make a clean break than the current one.
748Most Indians, as it seems many French, would prefer not to shed the “hypocrisy” Sarkozy laments on the part of his predecessors (read: former French President François Mitterrand, who had a child with his mistress about whom the public knew nothing until the man’s funeral).
749Sarkozy, of all people, should know that a large part of the gravitas of office derives from pomp and circumstance.
750Statecraft is a realm where appearances are meant to be deceiving.
751When Sarkozy, who otherwise has such finely tuned media instincts, protests that he’s no different from any other man, he comes dangerously close to confusing the office and the person of the president.
752Most French people could only dream of an exotic wedding in India.
753Sarkozy could make that dream come true.
754If he really is as head-over-heels in love with Bruni as he claims, and plans to marry her imminently, why not take advantage of his upcoming trip to India and make this a wedding to remember?
755He could meet his bride seated majestically on the caparison of an elaborately decorated elephant, and she would look ravishing swathed and bejeweled in Indian finery.
756The “bling-bling” president, as Sarkozy has been dubbed, can wear all the gold he wants and heap yet more diamonds on his bride.
757The cameras would roll, Indians would smile, and France would be treated to a Bollywood spectacle beyond its wildest dreams.
758And if it’s too late for the wedding, there’s always the reception.
759A Born-Again CAP
760WAGENINGEN, NETHERLANDS – Born in 1957, the Common Agricultural Policy (CAP) is now more than 50 years old, and the European Commission is proposing what it calls a health check for its middle-aged child.
761But superficial repairs will not meet the European Union’s future needs. The CAP must be born again.
762Work on its renewal is due to start now, with the completed project ready in 2013. But a much more profound re-think is needed.
763The CAP’s original aim was to provide a secure source of food for the six original member states of the Union, which were importers of food and sought a degree of self-sufficiency.
764Good, healthy, and cheap food had to be accessible for all citizens. Improved agricultural productivity would benefit rural areas and give farmers a comparative share in the Union’s growing wealth.
765Instruments to achieve those objectives were developed, and food security was achieved.
766The CAP quickly came to be seen as the jewel in the crown of the European project.
767As the EU has evolved and expanded, food systems have become more complex, involving production, processing, supply-chain organization, and wholesale and retail distribution, with all of these involving new issues like health and the environment. The use of land is also receiving more serious scrutiny.
768A 1991 study by the Netherlands Scientific Council for Governmental Policy, entitled Ground for Choices, demonstrated that the EU’s food supply could be met with 50% less cultivated land, 80% less pesticides, and at 50% less cost.
769Pollution would be reduced by 70% as a result of fewer nitrates in the surface water, and greenhouse gases would be cut.
770Those figures were for an EU of 15 countries, so with today’s 27 members the possibilities are even greater.
771A Dutch analysis of land use has shown that by employing the best technical and ecological means on the best available land, substantial gains could be made in food production.
772So it is not surprising that the number of farmers needed has fallen substantially.
773Viewed from the standpoint of food security and the wealth of rural areas, there is now an urgent need to revisit the CAP’s main instruments so that a new policy formula can be introduced.
774Perverse subsidies must be removed and recent new ones favoring products such as bio-fuels reconsidered.
775The status quo clearly has to be changed.
776Rural policy in the EU is too often reduced to income guarantees for the farming community. But that attitude is undermining change.
777Competition must be encouraged, as more rural entrepreneurship will strengthen the farming community, with fewer farmers but better farms.
778A simplified CAP would encourage cleaner, more productive, and efficient agriculture.
779A side benefit for the EU’s standing in the world could be that the World Trade Organization’s stalled Doha negotiations could be restarted once farmers in developing countries are assured of getting a fair deal from Europe.
780Moreover, the CAP’s role as a motor of political and social integration in Europe could be restored once renewed policies are in place.
781But renewal of this sort cannot be left to global market forces, as the results might not necessarily benefit European agriculture and society.
782If the market “misbehaves,” farmers could be reduced to poverty, leading to the neglect of large areas of Europe.
783That is a real enough danger to which policymakers must give serious thought as they reform the CAP on the basis of the following five pillars.
7841.      The EU needs a knowledge and innovation policy that strengthens European agriculture’s competitiveness.
785Such a policy has been successful in the Netherlands, substantially contributing to the development and power of the country’s agribusiness.
786Ten of 21 branches of Dutch agribusiness, including horticultural seeds, ornamentals, seed potatoes, and veal, are among the top contributors to the national economy and the country’s trade balance.
787In the EU as a whole, a policy directed toward research programs stimulating scientific excellence and greater coherence in the European knowledge system would greatly strengthen agriculture’s competitiveness and contribute to food security and sustainable development.
7882.      Europe also needs a restructuring policy for land use.
789Many structural improvement programs have been financed at the European level, but agricultural production and land use are not among them.
790The development of an Agricultural Main Structure would compliment the European Ecological Main Structure.
791Reforestation and the repair of natural ecosystems should also be part of a land use policy.
7923.      A policy for European food systems would treat production, processing, distribution, logistics, and retailing in combination.
793Consumption patterns and preferences are an integral part of such systems.
794Preliminary studies by the European Science Foundation’s “Forward Look on European Food Systems” could prove useful in devising an EU-wide policy.
7954.      Metropolitan agriculture in a rapidly urbanizing world can provide high-quality produce on small amounts of land.
796It offers an answer to rising demand for healthy food with minimal environmental side effects.
7975.      A new CAP should include a policy to safeguard Europe’s landscapes.
798But a cultural heritage should not be maintained everywhere, nor should it ignore cost.
799And it should not be a defensive policy of the sort that tends to concentrate on poor-quality land.
800These five pillars involve drastic choices, but they will probably require less money from Europe’s taxpayers, not more.
801They could make a real contribution to cleaner, more productive, and efficient farming and land use, while addressing social needs.
802A Breakthrough Against Hunger
803NEW YORK – Today’s world hunger crisis is unprecedentedly severe and requires urgent measures.
804Nearly one billion people are trapped in chronic hunger – perhaps 100 million more than two years ago.
805Spain is taking global leadership in combating hunger by inviting world leaders to Madrid in late January to move beyond words to action.
806With Spain’s leadership and United Nations Secretary General Ban Ki-moon’s partnership, several donor governments are proposing to pool their financial resources so that the world’s poorest farmers can grow more food and escape the poverty trap.
807The benefits of some donor help can be remarkable.
808Peasant farmers in Africa, Haiti, and other impoverished regions currently plant their crops without the benefit of high-yield seed varieties and fertilizers.
809The result is a grain yield (for example, maize) that is roughly one-third less than what could be achieved with better farm inputs.
810African farmers produce roughly one ton of grain per hectare, compared with more than four tons per hectare in China, where farmers use fertilizers heavily.
811African farmers know that they need fertilizer; they just can’t afford it.
812With donor help, they can.
813Not only do these farmers then feed their families, but they also can begin to earn market income and to save for the future.
814By building up savings over a few years, the farmers eventually become creditworthy, or have enough cash to purchase vitally necessary inputs on their own.
815There is now widespread agreement on the need for increased donor financing for small farmers (those with two hectares or less of land, or impoverished pastoralists), which is especially urgent in Africa.
816The UN Secretary General led a steering group last year that determined that African agriculture needs around $8 billion per year in donor financing – roughly four times the current total – with a heavy emphasis on improved seeds, fertilizer, irrigation systems, and extension training.
817In addition to direct help for small farms, donors should provide more help for the research and development needed to identify new high-yielding seed varieties, especially to breed plants that can withstand temporary flooding, excess nitrogen, salty soils, crop pests, and other challenges to sustainable food production.
818Helping the poor with today’s technologies, while investing in future improved technologies, is the optimum division of labor.
819This investment pays off wonderfully, with research centers such as the International Rice Research Institute and the International Maize and Wheat Improvement Centre providing the high-yield seeds and innovative farming strategies that together triggered the Asian Green Revolution.
820These centers are not household names, but they deserve to be.
821Their scientific breakthroughs have helped to feed the world, and we’ll need more of them.
822Dozens of low-income, food-deficit countries, perhaps as many as 40-50, have elaborated urgent programs for increased food production by small farms, but are currently held back by the lack of donor funding.
823These countries have appealed to the World Bank for financing, and the Bank made a valiant effort in 2008 to help through its new Global Food Crisis Response Program (GFCRP).
824But the Bank does not yet have sufficient funds to meet these countries’ urgent needs, and has had to ration assistance to a small fraction of the flows that could be effectively and reliably used.
825Hundreds of millions of people, in the meantime, remain trapped in hunger.
826Many individual donor countries have declared that they are now prepared to increase their financial support for smallholder agriculture, but are searching for the appropriate mechanisms to do so.
827The current aid structures are inadequate.
828The more than 20 bilateral and multilateral donor agencies for agriculture are highly fragmented and of insufficient scale individually and collectively.
829Despite the dedicated efforts of many professionals, the response to the hunger crisis remains utterly inadequate.
830The 2008 planting seasons came and went with much too little additional help for impoverished small farmers.
831African countries search endlessly, and mostly fruitlessly, for the small amounts of funding needed for their purchases of fertilizer and improved seeds.
832My colleagues and I, serving on an advisory committee for the Spanish initiative, have recommended that donors pool their funds into a single international account, which we call the Financial Coordination Mechanism (FCM).
833These pooled funds would enable farmers in poor countries to obtain the fertilizer, improved seed varieties, and small-scale irrigation equipment that they urgently need.
834Poor countries would receive prompt and predictable financing for agricultural inputs from a single account, rather than from dozens of distinct and fragmented donors.
835By pooling financial resources into a single-donor FCM, aid programs’ administrative costs could be kept low, the availability of aid flows could be assured, and poor countries would not have to negotiate 25 times in order to receive help.
836The time for business as usual is over.
837The donors promised to double aid to Africa by 2010, but are still far off track.
838Indeed, during the past 20 years, they actually cut aid for agriculture programs, and only now are reversing course.
839Meanwhile, a billion people go hungry each day.
840We need a breakthrough that is demonstrable, public, clear, and convincing, that can mobilize the public’s hearts and minds, and that can demonstrate success.
841History can be made in Madrid at the end of January, when the world’s richest and poorest countries converge to seek solutions to the global hunger crisis.
842The lives of the billion poorest people depend on it.
843A Breakthrough Opportunity for Global Health
844NEW YORK – Every year, millions of people die from preventable and treatable diseases, especially in poor countries.
845In many cases, lifesaving medicines can be cheaply mass-produced, but are sold at prices that block access to those who need them.
846And many die simply because there are no cures or vaccines, because so little of the world’s valuable research talent and limited resources is devoted to addressing the diseases of the poor.
847This state of affairs represents a failure of economics and law that urgently needs to be corrected.
848The good news is that there are now opportunities for change, most promisingly through an international effort headed by the World Health Organization that would begin to fix the broken intellectual-property regime that is holding back the development and availability of cheap drugs.
849Two main problems limit the availability of medicines today.
850One is that they are very costly; or, more accurately, the price charged for them is very high, though the cost of producing them is but a fraction of that amount.
851Second, drug development is geared toward maximizing profit, not social benefit, which skews efforts directed at the creation of medicines that are essential to human welfare.
852Because the poor have so little money to spend, drug companies, under current arrangements, have little incentive to do research on the diseases that afflict them.
853It doesn’t have to be this way.
854Drug companies argue that high prices are necessary to fund research and development.
855But, in the United States, it is actually the government that finances most health-related research and development – directly, through public support (National Institutes of Health, National Science Foundation), and indirectly, through public purchases of medicine, both in the Medicare and Medicaid programs.
856Even the part that is not government-financed is not a conventional market; most individuals’ purchases of prescription medicines are covered by insurance.
857Government finances health-care research because improved medicines are a public good.
858The resulting knowledge benefits everyone by stopping epidemics and limiting the economic and human toll of widespread illness.
859Efficiency requires sharing research as widely as possible as soon as it is available.
860Thomas Jefferson compared knowledge to candles: when one is used to light another, it does not diminish the light of the first.
861On the contrary, everything becomes brighter.
862Yet, in America and most of the world, drug prices are still exorbitant and the spread of knowledge is tightly limited.
863That is because we have created a patent system that gives innovators a temporary monopoly over what they create, which encourages them to hoard their knowledge, lest they help a competitor.
864While this system does provide incentives for certain kinds of research by making innovation profitable, it allows drug companies to drive up prices, and the incentives do not necessarily correspond to social returns.
865In the health-care sector, it may be more profitable to devote research to a “me-too” drug than to the development of a treatment that really makes a difference.
866The patent system may even have adverse effects on innovation, because, while the most important input into any research is prior ideas, the patent system encourages secrecy.
867A solution to both high prices and misdirected research is to replace the current model with a government-supported prize fund.
868With a prize system, innovators are rewarded for new knowledge, but they do not retain a monopoly on its use.
869That way, the power of competitive markets can ensure that, once a drug is developed, it is made available at the lowest possible price – not at an inflated monopoly price.
870Fortunately, some US lawmakers are taking a strong interest in this approach.
871The Prize Fund for HIV/AIDS Act, a congressional bill introduced by Senator Bernie Sanders, is just such an initiative.
872His bill also contains an important provision aimed at encouraging open-source research, which would move the current research model away from secrecy toward sharing.
873But, globally, our innovation system needs much bigger changes.
874The WHO’s efforts to encourage broad reforms at the international level are crucial.
875This spring, the WHO released a report that recommends solutions similar to those proposed in the US Senate bill, but on a global level.
876Importantly, the report, “Research and Development to Meet Health Needs in Developing Countries,” recommends a comprehensive approach, including mandatory funding contributions from governments for research on developing countries’ health needs; international coordination of health-care priorities and implementation; and a global observatory that would monitor where needs are greatest.
877In late May, the international community will have a chance to begin implementing these ideas at the WHO World Health Assembly – a moment of hope for public health around the world.
878Reforming our innovation system is not just a matter of economics.
879It is, in many cases, a matter of life and death.
880It is therefore essential to de-link R&D incentives from drug prices, and to promote greater sharing of scientific knowledge.
881For America, the Sanders bill marks important progress.
882For the world, the WHO’s recommendations represent a once-in-a-generation opportunity to remedy a long-standing and egregious inequity in health care, and, more broadly, to set a model for governance of global public goods befitting an era of globalization.
883We cannot afford to let this opportunity pass us by.
884India’s Change of Guard
885SINGAPORE – In August, Raghuram Rajan was appointed Governor of the Reserve Bank of India.
886On one level, this was a routine announcement that many had anticipated – after all, Rajan is arguably the best-known Indian economist of his generation.
887On another level, however, his appointment can be seen as part of a broader generational shift.
888Rajan, just 50, will be the first RBI governor born after India became a republic in 1950.
889Similar changes are taking place in all walks of Indian life, including politics, the arts, sports, and social development.
890And India will be better for it.
891Although the country is one of the youngest in the world, with an average age of just 26 years, until recently aging stalwarts incongruously dominated most fields, from politics to the arts and even business and sports.
892But now younger entrants are rising everywhere, bringing with them energy and new ideas.
893In politics, as the country prepares for next year’s general election, the leading contenders to replace 81-year-old Prime Minister Manmohan Singh are the Bharatiya Janata Party’s Narendra Modi, 62, and Rahul Gandhi, who is just 43.
894Either man would be the first prime minister who was not born in the British Raj.
895The arts were one of the first areas to witness this generational change.
896For a long time, Indian literature, especially in English, was dominated by a clique who wrote mainly for a niche audience and literary recognition.
897Then, a few years ago, a group of young writers – such as Chetan Bhagat and Amish Tripathi, both former bankers – changed the rules of the game by writing for the mass market.
898Rather than write for literary critics, they began to use a simpler language, including Indian turns of phrase.
899They also chose new themes: Tripathi dipped into ancient mythology to write a trilogy about the god Shiva, while Bhagat began to write about the lives of India’s young, upwardly mobile middle class.
900Predictably, the purists pounced and the critics ridiculed.
901But people have bought their books in the millions, and film deals have followed.
902As a result, the market for books has dramatically expanded and publishers have been forced to change their entire business strategies.
903Something similar has happened in the music industry. Previously dominated by a small cabal of singers and music directors, the market has been transformed by TV talent contests, similar to American Idol, which provide a national showcase for the wealth of India’s talent.
904The shows have made participants, some drawn from remote towns, into overnight stars, and many of them have gone on to sign lucrative careers.
905Thanks partly to this parade of new talent, the Indian music industry is experiencing a period of extraordinary innovation and expansion.
906The output of the US and European music industries sounds stale in comparison, owing to a dearth of innovation over the last two decades.
907Generational change has even come to India’s most popular sport – cricket.
908Such was the adulation once heaped upon its aging stars that many of them remained on the national team long past their peak.
909But a mere two years after winning the World Cup in 2011, several members of that victorious team have been replaced – a decision that until recently would have seemed unthinkable.
910India’s social sector has also been transformed.
911Development policy used to be dominated by career activists wedded to socialist-era thinking.
