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Cheap money: Addiction and ‘cold turkey’ risks

Erik Feyen's picture

The U.S. Federal Reserve System has taken new steps toward raising interest rates, but there is a disconnect between what the Fed and markets think will happen. What does it all mean for emerging and developing countries?
 
Central banks in developed economies have created an environment of ultra-low interest rates to rekindle economic growth and to battle falling inflation. They’re doing this by keeping policy rates close to zero and “printing money” on an unprecedented scale via a veritable alphabet soup of programs, such as QE, CE, LTRO and TLTRO.
 
These low interest rates have put a lot of pressure on investors, such as pension funds, to generate a decent return, setting off a massive search-for-yield frenzy.
 
This search for yield has created a cash tsunami that has also rolled on the shores of many emerging and developing economies.


 

Greek tragedy: 'Sleepwalking' toward an economic abyss, with eurozone fears pervading the Spring Meetings

Christopher Colford's picture

“All roads lead to Rome” may have been true in ancient times, but policymakers during this Spring Meetings season in Washington have been focused on another classical crossroads: All roads now lead to Athens, as the intensifying eurozone crisis is again stoking fears that Greece may soon “crash out” of the European common currency system – potentially dealing a severe shock to the still-fragile global financial markets.

“The discussions about Greece have pervaded every meeting” during this fast-forward week of finance and diplomacy, said the United Kingdom’s Chancellor of the Exchequer, George Osborne. That viewpoint was reinforced by a studious chronicler of the Greek drama’s daily details, Chris Giles of The Financial Times, who asserted – in an unusually dismissive swipe – that “the antics of Greece dominated the Spring Meetings of the International Monetary Fund and World Bank.”

The Greece-focused anxiety was palpable to many Spring Meetings attendees, judging by the number of corridor conversations and solemn sidebars that dwelled on the eurozone drama – especially on the Fund’s side of 19th Street NW. While most forums and panels on the Bank’s side of the street focused on the progress of many developing countries, events at the Fund seemed consumed by the policy contortions within Greece's faltering economy, as Meetings-goers monitored every tremble of their text messages to follow the week’s the week’s staccato bulletin-bulletin-bulletin news of Greece’s financial flailing.

“The mood is notably more gloomy than at the last international gathering,” said Osborne, “and it’s clear . . . that a misstep or miscalculation on either side [of the Greece negotiations] could easily return European economies to the kind of perilous situation we saw three to four years ago.” Having received a $118 billion bailout in May 2010 and a second package of $139 billion in October 2011, Greece is now at an impasse with its creditors: the IMF, the European Central Bank and the European Commission. A new government in Greece – having denounced the loan conditions reluctantly accepted by its predecessor governments – is debating how, or whether, it should comply with lenders’ pressure for far-reaching reform. Greece's foot-dragging has exasperated the lenders even as Greece envisions a potential third bailout program.

As the Greek tragedy unfolds, the doleful observation of Wolfgang Münchau in the FT seems all too apt: “Until last week, discussions with Greece did not go well. That changed when the circus of international financial diplomacy moved to Washington for the Spring Meetings. Then it became worse.”

Institutional Investment in Infrastructure (“In3”): A view from the bridge of a development agency

Jordan Z. Schwartz's picture


Note: The first advisory council meeting of the new Global Infrastructure Facility was recently convened at the World Bank Group headquarters in Washington, D.C.

Suddenly, it seems impossible to walk through London, Washington, New Delhi or Nairobi without bumping into a conference on institutional investors in infrastructure. The G20 has discovered the link along with their business counterparts at the B20. So too has the World Economic Forum, the OECD, the United Nations and the international financial institutions. Match the long-term liabilities of pensions and insurance plans with long-term assets, the mantra goes, and the infamous infrastructure gap will close.  Win-win.

If only life were so easy. 

We are reminded of the old expression, “If your grandmother had a beard, she’d be your grandfather.” In this case: If infrastructure were perceived by investors as a truly stable, risk-adjusted investment, it would already be able to attract the financing it needed. There would be no gap.

