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Bold Ideas on ‘Shared Prosperity’ Reshape Economic Theory -- and Now Influence Policymaking in the White House

Christopher Colford's picture

Whichever of the 18 worthy books on economics and finance eventually ends up winning this year’s Financial Times/McKinsey “Business Book of the Year Award,” it’s already clear which work has had the most transformational effect on this decade’s intense debate on economic policy. One of the finalists in that book competition, “Capital in the Twenty-First Century” by Thomas Piketty, has been hailed as a landmark analysis of the inexorable trends driving the modern-day economy, with Piketty’s scholarship abruptly detonating a debate that has profound implications for public policy and long-term economic theory.

Washington policymakers may sometimes be slow to embrace dramatic and innovative ideas about economics, but the impact of Piketty’s reach and relevance – especially after the financial Crash of 2008 – became even clearer when the chairman of the White House Council of Economic Advisers recently led a scholarly seminar at the World Bank Group, describing the impact of Piketty’s thinking on the Obama Administration’s approach to economic policy. If the White House itself is focusing on Piketty’s diagnosis of the ills now afflicting many Western economies, then his analysis should clearly rivet the attention of everyone who’s concerned with building shared prosperity globally.

When Jason Furman, the President’s chief economic adviser, came to the Bank as part of the Development Economics Lecture Series to analyze Piketty’s logic – describing how Piketty’s “Capital” is now being factored into the White House’s policymaking – the rapt attention of the throng in the Bank’s Old Board Room (and spilling out into the adjoining corridors) illustrated how Piketty’s work has been swaying economists’ debates.

Those debates have consumed policy-watchers not just at the Bank, the International Monetary Fund and other leading global financial institutions, but also at the Federal Reserve System and in policy journals and university economics departments worldwide. Even financial firms that epitomize Wall Street’s do-what-works, drop-all-ideology pragmatism – like Standard & Poor’s, which recently issued a candid analysis of how “too much inequality can undermine growth” – warn of the dangers of extreme inequality.

The video of the event can be viewed by clicking on the screen directly below, or by linking to the World Bank Group website:

Development Economics Lecture by Jason Furman

Furman’s DEC Lecture thus underscored the transformation in economic thinking that has been occurring, thanks in large part to Piketty. Mainstream economic institutions are newly attentive to the widening economic divide – the chronic gaps within each nation, and the enduring chasm between developed and developing nations. Furman himself helped contribute to the knowledge-base about inequality when he served on the Bank staff as a Senior Advisor to then-Chief Economist Joseph Stiglitz.

Furman’s lecture was the latest in a series of Bank discussions on inequality, including an InfoShop forum with Chrystia Freeland – formerly a journalist with the Financial Times and Thomson Reuters who is now a member of the Canadian Parliament – discussing her celebrated work “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.” Freeland applauded the voluminous Bank research – including the work of Branko Milanovic, the esteemed former Bank economist who is now at the City University of New York – that has helped lay the foundations of the inequality debate.

Given the linear logic that was spelled out in Furman’s data-rich DEC Lecture, it’s little wonder that Piketty’s research has inspired accolades from scholars like Milanovic, the author of “The Haves and the Have-Nots,” who has hailed “Capital” as “one of the watershed books of economic thinking.” Piketty’s work has also been praised as “the most important economics book of the year, and maybe of the decade” by Nobel Prize-winning economist Paul Krugman of the New York Times, and has been lauded as “an extraordinarily important” work “of vast historical scope, grounded in exhaustive fact-based research” by Martin Wolf of the Financial Times.

Introducing his lecture, entitled “Lessons for Inclusive Growth, from the U.S. and the World,” Furman said that “the ultimate test of economic performance” is “ensuring that the benefits of growth are broadly shared.” Such a broad sharing of prosperity may once have been a standard feature of advanced Western economies – but for at least the last 30 years, income inequality and wealth inequality have dramatically widened. Piketty’s meticulous work shows why.

As Furman detailed, Piketty’s data-driven research confirms what many economy-watchers have long suspected – and what many long-suffering wage-earners have long felt amid the aftermath of the Crash of 2008 and the Great Recession that followed: The trend toward the concentration of capital in modern-day industrialized economies is intensifying.

Crucially, Piketty contends that such a concentration is not an accident: Instead, the “rich get richer” phenomenon is a fundamental feature of the way that income and wealth are distributed in modern-day capitalism, for a straightforward reason: The rate of return to capital, over the long term, is higher than the rate of return to labor.