912But the arrival of new faces from the world of business, such as Ashish Dhawan, Jayant Sinha, and Ramesh and Swati Ramanathan, has meant that development issues are at last being assessed according to the problem-solving approach of social entrepreneurs, rather than through the ideological lens of activists.
913Ironically, it is the world of business that remains slow to change.
914The growth of the IT sector in the 1990’s seemed to promise that change would be rapid and far-reaching, but the old business families still dominate.
915There is hope, though.
916Entrepreneurs like Manish Sabharwal of Teamlease, and Binny and Sachin Bansal of Flipkart, an online retailer, are fundamentally changing the way India does business.
917Similarly, Indian academia may be moribund, but new public intellectuals like Pratap Bhanu Mehta have emerged from outside the mainstream.
918Yes, India’s economy has slowed sharply, the rupee has plunged, and scandals and protests dominate the headlines.
919But, behind the gloom, a new generation is taking over, bringing with it fresh ideas and visions for India.
920Absent-Minded Killers
921As a species, human beings have a major self-control problem.
922We humans are now so aggressively fishing, hunting, logging, and growing crops in all parts of the world that we are literally chasing other species off the planet.
923Our intense desire to take all that we can from nature leaves precious little for other forms of life.
924In 1992, when the world’s governments first promised to address man-made global warming, they also vowed to head off the human-induced extinction of other species.
925The Convention on Biological Diversity, agreed at the Rio Earth Summit, established that “biological diversity is a common concern of humanity.”
926The signatories agreed to conserve biological diversity, by saving species and their habitats, and to use biological resources (e.g., forests) in a sustainable manner.
927In 2002, the treaty’s signatories went further, committing to “a significant reduction in the current rate of biodiversity loss” by 2010.
928Unfortunately, like so many other international agreements, the Convention on Biological Diversity remains essentially unknown, un-championed, and unfulfilled.
929That neglect is a human tragedy.
930For a very low cash outlay – and perhaps none at all on balance – we could conserve nature and thus protect the basis of our own lives and livelihoods.
931We kill other species not because we must, but because we are too negligent to do otherwise.
932Consider a couple of notorious examples.
933Some rich countries, such as Spain, Portugal, Australia, and New Zealand, have fishing fleets that engage in so-called “bottom trawling.”
934Bottom trawlers drag heavy nets over the ocean bottom, destroying magnificent, unexplored, and endangered marine species in the process.
935Complex and unique ecologies, most notably underground volcanoes known as seamounts, are ripped to shreds, because bottom trawling is the “low cost” way to catch a few deep sea fish species.
936One of these species, orange roughy, has been caught commercially for only around a quarter-century, but already is being fished to the point of collapse.
937Likewise, in many parts of the world, tropical rainforest is being cleared for pasture land and food crops.
938The result is massive loss of habitat and destruction of species, yielding a tiny economic benefit at a huge social cost.
939After cutting down a swath of rainforest, soils are often quickly leached of their nutrients so that they cannot sustain crops or nutritious grasses for livestock.
940As a result, the new pasture land or farmland is soon abandoned, with no prospect for regeneration of the original forest and its unique ecosystems.
941Because these activities’ costs are so high and their benefits so low, stopping them would be easy.
942Bottom trawling should simply be outlawed; it would be simple and inexpensive to compensate the fishing industry during a transition to other activities.
943Forest clearing, on the other hand, is probably best stopped by economic incentives, perhaps combined with regulatory limits.
944Simply restricting the practice of land clearing probably would not work, since farm families and communities would face a strong temptation to evade legal limits.
945On the other hand, financial incentives would probably succeed, because cutting down forest to create pastureland is not profitable enough to induce farmers to forego payments for protecting the land.
946Many rainforest countries have united in recent years to suggest the establishment of a rainforest conservation fund by the rich countries, to pay impoverished small farmers a small amount of money to preserve the forest.
947A well-designed fund would slow or stop deforestation, preserve biodiversity, and reduce emissions of carbon dioxide the burning of cleared forests.
948At the same time, small farmers would receive a steady flow of income, which they could use for micro-investments to improve their household’s wealth, education, and health.
949Aside from banning bottom trawling and establishing a global fund for avoided deforestation, we should designate a global network of protected marine areas, in which fishing, boating, polluting, dredging, drilling, and other damaging activities would be prohibited.
950Such areas not only permit the regeneration of species, but also provide ecological benefits that spill over to neighboring unprotected areas.
951We also need a regular scientific process to present the world with the evidence on species abundance and extinction, just as we now have such a process for climate change.
952Politicians don’t listen very well to individual scientists, but they are forced to listen when hundreds of scientists speak with a united voice.
953Finally, the world should negotiate a new framework no later than 2010 to slow human-induced climate change.
954There can be little doubt that climate change poses one of the greatest risks to species’ viability.
955As the planet warms, and rain and storm patterns change dramatically, many species will find themselves in climate zones that no longer support their survival.
956Some can migrate, but others (such as polar bears) are likely to be driven to extinction unless we take decisive action to head off climate change.
957These measures are achievable by 2010.
958They are affordable, and in each case would ultimately deliver large net benefits.
959Most importantly, they would allow us to follow through on a global promise.
960It is too painful to believe that humanity would destroy millions of other species – and jeopardize our own future – in a fit of absent-mindedness.
961Making Do With More
962BERKELEY – In the United States, just three out of ten workers are needed to produce and deliver the goods we consume.
963Everything we extract, grow, design, build, make, engineer, and transport – down to brewing a cup of coffee in a restaurant kitchen and carrying it to a customer's table – is done by roughly 30% of the country's workforce.
964The rest of us spend our time planning what to make, deciding where to install the things we have made, performing personal services, talking to each other, and keeping track of what is being done, so that we can figure out what needs to be done next.
965And yet, despite our obvious ability to produce much more than we need, we do not seem to be blessed with an embarrassment of riches.
966One of the great paradoxes of our time is that workers and middle-class households continue to struggle in a time of unparalleled plenty.
967We in the developed countries have more than enough to cover our basic needs.
968We have enough organic carbon-hydrogen bonds to break to provide us with calories; enough vitamins and other nutrients to keep us healthy; enough shelter to keep us dry; enough clothing to keep us warm; enough capital to keep us, at least potentially, productive; and enough entertainment to keep us from being bored.
969And we produce all of it for an average of less than two hours a day of work outside the home.
970John Maynard Keynes was not off by much when he famously predicted in 1930 that the human race's “economic problem, the struggle for subsistence," was likely to be “solved, or be at least within sight of solution, within a hundred years."
971It will take another generation, perhaps, before robots have completely taken over manufacturing, kitchen work, and construction; and the developing world looks to be 50 years behind. But Keynes would have been spot on had he targeted his essay at his readers' great-great-great-great grandchildren.
972And yet there are few signs that working- and middle-class Americans are living any better than they did 35 years ago.
973Even stranger, productivity growth does not seem to be soaring, as one would expect; in fact, it seems to be decelerating, according to research by John Fernald and Bing Wang, economists in the Economic Research Department of the Federal Reserve Bank of San Francisco.
974Growth prospects are even worse, as innovation hits gale-force headwinds.
975One way to reconcile the changes in the job market with our lived experience and statistics like these is to note that much of what we are producing is very different from what we have made in the past.
976For most of human experience, the bulk of what we produced could not be easily shared or used without permission.
977The goods we made were what economists call “rival" and “excludible" commodities.
978Being “rival" means that two people cannot use the same product at the same time.
979Being “excludible" means that the owner of a product can easily prevent others from using it.
980These two traits put a great deal of bargaining power in the hands of those who control production and distribution, making them ideal for a market economy based on private property.
981Money naturally flows to where utility and value are being provided – and those flows are easy to track in national accounts.
982But much of what we are producing in the information age is neither rival nor excludible – and this changes the entire picture.
983The creation of information-age goods is difficult to incentivize; their distribution is hard to monetize; and we lack the tools to track them easily in national accounts.
984The result is an ever-growing discrepancy between what people would be willing to pay for a given service and growth as measured in national statistics.
985In other words, we are producing and consuming much more than our economic indicators suggest – and the creators of many of those products are not being adequately compensated.
986This produces a set of unique problems.
987To ensure that the workers of today and tomorrow are able to capture the benefits of the information age will require us to redesign our economic system to stimulate the creation of these new types of commodities.
988In addition to developing ways to account for this new type of wealth, we will have to develop channels through which demand for a product contributes to the income of its creator.
989Only by finding ways to put true value on the goods we produce will we be able to sustain a middle-class society, rather than one of techno-plutocrats and their service-sector serfs.
990Making Academia Matter Again
991CAMBRIDGE – Academic freedom is a precious commodity, critical to ensure that discovery of the truth is not encumbered by political or ideological forces.
992But this does not mean that intellectuals should hide in academic bunkers that, by protecting us from criticism by “non-experts,” allow ego to flourish and enable a focus on questions that are not actually relevant to anyone else.
993We experts should have to explain ourselves.
994This means, first and foremost, that researchers should be communicating their results in a way that supports accountability and confirms that public funds and education benefits are being used in ways that are in taxpayers’ interests.
995The duty to communicate findings also ensures that the public is educated, not only about the topic itself, but also about the way research actually works.
996Scholarly books and journals often give the impression that the truth is revealed through a neat, orderly, and logical process.
997But research is far from being a pristine landscape; in fact, it resembles a battlefield, littered with miscalculations, failed experiments, and discarded assumptions.
998The path to truth is often convoluted, and those who travel along it often must navigate fierce competition and professional intrigue.
999Some argue that it is better to hide this reality from the public, in order to maintain credibility.
1000For example, in 2014, physicists collaborating on a project known as BICEP2 thought that they had detected gravitational waves from the beginning of the universe.
1001It was later realized that the signal they had detected could be entirely attributed to interstellar dust.
1002Some of my colleagues worried that this revelation would undermine faith in other scientific predictions, such as those involving climate change.
1003But would hiding the truth from the public really do more for scientific and academic credibility than cultivating a culture of transparency?
1004Probably not.
1005In fact, being honest about the realities of research might enhance trust and create more space for innovation, with an informed public accepting that risk is the unavoidable and worthwhile cost of groundbreaking and broadly beneficial discoveries.
1006Another way to ensure that academia continues to innovate in useful and relevant ways is to blur the traditional boundaries among disciplines – the frontiers where invention so often happens.
1007To that end, universities should update their organizational structure, moving away from clearly delineated departments in order to create a kind of continuum across the arts, humanities, and sciences.
1008Students should be encouraged to take courses in multiple disciplines, so that they can weave those lessons and experiences into new patterns of knowledge.
1009To make this process sustainable, universities should ensure that the courses and curricula they offer help students to develop the skills that a fast-changing labor market demands.
1010This means not just creating new curricula today, but also updating them every few years, in order to account for new trends and discoveries in areas ranging from artificial intelligence and Big Data to alternative energy sources and genome editing.
1011Professors, for their part, should approach their job as mentors of future leaders in science, technology, the arts, and humanities, rather than attempting to mold students in their own intellectual image.
1012Of course, the latter approach can be useful if the goal is to advance the popularity of one’s own research program and to ensure that one’s own ideas and perspective endure.
1013But that is not the fundamental mission of academia.
1014The louder the consensus in the echo chambers of academia become, the greater the ego boost for those who inhabit those chambers.
1015But history shows that progress is sometimes advocated by a soft voice in the background, like that of Albert Einstein during his early career.
1016Truth and consensus are not always the same.
1017Diversity of opinion – which implies diversity of gender, ethnicity, and background – is vital to support creativity, discovery, and progress.
1018That is why it is so important for prizes and professional associations to be used not to reinforce mainstream perspectives, but rather to encourage independent thought and reward innovation.
1019This does not mean that all opinions should be considered equal, but rather that alternative views should be debated and vetted on merit alone.
1020We in academia cannot continue to pat ourselves on the back, celebrating our own privileges and failing to look at the world in new and relevant ways.
1021If we are to defend the freedom of our enterprise, we must restore dialogue with the broader public and ensure that the relevance of our work is well understood – including by us.
1022The Closing of the Academic Mind
1023LONDON – I would wager that I have been Chancellor of more universities than anyone alive today.
1024This is partly because when I was Governor of Hong Kong, I was made Chancellor of every university in the city.
1025I protested that it would surely be better for the universities to choose their own constitutional heads.
1026But the universities would not allow me to resign gracefully.
1027So for five years I enjoyed the experience of giving tens of thousands of students their degrees and watching what this rite of passage meant for them and their families.
1028When I came back to Britain in 1997, I was asked to become Chancellor of Newcastle University.
1029Then, in 2003, I was elected Chancellor by the graduates of Oxford University, one of the world’s greatest institutions of learning.
1030So it should not be surprising that I have strong views about what it means to be a university and to teach, do research, or study at one.
1031Universities should be bastions of freedom in any society.
1032They should be free from government interference in their primary purposes of research and teaching; and they should control their own academic governance.
1033I do not believe it is possible for a university to become or remain a world-class institution if these conditions do not exist.
1034The role of a university is to promote the clash of ideas, to test the results of research with other scholars, and to impart new knowledge to students.
1035Freedom of speech is thus fundamental to what universities are, enabling them to sustain a sense of common humanity and uphold the mutual tolerance and understanding that underpin any free society.
1036That, of course, makes universities dangerous to authoritarian governments, which seek to stifle the ability to raise and attempt to answer difficult questions.
1037But if any denial of academic liberty is a blow struck against the meaning of a university, the irony today is that some of the most worrying attacks on these values have been coming from inside universities.
1038In the United States and the United Kingdom, some students and teachers now seek to constrain argument and debate.
1039They contend that people should not be exposed to ideas with which they strongly disagree.
1040Moreover, they argue that history should be rewritten to expunge the names (though not the endowments) of those who fail to pass today’s tests of political correctness.
1041Thomas Jefferson and Cecil Rhodes, among others, have been targeted.
1042And how would Churchill and Washington fare if the same tests were applied to them?
1043Some people are being denied the chance to speak as well – so-called “no platforming”, in the awful jargon of some clearly not very literate campuses.
1044There are calls for “safe spaces” where students can be protected from anything that assaults their sense of what is moral and appropriate.
1045This reflects and inevitably nurtures a harmful politics of victimization – defining one’s own identity (and thus one’s interests) in opposition to others.
1046When I was a student 50 years ago, my principal teacher was a leading Marxist historian and former member of the Communist Party.
1047The British security services were deeply suspicious of him.
1048He was a great historian and teacher, but these days I might be encouraged to think that he had threatened my “safe space.”
1049In fact, he made me a great deal better informed, more open to discussion of ideas that challenged my own, more capable of distinguishing between an argument and a quarrel, and more prepared to think for myself.
1050Of course, some ideas – incitement of racial hatred, gender hostility, or political violence – are anathema in every free society.
1051Liberty requires some limits (decided freely by democratic argument under the rule of law) in order to exist.
1052Universities should be trusted to exercise that degree of control themselves.
1053But intolerance of debate, of discussion, and of particular branches of scholarship should never be tolerated.
1054As the great political philosopher Karl Popper taught us, the only thing we should be intolerant of is intolerance itself.
1055That is especially true at universities.
1056Yet some American and British academics and students are themselves undermining freedom; paradoxically, they have the liberty to do so.
1057Meanwhile, universities in China and Hong Kong are faced with threats to their autonomy and freedom, not from within, but from an authoritarian government.
1058In Hong Kong, the autonomy of universities and free speech itself, guaranteed in the city’s Basic Law and the 50-year treaty between Britain and China on the city’s status, are under threat.
1059The rationale seems to be that, because students strongly supported the pro-democracy protests in 2014, the universities where they study should be brought to heel.
1060So the city’s government blunders away, stirring up trouble, clearly on the orders of the government in Beijing.
1061Indeed, the Chinese authorities only recently showed what they think of treaty obligations and of the “golden age” of Sino-British relations (much advertised by British ministers), by abducting a British citizen (and four other Hong Kong residents) on the city’s streets.
1062The five were publishing books that exposed some of the dirty secrets of China’s leaders.
1063On the mainland, the Chinese Communist Party has launched the biggest crackdown on universities since the aftermath of the killings in Tiananmen Square in 1989.
1064There is to be no discussion of so-called Western values in China’s universities. Only Marxism can be taught.
1065Did no one tell President Xi Jinping and his Politburo colleagues where Karl Marx came from?
1066The trouble these days is precisely that they know little about Marx but a lot about Lenin.
1067Westerners should take a closer interest in what is happening in China’s universities and what that tells us about the real values underpinning scholarship, teaching, and the academy.
1068Compare and contrast, as students are asked to do.
1069Do you want universities where the government decides what it is allegedly safe for you to learn and discuss?
1070Or do you want universities that regard the idea of a “safe space” – in terms of closing down debate in case it offends someone – as an oxymoron in an academic setting?
1071Western students should think occasionally about their counterparts in Hong Kong and China who must fight for freedoms that they take for granted – and too often abuse.
1072The New Brain Drain in Science
1073DUBAI – In December 2013, the Nobel laureate physicist Peter Higgs told The Guardian that if he were seeking a job in academia today, “I don’t think I would be regarded as productive enough.”