In truth, some institutional investors found their way into infrastructure assets as far back as the 1990s and have been cautiously growing their investments, attracted by the long-term demand, steady growth and regulated returns. A few of the Canadian pensions and Australian super-annuation funds invest 10 to 12 percent of their assets in infrastructure, while equity funds that focus on infrastructure and related businesses in emerging markets, such as IFC’s Asset Management Company, are growing on the tide of this burgeoning market.

To date, the pensions are mostly exposed in equity investments in the regulated utilities of Europe, North America and Australia, while the funds are focusing on higher-risk, higher-return investments around the edges of infrastructure — in gas platforms and mobile licenses, in telecom towers, in container terminal operators or in the occasional power plant.

The real test of patience and stability will come when debt and debt-like products from the broader range of institutional investors begin flowing into large-scale, basic service infrastructure — transport, power, water and sanitation and the backbone of telecom services. And since infrastructure is highly leveraged — typically 70 to 80 percent debt in the capital structure — the broader infrastructure financing gap will not be closed until this happens.

A few questions surround these ambitions: 
 
  • Why would a development institution care so much about "In3"?
  • What are the hindrances to this happening?
  • What are we doing about it?

Closing the gender finance gap: Three steps firms can take

Heather Kipnis's picture
Despite eye-opening market potential — women control a total of $20 trillion in consumer spending —  they have somehow escaped the notice of the private sector as an engine for economic growth.  Women are 20 percent less likely than men to have an account at a formal financial institution. Yet a bank account is the first step toward financial inclusion.

Why is it important for the private sector to help with this first step?
 
In increasingly competitive global markets, companies are searching for ways to differentiate themselves, to deepen their reach in existing markets and to expand to new markets. Greater financial access for women would yield a growing market opportunity with phenomenal profit potential for companies. The size of the women’s market, and the resulting business opportunity, is striking:
 
  • Business credit: There is a $300 billion gap in lending capital for formal, women-owned small businesses. Of the 8 to 10 million such businesses in 140 countries, more than 70 percent receive few or no financial services.
  • Insurance Products: The Female Economy, a study in the Harvard Business Review, reported that the women’s market for insurance is calculated to be worth trillions of dollars.
  • Digital payments: Women’s lack of cellphone ownership and use means that millions cannot access digital-payment systems. Closing the gap in access to this technology over the next five years could open a $170 billion market to the mobile industry alone.
 

Greater financial access for women would yield a growing market opportunity with phenomenal profit potential for companies.


For the past several years at IFC, I’ve been working with the private sector, namely financial institutions, to address the supply-and-demand constraints that women face when trying to access the formal financial system. IFC tackles these constraints in three ways:
 
  • Defining the size of the women’s market, female-owned and  -led SMEs, and as individual consumers of financial services
  • Showing financial institutions how to tap into the women’s market opportunity by developing offerings that combine financial products, such as credit, savings and insurance, with non-financial services such as training in business skills
  • Increasing women’s access through convenient delivery channels, such as online, mobile and branchless banking

If you want to go far, go together

Jana Malinska's picture

A new global network of Climate Innovation Centers will support the most innovative private-sector solutions for climate change.
 
Pop quiz: What does an organic leather wallet have in common with a cookstove for making flatbread and a pile of recycled concrete?
 
Believe it or not, each of these represents something revolutionary: a private sector-driven approach to climate change. Each of these products – yes, even concrete – is produced by an innovative clean-tech company. And as of March 26th, those businesses, and hundreds more like them, have something else in common. They’re connected through infoDev's newly established global network of Climate Innovation Centers (CICs), an innovative project that is taking the idea of green innovation beyond borders.
 
Having piloted the CIC model in seven different countries – Kenya, South Africa, the Caribbean, Ethiopia, Morocco, Ghana and Vietnam – it was time for infoDev, a global entrepreneurship program in the World Bank Group’s Trade and Competitiveness Global Practice, to follow a time-honored business practice: to scale up and take this movement global.

And so, as part of last month’s South Africa Climate Innovation Conference, we joined forces with 14 experts from the seven different countries where the CICs operate to establish the foundations of the world’s first global network devoted to supporting green growth and clean-tech innovation.



CIC staff debate and discuss the new CIC Network during the South Africa Climate Innovation Conference.

