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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
In my presentation I gave a preview of ongoing work with colleagues here at CGD to define and measure an unobservable variable likely to affect women’s empowerment: the “reproductive ecosystem.” We define it as some combination of social norms, economic realities, laws and customs, and access to contraception that in developing countries affects girls’ and women’s “agency” on reproductive matters, and invites or not women to plan whether and when they will have children.
The reproductive ecosystem includes elements of both demand for contraception on the part of individual women (Is it socially acceptable to delay marriage and childbearing?), and supply (Is there a health clinic with contraceptive products nearby?). I think of it as something that a 10-year-old girl can “see” about the world she inhabits, with respect to her future roles in the family, community, and society—roles that for all women, whether they have children or not, are affected by the social expectation that they can.
Our objective is to develop a measure of the reproductive ecosystem across developing countries and over time (since about 1990), and ask whether differences across countries and changes within countries can be associated (subsequently) with women’s empowerment. For example, does a law prohibiting marriage before age 18 affect current or subsequent changes in girls’ education and women’s participation in the formal, paid labor force?
As a summary measure of the social context that matters peculiarly for women, the reproductive ecosystem helps define what the 10-year-old girl—whether in New York, Cairo, Bogota, or Dakar—can imagine about her future, and in addition what her parents and her community can imagine. What combination of children and “career” (or own-earnings) is open to her? How close is that imagined future to the one her brother can imagine? How does that affect her own and her parents’ decisions about investing in her future?
In the United States, the “power of the pill” was mostly about supply of a new technology
In the United States, the reproductive ecosystem changed dramatically in the late 1960s with the introduction of the contraceptive pill. Take-up of the pill grew rapidly in the 1970s, and an increase in women’s enrollment in professional education followed suit almost immediately (see chart). Jay Lindo, in this conference presentation (a tour de force, IMHO) referring to his own and others’ work using US data over the last five decades (“power of the pill” studies), explained how economists have used data on variation in access and cost to contraception (and abortion) to tease out causality—from greater access to greater empowerment of women—including higher wages decades later.
But over the last 30-40 years the pill and other modern contraceptive methods have been introduced in the developing world, where women have less education on average than women in the US in the late 1960s and were and still are, on average, poorer. The conditions for rapid uptake of contraception were not and have not been as propitious as in the US. New and better contraception is not like a new vaccine, almost universally taken up to avoid disease and death, or even like the mobile phone. Fertility and family are deeply sensitive subjects in every society; the decision to use contraception is heavily mediated not only by education and income, but by religion, prevailing social norms, and culture—and of course, the status or “rights” of women to make choices in the first place. Causality from supply of a new technology that matters for women to women’s empowerment is harder to assess.
Two papers presented at the conference may be among the first to do so rigorously, using household survey and other data from Malaysia and Colombia. In Malaysia, the authors use the natural experiment of differential access over time in different communities to show that greater (earlier) access is associated with greater schooling for girls. They emphasize the “indirect” or “incentive” effect at the community level; in communities where family planning became a known option, girls stayed in school longer, independent of whether their own mothers used contraception.
How can we address the same question across many developing countries and over time? Have elements of the “reproductive ecosystem” (on both the demand and supply side of use of contraception) that have varied over time and across countries mediated the effect of access to contraception on country and time-specific measures of women’s empowerment?
Measuring and validating the concept of “reproductive ecosystem”
To characterize the reproductive ecosystem in any one place at any one point in time (across many developing countries over the last three decades), we are putting together data from multiple sources, including: attitude data about women’s roles from the World Values Survey, e.g. whether a university education is more important for boys than girls, or if men have more of a right to scarce jobs than women; Demographic and Health survey data at the country level (and urban/rural within countries) on the social acceptance of contraception, e.g. the prevalence of “opposition” to contraception that women report; and data on observable country-year behavior of adult women, e.g. the percentage of women who work outside the home for wage or salary income. Other possibilities suggested by conference participants include laws that affect women’s ability to own property, at least on paper; prevalence of female genital mutilation; and measures of media access to alternative lifestyles of women (the famous example being that of soap operas in Brazil).
One way to validate any connection from these societal/country variables to women’s empowerment is to focus on women’s apparent decisions to time pregnancies, including to delay marriage, to delay their first birth, and to use contraception before they have any births at all—something I proposed 30 years ago (!) in this article and as was the case for women in their 20s in the United States in the early 1970s. These variables are more likely to reflect women’s “agency” in reproductive behavior than do traditional variables such as overall use of contraception or average number of children. The issue for women may not in fact be how many children to have—which has been the focus of efforts to improve access to contraception for decades—but when, if ever, to get pregnant. (For a tantalizing indication that these decisions have been changing in the developing world, compare slides 10 and 12 of my colleague Rachel Silverman’s conference presentation.) The US story indicates that starting in the 1970s, young women were confident, taking the contraceptive pill, that they could combine sex (and even marriage) with a partner with going to law or medical school—assured they could put off pregnancy, and that professional education made sense for them; they could imagine combining children and career with lower risk and higher return. As in the case of an indirect effect in Malaysia, we can surmise that in the 1970s admissions committees of medical and law schools also became more willing to admit women—knowing that women had control over the timing of any pregnancies both while in school and during any resulting career. The key point is that women can be empowered simply by the prevalence of contraception, independent of their own immediate choices.
From a modelling point of view, we are attacking two questions. First, what indicators of the reproductive ecosystem measured at the country level (including the demand side and the supply side, both of which affect the total cost of women choosing to plan births) affect measures of whether women are timing (including delaying) births at that time in that place? Second: with lags of about 15 years, is there an observable association across countries and/or over time between differences in “reproductive ecosystems” and differences in measures of women’s empowerment?