1074Having published fewer than ten papers since his groundbreaking work in 1964, Higgs believes that no university would employ him nowadays.
1075Academics are well acquainted with the notion of “publish or perish.”
1076They must publish their work in peer-reviewed journals increasingly often to climb the career ladder, protect their jobs, and secure funding for their institutions.
1077But what happens to scientists and other scholars, such as those in the Middle East, who have different research concerns from – and scant connections to – the professional journals that can make or break an academic/scientific career?
1078Scholars and institutions with high publishing rates in the established journals receive better productivity scores, which translate into bigger rewards, in terms of enhanced careers and greater research funding.
1079Whether the work they are publishing has a measurable impact on their field of study is, sadly, too often a secondary concern.
1080The incentives they face mean that quantity often comes before quality.
1081Academic journals determine the various disciplinary rankings that academic institutions are compelled to climb, which leads institutions to hire and retain only those scholars who can produce at high rates.
1082This has given rise to a deeper, twofold problem: academic journals have become disproportionately influential, and they have placed a premium on empirical research.
1083With respect to the first problem, journals are gradually replacing institutions as the arbiters of quality within academic communities.
1084Scholars in almost any discipline seeking jobs at “A-level” institutions must publish in a select few A-level journals that are seen as gateways.
1085These journals’ editorial boards increasingly privilege positivist theoretical work – meaning research that is based on empirical data analysis.
1086Qualitative research – such as ethnographies, participatory surveys, and case studies – is often designated as suitable only for B- and C-level journals.
1087Academics conducting empirical research have a big advantage over those carrying out qualitative work, because they can use efficient software and powerful computers to test their hypotheses quickly and account for different variables in data sets.
1088This kind of work can be cheaper, too, because a single data set can generate multiple journal articles.
1089To be sure, there is nothing wrong with scientific practices evolving along with technology, or with academics using richer data sets and better software.
1090But adoption of this quantitative approach should not be the single most important criterion for assessing scientific excellence and deciding career trajectories.
1091After all, knowledge is acquired in different ways, and empirical positivism is only one method in a larger epistemological inventory.
1092The positivist trend in science today is particularly problematic for developing countries, where data sets are scarce and often of poor quality.
1093Thus, scientists working in developing countries face a dilemma: either work on rich-world problems for which there is abundant data, or risk career advancement by conducting qualitative work that will not make it into A-level journals.
1094Academics who move from data-rich countries in Europe and North America to data-poor countries in the Middle East and elsewhere often face this problem.
1095As researchers at my institution in Abu Dhabi know, conducting surveys for qualitative research is feasible; but generating rich data from scratch for theory-building research is extremely difficult.
1096At the International Conference on Science and Technology Indicators this year, a French academic researching soil in Africa reported that only 5% of the published work in his field has originated from African researchers.
1097When he dug deeper into his own research, he found that 50% of what he had learned about African soil came from African researchers, who have not or could not publish their work in international academic journals.
1098Countries where English is not the lingua franca are particularly disadvantaged in science, not because they lack academic excellence, but because English-language journals call the shots.
1099Non-English academic journals simply do not command the same attention in the science community.
1100As a result, the scope of research topics that many countries can undertake is limited, and they must struggle to retain scientific talent.
1101This is particularly true in the Middle East, where governments are struggling to diversify their economies, in order to make them more resilient.
1102As English-language empirical-research journals consolidate their hold on the channels that determine whether or not a scientist will have a successful career, developing countries will have to invest heavily in their own data infrastructure to place domestic researchers on a more competitive footing.
1103But even – or especially – if developing countries do make such investments, much will be lost to science.
1104With (mostly) United States-based academic journals reigning over global science, no one has to move to become part of a new brain drain, whereby scientists’ research priorities, problems, and methods gravitate to the dominant positivist epistemology, at the expense of all alternatives.
1105Closing the Financial Services’ Accessibility Gap
1106KAMPALA – Last month, the United Kingdom hosted the first-ever Global Disability Summit to help focus the world’s attention on the needs of people with disabilities.
1107The agenda was packed with topics like building equitable education, ending discrimination, and bringing technology to disabled communities – especially poor countries in the Global South.
1108But one challenge that did not receive the attention it deserved is an often-overlooked component of development policy: access to financial services.
1109This was a missed opportunity – not only for the world’s one billion disabled people, but also for the institutions that should be serving them.
1110Increasing the accessibility of financial services is good for business and economic growth.
1111According to research by Barclays, when customers with disabilities are able to manage their money, economic vulnerability declines and overall economic health improves.
1112Moreover, with more than $1 trillion in disposable income, the so-called disability market is among the biggest potential client bases in the world. In other words, financial-service providers have every reason to cater to people with disabilities.
1113Why, then, are most businesses doing just the opposite?
1114One reason is a lack of awareness.
1115Because people with disabilities typically have less income than their nondisabled peers, service providers have often lacked an incentive to extend support to them.
1116But, with more attention being paid to total market potential, financial institutions are starting to adjust their product lines accordingly.
1117As they do, four issues must be addressed to maximize the benefits for customers with accessibility challenges.
1118First, financial-services companies must work harder to understand the needs of current and future clients.
1119For example, with better data, a bank in a particular market could improve the accessibility of its mobile-banking platforms.
1120This is essentially what happened at Standard Chartered Bank in India last year, when employees developed a voice-assisted system to help visually impaired customers access their accounts online.
1121Good data are also essential to the effectiveness of advocacy groups as they push providers to improve their services.
1122Second, engagement must not stop with innovative products; it must also be extended to the labor market.
1123Simply put, the financial-services industry should hire more people with disabilities by investing in assistive technologies like braille readers and alternative and augmentative communication devices.
1124The need to diversify the workforce is particularly acute in the United States, where one in five people has a disability.
1125Third, people with disabilities must always be included in discussions about how to expand and strengthen financial independence.
1126In 2013, when the Lloyds Banking Group convened a focus group to examine the effects of dementia on customer behavior, engagement with clients led to the charter on Dementia-friendly Financial Services.
1127This innovative document codified how banks should tailor products to clients with cognitive impairments.
1128Future initiatives should follow this collaborative model to ensure that decision-making at all levels is facilitated by human-centered design.
1129And, lastly, governments must commit to addressing this issue, by emulating the action of countries like the UK, which has linked services for the disabled to development funding.
1130With the right support, progress on these complex challenges can be sweeping; for example, at Financial Sector Deepening Uganda, where I work, we are using British aid money to extend financial services to the disabled in rural communities.
1131Our vision is to encourage the emergence of similar programs in many other countries around the world.
1132With 91 countries having already ratified the Optional Protocol to the Convention on the Rights of Persons with Disabilities, it is clear that there is plenty of political support for these initiatives.
1133The challenge now is to turn pledges into action.
1134In the coming decades, the world’s disabled population will grow as medical advances allow people to live longer, healthier, fuller lives.
1135Providing the disabled with access to financial services and products is among the best ways to guard against discrimination and nurture long-term empowerment.
1136Full financial inclusion will come slowly for a community often referred to as the “fastest-growing minority group in the world.”
1137The task for activists, advocates, enlightened business leaders, and policymakers is to highlight the social and economic benefits of success.
1138Surgery for All
1139BOSTON – On a recent trip to India, I hailed a rickshaw that was pedaled, I soon noticed, by a man with a lame leg.
1140It turns out that a few weeks earlier, the driver had been hit by a car while navigating the busy streets of New Delhi.
1141Although he had managed to obtain medication from a local pharmacy for the agonizing pain – probably because his leg was broken – he could spare neither the time nor the money to see a surgeon.
1142This type of tragic calculus is strikingly common.
1143The Lancet Commission on Global Surgery estimates that some five billion people – almost 70% of the world’s population – lack access to safe, affordable surgical and anesthetic care, while 33 million people are saddled with unbearably high health expenses.
1144Not surprisingly, the global poor suffer disproportionately: while low-income countries are home to close to 35% of humanity, they account for just 3.5% of all surgical procedures.
1145One of the biggest obstacles to achieving universal health coverage – which the United Nations has declared a global goal – is financing.
1146And, paradoxical as it may sound, one of the best ways that governments can get the money they need to expand coverage is by making surgery more widely available.
1147Time-sensitive health problems – such as injuries from traffic accidents and pregnancy-related complications – are among the leading causes of death and disability in low- and middle-income countries.
1148But untreated or undertreated conditions requiring surgery also hurt economic productivity.
1149For example, the Lancet study estimated that the failure to improve surgical care in developing countries would translate into $12.3 trillion of lost economic output by 2030.
1150Failure to maintain strong surgical capacity could even undercut economic gains made by middle-income countries, reducing total GDP growth by approximately 2% annually.
1151For many leaders, the common perception is that provision of surgical care is not sustainable or cost-effective.
1152When faced with tough budget choices, governments often favor programs that combat infectious and chronic diseases, leaving people like my rickshaw driver in the lurch.
1153But a growing body of evidence suggests that these views are misplaced.
1154When researchers at the Harvard Medical School analyzed surgical interventions in low- and middle-income countries, they found a remarkable disconnect between economic assumptions and reality.
1155For example, they calculated that money spent on cesarean sections and joint surgeries yields higher returns than spending on the management of HIV or heart disease.
1156To be sure, chronic and infectious diseases need our attention, too; we cannot restructure health systems overnight, nor should we turn our backs on those being treated for non-surgical illnesses.
1157But reforms that focus more attention on the importance of surgery would boost economic productivity and help create more equitable health care for everyone.
1158For starters, health ministries and physician organizations should formally recognize that surgical and anesthetic care are an essential part of universal health coverage.
1159To make this case, health-care providers will need to improve their collection and analysis of data on surgical outcomes, which would increase transparency on mortality and morbidity and strengthen overall accountability.
1160Decisions about how to expand services could be guided by the Lancet commission’s core indicators on “preparedness,” “delivery,” and “impact” of surgical care.
1161Second, to pool risk and guard against cost overruns, countries that are considering universal coverage policies should put surgical care under publicly financed plans.
1162While some funding for expanding surgical services could come from taxation, health-care providers should also explore innovative financing options – such as “social justice models,” whereby people pay according to their means.
1163Finally, to streamline resources and increase surgical capacity, hospitals should explore task-sharing, whereby non-emergency cases are referred to licensed nurses and physician assistants.
1164Longer-term strategies include investing more in medical education to bolster the ranks of doctors and surgeons.
1165The tremendous economic progress that many developing countries have made in recent decades has been largely driven by vibrant, young, and ambitious populations.
1166One of the most effective ways to maintain this growth and development is to ensure access to safe and affordable healthcare – including surgery.
1167While the cost of providing it may be high, the cost of not providing it is even higher.
1168Polluters Must Pay
1169NEW YORK – When BP and its drilling partners caused the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the United States government demanded that BP finance the cleanup, compensate those who suffered damages, and pay criminal penalties for the violations that led to the disaster.
1170BP has already committed more than $20 billion in remediation and penalties.
1171Based on a settlement last week, BP will now pay the largest criminal penalty in US history – $4.5 billion.
1172The same standards for environmental cleanup need to be applied to global companies operating in poorer countries, where their power has typically been so great relative to that of governments that many act with impunity, wreaking havoc on the environment with little or no accountability.
1173As we enter a new era of sustainable development, impunity must turn to responsibility.
1174Polluters must pay, whether in rich or poor countries.
1175Major companies need to accept responsibility for their actions.
1176Nigeria has been Exhibit A of corporate environmental impunity.
1177For decades, major oil companies, including Shell, ExxonMobil, and Chevron, have been producing oil in the Niger Delta, an ecologically fragile environment of freshwater swamp forests, mangroves, lowland rainforests, and coastal barrier islands.
1178This rich habitat supports remarkable biodiversity – or did before the oil companies got there – and more than 30 million local inhabitants, who depend on the local ecosystems for their health and livelihoods.
1179Twenty years ago, the International Union for Conservation of Nature and Natural Resources classified the Niger Delta as a region of high biodiversity of marine and coastal flora and fauna – tree species, fish, birds, and mammals, among other forms of life – and therefore rated it as a very high priority for conservation.
1180Yet it also noted that the region’s biodiversity was under massive threat, with little or no protection.
1181The global companies operating in the delta have spilled oil and flared natural gas for decades, without regard for the natural environment and the communities impoverished and poisoned by their actions.
1182One estimate puts the cumulative spills over the past 50 years at approximately 10 million barrels – twice the size of the BP spill.
1183The data are uncertain: there have been many thousands of spills during this period – often poorly documented and their magnitude hidden or simply unmeasured by either the companies or the government.
1184Indeed, just as BP was being hit with new criminal penalties, ExxonMobil announced yet another pipeline leak in the Niger Delta.
1185The environmental destruction of the delta is part of a larger saga: corrupt companies operating hand in hand with corrupt government officials.
1186The companies routinely bribe officials to gain oil leases, lie about output, evade taxes, and dodge responsibility for the environmental damage that they cause.
1187Nigerian officials have become fabulously wealthy, owing to decades of payoffs by international companies that have plundered the delta’s natural wealth.
1188Shell, the largest foreign operator in the Niger Delta, has been criticized repeatedly for its egregious practices and its unwillingness to be held to account.
1189Meanwhile, the local population has remained impoverished and beset by diseases caused by unsafe air, poisoned drinking water, and pollution in the food chain.
1190Local lawlessness has led to gang warfare and persistent illegal tapping into the pipelines to steal oil, leading to further massive oil spills and frequent explosions that kill dozens, including innocent bystanders.
1191In the colonial era, it was the official purpose of imperial power to extract wealth from the administered territories.
1192In the post-colonial period, the methods are better disguised.
1193When oil companies misbehave in Nigeria or elsewhere, they are protected by the power of their home countries.
1194Don’t mess with the companies, they are told by the United States and Europe.
1195Indeed, one of the largest bribes (a reputed $180 million) paid in recent times in Nigeria was by Halliburton, a company tightly intertwined with US political power.
1196(Dick Cheney went from being Halliburton’s CEO to the US vice presidency.)
1197Last year, the United Nations Environment Program (UNEP) issued a remarkable report on Ogoniland, a major ethnic homeland in the Niger Delta that has been at the epicenter of conflict between local communities and international oil.
1198The report was as scathing as it was scientifically clear.
1199Despite many past promises of a cleanup, Ogoniland remains in environmental agony, impoverished and sickened by the oil industry.
1200UNEP also offered clear and detailed recommendations, including emergency measures to ensure safe drinking water; cleanup activities targeting the mangroves and soils; public-health studies to identify and counteract the consequences of pollution; and a new regulatory framework.
1201The world’s governments have recently agreed to move to a new framework for sustainable development, declaring their intention to adopt Sustainable Development Goals at the Rio+20 Summit in June.
1202The SDGs offer a critical opportunity for the world to set clear, compelling standards for government and corporate behavior.
1203Many major companies, including in the oil industry, have expressed their readiness to support sustainable development goals.
1204Cleaning up the Niger Delta would provide the strongest possible example of a new age of accountability.
1205Shell, Chevron, ExxonMobil, and other major oil companies should step forward and help to fund the necessary cleanup, ushering in a new era of responsibility.
1206The Nigerian government’s own accountability is on the line as well.
1207It is heartening that several Nigerian senators have recently been in the forefront of efforts to strengthen the rule of law in the oil sector.
1208The cleanup of the Niger Delta provides an ideal opportunity for Nigeria, the oil industry, and the international community to show convincingly that a new age has dawned.
1209From now on, sustainable development must not be a mere slogan, but rather an operational approach to global governance and well-being on a strained and crowded planet.
1210Saving Capitalism from Economics 101
1211WASHINGTON, DC – All across the United States, students are settling into college – and coming to grips with “Econ 101.”
1212This introductory course is typically taught with a broadly reassuring message: if markets are allowed to work, good outcomes – such as productivity growth, increasing wages, and generally shared prosperity – will surely follow.
1213Unfortunately, as my co-author James Kwak points out in his recent book, Economism: Bad Economics and the Rise of Inequality, Econ 101 is so far from being the whole story that it could actually be considered misleading – at least as a guide to sensible policymaking.
1214Markets can be good, but they are also profoundly susceptible to abusive practices, including by prominent private-sector people.
1215This is not a theoretical concern; it is central to our current policy debates, including important new US legislation that has just been put forward.
1216One core problem is that market incentives reward self-interested private behavior, without accounting for social benefits or costs.
1217We generally overlook our actions’ spillover effects on others, or “externalities.”
1218To be fair, Econ 101 textbooks do discuss this issue in some contexts, such as pollution, and it is widely accepted that environmental damage needs to be regulated if we are to have clean air, clean water, and limits on other pollutants.
1219Unfortunately, “widely accepted” does not include by President Donald Trump’s administration, which is busy rolling back environmental protections across a broad range of activities.
1220The New York Times counts 76 rollbacks in progress.
1221The thinking behind this policy is straight out of the first few weeks of Econ 101: get out of the way of the market.
1222As a result, there is a lot more pollution – including more emission of greenhouse gases – in America’s future.