Capital-income inequality is thus self-perpetuating. As Furman explained: “How much wealth you have today is a function of how much income you had in the past, and a function of your rate of return, which itself is higher for higher-wealth households.”

Or as Piketty, aided by his skillful translator Arthur Goldhammer, more poetically declares: “The past devours the future.”

Will more debt hinder the development of the Dominican Republic?

Co-Authors: Aleksandra Iwulska, Javier Eduardo Báez and Alan Fuchs

In April this year the Dominican Republic borrowed 1.25 billion US dollars on international markets in 30-year bonds. The DR is the only country in the B investment rating group that  successfully issued 30-year bonds in the last 6 years. The country has a total of 2.75 billion US dollars for three issuances in the past 15 months.

At the same time, debt levels have been growing in the country: non-financial sector public (NFPS) debt doubled from 18.3 percent of GDP in 2007 to 36.6 in the first quarter of 2014.When considering the DR Central Bank debt stock, levels would be already close to 47 percent of GDP. It is worth noticing that Jiménez and Ovalle (2011) estimated in 56.7% the debt to GDP the maximum debt to GDP threshold that investors would consider sustainable for the DR in 2013.  Meanwhile, interest payments reached a peak of 2.4 percent of GDP in 2012-13 and external debt stood at 25 percent of GDP in 2013, levels not seen since the economic crisis of 2003. But the economic realities in the DR now are much different than they were in 2003. GDP grew by 4.1 percent last year and 5.5 percent in the first quarter of 2014. The Central Bank forecasts the annual economic growth at 4.5 percent this year. Meanwhile, central government fiscal deficit dwindled from 6.6 percent of GDP in 2012 to 2.9 percent in 2013.

The Bangladesh Remittance Story Reaffirmed

Zahid Hussain's picture

The Bangladesh Bureau of Statistics (BBS) has just released a Survey on the Use of Remittances. The survey provides interesting update on the demographic and economic characteristics of the 8.6 million Bangladeshi workers currently working abroad. Conducted during 12-23 June 2013, the survey enumerated 9,961 Remittance Receiving Households (RRHs) from all the seven divisions of the country.

Overall, the survey mostly reaffirms findings from previous surveys and studies about migration and remittance behavior of Bangladeshis.

Who are the migrants?
The overwhelming majority (97.4 percent) of migrants are males, married (67.1 percent), Muslims (97.8 percent) most of whom (78.2 percent) are less than 39 years old with majority (61.5 percent) having less than ten years of education.

The majority (over 57 percent) of the migrants have been staying abroad for over 5 years and a significant (22.3 percent) proportion (largely from Sylhet) have been staying abroad for over ten years. Most (91 percent) work as blue colored labor in Saudi Arabia, UAE, Malaysia, Oman, Kuwait, South Korea and Singapore.  Most of them (87.8 percent) received no formal training before leaving the country.

The need to improve transport impact evaluations to better target the Bottom 40%

Julie Babinard's picture
In line with the World Bank’s overarching new goals to decrease extreme poverty to 3 % of the world's population by 2030 and to raise the income of the bottom 40% in every country, what can the transport sector do to provide development opportunities such as access to employment and services to the poorest?

Estimating the direct and indirect benefits of transport projects remains difficult. Only a handful of rigorous impact evaluations have been done as the methodologies are technically and financially demanding. There are also differences between the impact of rural and urban projects that need to be carefully anticipated and evaluated.

Can we simplify the methodologies?

Despite the Bank’s rich experience with transport development projects, it remains quite difficult to fully capture the direct and indirect effects of improved transport connectivity and mobility on poverty outcomes. There are many statistical problems that come with impact evaluation. Chief among them, surveys must be carefully designed to avoid some of the pitfalls that usually hinder the evaluation of transport projects (sample bias, timeline, direct vs. indirect effects, issues with control group selection, etc.).

Impact evaluation typically requires comparing groups that have similar characteristics but one is located in the area of a project (treatment group), therefore it is likely to be affected by the project implementation, while the other group is not (control group). Ideally, both groups must be randomly selected and sufficiently large to minimize sample bias. In the majority of road transport projects, the reality is that it is difficult to identify control groups to properly evaluate the direct and indirect impact of road transport improvements. Also, road projects take a long time to be implemented and it is difficult to monitor the effects for the duration of a project on both control and treatment groups. Statistical and econometric tools can be used to compensate for methodological shortcomings but they still require the use of significant resources and knowhow to be done in a systematic and successful manner.

Overwhelming Pictures, Perturbing Reportage

Sina Odugbemi's picture

David Remnick, the editor of The New Yorker, opened a recent piece brilliantly titled ‘Aflame’ thus:

"Because memory, particularly historical memory, fails unfailingly, this summer feels like a uniquely horrific season of dissolution and blood."

