Emerging Markets | Council on Foreign Relations

International Organizations

Could the BRICS Bank Make China More Responsible?

Below is a guest post by Isabella Bennett, assistant director of the International Institutions and Global Governance program. Last weekend’s World Bank and International Monetary Fund (IMF) meetings took place under a flurry of questions about their new “competition:” the BRICS development bank and contingency fund. In July, the BRICS bloc (Brazil, Russia, India, China, and South Africa) established these new institutions as parallels to the World Bank and IMF. While neither of the BRICS institutions is likely to be fully functional soon, the BRICS bank is more likely to launch in the near term, which is prompting concern that the “New Development Bank” (the BRICS bank’s official name) will undermine the World Bank’s longstanding efforts to foster good governance alongside economic development. Despite the inevitable challenges and moral conundrums of judging which countries and programs deserve financing, at least the World Bank attempts to protect human rights and the environment. With the BRICS bank, all bets are off. Or so the theory goes. There are plenty of reasons to be cautious about the new BRICS bank. China is clearly the group’s economic powerhouse and will almost certainly wield disproportionate power over the institution’s decisions. Indeed, for precisely this reason, there was significant resistance within the other four BRICS countries to basing the bank in China. But China ultimately won the argument. The BRICS bank will be based in Shanghai. The episode suggests that, among the bank’s governors, China will be the first among equals. And China’s investment record is far from spotless. As Chinese activity in developing countries spanning the globe—from Myanmar to Sudan to Peru—has surged, so has criticism of Chinese investement practices. Though some of this condemnation is misleading or exaggerated, other charges are valid. Chinese companies operating outside of China have been reported to hire primarily Chinese laborers, whom they abuse and pay next to nothing—forcing locals to work for a pittance or forego opportunities with Chinese firms—undercutting Beijing’s argument that the investment is “win-win.” For example, in their book, China’s Silent Conquest, Juan Pablo Cardenal and Heriberto Araujo document the callous response from the Chinese embassy in Gabon to two workers who had fled conditions akin to slavery at a Chinese company operating in the Central African nation. When the two laborers sought assistance, they were turned away and instructed not to talk to the media. A lawsuit in China failed to punish the company or the boss who had abused the workers. Moreover, Chinese businesspeople, accustomed to operating in a national economy where corruption is pervasive, often have little compunction about behaving similarly abroad. Chinese companies are notoriously opaque, conduct business with some the world’s most brutal regimes (most famously with Omar al-Bashir of Sudan), and have been known to bribe authorities from oppressive governments. Indeed, officials from China National Petroleum Corporation (CNPC) told Cardenal and Araujo that they regard corruption as a price of doing business in places like Turkmenistan, one of the world’s most repressive countries. CNPC even includes these bribes on its balance sheets. Beyond feeding cycles of corruption, such practices can endanger human lives, both in China and abroad. In Sichuan province, cheap construction of schools contributed to the deaths of more than one thousand children. In Angola, a Chinese-built hospital that relied on shoddy materials and workmanship closed only months after it opened. Even in Brazil, one of Beijing’s partners in the BRICS development bank, Chinese companies have engaged in questionable practices. Last year, while I was investigating Chinese investment in Brazil, several sources confirmed that a Brazilian subsidiary of Chongqing Grains, a Chinese state-owned company, had illegally bought two farms. It did so despite a Brazilian prohibition on foreign purchases of large farms, legislation passed specifically to prevent Chinese companies from doing so (according to lawmakers I interviewed). As I describe in Carta Internacional(in English), the China Development Bank likely funded the project, while then-President Hu Jintao and Dilma Rousseff personally signed the deal—but with the explicit provision that Chongqing Grains would rent the land, not buy it. Western companies are not immune to corruption, of course. But thanks to civil society movements, as well as legislation like the Foreign Corrupt Business Practices Act, U.S. companies risk punishment for abuse abroad or under-the-table deals, both at the hands of consumers and the U.S. government. The same is generally true for corporations headquartered in members of the Organization for Economic Cooperation and Development (OECD), which has a Common Standard for Transparency. The World Bank, meanwhile, adheres to strict procurement and consultant guidelines, and maintains a detailed list of firms that have been known to violate laws. Thanks to such activism and oversight, U.S. and other Western corporations face potentially significant economic and legal sanctions for corrupt practices. And the effects, in terms of reduced abuses, have been real. In China, in contrast, publicly criticizing a major Chinese foreign investment can be downright dangerous. Thus, it is reasonable that many are concerned about a development bank that China will lead in practice (if not in name). Ironically, however, the New Development Bank may actually help improve China’s engagement with developing countries. To begin with, Chinese authorities have begun to improve their investment practices. Their motives may be pure, or they may simply recognize that their country has a serious global image problem. Thanks to perceptions of corruption, China has become a convenient target around the world for protectionism and nationalist rhetoric. This threatens China’s “going-out strategy,” which aims to expand overseas investment to secure natural resources, promote Chinese exports, and help China’s multinational companies grow. On his tour of Africa last year, Xi Jinping’s speeches sought to confront the widespread perception that China is in Africa merely to rob resources by emphasizing partnership and cooperation with African partners. Perhaps more importantly, setting up the BRICS bank will force China to debate development challenges with its cofounders. To be sure, Russia is unlikely to be in the vanguard of anti-corruption efforts, but it is also unlikely to regard the development practices as important enough to bother fighting them. But India, Brazil, and South Africa (to a lesser extent) are all inclusive democracies where citizens openly—and loudly—criticize the government, demand better governance, and press for sound development policies. China’s experience in Brazil, in particular, shows that there is hope for improvement in Beijing’s development policies. Over the past five years, Brazil successfully reformed China’s investment approach. Local and federal authorities carefully negotiated with Chinese investors to ensure that projects hired local laborers under fair conditions—as well as strategically pushed China to focus more on investing in sectors outside natural resources. Lastly, Chinese investors have gradually grown accustomed to negotiating legitimate deals under local rules. In the BRICS bank, Brazil is likely to continue pushing China to improve its investment practices. Finally, the New Development Bank will force the BRICS to address complaints from other developing countries. As the IMF and World Bank failed to pass reforms to integrate rising powers, it was easy for the BRICS to join the chorus of criticism against the West. But as leaders of a development bank themselves, the BRICS will increasingly become a target of criticism from borrowers, and feel pressure to improve development practices. Investment in developing countries from the BRICS—and especially from China—will continue growing at a fast clip. Perhaps a development bank that forces them to debate investment practices among one another—and opens them up to more criticism—is actually an opportunity.