1223There is also an even deeper problem.
1224There is a general presumption in Econ 101 that firms should maximize profits, and that this is best for their shareholders and for society.
1225But this notion of “firms” is just a shorthand for people organized in a particular form. People, not firms, make decisions.
1226To understand the nature and impact of these decisions, we need to look closely at the incentives of firms’ senior managers and board members.
1227Since the 1970s, the people who run firms have become much more focused on increasing their compensation, through bonuses, stock options, and the like.
1228There has been a significant rise in the value of shares, most of which are owned by the wealthiest 10% of Americans.
1229At the same time, median wages have barely increased – a dramatic change from the immediate post-World War II period, when productivity increases led to steady wage gains.
1230Today, it is top managers and members of boards of directors in whose interest firms are run.
1231Investors sometimes get a good ride, though there are plenty of instances where insiders take excessive advantage by awarding themselves overly generous compensation, taking on excessive risk, or engaging in other, more devious practices.
1232The idea that compensation committees insist on genuinely impressive performance, relative to relevant benchmarks, has become risible.
1233This is the context in which Senator Elizabeth Warren of Massachusetts is proposing a new Accountable Capitalism Act.
1234Very large companies would need to acquire a federal charter (as opposed to the current state charter arrangements), which would come with specific obligations – in particular, the need to consider the interests of all corporate stakeholders, including workers.
1235To make this more meaningful and generally improve transparency, ordinary (non-management) employees should get some representation on the board of directors.
1236This type of arrangement works well in Germany, a country where workers continue to be treated with respect.
1237Warren also supports a proposal that originated from John Bogle, founder of Vanguard (a mutual fund company), that would require super-majority support from shareholders and directors before a large company could engage in political expenditures.
1238The underlying legal theory behind these proposals is sound, and it is well articulated in a letter signed by Robert Hockett of Cornell Law School and other distinguished figures.
1239Large corporations are granted significant rights, including limited liability for individual executives, and facilitate the pooling of large amounts of capital from people who do not necessarily know one another (or the promoters of the company).
1240Originally, the purpose was to enable the private sector to carry out large-scale risky investments that had broader potential impact, such as building canals and railroads.
1241The US supposedly constrains the activities of large corporations, with the Department of Justice taking action if companies acquire monopoly power or otherwise behave in an anti-competitive manner.
1242Realistically, the enforcement of antitrust law has slipped a long way in recent years, under both Republican and Democratic administrations.
1243Warren is proposing a much broader rethink.
1244Large corporations can still do well, but they need to be held accountable in a much more transparent way.
1245Incentives for executives would be adjusted, and running these companies would no longer be so much about lining their own pockets.
1246Workers would no longer be treated so badly, and more people might even start to believe again in the American Dream of prosperity for all.
1247The legitimacy of capitalism – private ownership and reliance on market mechanisms – would be greatly strengthened under the Accountable Capitalism Act.
1248So, yes, like it or not, this will be on the final exam.
1249A Centerless Euro Cannot Hold
1250CAMBRIDGE – With youth unemployment touching 50% in eurozone countries such as Spain and Greece, is a generation being sacrificed for the sake of a single currency that encompasses too diverse a group of countries to be sustainable?
1251If so, does enlarging the euro’s membership really serve Europe’s apparent goal of maximizing economic integration without necessarily achieving full political union?
1252The good news is that economic research does have a few things to say about whether Europe should have a single currency.
1253The bad news is that it has become increasingly clear that, at least for large countries, currency areas will be highly unstable unless they follow national borders.
1254At a minimum, currency unions require a confederation with far more centralized power over taxation and other policies than European leaders envision for the eurozone.
1255What of Nobel Prize winner Robert Mundell’s famous 1961 conjecture that national and currency borders need not significantly overlap?
1256In his provocative American Economic Review paper “A Theory of Optimum Currency Areas,” Mundell argued that as long as workers could move within a currency region to where the jobs were, the region could afford to forgo the equilibrating mechanism of exchange-rate adjustment.
1257He credited another (future) Nobel Prize winner, James Meade, for having recognized the importance of labor mobility in earlier work, but criticized Meade for interpreting the idea too stringently, especially in the context of Europe’s nascent integration.
1258Mundell did not emphasize financial crises, but presumably labor mobility is more important today than ever.
1259Not surprisingly, workers are leaving the eurozone’s crisis countries, but not necessarily for its stronger northern region.
1260Instead, Portuguese workers are fleeing to booming former colonies such as Brazil and Macau.
1261Irish workers are leaving in droves to Canada, Australia, and the United States.
1262Spanish workers are streaming into Romania, which until recently had been a major source of agricultural labor in Spain.
1263Still, if intra-eurozone mobility were anything like Mundell’s ideal, today we would not be seeing 25% unemployment in Spain while Germany’s unemployment rate is below 7%.
1264Later writers came to recognize that there are other essential criteria for a successful currency union, which are difficult to achieve without deep political integration.
1265Peter Kenen argued in the late 1960’s that without exchange-rate movements as a shock absorber, a currency union requires fiscal transfers as a way to share risk.
1266For a normal country, the national income-tax system constitutes a huge automatic stabilizer across regions.
1267In the US, when oil prices go up, incomes in Texas and Montana rise, which means that these states then contribute more tax revenue to the federal budget, thereby helping out the rest of the country.
1268Europe, of course, has no significant centralized tax authority, so this key automatic stabilizer is essentially absent.
1269Some European academics tried to argue that there was no need for US-like fiscal transfers, because any desired degree of risk sharing can, in theory, be achieved through financial markets.
1270This claim was hugely misguided.
1271Financial markets can be fragile, and they provide little capacity for sharing risk related to labor income, which constitutes the largest part of income in any advanced economy.
1272Kenen was mainly concerned with short-term transfers to smooth out cyclical bumpiness.
1273But, in a currency union with huge differences in income and development levels, the short term can stretch out for a very long time.
1274Many Germans today rightly feel that any system of fiscal transfers will morph into a permanent feeding tube, much the way that northern Italy has been propping up southern Italy for the last century.
1275Indeed, more than 20 years on, Western Germans still see no end in sight for the bills from German unification.
1276Later, Maurice Obstfeld pointed out that, in addition to fiscal transfers, a currency union needs clearly defined rules for the lender of last resort.
1277Otherwise, bank runs and debt panics will be rampant.
1278Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities.
1279A logical corollary of the criteria set forth by Kenen and Obstfeld, and even of Mundell’s labor-mobility criterion, is that currency unions cannot survive without political legitimacy, most likely involving region-wide popular elections.
1280Europe’s leaders cannot carry out large transfers across countries indefinitely without a coherent European political framework.
1281European policymakers today often complain that, were it not for the US financial crisis, the eurozone would be doing just fine.
1282Perhaps they are right.
1283But any financial system must be able to withstand shocks, including big ones.
1284Europe may never be an “optimum” currency area by any standard.
1285But, without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade.
1286Achieving a “Europe of Results”
1287BRUSSELS – The tsunami that has swept across financial markets is a global catastrophe.
1288If handled correctly, however, the crisis may yet raise the esteem of the European Union and its institutions.
1289The EU’s legitimacy problem has two different aspects: apathy, leading to a low turnout in the European parliamentary elections, and outright euro-skepticism.
1290The voter-turnout problem partly reflects frustration about the present state of the EU, and also people’s impression that they can exert little influence by voting one way or the other.
1291Euro-skepticism, on the other hand, and the looming threat of anti-European populism, is directly linked to the idea that the EU is not merely incapable of offering a solution to the crisis, but in fact is part of the problem.
1292So, although the EU represents our best hope of ensuring that Europe is internationally competitive in today’s increasingly difficult environment, it is actually being blamed for globalization.
1293Many people confuse these two aspects of the EU’s legitimacy problem, and believe that somehow turnout in European elections can be increased by pointing out to people how good and important the EU is.
1294But in most cases, this is not possible.
1295At first sight, the easiest answer to the problem of low voter turnout is to give more power to the European Parliament.
1296But if this was the solution, then we would not have had steadily declining turnouts since the high point of 63%, at the first elections to the European Parliament in 1979. After all, since then the EP’s influence and powers of joint decision-making have grown constantly.
1297The trouble is that, EP elections must be “about” something if voters are to be interested, which means they must involve a real choice.
1298And a real choice requires Europe-wide election campaigns by all parties. This would also involve making the choice of the European Commission’s president dependent on the outcome of the EP elections.
1299But, in fact, both of these conditions have already been met; in 2004, Portuguese Prime Minister José Manuel Durão Barroso was appointed President of the Commission because he came from the political organization with the strongest election result, the European People’s Party.
1300And this year’s elections saw a more intensive presence of party organizations at European level than ever before.
1301Instead, I believe that the most important way to reawaken voters’ interest in European elections will be to open up the election of the Commission’s President to them, and create a genuinely Europe-wide political debate during the next election campaign.
1302The Euro-skepticism problem can be tackled only if the Union itself starts to perform better, and is seen to be doing so.
1303That is why in the aftermath of the failed referenda four years ago in France and the Netherlands on the Constitutional treaty, the Commission tried to emphasize the idea of a “Europe of Results” that would seek to convince citizens of its worth through concrete achievements.
1304Given the gravity of the economic crisis, the time has come for the EU to demonstrate its strengths whenever possible.
1305The aim must be not only to win back the hearts of Europeans who have become skeptical, but also to convince them that the Union is indispensable to meeting the challenges Europeans face.
1306Europe’s citizens understand that the relatively small nation-states that make up the EU are no longer able to face these enormous challenges on their own.
1307In Ireland, last autumn’s financial crisis provoked a turnaround in public opinion about the EU, and even in Iceland, although it lies on the periphery of our continent, membership of the EU and the euro have become a priority.
1308European countries have become so interconnected that isolated national measures on issues like financial-market regulation are hopeless.
1309A changing world in which new powers like China and India play an increasingly important role will not wait for Europe to make up its mind.
1310The EU must instead show leadership through its efforts to solve the world’s current problems.
1311As for the European People’s Party, for us the economy is not an end in itself but should serve the people.
1312The economic crisis was caused by shortsightedness and a lack of control in the global financial system. Now we must redefine the role of regulators in financial markets and in the wider economy, for we cannot let the financial sector walk off with the profits and leave taxpayers bearing the losses.
1313That doesn’t mean that we are advocating a move to socialism; we want better and smarter regulation, not regulation for its own sake.
1314We see five keys to recovery:
1315A “Europe of Results” is achievable.
1316It can strengthen the EU’s legitimacy, though, only if policy recommendations such as these, and the successes that result from implementing them, are communicated clearly and effectively to the general public.
1317The Education Roadmap to 2030
1318LONDON – When I visited the Zaatari refugee camp in Jordan earlier this year, I met with children who told me what education means to them.
1319For Syrian youths who have been forced from their homes and have lost everything, education is about more than qualifications or test scores; it embodies their hope for the future.
1320Children like those in Zaatari, and millions of others around the world, are central to the work of the International Commission on Financing Global Education Opportunity, which I joined last September.
1321This commission is committed to the fourth United Nations Sustainable Development Goal, which aims, by 2030, to “ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.”
1322This goal is still a distant prospect for far too many children.
1323With so many development issues demanding our attention, policymakers should bear in mind that education is not just a good in itself; it is also a catalyst for many other development gains.
1324As the old African proverb goes, if you educate a girl, you educate an entire nation.
1325Ensuring access to quality education for children, especially girls, will lead to fewer child marriages and less child labor and exploitation.
1326And education has long-term societal benefits: aside from increased political engagement, educated children contribute intellectual capital and pursue entrepreneurial opportunities when they grow up, boosting economic growth.
1327Tackling the education challenge needs to start from two principles embedded in the goal.
1328First, “for all” means that we must focus on the children who have been left behind.
1329Millions of children are out of school or are receiving a substandard education because of who they are or where they live.
1330According to the UN High Commissioner for Refugees, refugee children are five times more likely to be out of school than other children in the countries to which they’ve been displaced.
1331And in all but two African countries, girls remain less likely than boys to complete a primary education.
1332Getting these children into school will require new approaches that directly address their exclusion and make schooling genuinely accessible and relevant.
1333Second, “quality”: Education must be effective, so that children actually learn.
1334For the 61 million children who are out of primary school, formal education is beyond reach.
1335But, just as urgently, more than one-third of children of primary-school age – 250 million – are not learning the basics, according to the UNESCO Education for All Global Monitoring Report.
1336Half of these children have been in school for at least four years.
1337We must address the barriers to learning, both in the classroom and at home, by improving the quality of teaching and classroom conditions and teaching parents how they can support their children’s education.
1338Upholding these two principles will require increased investment.
1339Last year, UNESCO calculated that governments must double education spending as a share of national income to achieve the 2030 goals.
1340This will require increased revenue from taxation and stronger efforts to collect what’s owed.
1341Donors also need to live up to their aid commitments and target aid more effectively.
1342For example, less than one-third of education aid goes to Africa, even though the region accounts for almost two-thirds of out-of-school children.
1343Moreover, at the moment, education budgets are often regressive, with almost half of spending in the poorest countries allocated to the most educated 10% of the population.
1344Fixing education investment requires action in two key areas.
1345First, we need equitable financing, with more investment in early childhood care and development, where there is the biggest potential for returns.
1346Budgets must be focused on the most excluded children, and primary education must be free at the point of use, so that every child can learn.
1347We also urgently need more transparency and accountability, so that budgets are visible and communities have a say in school governance.
1348Second, we need to strengthen domestic education systems so that governments see themselves as the guarantor of accessible, quality schools for their citizens, rather than abdicating that role to outside development agencies.
1349In particular, we should push for partnerships between government and business to boost domestic resources for education, and eliminate illicit capital flows that deprive governments of the means to fund it, such as tax evasion and money laundering across national borders.
1350With these priorities in mind, the education commission will deliver its recommendations at the UN General Assembly on September 18, when the Secretary-General will receive and act on them.
1351The Education Commission will have succeeded if we are able to leverage the funding and political will to ensure that every child learns, regardless of their income, location, or social status.
1352Our work will not be complete until that happens.
1353Sustaining Progress in Transition Countries
1354NEW YORK – In the World Bank’s most recent “Doing Business” report, half of the Eastern European and Central Asian countries included in the global ranking were among the top 50.
1355As a measure of economic maturity, the report confirms what many in the international development community have long known: the region is ascendant.
1356Over the last decade, the economies of Eastern Europe and Central Asia have recorded spectacular gains, buttressed by ambitious market and public-sector reforms.
1357The question now is how to ensure that this progress – which has tripled the size of the middle class – is sustained.
1358Signs of the region’s social and economic prosperity are everywhere.
1359In Azerbaijan, incomes have increased dramatically in recent decades, and only 5% of the population now lives below the poverty line – down from nearly 50% in 2002.
1360Elsewhere, Estonia is the third country in Europe in startups per person and has one of the fastest Internet speeds anywhere.
1361And from Albania to Kyrgyzstan, e-government systems are allowing more people to connect with critical services through online and electronic portals.
1362But while it is tempting to assume that the region is destined for prosperity, structural bottlenecks continue to slow progress, especially in the Western Balkans, the southern Caucasus, and parts of Central Asia.
1363To maintain momentum in meeting the United Nations Sustainable Development Goals (SDGs) by 2030, leaders must address three key issues.
1364First, the region’s economies need to be strengthened to incentivize smarter, more sustainable growth.
1365For example, fossil-fuel subsidies should be reconsidered, because they discourage investment in energy-efficiency projects, and impede the development of renewable technologies.
1366Similarly, while public financing of pensions and welfare programs is dependent on taxing labor, much of the region currently suffers from high rates of unemployment; in the Western Balkans, there are nearly no jobs, or none at all.
1367Job creation is an urgent challenge for every state in the region.
1368Second, in many countries, the space for civil society is becoming narrower, posing a threat to pluralism and accountability.
1369To prevent conflict and give voice to the region’s marginalized groups, tolerance and respect for human rights must be made essential ingredients of governance.
1370Finally, the region must coordinate on strategies to address the changes that automation and artificial intelligence will bring to the labor market.
1371Leaders in some countries, particularly Belarus, are shifting economic output from heavy manufacturing to technology startups.
1372But authorities everywhere can do more to increase the resilience of their workforces.
1373Fortunately, governments, technology companies, civil-society groups, and journalists recognize the salience of these issues and are working together to build more transparent and accountable institutions.
1374In many countries, heads of government are using the SDGs to guide their national planning and efforts to legislate reforms.
1375The parliaments of several Central Asian countries have even endorsed the SDGs as a development roadmap.
1376Changes like these are helping to translate development ambition into action.
1377In Armenia, the government recently created the world’s first national SDG innovation laboratory, a collaborative effort designed to “accelerate” SDG implementation.
1378Initial research efforts will focus on increasing the country’s tax collection, improving its education system, and boosting its renewable-energy sector.
1379Meanwhile, planning officials in Moldova have used crowdfunding to raise millions of dollars from the diaspora to fund sustainable development projects at home.
1380Revitalization efforts have included the reconstruction of a public plaza in the capital, Chișinău, and the expansion of infrastructure in rural areas.
1381The region’s private sector is also participating actively in sustainable development efforts.
1382From Siemens’ green heating and air conditioning systems to Unilever’s “equal pay for equal work” policy, multinational firms operating in Eastern Europe and Central Asia are embracing sustainability and equality as viable business models.
1383In only a few decades, the people of Eastern Europe and Central Asia have witnessed profound political and economic changes.
1384To capitalize on the development progress already made, countries and organizations must learn from one another, adapting solutions to local conditions.
1385That will be the main topic at the Istanbul Development Dialogues, an annual global gathering organized by the UN Development Programme, this week.
1386As the new UNDP Strategic Plan for 2018-2021 argues, collaboration is a critical component to any sustainable-development strategy.
1387If the measure of a country can be calculated by how easily business is conducted within its borders, the states of Eastern Europe and Central Asia have a bright future.
1388With strong leadership that transforms the region’s economies and modernizes its institutions, the region’s recent gains will not be fleeting.
1389The Achilles’ Heel of Trumponomics
1390NEW HAVEN – Donald Trump’s economic strategy is severely flawed.
1391The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving.
1392This points to a further compression in national saving, making a widening of an already outsize trade gap all but inevitable.
1393That dynamic unmasks the Achilles’ heel of Trumponomics: a blatant protectionist bias that collides head-on with America’s inescapable reliance on foreign saving and trade deficits to sustain economic growth.
1394The Trump administration will not inherit a strong and sound US economy.
1395The pace of recovery since the Great Recession has been running at half that of normal cyclical rebounds – all the more disturbing given the massive size of the contraction in 2008-09.
1396And savings, the seed corn of future prosperity, remain in woefully short supply.
1397The so-called net national saving rate – the depreciation-adjusted sum of business, household, and government saving – stood at just 2.4% of national income in mid-2016.
1398While that’s an improvement from the unprecedented negative saving position in 2008-2011, it remains far short of the 6.3% average that prevailed over the final three decades of the twentieth century.
1399This is important because it explains the pernicious trade deficits that Trump continues to rail against.
1400Lacking in saving and wanting to grow, the United States must import surplus saving from abroad.
1401And the only way to attract that foreign capital is by running massive current-account and trade deficits.
1402The numbers bear this out: since 2000, when national saving fell well below trend, the current-account deficit has widened to an average of 3.8% of GDP – nearly four times the 1% gap from 1970 to 1999.
1403Similarly, the net export deficit – the broadest measure of a country’s trade imbalance – has been 4% of GDP since 2000, versus an average of 1.1% over the final three decades of the twentieth century.
1404Trumponomics has the cause and effect behind this development backwards.
1405It fixates on country-specific sources of the trade deficit, like China and Mexico, but misses the fundamental point that these bilateral deficits are symptoms of America’s far deeper saving problem.
1406Presume for the moment that the US closes down trade with China and Mexico – the first and fourth largest components of the overall trade deficit – through a combination of tariffs and other protectionist measures (including the proposed renegotiation of NAFTA and a Mexican-funded border wall).
1407Without addressing America’s chronic saving shortage, the Chinese and Mexican components of the trade deficit would simply be redistributed to other countries – most likely to higher-cost producers.
1408The result would be the functional equivalent of a tax hike on beleaguered middle-class US families.
1409In short, there is no bilateral fix for a multilateral problem.
1410The US had trade deficits with 101 countries in 2015 – a multilateral problem stemming from a saving shortfall that cannot be effectively addressed through country-specific “remedies.”
1411That’s not to say that America’s trading partners should be let off the hook for unfair practices.
1412But it does mean that there is limited hope for resolving seemingly chronic trade deficits – and the related erosion of domestic hiring traceable to these imbalances – if the US doesn’t start saving again.
1413Alas, this plot is about to thicken.
1414Trumponomics seems likely to exacerbate America’s saving shortfall in the years ahead.
1415Analyses by the Tax Policy Center, the Tax Foundation, and Moody’s Analytics all indicate that federal budget deficits under Trump’s economic plan are headed back toward at least 7% of GDP over the next ten years.
1416Trump’s senior economic-policy advisers, Peter Navarro and Wilbur Ross (Trump's pick for commerce secretary), argued in a position paper in September that these estimates are flawed, because they don’t take into account “growth-inducing windfalls” from regulatory and energy reforms, or the added bonanza that should arise from a sharp narrowing of America’s trade deficit.
1417Indeed, the Navarro-Ross analysis attributes fully 73% of the growth-inducing revenue windfall of Trumponomics to a massive improvement in the overall trade balance over the next decade.
1418Yet, as stressed above, barring a miraculous surge in national saving, this is highly dubious.
1419Creative accounting, long a staple of supply-side economics, has never been more imaginative.
1420Therein lies one of the most glaring disconnects of Trumponomics.
1421Getting tough on trade at a time when national saving is about to come under ever-greater pressure simply doesn’t add up.
1422Even the most conservative estimates of the federal budget deficit suggest that the already-depressed net national saving rate could re-enter negative territory at some point in the 2018-2019 period.
1423That would put renewed pressure on the current-account and trade deficits, making it extremely difficult to reverse the loss of jobs and income that politicians are quick to blame on America’s trading partners.
1424Ironically, in the coming era of negative saving, the US will find itself increasingly dependent on surplus saving from abroad.
1425If the Trump administration takes aim at major foreign lenders – namely, China – its strategy could quickly backfire.
1426At a minimum, there could be an adverse impact on the terms by which America borrows from abroad; that could mean higher interest rates – hints of which are already evident – and ultimately downward pressure on the dollar.
1427And, of course, there is the worst-case scenario of an escalating global trade war.
1428Protectionism, anemic saving, and deficit spending make for an especially toxic cocktail.
1429Under Trumponomics, it will be exceedingly difficult to make America great again.
1430A Clarion Call for Emerging Markets
1431ITHACA – With 2012 underway, it is worth reflecting on how a decade of strong economic growth in emerging markets led to last year’s resounding political transformations.
1432From the dramatic events in the Middle East, to the groundswell of support for the anti-corruption crusader Anna Hazare in India, leaders in emerging markets are getting a clear message from the streets that growth is not everything.
1433They ignore this message at their peril.
1434Emerging-market economies delivered solid growth during the 2000’s, and even survived the global financial crisis without a growth collapse.
1435But the specter of rising corruption is compromising the legitimacy of their economic gains and eroding support for further reforms needed to sustain their growth momentum.
1436Corruption takes many forms, but, in emerging markets, a combination of factors has turned it into a cancer that ultimately topples regimes.
1437Relentless low-level corruption is a major irritant for poor people in many of these countries; indeed, it limits their access to the social services and basic government functions that they often depend upon for their very survival.
1438Another type of corruption involves siphoning enormous sums of money from large-scale projects.
1439In India, for example, the government lost as much as $30-40 billion of much-needed revenue when coveted band spectrum was sold through a rigged auction.
1440For ordinary people, large-scale corruption is less visible, because, while the sums involved are mind-boggling, the costs are not as directly felt as they are in the case of lower-level graft.
1441But the perception of this type of mega-corruption has changed as rapid growth has increased inequality.
1442In countries like China and India, rapid economic growth has lifted a huge number of people out of poverty.
1443But the fruits of globalization and rapid growth have not been evenly shared – the rich become super-rich, even as a large fraction of the population remains destitute.
1444Rising income inequality is hardly limited to emerging markets, but their combination of open corruption and pervasive inequities creates a toxic brew that is undermining support for reforms that would strengthen and consolidate their economic gains.
1445In many emerging markets, a lack of political freedom adds to the combustible mix.
1446The combination of corruption, inequality, and political repression builds up enormous pressure, and there are no institutional channels through which to release it.
1447But freer political regimes are not a panacea.
1448In a democracy like India’s, the politically well-connected benefit from skewed growth, thus increasing the resentment of those left behind.
1449The opportunity to “throw the rascals out” in each election cycle helps to let off some steam, but it does not resolve the problems that are generating it.
1450It is difficult to predict what triggers popular protest, but economic factors are key.
1451For example, rising food prices tend to hurt the poor, especially the urban poor, who spend a large share of their income on food; unlike agricultural workers, they receive none of the benefits of higher food prices.
1452With swelling urban populations, it will become increasingly difficult to keep a lid on these pressures.
1453Some governments have reacted to recent events with political repression, information blackouts, or a combination of authoritarian measures.
1454China, for example, blocked media coverage of the Egyptian protests.
1455The Arab Spring, however, reveals the fragility of repressive political regimes that try to maintain their legitimacy by limiting information flows.
1456The main lesson for dynamic emerging-market countries is that an exclusive focus on GDP growth may ultimately not be good for economic and political stability.
1457Even with rapid increases in national income, if these countries’ leaders do not distribute the benefits fairly, they will become vulnerable to popular discontent.
1458Tackling corruption is critical to improving long-term growth and maintaining social stability.
1459These economies need measures that help to keep the poor out of poverty traps, and that give them realistic opportunities to improve their economic well-being.
1460Such steps include broadening financial markets to give more people access to credit and investment, strengthening social safety nets to protect the economically vulnerable, and improving educational access and quality.
1461These lessons apply equally to advanced economies, which also suffer from rising inequality and subtle forms of corruption.
1462But, for those wealthy economies, restoring decent growth is now the major priority.
1463Emerging markets have a golden opportunity to build on their economic gains and lock in growth and stability by tackling deep-seated problems like corruption.
1464As the past year’s events have shown, the costs of inaction could be calamitous.
1465A Climate Deal is Not Enough
1466AMSTERDAM – During the COP15 climate summit in Copenhagen, world leaders have been negotiating the future of our planet. All the signs suggest that they are unlikely to sign a global climate treaty.
1467The politicians, civil servants, and other participants at the Copenhagen summit have mainly been bombarding each other with numbers.
1468Figures on how much various countries should reduce CO2 emissions, the amount of money they should put up in coming years, the exact nature of their responsibilities, how much temperature increase Earth will be able to endure, and how long we can continue to wait.
1469These are all very important issues.
1470But the mere figures are simply not enough. A different approach to the problem of climate change is needed.
1471The climate issue can only be solved on the basis of shared, deeply felt ethical principles.
1472Humanity has reached a critical moment in Earth’s history, at which peoples and nations will have to recognize their solidarity – with each other and with the Earth – and start acting upon it.
1473Similar to the way world leaders adopted the United Nations Millennium Declaration in September 2000, and embraced the resulting Millennium Development Goals, today’s climate negotiators will have to commit themselves to creating a basis of shared fundamental ethical principles.
1474Such a basis is not hard to find.
1475Its inspiration can be the Earth Charter, which, launched in 2000, was initiated by, among others, former USSR President Mikhail Gorbachev and Wangari Mathaai, who received the 2004 Nobel Peace Prize for her efforts in the Green Belt Movement, a pan-African tree-planting initiative.
1476The climate problem does not stop at borders.
1477In the next few decades, a low-lying country like the Netherlands will need to invest billions of euros to intensify its age-old struggle against rising water.
1478But in many other countries, the water is already flooding over the dikes, both literally and figuratively.
1479Climate change affects particularly those countries that lack the money needed to take adequate measures against rising sea levels, persistent droughts, or devastating storms, even though they had nothing to do with the primary cause of these problems – industrialization in the developed countries.
1480Apart from the necessary, often infrastructural adaptations to survive the effects of climate change, enormous efforts to prevent even worse things from happening are required.
1481Large investments in forestation, agriculture, and energy supply are called for.
1482In devising solutions, the role of women should be the main focus.
1483Women are often the first people who have to address the problem of gaining access to natural resources, and they are capable of playing a major role as pioneers in finding solutions to climate change and the way humankind should adapt to it.
1484In the short term, the world should become a sustainable global society of low CO2 emitters.
1485This is a mission for all humankind, in which patriotic feelings and thinking in terms of power blocs have no place.
1486The pursuit of a sustainable global society of low CO2 emitters requires a tremendous effort.
1487Precisely for this reason, it also requires a broadly shared ethical basis.
1488This would guide the negotiating parties in such a way that they look not only for solutions to a part of the problem, but first and foremost at a comprehensive solution to the entire problem.
1489The climate change issue is too important to be left in the care of politicians.
1490In Copenhagen, it is therefore imperative that not only nation states, but the business community and citizens combine their efforts to save our planet’s climate. That is not only a scientific necessity; it is an ethical imperative.
1491A Communist Party without Communism
1492PRINCETON – Russian President Vladimir Putin’s anointment of Alexander Medvedev to succeed him in what is supposed to be a democratic presidential election next March shows that Russia’s leaders have not changed a whit.
1493It looks increasingly likely that, as under Leonid Brezhnev, we will see the same names in the news for decades to come.
1494According to Gleb Pavlovsky, the Putin regime’s leading ideologist, the current Russian system is perfect in all respects but one: it doesn’t know its enemies.
1495Indeed, it seems as if everyone in the Kremlin is reading Carl Schmitt, the Nazi legal theorist who taught that naming your enemy is the central mission of politics.
1496In the spirit of Schmitt, Putin’s men designated a liberal party, the Union of Right Forces, as their ur-enemy.
1497Its public meetings were broken up by armed police; its leaders arrested and beaten; Putin called its supporters “coyotes.”
1498What is surprising is that this aggressive behavior occurred in response to no visible danger.
1499Oil prices are soaring, as are Putin’s approval ratings.
1500His appointees control everything that matters, from Gazprom to the Central Electoral Committee.
1501Since the pacification of Chechnya with violence and subsidies, the incarceration or emigration of a few financially viable opponents, and the massive “social investments” of recent years, which, under Medvedev’s personal supervision, have bribed the population, no credible force can seriously challenge Putin’s men.
1502Yet their regime is in crisis, and they know it.
1503Russia’s economy is more dependent on gas and oil than ever before.
1504Military reform has been reversed.
1505Despite increasing incomes, Russians are less educated and less healthy than they were when Putin came to power; they still die at a shockingly young age.
1506Russian involvement in world affairs is tainted by poison and corruption.
1507State monopolies undo what private businesses created.
1508With more money, ill-educated bureaucrats hire more ill-educated bureaucrats; as a result, the regime fails to rule the country.
1509The country is unruly, and its rulers know it.
1510So they panic.
1511Putin’s aim was to subject all power to the control of Russia’s security forces.
1512His generation of KGB officers watched the collapse of the Communist Party and all the governmental bodies that it “directed and controlled,” including the KGB.
1513Under Putin, the security service has had its revenge.
1514Its people have become powerful, arrogant, and enormously rich.
1515They have also become disobedient.
1516In 2004, General Viktor Cherkesov, then Putin’s representative in northwest Russia, published an essay that glorified the KGB as the only unspoiled authority in a corrupted country.
1517This essay, more than anything else, defined Putin’s second term.
1518In October 2007, Cherkesov (now chief of one of the most obscure and powerful services, the Federal Anti-Drug Administration) published another essay in which he lamented his colleagues’ degradation: warriors had turned into traders, he complained.
1519Earlier, generals from a competing service, the FSB, had arrested Cherkesov’s deputy for “illegal bugging.”
1520In a public gesture of despair, Cherkesov admitted the failure of Putin’s project to reanimate Russian governance by subordinating it to the security services.
1521Cherkesov’s deputy remains in prison.
1522Most believe that Putin is unable to intervene in his defense.
1523In the absence of Communist Party control, these security officers betrayed their corporate ethic and engaged in horse-trading, applying force when a trade did not go well.
1524That this happens to ordinary Russians is clear; what Cherkesov revealed was that Putin’s circle also confronts this situation.
1525What is to be done when ex-KGB warriors turn their swords and bugs against one another?
1526Cherkesov’s case exemplifies Putin’s nightmare.
1527But if your instincts betray you, you go back to even deeper ones.
1528Now that Putin’s people have left their predecessors’ neo-liberal ideas behind and feel disenchanted with the ex-KGB clique, the task is to recreate an omnipresent political party that controls the security services, the administration, business, and much else.
1529This party will be centralized under personal leadership and will reduce the state to a legal fiction.
1530Preaching nationalism, its managers will believe in their universal competence, as opposed to KGB-style professionalism and corporatism.
1531Boris Yeltsin forbade party cells in state-controlled institutions by decree.
1532Putin’s lawyers will reverse that decision; the party will have cells or committees in every factory, corporation, military unit, university department, etc.
1533Integrated by the leader’s charisma and party discipline, party members will direct and unify the desolated country.
1534This is Putin’s plan.
1535Like former Soviet leader Yuri Andropov, the only other KGB man to rule Russia, Putin will become the party’s general secretary.
1536As in the Soviet era, state and governmental officials will be reduced to party ciphers – the role that President Medvedev will play under General Secretary Putin.
1537And, of course, being General Secretary carries no constitutional term limit.
1538In the end, Putin has what history left him: not ideas, just a faction yearning to consolidate its grip on power.
1539Lenin and Trotsky needed a party to make their ideology a reality; Putin and Medvedev are devising an ideology to solidify their party.