This global network of Climate Innovation Centers – business incubators for small and medium-sized enterprises (SMEs) – has been designed to help local ventures take full advantage of the fast-growing clean-technology market. The infoDev study “Building Competitive Green Industries” estimates that over the next decade $6.4 trillion will be invested in clean technologies in developing countries. An even more promising fact is that, out of this amount, about $1.6 trillion represents future business opportunities for SMEs, which are important drivers of job creation and competitiveness in the clean-tech space.

History in the making: 'Policy relevance' and long perspective, with the Spring Meetings starting a series of summits

Christopher Colford's picture

History “is a critical science for questioning short-term views, complicating simple stories about causes and consequences, and discovering roads not taken. Historical thinking – and not just by those who call themselves historians – can and should inform practice and policy today. . . . History can upset the established consensus, expand narrow horizons, and ‘keep the powerful awake at night.’ In that mission lies the public future of the past.” -- "The History Manifesto"
 
Lace up your running shoes and summon your stamina: At the starting line of the Spring Meetings sprint, policymakers and economy-watchers are now poised for an adrenaline-fueled week of debates on diplomacy and development at the World Bank Group and the International Monetary Fund.
 
History hangs heavily over the Bank and Fund this week, amid an animating awareness that “2015 is the most important year for global development in recent memory,” as World Bank Group President Jim Yong Kim declared in a speech last week at the Center for Strategic and International Studies. In an environment that has provoked dire warnings by the IMF’s Christine Lagarde about the danger of prolonged low-growth, high-unemployment “secular stagnation” – with “the new mediocre” threatening to become “the new normal” – this week’s meetings will be just the starting-point in a series of events in 2015 that could define the development agenda for decades.

A July conference in Addis Ababa will determine the financing mechanisms for future development initiatives. A September summit at the United Nations in New York will adopt a detailed set of Sustainable Development Goals. A December forum in Paris will adopt – or reject – a worldwide treaty to restrain climate change. Along the way, the Bank and Fund will convene policymakers – in Lima rather than Washington – for the Annual Meetings in October.

Pulling off a success at any one such summit would be a dramatic achievement. Delivering triumphs at all three summits might require masterstrokes of diplomacy.

“When we look at the longer-term picture,” said Kim in his CSIS speech, “we see that the decisions made this year will have an enormous impact on the lives of billions of people across the world for generations to come." The challenges that Kim and Lagarde analyzed in their pre-Spring Meetings speeches require “governments [to] seize the moment” – starting this week – if they hope for success in the Addis-UN-Paris trifecta.
 

From MIGA: Reflections on investment prospects for countries facing fragility and conflict

Kyoo-Won Oh's picture

On a mission for MIGA – the political risk insurance arm of the World Bank Group – I recently visited Burundi, South Sudan and Afghanistan to understand the investment conditions and needs of these conflict-affected countries.
 
In a blog post, I've shared four common threads that I observed during my trip, which offer insights into the challenges and opportunities on the ground.
 
The blog post for MIGA – the Multilateral Investment Guarantee Agency – can be found here: https://blogs.worldbank.org/miga/reflections-investment-prospects-countries-facing-fragility-and-conflict
 

Valuable lessons from many backyards What can SEZs learn from U.S. Foreign Trade Zones, and vice versa?

Martin Norman's picture


Back in January, as I sat in the “Fundamentals of U.S. Foreign Trade Zones” (FTZs) class in Austin, Texas, I was looking for answers to two questions.
  
  • “What can I learn from the way the US runs its FTZ regime that I can bring to my government clients worldwide for their Special Eeconomic Zone regimes?” and
  • “Are there actually things that other countries are doing that hold lessons for the U.S. FTZs?” 

After several moments of epiphany during the event with regard to these two questions, I discussed some of my experiences and takeaways with various board members of the event organizer, the U.S. National Association of Foreign Trade Zones (NAFTZ), who then invited me to be the keynote luncheon speaker at their annual Legislative and Regulatory Seminar on February 10, in Washington.

