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Development economics, globalism and inequality, the aid system, international financial institutions, education, Latin America, climate financing
Nancy Birdsall is president emeritus and a senior fellow at the Center for Global Development, a policy-oriented research institution that opened its doors in Washington, DC in October 2001. Prior to launching the center, Birdsall served for three years as senior associate and director of the Economic Reform Project at the Carnegie Endowment for International Peace. Her work at Carnegie focused on issues of globalization and inequality, as well as on the reform of the international financial institutions.
From 1993 to 1998, Birdsall was executive vice-president of the Inter-American Development Bank, the largest of the regional development banks, where she oversaw a $30 billion public and private loan portfolio. Before joining the Inter-American Development Bank, she spent 14 years in research, policy, and management positions at the World Bank, most recently as director of the Policy Research Department.
Birdsall has been researching and writing on economic development issues for more than 25 years. Her most recent work focuses on the relationship between income distribution and economic growth and the role of regional public goods in development.
Birdsall is a member of the Board of Directors of the International Food Policy Research Council (IFPRI), of the African Population and Health Research Center, and of Mathematica. She has chaired the board of the International Center for Research on Women and has served on the boards of the Social Science Research Council, Overseas Development Council, and Accion. She has also served on committees and working groups of the National Academy of Sciences.
Birdsall holds a PhD in economics from Yale University and an MA in international relations from the Johns Hopkins School of Advanced International Studies.
Putting Education to Work in Egypt, by Nancy Birdsall and Lesley O'Connell. Prepared for Conference, Growth Beyond Stabilization: Prospects for Egypt, sponsored by The Egyptian Center for Economic Studies in collaboration with the Center for Institutional Reform and the Informal Sector, University of Maryland; the Harvard Institute for International Development, and the US Agency for International Development, February 3-4, 1999, Cairo, Egypt. March 1999.
"Intergenerational Mobility in Latin America: Deeper Markets and Better Schools Make a Difference," with Jere R. Behrman and Miguel Szekely, in New Markets, New Opportunities? Economic and Social Mobility in a Changing World (1999)
"The U.S. and the Social Challenge in Latin America: The New Agenda Needs New Instruments," with Nora Lustig and Lesley O'Connell, in The Search for Common Ground: U.S. National Interests and the Western Hemisphere in a New Century (W.W. Norton & Company, Inc., 1999)
"Deep Integration and Trade Agreements: Good for Developing Countries?" with Robert Z. Lawrence in Global Public Goods: International Cooperation in the 21st Century (Oxford University Press, 1999)
"No Tradeoff: Efficient Growth Via More Equal Human Capital Accumulation in Latin America," in Beyond Trade-Offs: Market Reforms and Equitable Growth in Latin America (1998)
"That Silly Inequality Debate," in Foreign Policy, May/June 2002
"Education in Latin America: Demand and Distribution are Factors that Matter," with Juan Luis Londoño and Lesley O'Connell in CEPAL Review 66, December 1998
"Life is Unfair: Inequality in the World," in Foreign Policy, Summer 1998
"Public Spending on Higher Education in Developing Countries: Too Much or Too Little?" in Economics of Education Review, 1996
Developing countries have made considerable progress in raising taxes in recent years. Between 2002-2014, average tax ratios rose by 2.8 percent of GDP in sub-Saharan Africa, and by 3.6 percent in the Western Hemisphere and emerging and developing Asia (see Figure 1). The IMF has long argued that there is potential for generating additional tax revenues in these regions, and since the Addis Ababa 2016 Financing for Development Conference, the World Bank, UN, OECD, and bilateral donors have joined the IMF in support of increased “DRM,” that is, domestic resource mobilization, by developing country governments.
A large proportion of revenue gains over the last two decades has come from countries’ efforts to improve the design and compliance of consumption and other indirect taxes, particularly the VAT (value-added tax); in doing so, the objective has been to minimize VAT’s regressive effects by exempting sales of small businesses below a threshold (where the poor typically tend to buy) as well as imposing zero tax on certain food and other products which take up a large proportion of consumption of poor households.
Less attention has gone to expanding the coverage of potentially more progressive taxes, such as personal income and property taxes. The challenge of these more equity-friendly taxes is that they have far more demanding requirements on government administration, data and systems than indirect taxes, and therefore are likely to yield less revenue in the short run. In advanced economies, the personal income tax generates somewhat more than the VAT on average; in developing countries the VAT generates more than twice the income tax.
We believe it is now time for countries to begin in earnest investing in the systems that support these more equity-friendly taxes.
Property taxes have been mostly neglected
Property taxes consist mostly of annual taxes on immovable property (houses, commercial buildings) and the sale of that property. The OECD countries on average generate around 2 percent of GDP in property taxes (or 5.5 percent of total taxes). The average tax-take is lower in emerging markets, at 0.6 percent of GDP (but still 3.4 percent of total taxes—reflecting their relatively lower overall tax/GDP ratios). It is even lower for low-income developing countries at 0.3 percent of GDP (or 1.8 percent of total taxes) (See Figure 2). Over 120 countries have property taxes in place with different tax bases and rates.
It’s not surprising that property taxes have been neglected. In most countries, property taxes are collected by local governments—although higher level governments may play a role in their design and operation—where administrative capacity to record ownership titles and collect revenue is not well developed. Good information on property ownership and on the base for valuing property is hard to obtain in developing countries’ thin markets for property transactions. In low-income countries, agricultural activities take up a relatively large share of land area and income derived from agriculture is relatively low. In many developing and emerging countries, urban middle-class property owners naturally resist paying property taxes; that may lie behind governments’ often providing extensive tax exemptions to different classes of property owners (for example, Kenya, South Africa, and Tanzania exempt different classes of land and give the minister and local authorities a wide latitude in granting exemptions). In Kampala, Uganda, the exercise to revise property valuations started last year and will continue until 2019—the last property valuation was carried out in 2005.
