Policy persuasion is most effective when it draws on the evidence base of all the social-science disciplines. Every strand of the social sciences – not just the mathematical precision of economics, but also the nuanced interpretations of history and the subtle trajectories of sociology – has a great deal to contribute as policymakers balance competing priorities.
That multidisciplinary approach – emphasized in such recent works as The History Manifesto, in which Harvard and Brown University historians call for policymakers’ greater reliance on the combined reasoning of all the social sciences – was thoroughly borne out in the recent Development Economics Series lecture by economist David Autor of MIT (who is a scholar at the National Bureau of Economic Research). Presenting a research paper on trade policy, and underscoring the importance of public opinion in shaping policymakers’ approach to it, Autor’s presentation used the logic of political science to highlight the electoral mood swings that help shape countries’ position on international trade.
Using the perspectives of political science – in the paper, “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure” (co-authored with colleagues from the University of Zurich; the University of California, San Diego; and Lund University) – was a valuable way to help remind Autor's economics-focused World Bank Group audience that policymaking does not occur in an academic vacuum. Even though the Bank’s economics-heavy analyses may try to distill policy options into quantifiable formulae, the policymakers whom the Bank advises get their political mandate from their countries’ volatile voters – who do not always follow homo economicus’ coldly rational approach to decision-making.
Amid the topsy-turvy 2016 electoral cycle in many countries – in which voters’ fears about job losses due to international trade have been inflamed amid an upsurge of populism and protectionism – you don’t have to be a public-opinion pollster to affirm Autor's assertion in his analysis of recent U.S. voting patterns: “We detect an ideological realignment that is centered in trade-exposed local labor markets and that commences prior to the divisive 2016 U.S. presidential election. Exploiting the exogenous component of rising trade with China and classifying legislator ideologies by their congressional voting record, we find strong evidence that congressional districts exposed to larger increases in import competition disproportionately removed moderate representatives from office in the 2000s.”
Translation: If you’re a pro-trade lawmaker in a district that has a high degree of imports from overseas, in a region that has endured what Autor calls “economic scarring,” then you’re likely to pay a heavy price at the ballot box – and, if you’re defeated, your successor just might be a strident protectionist. The Autor analysis shrewdly underscores the adjective “political” in the anodyne textbook phrase, “political economy.”
Questions like those – focusing on the private sector as the principal driver of growth, with deft public policy as an indispensable catalyst – inspired a dialogue among some of the developing world’s most experienced policymakers at a major forum, “Powering Up Growth: Ideas for Beating the Slowdown,” during the recent Spring Meetings of the World Bank Group and the International Monetary Fund. All four government Ministers on the panel – from both commodity-exporting and -importing countries – voiced a sense of urgency, describing their efforts to attract private investment to spur job creation, amid a global economy that seems destined for prolonged weakness.
Before the policymakers ascended the Preston Auditorium stage, sobering updates had arrived from the Bank and the Fund: The Bank’s latest forecast for global growth has been lowered from 2.9 percent to 2.5 percent – with the caveat that this latest forecast is subject to further downside risks. That downward revision is in parallel with the Fund’s similar projection, which sees global growth this year in the neighborhood of just 3 percent.
Policymakers worldwide are eager to explore any option to try to lay the foundation for an eventual return to a long-term economic expansion. It was clear that the panelists in the “Powering Up Growth” event – which was convened by Jan Walliser, the Vice President for the Bank Group’s practice group on Equitable Growth, Finance and Institutions (EFI) and organized by the Global Practice for Macroeconomics and Fiscal Management (MFM) – were focused on long-term structural changes that can energize the private sector’s ability to drive growth.
The panelists – from Bolivia, Pakistan, Angola and Ukraine – represented countries from different regions and at various levels of economic development, but they shared a determination to jump-start growth through reforms that will strengthen the private sector’s long-term confidence. The Ministers, at times, seemed to envision opportunities, not just for short-term structural adjustment of their priorities or medium-term structural reform of their policy farmeworks, but for far-reaching structural transformation of their economies and societies.
Call it “secular stagnation,” or the disappointing “New Mediocre,” or the baffling “New Normal” – or even the back-from-the-brink “contained depression.” Whatever label you put on today’s chronic economic doldrums, it’s clear that a slow-growth stall is afflicting many nation’s economies – and, seven years into a lackluster recovery from the global financial crisis, some fragile economies seem to be lapsing into another slump.
As policymakers struggle to find a plausible prescription for jump-starting growth, a tug-of-war is under way between techno-utopians and techno-dystopians. It’s a struggle between optimists who foresee a world of abundance thanks to innovations like robot-driven industries, and pessimists who anticipate a cash-deprived world where displaced ex-workers have few or no means of earning an income.
