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).
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.
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.
Follow the money, and you’ll find out how and why corruption has become "Public Enemy Number One" for those who are promoting global development – as crony capitalists in the private sector connive with corrupt officials in the public sector to short-circuit sound business practices, reward self-interested insiders, subvert the broad public interest, and undermine the ideals of good governance.
This week’s gathering of the third-ever conference of the International Corruption Hunters Alliance (ICHA) – a global network of prosecutors, lawyers, detectives, forensic accountants and policymakers who track down illegal and unethical financial practices – will underscore the continuing drain on development imposed by public-sector graft, private-sector lawbreaking, and the worldwide flow of illicit funds from sinister financial transactions.
Monday morning’s opening plenary session at the World Bank Group’s headquarters in Washington – headlined by Prince William, the Duke of Cambridge and heir to the British throne, along with Bank Group President Jim Yong Kim – began a week that should help focus worldwide attention on the way that systematic corruption enriches lawbreakers, undermines respect for the rule of law, thwarts good-governance efforts and drains scarce resources from effective development.
The three-day conference should also raise public awareness of the vigorous international action that has been mobilized in recent years, as corruption-related concerns have risen to a leading position on the global diplomatic agenda.
Inspired by then-World Bank President James D. Wolfensohn’s landmark “cancer of corruption” speech at the 1996 Annual Meetings, global action has been steadily gaining momentum – through such channels as the G20 leaders’ working group to tighten policies and procedures; the Financial Action Task Force’s standard-setting vigilance; the OECD’s Anti-Bribery Convention and its continuing monitoring of corruption’s toll; and civil-society organizations’ diligent watchdog efforts to ensure that development dollars will go, not toward graft, but toward the places where aid is desperately needed.
This week’s events at the Bank Group – focusing on the theme of “Ending Impunity,” and pivoting around International Anti-Corruption Day, which the United Nations has designated as this Tuesday – are timed to coincide with the launch of the OECD’s latest Foreign Bribery Report.
The World Bank Group continues to champion the anticorruption ideal and good-governance standards: by enforcing a “zero tolerance” policy for corruption, closely tracking furtive patterns of suspicious financial flows, and working with law-enforcement officials worldwide to track down assets that have been looted and hidden by kleptocratic regimes. This week’s conference is organized by the Integrity Vice Presidency – which coordinates the Bank Group-wide effort to expunge all corrupt or unethical practices – with the support of such Bank Group units as the Governance Global Practice and the Stolen Assets Recovery Initiative.
- anti-corruption; politics; open government; accountability; transparency; collaborative governance; collaboration; inclusive development; open contractring; open contracting data standard; open data;
- Stolen Assets
- Stolen Assets Recovery
- Stolen Asset Recovery Initiative
- Anti-Corruption Initiatives
- Anti-Corruption Day
- Public Sector and Governance
- Private Sector Development
- Law and Regulation
- Global Economy
- Financial Sector
At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.
The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund.
Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.
The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.
The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.
Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”
The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”
For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.
Step by step, consider how this process delivered today's energy abundance.
- What inspired the arrival of these new energy supplies? New technologies and techniques – “hydraulic fracturing” and “horizontal drilling” – have helped coax once-inaccessible oil and natural-gas deposits out of underground rock formations.
- And how were those techniques developed? Through well-targeted innovation programs that were initially funded by government agencies.
- After government-funded R&D had proven the new technologies' promise, the new industrial methods were eagerly applied by innovators in the energy industry.
- Connect the dots: This revolution was brought to you by far-sighted, government-inspired investment initiatives that helped a strategically-chosen sector of the economy promote competitive industries and innovation.
- OK: Let's come right out and say it: This marks a triumph of industrial policy.
There: We actually said the fateful phrase: "industrial policy."
That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."
It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.
Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.
Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.”
Mitchell’s determined experimentation with the new technologies built atop the crucial government investment in R&D. His entrepreneurial zeal was even more remarkable considering the opposition of many free-market absolutists on Capitol Hill, who disdained any type of public-private partnership that tolerated an active government role. Mitchell’s team gives credit where credit is due: “DOE started it, and other people took the ball and ran with it,” according to Mitchell’s former vice president and lead geologist. “You cannot diminish DOE’s involvement.”