Blog Post by Guest Blogger for the Internationalist October 15, 2014 The Internationalist
Emerging Markets

Food Security and the Need for Responsible Investment Guidelines

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Gregory Myers, director of private sector engagement at Cloudburst Group and former division chief for the Land Tenure and Property Rights Division at the U.S. Agency for International Development. Over eight hundred million people in the world do not have enough to eat. In fact, hunger kills more people every year than malaria, AIDS, and tuberculosis combined. But feeding the world’s growing population cannot be achieved through government action and public resources alone. Instead, governments and international organizations should encourage responsible investment in agriculture from a wide range of private sector actors, particularly those with large land-based investments. Coca-Cola and PepsiCo, both based in the United States, have already begun reviewing their supply chain processes and are doing more to foster responsible investment. In Europe, Unilever, Nestlé, and Rabobank are also working to address challenges related to “land grabbing.” Yet governments and the private sector need to do more. Achieving genuine progress on this front will require coordination by a variety of actors. It is encouraging that many groups—NGOs, companies, international donors, and governments—are now focused on this issue. In August, the UN Committee of World Food Security (CFS) negotiated a long sought-after set of global principles to guide responsible investment in agriculture (RAI), mainly for application in emerging economies. Although the ten RAI principles are not without controversy, the document marks an important step toward reducing food insecurity for women, men, and children while promoting sustainable economic growth. Paired with another set of principles, the Voluntary Guidelines for the Responsible Governance of Tenure of Land, Fisheries, and Forests, the RAI can facilitate clear, transparent, and predictable rules, laws, and policies that secure property rights and promote investment in ways that both benefit local populations and contribute to global economic growth. Together, these principles could dramatically improve the nature and outcomes of global development efforts by changing both how investment in agriculture in emerging economies takes place and, most importantly, who benefits from these investments. These principles complement other investment guidelines, such as the UN’s Guiding Principles on Business and Human Rights. Protecting land and resource rights is essential to responsible investment, the fight against hunger, and economic growth. With secure property and resource rights, local people and communities are granted new economic opportunities: they can rent out land to prospective investors or enter into joint ventures with them. In addition, when people believe their land and resource rights are secure, they are more likely to invest in their property, which can increase crop yields and thereby improve household incomes and reduce hunger and food insecurity. Respecting and protecting these rights can also benefit investors by reducing the financial and reputational risks of investing in economies with weak property rights systems. Implementing these principles and turning good ideas into real change requires more than setting guidelines. Therefore, world leaders, international donor organizations, civil society, and the private sector should create an independent, multi-stakeholder platform to develop practical tools to make the promise of the RAI and the guidelines for responsible governance a reality. An example of such a platform is the Kimberley Process, which prevents trafficking in conflict diamonds. A multi-stakeholder platform could develop a gold standard industry certification, which would set clear expectations for how investors should conduct business with respect to land in emerging economies. These standards would also empower civil society to monitor investments in a more systematic way and allow consumers to reward companies that behave responsibly and pressure those that do not. Next, policymakers should experiment with models at the local level to create more profitable investment relationships between commercial and smallholder farms that result in better food security, nutrition, and economic outcomes for all. These could be piloted through country-level, multi-stakeholder partnerships similar to those launched under the Group of Eight (G8) last year. Finally, this multi-stakeholder platform should improve information sharing and learning by establishing common data standards and procedures that allow information to be compared and shared more easily. The time is ripe to capitalize on the growing investor interest in agriculture and the movement to develop more responsible investment models, and thus achieve powerful results for local people and communities. Through concentrated efforts, responsible agricultural investments can drive local economic growth and propel millions out of extreme poverty.

Blog Post by Guest Blogger for Women Around the World September 15, 2014 Development Channel
Development