To add a bracing dose of academic rigor to the tech-focused tug-of-war, along comes a data-focused realist who adds a welcome if sobering historical perspective to the debate. Robert J. Gordon, a macroeconomist and economic historian at Northwestern University, takes a longue durée perspective of technology’s impact on growth, wealth and incomes.
Gordon’s blunt-spoken viewpoint has caused a sensation since his newest book, “The Rise and Fall of American Growth,” was launched at this winter’s meetings of the American Economic Association. His analysis injects a new urgency into policymakers’ debates about how (or even whether) today’s growth rate can be strengthened.
When Gordon speaks at the World Bank on Thursday, March 31 – at 11 a.m. in J B1-080, as part of the Macrofiscal Seminar Series – economy-watchers can look forward to hearing some ideas that challenge the orthodoxies of recent macroeconomic thinking. His topic – “Secular Stagnation on the Supply Side: Slow Growth in U. S. Productivity and Potential Output” – seems likely to spark some new thinking among techno-utopians and techo-dystopians alike.
To watch Gordon’s speech live via Webex – at 11 a.m. on Thursday, March 31 – click here. To dial in to listen to the audio, dial (in the United States and Canada) 1-650-479-3207, using the passcode 735 669 472. For those telephoning from outside the United States and Canada, the appropriate numbers can be found on this page.
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The volatility that’s now shaking the global financial system seems likely to have some of its most profound effects on the world’s emerging markets and developing economies (EMDEs). As policymakers seek to ride out the late-summer storm, it’s more vital than ever for economists and investors to understand how and why those economies got into today’s predicament.
In the wake of the global financial crisis that began in 2007, the extraordinary monetary policies (EMPs) pursued by the world’s developed economies – its wealthier nations – triggered a buying spree in emerging and developing economies (EMDEs). Those countries experienced an unparalleled surge in total gross capital inflows from an annual average of $0.5 trillion from 2000 to 2007 to $1.1 trillion from 2010 to 2013. EMDE external bond issuance, which had been increasing steadily before the crisis, accelerated rapidly post-crisis and has now reached unprecedented levels.
From 2009 to 2014, EMDE corporates and sovereigns cumulatively issued $1.5 trillion in external bonds – almost a tripling from $520 billion in the period from 2002 to 2007. The recent surge in issuance is driven by corporates, which issued a total of about $300 billion in 2014 compared to $14 billion in 2000 (Figure 1). Most of that issuance is denominated in foreign currencies (Figure 2). Cumulative post-crisis issuance of bonds relative to the size of the economy has risen to unprecedented levels – a phenomenon that is widespread and not driven by a single country or region (Figure 3).
Recently, financial volatility returned because of various concerns in the marketplace – including (just to name a few) shifting expectations of the shape of the Federal Reserve’s exit path from ultra-low interest rates and the rapid strengthening of the US dollar; the launch of quantitative easing by the European Central Bank and its impact on inflation expectations and bond markets; low and volatile oil prices; China’s growth slowdown, additional stimulus and financial-sector challenges; the standoff between the new Greek government and its creditors; and continuing geopolitical turmoil.
In this context, EMDEs face six interrelated financial challenges, although it is important to note significant differences between countries exist.
First: Prolonged extraordinary monetary policies (EMPs) in developed countries and the prospect of asynchronous exits create a wide range of global financial market challenges. EMPs in developed economies created an environment of ultra-low interest rates, as policymakers have aimed to rekindle economic growth and battle disinflationary pressures. Three key risks have emerged:
- Low rates and excessive risk-taking have contributed to very high asset valuations, compressed risk spreads and term premiums, and stimulated non-bank-sector growth, boosting leverage, illiquidity and collateral shortages. That exposes the financial system to shocks. This has weakened risk pricing and contributed to the “illusion of liquidity,” raising the risk of pro-cyclical “fire sales” with global spillovers.
- Sudden shifts in market expectations or a bumpy trajectory of the U.S. Federal Reserve exit path to normalized interest rates could trigger volatility in currency, equity and capital-flow markets – similar to the “Taper Tantrum” of 2013, when the Federal Reserve openly contemplated scaling back its asset purchases.
- Increasing divergence between central bank policies in developed economies has already had significant implications for currency markets, particularly for the euro-dollar pair. Divergence creates an interference risk and the possibility of miscommunication, which could trigger new bouts of global financial market volatility.
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.