1540It is a bizarre ideology.
1541Accusing warriors of being traders and traders of being thieves, it shuns its Marxist origins.
1542It will subordinate all who really do work – traders, warriors, journalists, and others – to party ideologues whose sole job is to search for enemies.
1543A Confederal Solution for Palestine
1544LONDON – Last month, while in New York City, I happened to be staying in the same hotel as Israeli Prime Minister Binyamin Netanyahu.
1545To accommodate his security needs, the hotel had been converted into a fortress, much like Israel itself.
1546Netanyahu was in the United States for yet another round of Middle East peace talks.
1547The US offered various sweeteners to induce Israel to freeze its West Bank settlement construction for another 90 days.
1548The Israelis refused; another impasse was reached.
1549What, then, might be the prospects of a negotiated peace between two peoples with claims to the same land?
1550The answer is: very poor.
1551All peace efforts since the Oslo accords of 1993 have been based on the “two-state solution,” according to which Israel is supposed to turn over the occupied territories to a Palestinian state, the Palestinians are supposed to renounce any claims on the Jewish state, and everyone is supposed to live happily ever after.
1552A negotiated “land for peace” solution still remains official Western doctrine.
1553As US Secretary of State Hillary Clinton put it in a recent speech, “a just, lasting, and comprehensive peace” has to be based on “two states for two peoples.”
1554Meanwhile, the two main parties to the dispute, Palestine and Israel, are searching for unilateral alternatives to the stymied “peace process.”
1555The Palestinians are pushing for international recognition of their statehood, while the Israelis are using their settlement policy to preempt a Palestinian state.
1556Palestinian President Mahmoud Abbas has said that, if the latest peace talks collapse, he will press for UN recognition of a Palestinian state based on the 1967 borders.
1557This month, Brazil and Argentina recognized “Palestine,” and a cascade of Latin American countries is expected to follow.
1558Abbas is now setting his sights on Europe, and would ask Turkey to serve as a go-between.
1559The game is to use international recognition of an independent Palestinian state to pressure the US to retreat from its almost unconditional support for Israeli policy.
1560Israel’s main concern continues to be security.
1561The official Western doctrine is that Israel’s long-term security depends on the success of the “peace process.”
1562In practice, Israel has been taking other measures to secure its future.
1563Media attention has been focused on the “security wall,” which has certainly succeeded in reducing the level of violence.
1564But, to the hawks who now control Israeli politics, the key to Israel’s security depends on depth of defense, for which expansion of the settlements is indispensable.
1565The hawks’ recipe for survival is threefold: continued military and economic support from the US, defensible frontiers through a strategic settlement program, and the carve-up of the Palestinian West Bank into disconnected bantustans, or subordinate authorities, incapable of concerted opposition to Israeli policy.
1566Thus, while Abbas seeks to create a new “fact on the ground” by drumming up international support for a Palestinian state, Israel aims to trump him by making such a state unviable.
1567The ideal alternative to both strategies is a peace process that aims not to create two states, but rather to establish the political and economic basis for a single confederal state.
1568Indeed, the two-state solution was always an illusion.
1569There was never enough land to satisfy the passionate possessiveness of all those with claims to it.
1570And, over time, Israeli settler disengagement from the West Bank and East Jerusalem has become just as impossible as any attempt by Israel to expel its remaining Arabs.
1571Israeli Jews are bound to stay in the West Bank and East Jerusalem, and Israeli Arabs are bound to stay in Israel proper.
1572These are the “facts on the ground” that doom Palestinian hopes for a sovereign Palestinian state no less than Israeli hopes for a wholly Jewish state.
1573Moreover, land for peace never made sense from an economic point of view.
1574If compensation for wrongs to the Palestinians was to be the guiding principle, there were always better ways of going about it than to found a rickety, poverty-ridden new country dependent on foreign aid.
1575Most people have forgotten that the Paris Protocols of April 1994 established a customs union between Israel and the occupied territories, with a joint Economic Council to adjudicate trade disputes.
1576The free movement of goods, labor, and capital between the two parts could have given a tremendous economic boost to Palestinian GDP.
1577It could also have been the basis of a confederal state, whose Palestinian part would have benefited from the West Bank settlers’ productivity and taxes.
1578But this benign prospect was undermined by the violence needed to maintain the Jewish state and enable the emergence of a Palestinian one.
1579The official view remains that only an internationally guaranteed two-state settlement will bring about the security needed for the economic revival of the Palestinian territories.
1580But it is just possible that unilateral Israeli policy, implicitly backed by the US, will create interim conditions of peace that are sufficient for economic growth to cool Palestinian nationalism.
1581The Palestinian cause is not the overriding preoccupation of even the Arab states, so Netanyahu’s strategy of defense in depth stands a better chance of success than Abbas’s pursuit of statehood through international recognition.
1582Netanyahu’s project is not moral.
1583But that doesn’t mean that it won’t work, at least for a time.
1584A Confederation for Kosovo
1585Time is running out in Kosovo.
1586If a United Nations-backed settlement is not reached by early December, the province’s majority Albanian population is likely to declare independence unilaterally – a move that the United States has announced it may support.
1587That would be a disastrous step.
1588Russia would be furious, because it fears that Kosovo’s secession – whether or not it is internationally recognized – might fuel separatist movements in the former Soviet empire.
1589Serbia is even more strongly opposed.
1590Dusan Prorokovic, Serbia’s state secretary for Kosovo, has said that his country might use force to maintain its sovereignty.
1591Even if the government hesitates, ultranationalist groups might push Prime Minister Vojislav Kostunica to send in troops: the current UN presence in Kosovo is very thin (only 40 “military observers” and 2,116 policemen) but the stationing of 15,000 NATO troops could make any armed clash very dangerous.
1592After eight years of international administration, Kosovo’s Albanian majority has tasted freedom and is eager for full independence.
1593But Serbia claims that the province remains an essential part of its historical and cultural tradition.
1594Moreover, independence would not be accepted by the Serbian public, which has already watched in dismay as “Great Serbia” has been gradually whittled away, most recently with the secession of Montenegro.
1595Serbia is prepared to concede only “enhanced autonomy” to Kosovo, and some capacity to enter into international agreements.
1596Yet, while the two parties now seem irreconcilable, it is not too late for compromise.
1597But this is possible only by resuscitating – and updating – an old institution of the international community: a confederation of states.
1598By means of a binding UN Security Council resolution, Kosovo could be granted full and exclusive authority over its citizens and territory, as well as limited capacity for action on the international scene.
1599It could be authorized to enter into trade agreements as well as agreements concerning individuals (for example, admission and circulation of foreigners, or extradition), plus the right to seek admission to the UN (which does not require full sovereignty and independence).
1600Kosovo would thus gain some essential trappings of statehood.
1601However, a decision-making body consisting of delegates from Kosovo, Serbia, and the European Union would be given full authority over major foreign policy issues (for example, alliances and relations with international economic institutions), defence, borders (in case Kosovo wished to join with Albania), and the treatment of Kosovo’s Serbian minority.
1602As a result, Kosovo and Serbia would constitute two distinct international subjects, bound by a confederation hinging on a common decision-making body.
1603Of course, this confederation would be asymmetrical, because the Serbian government’s sovereignty over the rest of Serbia would remain intact and unlimited, whereas the Kosovar government’s “sovereignty” over Kosovo would be restrained.
1604To avoid one of the two parties getting the upper hand and imposing arbitrary decisions, the common decision-making body should consist of four Serbian delegates, two Kosovar delegates, and three representatives of the EU, thus requiring both sides to gain the support of the European delegates.
1605In addition, the EU should create a small but effective military force (say, 5,000 troops) to back up the common body’s decisions.
1606As with any compromise, the contending parties would both gain and lose from this arrangement.
1607Serbia would save face, and would continue to have a say on crucial matters concerning Kosovo, including the treatment of the Serbian minority.
1608Kosovo would acquire limited independence, with its status rising from a province of a sovereign state to an international subject capable of entering into certain agreements with other states and even joining the UN.
1609The EU would benefit as well, by contributing to the stabilization of a highly volatile area.
1610Subsequently, the EU would monitor Kosovo and prevent any dispute that might turn violent.
1611A final advantage of this solution is that it would be temporary.
1612Historically, confederations sooner or later either become federations (as occurred in the US, Germany, and Switzerland) or, pushed by centrifugal forces, split up (as with the United Arab Republic, established in 1958, which split three years later into Egypt and Syria).
1613The confederation I advocate would thus constitute an intermediate stage (lasting five or ten years), at the end of which Kosovo is likely to become fully independent.
1614Delaying a final solution in this way would provide time to verify Kosovo’s prospects of joining the EU and thus eventually sharing “sovereign authority” with other independent states, which could deflate Kosovars’ dangerously robust nationalistic demands.
1615A Cool Calculus of Global Warming
1616The British government recently issued the most comprehensive study to date of the economic costs and risks of global warming, and of measures that might reduce greenhouse gas emissions, in the hope of averting some of the direst consequences.
1617Written under the leadership of Sir Nicholas Stern of the London School of Economics, who succeeded me as Chief Economist of the World Bank, the report makes clear that the question is no longer whether we can afford to do anything about global warming, but whether we can afford not to.
1618The report proposes an agenda whose cost would be equivalent to just 1% of annual consumption, but would save the world risk equivalent costs that are five times greater.
1619The reported costs of global warming are higher than in earlier studies because it takes into account the mounting evidence that the process of global warming is highly complex and non-linear, with a non-negligible chance that it may proceed much faster than had previously been thought and that the extent of warming may be much greater than had previously been thought.
1620Indeed, the study may actually significantly underestimate the costs: for instance, climate change may lead to more weather variability, a possible disappearance or major shift of the Gulf Stream – of particular concern to Europe – and a flourishing of disease.
1621When I served in 1995 on the Intergovernmental Panel on Climate Change, the scientific group that periodically assesses the science of global warming, there was overwhelming evidence that the concentration of greenhouse gases in the atmosphere had increased markedly since the beginning of the industrial revolution, that human activity had contributed significantly to those increases, and that they would have profound effects on climate and sea levels.
1622But few saw, for instance, the Artic ice cap melting as rapidly as now seems to be the case.
1623Still, some suggest that because we are not certain about how bad global warming will be, we should do little or nothing.
1624To me, uncertainty should make us act more resolutely today, not less.
1625As one scientist friend puts it: if you are driving on a mountain road, approaching a cliff, in a car whose brakes may fail, and a fog bank rolls in, should you drive more or less cautiously?
1626Global warming is one of those rare instances where the scientific community is more fearful of what may be happening than the population at large.
1627Scientists have glimpsed what the future may portend.
1628As the Stern report points out, as usual, the poor are the most vulnerable.
1629A third of Bangladesh will be underwater by the end of this century.
1630The Maldives and a host of Pacific Island states will disappear: our twenty-first-century Atlantis.
1631To an economist, the problem is obvious: polluters are not paying the full costs of the damage they cause.
1632Pollution is a global externality of enormous proportions.
1633The advanced countries might mean Bangladesh and the disappearing island states no harm, but no war could be more devastating.
1634A global externality can best be dealt with by a globally agreed tax rate.
1635This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes.
1636It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.
1637Although President George W. Bush says he believes in markets, in this case he has called for voluntary action.
1638But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill, especially when it comes to oil companies that regard their sole objective as maximizing profits, regardless of the cost to others.
1639Exxon has reportedly been funding so-called think tanks to undermine confidence in the science of global warming, just as the tobacco industry funded “research” to question the validity of statistical findings showing the link between smoking and cancer.
1640Some companies even seem to celebrate the melting of the polar ice cap, because it will reduce the cost of extracting the oil that lies beneath the Arctic Ocean.
1641The good news is that there are many ways by which improved incentives could reduce emissions – partly by eliminating the myriad of subsidies for inefficient usages.
1642The US subsidizes corn-based ethanol, and imposes tariffs on sugar-based ethanol; hidden in the tax code are billions of dollars of subsidies to the oil and gas industries.
1643Most importantly, price signals that show the true social costs of energy derived from fossil fuels will encourage innovation and conservation.
1644Small changes in practices, when replicated by hundreds of millions of people, can make an enormous difference.
1645For example, simply changing the color of roofs in warm climates to reflect sunlight or planting trees around houses can lead to great savings on energy used for air conditioning.
1646We have but one planet, and should treasure it.
1647Global warming is a risk that we simply cannot afford to ignore anymore.
1648A Cool Head for the Hottest Issues
1649LONDON – Reading Barack Obama’s Dreams from My Father, the US president’s beautifully written reflections on his early life and identity, most people are struck by his cool and intellectual approach.
1650This is not to say that he is unemotional.
1651Obama can rage and weep.
1652But he rarely seems to act on the basis of raw sentiment or instinctive prejudice.
1653Pragmatic and highly intelligent, sooner or later every issue receives the full attention of his forensic curiosity.
1654Recalling Hillary Clinton’s famous Democratic primary television advertisement, Obama, it turns out, is exactly the sort of president that most of us would want to have in the post for that 3 a.m. phone call about an international crisis.
1655He would not be afraid to act, but he would be prepared to think first.
1656I do not think, therefore, that Obama will be too vexed by some of the criticism he faces at the end of his first year in office, though he will undoubtedly grimace at the defeat of the Democratic candidate in the special election in Massachusetts to fill Ted Kennedy’s old seat.
1657Obama was praised extravagantly a year ago; 12 months on, the criticism is over the top, too.
1658Obama inherited a terrible legacy – recession, financial meltdown, Iraq, Afghanistan. He has not solved all of these problems.
1659But it is difficult to see any really bad mistakes, except perhaps allowing himself to be pushed around by Israeli Prime Minister Netanyahu and giving China the impression that he was prepared for a bilateral relationship entirely on China’s terms.
1660That seems to be changing now.
1661Obama may have come to understand that when you are the leader of the world’s only superpower, you need to be feared just a little if you are to be respected.
1662The left in America criticizes Obama for not turning the economy around already.
1663The right angrily denounces him as a crypto-communist because he wants every American to have health care.
1664With a dispassionate eye on the long game, what will the president himself be thinking?
1665One issue that Obama is certain to have in his sights is a problem that shadowed the world for years.
1666When I was growing up in the 1950’s and 1960’s, world peace was based on the nuclear standoff between the US and the Soviet Union.
1667The main strategic assessment on both sides of the Berlin Wall was that if either side made a wrong move, all of us might end up consumed in the flames of a nuclear holocaust.
1668This was called, in the geostrategic jargon of the day, “mutually assured destruction,” or MAD. The acronym was entirely appropriate.
1669We have forgotten those days.
1670Yet there are still 23,000 nuclear warheads on our planet, with the explosive power of 150,000 Hiroshima bombs.
1671Terrorist groups would undoubtedly like to get their hands on one.
1672In all, there are eight nuclear-weapon states – the US, Russia, Britain, France, China, Israel, India, and Pakistan.
1673North Korea may also have a few bombs. Iran is believed by many to be trying to develop one.
1674Other states, which have their own civil nuclear capacity, have the potential to develop a weapon. The number of countries in this category is bound to increase as the number of nuclear power reactors doubles over the next 20 years.
1675The Nuclear Non-Proliferation Treaty (NPT) has contained the number of nuclear states.
1676A conference is to be held in May to renew and review it.
1677Obama clearly recognizes that the NPT needs to be strengthened in order to prevent countries from turning their civil nuclear-power capacity into weapons.
1678But Obama also knows that if the existing nuclear states want others to accept tougher restrictions, they will have to cut back their nuclear arsenals.
1679This is principally an issue for the US and Russia, which possess 95% of the world’s nuclear weapons.
1680In addition, it would help if the US could take a strong lead by ratifying the Comprehensive Nuclear-Test-Ban Treaty.
1681The nuclear issue is one of the biggest items on the Obama agenda. How it is handled will help to define his presidency.
1682Even before the talking gets serious in May, there will be the question of Iran to sort out.
1683Iran says that it seeks no more than its own ability to produce nuclear power.
1684Disbelief grows with every revelation of secret Iranian facilities and plans, and with every refusal by Iran to negotiate safeguards that would allow for civil use while preventing weaponization.
1685The US, the European Union, and Russia have tried to engage Iran on this issue, so far without success.
1686China seems likely to block effective sanctions on Iran because of its close energy relationship with the country.
1687How China eventually handles this will profoundly affect its standing in the US and Europe.
1688These are going to be some of the major questions for Obama over the next year and more.
1689If he gets them right, he can forget about his short-term critics.
1690Fortunately, he is smart enough to know this.
1691A Crisis in Full Flight
1692MUNICH – For a while, it looked as if the European Central Bank’s €1 trillion credit program to pump liquidity into Europe’s banking system had calmed global financial markets.
1693But now interest rates for Italian and Spanish government bonds are on the rise again, closing in on about 6%.
1694Of course, this may not be the breaking point beyond which the debt burden becomes unsustainable.
1695After all, interest rates in Southern Europe were well above 10% in the decade before the euro was introduced.
1696Even Germany at that time had to pay bondholders more than 6%.