Indeed, the impact of lower oil and natural-gas prices has been so dramatic that some energy-policy scholars, as became clear at this week’s European Union event, understandably worry that lower energy prices may lull governments and consumers into a false sense of security. Lower energy costs may remove a price-conscious spur to continued investment in cleaner, more sustainable alternative energy sources. That concern surely poses a genuine challenge for policymakers as they craft clean-energy and anti-climate-change strategies for the long term. Avoiding any backsliding on clean-energy investment will require sustained pro-innovation initiatives, and perhaps tax-policy adjustments, that promote long-term investment in cleaner energy sources. Disincentives on the use of fossil fuels is surely crucial to climate-smart strategies, speeding the transition toward renewable sources. The recent shale-gas revolution has bought some extra time for the economy to make that transition, and, as environmental advocates insist, that time must be used wisely.
Looking back on the process that delivered today’s shale-gas and tight-oil abundance, the lesson is clear: A well-targeted industrial policy – or, if you’d prefer to use the modernized lingo, competitiveness strategy – inspired today’s revolution in energy policy. It’s the latest proof that competitiveness strategies, with the public sector and the private sector both playing constructive roles, can contribute to positive change.
So the next time a dogmatic defender of laissez-faire passivity tries to tell you that government should always keep its hands completely off the economy – or scoffs that all forms of competitiveness strategy are merely doomed attempts at “picking winners and losers” – remind that laissez-faire fatalist about the positive economic impact of government-and-industry partnerships.
Yes, it took decades of patient public-private teamwork to trigger this energy revolution. And, yes, as environmentalists wisely warn, the new technologies must be used under strict regulation that upholds the highest degree of environmental protection. Yet, accepting all the caveats, the economy now seems ready to reap a rich reward.
Whether you embrace the term "industrial policy" or use a euphemism like "competitiveness strategy," this example of mission-focused, government-organized, private-sector-driven, technology-led progress provides dollars-and-cents evidence that activist strategies, promoting research and investment in high-priority sectors of the economy, can deliver a dramatic payoff in productivity.
After all the gloom, there’s a glimmer of hope on the horizon.
Front-loading the impact of its double-barreled motto, “Global Challenges, Global Solutions,” the Annual Meetings season may have finally gotten the grim “challenges” part over and done with. This week – starting at 9 a.m. on Tuesday, livestreaming via “World Bank Live” from the Bank’s Preston Auditorium – we’re about to explore one of the most promising solutions now inspiring the development community: the pro-growth, pro-jobs Competitive Industries and Innovation Program (CIIP).
The competitiveness conference will brighten the mood after last week’s barrage of bad news, which seemed relentless throughout the week as downbeat economic and geopolitical forecasts dominated the debate at the Annual Meetings of the World Bank Group and the International Monetary Fund. From Jim Kim’s exhortation that the world’s inadequate response to the ebola crisis must be strengthened, to Christine Lagarde’s stern warning of an “uneven and brittle” era of “prolonged subpar growth [with] excessive and rising inequality,” there was plenty of disheartening data. Lagarde offered a deflating new coinage: "the New Mediocre."
The sobering numbers within the IMF’s new World Economic Outlook underscored the sense that the global economy (and especially its wealthier countries) may indeed be stuck in an era of “secular stagnation.” So did the conclusion by Financial Times economic scholar Martin Wolf that the once-buoyant, now-humbled leaders of the global economy are in “an extraordinary state” of not just a gnawing malaise but a ‘managed depression’.”
As if all that weren’t dispiriting enough, the news late in the week that the world’s leading financial regulators were holding an unprecedented “stress test” of their crisis-response system – to analyze whether its newly strengthened safeguards can indeed protect against the risk of another cross-border crash of the financial system – made some skeptics wonder, “What do those guys know that we don’t know?”
Amid all the dreary news about the futile quest for elusive growth and the imbalanced rewards in a class-skewed society, one could be forgiven for feeling downcast. Yet Largarde’s rallying cry – “With the risk of mediocrity, we cannot afford complacency” – should remind optimists that we mustn’t let momentary doubts induce a drift toward the do-nothing paralysis of laissez-faire. An array of nuanced, pro-active strategies can help revive growth and jump-start job creation – and the World Bank Group conference this week will bring together some of the world’s leading economic-policy scholars to explore those strategies.