Against this background, conventional wisdom has been for developing countries to focus on revenue sources with substantially larger potential—at least until administrative capacity, particularly of local governments improved.
Six reasons to revisit property taxes
We urge a revisit of property tax potential, for at least six reasons (and for IMF endorsement, see page 12 of this book).
First and perhaps most important: Property taxes are inherently progressive—as Marx observed, it is the rich that own property, and as is the case everywhere, the rich own more and more valuable property. Where income is concentrated at the top of the distribution, property taxes will reduce post-tax income inequality. Income distribution in many developing countries has worsened since the 1980s, though less so than in the US and UK, among other advanced economies. In fact, in all countries wealth inequality is twice as high as income inequality.
The sense of fairness matters—including for ensuring tax compliance. There is global consensus that developing countries must raise more revenues domestically to finance priority spending on Sustainable Development Goals, as set forth in the Addis Financing for Development agenda. But tax compliance is a challenge everywhere; the middle classes will accept a rising tax burden, including on their own modest properties, only if they see that the visibly wealthy are contributing a fair share.
Second, property taxes can reduce corruption when adequately enforced—adding to the sense of fairness in many developing countries in which the majority of citizens believe their government is corrupt. With rapid urbanization in Asia and Africa in the next several decades, governments will be investing in more roads, mass transit, power and sanitation projects, and public housing. That will raise land values. In the past it is wealthy land developers and political insiders that have too often reaped the resulting enormous rents; a system that imposes property taxes will discourage rent seeking and related inefficient land use as well.
Third, property taxes are less distortive; they do not have the bad incentive effects of taxes on labor, and they do not reduce investment. The supply of urban land is fixed and its taxation does not negatively affect urban investment. Rather it creates incentives for land owners to use their land more productively.
Fourth, more urbanized cities attract more educated and productive middle-class workers who capture a share of unpriced benefits of urban life, including the rising value of their urban property. From the perspective of fairness, these workers (or their landlords) should pay property taxes (and be subject to progressive income taxation as well).
Fifth, property taxes have the advantage of creating accountability to the local citizenry—a political benefit in terms of good governance.
And finally, the advent of new technologies means that it is possible to do things now that we could not do as well before. Technological innovation can help overcome the capacity constraints that developing countries currently face in levying property taxes. Property registers can now be digitized, and use of satellite data and computer-aided mass valuation systems can make valuation of property and updates of values cheaper and quicker. Many Indian municipalities are complementing property surveys with satellite imaging to value property with significant increases in revenues. The computer systems are now being used to appraise property values in Slovenia and Tanzania.
A bottom line
Of course, we have to be realistic. More equity-friendly taxes face even greater political and technical obstacles to effective implementation as the more tried-and-true VAT (and excise taxes and the corporate income tax). The process of implementing property taxation will have to be gradual, the rates will have to be reasonable—not 10 to 30 percent as in Egypt and Kenya which has resulted in poor compliance—and exemptions from the tax will have to be minimal.
But the time for action is now. The IMF, World Bank, and bilateral donors have committed to scaling up their support for building tax capacity of developing countries as part of the Addis agenda. We urge them to ramp up support for strengthening the systems and infrastructure critical to collecting equity-friendly property (and potentially progressive personal income) taxes. Though in some countries it will take many years, the returns (in revenue, a sense of fairness, reduced corruption, greater compliance, and better local governance) can be substantial—contributing directly and indirectly to measurable progress on the SDGs by 2030.
One-quarter of the world’s school-age children live in East Asia and the Pacific. In the past 50 years, some economies in the region have successfully transformed themselves by investing in the knowledge, skills, and abilities of their workforce. Through policy foresight, they have produced graduates with new levels of knowledge and skills almost as fast as industries have increased their demand for them. Yet, tens of millions of students in the region are in school but not learning. In fact, as many as 60 percent of students remain in systems that are struggling to escape the global learning crisis or in systems where performance is likely poor.
(If you are an insider on the mandate of the G20 Eminent Persons Group regarding the international financial institutions, or you are an insider on the World Bank and the other multilateral development banks, you may want to skip this Background section. If you are not an insider, do keep reading!)
The G20 EPG (on global economic governance—do keep reading!) was created in the spring of 2017 to recommend practical reforms to improve the functioning of the international financial institutions (IFIs), and to ensure the IFIs are fit for purpose in a rapidly changing global system. The group focuses on the World Bank and other multilateral development banks (MDBs), my concern in this blog, as well as the International Monetary Fund and other IFIs focused on global financial stability.
It has been a relatively obscure and quiet group, perhaps by intention (its members are mostly apolitical experts).
Why is the EPG’s work important? After all, the World Bank and other multilateral development banks (MDBs)—the development financing arms of the multilateral system—appear well-insulated from the recent assaults on the open, liberal international order (Brexit, Trump-Bolton, nationalist and populist parties on the rise in Europe). The MDBs, for example, have substantial financial resources and solid AAA ratings—which allow them to borrow on capital markets at low cost, and on-lend to developing countries to support public and private investments with long-run social and economic returns. And the MDB model has been amply vindicated after all, by the creation of more and more of them, in the latest round by China.
On the other hand, the challenge for the MDBs, particularly the World Bank and its regional counterparts founded in the twentieth century, may be that very resilience. The risk is not a sudden withdrawal of support by major country shareholders (The United States and Europe especially), but a slow slide into irrelevance without adaptation and adjustments to the reality of this century’s challenges. Those challenges include the troubling infrastructure gap in most developing countries despite their growing access to private capital; political instability and conflict in low-income “fragile” states unable to borrow; and a critical set of collective action challenges: climate change, antibiotic resistance, unmanaged surges of cross-border migration, the risk of world-wide pandemics, inadequate increases in agricultural productivity to ensure long-run food security across Africa.