Why is this work potentially policy relevant? Compared to 30 years ago, greater access to modern contraception is clearly associated with greater use (with modern method usage now as high as 63 percent in Kenya, 54 percent in Bangladesh, and 48 percent in India)—and probably to some extent with lower fertility (with the total fertility rate 3.9 per woman in Kenya, 2.1 in Bangladesh, and 2.4 in India (WDI)). But whether and why greater access is associated (or not) with increases in women’s empowerment is less clear—and if not why not? We have compelling evidence in the Malaysia case that at the community level, greater access to contraception can be causally linked to the likelihood that girls will stay longer in school. But would that be equally true in India and Senegal? What else besides “access” feeds through to measures of women’s empowerment? And over what time periods? It may be that in some settings it is patriarchy itself that matters. It may be that the next best investment for empowering women (and ultimately for development itself) is a direct effort to change aspects of what we are calling the reproductive ecosystem. Undoing laws and customs affecting property rights for women, in a virtuous circle, might itself undo the patriarchy that discourages girls from delaying marriage to finish secondary school and earning an independent living—and by undoing patriarchy, fuels growth and development.
Meanwhile, we are looking for whatever indicators are out there of the reproductive ecosystem, while exploring the potential of what is, as always, limited data to test our alternative models of reproduction and empowerment across societies. We have data challenges and statistical/econometric challenges. We welcome your suggestions (comment below) on data that would help us represent the reproductive ecosystem—and help create a better future for today’s 10-year-old girls across the developing world.
Numerous studies find that child health suffers when children are exposed to conflict, and armed conflicts are more likely to occur in poor countries with weak states. Nigeria is among the most conflict-prone countries in the world, experiencing the highest number of conflict-related deaths of all Sub-Saharan African countries in many of the years since 2000, with a peak in 2012. In this paper, researchers at the Urban Institute and the Center for Global Development are studying the relationship between child health and conflict in Nigeria by combining geo-coded data from the Demographic and Health Survey (DHS) of 2013 and the Social Conflict Analysis Database. In both urban and rural areas of Nigeria, they find significant increases in child wasting (acute malnutrition) in 2013 associated with proximity to violent conflict in 2012. In urban areas, infant mortality also increased significantly in 2003-2013, when the mother was exposed to conflict during pregnancy. They will discuss these findings and their implications, as well as some of the challenges to studying health in conflict-torn places.
What will you remember about 2017? The growing crisis of displacement? The US pulling out of the Paris agreement and reinstating the global gag rule on family planning? Or that other countries reaffirmed their commitment to the Paris agreement, that Canada launched a feminist international assistance policy, that Saudi Arabia finally let women drive?
CGD experts have offered analysis and ideas all year, but now it's time to look forward.
What's going to happen in the world of development in 2018? Will we finally understand how to deal equitably with refugees and migrants? Or how technological progress can work for developing countries? Or what the impact of year two of the Trump Administration will be?
Today’s podcast, our final episode of 2017, raises these questions and many more as a multitude of CGD scholars share their insights and hopes for the year ahead. You can preview their responses in the video below.
Thanks for listening. Join us again next year for more episodes of the CGD Podcast.
Researchers from many academic institutions and think tanks have studied the relationship between contraception and women's economic empowerment. In both the developing and developed world, the evidence suggests that access to contraception is not only correlated with but can even cause women’s economic empowerment and drive economic growth.
On December 7th, academics, private sector representatives, and policymakers turn to an issue that affects women in rich and poor countries alike: the ability to make informed, voluntary, and autonomous choices about childbearing, and the implications of reproductive choice as a lever to expand women’s economic and life prospects. Until recently, there has been a lack of rigorous empirical evidence on the links between contraceptive access and women’s economic empowerment in low- and middle-income countries. The 2017 Birdsall House Conference features new findings on this relationship alongside existing evidence from the United States.
The United States is apparently driving a hard bargain with World Bank President Jim Kim, who is hoping the bank’s 189 shareholders will agree to increase the current capital of the bank’s “hard” window (for middle-income countries with over $1200 in per capita income) sometime in 2018. A deeper capital base would allow the bank to lend more—more each year than the almost $30 billion of loans approved in 2016. But the US wants to link any support for a recapitalization to World Bank “graduating” China—and perhaps other member countries with good access to private capital markets who don’t seem to “need” the World Bank.
But cutting off China is not something Jim Kim and senior management at the World Bank want to do. There are sensible arguments on both sides of this divide. And there is a simple way to begin to thread the needle and get to yes, but first some background (readers familiar with the US position and the World Bank counter-arguments may want to skip to the “getting to yes” section below).
The US position has some merit
On the face of it, the US position is not unreasonable. China doesn’t “need” to borrow; it can easily self-finance its own development investments. Indeed, China is a donor and a lender to other countries, with massive lending by its ”policy banks” (China Development Bank and China Exim) both inside and outside China (and long-run plans to lend heavily to other countries as part of its Belt and Road Initiative; China is also the single largest shareholder in what the US might consider a “rival” multilateral bank to the World Bank, the Asian Infrastructure Investment Bank founded under its leadership in 2015. And from the point of view of the US, China’s status as one of the biggest borrowers at the World Bank (with almost $2 billion in approvals in 2016, behind only Peru, India, and Kazakhstan) means that ending its borrowing would free up existing World Bank capital for other smaller and poorer countries that face tougher terms if they borrow on private markets.
Then why does China want to borrow?