1697Nevertheless, the markets are clearly signaling growing doubt about whether Spain and Italy will be willing to bear their debt burden.
1698The main problem is Spain, where private and public-sector foreign debt is larger than that of Greece, Portugal, Ireland, and Italy combined, and, as in Greece, is in the neighborhood of 100% of GDP (93% to be precise).
1699A quarter of the labor force and half of Spain’s youth are unemployed, reflecting the country’s loss of competitiveness in the wake of the real-estate bubble inflated by cheap euro credit in the pre-crisis period.
1700The current-account deficit remains at 3.5% of GDP, despite the recession-induced decline in imports, while economic contraction will cause Spain to miss its budget-deficit target again.
1701Moreover, Spain’s debt with the ECB’s TARGET settlement system rose by €55 billion ($72 billion) between February and March, because capital outflows of that amount had to be compensated.
1702Since July 2011, Spain’s TARGET debt has grown by €199 billion.
1703Capital is in full flight, more than offsetting the inflows from 2008-2010.
1704The cumulative total since the beginning of the first crisis year (2008) means that Spain has financed its entire current-account deficit via the printing press.
1705The picture is little better in Italy, where the current-account balance has swung from a surplus of around 2% of GDP to a 3%-of-GDP deficit over the last ten years.
1706The country’s TARGET debt grew by €76 billion from February to March, with the total since July 2011 reaching €276 billion.
1707Italy, too, is being drained of capital; in fact, the flight of investors accelerated after the ECB’s liquidity injection.
1708It is now clear that the ECB itself has caused a large part of the capital flight from countries like Spain and Italy, because the cheap credit that it offered drove away private capital.
1709The purpose of the ECB’s measures was to re-establish confidence and bring about a recovery of the inter-bank market.
1710In this, too, it has not really been successful, despite the huge amount of money that it put on the table.
1711Indeed, now the French are looking wobbly.
1712As capital fled the country between July 2011 and January 2012, France’s TARGET debt increased by €95 billion.
1713France, too, has become uncompetitive, owing to the cheap credit brought by the euro in its initial years.
1714According to a recent study by Goldman Sachs, the country’s price level must drop by an estimated 20% vis-à-vis the euro average – that is, depreciate in real terms – if the economy is to regain competitiveness within the eurozone.
1715Italy will have to depreciate by 10-15%, and Spain by roughly 20%.
1716While Greece and Portugal face the need for deflation totaling 30% and 35%, respectively, the figures for Spain and Italy are high enough to justify fears about the future development of the eurozone.
1717These imbalances can be redressed only with great effort, if at all, and only if one accepts a decade of stagnation.
1718For Greece and Portugal, staying in the eurozone will be a tight squeeze.
1719There are many who would solve the problem by routing more and more cheap credit through public channels – bailout funds, eurobonds, or the ECB – from the eurozone’s healthy core to the troubled South.
1720But this would unfairly force savers and taxpayers in the core countries to provide capital to the South on terms to which they would never voluntarily agree.
1721Already German, Dutch, and Finish savings amounting to €15,000, €17,000, and €21,000, respectively, per working person have been converted from marketable investments into mere equalization claims against the ECB.
1722No one knows what these claims will be worth in the event of a eurozone breakup.
1723Above all, however, the permanent public provision of cheap credit would ultimately lead to a lingering infirmity, if not to Europe’s economic collapse, because the eurozone would become a central management system with state control over investment.
1724Such systems cannot work, because they eliminate the capital market as the economic system’s main steering mechanism.
1725One cannot help but wonder how thoughtlessly Europe’s politicians have started down this slippery slope.
1726A Crisis in Two Narratives
1727CHICAGO – With the world’s industrial democracies in crisis, two competing narratives of its sources – and appropriate remedies – are emerging.
1728The first, better-known diagnosis is that demand has collapsed because of high debt accumulated prior to the crisis.
1729Households (and countries) that were most prone to spend cannot borrow any more.
1730To revive growth, others must be encouraged to spend – governments that can still borrow should run larger deficits, and rock-bottom interest rates should discourage thrifty households from saving.
1731Under these circumstances, budgetary recklessness is a virtue, at least in the short term.
1732In the medium term, once growth revives, debt can be paid down and the financial sector curbed so that it does not inflict another crisis on the world.
1733This narrative – the standard Keynesian line, modified for a debt crisis – is the one to which most government officials, central bankers, and Wall Street economists have subscribed, and needs little elaboration.
1734Its virtue is that it gives policymakers something clear to do, with promised returns that match the political cycle.
1735Unfortunately, despite past stimulus, growth is still tepid, and it is increasingly difficult to find sensible new spending that can pay off in the short run.
1736Attention is therefore shifting to the second narrative, which suggests that the advanced economies’ fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt-fueled spending.
1737More such spending will not return these countries to a sustainable growth path.
1738Instead, they must improve the environment for growth.
1739The second narrative starts with the 1950’s and 1960’s, an era of rapid growth in the West and Japan.
1740Several factors, including post-war reconstruction, the resurgence of trade after the protectionist 1930’s, the introduction of new technologies in power, transport, and communications across countries, and expansion of educational attainment, underpinned the long boom.
1741But, as Tyler Cowen has argued in his book The Great Stagnation, once these “low-hanging fruit” were plucked, it became much harder to propel growth from the 1970’s onward.
1742Meanwhile, as Wolfgang Streeck writes persuasively in New Left Review, democratic governments, facing what seemed, in the 1960’s, like an endless vista of innovation and growth, were quick to expand the welfare state.
1743But, when growth faltered, this meant that government spending expanded, even as its resources shrank.
1744For a while, central banks accommodated that spending.
1745The resulting high inflation created widespread discontent, especially because little growth resulted.
1746Faith in Keynesian stimulus diminished, though high inflation did reduce public-debt levels.
1747Central banks then began to focus on low and stable inflation as their primary objective, and became more independent from their political masters.
1748But deficit spending by governments continued apace, and public debt as a share of GDP in industrial countries climbed steadily from the late 1970’s, this time without inflation to reduce its real value.
1749Recognizing the need to find new sources of growth, towards the end of Jimmy Carter’s presidency, and then under Ronald Reagan, the United States deregulated industry and the financial sector, as did Margaret Thatcher in the United Kingdom.
1750Productivity growth increased substantially in these countries over time, which persuaded Continental Europe to adopt reforms of its own, often pushed by the European Commission.
1751Yet even this growth was not enough, given previous governments’ generous promises of health care and pensions – promises made even less tenable by rising life expectancy and falling birth rates.
1752Public debt continued to grow.
1753And the incomes of the moderately educated middle class failed to benefit from deregulation-led growth (though it improved their lot as consumers).
1754The most recent phase of the advanced economies’ frenzied search for growth took different forms.
1755In some countries, most notably the US, a private-sector credit boom created jobs in low-skilled industries like construction, and precipitated a consumption boom as people borrowed against overvalued houses.
1756In other countries, like Greece, as well as under regional administrations in Italy and Spain, a government-led hiring spree created secure jobs for the moderately educated.
1757In this “fundamental” narrative, the advanced countries’ pre-crisis GDP was unsustainable, bolstered by borrowing and unproductive make-work jobs.
1758More borrowed growth – the Keynesian formula – may create the illusion of normalcy, and may be useful in the immediate aftermath of a deep crisis to calm a panic, but it is no solution to a fundamental growth problem.
1759If this diagnosis is correct, advanced countries need to focus on reviving innovation and productivity growth over the medium term, and on realigning welfare promises with revenue capacity, while alleviating the pain of the truly destitute in the short run.
1760For example, Southern Europe’s growth potential may consist in deregulating service sectors and reducing employment protection to spur creation of more private-sector jobs for retrenched government workers and unemployed youth.
1761In the US, the imperative is to improve the match between potential jobs and worker skills.
1762People understand better than the government what they need and are acting accordingly.
1763Many women, for example, are leaving low-paying jobs to acquire skills that will open doors to higher-paying positions.
1764Too little government attention has been focused on such issues, partly because payoffs occur beyond electoral horizons, and partly because the effectiveness of government programs has been mixed.
1765Tax reform, however, can provide spur retraining and maintain incentives to work, even while fixing gaping fiscal holes.
1766Three powerful forces, one hopes, will help to create more productive jobs in the future: better use of information and communications technology (and new ways to make it pay), lower-cost energy as alternative sources are harnessed, and sharply rising demand in emerging markets for higher-value-added goods.
1767The advanced countries have a choice.
1768They can act as if all is well, except that their consumers are in a funk, and that “animal spirits” must be revived through stimulus.
1769Or they can treat the crisis as a wake-up call to fix what debt has papered over in the last few decades.
1770For better or worse, the narrative that persuades these countries’ governments and publics will determine their future – and that of the global economy.
1771Financing the Next Development Agenda
1772WASHINGTON, DC – As the 2015 target date for the Millennium Development Goals approaches, the United Nations is intensifying its efforts to foster debate about what comes next for promotion of development worldwide.
1773The outcome of these discussions will shape policies and investment aimed at spurring GDP growth, strengthening human capital, and promoting more inclusive prosperity.
1774With the global population expected to reach nine billion people by 2050 – a significant proportion of whom will reside in developing or underdeveloped countries – the international community must improve access to education, health care, and employment opportunities worldwide.
1775Meanwhile, the prospect of a rise in global temperature of more than 2°C (3.6°F) over pre-industrial levels by the end of this century (which would trigger global warming’s most damaging effects) calls for higher investment in sustainable urbanization, climate-smart agriculture, and social safety nets.
1776Both factors challenge us to define, in the longer term, more sustainable patterns of production and consumption.
1777Governments, civil society, and the private sector must rise to the challenge, cooperating to find and implement creative solutions.
1778But, first, they must anticipate the associated financing requirements, which will soon surpass the current capacities of governments and international donors, and take action now to activate new, reliable sources of financing.
1779To start, governments should design targeted, evidence-based policies and support the development of sound institutions.
1780This would make government services more effective, while helping to catalyze additional development aid from traditional donors and mobilize private-sector resources.
1781In many countries, there is considerable scope for domestic resource mobilization.
1782Broadening the tax base, improving tax administration, and closing gaps in the value-added tax could make a significant difference in lower-income countries, where tax revenues account for only about 10-14% of GDP, compared to 20-30% of GDP in high-income countries.
1783More equitable taxation would have a positive impact on governance, another important tool for mobilizing domestic resources.
1784With improved corporate and public governance and clear transfer-pricing policies, resource-rich countries could shore up their capacity to negotiate fair contracts with extractive industries, balance revenues and expenditures over time, and manage their natural endowments more transparently.
1785Progress in these areas would help governments to channel their spending more effectively toward those who would benefit the most.
1786For example, only 8% of the $409 billion spent on fossil-fuel subsidies in 2010 reached the poorest 20% of the population.
1787A targeted support program could increase substantially the efficiency of spending, freeing up resources for education, health, and poverty eradication.
1788Furthermore, promoting financial deepening and inclusiveness could accelerate private-sector growth, creating more opportunities.
1789Indeed, broader access to financial services would help the estimated 400 million micro, small, and medium-size enterprises in developing countries to prosper, while enabling the 2.5 billion people worldwide who currently lack access to such services to build their assets.
1790A deeper and more efficient financial sector would also reduce transaction costs and facilitate risk management.
1791Local-currency bond markets could help to develop domestic investor bases and mobilize domestic savings to support long-term investments.
1792At the same time, the international community should work to improve the availability and effectiveness of official development assistance.
1793The ODA target of 0.7% of GDP – agreed in 2002 at the International Conference on Financing for Development in Monterrey, Mexico – should motivate countries to increase their contributions.
1794They can also take steps to make ODA more predictable from year to year.
1795Donors should structure aid to ensure that it supports sound national development policies and programs, rather than their own narrow interests.
1796This is particularly relevant as emerging development partners, especially the BRICS (Brazil, Russia, India, China, and South Africa), offer new kinds of aid packages that incorporate investment and non-financial assistance.
1797Private charities, which have been instrumental in promoting innovation in fields such as health care, the environment, and education, could provide valuable insight into channeling aid more effectively.
1798More generally, improving coordination among donors would help to maximize the impact of aid on the ground.
1799While ODA remains an important source of financing for fragile and very-low-income countries, it represents only 7% of net financial flows to developing countries, where foreign direct investment, remittances, long-term debt, and portfolio investment have a larger impact.
1800Donors should leverage aid to “grow the pie” and to diversify financing sources for the world’s poorest countries by providing risk guarantees, innovative investment vehicles, debt syndication, and co-financing arrangements.
1801Attracting even a fraction of the assets held by institutional investors, sovereign-wealth funds, and public pension funds could boost development finance substantially.
1802Diaspora populations are another major potential source of development financing.
1803Reducing transfer costs, which average an estimated 9% of the value of transactions, would put more money into the hands of those who need it most.
1804Tailoring financial products for diaspora communities could attract resources for investment, while reinforcing migrants’ ties – economic and otherwise – to their home countries.
1805Finally, the international community bears a special responsibility for delivering global public goods.
1806The responsibility to preserve the environment, stem the spread of communicable diseases, strengthen the international financial architecture, enhance developing-country participation in the global trading system, and facilitate the exchange of knowledge lies at the intersection of national development priorities and global interests.
1807Duty-free, quota-free access to OECD markets, complemented by simpler, more transparent rules of origin, would raise GDP by 1% in the least-developed countries, lifting millions out of poverty.
1808Investment in statistical capacity would help governments and businesses worldwide to make better policy decisions, based on a more accurate accounting of the associated costs and benefits.
1809The challenge of the post-2015 development agenda lies in finding creative solutions to support prosperity, equality, and sustainability.
1810Together, governments, civil society, international organizations, and the private sector can improve the availability and quality of finance for development, and shape a better future for all.
1811A Czech Moment
1812PRAGUE – As I listened to what some Europeans were saying as my country prepared to take over the presidency of the European Union, I heard dim echoes of Neville Chamberlain’s infamous description of Czechoslovakia as “a faraway country of which we know little.”
1813I suppose that Donald Rumsfeld’s misguided bid a few years ago to incite a divide between “new and old” Europe contributed to the re-emergence of that disdainful attitude.
1814The reality is that there is no such thing as “old and new” Europe, and there never was.
1815The break with communism and reunification of Europe is now almost two decades old.
1816We Czechs are 100% European, and were even when the Iron Curtain cut us off from democratic Europe.
1817Indeed, our pro-EU sentiments may be all the stronger because our membership in the Union, like our freedom, is so comparatively new.
1818So no one in Europe needs to fear that the Czech Republic has some nostalgic or idiosyncratic agenda that it wants to impose on the Union.
1819On the contrary, events have imposed an agenda on Europe that we cannot escape and for which solidarity – true union – will be needed.
1820The primary, and most pressing, of the problems we face is the financial and economic crisis that is enveloping the EU.
1821Unfortunately, conditions across the Union will likely worsen before they begin to improve.
1822The type of social unrest recently witnessed in Greece may spread, because the downturn is likely to take a disproportionate toll on Europe’s young people, who are seeking jobs at a time when hard-pressed European businesses will be able to offer them very few.
1823It will fall to the Union, once again, to help transform despair into hope.
1824We Czechs know something about this, as the wrenching economic transition that we underwent in the 1990’s taught us much about how the right policies can break the grip of hopelessness.
1825To contain today’s financial and economic crisis, Europe will also need to continue the cooperation that it has shown up to this point.
1826The very existence of our Union, and particularly of the euro, has already helped to prevent the competitive devaluations and beggar-thy-neighbor policies that ravaged Europe during the 1930’s – the last time the continent faced so brutal an economic downturn.
1827But we cannot be complacent that the forces of national egoism will remain in check.
1828For now, EU governments’ coordinated fiscal stimulus has deprived populists of their usual charge that the EU is indifferent to the fate of individuals.
1829Even more policy coordination will be needed both to confront the crisis and to re-establish EU norms once the storm clouds begin to dissipate.
1830Although it is right that the Stability and Growth Pact has become more flexible in these extraordinary times, its rules did secure a successful first decade for the euro.
1831These rules must eventually be restored intact if Europe is to return to the path of sustainable growth, and a consensus will need to be forged now to make that happen.
1832The second key challenge that we will face during our European presidency is that of Russia.
1833A new Partnership and Cooperation Agreement (PCA) between the EU and the Russian Federation must be negotiated.
1834Those negotiations should have begun seriously last year, but the war in Georgia intervened to put them on hold.
1835Now those talks have resumed, but the background to the negotiations has changed dramatically.
1836Russia’s economy is now in far worse shape than that of EU members.
1837The collapse of world oil and gas prices has wounded Russia’s budget, and lack of investment in the country’s energy sector over the years is now causing the declining production that economists have long predicted.
1838Until now, Russia has cared less about a new PCA than the EU, because two-thirds of Russia’s exports to the Union comprise natural resources, which bring in cash even without the strong rules that a PCA provides.
1839Given the stark changes in economic conditions, however, it is now in Russia’s national interest to reassure international markets that it is a reliable place to do business, for which a new PCA would serve as an ideal signal.
