February 2012

In 1960, I wouldn’t have been writing this blog post. For a start I was just a baby at the time. Second, we were several decades away from 1994 when Justin Hall – then a student at Swarthmore – would sit down and tap out the world’s first blog. Most importantly of all, though, according to Google’s ngram viewer, people didn’t write about health systems much in 1960 (see chart). Usage of the term in books took off only in the mid 1960s, waned in the 1980s, and then started rising again in the 1990s. This doesn’t look like a statistical artifact. Usage of the term “Nobel prize” has stayed relatively constant over the period, and while the term “health economics” has also trended upwards, the growth has been much slower. So “health systems” is a fairly new term – and it’s on the rise.

Not everyone thinks that’s a good thing.

In a world in economic turmoil, calls for greater fiscal austerity, leaner social entitlements, and smaller government expenditures are seemingly ubiquitous. From the United States to the Euro Zone, the size and role of government are being questioned. Yet, at the same time, the recent financial crisis has highlighted the importance of the state as a regulator of the financial system. Just think about who was needed to step in to protect “too big to fail” financial institutions, extend social protections to the most vulnerable, and preserve the stability of the financial system at a time when no one else could?

Beyond these fluctuations in public opinion about the role of government, there is more the state can do to help drive post-crisis growth. In addition to its role in regulating financial systems, the state can play a very vital role as an investor in the knowledge economy by supporting policies and making investments that catalyze both market and firm growth. For example, government intervention in higher education is a primary area for enhancing growth, as a laissez-faire economy will tend to generate too few of these investments. Another example is in climate-change policy, where government can have a role in redirecting technical change to support green growth.

Another key area in which the state can intervene in the post crisis world is to serve as a guarantor of the social contract at a time when coping with the social costs of the crisis and creating jobs must go in tandem with reducing indebtedness. In the context of weakening public finances, tightening credit, and surging global imbalances, this pact must allow the state to manage the public deficit, while ensuring social peace and avoiding strikes and protests.

As a rule, when intellectuals contribute to public debate on any issue of public concern in any country, it is an entirely wholesome development, and one deserving every encouragement. That is truer if the intellectuals involved know how to communicate even the most abstruse area of knowledge vividly, clearly, compellingly. For, when we say we desire ‘informed public opinion’, one of the best ways of bringing that about is by encouraging well-trained minds on any subject relevant to a public policy question of general concern to help their fellow-citizens by throwing a bright light on the subject. That is why news and current affairs editors everywhere try to maintain a roster of experts that can be called upon to comment on issues occasioning public controversy.

As part of my duties at the World Bank, I talk with lots (and lots!) of people and groups.  Mostly, I talk to people within the World Bank and in other development institutions (this is part of my official responsibilities, to support the work of such people as a 'subject expert'); to our counterparts in governments around the world (we say 'clients' but I am not a big fan of this formulation); and with lots of consultants and practitioners*.

(*Some of you may quickly identify a pretty important group that is missing here: 'users', or beneficiaries.  This is a pretty big, if not fundamental, omission, in my view. Talking with practitioners is a sort of proxy for talking with end users and beneficiaries ... I guess ... but certainly an insufficient and inadequate one. Mistaking those who pay for, and those who implement, development programs with those who actual 'use' or benefit from them is a recipe for potential disaster ... perhaps a topic for a future blog post.)

I also speak with lots of companies.  Sometimes I am obliged to do this, because (to be blunt, and honest) the company is 'important' and politically well connected.  Sometimes I really want to do this, because the company is doing something quite new and/or cool, or is doing something quite well.  (I should note that these things aren't necessarily mutually exclusive, of course.) I frequently talk with companies at the request of colleagues or counterparts in government ("these guys are telling us x and y ... should we believe them?"). I also do it to better understand what is happening in various markets; I often find that firms (as with NGOs) have a better sense of what is happening in government schools related to the use of technology than do ministries of education.

Occasionally I speak not to individual companies, but to large industry groups.  Because presentations to these types of groups often occur behind 'closed doors' of various sorts, I thought I'd share here some of what I tell them, in case it might be of any interest.  (One of the reasons that this blog exists is to try to open up certain conversations that typically occur behind closed doors to wider audiences.)

Minneapolis has the largest Somali population in the US. Sending remittances to Somalia was put at risk late December when the Sunrise Community Bank in Minneapolis announced that it was going to close the accounts of all Somali remittance companies on December 30th 2011.To our knowledge, the Sunrise Community Bank was the last bank that was serving Somali remittance companies in Minneapolis. Closure of accounts meant no operation for remittance companies. This in turn meant no money for remittance-dependent Somalis, who had no other options since remittance service providers such as Western Union and MoneyGram didn’t operate in Somalia. Aid groups lobbied to challenge the closure, and their petition reached all the way up to President Obama.

Swaziland and Lesotho are among the countries with the highest HIV prevalence in the world.
Recent nationally representative estimates reveal an adult HIV prevalence equal to 26% in Swaziland¹ and 23.2% in Lesotho².

These countries have two other main features in common: they are small countries bordering South Africa and, during the past decades, they were exposed to massive recruitment efforts to work in South African mines. For more than a century, about 60 percent of those employed in the mining sector in the Republic of South Africa were migrant workers from Lesotho and Swaziland³.

In a recent paper⁴ with Lucia Corno, we started from this set of facts and investigated whether the massive percentage of migrant workers employed in the South Africa’s mining industry for a long period might be one of the main explanations for the high HIV prevalence observed in Swaziland and Lesotho.

The first IFMR Financial Systems Design Conference was held in Chennai on August 5th and 6th, 2011. Hosted by IFMR and IFMR Finance Foundation, the conference aimed to take a step back from specific institutional frameworks, products and regulatory architectures and take a more fundamental and functional view of the financial system, and thereby attempt to understand what can be done to improve the ability of the Indian financial system to fulfil its functions effectively. The conference brought together a group of leading researchers and practitioners in the Indian financial system. In his introductory remarks, Dr. Nachiket Mor observed that “we are at a time when many of the historic imperatives which led to the current design of our financial systems are perhaps no longer valid and that, as a uniquely advanced but also very poor country urgently in need of sustained and rapid growth and development, we have the opportunity to do things in a way that other countries do not.”

To provide some context, while the Indian financial system has steadily evolved over the years, it continues to lag behind in terms of size (financial firms growing much slower than needs of the real economy), spread (80% of Indian villages do not have a bank branch in a 2 KM radius, more than 50% of small business financing happens through informal sources), scope (roughly 50% of the population has a bank account, about 10% have life insurance and less than 10% participate in equity markets in any form), innovation (securitisation, credit derivatives and corporate bond markets are tiny) and diversity of ownership (largest financial firms are Government owned).

Equity markets have risen in both developing and high-income countries as risk-aversion associated with the financial turmoil in Europe has started to dissipate. The credit worthiness of developing country sovereigns is improving relative to that of high-income country sovereigns, as the latter has deteriorated at a relatively rapid pace. Meanwhile, industrial capacity utilization in developing countries is nearing pre-crisis levels, while spare capacity in high-income countries is still markedly below its pre-crisis level.
Equity markets recover in early 2012. Global stock markets have gained 13.9% since mid-December, making up most of the losses incurred between July and mid-December. Year-to-date, equities in developing countries have gained 11%, with all regions rebounding as risk aversion associated with the financial turmoil in Europe and fears of contagion have started to dissipate. Investors have re-invested $19bn in emerging markets mutual funds year-to-date. That represents a return of about 60% of the outflows recorded in 2011. The gains in equity markets along with strong bond issuance suggest emerging markets are back in favor with investors, although syndicated bank lending remains weak. As stock indices increase, more equity fund inflows will follow. Low valuations and low returns in safe haven assets also suggest that further increases are in store (equities are trading at 1.6xprice-to-book value, close to a 30-year low and well below the long-term average of 2.1%).
The credit quality of developing country sovereigns is stable, but the gap between mature and emerging markets sovereign ratings has narrowed due to ratings downgrades in high-income countries. Rating agencies have continued to downgrade high-income sovereigns in early 2012, while creditworthiness in emerging markets remained relatively stable. Since the 2008 financial crisis, 47 developing countries have received 123 upgrades by major rating agencies, with Iceland being the only high-income country to receive an upgrade since the crisis. General government debt-to-GDP ratios and fiscal deficits are much lower in developing countries, at less than 40% and 3% respectively, compared to more than 100% and 6% for high-income countries. Partly as a result, many developing countries currently have a positive outlook on their sovereign debt, signaling that additional upgrades are possible.
In aggregate, industrial capacity has regained pre-crisis trend levels in developing countries, although regional differences remain stark. Manufacturing capacity utilization remains close to or above trend levels in East Asia & Pacific, Latin America and South Asia. In these regions, additional investment in productive capacity will be necessary to sustain growth ahead. Ample spare capacity remains in the Middle East & North Africa and Europe & Central Asia, with gaps estimated to be 21.2% and 17.3% respectively. Since the crisis capacity utilization has recovered 6.1 percentage points in developing countries and 5.5 percentage points in high income countries to stand 2.2 and 5.7 percentage points below their pre-crisis peaks. Manufacturing capacity utilization remains close to or above trend levels in East Asia & Pacific, Latin America and South Asia. In these regions, additional investment in productive capacity will be necessary to sustain growth ahead. Ample spare capacity remains in the Middle East & North Africa and Europe & Central Asia, with gaps estimated to be 21.2% and 17.3% respectively. Since the crisis capacity utilization has recovered 6.1 percentage points in developing countries and 5.5 percentage points in high income countries to stand 2.2 and 5.7 percentage points below their pre-crisis peaks.

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