Metaphor of the month, via a deft dispatch from Davos: Thomas “Piketty was not in attendance this year – which was like putting on ‘Hamlet’ without the Prince” of Denmark, quipped Larry Elliott, the economics editor of The Guardian, as he needled ostentatious Davos-goers for only half-heartedly living up to the Davos dictum of being “ ‘committed to improving the state of the world,’ provided nothing much changes.”
Let’s shift the Shakespearean citation slightly, from “Hamlet” to “Macbeth”: Like Banquo’s ghost, the specter of Piketty’s analysis of inequality and injustice seemed to haunt many private-sector leaders at Davos this year – and thus the scholar from the Paris School of Economics didn’t need to be present in order to have a powerful impact at this year’s World Economic Forum.
Amid last week's self-exculpatory denialism from the unrepentant-oligarch wing of the Davos Man culture, one could almost hear the apologists for plutocracy and the free-market fatalists joining the conscience-stricken Macbeth in shrieking to Banquo's implacable apparition: “Thou canst not say I did it! Never shake thy gory locks at me!”
The Davos 2015 parade of plutocrats may have been worth all the time and trouble, after all – despite its customary spectacles of self-indulgence – if the pageantry helped pique the conscience of some of the One Percenters and their courtiers, at least momentarily. “Most of the conversations between chief executives here are about Piketty-type issues. They talk about things [at Davos that] they wouldn’t be talking about back in the boardroom,” one eminent corporate leader told Elliott of The Guardian. Piketty-inspired concerns about inequality – along with fears of chronic economic stagnation and an irretrievably despoiled planet – seem likely to inform this year’s top-level global policy forums, from Addis Ababa in July to the United Nations in September to Paris in December.
Signaling that many private-sector leaders have been awoken by, and are responding to, Piketty's landmark analysis of the intensifying concentration of capital in ever-fewer hands – which is provoking a more rigid stratification of society along hardening lines of social class – the World Economic Forum itself set the stage for Davos 2015 by publishing a 14-point agenda for promoting more inclusive growth. That analysis, searching for constructive solutions, is certainly a welcome contribution to the debate. Yet Piketty’s analysis of the widening gaps between the ultra-wealthy and everyone else – with Davos as perhaps an inadvertent self-parody of the cocooned Uber One Percent – suggests that there’s scant hope for mending a torn society unless policymakers enact policy changes on a vast scale: by (among other priorities) adopting greater progressivity in tax rates and enforcing a crackdown on cross-border tax evasion.
(An aside, regarding those who quibble with a point of Piketty-era terminology – and those who have attempted, and have conspicuously failed, to refute Piketty’s logic. Using a chicken-and-egg argument, some theorists lament the Piketty-inspired focus on the term “inequality,” insisting that inequality may be the outgrowth of, rather than the cause of, economic stagnation and social stratification. Fair enough. Yet such casuistry dwells on a distinction without a practical difference. Enacting pro-growth programs to avoid “secular stagnation” would surely be wise policymaking. Yet no serious plan would envision going back to a pre-2008-style “GDP growth at any cost” approach. The global financial crisis of 2008 revealed the recklessness of simplistic gun-the-engine, GDP-uber-alles policies that produce merely unsustainable, low-quality growth. Today’s pragmatists, instead, champion a more inclusive economy that eases social divisions and sustains broader opportunity – promoting what the World Bank Group calls “shared prosperity.”)
Judging by Piketty’s esteem among Davos 2015 participants, most leaders of the private sector – all but a recalcitrant few, some of whom dwell on the free-market fundamentalist fringe – have evidently gotten the message (at last): Chronic inequality and stifled social mobility have reached a socially intolerable and perhaps politically destabilizing intensity. Yet if all but an eccentric remnant in the private sector “get it,” do public-sector policymakers – many of whom seem ever-eager to do the bidding of the most self-aggrandizing monied interests? The Davos-style ideal of “capitalism for the long term” is motivated by “enlightened self-interest,” yet many boardrooms – and those politicians who are forever at their beck and call – apparently need still more enlightenment and less self-interest.
Charting the next steps beyond Piketty's “Capital in the Twenty-First Century" – advancing from academic analysis to social action – will be the next order of business in 2015, a year with parliamentary elections in several pivotal countries. Just in time for the post-Davos and pre-election season, a newly published book seems poised to pick up where Piketty left off: emphasizing that society needs a healthier balance between private-sector dynamism and public-sector activism, undergirded by a humane sense that an economy with truly shared prosperity should prioritize social fairness.
With their appetites whetted by early excerpts published this week in The Observer, many admirers of Piketty will be eager to read “How Good We Can Be: Ending the Mercenary Society and Building a Great Country” by Will Hutton, the principal of Hertford College, Oxford. Hutton – for all his gloom about the injustices inflicted on his native United Kingdom over the past 35 years – advances an optimistic agenda that might show the way toward correcting decades’ worth of policy errors.