The group has just publicly released an update of its discussions in the last year, in anticipation of the G20 meeting of finance ministers later this month. Its final report is due in the fall, for discussion (presumably) at the G20 Summit in Buenos Aires—set for late November.
Disappointed but Hopeful: Three Areas where the EPG Could Set an Agenda for Change
I’m disappointed by the update—but still hopeful. In the case of the MDBs, the EPG may miss an opportunity to put some fundamental changes on the agenda—at least for discussion if not for full resolution. Even assuming differences of view on specific issues among EPG members, that should not amount to an insiders’ game; the members can use their knowledge and even their differences to propose an agenda with potential, as a colleague said well, to “shake the system rather than sculpt it.”
But I’m also hopeful. Here are three concrete issues that the group could raise regarding the MDBs.
1. The global commons
In late 2016, we at CGD issued Multilateral Development Banking for This Century’s Development Challenges, a report of a high-level panel (not of an “eminent persons group” though our panel members were all eminent too—see the link!). The first of five recommendations to MDB shareholders was for an explicit new mandate for the World Bank to promote global public goods (GPGs) critical to development “through the creation of a new financing window…with a target of deploying $10 billion a year.”
The EPG update does refer to growing threats to the global commons, including on the development side climate change and pandemic risks. These along with other collective action problems such as global food security and refugee issues, are challenges on which the MDBs could provide robust financing and related expertise that would complement the work of WHO, the Green Climate Fund and other UN agencies.
What is disappointing is that the update makes no reference to the hidden limits on the MDBs’ current ability to do so at sufficient scale and scope and effectiveness. (They all try to “green” their lending and the World Bank hosts and manages various trust funds and other special initiatives in health and climate—but these are ad hoc, and their financing is not secure over the long term.) That limit is the MDBs’ reliance, intrinsic to their business model, on the country-based loan to generate sufficient net income to cover the long-run cost of their operations.
The simplest approach would be for all MDBs to have a mandate from shareholders to secure grant financing dedicated to subsidizing their standard loan rates to encourage countries to borrow for investments that have positive global “spillover” benefits. These could be in renewable energy where it is not currently “least cost” compared to coal, for example; in mass transit and data-based efficient bus systems in Bangkok and Lagos that would reduce the commuting time of struggling low-income workers; in disease surveillance systems in the Congo and Cambodia; in deforestation programs in Indonesia and Brazil. The current limit to more lending of these kinds is the reasonable unwillingness of borrowers to pay standard (yes, partly subsidized compared to the private market) rates to finance investments that have substantial co-benefits for other countries. The example exists already in the case of donor-funded subsidies that are reducing the cost to Jordan and Lebanon of borrowing to provide social and other services to Syrian refugees in those countries.
The possibility of subsidizing loan rates would turn a constraint the banks face—the reliance on the country-based loan—to an advantage that builds on their comparative advantage.
This is a concrete idea that could be put on an agenda for broad discussion: Should the MDBs have a mandate to seek capital and other financing to address GPGs and other collective action problems beyond the current ad hoc, often unsustained approach of relying on one or another donor to one or another trust fund? This approach is hard to realize without a collective decision by all the shareholders of the MDBs, because it has no champion among any group of shareholders—low-income, middle-income or high-income countries. (See the 2016 CGD MBD report, last paragraph on page 9 for more information).
Moreover It raises a host of related questions. Where would this grant financing to cover subsidies come from? How much should loans be subsidized? Should the mandate to raise financing from its members be concentrated initially at the “global” World Bank? If so, should the World Bank be told to share resulting funds to other MDBs and lenders such as the Green Climate Fund (as recommended in our 2016 report)? And if such subsidies were available at any of the MDBs, how should member countries ensure and monitor adequate partnership with WHO on disease surveillance and emergency pandemic response, and with other UN agencies with expertise in other areas?
The clear reference in the update to threats to the global commons opens the door to putting some concrete ideas on the table for a more robust role for the MDBs on development-relevant GPGs. My hope resides in an allusion in the EPG update to the possibility of more flexibility in the pricing of loans. It’s only a footnote, but it hints at the idea of more flexible pricing, for one reason or another. Footnote 3 notes that “MDB engagements need to ensure access to…provision of global public goods in MICs.” and in that context suggests that “pricing policies should reflect declining subsidy components, as per capita income grows.” This reference to differential pricing by country, with presumably somewhat higher prices (lower subsidies relative to private markets) for middle-income countries; it opens the door to more flexible pricing in general, which in turn invites new thinking about lower prices (greater subsidies) when countries borrow for programs with global benefits.
2. The MDBs: cooperation, collaboration, and common platforms?
The EPG update calls for more collaboration across the MDBs on “principles, procedures, and country platforms”. But calls for collaboration in these (vaguely defined) areas are not new call and not likely to inspire any serious change. In fact, the banks do already cooperate where it is win-win for them, including co-financing large programs (e.g. the Asian Development Bank and the Asian Infrastructure Investment Bank), and spend a lot of time at the field level on cooperation with bilateral donors in low-income countries. Otherwise, the natural tendency is for the banks to compete (e.g. the Inter-American Development Bank and the World Bank in Latin America) for projects and programs to finance, and in their analytic work too. And competition is not always a bad thing. It invites innovation and and useful debate, and in the case of loans creates healthy pressure on the banks to reduce burdensome transactions costs and delays, from which their “consumer-borrowers” can benefit. It also gives borrowing countries “ownership” of their own investment strategies.