China wants to borrow, the World Bank often argues, because along with the money for any particular project or program comes valuable technical and policy advice based on World Bank staff’s expertise and experience acquired in other countries. China could in principle “buy” advice from the World Bank, but may well prefer to bundle money with advice; that way World Bank management has skin in the game on the success of a major investment. Moreover, for China the process of borrowing and implementing World Bank projects brings lessons on how to manage procurement, avoid corruption, develop high standards of project analysis, and avoid costly environmental and social risks. In addition, the central government as gatekeeper to the World Bank (and the Asian Development Bank) manages a healthy competition among state and local governments; only high-value proposals consistent with central government priorities get approval to open negotiations with the outside lender.
Why does the World Bank want to lend?
And the World Bank wants to lend—especially to China. The hard window of the World Bank, as in any bank, has to pay for itself if its development mission is to be sustained and furthered. Having “strong” as well as “weak” borrowers is at the heart of its business model as a collective cooperative or global club for lending. China’s risk of default is low, and it’s a big economy; the transaction costs of doing big loans to big economies are in general lower than for most other borrowers. Net income from lending to China thus helps subsidize the higher costs and greater risks of lending to smaller and less financially hefty borrowers. In addition there is the argument that the bank benefits in non-financial ways from its work in China--quoting President Kim—that “the lessons we learn in China…are very helpful to other middle income countries”. Finally, the Bank argues that 73 percent of the world’s poor (using the $1.90 a day line of absolute poverty) live in middle-income countries; and though fewer than 2 percent of China’s population is estimated to live below the poverty line now, median consumption is still surprisingly low, at $7.66 per person per day compared for example to Poland at $14.20, until recently another large, middle-income borrower.
Is it just China? What else is motivating the US position?
First, a recapitalization would require the Trump Administration to ask Congress for money. To add $40 billion of paid-in capital to the bank’s current ledger (which would more or less double its current equity capital would require Congress come up with about $6 billion (given its 15.9 percent share in total ownership of the bank)—not a huge amount but politically a heavy lift for an administration arguing the US bears too much of the burden of global peace and security. Even during the Obama Administration, US Treasury sought to keep capital increases at the MDBs to a minimum, even as they acknowledged the need for more capital following aggressive MDB counter-cyclical lending in the face of the global financial crisis.
Second, there is ideology to consider. In 2000, in the waning days of the Clinton Administration, the Republican majority of the members of the “Meltzer” Commission recommended the World Bank end lending to “middle-income” countries on the grounds that those countries had adequate access to foreign capital markets—similar to today’s discussion, and that therefore the World Bank and the other multilateral banks were competing with private capital. (With the subsequent election of Republican George Bush in 2000, the resulting discussion and debate was worrying for supporters of the World Bank’s business model and its development mission in the US and Europe, and for middle-income countries who wanted continued access to loans on the better terms the multilaterals provided, and motivated this report of the Carnegie Endowment for International Peace criticizing the Meltzer commission analysis—and with recommendations I invoke below.)
And third, China is special. Why not formally “graduate” Poland and other borrowers with income per capita higher than China? China’s huge economy makes it a geopolitical power that now rivals the US—and then there is the Trump Administration unhappiness with China’s persistent trade surplus with the US.
Moreover, the US has the stronger hand in any negotiation—with President Kim and with other country shareholders
Why? The US’s 15.9 percent of the bank’s capital makes it the largest single shareholder. In principle the US could step aside and allow other countries to contribute to a recapitalization, but that would dilute its current ownership and in current circumstances, with Trump Administration support for multilateral institutions at best unclear, that might make it costlier for the World Bank to borrow. The World Bank’s AAA++ rating and resulting ultra-low costs as a borrower, depends in some unclear measure on continuing and active US support; in the end US steadfast political support is central to what the rating agencies rely on. So the World Bank needs the US in on any recapitalization.
In a sense it’s a good sign that the Trump Administration hasn’t just said no, and prefers to get something back by negotiating. Perhaps even the Trump administration doesn’t want to give up entirely the big leverage the World Bank provides in support of US foreign policy, market-driven growth, enhanced global security, reduced poverty, and in general a better world—all at bargain rates for US taxpayers.
Getting to yes: Differential pricing
The World Bank’s arguments are sensible and technocratic; the United States argument is rooted in its fiscal straits, its longstanding market (laissez-fare) orientation, more marked during Republican administrations, and the Trump Administration’s unfriendliness to its new global rival.
But both sides want to get to yes. The Trump Treasury Department is probably looking to limit the size of any recapitalization, and to see China “graduated.” The World Bank and its middle-income borrowers don’t want to accept the idea that any borrower that is otherwise in good standing can be excluded from the borrowing club, and particularly in a case where it is one or more non-borrowers that want a club member pushed out.
One way of getting to yes is for the US to take the position that it is time for the World Bank to change its pricing. At the moment, all borrowers face the same rate for any particular type of loan—the poorest IBRD countries (think Guatemala or Zimbabwe) borrow at the same rate as China. All get a subsidy in the amount of the spread between the IBRD loan and the higher cost (and terms in general, including maturity) of loans on the private market. The table below includes countries that have been or are currently among the bank’s biggest borrowers. As the table below shows, using as an example a 10-year fixed loan from IBRD of 2 percent or 200 basis points, the more costly a country’s alternative on the private market the bigger would be its subsidy were it borrowing today.
GDP per capita (current US$)
10-year fixed loan rates
Subsidy assuming World Bank lending rate of 2%
In most banks, terms of loans are related to the borrower’s creditworthiness—more risky borrowers face higher costs. But the World Bank is a development bank; it would make sense to tie the effective subsidy, whatever it is to some measure of countries’ wealth—so that the richer the country the smaller its subsidy. That form of differential pricing was a recommendation of the 2001 Carnegie Endowment report referred to above (The Role of the Multilateral Development Banks in Emerging Market Economies), co-chaired by Paul Volcker (a firm believer in encouraging countries to “graduate”) and Angel Gurria (then a former Finance and Foreign Affairs minister of Mexico and now the head of the OECD). The first recommendation of that report was that graduation should be “voluntary, but coupled with incentives to avoid prolonged dependence.”
The logic of voluntary graduation
The logic of voluntary graduation is that countries do in fact ‘self-graduate’ as the spread borrowing on the private market and borrowing from the World Bank shrinks. By the year 2000, 26 countries had done so—and demonstrating one logic of voluntary graduation, four (Korea, Malaysia, Chile and Costa Rica) had returned by 2000 to borrowing, showing voluntary graduation gives the MDBs the flexibility to respond when they are needed with counter-cyclical lending during global systemic crises. Since then many more have without fan-fare self-graduated, including apparently Poland.
The Volcker-Gurria commission wanted at the same time to avoid “prolonged dependence” and encourage countries to rely on private capital; so the World Bank and the other MDBs “should increase further the incentive to graduate by differentiating their pricing according to borrowers’ per capita income.”
That idea still makes sense, and could help the parties get to yes on a recapitalization and on graduation soon if not immediately of China.
A simple and predictable change in pricing according to per capita income would not be new at the World Bank, where already countries in the category “low-income” borrow from IDA, the soft window, at much lower rates than countries in the category “lower middle-income.” Thus, for example, Malawi and Honduras borrow at lower rates than Ghana and Paraguay. However, lower middle-income countries such as Ghana and Paraguay currently borrow at the same rates as countries in the category “upper-middle income” such as South Africa, China, and Brazil. Of the countries listed in the table above, all are “upper middle income” except India, Indonesia, and Ukraine.
As a start on differential pricing, the bank’s shareholders could agree on a different rate for the lower middle-income borrowers than for higher middle-income borrowers. For China, in the latter category, that would still mean a subsidy but a smaller one than now (see table).
Note that an increase in the cost of borrowing for all upper-middle income countries, including China and high-income Poland, would make sense in other ways. For example, it would increase the incentives inside the World Bank to minimize the delays and relatively high “hassle” costs that “strong” borrowers like China face, extracting some efficiency gains from the new pricing policy. And it would not eliminate access of countries like China to policy advice; even now some countries that have voluntarily graduated “purchase” that advice from the bank—including Chile and countries like Saudi Arabia which has never been a borrower.
Of course, a policy tying borrowing costs to per capita income would not be welcomed by upper middle-income borrowers, and the specifics would have to be negotiated not only between the US and the bank, but by all the shareholders.
But negotiating is all about in the end getting to yes—and in this case getting closer to a healthy recapitalization and a more optimal “development” use of the bank’s lending resources.
The Birdsall House Conference Series on Women seeks to identify and bring attention to leading research and scholarly findings on women’s empowerment in the fields of development economics, behavioral economics, and political economy. On December 7th, academics, private sector representatives, and policymakers will turn to an issue that affects women in rich and poor countries alike: the ability to make informed, voluntary, and autonomous choices about childbearing, and the implications of reproductive choice as a lever to expand women’s economic and life prospects. Until recently, there has been a lack of rigorous empirical evidence on the links between contraceptive access and women’s economic empowerment in low- and middle-income countries. The 2017 Birdsall House Conference will feature new findings on this relationship alongside existing evidence from the United States.
Inequality and inclusive growth were high on the agenda of the Annual Meetings of the International Monetary Fund and World Bank earlier this month. We are glad about that, but the under-reported story here is that this prominence marks a dramatic shift in the IMF over the last two decades in the IMF’s approach to the relevant challenges for the poorest countries, including on the issue of social safety nets and social expenditures.
The IMF is waking up on how to help countries manage fiscal reforms AND protect the poor
In the 1990s and early 2000s, the IMF was still largely living up to its nickname “It’s Mostly Fiscal.” Distributional matters were considered a matter of politics and under the purview of national governments—and for analytic and policy work a matter for the World Bank. (In 2002 a report of the IMF’s Independent Evaluation Office recommended that during Article IV consultations, staff ask whether authorities had identified social programs they would like to protect in the event of a crisis. Several Board members resisted that recommendations, viewing it as “impractical”—and infringing on World Bank responsibilities.) And as recently as 2007, this CGD report (led by the former head of the IMF’s IEO) found that IMF programs in African countries, in part because they systematically understated expected future donor support for health programs, made recommendations for fiscal consolidation that were not necessary, and for reductions in civil service numbers that ended up with governments, faced with conditionality on civil service spending cuts, hitting the health sector (and possibly the education sectors) hard.
But with the global financial crisis, the failure of harsh bouts of fiscal austerity in Greece to restore growth, and the growing body of IMF research income distribution and its causes and consequences, the IMF has changed. In its official statements, the institution now recognizes explicitly the potential trade-off between fiscal “consolidation,” for all its merits in many circumstances, and the effects on the poor of resulting cuts in social spending. Those cuts not only reduce spending on basic schooling and health care (the obvious concern of the IMF and fiscal authorities), but if they lead to pension reductions and civil service job eliminations, can move back into poverty incipient middle class “strugglers,” as well.
In spring of this year, for example, the Fund released this Staff Paper, reporting on research indicating that in the poorest countries eligible for grants and low-cost Fund loans, IMF programs since 2010 have included “floors” or “indicative targets” on education and health spending and on whatever social safety net programs borrowing countries had (see Broome for the provenance of this new “floor” approach), and that in two thirds of the 68 loan programs examined, the resulting “indicative conditions” were met.
As Jo-Marie Griesgraber of New Rules for Global Finance notes, the paper on which the Staff Report is based is at least transparent (e.g. on the failed “floor” in one-third of borrowing countries; “in every classroom in the world, 66% is still failing”), and we would add that the paper, now in the form of a Staff Report is on the record, clarifying that IMF country operations staff have a responsibility to take note.