Unlocking the Potential of Women Entrepreneurs

This post is from Isobel Coleman, Council on Foreign Relations (CFR) senior fellow and director of the Civil Society, Markets, and Democracy initiative, and Dina Habib Powell, global head of corporate engagement at Goldman Sachs and president of the Goldman Sachs Foundation. A staggering six hundred million new jobs are needed globally over the next fifteen years to keep employment rates at their current level. This is especially daunting given slowing global growth rates. One bright spot in this enormous challenge is a powerful, and often overlooked, source of job creation: women entrepreneurs. In the United States, women-owned businesses account for approximately 16 percent of all jobs in the economy, and with women graduating from university at higher rates than men, that percentage is expected to grow in coming years. Governments around the world are beginning to wake up to the economic benefits of women’s empowerment. Kathy Matsui of Goldman Sachs first wrote about "womenomics" in 1999 when she advocated that Japan could increase GDP by as much as 15 percent by tapping the potential of women. Fifteen years later, Prime Minister Shinzo Abe has made greater female workforce participation the cornerstone of his strategy to accelerate the Japanese economy and has proposed new policies that will address childcare, tax distortions, and female representation in government. In most economies, significant barriers inhibiting women from reaching their full potential remain. A recent International Monetary Fund paper shows a GDP per capita loss as high as 27 percent in some regions as a result of not fully engaging women in the labor force. In certain countries, the loss is even bigger. The IMF paper estimates that in Egypt, for example, raising women’s workforce participation rate to that of men would lift the country’s GDP by more than a third. Globally, gains in women’s participation in the labor force have stalled; women continue to work in lower paying and less productive sectors than men; and there are still laws in many countries that restrict women’s movements and choices. A World Bank study shows that almost 90 percent of the 143 economies researched still have at least one legal restriction on women’s economic opportunities, including seventy-nine economies that restrict the types of jobs women can perform. There is also a lack of role models to inspire more women to join the workforce and change societal attitudes. In addition, women are less likely than men to know other entrepreneurs and more likely to have weaker professional networks. Finally, access to capital remains a significant constraint to engaging women productively in the world economy. The International Finance Corporation (IFC) estimates that 70 percent of women-owned SMEs in the formal sector in developing countries lack access to capital, resulting in a global financing gap of $285 billion. In 2008, Goldman Sachs launched the 10,000 Women initiative to address the constraints facing women entrepreneurs in emerging markets by providing them with business training, mentoring, and networking opportunities. A new evaluation of the program conducted by Babson College, and released at the Council on Foreign Relations today, demonstrates that targeted interventions can indeed help women grow their businesses and create jobs. The study found that nearly 60 percent of graduates created new jobs, on average more than doubling the size of their workforce. Eighteen months after graduation, nearly 70 percent of the women had increased revenues, and the average growth across all participants was 480 percent. The potential to replicate these results on a broader scale by providing more women with greater access to business training, mentoring, networking, and capital is enormous. Goldman Sachs 10,000 Women is expanding its efforts and has recently launched a new partnership with IFC, a member of the World Bank Group, to create the first ever global finance facility dedicated to women entrepreneurs. The facility will enable approximately one hundred thousand women entrepreneurs around the world to access capital and grow their businesses. With 126 million women starting or running businesses in sixty-seven economies around the world, improving their growth prospects will reverberate throughout the global economy and ultimately lead to healthier, safer, and more prosperous communities—for everyone.

Blog Post by Isobel Coleman September 10, 2014 Development Channel

Economics

China Chooses Growth Over Reform

The Wall Street Journal piece on rapid credit growth in China yesterday describes the sharp tradeoff for the Chinese government: achieving growth targets in the near term comes at the expense of reform delays and further rapid debt accumulation. With growth likely to decelerate in 2015 without additional stimulus, the prospects for meaningful economic reform are receding. I’ve explored this tradeoff in my July Global Economics Monthly (here). Imposing hard budget constraints, tightening credit, recognizing losses, and addressing massive excess capacity in real estate, raw materials and other sectors is disruptive in the short term, and as long as growth is falling short of government targets the hard decisions are likely to be deferred. If it takes a crisis to force change, I argue in the GEM that the smooth rebalancing scenarios that China optimists predict will be at risk.