More disappointing is the lack of any concrete suggestion that would have shareholders consider different roles for different institutions in the “system” (“different strokes for different folks”). The 2016 CGD report was shaped by the notion that the World Bank, as the sole “global bank,” could take leadership on “global” challenges including global public goods, including in the context of continued country lending, but with a greater mandate to do more lending with positive global spillovers; and that any need for increased capital in the MDB system, including to finance basic infrastructure, should be concentrated at the regional banks, with their greater proximity, sense of ownership and trust on the part of the borrowers. That is one specific and concrete idea that could be on an agenda for shareholder discussion.
In one area, the update is clear and concrete: the potential for “joined-up” initiatives across the MDBs that could bring more private sector capital to developing countries. These include pooling and insuring risks (the banks already trade their risk exposures to offset their otherwise region-specific concentrations) and system-wide securitization of pooled loans to bring institutional investors’ huge resources to the development table, as in this proposal from my CGD colleague Nancy Lee (and see this big idea too). On insuring political risk, there is a concrete proposal for the banks to jointly help increase the financial capacity of MIGA, the World Bank Group insurance arm; what is worthy of discussion is why the banks have not been willing to “price” the current guarantee instrument they have in a way to make it more attractive, and whether a joined-up MIGA would be more likely to address that reluctance.
3. The MDBs as a “System”
The EPG update is clear on the logic of common shareholders treating the MDBs as a group, or as a system in which the sum of their parts would be greater than the current whole. That is behind the call for more collaboration. It was the “system” point that gave rise to our recommendation in the 2016 CGD report for a cross-MDB review at the level of ministers every five years—what Caio Koch-Weser, one of our panel members, called a “mini-Bretton Woods” —and which influenced (we believe) the German hosts of the 2017 G20 to create the EPG in the first place.
On the agenda of such a review would be such fundamental questions as: Do the MDBs have enough capital as a group? Is shareholder capital reasonably allocated for the long run across the banks given different regional needs? Which of them might better optimize use of their balance sheets to stretch their existing capital? Should recapitalizations and replenishments be better coordinated, to help rationalize shareholder allocations? What’s needed to enable the World Bank to follow the Asian Development Bank’s lead?
Are there imbalances across the banks in financial capacity, given their mandates and relative comparative advantages over the next decade? Is the shrinking relative size of the African Development Bank concessional window compared to the World Bank’s IDA window in Africa (the latter at least five times bigger now) the outcome of a strategic decision among member contributors? Is it sensible for the long run? Should the common shareholders of those two banks consider the logic of the “local” bank being much smaller in the region with most of the world’s failed and fragile states, the highest growth of job-seeking cohorts, and the greatest poverty? Should a new Asian Infrastructure Investment Bank focused on infrastructure in Asia and the huge potential financing role of the China Development Bank across Eurasia change or enhance the work of the Asian Development Bank in infrastructure? Should the EBRD, the World Bank, and the African Development Bank agree to some division of sectoral emphases in North Africa? And what about the Islamic Development Bank?
Also disappointing is the lack of any reference in the update to the corporate governance problem at the legacy MDBs. The problem is summarized well in the CGD MDB report: “The legacy MDBs have become overly bureaucratic, rigid, and rule-driven in large part because of shareholder governance that has failed to distinguish between appropriate strategic oversight (combined with accountability measures) and issues more appropriately within the purview of management.” Should governance issues—voice and votes, selection of heads and their roles as Chairs of the Board (except at AIIB), costs and benefits of resident boards—be on an agenda for periodic discussion by common shareholders across the banks?
Of all these questions, the most fundamental is whether the MDBs have sufficient resources for the coming decade and beyond—or as some might argue are too big given developing countries’ growing access to private capital. (On whether the IMF has sufficient resources, go here.)
On the other hand, there is time. The EPG can certainly put the idea of a periodic mini-Bretton Woods on the agenda for discussion in Buenos Aires (how often? what role for the G20?) and encourage the Argentines to take whatever next step is appropriate to ensure it “sticks.”
Imagine a G20 agenda that included: Should the MDBs have a “window” or consolidated “trust fund” with grant money, to subsidize loans with big positive global spillovers? Should MDB shareholders “assign” leadership to the World Bank on going green, and support concentrating additional capital to back traditional lending at the regional development banks? Should the shareholders debate the question: Are the MDBs as a group big enough for current development challenges? Should the shareholders consider a quinquennial mini-Bretton Woods meeting?
It is not too late. These kinds of questions need not be agreed or resolved by the EPG, only chosen, prioritized and organized—with sufficient factual background to enable a rich discussion grounded in shared facts at the common shareholder, ministerial level.
I remain hopeful that the EPG will propose a clear and compelling and necessarily controversial agenda of topics for discussion by the world’s sovereign shareholding members of the banks. I remain hopeful that a better system of “global economic governance” for development can be snatched from the jaws of insider obscurantism before the group finalizes its report this fall.
The world is grappling with some of the highest levels of displacement on record, and with that new complex and wide-reaching economic, social, and political effects. Left unaddressed or poorly managed, displacement can be a cause and consequence of fragility, conflict, and crisis. These realities can—and have—become some of the most significant challenges facing the 21st century. This event will explore the next frontiers in responding to forced displacement and fragility: emerging challenges, priorities, and solutions.
Globalization of the economic sort is often maligned. But then there is globalism: of norms, values, culture, and attitudes. Are norms and values, even “culture,” being globalized? Is the idea, for example, that women have equal rights, as in the Sustainable Development Goals (SDGs), gaining ground as a universal norm? And might changing norms and values affect legal regimes and behavior (sometimes, maybe)?
The charts below show the results of questions posed to men and women in the (nationally representative) Demographic and Health Surveys starting in the early 2000s, which asked about what circumstances respondents believe might justify a husband beating his wife: when the wife burns the food? Argues with her husband? Goes out without telling him? Neglects the children? Refuses to have sex with him? Is too tired?
The first set of charts indicates the percentage of urban women interviewed who agreed that one or more of the reasons posed justifies wife-beating, for each of five regions and separately for Anglophone and francophone Africa. (We include only countries in which the questions were posed in at least two years. For rural women, the percentages are slightly higher and the trends very much the same, country by country.)
Figure 1. Percentage of respondents who agreed that one or more reasons justify wife-beating by husband.
In many countries surveyed, the absolute percentages of women are disturbingly high—except in Peru and Colombia, both upper middle income countries of Latin America where less than 5 percent of women see some justification for wife-beating. For the most recent survey years in other countries outside Latin America, levels range between 9.5 percent (the Philippines) and 89.5 percent (Guinea). In India and Bangladesh, it is hard to see a “good” downward trend from relatively high levels (see the chapter on meta-preference for sons in this latest economic report on the Indian economy). On the other hand, the trend is downward in Egypt and Jordan, in many countries of francophone Africa, and in most countries of Anglophone Africa.
There are anomalies (why is the percentage rising in Cambodia and Indonesia, while falling to a low level in low-income Benin? (Is it Benin’s democracy?) Why so high in Guinea (recent war? Ebola?) and why is it failing to fall in Sierra Leone (Ebola?), but falling in Liberia (Africa’s first female president for a decade?) Why is the percentage lower and more likely to be falling in Anglophone compared to francophone Africa? Is the difference real—something about colonial history or “culture”—or were the relevant questions framed or understood differently?
The next chart illustrates the difference between the percentage of urban women and men who said that there are one or more justifications for wife-beating (in the most recent year for each country and including countries with only one survey year with these questions). Except in the Dominican Republic, Colombia, Mozambique, Lesotho, and Kenya, the percentage of men who endorse at least one reason is lower. Why? Perhaps because some wives who are survivors of partner violence suffer confirmation bias. Perhaps men more than women try to answer the way they assume they ought to? (See Rachel Glennerster on the challenge of attitude and other questions meant to measure women’s agency or empowerment.)
Figure 2. Percentage of respondents who agreed that one or more reasons justify wife-beating by husband.
These questions, and additional ones on domestic violence, were only introduced into the DHS after the turn of the century. Why then? In 1979, the UN General Assembly adopted the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW)—and there is evidence of a subsequent positive and statistically robust (though uneven across countries) “CEDAW Effect” on women’s rights around the world. The Beijing Women's Conference (more formally known as The Fourth World Conference on Women: Action for Equality, Development, and Peace) was in 1995. Did global “jawing” in the late 20th century help inspire, with some lag, the introduction of these questions into the DHS system?
The questions are about attitudes, not behavior. But surely in the long run attitudes matter. Might the universal values reflected in CEDAW, discussed in Beijing, and codified in the Sustainable Development Goals explain some of the downward trend the charts show in many countries? Is recent news of sexual assaults on women—in Delhi on a public bus, by UN peacekeepers in the Congo, in Hollywood, USA—a sign that at the global level the norm is changing? Let us hope there is in fact a phenomenon we could call globalism of norms, and that changing norms are changing behavior. That would mean that sometimes-maligned globalism has been good for women in the most intimate and private part of their lives—and thus good for all of us.
Mohamed Bouazizi is the man whose protest sparked the Arab Spring in December 2010. Bouazizi, shown in the second slide here, was a typical “struggler,” as in the title of my keynote speech at the Australasian Aid conference several weeks ago: “Strugglers: This Century’s New Development Challenge.” Below is a rough summary of my talk. (I have modified the slide titles slightly to better convey the gist of my remarks.)
Bouazizi was a street vendor in his early 30s in a small town in Tunisia who triggered uprisings in the Arab world by immolating himself. He was not poor—in fact, he gave to the poor in his town. He supported a younger sister, hoping she would finish secondary school and attend university. But the police regularly harassed him, whether for a bribe or for the permit he allegedly needed to sell produce from his vegetable cart in the open market. The day he took his own life, the police had destroyed his cart and seized his electronic scale and the produce he had bought the day before on credit, depriving him of the assets on which his livelihood and that of his family depended. His protest was apparently a reaction to an acute sense of injustice in a system in which the institutions of the state brought predation rather than protection for people struggling day to day to earn a living.
Who are strugglers exactly? In crude income terms, a struggler is a member of a group (see this 2013 paper) wedged between the world’s poor (living on $1.90 a day or less, the World Bank international poverty line) and the secure middle class (at least $10 a day in household income per capita, PPP). The probability that a struggler will fall back into poverty is high (slide 4).
Like Bouazizi, strugglers have fallen between the cracks in development—they are a forgotten majority, the new poor of the twenty-first century. They comprise about 60 percent of people living in developing countries today and are likely to still comprise about 60 percent in 2030. They are heavily concentrated in middle-income countries, including upper- and lower-middle-income countries, using World Bank country classifications (slide 8).
Most strugglers have primary education or more, and most are probably informal workers in peri-urban and urban areas, working without the regular paystubs that provide a sense of security to workers in the formal sector. Except in Latin America, they benefit little from public pension and health insurance programs; in many developing countries, they are net payers to tax systems, unlike the traditional poor, who are more likely to receive cash transfers.
As a group, strugglers have benefited more from growth since 1990 than any other income group (the elephant graph, slide 16). Perhaps as a result, they probably have high expectations for a better future for themselves and their children. Like Bouazizi, who hoped to see his sister enter university, many have middle-class aspirations—if not for themselves, for their children. They are strivers as well as strugglers. But they live anxious, stressful lives, in which a health crisis for a family member, or a sudden increase in bus fares, or the loss of their minimal “capital” to thievery or a local weather disaster, can mean a choice between the monthly rent or adequate protein in their children’s diet.