The “New Growth Strategies” conference – on Tuesday, October 14 and Wednesday, October 15 – will explain and expand upon the pro-growth thinking that undergirds the Competitive Industries approach. Targeting investment at the sector and industry levels to strengthen productivity and unlock new job creation, a wide range of analytical, investment and advisory projects are already under way – in both low-income and middle-income countries – through the Competitive Industries and Innovation Program (CIIP), which is convening the conference.
Amid the week-long procession of buttoned-down, business-suited speakers who commanded the stage during the Annual Meetings week of the World Bank and International Monetary Fund, the most thought-provoking comments may have come from someone who was not outfitted in business attire at all – but who was instead wearing a clerical collar.
It seemed fitting that the remarks by (some might say) the week’s most authoritative participant occurred on a Sunday morning, at an hour when many Washingtonians habitually heed an authority even more elevated than the Bank and the Fund. The major attraction at the IMF’s day-long “Future of Finance” conference was the Archbishop of Canterbury, Justin Welby, whose stature lent a special gravitas to the already-serious tone of the Fund forum’s focus on scrupulous ethics as a bedrock principle of sound capitalism.
On a panel with some of the titans of worldly finance – including the leaders of the IMF and the Bank of England – only someone of Welby’s ecclesiastical renown could have stolen the show. Although he did his down-to-earth best to try to avoid upstaging his fellow panelists – quipping, “I feel rather like a lion in a den of Daniels at the moment . . . slightly nerve-wracking” – the leader of the worldwide Anglican Communion was clearly the marquee draw for the throng that packed the Jack Morton Auditorium, spilled beyond the extra overflow rooms and jammed the adjoining corridors.
Citing the need for “heroism in the classic sense” to overcomethe spirit of “recklessness” that recently pervaded much of the financial industry, Welby called for a return to “ethical and worthwhile banking.” He urged everyone working in finance to aim to “leave a mark on the world that contributes to human flourishing.”
Welby – himself a former financier, who traded derivatives and futures before he joined the clergy – recounted the misgivings of the mournful bankers whom he had interviewed while serving as a member of the U.K.’s Banking Standards Commission in the wake of the 2008 financial crash. Welby recalled the lamentations of a deeply penitent banker who had been “broken by the experience” of leading his bank to ruin: In retrospect, reasoned the banker, “you can either have a big bank that’s simple, or a small bank that’s complex, [but] you cannot have a big complex bank and run it properly. . . . If only we had kept things simple.”
Welby’s call for the highest standards of conduct in the financial sector was matched by the exhortations of his fellow panelists – including IMF Managing Director Christine Lagarde, who reminded the audience that every financier must see himself or herself as “a custodian of the public good.” Lagarde's message was underscored by Bank of England Governor Mark Carney – who also leads the global Financial Stability Board – who deplored the pre-crash “disembodiment and detachment of finance” from the rest of the economy.
Only by upholding the most exacting ethical standards, said Largarde and Carney, can financiers rebuild public confidence in the financial sector – confidence that, in Lagarde's words, “builds over time and dies overnight.”
The regrets voiced by the panel’s private-sector financiers contributed to the panel’s almost confessional tone.
“If we can’t get the basic incentives right, it’ll be hard to get the right outcomes,” said Philipp Hildebrand, who had served as a senior central-bank official during the financial crisis before returning to the private sector. He reflected that “with wrong incentives, you end up with a wrong business model,” which in turn attracts “the wrong kind of people” who are prone to take excessive risks. Thus he underscored the need for “a personal transformation” within the spirit of every business leader.
Putting an even sharper point on the source of the problem, longtime financier Kok-Song Ng regretted that “a virus entered the system” in the years leading up to the crash, as financial firms deliberately recruited profit-driven “mercenaries” to run their trading desks. Those firms ignored the explosive risks being taken by their hired-gun traders, because they succumbed to “the great temptations for those in ‘the money world’ to want to make a quick buck” no matter how dangerous their tactics might be.