Over beef stroganoff and fresh salad, I gave the 80 participants a whirlwind virtual tour of SEZs worldwide and lauded the best practices that I could use as U.S. models for my client countries, in particular investor-friendly and innovative aspects of the US FTZ regime from which other countries can learn:
 
  • “Smart incentives,” including the ability for FTZ companies selling into the local U.S. market to choose either the value of the end product or the sum of some group of components as the basis for calculating the duties owed to Customs.
  • The ability for FTZ companies to pay a single, weekly introduction fee for containers for FTZs – equivalent to a single container’s fee – instead of a fee for each container. 
  • The Alternative Site Framework (ASF) established in 2009, which allows a large tract of land, often associated with the boundaries of several counties, to be designated as an FTZ.  However, nothing in that area is actually “activated” (i.e., a bona fide FTZ company with all the associated benefits) until, one by one, companies apply for the automatic grant of FTZ benefits of either some or all of its buildings. 

 
But what about the second question: about things that other countries are doing that might be useful ideas for U.S. FTZs? The NAFTZ Board had instructed me not to shy away from provocative ideas, and indeed I had found an area which I felt to be Achilles' heels of the US FTZ regime.
 
The US FTZs are highly geared toward production, assembly or logistics.  Yet Business Insider recently published an article in which 11 out of the 14 industries projected to “boom in the next decade” are in the services industries. Are the US FTZs well-positioned for riding the crest of a great, upcoming services industry wave?  I doubt it, and I believe that several international zones, such as Hong Kong’s Cyberport and Dubai Media World, can show the way on how to improve the future competitiveness of the US FTZs. 
 
My big takeaway from these two experiences was that South-to-South learning is vital for our client countries worldwide, without doubt.  However, we often forget that developed economies may have some interesting lessons to glean from at our own backyards in the developed world.  And yet, even a country like the United States can learn from some of the practices buried in the backyards of our client countries.  




 

'Mission-oriented' strategies to invest in innovation: Competitiveness via an enterprising public sector

Christopher Colford's picture
Mariana Mazzucato on "The Entrepreneurial State"


“This is the most extraordinary collection of talent, of human knowledge, that has ever been gathered – with the possible exception of when Thomas Jefferson dined alone.” That quip sprang readily to mind this week – it was coined in 1962 by President John F. Kennedy, when he welcomed a group of Nobel laureates to the White House – at a paradigm-shifting, synapse-snapping seminar featuring Prof. Mariana Mazzucato and other leading economics scholars, who convened for a think-tank symposium on innovation policy and competitiveness strategy.

The ideal of innovative, inclusive, green and sustainable economic growth is achievable, Mazzucato explained to the Information Technology and Innovation Foundation – if policymakers and private-sector firms recognize that a dynamic economy requires a “mission-oriented” approach to driving technological innovation. An acclaimed economist at the University of Sussex – and the author of, among other works,“The Entrepreneurial State: Debunking Public vs. Private Sector Myths” – Mazzucato is inspiring an increasingly wide-ranging debate over how to create higher-quality jobs in higher-value industries by sharpening economies’ competitiveness.

An essential driver of creativity is “the innovative state,” as Mazzucato recently detailed in an essay in the journal Foreign Affairs – through disciplined, deliberate public-sector investment, not just in basic research, but in risk-taking ventures as a key stimulant to economy-wide growth. That requires a forthright embrace of the public sector’s ability – and responsibility – to “actively shape and create markets, not just fix market failures.”

With a frisson of what one panelist called “the goosebump factor” enlivening the ITIF seminar – which was moderated by another top scholar of innovation and competitiveness, ITIF’s Rob Atkinson – the think-tank crowd heard Mazzucato outline the need for public-sector agencies to be, not just an occasional partner of private-sector firms, but a persistent driver of investment in leading-edge industries.

Industrial policy is finally back on the agenda,” Mazzucato asserted at the start of her ITIF remarks. Yet her vision of a competitiveness-minded public sector promoting a modernized version of industrial policy goes far beyond the long-ago experiments in heavy-handed planning that many free-market fundamentalists – forever in thrall to Thatcherism – still enjoy deriding as doomed attempts to “pick winners and losers.” Political Washington’s stale bickering over such a frozen-in-time caricature of industrial policy has long since been eclipsed, among economics scholars and practitioners, by the imaginative approaches of Mazzucato and others to energizing “the entrepreneurial state.”