What are the implications for students of development? One has to do with good governance and accountable states. Strugglers, unlike members of the secure middle class, have little capacity to pay taxes and hold accountable their own governments. But the middle class is still small in most countries of the developing world—between 5 and less than 50 percent almost everywhere. Most developing countries are “struggler” states.
Another implication relates to jobs, productivity, and adequate livelihoods. What can governments do to support increased productivity (and thus earnings) of the billions of struggling people, including children, who are informal workers—short of providing them with credit, training, and police protection in their homes and on the street? Would increased provision of tax-funded social insurance help? For development advocates and thinkers, this challenge is immediate and pressing—compared to the slower-evolving prospect of job-stealing robots and artificial intelligence in the rich world.
For other policies to ponder through a struggler lens, including the role of outsiders, see slides 28 and 29. And please weigh in with comments, concerns, and ideas.
Sources are shown on slides. Many thanks to Kyle Navis for help with the presentation.
Yet many of the world’s poorest countries in sub-Saharan Africa have shown they can reform and improve governance. The Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative supported by the world’s major donors in the early 2000s took $75 billion in debt off the benefiting countries’ balance sheets—see the March 2016 World Bank-IMF update—and motivated wide-ranging macroeconomic and structural reforms that reduced poverty. Along with rapid growth in China and the commodity price boom, the result was a decade of high growth across the region.
But the momentum is fizzling out. In a new round of tough reforms, African leaders will need to do the heavy lifting. Africa is still poor, and not yet able to finance the investments critical to a new round of growth and poverty reduction. Here’s what donors could do:
Help jump-start a big push on regional infrastructure to knit together many small economies and create economies of scale for local producers. That requires attracting Foreign Direct Investment (FDI) since even the best-managed countries in sub-Saharan Africa (consider Rwanda, Côte d’Ivoire, or Senegal) cannot rely on market financing because maturities are too short and interest rates too high.
To find the money, securitize a small portion of the over $40 billion in annual aid flows that sub-Saharan Africa now receives, as outlined in a recent Project Syndicate article, to finance the public portion of public-private “blended” investments in major cross-border power and transport (the Lagos-to- Dakar highway is a good example)—with benefiting countries servicing these loans, which will be superior to market alternatives on cost and maturity.
Africa needs a new round of success stories. Success requires a big push not just on infrastructure but also on sustained policy and institutional reform. African leaders must take the lead. Donors can help.
The last time a global depression originated in the United States, the impact was devastating not only for the world economy but for world politics as well. The Great Depression set the stage for a shift away from strict monetarism and laissez-faire policies toward Keynesian demand management. More important, for many it delegitimized the capitalist system itself, paving the way for the rise of radical and antiliberal movements around the world.
For the first time in its seven-decade-long history, World Bank staff staged a work stoppage earlier this month. Staff are unhappy about the “Change Process,” aka the ongoing internal reorganization that President Kim initiated on his arrival at the bank now more than two years ago. A Staff Association update of October 9 says: “We are riding a bicycle as we build it, and staying upright is getting harder and harder.”*
The reorganization process is the first of my two big worries about the World Bank.
The second is more troubling: The bank is well past its heyday as a major supplier of funds to developing countries. Short of a new vision, it faces an existential threat of growing irrelevance and obscurity as rising incomes in big emerging markets reduce the demand for and logic of the bank’s country loan model. I believe the world still needs a World Bank. But it needs a World Bank built for the development challenges of the 21st century, not the 20th.
One: The Troubled Reorganization
This I would lay directly at the feet of President Kim to fix.
Disruption is good, but two years of disruption with no clear end in sight is too much. An example: In the last two years at least five of the bank’s most senior managers, with an accumulated 50 years or more of bank experience (yes, insiders) have been (apparently) summarily dismissed. Recently the vice president for Africa “resigned” just days before last month’s Annual Meetings of the World Bank and the IMF—only to be brought back two weeks later.
From outside it is easy to assume that a well-paid staff is grousing about losing status or position or even employment itself because of a reorganization. But after living through and observing reorganizations at the World Bank over the last 30 years, I have the sense that the press gets that part of the story mostly wrong. What staff are concerned about is the continuing uncertainty that affects their work in the field. Who is going to now be in charge of the water and sanitation program I’ve been working on in Mali? Will my dialogue with the Karachi school authorities on the verge of agreeing to try contract teachers fall apart because a new department head will cut the travel budget? Can I get funding without a vice-president in place to champion technical analysis of a crop insurance program in eastern China?
World Bank staff traditionally settle down after a reorganization and get back to the business at hand. They know they have great jobs, mostly well paid and with a deeply satisfying mission; they also have passion about their mission: to work for a better world. But when President Kim agreed to an emergency town hall meeting several weeks ago, 8,000 (out of about 10,000) staff attended, including 5,000 online (many connecting in the middle of their night from overseas).
Staff, it seems, do not believe this reorganization is done, let alone at the stage of fine-tuning. Their specific concerns are fundamental: the new reorganization has created fourteen silos where there were four and more not fewer management layers; decision-making is more centralized not less; transactions costs to organize teams are higher than ever and budgeting for work with clients is not flowing; a few senior managers get bonuses while a big budget cut is slashing travel budgets. Surely management should share in the austerity.
It sounds as though structure and incentives are less aligned than before. Something is wrong, and it seems right to ask President Kim to say so and fix it.
Two: The Threat of Irrelevance—Global Goods and Bads
The second thing that troubles me about the World Bank is a deeper sign of the disjunction between what the world needs the bank to do, forcefully and with full funding, and its current limited mandate: to support countries qua countries, for the most part one country loan at a time.
President Kim’s quick response to the Ebola pandemic in West Africa was impressive because it responded to a global concern—and not with the usual one-country-at-a-time process. Kim was able to commit $400 million because the bank had the cash in its wallet—yes “cash” in the form of big grant (not loan) money. That special grant money is there because the donors to the bank’s “special funds” (IDA money for insiders) for the poorest countries put it there; in 2013 the United States, Japan, Germany and other rich countries contributed close to $30 billion for the bank to deploy over the subsequent three years in the form of grants and highly concessional (cheap) loans for the poorest countries. This special funding included an even more special set-aside for disaster relief and other emergencies in the poorest countries (which the $400 million disbursed for Ebola largely depletes).
But there is an irony here. The Ebola pandemic is what economists would label a global public “bad”; although it is taking place in a few small poor countries, it puts everyone everywhere at risk (and no one country has much reason to take sufficient action alone since the benefits will go also to other countries). Other global public bads include climate change, financial crises (such as the 2008 crisis that started in the United States and spread worldwide), growing antimicrobial resistance to drugs, and global terrorist movements. Weak governments in poor countries are increasingly a global public “bad” in themselves—consider pirates off the coast of Somalia and consider Ebola itself, seeded in three of the world’s poorest countries.
There are also global public “goods”: an Ebola vaccine, the agricultural breakthroughs that brought the Green Revolution, standing forests that sequester carbon. But the World Bank’s mandate is to make loans and grants to countries, mostly one country at a time. It has no mandate to finance more of these global “goods” or to attack the global “bads,” despite the fact that in a thoroughly interconnected world all of these goods and bads matter hugely for reducing poverty and advancing prosperity.
In the Ebola case, President Kim had some good luck. First, special funding happened to be available. Second, other poor countries that might have resisted having money taken from their common pot were eager to spend it to contain a problem putting them at risk as well.
Now comes the irony: What was lucky in the Ebola case is being undone elsewhere in the bank. Word is that the budget-cutting that President Kim has promised as part of the reorganization is leading to the elimination of the small but crucial and catalytic grants the bank has historically made from another “special” facility, the Development Grants Fund for global initiatives. The DGF is tiny compared to bank capital and country lending (about $200 million a year over the last two decades compared to $35 billion in lending in 2012); it is a kind of ad hoc way to engage in obvious high-return investment opportunities in the absence of a clear mandate to support global initiatives. Since 1997 it has provided core funding to support global-public-good institutions such as the Global Development Network, which funds researchers in developing countries, the Extractive Industries Transparency Initiative, which promotes disclosure of natural resource deals and profits in the interests of reducing corruption, and CGIAR, the network of research institutions that produced the Green Revolution. Word is that this window will be gone entirely within a year. Meanwhile, the bank’s more extensive if still ad hoc multi-country bank-managed program of surveillance and response to the Avian flu crisis a decade ago has disappeared; an independent evaluation of the program concluded that the global public good nature of the program meant it was difficult for the bank to sustain once the sense of crisis passed.
In an internal reorganization meant to strengthen “global practices,” there has been no leadership on acquiring a “global” mandate. Almost 10 years ago, in this 2005 CGD report, a distinguished expert group proposed that the World Bank have a mandate and a pot of money to set priorities for the funding of cross-border, global investments. It could then deploy its expertise and its resources to cover the incremental cost of solar or wind energy instead of coal in South Africa; to help finance licensing fees to speed up access to new patented technologies on behalf of developing countries; to co-finance, with the Global Environment Facility, payments to Indonesia for retaining its forests; to collaborate with WHO on financing the testing of a vaccine for avian flu or Middle East respiratory syndrome coronavirus (MERS-CoV); to jumpstart a new round of agricultural research geared to Africa’s soils and land use constraints; and most of all to invest strategically in global goods to prevent global bads, rather than responding with repeated rounds of emergency relief after global bads strike.
I put this second worry, the growing gap between what the world needs from the bank and what the bank has the remit to do, to President Kim to fix, too. A truly global mandate is not about big money but about effective leverage of the bank’s singular combination of financial heft, technical depth, and global know-how in an institution designed for international collective action. Kim’s leadership on Ebola positions him well to ask the Bank’s board to open a serious conversation about a new mandate and to ask the White House and the US Treasury to contribute actively to that conversation.
It is time for the World Bank to take on the 21st century—to further its mission and save itself.
* The Staff Association update cited above was sent to me by a third party who received it from a staff member.
PovcalNet, the World Bank’s global poverty database, provides all kinds of country statistics, including mean income, the share (and number) of the population living in absolute poverty ($1.90), the poverty gap and several measures of income inequality, such as the Gini coefficient. But one thing it doesn’t provide is median income or consumption. The median is a better measure of “typical” well-being than the mean, which is always skewed to the right.
We’ve been waiting for the World Bank to add these medians to its PovcalNet database, but we got impatient and did it ourselves. By manually running a few hundred queries in PovcalNet, we now have (and can share with you) the latest median income/consumption data for 144 countries (using 2011 PPPs — more on our methods below).
By making this data public, we hope to encourage more development professionals to use the median in evaluating individuals’ material well-being in developing (and developed) countries and progress toward broad-based economic growth and shared prosperity. We also hope that wider use of the median will provide an incentive for the World Bank to publish the data in an easily accessible format along with the full distribution, in line with its open data policy.
Why the median?
Average or mean-based measures of income, such as GDP per capita, will always be higher than the median — the value at the midpoint — of that distribution, which is inevitably skewed to the right. So medians convey far better the material well-being of the typical individual in a country and have other advantages including simplicity and durability. The simplicity helps explain why the stagnation of the median wage is so often cited in the US press in the context of middle-class decline as the benefits of growth go to the top. Real median household income has been about $53,000 a year or $48 a day per person for a family of three. That puts median income per person in the US at only just about one-third of average income measured as GNI per capita.
A better example for the development community: the median reflects how much the person at the 50th percentile of the income distribution earns (or spends), giving us a better picture of the well-being of a “typical” individual in a given country. Take Nigeria and Tanzania: in 2010, Nigeria’s GDP per capita (at PPP) was $5,123; Tanzania’s stood at only $2,111. This suggests that Nigerians were more than twice as well off as Tanzanians. Yet, if we compare consumption medians, a different picture emerges: a Nigerian at the middle of the income distribution lived on $1.80 a day, while his or her Tanzanian counterpart had 20 cents more to spend, at $2 a day.
That difference is illustrated in the graph below, with countries plotted left to right according to their GDP and vertically according to their median income or consumption. The highlighted pairs, such as Nigeria and Tanzania, have very different GDPs per capita while sharing similar levels of typical well-being as measured by median income or consumption.
Using PovcalNet to extract the medians: data and very brief methodology
Despite the illustrative power of the median, the development literature still relies largely on GDP (per capita) or sometimes on the marginally more representative GNI (per capita). For the last five years, the data needed to calculate country medians has been available via the World Bank’s PovcalNet database. PovcalNet provides information about poverty and inequality across the globe based on over 800 representative household surveys and 1.2 million households in over 140 economies. It is a treasure trove for scholars, students, and development professionals, but it fails to live up to its full potential in its current format. In one query, one can view average monthly income, the share of the population below a user-determined poverty line, the poverty gap, the Gini index, and other, more obscure measures of poverty and inequality (see the screenshot on Brazil’s data below). But there is no easy way for users to check the median income or consumption for a country or to access a country’s full income distribution. There is also no way to download query results in an easily editable format like a csv or xls file.
A year and a half ago, our colleagues Justin Sandefur and Sarah Dykstra ran 23 million queries through PovcalNet over the course of nine weeks and made the resulting global poverty and income distribution data (using 2005 PPPs) available to the public. We didn’t attempt to repeat their herculean efforts, but we did create a dataset of median income/consumption for all countries available using the recently updated 2011 PPPs. Our median data was obtained in its entirety from the World Bank’s PovcalNet database. We use the latest survey year available and list whether the median is based on consumption or income data. We also note — as PovcalNet does — whether the data is grouped (C or I) or whether it represents unit-record data (c or i). For China, India, and Indonesia values for rural and urban areas are listed separately. The data were collected by manually entering a guesstimate for the given country’s median as the “poverty line,” and revising the guesstimate until the associated headcount was 50 percent. Deviations of up to 1.5 percent in the headcount associated with the median are possible.
Each year billions of dollars are spent on thousands of programs to improve health, education and other social sector outcomes in the developing world. But very few programs benefit from studies that could determine whether or not they actually made a difference. This absence of evidence is an urgent problem: it not only wastes money but denies poor people crucial support to improve their lives.
Over the last several years, the United States and other major donor countries have supported a historic initiative to write down the official debts of a group of heavily indebted poor countries, or HIPCs. Donor countries had two primary goals in supporting debt relief: to reduce countries' debt burdens to levels that would allow them to achieve sustainable growth; and to promote a new way of assisting poor countries focused on home-grown poverty alleviation and human development. While the current "enhanced HIPC" program of debt relief is more ambitious than any previous initiative, it will fall short of meeting these goals. We propose expanding the HIPC program to include all low-income countries and increasing the resources dedicated to debt relief. Because debt relief will still only be a first step, we also recommend reforms of the current "aid architecture" that will make debt more predictably sustainable, make aid more efficient, and help recipient countries graduate from aid dependence.
This paper addresses four misconceptions (or ‘myths’) that have likely played a role in the limited utilization of the IMF’s two precautionary credit lines, the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL). These myths are 1) too stringent qualification criteria that limit country eligibility; 2) insufficient IMF resources; 3) high costs of precautionary borrowing; and 4) the economic stigma associated with IMF assistance. We show, in fact, that the pool of eligible member states is likely to be seven to eight times larger than the number of current users; that with the 2016 quota reform IMF resources are more than adequate to support a larger precautionary portfolio; that the two IMF credit lines are among the least costly and most advantageous instruments for liquidity support countries have; and that there is no evidence of negative market developments for countries now participating in the precautionary lines.
We argue that survey-based median household consumption expenditure (or income) per capita be incorporated into standard development indicators, as a simple, robust, and durable indicator of typical individual material well-being in a country.
In this paper we identify a group of people in Latin America and other developing countries that are not poor but not middle class either. We define them as the vulnerable “strugglers”, people living in households with daily income per capita between $4 and $10 (at constant 2005 PPP dollar). They are well above the international poverty line, but still vulnerable to falling back into poverty and hence not part of the secure middle class. In a first step, we use long-term growth projections to show that in Latin America about 200 million people will likely be in the struggler group in 2030, accounting for about a third of the total population.
Global governance is no substitute for a country’s own well-managed policies of politics and economics, but the interconnected nature of our world demands that our leaders recognize the necessity for global coordination to keep pace with the for a more farsighted global order.
In this paper, Nancy Birdsall sets out basic information on the growing middle class in Latin America and the Caribbean and provides grounds for optimism that such expansion might reinforce the inclusive politics that sustain broadly shared growth.
In this working paper, the authors investigate the relation between class (measured by the position in the income distribution), values, and political orientations using comparable values surveys for six Latin American countries.
New research shows that inequality in Latin America is falling. In this paper, the authors summarize recent findings, analyze the affect of different regimes, and investigate the relationship between inequality and changes in the size of the middle class in the region. They conclude with some questions about whether and how changes in income distribution and in middle-class economic power will affect the politics of distribution in the future.