Blog Post by Robert Kahn July 18, 2014 Macro and Markets
India

Bringing India Inside the Asian Trade Tent

The new Indian government, led by the Bharatiya Janata Party, has outlined trade as a national priority. But economic ties between the United States and India have soured recently, with both sides entrenched in acrimonious market-access complaints. Coming at a time when the United States and India have differences over post-2014 Afghanistan, Pakistan, and other regional security issues, the absence of a once-strong economic ballast matters. To reestablish a constructive economic dialogue with India at just the time a new government takes charge in New Delhi, the United States should champion India's long-pending request for membership in the Asia-Pacific Economic Cooperation (APEC) forum as a step toward eventual inclusion in the Trans-Pacific Partnership (TPP). Membership alone would not eliminate bilateral frictions, but would provide a good opening to resolve concerns and revitalize ties. Growing Commercial Ties, Growing Frictions India has the world's tenth-largest economy in nominal terms and the third largest based on purchasing-power parity, a measure of gross domestic product (GDP) incorporating relative costs and inflation. Not long ago, U.S. economic ties with India—which began to open its markets following a foreign reserves crisis in 1991—were minimal. That has changed; U.S.-India trade in goods and services grew from $15 billion to nearly $100 billion over the past fifteen years, and two-way investment has increased rapidly. Growing business ties during the 2000s propelled Washington and New Delhi closer. Yet U.S.-India trade remains well below its potential—a little more than one-tenth of U.S.-China trade in goods, the scale of Taiwan or the Netherlands. Worse, in the last three years, disputes over issues such as Indian barriers to U.S. poultry and dairy imports, local content requirements (especially in solar energy), intellectual property protections, and investment limits have become major sources of friction. The United States has initiated three disputes with India in the World Trade Organization (WTO). India has its own countercomplaints about temporary worker visas and nonrefundable social security contributions. In 2013 the atmosphere deteriorated sharply when exasperated U.S. businesses, industry associations, and members of Congress began urging more aggressive action. In 2014, the U.S. International Trade Commission held hearings on India at Congress's request, and the U.S. Trade Representative's office reviewed India for Special 301 Priority Foreign Country designation, with a further out-of-cycle review in the fall. This all-sticks, no-carrots approach has achieved little with India, which sees these processes as illegitimate and outside the WTO. Getting back on track with India will require something positive to collaborate on, so a clear signal of U.S. support for India's bid would be beneficial. Finally, collaboration can be helpful in and of itself: while the U.S.-India civil nuclear initiative has yet to yield the commercial benefits many supporters expected, the deal improved the two countries' ability to work on nonproliferation, which had previously been the most intractable aspect of the bilateral relationship. The Case For APEC Membership Support for India's APEC membership request might seem intuitive. India desires entry and has been waiting for nearly twenty years since its first request. Yet India has been on the outside even prior to the forum's moratorium on new members declared in 1997, which expired in 2010. Action on new requests writ large remains stalled amid indecision among APEC members about enlargement, especially over selection of a broader multiregional slate of new members. For U.S. interests, further delay on considering India is both a strategic and tactical mistake. India is expanding its economic ties across Asia and Latin America, embarking on numerous trade agreements with Asian countries and the Association of Southeast Asian Nations (ASEAN), and joining the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) effort, in which the United States does not participate. APEC membership would embed India in the premier organization promoting free trade and economic cooperation in Asia, an organization that sets norms also shared by the United States. Indian membership would provide an incentive to continue economic liberalization. An India within APEC—responsible for upholding its commitments—would likely ameliorate some of the market-access concerns troubling U.S.-India economic ties. APEC's technical groups, which align with several of the areas of U.S.-India friction, hold expert-level consultations within the multilateral framework. With its "green goods" goal, APEC's energy working group promotes eliminating barriers in clean energy trade and services, such as the removal of local content requirements, a live issue between the United States and India. All APEC member economies craft annual action plans toward APEC's Osaka Action Agenda goals of "free and open trade and investment," covering tariffs, nontariff barriers, services, investment, standards, intellectual property rights, and other issues. Member economies peer review action plans. India would reject such a transparency exercise bilaterally, but it prizes the role of multilateral institutions and seeks to uphold the norms of those in which it is part. Its relationships with such institutions do not provoke concerns about strategic autonomy in the way that bilateral relationships sometimes do. For this reason alone, APEC would provide a substantial assist to managing bilateral frictions, complementing the adversarial approaches inherent to the WTO. Most importantly, India has demonstrated responsiveness to its multilateral commitments. India remains a tough WTO negotiator, but joining the organization substantially changed the country. It lowered tariffs and implemented intellectual property–rights protections to meet WTO requirements, including amending its patent law after adhering to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. India updated its domestic export controls to harmonize with global norms as it works to join the global nonproliferation regimes. In these cases, global organizations provided incentives to make tough political choices at home that bilateral negotiations did not. The effects have not been instant, but were realized in the WTO case within a decade, and in the nonproliferation case within five years. India seeks APEC membership fully aware of its requirements, so entry would significantly affect the way India approaches its own commitments to free and open trade. It would also build confidence for considering future Indian membership in the TPP. Indeed, the Confederation of Indian Industry has begun preparing a roadmap for what India could do to be eligible for the TPP's demanding terms. APEC would be a helpful stepping-stone. There is no financial cost to the United States for supporting India's APEC membership request. But there will be diplomatic costs: the membership moratorium closed the door after Russia, Vietnam, and Peru joined in 1998, so consideration of any new member spurs talk about the need for "balance" from all APEC regions, such as Latin America and Southeast Asia. Although there appears to be no specific objection to India—all but four APEC member economies already have, or are pursuing, trade agreements with India bilaterally or multilaterally, including China—the balance quest bogs down any conversation about India. Balance is a laudable goal, but should not delay consideration of India's case; the economies of Panama or Cambodia, for example, should not be debated as if they were comparable to India's. (For example, using World Bank 2012 GDP figures, India's GDP is $1.8 trillion; Panama's is $36 billion; and Cambodia's is $14 billion—50 and 128 times smaller than India, respectively.) U.S. leadership will be needed to nudge the twenty other members to focus on the special opportunity India presents. It is, however, doable—especially compared to the far more challenging diplomacy needed in 2008 to secure an exemption for India from the forty-two-member Nuclear Suppliers Group. If the United States decides to advocate strongly for India, it could achieve success within a year or two. Some critics worry that India may not be ready for APEC membership, or that Indian membership may hinder consensus decisions within APEC. These concerns stem from well-documented tough negotiating postures India has taken in the Doha Round and the Bali trade facilitation talks. APEC is not a binding negotiating forum, however, but an organization focused on transparency and peer consultation to meet open trade goals. The merits of APEC lie in providing a set of shared norms to help orient India toward greater openness in step with the region. Including Asia's second-fastest-growing economy, a colossus in its own right, in this consultative forum far outweighs any potential losses to efficiency once India joins the table. Without India, the forum cannot represent the Asia-Pacific economy. Getting Back on a Positive Track: Next Steps Successfully championing India's bid for APEC membership will require deft diplomacy. As the U.S. government's lead agency for APEC, the Department of State should coordinate support for India's membership bid and commit to working closely with India. To be most effective and sensitive to India's needs, Washington and New Delhi should be fully aligned on strategy, process, and talking points at all times. The secretary of state should call his counterpart with the proposal, as a sign of the importance the U.S. government places on one of India's long-standing goals. In coordination with India, the United States should execute the following steps: Convey U.S. support for India's bid for APEC membership to the host country. With China as the 2014 APEC forum host, the secretary of state should express to China the U.S. intention to back India's membership bid, in preparation for the many upcoming coordination meetings among senior officials before the November summit. Instruct U.S. ambassadors in all APEC member economies and aspirants to convey the U.S. decision to support India's bid. The East Asia, Europe, and Western Hemisphere bureaus in the State Department should mobilize support from all current APEC member economies, informing aspirants subsequently. Identifying champions of Indian membership will help advance the bid. Assistant secretaries can follow up with phone calls; undecided members should receive sub-cabinet-level calls. Arguments supporting India's APEC bid should be provided to every U.S. official at the deputy assistant secretary–level and higher for every appropriate meeting. Include specific instructions in démarche and senior officials' talking points to separate deliberation on additional members from discussion of India. Should member economies fail to reach agreement on a broader slate of new members, as has been the case for years, the United States should propose to postpone deliberation over other candidates to a later date, to prevent India's case from stalling further. Consult the business advisory group and seek input. The State Department should consult the APEC Business Advisory Council (ABAC) on India, given Indian businesses' participation in ABAC's chief executive summit. First points of contact should be the U.S. members (Caterpillar, Eli Lilly, and Qualcomm) and the ABAC secretariat. By supporting India's long-standing request as a new trade-oriented government takes charge in New Delhi, Washington can take an important step toward reorienting economic ties with India just as they become more important. The opinions and characterizations in this memo are those of the author and do not necessarily reflect the opinions of the U.S. government.