Wars seem to be kicking off or intensifying everywhere. States are unraveling in what someone called ‘a great sorting out’. Global leaders and global institutions are struggling, unsuccessfully thus far, to contain, manage, and end not one conflict but several. And some of the conflicts are merging, evolving, transforming in ever more macabre ways. Above all, civilians are being killed in every one of these conflicts. Mortars are landing on homes. Women, children, the old and infirm are being slaughtered. The hard men – and they all seem to be men – leading these fights have welded iron into their souls. They have decided that they will not allow moral or legal niceties about protecting non-combatants to get in the way of an all-out drive for ‘victory’ by any means necessary.

Capacity Building for Border Control: The Tension between Security and Development

Khalid Koser's picture

Over the past decades, following the creation of the Schengen area, the European Union has redefined its border control policies towards third countries with the stated objective of improving security through more efficient external border controls, while facilitating access of those having a legitimate interest to enter the EU territory.

These policies have direct implications for third countries on their economic and human development. A key channel is through capacity-building undertaken under the auspices of European migration management framework.

Weekly Wire: The Global Forum

Roxanne Bauer's picture
These are some of the views and reports relevant to our readers that caught our attention this week.

Facebook’s Gateway Drug
The New York Times
SILICON VALLEY was once content to dominate the tech world. But recently, its leading companies have ventured deep into areas well outside its traditional bailiwick, most notably international development — promising to transform a field once dominated by national governments and international institutions into a permanent playground of hackathons and app-fueled disruption.  To observe this venture humanitarianism in action, look no further than, a coalition of Facebook, Samsung and several other large tech companies that promises to bring low-cost Internet access to people in underserviced parts of the world, via smartphones. 

New World Order, Labor, Capital, and Ideas in the Power Law Economy
Foreign Affairs
Recent advances in technology have created an increasingly unified global marketplace for labor and capital. The ability of both to flow to their highest-value uses, regardless of their location, is equalizing their prices across the globe. In recent years, this broad factor-price equalization has benefited nations with abundant low-cost labor and those with access to cheap capital. Some have argued that the current era of rapid technological progress serves labor, and some have argued that it serves capital. What both camps have slighted is the fact that technology is not only integrating existing sources of labor and capital but also creating new ones.

Transitional Justice in Tunisia Expanded to Include Economic Crimes

Amine Ghali's picture

More than three years after the wave of revolutions that swept some countries of the Arab region, it is now possible to step back and make an initial assessment of the subsequent transformation processes. While the picture seems bleak overall, the prospects for Tunisia’s democratic transition, at the very least, offers some cause for hope. Among the many features of the Tunisian transition, one of the most significant is the country’s commitment to a process of a transitional justice (TJ). The process took three years to materialize, and required a joint effort on the part of many actors, ranging from national organizations to the international community, along with politicians and legal professionals.

Philippines: Why We Need to Invest in the Poor

Karl Kendrick Chua's picture
A fish vendor waits for customers in his stall in Cebu City. According to the latest Philippine Economic Update, pushing key reforms to secure access to land, promote competition and simplify business regulations will also help create more and better jobs and lift people out of poverty. ​(Photo by World Bank)

In my 10 years of working in the World Bank, I have seen remarkable changes around me. In 2004, Emerald Avenue in Ortigas Center, where the old World Bank office was located, started to wind down after 9 PM.  Finding a place to buy a midnight snack whenever I did overtime was hard. It was also hard to find a taxi after work.

Today, even at 3 AM, the street is bustling with 24-hour restaurants, coffee shops, and convenience stores, hundreds of BPO (Business Process Outsourcing) employees taking their break, and a line of taxis waiting to bring these new middle class earners home. Living in Ortigas Center today means that I also benefit from these changes.

Why we were happy when our bosses raised employee parking rates... Or how parking requirements drive modal choice

Shomik Mehndiratta's picture
Follow the authors on Twitter: @shomik_raj and @canaless
Recently, as part of a broader cost cutting initiative, World Bank management decided to do away with a long standing policy of subsidizing parking for its employees. Those of us who work on the Bank’s transport projects and help cities develop more sustainable mobility systems saw this is as a welcome development… losing some friends in the process. 
This personal example, along with a recently completed pilot we conducted on corporate mobility programs, inspired us to share some insights on the dramatic role parking-related regulations and incentives can play in influencing the decisions made by all stakeholders with regard to modal choice –whether it be private developers, property managers, employers or employees: