G20 gives U.S. until end of year on IMF reform

When finance ministers and central bankers from the G20 major economies met last week in Washington, they rapped the United States on the knuckles for its failure to ratify reforms of the International Monetary Fund. The reforms, which leaders from around the globe agreed in 2010 but which require U.S. Congressional ratification to be implemented, would increase the voice of emerging market economies on the IMF’s board and strengthen its general account (what the IMF calls “quotas”). In the G20 final communique, the global financial chiefs expressed how “deeply disappointed” they were, and fired off a stern warning, giving the U.S. until the end of the year before they request the IMF to proceed on reform (without the United States, to insert the subtext). Given that the U.S. was instrumental in founding the IMF and has always been its largest shareholder and exercised a veto over major institutional changes, the warning is serious stuff. Whether or not the IMF can actually do anything without the buy-in of its largest shareholder remains in question, but certainly the rest of the world is growing impatient with the extended delay.

In a recent analysis, I point out that the delay is undue. The IMF has traditionally enjoyed support from Democrats and Republicans, and the current proposal for reforms builds upon a process that began under the George W. Bush administration. The IMF helps to maintain global financial stability and prevent and mitigate economic crises, something both parties can get behind. The reforms strengthen the IMF’s core capabilities and improve its governance, equipping the IMF to better prevent and manage economic crises of the twenty-first century and creating a platform for constructive relations with emerging market economies such as India, Brazil and China.

And despite some claims to the contrary, the reforms do not increase U.S. financial commitments, because the new U.S. contribution to the IMF general fund would be offset by an equal reduction in its commitment to another IMF fund (the New Arrangements to Borrow). The Congressional Budget Office, Congress’ official budget scorekeeper, estimates the technical cost of implementing the quota reforms at $239 million – but also estimates that shifting the funds away from the NAB would save $693 million over the same time frame. So the reforms don’t increase US financial commitments, and the US might actually recoup money on account maintenance costs. A pretty good deal.

The case for the reforms seems obvious, so why the delay? The toxic political environment in Washington is the primary culprit. The Obama administration has not made the case for reforms as clear and compelling as it could and should, and delayed proposing them, while Congress is loath to give the Administration any kind of victory. And with the rise of tea party influence in the Republican party and an increasingly isolationist American public, Congressional blockers may actually reap political rewards. In return for ratifying IMF reforms, some Republicans are demanding a delay in the Obama administration’s proposed rules to limit political activities of non-profits. (If that seems like a a non sequitur, that’s because it is. Such is political deal-making in today’s Washington.)

All of this is bad news for the U.S., and bad news for the world. The fact is that for now and the foreseeable future, the U.S. is still the world’s preeminent power. And that power must be exercised with commensurate responsibility. As the G20 warning made clear, the rest of the world will not wait indefinitely. They are already eying a plan B if the U.S. does not ratify the IMF reforms. Whether they act without the U.S. remains to be seen, but everyone loses if the U.S. does not step up to lead the modernization of an international system that emphasizes cooperation over competition. The IMF is an early but important step in a revitalized, rules-based global order that can manage the challenges of the twenty-first century.

 

Sustainable development goals, targets and…clusters?

The UN’s Open Working Group on Sustainable Development Goals (OWG) will meet next week to discuss potential goals and targets to replace the Millennium Development Goals (MDGs), which expire in 2015. The OWG and its co-Chairs deserve praise for making significant progress in an incredibly complex process involving an overwhelming number of issues and actors.

The OWG co-Chairs have admirably attempted to reduce a long list of development priorities into 8 “clusters” for discussion (issued last week), following reactions to the 19 “focus areas” they released last month. Many asserted that 19 is too many, compared to the 8 goals of the MDGs. Though the co-Chairs are careful to caution that the focus areas are not goals – and that the clusters are simply for discussion – these caveats are generally ignored. The co-Chairs themselves have indicated they would like to have a better sense of the sustainable development goals and targets by the end of next week. Under considerable pressure to provide structure, producing the 8 clusters is a natural attempt to meet these demands. But any clustering of issues at this point will inevitably raise questions.

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IMF: To solve inequality, tax food, books and funerals

The IMF has attracted plenty of favourable attention from unfamiliar places with two ‘staff papers’ (we’re enjoined to consider them as the personal opinions of the authors, not the IMF itself, an injunction that we all merrily ignore). The first argues that inequality reduces growth, while redistribution is an effective tool for reducing it; the second explains how governments should use taxes and public expenditure to achieve this goal.

Inequality campaigners are over-the-moon to have the IMF on their side. Oxfam International hails the IMF for “mashing myths and debunking dogma in economic policy,” while the Oxfam inequality guru, Nick Galasso, is fulsome in his praise of an “ideological sea change” at the Fund (“if If it sounds like I have a crush on the IMF’s Managing Director, Christian Lagarde…”).

But what tools does the IMF think we should use to shrink inequality? Oxfam’s tweet leads to a Reuters article covering a speech by IMF deputy managing director, David Lipton. The speech is definitely worth reading in full – it’s a digestible summary of emerging IMF thinking, while the table on page 43 of the IMF report provides an overview of its suite of policy prescriptions.

Key recommendations for developed countries include substituting means-tested benefits for universal ones; raising the retirement age and making the rich work longer than the poor; charging more for university education in order to spend more on schools; and making income tax more progressive, while eliminating tax breaks.

Many of these are good policies, but let’s not pretend they’re all politically palatable. Take the last one as an example. In the United States, President Obama and the Republicans are locked into fruitless combat on eliminating a few of the most egregious pro-rich tax breaks. A recent revenue-neutral tax reform plan from a Republican has provoked a blizzard of protest from Wall Street and has been roundly condemned by his colleagues.

But the IMF is not interested in these small-bore controversies, it has the big one in its sights: the 37 million Americans who benefit to the tune of $70bn or so from tax relief on their mortgages. And that’s a political live wire. I’d speculate that any presidential candidate – Republican or Democrat – who ran for 2016 on a “tax the homeowners” platform would have as much chance of winning the nomination as I do.

This is not just an American problem. Look at the IMF’s core policy prescription for the United Kingdom – one good enough that it makes it into Lipton’s speech as well as into the report. The UK should move to a flat rate of VAT on all goods and services, Lipton argues, and use the money to increase benefits.

That would mean imposing a 20% tax on food (raising £16bn or so), and on rent and house construction (another £13bn), while increasing tax on household electricity and gas from 5% to 20% (£5bn). Tax would also go up on books, children’s clothing, tampons, condoms, stamps, charities like Oxfam, and… funerals. Yep – the IMF is proposing a burial tax.

All in all, this would give George Osborne £60bn to play with (table 4), more if he axes universal benefits in favour of greater means-testing (goodbye child benefit, winter fuel allowance etc). This would be enough to double benefits for working-age low earners and the unemployed (table 8.2).

Good news for inequality, maybe, but an act of political insanity. In the UK, we once had a manifesto that was derided as ‘the longest suicide note in history’. Flat rate VAT (for all its merits) would be the shortest. VAT on food? On books? On coffins? Just look at the disaster that befell the British government when it tried to tax Cornish pasties to see how badly this would go wrong.

There are equally obvious political bear traps when you look at the problem from the point of view of low and middle income countries. And the task ahead of them is daunting, given that inequality levels are higher in Asia and the Middle East than in the West, and much higher again in Africa and Latin America. A European minister told me that he was hoping for a post-2015 goal that would inspire the whole world to be as equal as his country by 2030. I shudder to think of the collective apoplexy this prospect would cause in the G77.

IMF Disposable Income Inequality

No-one is pretending that IMF-branded policies represent the final word on inequality. Oxfam issued a media brief this week, which proposes the UK tackles inequality by cracking down on tax dodgers, implementing a Tobin tax and a tax on land, and increasing the minimum wage.