Policy Innovation Memorandum by Alyssa Ayres June 25, 2014
Middle East and North Africa

Segovia: A New Player in Cash Transfers

For several years now I’ve been following the progress of an innovative new philanthropy: GiveDirectly. Its cofounders, Michael Faye and Paul Niehaus, started the organization in 2008 while doing their PhD’s in economics at Harvard. Their idea was simple. Given mounting evidence that cash transfers are among the most efficient and effective ways to address poverty (and that the poor know very well what to do with money), why not start a charity that skips the rigmarole of providing services to poor people in poor countries and just gives them cash? Satellite imagery allowed GiveDirectly to efficiently and objectively identify the poorest in their chosen test sites in rural Kenya–those living in huts with only thatched roofs. The spread of mobile payments via cell phones provided a reliable and inexpensive way to distribute money. Committed to measuring results every step of the way, GiveDirectly collaborated with Innovations for Poverty Action (IPA) to conduct a randomized control trial and have been transparent with the results. And so far, those results have been impressive: recipients increased their assets and income significantly; their food security and mental health improved; violence against women fell. GiveDirectly achieved these results with an expense ratio of roughly seven percent–far less than what most NGO’s spend. “We want cash transfers to be the benchmark against which everything else is judged,” says Niehaus. Not surprisingly, GiveDirectly has gone from success to success, winning accolades and raising millions from the likes of Google and Good Ventures. But despite these gains, and talk about scaling the organization to disperse billions, it wasn’t clear to me how they were going to evolve from reaching a few thousand recipients now to their lofty goal of reaching millions. With their announcement today of the formation of a for-profit spin-off company, I’m beginning to see the way. The new company is called Segovia after one of the largest aqueducts of the Roman Empire–an engineering feat that carried water for two thousand years. Segovia’s founders hope the name will evoke “good governance.” Essentially, the company will build out a technology platform to make cash transfers efficiently to millions of people, with its eye on governments and other institutions as clients. Undoubtedly, Segovia’s potential market is enormous. A World Economic Forum report estimates that government cash transfers to the unbanked in emerging markets are nearing $550 billion. India’s cash transfer program to workers alone is $14 billion. Already, approximately a billion people are reached by cash transfers in emerging markets, and that figure is only likely to grow as research continues to demonstrate their efficiency and effectiveness at poverty alleviation. Segovia’s goal is to partner with governments and other institutions to streamline those cash transfers–to make the process better, faster, cheaper. The same World Economic Forum report estimates that the potential savings of migrating government cash transfer payments onto a digital platform could be as high as $100 billion. This includes reducing the leakage, transaction, and administrative costs of existing programs and realizing the economic benefits of greater ease and safety for recipients. Michael Faye, who will head up Segovia as CEO, believes that the sophisticated modeling behind GiveDirectly, and the insights they’ve gained by working in the field on cash transfers, give them a distinct advantage in building out the platform and becoming the partner of choice for governments looking to more efficiently manage their cash transfer programs or to start one. Already, Segovia has put together an impressive management team. Chris Hughes, one of the cofounders of Facebook and now publisher and editor-in-chief of the New Republic, will serve as the company’s executive chairman. When we chatted recently about Segovia, Hughes stressed that he was planning to devote significant time to the new endeavor. The opportunity to push the world’s collective thinking on the potential of cash transfers, combined with the attractive market opportunity, is clearly a winning combination for Hughes. Investor Arif Naqvi, founder and CEO of the Abraaj Group, will also play an active role in Segovia–no doubt helping to open doors to governments around the world. GiveDirectly will remain a separate non-profit, albeit with close ties to for-profit Segovia. The charity will continue to be run by Paul Niehaus, who will also sit on Segovia’s board (and Faye and Hughes on GiveDirectly’s board), and it will be a minority shareholder in the new company. It will probably continue to function as an important idea lab, undertaking innovative test cases that governments would be reluctant to do without more data and proven results. Despite the cofounders’ best efforts to rationalize the decision to move into the for-profit space (namely, that a non-profit structure would hinder their work with governments and their march to scale), I’d be surprised if some controversy doesn’t accompany Segovia’s founding. There will be the inevitable brickbat of “selling out.” And with the higher financial stakes, there will certainly be deeper scrutiny of the unconditional cash transfer model which has already generated some grumbling. But I applaud the move. Other examples of non-profits spinning off into for-profits demonstrate that it can be an effective way to attract the capital and talent necessary to get to scale. Unconditional cash transfers are a big idea in poverty alleviation: if Segovia can help build the infrastructure to allow more efficient transfers, while scrupulously measuring impact and learning from those evaluations, the world will be better off for it. So what if a couple of economists get rich along the way?