“Inequality has become a challenge to us as moral beings,” declares Hutton, reinforcing Piketty’s view of a society starkly stratified by social class. A callousness toward social divisions has spilled over from the economic realm into political decision-making, resulting in an “amoral deficit of integrity” – and Hutton is not shy about pointing to a specific turning point, or about naming a specific name.
“Ever since [Margaret] Thatcher’s election in 1979, Britain’s elites have relegated concerns about inequality below the existential question of how to restore our capitalist economy to economic health, a matter deemed to transcend all other considerations,” writes Hutton. “The language of the socioeconomic landscape has been commanded by words like efficiency, productivity, wealth generation, aspiration, entrepreneur, pro-business and incentives. To the extent they are significant at all, preoccupations with inequality have been seen as of second-order importance.”
The “raw trends” of the weakened power of wage-earners and the strengthened dominance of capital-owners – the outgrowth of Piketty’s iconic formula, r>g – “are then exacerbated by the reduction of taxation on capital, companies and higher earners in the name of promoting incentives and 'wealth generation.' " No wonder, Hutton asserts, that the United Kingdom has suffered “a stunning increase in inequality, the fastest in the OECD.”
Readers who were drawn to Piketty’s logic – yet who were left by "Capital" with a despairing feeling of “where do we go from here?” – are likely to warm to Hutton’s work, which extends the logic of his influential 1995 analysis, “The State We’re In.”
“Indifference to the growing gap between rich and poor, in all its multiple dimensions, is the first-order-category mistake of our times," warns Hutton. "No lasting solution to the socioeconomic crisis through which we are living is possible without addressing it.”
Recalling his years of energetic columns in The Guardian and The Observer, Hutton’s activist economic prescription in “How Good We Can Be” seems likely to include a better-focused approach to industrial policy; targeted investment in innovation capacity; pro-entrepreneurship mechanisms to sharpen competitiveness; and pro-active tax policies that ease rather than intensify the wealth divide.
Many of those who missed this year’s Davos triumph of Piketty-style reasoning are now awaiting the arrival of Hutton’s new book on this side of the Atlantic. Piketty scored the scholarly sensation of 2014 with the publication of “Capital.” My early hunch is that Hutton, with “How Good We Can Be,” just might achieve a similar agenda-setting success in 2015.
“We need everybody,” as World Bank Group President Jim Yong Kim has passionately argued. “We need writers who can write about this. We need engineers. We need doctors. We need lawyers. We need artists. We need everybody who can capture the imagination of the world to end poverty." There’s a role in development for public-spirited people from every profession who seek to contribute to the cause.
Deep legal knowledge and deft legal reasoning are certainly part of the skill set needed to eradicate poverty and promote development. That’s because “you can’t have justice without advocates for justice,” as the Justice Community of Practice at the World Bank Group recently learned from the leader of an energetic initiative to link public-spirited legal practitioners with the nonprofit and non-governmental organizations (NGOs) that need their skills.
The legal acumen that helps for-profit law firms succeed in the marketplace is often sought by nonprofits, human-services groups and human-rights advocates. Lawyers' skills can often make a crucial difference for organizations that deal with social prorities – whether it’s by tackling complex challenges like protecting refugees or defending prisoners of conscience, or by pursuing routine tasks like negotiating an office-space lease or reviewing an employment contract.
Matching the needs of social organizations with the capacity of lawyers who have a bit of time to commit to pro bono publico ideals – and thus to “strengthen the global pro bono community” for the long term – is the goal of PILnet, the Global Network for Public Interest Law. PILnet president Edwin Rekosh recently told the Bank’s justice-focused group that “promoting voluntarism among lawyers” often starts with the simple question, “Do you care about doing something good with your free time?” If so, “What do you care about?”
Lawyers within some of the world’s largest international law firms, in particular, often find that they have some spare capacity when they're in-between client assignments. Putting those flexible hours to good use for a pro bono client can both satisfy the lawyers’ altruistic aspirations and reflect well on their firms’ commitment to devote time and talent free of charge to worthy social causes.
Source: Branko Milanovic
If you thought the wealth gap was vast between the miser Ebenezer Scrooge and the oppressed Bob Cratchit in “A Christmas Carol,” then lend a Christmastime thought for the desperate Dickensian divide that’s now afflicting the global economy.