1840Moreover, without a new PCA, individual European countries may feel it necessary to seek even more bilateral agreements with Russia.
1841Indeed, many EU members have been in a race with each other to see who will be Russia’s closest friend in the Union.
1842But the bilateral deals that have emerged from this race sometimes come at the expense of other Union members, and may unbalance relations within the Union as a whole.  Only a rules-based EU framework can provide a firm foundation for both bilateral and Union-wide relations with Russia.
1843Europe’s main strength in foreign policy is not its commitment to a rules-based multilateralism, important as that undoubtedly is, but its unity.
1844When the Georgia crisis erupted, Europe united around a single position on Russia’s withdrawal.
1845It is the Czech Republic’s task, and that of the Swedish EU presidency that will follow our own, to maintain this unity as the PCA negotiations move forward.
1846During the 1990’s, the US and Europe erred in treating Russia with benign neglect.  It would be a mistake for Russia to respond in kind today by seeking to prolong the PCA negotiations in the hope that a possibly more amenable EU president may one day offer softer terms.
1847We, like all EU presidencies, will be representing the wider Union interests when we negotiate.
1848In Praise of Fragmentation
1849LONDON – Emerging markets are back in the spotlight.
1850Investors and banks are suddenly unwilling to finance current-account deficits with short-term debt.
1851South Africa, for example, has had to increase interest rates, despite slow economic growth, to attract the funding it needs.
1852Turkey’s rate increase has been dramatic.
1853For these and other emerging countries, 2014 may prove to be a turbulent year.
1854If volatility becomes extreme, some countries may consider imposing constraints on capital outflows, which the International Monetary Fund now agrees might be useful in specific circumstances.
1855But the fundamental question is how to manage the impact of short-term capital inflows.
1856Until recently, economic orthodoxy considered that question invalid.
1857Financial liberalization was lauded because it enabled capital to flow to where it would be used most productively, increasing national and global growth.
1858But empirical support for the benefits of capital-account liberalization is weak.
1859The most successful development stories in economic history – Japan and South Korea – featured significant domestic financial repression and capital controls, which accompanied several decades of rapid growth.
1860Likewise, most cross-country studies have found no evidence that capital-account liberalization is good for growth.
1861As the economist Jagdish Bhagwati pointed out 16 years ago in his article “The Capital Myth,” there are fundamental differences between trade in widgets and trade in dollars.
1862The case for liberalizing trade in goods and services is strong; the case for complete capital-account liberalization is not.
1863One reason is that many modern financial flows do not play the useful role in capital allocation that economic theory assumes.
1864Before World War I, capital flowed in one direction: from rich countries with excess savings, such as the United Kingdom, to countries like Australia or Argentina, whose investment needs exceeded domestic savings.
1865But in today’s world, net capital flows are often from relatively poor countries to rich countries.
1866Huge two-way gross capital flows are driven by transient changes in perception, with carry-trade opportunities (borrowing in low-yielding currencies to finance lending in high-yielding ones) replacing long-term capital investment.
1867Moreover, capital inflows frequently finance consumption or unsustainable real-estate booms.
1868And yet, despite the growing evidence to the contrary, the assumption that all capital flows are beneficial has proved remarkably resilient.
1869That reflects the power not only of vested interests but also of established ideas.
1870Empirical falsification of a prevailing orthodoxy is disturbing.
1871Even economists who find no evidence that capital-account liberalization boosts growth often feel obliged to stress that “further analysis” might at last reveal the benefits that free-market theory suggests must exist.
1872It is time to stop looking for these non-existent benefits, and to distinguish among different categories of capital flows.
1873Some are valuable, but some are potentially harmful.
1874Foreign direct investment (FDI), for example, can aid growth, because it is long term, involves investment in the real economy, and is often accompanied by technology or skill transfers.
1875Equity portfolio investment may involve price volatility as ownership positions change, but at least it implies a permanent commitment of capital to a business enterprise.
1876Long-term debt finance of real capital investment can play a useful role as well.
1877By contrast, short-term capital flows, particularly if provided by banks that are themselves relying on short-term funding, can create instability risks, while bringing few benefits.
1878What is less clear is the best policy response.
1879Capital controls are invariably porous, and we cannot gain the benefits of free trade and FDI without creating some opportunities for short-term investor positioning.
1880China has not liberalized its capital account, but short-term inflows are now driving stronger upward pressure on the renminbi (and larger offsetting reserve accumulation by the People’s Bank of China) than can be explained by the current-account surplus and FDI flows.
1881A case can thus be made for capital-account liberalization that is based on the impossibility of effective control, not on any supposed benefits.
1882But while perfect policy is unattainable, partly effective controls can still play a useful role if targeted at the interface between short-term inflows and domestic credit cycles.
1883After all, capital inflows cause the greatest harm when they drive rapid increases in credit-financed consumption or real-estate speculation.
1884The required policy response should integrate domestic financial regulation with capital-account management.
1885Tax instruments and reserve requirements that put sand in the wheels of short-term capital inflows should be combined with strong countercyclical measures, such as additional capital requirements, to slow domestic credit creation.
1886The effectiveness of such measures can be undermined if global banks operate in emerging countries in branch form, providing domestic credit financed by global funding pools.
1887But this danger can be countered by requiring banks to operate as legally incorporated subsidiaries, with locally regulated capital and liquidity reserves, and strong regulatory limits on the maturity of their funding.
1888Such requirements would not prevent useful capital flows: global banking groups could invest equity in emerging markets and fund their subsidiaries’ balance sheets with long-term debt.
1889In banking, as in other sectors, investment that combines long-term commitment with skill transfer can be highly beneficial, which implies that foreign banks should be free to compete on the same basis as domestic banks.
1890Neither mandatory subsidiarization nor tax- or regulation-based capital controls will solve all of the problems.
1891But, taken together, they can stem the volatility implied by short-term flows and help to smooth out domestic credit cycles.
1892Much of the financial industry resists such measures, as do the many economists who remain wedded to the old orthodoxy.
1893Renewed capital controls, they claim, would “fragment” the global financial market, undermining its ability to allocate capital efficiently.
1894In the past, policymakers have been at pains to stress that no such fragmentation will be allowed.
1895But we need to be blunt: Free flows of short-term debt can result in capital misallocation and harmful instability.
1896When it comes to global capital markets, fragmentation can be a good thing.
1897The High-Tech, High-Touch Economy
1898LONDON – A recent report revealed that the five richest families in Britain are worth more than the country’s poorest 20% combined.
1899Some of the wealth comes from new business ventures; but two of the five are a duke and an earl whose ancestors owned the fields across which London expanded in the nineteenth century.
1900Urban land wealth is not just a London phenomenon.
1901As Thomas Piketty’s recent book Capital in the Twenty-First Century shows, accumulated wealth has grown rapidly relative to income across the advanced economies over the last 40 years.
1902In many countries, the majority of that wealth – and the lion’s share of the increase – is accounted for by housing and commercial real estate, and most of that wealth resides not in the value of the buildings, but in the value of the urban land on which it sits.
1903That might seem odd.
1904Though we live in the hi-tech virtual world of the Internet, the value of the most physical thing – land – is rising relentlessly.
1905But there is no contradiction: The price of land is rising because of rapid technological progress.
1906In an age of information and communication technology (ICT), it is inevitable that we value what an ICT-intensive economy cannot create.
1907ICT has already delivered remarkable new products and services; but, as MIT’s Erik Brynjolfsson and Andrew McAfee argue persuasively in their recent book The Second Machine Age, the really dramatic changes are yet to come, with robots and software bound to automate out of existence a huge number of jobs.
1908One consequence is the striking phenomenon of huge wealth creation with very little labor input.
1909Facebook has an equity valuation of $170 billion but employs only around 6,000 people.
1910The investment that went into building the software that runs it entailed no more than around 5,000 software engineer man-years.
1911This remarkable technology has helped to deliver increasing average incomes and will continue to do so.
1912But the distribution of that bounty has been very unequal.
1913The lion’s share of the growth has gone to the top half, the top 10%, or even the top 1% of the population.
1914As the better off become richer, however, much of their rising income will not be spent on ICT-intensive goods and services.
1915There is a limit to how many iPads and smart phones one can need, and their price continues to plummet.
1916Instead, an increasing share of consumer expenditure is devoted to buying goods and services that are rich in fashion, design, and subjective brand values, and to competing for ownership of location-specific real estate.
1917But if the land on which the desired houses and apartments sit is in limited supply, the inevitable consequence is rising prices.
1918Urban land is therefore rising in value – in London, New York, Shanghai, and many other cities – partly because of consumer demand.
1919But its rising value also makes it an attractive asset class for investors, because further price increases are expected.
1920Moreover, returns on real estate have been swollen by the dramatic fall in interest rates over the last 25 years, a decline that was far advanced even before the 2008 financial crisis.
1921The cause of those low interest rates is debated; but one probable factor is the reduced cost of business investment in hardware and software-based “machines.”
1922If you can build a $170 billion company with just 5,000 software engineer man-years, you don’t need to borrow much money.
1923The fact that technology is so powerful not only makes physical land more valuable; it also means that future employment growth will be concentrated among the jobs that cannot be automated, particularly in services, which have to be delivered physically.
1924The US Bureau of Labor Statistics estimates that among the most rapidly growing occupational categories over the next ten years will be “healthcare support occupations” (nursing aides, orderlies, and attendants) and “food preparation and serving workers” – that is, overwhelmingly low-wage jobs.
1925In short, ICT creates an economy that is both “hi-tech” and “hi-touch” – a world of robots and apps, but also of fashion, design, land, and face-to-face services.
1926This economy is the result of our remarkable ability to solve the problem of production and automate away the need for continual labor.
1927But it is an economy that is likely to suffer two adverse side effects.
1928First, it may be inherently unstable, because the more that wealth resides in real estate, the more the financial system will provide leverage to support real-estate speculation, which has been at the heart of all of the world’s worst financial crises.
1929Major changes in financial and monetary policy, going far beyond those introduced in response to the 2008 crisis, are required to contain this danger.
1930Second, unless we deliberately design policies that encourage and sustain inclusive growth, a highly unequal society is virtually inevitable, with rising land values and wealth magnifying the effects of the unequal income distribution that ICT produces directly.
1931Indeed, the modern economy may resemble that of the eighteenth century, when the land owned by the Duke of Westminster and the Earl of Cadogan was still just fields to the west of London, more than the middle-class societies in which most developed countries’ citizens’ grew up.
1932The Trade Delusion
1933LONDON – Since 2008, global trade has grown slightly more slowly than global GDP.
1934The Doha Round of World Trade Organization negotiations ended in failure.
1935Transatlantic and transpacific trade negotiations are progressing slowly, held back by the resistance of special interests.
1936But, though many experts fear that protectionism is undermining globalization, threatening to impede global economic growth, slower growth in global trade may be inevitable, and trade liberalization is decreasingly important.
1937To be sure, for 65 years, rapid trade growth has played a vital role in economic development, with average advanced-economy industrial tariffs plummeting from more than 30% to below 5%.
1938The creation of Europe’s single market facilitated increased intra-European trade.
1939Japan, South Korea, and Taiwan achieved rapid economic catch-up on the basis of export-led growth.
1940China has followed the same path over the last 30 years.
1941Trade grew about twice as fast as global output from 1990 to 2008.
1942But there is no reason why trade should grow faster than GDP forever.
1943Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods.
1944Several factors make it possible that we are entering such a period.
1945For starters, there is the changing pattern of consumption in the advanced economies.
1946Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services).
1947Non-tradable sectors tend to account for a growing share of employment and economic activity.
1948For several decades, that tendency has been offset by ever more intensive trading of tradable goods, often passing through many countries in complex supply chains.
1949In the future, however, the shift to non-tradable consumption may dominate.
1950Indeed, trade intensity may decline even for manufactured goods.
1951Trade is partly driven by differences in labor costs.
1952China’s dramatic manufacturing growth reflected low wages up to now.
1953But as real wages in China and other emerging economies grow, incentives for trade will decline.
1954The more that global incomes converge, the less trade there may be.
1955In addition, as the economists Erik Brynjolfsson and Andrew McAfee of MIT have argued in their book The Second Machine Age, rapid advances in information technology may enable increasingly extensive automation.
1956Some manufacturing activities, though few jobs, may well return to developed countries, as the advantages of proximity to customers and lower transport costs outweigh decreasingly important differences in labor costs.
1957Global trade as a share of GDP may therefore decline, but without adverse consequences for global economic growth.
1958Rising productivity does not require relentlessly increasing trade intensity.
1959Earth, after all, does not trade with other planets, yet its economy still grows.
1960Optimal trade intensity depends on many factors – such as relative labor costs, transport costs, productivity levels, and economy-of-scale effects.
1961Trends in these factors might make reduced trade intensity not only inevitable but desirable.
1962Even if that is true, international trade will still play a vital role, and preventing any reversal of past trade liberalization is essential.
1963But further trade liberalization is bound to be of declining importance to economic growth.
1964With industrial tariffs already dramatically reduced most potential benefits of trade liberalization have already been grasped.
1965Estimates of the benefits of further trade liberalization are often surprisingly low – no more than a few percentage points of global GDP.
1966That is small compared to the cost of the 2008 financial crisis, which has left output in several advanced economies 10-15% below pre-crisis trend levels.
1967It is small, too, compared to the difference in economic performance between successful catch-up countries – such as China – and other countries that have enjoyed the same access to global markets but have performed less well for other reasons.
1968The main reason for slow progress in trade negotiations is not increasing protectionism; it is the fact that further liberalization entails complex trade-offs no longer offset by very large potential benefits.
1969The Doha Round’s failure has been decried as a setback for developing countries. And some liberalization – say, of advanced economies’ cotton imports – would undoubtedly benefit some low-income economies.
1970But full trade liberalization would have a complex impact on the least developed economies, some of which would benefit only if compensated for the loss of the preferential access to advanced-economy markets that they currently enjoy.
1971This implies that further progress in trade liberalization will be slow.
1972But slow progress is a far less important challenge to growth prospects than the debt overhang in developed economies, or infrastructure and educational deficiencies in many developing economies.
1973That reality often goes unacknowledged.
1974The importance of past trade liberalization has left the global policy establishment with a bias toward assuming that further liberalization would bring similar benefits.
1975But while the potential global benefits of trade liberalization have declined, reduced trade intensity might still impede economic development in some countries.
1976Only a handful of economies over the last 60 years have fully caught up to advanced-economy living standards, and all relied on export-led growth to drive productivity and job creation in manufacturing.
1977Relying solely on that model will be more difficult in the future.
1978China is so big that it must develop domestic drivers of growth at an earlier stage of development than did Japan, Taiwan, or South Korea; as a result, its exports will inevitably decline (relative to GDP).
1979Meanwhile, for some low-income countries, increased manufacturing and service-sector automation of the sort described by Brynjolfsson and McAfee, whether within advanced economies or within China’s established industrial clusters, will make the path to middle- and high-income status more difficult to achieve.
1980That poses important challenges for development policy, which further trade liberalization can alleviate only marginally.
1981Rethinking the Monetization Taboo
1982LONDON – Now that the pace of the US Federal Reserve’s “tapering” of its asset-purchase program has been debated to death, attention will increasingly turn to prospects for interest-rate increases.
1983But another question looms: How will central banks achieve a final “exit” from unconventional monetary policy and return balance sheets swollen by unconventional monetary policy to “normal” levels?
1984To many, a larger issue needs to be addressed.
1985The Fed’s tapering merely slows the growth of its balance sheet.
1986The authorities would still have to sell $3 trillion of bonds to return to the pre-crisis status quo.
1987The rarely admitted truth, however, is that there is no need for central banks’ balance sheets to shrink.
1988They could stay permanently larger; and, for some countries, permanently bigger central-bank balance sheets will help reduce public-debt burdens.
1989As a recent IMF paper by Carmen Reinhart and Kenneth Rogoff illustrates, advanced economies face debt burdens that cannot be reduced simply through a mix of austerity, forbearance, and growth.
1990But if a central bank owns the debt of its own government, no net public liability exists.
1991The government owns the central bank, so the debt is to itself, and the interest expense comes back to the government as the central bank’s profit.
1992If central bank holdings of government debt were converted into non-interest-bearing perpetual obligations, nothing substantive would change, but it would become obvious that some previously issued public debt did not need to be repaid.
1993This amounts to “helicopter money” after the fact.
1994In 2003, then-Fed Chairman Ben Bernanke argued that Japan, facing deflation, should increase public expenditure or cut taxes, funding the operation by printing money rather than issuing bonds.
1995This, he argued, was bound to increase national income, because the direct stimulative effect would not be offset by concern about future debt burdens.
1996His advice was not followed; large Japanese deficits were in fact bond-financed.
1997But the debts held by the Bank of Japan (BoJ) could still be written off.
1998In Japan’s case, this would reduce government debt by an amount equal to more than 40% of GDP today, and around 60% if implemented after the bond purchases planned for 2014.
1999Objections focus on two risks: central-bank losses and excessive inflation.
2000But both of these outcomes can be avoided.