Blog Post by Isobel Coleman June 20, 2014 Development Channel

International Organizations

Ukraine: Now Comes the Hard Part

Petro Poroshenko’s convincing first-round victory in yesterday’s Ukrainian presidential elections, with 54 percent of the vote, is an important step toward political stability. But hard work lies ahead, as attention now returns to the even-more-daunting task of restoring economic stability. Remember that the political crisis of the last six months began as an economic crisis and had its origins in decades of failed economic policies. Massive fuel subsidies going disproportionately to the wealthy, widespread corruption, and distorted markets all contributed to the rot. These policies were reflected in an overvalued exchange rate, large sustained budget deficits, a rising current account deficit, and a falling foreign exchange reserves. Former President Yanukovych’s decision to accept $12 billion from Russia and repudiate the EU association agreement in late 2013 was an effort to delay the inevitable economic crisis that Ukraine now confronts. The IMF stepped in with a $17 billion reform package at the end of April designed to both provide emergency financing and begin the process of reform. Actions taken prior to IMF approval of its program included floating the exchange rate, an initial increase in energy prices, some other budget measures, and steps to address corruption. While necessary, the additional austerity implied by these measures represents a burden on an economy already in recession. So far, the government has sustained support for pro-Western policies despite the clear economic pain involved. Goodwill towards the new regime, and perhaps the unifying effect of the threat from Russia, have limited opposition to these measures outside of southeast Ukraine. But the new President will have to move quickly to address a number of economic challenges if yesterday’s political achievement is going to translate into a more enduring stability. These include: 1. Reaching agreement with Russia on energy and debt. Attention has focused on Russia’s threat to cut off gas deliveries on June 1, but equally important is the price that Ukraine pays. The IMF assumes agreement is reached with Russia on a price for gas in line with global prices at $385/mcm (thousand cubic meters). It also assumes gas arrears and debt service are paid. A slightly higher or lower price would be handled through an adjustment to IMF financing, but a significantly higher price for gas would outstrip Western financing and raise serious concerns about fiscal and debt sustainability. 2. Accelerate the financial and trade flows from the West. The West has actually contributed little relative to headline promises so far, though Europe has accelerated trade benefits from the still-to-be–signed association agreement. The $17 billion pledged by the IMF is supposed to unlock a further $10 billion to $15 billion in funding from the World Bank, EU, and other individual countries, and accelerating those flows will be a critical task. 3. “Sell” austerity at home. The new government will need to explain to the general public why deeper austerity is needed, and why the measures being taken are being done. The interim government, perhaps reflecting Russia’s threat, had maintained a low profile on economic as well as political grounds. That will need to change. 4. Renegotiate the IMF program? When the IMF team returns to Kiev at the end of June, it likely will find an economy far different from the rosy economic projections in the program. Anecdotally, the economy outside of southeast Ukraine looks to have weathered the crisis better than some feared, but there is no doubt that the recent turmoil has imposed material costs. The threat of Russian invasion may have receded, but the crisis is imposing continuing costs on economic activity and investment. Further, it is usually the case in cases like this that fiscal revenue falls, not just because of falling growth but also because of increased tax avoidance. The program is not asking for a lot of fiscal austerity—just two percent of GDP in measures (and the deficit actually widens in the short term with the decline in output). But activity is likely to be lower, and debt higher, than projected. The costs of the financial sector bailout are still not clear, and could be higher than the government is assuming. The new government will likely make the case that a more gradual fiscal adjustment, coupled with additional spending on social services, would be more sustainable. I have sympathy for that argument, though Ukraine’s past record of failed programs creates unsurprising skepticism. And who will pay, official creditors or creditors who may be asked to restructure their claims? The IMF is scheduled to disburse $1.4 billion as soon as July 25, and again at end September. Success will require strong governance, and substantial support from the West. It will not come cheap, and it will take time. But some early success may be essential to sustaining public support over a difficult coming period.

Blog Post by Robert Kahn May 26, 2014 Macro and Markets
Middle East and North Africa

World Bank Report on Women’s Empowerment Breaks New Ground

Over the past several decades, the World Bank has been an important thought leader on the value of investing in women and girls. In 2001, the Bank released a seminal report, “Engendering Development – Through Gender Equality in Rights, Resources, and Voice,” which made the incontrovertible case that investing in girls’ education and other aspects of female empowerment is critical for poverty alleviation. More recently, in 2012, the Bank devoted its annual World Development Report to women and girls, highlighting that, despite gains, gender gaps persist and greater gender equality is critical to growth. Earlier this week, under the direction of Director for Gender and Development Jeni Klugman, the Bank released another major report on the importance of women and girls’ rights. In many ways, the report, “Voice and Agency: Empowering Women and Girls for Shared Prosperity,” breaks new ground and gets at the heart of the challenge for women’s empowerment: in some regions, norms and traditions actively constrain opportunities for girls and women. Until norms evolve to allow greater agency for women and girls, cycles of poverty will not be broken. Using reams of data, which is one of the Bank’s strengths, this new report quantifies in a variety of ways the cost to society of disempowering women and girls. One eye-popping statistic from the report is the cost to society of intimate partner violence, which is pervasive in many countries. The Bank estimates the toll on gross domestic product (GDP) ranges from 1.2 to 3.7 percent in some countries. This is equivalent to what these same countries are spending on education. Another staggering calculation is the cost of limiting women’s reproductive and sexual rights. The report estimates that the lifetime opportunity cost of adolescent pregnancy reaches as high as 12 percent of GDP in India and 30 percent in Uganda. This week, I had the pleasure of moderating a panel discussion among World Bank President Jim Kim, UN Women Executive Director Phumzile Mlambo-Ngcuka, and former U.S. Secretary of State Hillary Clinton to launch this report. All of the panelists acknowledged the power of social norms in limiting women’s agency. Kim emphasized that we have to be careful because “what one group says is a cultural norm is not necessarily what all the groups will say is the social norm,” and argued that often norms are used as “a way of justifying very unequal power relations.” Clinton echoed Kim’s point with several striking examples from her tenure as secretary of state, and underscored the idea that “often times these social norms cannot bear the light of day. They are carried on because they’ve always been carried on.” To watch the panel discussion in its entirety, check it out on the Bank’s website here.