The biggest economic-policy issue of 2014 has certainly been the outpouring of alarm about the chronically intensifying divide between wealth and poverty – an uproar that has had a transformational effect on the worldwide debate on economic policy. As a seminar at the Center for Global Development recently discussed, the precise statistics on inequality (and the perception of inequality) are subtle, with many nuances of measurement (whether data should be derived, for example, from tax-return filings or from household surveys). Yet this year’s irrefutable interpretation among economists and business leaders has been driven by a landmark of economic scholarship: the bombshell book “Capital in the Twenty-First Century” by Thomas Piketty. “Capital” has forced economists, policymakers and scholars to reconsider the inexorable trends that are driving the modern-day economy toward an ever-more-intense concentration of capital in fewer and fewer hands.
No wonder Piketty’s “Capital” was hailed as the Financial Times/McKinsey “Business Book of the Year.” Piketty’s analysis has fundamentally changed the parameters of the public-policy debate, and many of its ideas challenge conventional economic theory.
To explore the implications of the alarming trends in income and wealth inequality, there’s no analyst more insightful than Branko Milanovic, the former World Bank economist who is now a scholar at the LIS Center (working on the authoritative Luxembourg Income Study) at the City University of New York. Milanovic has justly won acclaim for his work, “The Haves and the Have-Nots,” which pioneered the territory now being explored by Piketty.
Confirming the trends that Piketty identified in “Capital” – and taking those insights one significant step further, to measure the wealth gaps both within countries and between countries – Milanovic recently led a compelling CGD seminar on “Winners and Losers of Globalization: Political Implications of Inequality.”
The seminar’s sobering conclusion: If you think the wealth-and-incomes gap is painful now, just wait a decade or two. If allowed to go unattended, the widening economic divide will soon become a dangerous social chasm. That data-driven projection is leading many analysts to dread that inequality (whether between countries or within the same country) threatens topose a stark challenge to social stability, and even to the survival of democracy.
The breakthtaking “a-ha!” moment of Milanovic’s CGD presentation was the chart (see the illustration, above) – praised as "the Chart of the Century" by seminar chairman Michael Clemens of CGD and discussant Laurence Chandy of the Brookings Institution – that plotted-out the pattern of how globalization has exerted relentless downward pressure on the incomes of the global upper-middle class, which roughly corresponds to the Western lower-middle class.
Globalization has helped promote the prosperity of skilled workers in developing nations, Milanovic explained, with the dramatic surge of China’s economy being the greatest driver of global “convergence.” Yet globalization has had an undeniable downward effect on the wealth and incomes of low- and medium-skilled workers in developed, industrialized nations. That certainly helps explain the angry mood among voters in Western Europe and North America, whose overall incomes and wealth have been stagnating for perhaps 40 years.
At the same time – reinforcing the significance of Piketty’s iconic formula that r>g (that the returns on capital are destined to be greater than overall economic growth) – a vast proportion of the world’s wealth has been concentrated in just the very top echelons of society. Milanovic’s meticulous data (see the illustration, below) confirm the extreme concentration of global absolute gains in income, from 1988 to 2008, in the top 5 percent of the world’s income distribution. Rigorous empirical evidence from multiple sources indeed confirms that most of the global gains in wealth have accrued to the already-vastly-wealthy top One Percent. The data on increasing socioeconomic stratification are, by now, so well-established that only the predictable claque of free-market absolutists and dogmatic denierscling (with increasing desperation) to the notion that the inequality gap is merely a myth.
Source: Branko Milanovic
Reinforcing Milanovic’s analysis, yet another well-documented study – this time, by the OECD– asserted this month that economic inequality is intensifying within the world’s developed nations. That within-country trend accompanies the yawning inequality gap between developed and developing economies. The OECD thus joined the chorus that includes the World Bank Group, the International Monetary Fund, the United Nations’ Department of Economic and Social Affairs and the U.S. Federal Reserve System in sounding the alarm about the way that income and wealth disparities are becoming socially explosive. Even on Wall Street, many pragmatists are warning with increasing urgency that “too much inequality can undermine growth.”
Economic inequality – both the perception and the reality of the egregious global gap – has surely been the key economic theme of 2014, and Milanovic’s CGD presentation capped the year with what the seminar-goers recognized as authoritative data distilled into “the Chart of the Century.” Milanovic thus echoed warnings by National Economic Council chairman Jason Furman and Canadian Member of Parliament Chrystia Freeland (both of whom have led recent World Bank seminars), who cautioned Washington policymakers about the potential dangers of runaway inequality.
Energized by Milanovic’s latest calculations and analysis, scholars and development practitioners at the World Bank Group and beyond should approach 2015 with a renewed commitment to building prosperity that is truly shared – and that avoids the potential social explosion that might await many economies if runaway inequality is allowed to continue unchecked.