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

Christopher Colford's picture

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

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

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

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

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

Development Economics Lecture by Jason Furman

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

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

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

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

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

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

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

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

PISA data on financial literacy: Unanswered questions on developing financial skills for the broad student population

Margaret Miller's picture

A few weeks ago, the results of the OECD’s PISA (Programme for International Student Assessment) module on financial literacy were revealed, with Shanghai taking top honors in this category – just as it has in the last two rounds (in 2009 and 2012) on the traditional academic curriculum (reading, math and science).
This is no coincidence, as the OECD results and many other studies suggest a close relationship between education levels and academic performance in math and reading comprehension and scores on financial literacy tests.
In the PISA report, the correlation coefficients between financial literacy scores and performance in mathematics and reading were 0.83 and 0.79 respectively across 13 OECD countries in the survey sample. For high performers like Shanghai and New Zealand, these correlations were even stronger: 0.88 for mathematics, 0.86 for reading.

While waiting for general improvement in academic performance is one path to improved financial literacy, the urgency of addressing financial skills for today’s youth has led many educators and policymakers to look for more immediate steps that can be taken, including financial education interventions at school. The PISA results, however, don’t include an assessment of the value of possible financial literacy curricula, due to the “limited and uneven provision of financial education in schools.” That factor makes comparisons across countries difficult, as described in the report.

Lessons learned from policymakers on how to establish a financial consumer protection supervision department

Jennifer Chien's picture

Financial consumer protection has become a hot topic among financial-sector policymakers in recent years. Consumer protection is increasingly recognized as a critical complement to financial inclusion, particularly after the global financial crisis.

Enabling consumers to understand what financial products they’re buying, and enabling them  to “comparison shop” among providers, can lead to safer access to financial services as well as to broader financial stability.

As a result, many policymakers around the world have been putting in place laws and regulation on financial consumer protection, as evidenced by the Global Survey on Consumer Protection and Financial Literacy. At the same time, international organizations have issued guidelines and principles on designing financial consumer protection policy and regulatory frameworks, such as the G-20’s High-Level Principles on Financial Consumer Protection and the World Bank’s Good Practices on Consumer Protection and Financial Literacy.

But less guidance exists on the tricky question that immediately follows new laws and regulation: How do you implement and enforce these new rules? Policymakers have many considerations to juggle, from legal and technical issues to practical and operational concerns. Unclear legal mandates, limited supervisory capacity, the different skill sets required of staff, the need for supervisory tools adapted to financial consumer protection, and the relationship with prudential supervision – these are just some of the many questions facing regulators who are seeking to establish a financial consumer protection supervision department (“FCPSD”).

The latest technical note from the Financial Inclusion and Consumer Protection team at the World Bank (“Establishing a Financial Consumer Protection Supervision Department: Key Observations and Lessons Learned in Five Case Study Countries”) seeks to shed light on this area of growing concern. Surveys and interviews were conducted with financial consumer protection supervisors in Armenia, the Czech Republic, Ireland, Peru and Portugal to gather concrete, practical insights from the experiences of these countries in setting up FCPSDs.

There is obviously no “one size fits all” approach to establishing a FCPSD, as the right approach will be highly dependent on country context. Nevertheless, the five case study countries highlight a few common obstacles and lessons learned.

Shaping the Debate on Promoting Jobs and Competitiveness in Small Island Developing States

Ivan Rossignol's picture

The United Nations has declared 2014 as the International Year of Small Island Developing States (SIDS), in recognition of the contributions this group of countries has made to the world, and to raise awareness of the development challenges they confront – including those related to climate change and the need to create high-quality jobs for their citizens.

The Third International Conference on SIDS in September in Apia, Samoa will be the highlight event.  The World Bank Group is helping shape the debate on both climate and jobs with a delegation led by Rachel Kyte, the Group Vice President and Special Envoy for Climate Change, and with senior-level participation in the conference’s Private Sector Forum.

Is the global jobs agenda relevant to small islands states?

Tackling the challenges related to the jobs agenda in large and middle-income countries could be seen as the most significant issue for the Bank Group’s new Trade and Competitiveness Global Practice, of which I’m a member. Yet the Minister of Finance of Seychelles recently challenged my thinking on this. 

At the June 13  joint World Bank Group-United Nations' High-Level Dialogue on Advancing Sustainable Development in SIDS (which precedes the September conference on SIDS), the presentation by Pierre Laporte, the Minister of Finance, Trade and Investment of Seychelles – who is also the chair of the Small States Forum – led to a lively discussion on various job-creation and growth models that the SIDS countries may want to pursue. 