Blog Post by Isobel Coleman May 16, 2014 Development Channel
Economics

Russian Contagion, Geopolitical Risk, and Markets

Yesterday, I published my Global Economics Monthly. I argue that further economic sanctions against Russia would have significant global economic effects because of the Russia’s connectedness to energy and financial markets. Why then, are markets apparently so sanguine? Is it because investors, by and large, expect de-escalation? Is it a view that Russia does not matter for the global economy? Could it be a search for yield? Or is it the inherent difficultly that markets face in pricing in hard-to-quantify, large geopolitical dislocations? Probably a little bit of all of the above. A poll of investors by Citigroup’s Matthew Dabrowski and Tina Fordham illustrates the problem even if it doesn’t answer these questions. The survey of over 1000 investors reported significant concern about political and security risks in Russia, China, and Europe this year. In addition to sanctions, these risks included a breakdown in Iran nuclear talks, victories by fringe parties in European elections, snap elections in Greece, and Sino-Japanese military tensions sanctions. Russian trade sanctions and China tensions were seen as having the most negative impact (see their chart below), but markets remain constructive at the same time, “raising the question of whether market participants have fully considered these geopolitical risks.” Source: Citigroup David Gordon at Eurasia Group also sees a disconnect between the two worlds: the political and the markets-based. He contrasts rising geopolitical concerns with the generally constructive mood among investors at the recent IMF-World Bank spring meetings as well as strong (and not-terribly volatile) markets. He is more comfortable than I am that markets have it right: “geopolitics is not quite the nightmare some seem to think. Markets don’t always have it right, but their current perspective on the big picture remains pretty close to the mark.” He does agree, though, that on Russia in particular, markets do seem too sanguine. What does this mean for our sanctions policy towards Russia? Up till now, it does appear that vulnerability of Western companies to sanctions and possible retaliation has been a brake on the Obama administration’s willingness to move aggressively ahead with financial sector (“sectoral”) sanctions. But that may be changing. There is a growing recognition that the chill of potential sanctions has not been an effective constraint on Russia’s aggression against Ukraine, and perhaps frustration that markets have not reacted more. (Though my market friends emphasize it is hard to derisk in this environment, particularly for large emerging market portfolio investors facing shrinking liquidity.) There is a sense now in Washington, D.C. that markets have been warned and have had time to adjust. Financial sector sanctions are not a zero-one decision, as they could in principal be targeted at certain transactions and relationships to try and manage the fallout for the West. But sectoral sanctions seem to me the most likely scenario. The continuing disconnect between D.C. and New York suggests markets could correct sharply if conditions on the ground in Ukraine worsen.

Blog Post by Robert Kahn May 8, 2014 Macro and Markets
Europe

IMF/World Bank Spring Meetings: Three Questions

The IMF/World Bank spring meetings start today, with a broad agenda and amidst significant global uncertainty. A good discussion of the agenda is here and of the Fund’s view is here. Here are three questions on which I am looking for news, and perhaps even answers. Have we lost confidence in our global growth story? IMF’s global outlook is reasonably sanguine: the IMF forecasts global growth to average 3.6 percent in 2014--up from 3 percent in 2013--and to rise to 3.9 percent in 2015, led by a solid U.S. recovery. They argue that global headwinds from the great recession are receding, allowing monetary policy—both conventional and unconventional—to normalize. Yet the hallway discussion will be on the new threats to global economy, most notably geopolitical tensions with Russia and in Asia, and what policymakers need to do to prepare. Most significantly, an intensification of sanctions against Russia could have significant effects on trade and investment, and cause substantial deleveraging in global financial markets. With fiscal authorities for the most part having limited room to offset this shock, contingency planning likely will focus on central bank monetary policy and liquidity facilities (e.g., swap lines). Is this enough? Beyond the evident cyclical risks, a broader question is whether we are too optimistic about trend growth. In the emerging markets in particular, optimism about growth and convergence has been tempered by weakening performance and more adverse external conditions (e.g., capital outflows, falling export demand due to lower China growth). From this perspective, the taper tantrum of last year is a false issue (though some emerging market policymakers will still raise it for domestic political purposes); communication is good and the Fed is well aware of the implications of its policies on the world (though they are always cautious in talking about their systemic responsibilities given their legal dual mandate on price stability and employment). The real issue is whether domestic policies are supportive of growth aspirations. And if not, is there scope, economic and political (with elections coming up in a number of countries), to change policies to restore the momentum of growth? Or is the emerging market growth model broken? How do we reform the IMF? It appears that the main headline from these meetings will be a new effort to restart IMF reform. The disappointing refusal of the U.S. Congress to pass the IMF reform package will do long-run damage to America’s soft power and the ability to build consensus in difficult crisis resolution issues. But what is the solution? Ted Truman has an interesting idea for the Fund to end-run the U.S. Congress but I think going around legislatures is too politically dangerous in the United States and elsewhere. Perhaps more reasonable would be to “combine" the 14th and 15th quota review. Translated, this means that the agreement would be set aside and a new negotiation begun. The U.S. administration could commit to the negotiation with Congressional approval, deferring Congressional approval for a better day. Will the rising powers be satisfied with an approach that delays them having an appropriate representative voice in the organization? Is low inflation a major global risk? A few weeks ago, the IMF had a great blog on the risks for Europe from persistently low inflation (“lowflation”). Their argument was, at its core, that even absent deflation, low inflation raises real interest rates and the burden of debt, inhibits adjustment, and weakens demand. While the issue is most salient for Europe, we could ask the question more broadly. Lower China growth and the turn in the commodity cycle is a drag on export prospects of many countries, particularly commodity-exporting emerging markets. Corporate leverage in Europe and emerging markets is dangerously high. High levels of unemployment remain a critical social and economic problem. Are disinflationary pressures dampening global growth prospects?