Focusing the debate on the many pro-active instruments that the public sector can assert to help channel investment into innovation, Mazzucato hurled the defeatist “picking winners and losers” accusation back at the laissez-faire fatalists: “The question is not whether we should ‘pick’ but how.”

“The ‘entrepreneurial’ state, to me, means the state being willing and able to take on risk, to take on real fundamental uncertainty,” Mazzucato recently told The Financial Times. An enterprising public sector has often proven far more venturesome than short-term-focused private-sector firms, which often shy away from higher-risk, higher-reward investments that might diminish their next quarter's profits.   

“Venture capitalists themselves often enter [the innovation process] late in the game. In biotechnology, they actually came in after the state had made some of the most radical, revolutionary investments – which, after all, will often fail,” said Mazzucato. “And this is a very important point. Innovation is uncertain. It will often fail. So you need to make sure that the government budget can also fund some of the failures, cover the losses, as well as reap the return from some of the successes to fund the next round” of investments in innovation.

In his enthusiastic review of Mazzucato’s book, economics sage Martin Wolf of the Financial Times noted that energetic public-sector investment in innovation – and the abdication by private-sector firms of their oft-bragged-about, seldom-fulfilled role as bold risk-takers – has led to a “free-rider” problem that distorts incentives.

“Government has increasingly accepted that it funds the risks, while the private sector reaps the rewards,” wrote Wolf. “What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most loss-making elements are socialised, while the profitmaking ones are largely privatised.” Neoclassical purists' continued scorn for the positive role of innovation-minded public-sector investment, Wolf reasoned, may be “the greatest threat to rising prosperity” in austerity-pinched Western economies.

Mazzucato’s analysis at ITIF reminded economy-watchers of how far the innovation-policy discussion has advanced, even as laissez-faire dogmatists belabor their weary bromides about the supposed taboo against “picking winners and losers.” Propelling a more nuanced vision of competitiveness strategy, as an improvement on earlier approaches to industrial policy, this week’s ITIF seminar advanced an enterprising agenda that Washington should weigh more often – analyzing not whether, but how, the public sector and the private sector can share the responsibility of crafting pro-growth policies and pro-jobs initiatives sans frontières. Meeting that challenge will require a paradigm-changing determination to champion an entrepreneurial public sector as a positive catalyst for creativity.

Mazzucato: "Value Creation" -- Dynamic Role for Government


 

Newest private participation in infrastructure update shows growth and challenges

Clive Harris's picture



In 2013, investment commitments to infrastructure projects with private participation declined by 24 percent from the previous year.  It should be welcome news that the first half of 2014 (H1) data – just released from the World Bank Group’s Private Participation in Infrastructure (PPI) database, covering energy, water and sanitation and transport – shows a 23 percent increase compared to the first half of 2013, with total investments reaching US$51.2 billion.

closer look shows, however, that this growth is largely due to commitments in Latin America and the Caribbean, and more specifically in Brazil. In fact, without Brazil, total private infrastructure investment falls to $21.9 billion – 32 percent lower than the first half of 2013. During H1, Brazil dominated the investment landscape, commanding $29.2 billion, or 57 percent of the global total.

Four out of six regions reported declining investment levels: East Asia and the Pacific, South Asia, Africa, and the Middle East. Fewer projects precipitated the decrease in many cases. Specifically, India has experienced rapidly falling investment, with only $3.6 billion in H1, compared to a peak of $23.8 billion in H1 of 2012. That amount was still enough to keep India in the top five countries for private infrastructure investment. In order of significance, those countries are:  Brazil, Turkey, Mexico, India, and China.

Sector investments were paced by transport and energy, which together accounted for nearly all private infrastructure projects that were collected in this update. The energy sector captured high investment levels primarily due to renewable energy projects, which totaled 59 percent of overall energy investments, and it is poised to continue growth due to its increasing role in global energy generation.

The energy sector also had the biggest number of new projects (70), followed by transport (28), then water and sewerage (12). However, transport claimed the greatest overall investment, at $36 billion, or 71 percent of the global total.

While we need to see what the data for the second half of 2014 show, what we have to date suggests that infrastructure gaps may continue to grow as the private sector contributes less. It also suggests that, in many emerging-market economies, there is much work to be done to bring projects to the market that will attract private investment and represent a good deal for the governments concerned. 
 

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