The limits of the IMF’s indicative targets on social protection
At the same time, there is a long way to go. The underlying research in the recent report was limited in its aims, definition, and scope. The main conclusion is that IMF programs in poor countries have leaned, since 2010, in the right direction—by minimizing cuts in those programs most likely to reach the poor. But that conclusion relies heavily on the expenditure side, e.g., on countries’ maintaining floors during IMF program periods on total expenditures on health and education and social transfers as a share of the countries’ GDP.
But indicative targets on spending on cash transfers, education, and health are not a robust indicator of whether the adopted fiscal policy mix adequately protects the poor. And “defining spending floors to narrowly cover the needs of the most vulnerable,” one of the key recommendations of the Staff Paper, while important, is not enough. Why? In simple terms, because the effect of these aggregate floors on the near-poor and the poor cannot be determined without information on not only how much the poor receive in benefits but also how much they pay in taxes.
The key to knowing how countries can minimize the tradeoff between appropriate fiscal consolidation and protection of the poor requires having and analyzing, country by country, micro data on the incidence of expenditures and taxes as well, on the poor and other income groups. A new generation of such studies undertaken in more than 30 countries (under the sponsorship of this program, and discussed here shows that significant numbers of the poor, especially in low-income countries, are net payers into the fiscal system (primarily due to consumption taxes) and that reducing subsidies can hurt the poor even when the subsidies, for example on gasoline, benefit disproportionately the middle class and the rich.
In some countries fiscal policies made the poor poorer
For example, in Ethiopia, Ghana, Guatemala, Nicaragua, Uganda, Togo, and Tanzania (in around 2012) the extreme poverty rate was higher after taxes and transfers than before. In Ethiopia, half a million people were pushed below the extreme poverty line because taxes they paid outweighed the value of transfers and subsidies they received. In Tanzania, 50 percent of the extreme poor were impoverished by the fisc. And in Ghana, Guatemala, Nicaragua, Tanzania, and Uganda, the extreme poor—on average—were net payers into the fisc—in all cases despite cash transfers. While it is true that the extreme poor in these countries may benefit from government spending on education, health, and infrastructure, these cannot replace food, clothing, and shelter.
With this kind of micro evidence, governments are equipped with the information to justify “fiscal policy fixes” that benefit the poor (or at least protect them) while preserving macroeconomic stability. What happened in Ethiopia illustrates this well: “The results from the Ethiopia CEQ Assessment contributed to two key policy changes in 2016: the cash transfer program was expanded to include urban areas and the minimum threshold of taxable personal income was raised.”
The good news is that the IMF, in partnership with the Commitment to Equity Institute at Tulane University and the World Bank, has recognized the need for more granular distributional analysis incorporating fiscal incidence analysis in its surveillance and fiscal consolidation programs in Costa Rica, Guatemala, Namibia, Swaziland,Togo, and Zambia (and with more countries in the pipeline). The case of Togo is a good example: “[t]he finding that VAT [Value Added Tax] imposes an economic burden on lower-income households, despite its overall progressivity, also suggests the need to effectively target social spending.” (p. 13).
Better late than never: The IMF is waking up on how to help countries manage fiscal reforms AND protect the poor. And a bottom line: spending on safety nets for the poor needs to be set net of the taxes that the poor pay.
As I blogged before, one of the last articles Daniel Pearl wrote for the Wall Street Journal before he was abducted and murdered---coauthored with Michael Phillips---exposed financial woes at the Grameen Bank. Appearing on page 1 on November 27, 2001, under the headline Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag, the piece described how some Bangladeshis were juggling loans from several microcreditors at once, how others had banded together to protest and resist the Bank's policies, and how the Bank's loose accounting standards and slow disclosure hid a decline in loan repayments.
This post shares new data that suggest that history is repeating itself in important ways. The Grameen Bank, indeed all big microcreditors in Bangladesh, may be finding it harder to collect on loans. As far as the evidence goes, there has been no epidemic of default. But the combination of years of rapid growth and accelerating declines in key indicators of delinquency are so reminiscent of the lead-up to the global financial crisis that the broad implications hardly need explaining. A partial meltdown in the Mecca of microcredit would not sow the same economic destruction---microfinance is not the heart of Bangladesh's economy in Schumpeter's sense---but it could have lasting implications for microcredit worldwide.
In his autobiography, Banker to the Poor, Muhammad Yunus describes how Grameen grew from an idea, to a project with his students, to a formal branch of a state bank, to an independent bank. By the mid-1990s, the Grameen Bank was a national operation with a global reputation. However, growth then slowed and the Bank ran into trouble persuading its borrowers to pay back. Stuart Rutherford:
Arrears on loan repayments began to grow, and more and more clients stopped attending the village-level weekly meetings where bank business is conducted. Then in 1998 Bangladesh suffered its worst floods in living memory, disrupting the bank’s work in almost two thirds of the country and dealing its balance sheet another severe blow.
The system consisted of a set of well-defined standardised rules. No departure from these rules was allowed. Once a borrower fell off the track, she found it very difficult to move back on, since the rules which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off the track. Then there was the multiplier effect. If one borrower stopped payments, it encouraged others to follow.
Grameen's performance in recent years hasn't lived up to the bank's own hype. In two northern districts of Bangladesh that have been used to highlight Grameen's success, half the loan portfolio is overdue by at least a year, according to monthly figures supplied by Grameen. For the whole bank, 19% of loans are one year overdue. Grameen itself defines a loan as delinquent if it still isn't paid off two years after its due date. Under those terms, 10% of all the bank's loans are overdue, giving it a delinquency rate more than twice the often-cited level of less than 5%.
Some of Grameen's troubles stem from a 1998 flood, and others from the bank's own success. Imitators have brought more competition, making it harder for Grameen to control its borrowers.
...microlending has lost its novelty. In Tangail, signboards for rival microlenders dot a landscape of gravel roads, jute fields and ponds with simple fishing nets. Shopkeepers playing cards in the village of Bagil Bazar can cite from memory the terms being offered by seven competing microlenders....Surveys have estimated that 23% to 40% of families borrowing from microlenders in Tangail borrow from more than one.
Borrowers have also become more rebellious. "The experience was good in the beginning," says Munjurani Sharkan, who became leader of a Grameen group in Tangail's Khatuajugnie village in 1986. To put pressure on "lazy" group members who were slow making payments, she says she used to start removing the tin roofs of their homes. But one day, the whole group decided to stop making payments.
They were protesting Grameen's handling of a fund it created for each group, using 5% of each loan and additional mandatory deposits. The "group fund" was meant for emergencies, but many borrowers wanted to withdraw money from the group fund. After a protest movement, complete with placards and amplified speeches, Grameen finally agreed to give borrowers easier access to the fund.
The troubles and the exposé left several legacies. First, even before Pearl and Phillips got onto the story, Grameen embarked upon a program of transformation eventually called "Grameen II." Its hallmarks were simplification (of the various loan products), computerization, flexibility, and the taking of voluntary savings deposits. In response to the article, Yunus publicly regretted the Journal's failure to tell this story of positive change (and published all his e-mail exchanges with Pearl and Phillips!). He lacked credibility since Grameen's forthrightness had just been called into question; yet he was substantially right. Grameen II confounded the critics. Today, the icon of tiny loans for the poor does more microsavings than microcredit. Portfolios of the Poorextols the flexible new "topping up" system that lets people borrow back loan balances after 26 weeks of on-time payment.
A second legacy: Grameen overhauled its metrics of loan delinquency and began posting them monthly on its web site. It thus set a standard of transparency that its main rivals, ASA and BRAC, are far from matching.
Third, and far less important, when I started at the Center for Global Development in early 2002 and listed topics I could work on, my new boss Nancy Birdsall lit on "microfinance"; I think the recent Pearl and Phillips article was in the back of her mind. So it's one reason I am writing this today.
Grameen II also confounded the critics in embarking upon a new round of growth---from 2.4 million Grameen members at the end of 2001 to a stunning 6.9 million at end-2006 and just under 8.0 million today. ASA and BRAC kept pace---in fact, closed the gap---so that that all the big three clustered around 6 million borrowers at end-2008. So strong is the convergence that one wonders whether the three are lending to the same 6 million households. (Not all 8 million Grameen members borrow at a time.)
Indeed, multiple borrowing is widespread in Bangladesh now, and it has raised concerns that some Bangladeshis are juggling microcredit loans the way some Americans juggle credit card debt, in a merry-go-round that must one day stop. The worry, in other words, is that there is a microcredit bubble. In 2007, Shafiqual Haque Choudhury, founder and head of ASA, which is known as the most commercially savvy of the big three, worried aloud about a "train crash." And that was before the global financial crisis, which has probably been transmitted into poor Bangladeshi households via lower exports of clothing made in Bangladeshi factories and fewer construction jobs in the Middle East for Bangladeshi workers.
Yet so far, at least from afar, tranquility seems to prevail. Repayment rates, to the extent they are reported, have remained high. In the last year, Portfolios of the Poor has depicted microcredit as a source of stability for Bangladeshi families more than instability. And Rich Rosenberg implicitly leaned on the high repayment rates in microcredit's exemplar nation in arguing that since people keep repaying loans over many years, and there have been only scattered credit meltdowns, most poor people must be avoiding gross over-borrowing.
If Bangladeshi microcredit was approaching a train wreck---or at least a bumpy stretch---where would we see it first? On the website of the most transparent large microcreditor in the country. A few days ago, I visited Grameen's site, and was surprised to find this trend (full spreadsheet):
I think about this graph in two ways. One is by focusing on the ending level of 96.54%. That seems high in absolute terms. But it is low by historical standards. And Rich Rosenberg, in his authoritative field guide to delinquency metrics (quoted by Pearl and Phillips) and in a recent post, explains that a 95% collection rate can spell disaster. On a one-year loan with weekly repayments, lent taka (the Bangladeshi currency) return to the microcreditor over 0--12 months, so the average taka makes a lender-borrower round trip in 6 months, and can be immediately relent. Thus a 95% collection rate can lose 5% of capital in 6 months, and 10% in a year---maybe manageable if interest rates are high enough, but not trivial. In addition, non-payment is contagious, as Yunus noted. Once delinquency starts feeding on itself, the costs of cajoling and pressuring for repayment can skyrocket.
Another way to analyze the graph is by focusing on the recent change. Whether or not Grameen Bank is yet in the red zone, it seems likely that something bad is happening. In Rosenberg's language, the on-time collection rate graphed above is an excellent red flag indicator because it plummets as soon as borrowers start struggling. It is a leading indicator of trouble, a canary in the coal mine.
The on-time collection rate does have a weakness, though: paying late is not paying never. Delinquencies do not automatically harm a creditor greatly in the long run. This is why Rosenberg recommends the microlenders also compile indicators of more protracted difficulties---and why Grameen does so. Its monthly tables list total amounts owed by people that have missed 5--9 consecutive payments (1--2 months of weekly installments). By this measure, if you miss the first 5 payments on a $100,000 mortgage, the entire $100,000 is counted as at risk. Grameen does the same for those missing 10 or more payments.
This graph shows all three of Grameen's delinquency indicators. The blue line is the same as that above, but flipped for comparability from a collection to a non-collection rate. The two added indicators are for Grameen's core credit product, the basic loan, which can last from 3 months to 3 years and has weekly payments. These too point to degradation:
So what is the story behind the numbers? I imagine two main possibilities. One is that the global financial crisis is mainly to blame and little is fundamentally wrong with microfinance in Bangladesh. The other is that a "train crash" is indeed occurring, however mild or severe. The global crisis may merely have popped the bubble. Both of these stories are about Bangladeshi microcredit in general, not just the Grameen Bank. I focus on the Bank only because it does such a good job of publishing delinquency indicators. [Update: a bit more analysis in this post.]
I spoke last night with the leading foreign observer of Bangladeshi microfinance, Stuart Rutherford, and he strongly favored the second explanation. More than 650 microcreditors operate in Bangladesh. Multiple borrowing is widespread. At least until very recently, there has been no national ID system, so creditors have been unable to share information in order to track how much debt people are juggling, the way creditors in rich countries do through credit bureaus. The microcreditors are flying blind. Some winnowing seems inevitable and healthy.
How will the big three fare? ASA, according to Rutherford's Pledge has more money than it knows what to do with. It is lean and mean, financially strong. It stopped opening new branches in 2007 and went into reverse, closing or amalgamating some. BRAC borrows its capital more than the others, which may make it vulnerable, but also receives more support from donors for the way it integrates microcredit with other activities to help the poor.
Finally, Grameen holds 45.4 billion taka in savings for its members, against 56.1 billion in outstanding loans. To the (unclear) extent that the individuals who owe the bank the most are those who save the most with it, Grameen should be in reasonable shape: defaulters will lose their savings. (That said, I wonder whether recent drops in Bangladesh's commercial interest rates will place another strain on the Grameen. It has committed to paying 12%/year over 10 years (10% over 5) on its Grameen Pension Scheme savings plan. Adding the 38.4 billion taka in savings of non-members puts Grameen in a net savings position, and the earnings on its net savings are going down. See the bottom of the "Monthly data" tab in my spreadsheet.)
More graphs may shed more light. This one shows what may be a problematic pattern in the evolution of the Bank, and perhaps microcredit generally in the country. Whenever the Bank has stopped growing, delinquency has flared:
This graph shows that despite the current plateau in membership, the Bank has maintained growth in taka terms by increasing lending per member:
I tried to ask the Grameen Bank about the story behind the statistics. But the phone number on its Contact Us page has yet to answer, messages to the posted e-mail address bounce, and the web-based e-mail form produces an error message. I hope that this post will elicit an informative response.
I do not know whether Bangladesh's microcreditors are in major trouble. But if they are, the denouement will manifest much as in the graphs above.
It is tempting to link the degradation in the Bank's portfolio to the mysterious dismissal of Deputy Managing Director Dipal Barua in December. I have no evidence for a link. However, when a financial institution forces out its head of operations while key indicators are going south, it raises questions. Shareholders---mainly the Bank's members---donors, and other stakeholders deserve an explanation.
A crisis in Bangladesh, akin to recent ones in Bosnia, Morocco, Pakistan, and India, would tarnish the image of microcredit worldwide, perhaps permanently.
Other microcreditors should quickly match Grameen's standards of financial disclosure so that we can get a better read on the extent of trouble.
The Grameen Bank has repeatedly defied the skeptics and flourished for 34 years. This history should instill humility in any who would declare Grameen compromised now.
Yet the Bank and its competitors have not quite proved that they can thrive without growth, as they must for permanence. A history of ending lending problems by outgrowing them is not entirely reassuring.
Reliance on natural resource revenues, particularly oil, is often associated with bad governance, corruption, and poverty. Worried about the effect of oil on Alaska, Governor Jay Hammond had a simple yet revolutionary idea: let citizens have a direct stake. Thirty years later, Hammond’s vision is still influencing oil policies throughout the world.
Development progress has traditionally been measured in terms of reductions in poverty and increases in per capita GDP, that is, average income as calculated by dividing total income by the total population. My guests on this week’s Global Prosperity Wonkcast, Nancy Birdsall and Christian Meyer, argue that median income—the income at the middle of a country’s income distribution—is a better measure. They join me to discuss their new working paper, The Median is the Message: A Good-Enough Measure of Material Well-Being and Shared Development Progress. During the interview we discuss why the median makes more sense (hint: something to do with inequality); why it hasn’t been used much in the past (hint: data availability); and how it could be incorporated into the post-2015 development framework.
I ask Nancy how she became interested in the median. “Almost 10 years ago, I did a paper where I (initially) defined the middle class as the group around the median, and that’s how I discovered just how low the median was. I realized that definition of the middle class didn’t make sense,” Nancy explains. “We called it the ‘middle income group’ because it really wasn’t middle class by Western standards.”
In later works, Nancy identified (as opposed to “defining”) the middle class as those who have the equivalent of at least $10 per day per capita. Last year, in a paper on Latin America authored with Christian and Nora Lustig , she identified a group she calls the “strugglers” – people with daily incomes between $4 and $10 who are well above the international poverty line but still vulnerable to falling back into poverty.
This research, she says, caused her to realize that although there are millions of people who’ve escaped extreme poverty, half of the population of the developing world is still at $3 per day or less (about the median for all people in developing countries today), and $3 per day is still very poor.
Christian explains that unlike per capita income, median income reflects differing levels of inequality. If there are a few very rich people and many poor people, average income will be much higher than the median income. If, on the other hand, income distribution is relatively less unequal, the difference between the mean and the median will be smaller.
“The median provides a distribution-aware measure,” Christian explains. “Unlike the average, it’s aware of the underlying distribution of wealth in a country, and using such a measure provides a simple sense of income inequality.”