The sentiment among SIDS leaders was that one-size-fits-all solutions will not do when it comes to jobs and growth.  Yes, they do want to continue to address the tough fiscal challenges they face, but they want to tackle them while creating job opportunities for their citizens. 

Decades of reforms have not helped SIDS grow at a rate similar to the rest of the world: On average, their pace of job creation is about half the global rate. The lack of opportunities felt by many generations resulted in a heavy “brain drain” that exceeds the level seen in other developing countries. 

It is becoming very clear that business as usual in SIDS will not do.  Creative solutions need to be found now.

Behind the Scenes of 'Startupland': A Documentary that Tells the True Stories of Entrepreneurs

Toni Kristian Eliasz's picture

Try to search for stories that feature the growing pains and gains of growth-oriented technology startups – content that is not only entertaining, but of high quality and most important, educating. It is a surprisingly hard task in today's economy, where entrepreneurship is booming again.

What does it take to have vibrant growth for all?

Paula Tavares's picture

Photo Credit: Mauricio Santana – Women’s Forum 2014

The question was posed at this year’s Women’s Forum Brazil held in São Paulo, Brazil, on May 26 and 27. In a country bustling with the World Cup and gearing up for presidential elections, "Vibrant Growth for All" was a fitting topic. As more than 500 women and men involved in politics, business, civil society and academia from all regions of Brazil, countries of Latin America, the United States and Europe gathered together, women’s full participation in the economy and society was center stage in the discussions. The setting was quite appropriate: Women have made great strides and have increasingly taken the stage in the country. And starting from the top – the country’s President – and in all sectors of society and the economy, women are present and continue to take on leading positions, with many good examples present at the plenary room and throughout the two-day event.

Kicking off with an impassioned plea for the release of the abducted Nigerian schoolgirls and the keynote address given by Minister of State of Public Policies for Women Eleonora Menicucci, focusing on the achievement of economic autonomy for women in Brazil and initiatives to end violence against women such as the “Eu Ligo” campaign (with the double meaning in English: “I call / I care”), the forum throughout was indeed a vibrant event.

The plenary sessions and panels that followed were brilliantly composed of high-level women in leadership positions from Brazilian and international companies, small and medium-size enterprises (SMEs) and of government and civil society, including the CEO of Boeing Brazil, the CEO of Brazilian Tam Airlines, the CEO of the Women’s Forum for the Economy and Society, and the Clinton Global Initiative Director for Women and Girls, to shed light on topics such as business and human rights, marriage, machismo, and social investment in women, incentivizing leadership and talent, among others.

O que é preciso para criar uma economia próspera para todos?

Paula Tavares's picture

Photo Credit: Mauricio Santana – Women’s Forum 2014

A pergunta foi o foco do Fórum de Mulheres realizado este ano nos dias 26 e 27 de maio, em São Paulo, Brasil. Em um país movimentado com a Copa do Mundo e se preparando para eleições presidenciais, o tema ‘Criar uma Economia Próspera para Todos’ foi bastante propício. Mais de quinhentos homens e mulheres participantes, entre políticos, empresários, membros da sociedade civil e acadêmicos de todos os cantos do Brasil, de países da América Latina, dos Estados Unidos e da Europa se reuniram para colocar em pauta – e no centro do palco – a questão da plena participação das mulheres na economia e na sociedade. O cenário foi bastante adequado: um país em que as mulheres conquistaram grandes avanços e cada vez mais estão em posições de destaque. Do mais alto cargo - da Presidente do país - e em todos os setores da socidade e da economia, as mulheres estão atuantes e continuam a assumir cargos de liderança, com muitos bons exemplos presentes nas sessões plenárias e durante todo o evento.

O Fórum foi de fato próspero e marcante. Começou com um apelo pela libertação das estudantes Nigerianas sequestradas seguido da palestra de abertura, dada pela Ministra da Secretaria de Políticas para as Mulheres, Eleonora Menicucci, focando na conquista da autonomia econômica para as mulheres no Brasil e em iniciativas como a campanha “Eu Ligo” pelo fim da violência contra as mulheres.

As sessões plenárias e painéis que se seguiram, todos compostos de brilhantes exemplos de mulheres em posições de destaque e de liderança em empresas brasileiras e internacionais, pequenas e médias empresas e no governo e na sociedade civil, como a presidente da Boeing Brasil, a presidente da companhia aérea TAM, a presidente do Fórum de Mulheres e a diretora para Mulheres e Crianças da Clinton Global Initiative, abordaram temas relevantes como negócios e direitos humanos, casamento, machismo, e investimento social em mulheres, incentivando talentos, entre outros.