Blog Post by Robert Kahn April 10, 2014 Macro and Markets
Europe and Eurasia

Lew Does Not Need IMF Reform to Aid Ukraine

The new provisional government in Ukraine is seeking $15 billion in assistance from the International Monetary Fund. This would represent 700% of the country’s quota with the Fund, added on top of the loans it has already outstanding, amounting to 214% of its quota. The Fund allows members to borrow up to 200% of their quota annually and 600% cumulatively through stand-by and extended arrangements, so Ukraine is clearly seeking well in excess of this. U.S. Treasury Secretary Jack Lew has called on Congress to back IMF quota reform, “which would support the IMF’s capacity to lend additional resources to Ukraine.” We wholeheartedly back the IMF reform the administration seeks, but it is neither necessary nor desirable for Lew to ratchet up this fight with Congress now. The IMF already has criteria for allowing member countries to borrow beyond the normal access limits. And indeed, as shown in the graphic above, Greece, Portugal, and Ireland are already doing so. Lew knows this. Since Ukraine should also meet the criteria for above-quota borrowing, it is imprudent of him openly to question the IMF’s “capacity” to aid Ukraine as a pretext for shunting Republicans into action on broader IMF reform. CFR Expert Roundup: The Case for IMF Quota Reform Congressional Research Service: IMF Reforms Macro and Markets: Make or Break for IMF Reform Geo-Graphics: A GDP-Based IMF Would Boost China’s Voice . . . and America’s Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Blog Post by Benn Steil and Dinah Walker March 5, 2014 Geo-Graphics
South Korea

South Korea, Poland, and Turkey: Three Emerging Market Success Stories Look to Sustain Their Growth

Emerging economies have boomed over the past decade, but many have recently seen their currencies come under pressure. With a potential currency crisis looming, CFR's Steven A. Cook, Marcus Noland of the Petersen Institute for International Economics, and Mitchell Orenstein of Northeastern University take an in-depth look at three emerging market success stories in a conversation with Foreign Affairs editor Gideon Rose.

Event with Marcus Noland, Mitchell Orenstein, Steven A. Cook and Gideon Rose January 29, 2014 Foreign Affairs Issue Launch
South Korea

South Korea, Poland, and Turkey: Three Emerging Market Success Stories Look to Sustain Their Growth

Emerging economies have boomed over the past decade, but many have recently seen their currencies come under pressure. With a potential currency crisis looming, CFR's Steven Cook, Marcus Noland of the Petersen Institute for International Economics, and Mitchell Orenstein of Northeastern University take an in-depth look at three emerging market success stories in a conversation with Foreign Affairs editor Gideon Rose.

Event January 29, 2014
Chile

The World Economy and Emerging Markets: A View from Chile

Event with Felipe Larrain and Maria Bartiromo January 17, 2014
Development

Banking on Growth

I recently wrote a memo titled “Banking on Growth: U.S. Support for Small and Medium Sized Enterprises in Least-Developed Countries,” which argues that it is in the United States’ interest to invest in small and medium enterprises (SMEs) in the world’s toughest and poorest economies. Investing in such businesses has diplomatic and financial dividends: it would spur economic development, accelerate progress towards international health and education development goals, and boost stability in fragile economies -- all of which furthers U.S. foreign policy goals. According to the International Finance Corporation (IFC), small and growing businesses account for about 90 percent of businesses worldwide and contribute nearly 30 percent of formal GDP in lower-income countries. Accounting for more than 50 percent of employment globally, these enterprises are key drivers of job creation and market innovation, both of which strengthen economies in societies vulnerable to political and social instability. Yet despite growing evidence that SME investment yields positive economic, development, and security benefits, the United States currently lacks the ability to deploy the full weight of its entrepreneurial knowhow on behalf of entrepreneurs and SME-owners. The Overseas Private Investment Corporation (OPIC) comes the closest to filling this role, but OPIC’s efforts are constrained: it has to work with a U.S. bank when investing in the private sector and cannot offer technical assistance or equity investments. An American development bank that expands and builds upon OPIC’s efforts would give the United States the flexibility to invest in SMEs abroad with fewer restrictions. And it could be done at no cost to taxpayers: for each of the last 36 years, OPIC has actually returned money to the government – most recently $426 million. Some of this money could be deployed to expand OPIC’s capabilities and scope. In the memo, I suggest that the U.S. government do three things in order to effectively invest in SMEs and women entrepreneurs: 1. Invest in and create a new American development bank that would build on OPIC’s framework and provide a "one-stop shop" solution for entrepreneurs in lower-income countries. 2. Encourage the American development bank to invest in locally owned small businesses in order to demonstrate that the SME sector – which investors often view as high-risk – is vital to economic growth and stability. Women entrepreneurs would be a focus of such a development bank given the development benefits of investing in women. 3. Collaborate with others already supporting SMEs, including governments, civil society organizations, private sector entities, UN agencies, international NGOs, and other development finance institutions. Women entrepreneurs would be a critical focus of the American development bank. There are around 8 to 10 million women-owned SMEs in the formal economies of emerging market countries, and millions more in the informal sector. Women face all the challenges of growing businesses in risky environments that men face, and more. Seen as high-risk clients, investors are usually reluctant provide women with access to the capital, networks, and support they need to build and expand their businesses. By serving women, an American development bank would help female entrepreneurs contribute more to local economies, and in the process help create more prosperous and financially secure communities. The U.S. government stands to reap substantial gains from launching an American development bank that could invest directly in entrepreneurs in lower-income countries. Doing so would help the United States get far more from its aid dollars and address important national security risks associated with weak economies and unstable societies.

Blog Post by Gayle Tzemach Lemmon December 19, 2013 Development Channel