But what the Fund’s excellent report does is underline the importance of going from high-level aspirations to detailed scrutiny of the policies we want governments to implement to bring inequality down. Only then can we understand how today’s high level debate on inequality will play out in the bruising world of retail politics. It would be good to see Oxfam’s proposals costed and their likely impact on inequality audited, so we can see what they’ll deliver and who’d foot the bill. Without that the politics remain hard to read.

A greater focus on policies and implementation, and the politics of both, is especially important for those arguing that we should stop being “belligerent” about the “unrealistic goal” of ending sub-$1.25 a day poverty and instead build a post-2015 agenda on the the more sustainable political foundations that inequality offers.

Sure, we have an ‘emerging consensus’ that something needs to be done to bring inequality down. But will that consensus hold when publics around the world, and assorted lobbyists, get a better sense of what that something looks like?

Development Dilemmas

In our development dilemmas piece we consider what progressives should do now the split between foreign and development policy no longer exists:

Should aid be used as an instrument of foreign policy? If so, how? If not, why not? If policy coherence’ really means ‘foreign policy first’, how should DFID prioritise if the countries which are the breeding grounds for terror are not the same ones with the greatest incidence of poverty? Should a combustible Nigeria, at 153 in the UN Human Development Index, command more attention than stable Sierra Leone, languishing at 177? Should aid money be spent, as it is by the United States, more in the powder keg of the Middle East than the desperation zones of sub-Saharan Africa?

Can Empowered Cities Save Fragile States? My article on Lagos in the NYT

Lagos,_Nigeria_57991Nigeria is arguably the worst run of the world’s seven most populated countries. Despite earning hundreds of billions of dollars in oil revenue over the past decade, it is expected by 2015, by some calculations, to have the second-most destitute people in the world after India. But its largest city, Lagos, which until recently was known as one of the world’s most difficult cities to govern, seems to have turned a corner. As I argue in a recent article in the New York Times, one of the chief reasons for this better performance is the nature of incentives that elites and politicians face: Continue reading

It’s developed country, not emerging economy, attitudes that are the problem on sustainability

One of the best sets of data available on attitudes to sustainability around the world is the ‘Greendex’ produced by the polling company Globescan for National Geographic magazine. Its most recent version, published in 2012 (highlights; full pdf), paints a fascinating – and often surprising – picture.

For me, the key headline finding from the survey is all about the gap in perceptions between people in emerging economies and those in developed countries. Despite the fact that emerging economy citizens have much lower per capita consumption levels, the survey found that:

  • Emerging economy citizens are substantially more concerned about environmental problems than developed country citizens. The six countries in which most people agree with the statement “I am very concerned about environmental problems” are Mexico, China, Brazil, South Korea (which is a developed country, of course), Argentina, and India. The bottom six (with the least concerned last) are Japan, the US, Germany, Britain, Australia, and (weirdly) Sweden. When prompted about global issues, environmental challenges like climate change, air and water pollution, fresh water shortages, and species and habitat loss all score consistently highly as concerns in emerging economies. In developed countries, on the other hand, consumers are less concerned about the environment and more focused on the economy and the cost of energy and fuel.
  • People in emerging economies are much more likely than people in developed countries to say that they feel guilty about their environmental impacts – despite the fact that their per capita environmental impacts are much lower. The countries in which most people agree that they feel guilty about their impacts are India, Mexico, China, Brazil, and Argentina; the lowest scoring are Britain, France, America, Australia, Germany, and (last and least) Japan.  Yet when these findings are plotted on the same graph as countries’ actual Greendex score – a measure of the sustainability or unsustainability of their consumption patterns – it emerges that those countries that feel least guilty are in fact those with the highest environmental impacts.