Catalyzing a New Generation of ‘Agri-preneurs’ in Africa

Julia Brethenoux's picture

Trying out new foods is one of life’s simple pleasures. Cuisine immerses you in a culture, exposes you to new tastes and excites the imagination. The challenge is, the more we succeed, the less time we can afford to cook and experiment in our home kitchens. So as Africa’s emerging markets grow, domestic demand for ready-to-consume food products is quickly on the rise, thanks to rapid urbanization and an expanding middle class. As over-sized supermarkets pop up across the continent, however, their shelves are mostly being filled by imported processed foods.

This is a huge opportunity that only requires a small change in thinking. If most agriculture initiatives usually start with the farmers and move up the value chain, then agro-processing solutions must start in the marketplace, identify opportunities, and develop businesses that leverage local agricultural resources. When you consider that, for each job created in agro-processing, an additional 2.8 jobs are created in the wider economy, you realize the benefits go much further than cheaper groceries.

New Data and Momentum for Financial Inclusion in Paraguay

Douglas Randall's picture

Paraguay’ s progress towards developing a National Financial Inclusion Strategy received a boost of energy and analytical rigor last week, as the Central Bank released new demand-side data describing the current state of financial inclusion for the country’s 4.8 million adults.

According to the EIF (Encuesta de Inclusion Financiera) data, 29 percent of adults in Paraguay have an account at a formal financial institution, 28 percent of adults use a mobile money product, and 55 percent use some type of financial service (including both of the former but also credit, insurance, and other payment products). This puts Paraguay below the average for account penetration in Latin America (39 percent as of 2011), but suggests that the country is a regional leader in the expansion of mobile financial services.

The EIF was conceived of last fall when the Paraguayan authorities, eager to paint a comprehensive and up-to-date picture of financial inclusion in their country, expanded the Global Findex questionnaire to cover additional topics including financial capability, insurance, and domestic remittances. Efforts were also made to align the EIF questionnaire with the unique financial-sector landscape in Paraguay, which features a strong cooperative sector and a fast-growing mobile financial service industry led by mobile network operators (MNOs) Tigo and Personal.

The resulting EIF data, collected in late 2013 in partnership with the World Bank and Gallup Inc., represents a valuable update and extension of the 2011 Global Findex.

On June 4, the data and related analysis were presented to the public by Santiago Peña, board member of the Central Bank of Paraguay, in an event that included key stakeholders such as the Minister of Finance, the President of the Cooperatives regulator (INCOOP), the World Bank Resident Representative, and representatives from the public and private sector as well as a wide range of civil society actors.

The data and event – described in detail the next day on the front page of a national newspaper – also served to renew momentum toward the development of the National Financial Inclusion Strategy. The authorities plan to use the EIF data to define targets, identify priority populations, and develop policy actions. The data will also act as a baseline from which to measure progress and as a means to hold the government accountable for its financial inclusion commitments.

Not Just 'Women’s Issues': Including Women in the Growth Agenda

Yasmin Bin-Humam's picture

Panelists at the conference included Maria Eugenia Davalos of the World Bank Group; Yasmin Bin-Humam of "Women, Business and the Law"; Nasim Novin of IFC's Gender Secretariat; Dzana Ferhatbegovic of the Women's Empowerment Principles of the United Nations Global Compact; and Lisa Kaestner of the Investment Climate department of IFC.

It was an ironic beginning to the IFC-sponsored conference on Employing Women in the Western Balkans: With school cancellations due to heavy rain, the organizers feared lower attendance because women would have to stay home with their children.
Caring for children may still be seen as a woman’s role – but that doesn’t mean that child care is solely a women’s issue. “Initial estimates show that, in the Western Balkans, [the] loss of average GDP per capita is about 18 percent due to differences in the level of employment of men and women," said Tony Verheijen, the World Bank’s Country Manager for Serbia. In Serbia, 51 percent of working-age women are active in the labor market. The figures throughout the region aren’t more promising, with 42 percent in Bosnia and Herzegovina and 18 percent in Kosovo.
Conference participants identified discrimination on the part of employers, along with the lack of child care, as major barriers to women’s labor-force participation in the region. Women who want to work simply can’t. A representative from the ministry of labor in Montenegro pointed out that the government had recently changed working hours, but that day-care hours remained unchanged, leaving a gap between when day-care centers close and when women leave work, making work difficult. A campaign led by NALED in Serbia pointed out that, in the past, the amount of documentation and processing required in order to receive maternity payments was excessive and could be reduced by more than half, saving employers RSD 690 million annually (enough to employ 1,200 people!).
Women’s employment is a pillar of economic growth. How far would the industrial revolution have come without the armies of women who joined the labor force? Would the East Asian "tigers" have remained kittens without women?