Greendex vs guilt

  • Emerging economy citizens are far more likely than those in the rich world to agree with the statement that “as a society we will need to consume a lot less to improve the environment for future generations”. The countries that most endorse this view are Mexico, Argentina, Brazil, and China; the US, Australia, Germany, and Japan are least convinced. And even though developed countries are least convinced of the need to consume less, they are also the most sceptical of the view that “people in all countries should have the same standard of living as people in the most wealthy countries”, with Germany, Canada, America, South Korea, and Japan all in the bottom five. (Interestingly, though, Britain and Spain score significantly higher than most other developed countries on both fronts.)

A similar story emerges on the specific issue of climate change. Of the 17 countries covered in the Greendex survey, the six in which most concern is expressed about climate change are Mexico, South Korea, Brazil, Argentina, India, and China, with over 70% of people in each country saying that they are either concerned or very concerned about the issue. Britain, America, and Australia, on the other hand, rank  lowest, in every case with less than 45% of people in these two categories.

People in emerging economies are also much more likely to agree that “global warming will worsen my way of life within my own lifetime” than those in developed countries, and to support the statement that “most scientists are convinced that human activity causes climate change and global warming”.

The new politics of time

Real terms median wages have been stagnating in developed countries since the mid-1970s, when – as David Schweickart notes in this terrific paper (h/t Casper Ter Kuile) – growth in wages first became uncoupled from growth in productivity. So what caused this shift, which is right at the heart of the issue of the ‘squeezed middle’?

Partly, of course, it’s about the effects of trade, as globalisation meant that developed country workers found themselves competing with workers in the developing world. But, argues economist David Autor, the more significant factor has actually been technology, and the automation of routine work. The effect, he continues, has been what he calls the ‘polarisation’ of the job market, with job opportunities declining in both white and blue collar ‘middle-skill’ occupations.

This week’s Economist has a cover story on technology and jobs, observing that what we’ve seen so far is just the beginning (emphasis added):

From driverless cars to clever household gadgets (see article), innovations that already exist could destroy swathes of jobs that have hitherto been untouched. The public sector is one obvious target: it has proved singularly resistant to tech-driven reinvention. But the step change in what computers can do will have a powerful effect on middle-class jobs in the private sector too.

Until now the jobs most vulnerable to machines were those that involved routine, repetitive tasks. But thanks to the exponential rise in processing power and the ubiquity of digitised information (“big data”), computers are increasingly able to perform complicated tasks more cheaply and effectively than people. Clever industrial robots can quickly “learn” a set of human actions. Services may be even more vulnerable. Computers can already detect intruders in a closed-circuit camera picture more reliably than a human can. By comparing reams of financial or biometric data, they can often diagnose fraud or illness more accurately than any number of accountants or doctors. One recent study by academics at Oxford University suggests that 47% of today’s jobs could be automated in the next two decades.

So what should we do about this? The Economist leader concludes by arguing that the approach favoured by the left (and now George Osborne too) – big hikes in the minimum wage – is dead wrong, in that it will just accelerate the shift from humans to computers. Instead, they argue, “better to top up low wages with public money so that anyone who works has a reasonable income, through a bold expansion of the tax credits that countries such as America and Britain use”.

That’s a fair point, but it doesn’t really engage with the larger issue, of who harvests the benefits of the extraordinary productivity gains we’ll see over the next 20 years. Last week, I quoted Keynes speculating on the world in 2030, and imagining an economy in which

…we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs … What work there still remains to be done will be as widely shared as possible – three hour shifts, or a fifteen-hour week …

Might the avalanche of technology coming our way bring that vision within reach? One interesting ‘weak signal’ in the background is the new interest – from both left and right, as the NYT’s Annie Lowrey observed in November last year - in the idea of an unconditional basic income paid to all, as of right (not as a means-tested benefit that depends on being in work or in poverty, therefore).

As the Economist pointed out in a response to her piece, a universal payment along these lines wouldn’t do much to reduce inequality of income (never mind wealth). But it would go a long way towards giving everyone, rather than just capital, a share of the winnings from technology, and the beginnings of a strategy for dealing with a world in which there’s less work to be done.