Nancy illustrates this with a comparison of Cameroon and China. Both have median daily consumption expenditure of about $3.25 per capita,” Nancy says, even though China is far richer measured in terms of average per capita GDP -- about 3.5 times richer than Cameroon. Right away, you know that income inequality is higher in China, and that is in fact the case, with higher incomes in the coastal cities and much lower incomes in the rural interior.
Inequality hasn’t only been rising in China. I note that Figure 11 from their paper shows the growing divergence in the US between average income and median income since the 1980s. I suggest that as the two measures have diverged, interest in the median as a measure of social wellbeing seem to have grown.
Nancy confirms that rising inequality is part of what is driving this interest. Another factor, she says, is increased data availability. “What’s changed over the last 10 years is the increase in household survey data in developing countries,” Nancy notes. “Now we have increasing access to the entire distribution of household consumption expenditures or income, which makes estimating the median possible.”
We also discuss the World Bank’s new shared prosperity indicator, which tracks the income growth of the bottom 40 percent of the population, and why the median is likely to be a better overall measure of development progress (listen to the Wonkcast for more on this!).
I end by asking Nancy how she would propose incorporating median income into the post-2015 development framework. She proposes that each country should set its own target for an increase in the median income between now and 2030. “Because it’s a distribution-aware measure, it allows countries to set goals without facing the kind of pushback around thinking of inequality as an outcome, when everyone wants to focus on equality of opportunity,” she says.
The current size of the income-secure middle class and its likely future growth, suggest that
optimism is indeed warranted for many of today’s middle-income countries. But it is not warranted for all of them, and especially not for most of the
low-income countries of South Asia and sub-Saharan Africa — even if they continue to grow at the relatively healthy rates they have enjoyed in the last
decade and more.
Globalization is creating fresh opportunities for hundreds of millions of people. But the gap between richest and poorest countries is widening and inequality within many countries is increasing. CGD president Nancy Birdsall will testify this week before a U.S. congressional committee on ways that the U.S. can help to support fair growth in Latin America, where inequality, long a problem, is getting worse.
Birdsall has written and spoken extensively on the relationship between globalization, inequality, and development. A new CGD initiative, Globalization and Inequality, provides an overview of the issues and brings together recent work by Birdsall and others on this important topic. On Friday, March 30th at 11:00 a.m. EST, Birdsall will answer questions live online about globalization and inequality via Ask CGD.
In a recent article in the Boston Review, Inequality Matters: Why Globalization Doesn't Lift All Boats Birdsall begins by describing how high inequality in Latin America has undermined growth and poverty reduction. She contrasts this with East Asia, where lower inequality was an important ingredient in the East Asian miracle of rapid, sustained, poverty-reducing growth.
Excerpts from Inequality Matters:
After spending the late 1980s working on Latin America for the World Bank, I became involved in a major study of East Asia's postwar growth. The contrast between the two regions was notable: Latin America was stagnating while East Asian economies were growing rapidly, with tremendously high rates of private and public investment and savings. The emphasis on exports and the pressure to compete in global markets seemed to have worked…
For economists… inequality has typically represented at worst a necessary evil and at best a reasonable price to pay for growth. So, for the most part, they have not been concerned with the apparent trend of rising inequality. Development economists in particular have focused instead on the reduction of absolute poverty. But in East Asia the textbook story seemed altogether wrong. One key to East Asia's success seemed to be its low initial levels of inequality, which were associated with the legacy of postwar redistribution of farm land in the northern economies and with subsequent high public investments in education, agricultural extension, and other programs in rural areas.
In 1993 I left the World Bank to become the executive vice president at the Inter-American Development Bank. By then I was persuaded that Latin America's high inequality was an economic problem, slowing its growth, as well as a social problem. I advocated more research on the issue…
Subsequent work by many economists has strengthened my conviction that while inequality may be constructive in the rich countries--in the classic sense of motivating individuals to work hard, innovate, and take productive risks--in developing countries it is likely to be destructive. That is especially true in Latin America, where conventional measures of income inequality are high. It also may well apply in other parts of the developing world, where our conventional indicators are not so high but there are plentiful signs of other forms of inequality: injustice, indignity, and lack of equal opportunity.
Now globalization is creating pressures that tend to increase inequality. We need to understand what those pressures are and how they operate as today's increasingly integrated global economy raises the bar of competitiveness. How might they best be managed, within countries and at the global level, to avoid their potentially destructive effects on growth?
We have a potentially powerful instrument to increase wealth and welfare: the global economy. But to support that economy we have an inadequate and fragile global polity. A major challenge of the 21st century will be to strengthen and reform the institutions, rules, and customs by which nations and peoples complement the global market with collective management of the problems, including persistent and unjust inequality, which markets alone will not resolve.
In this paper we argue that neither the level nor the change in a country's trade/GDP ratio can be taken as an indication of the "openness" of a country's trade policy. In particular, we examine the ways in which terms of trade shifts have affected trade/GDP ratio over the past two decades, and find that the empirical evidence offered by the existing literature overstates the importance of trade policy in economic growth.
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.
Nancy Birdsall argues that the concept of inclusive growth should go beyond the traditional emphasis on the poor (and the rest) and take into account changes in the size and economic command of the group conventionally defined as neither poor nor rich, that is, the middle class.
With the Copenhagen climate talks finally underway, a CGD survey of 500 development and climate aficionados in 88 countries finds unexpected agreement about what should be done—and important differences between respondents from developed and developing countries about how an agreement should be financed and managed. Jan von der Goltz and CGD president Nancy Birdsall examine the survey results to shed light on some of the ingredients of a successful climate agreement.
The paper proposes a new narrative on climate equity that emphasize basic energy needs and the equality of access to energy opportunities rather than emissions. It advocates abandoning the setting of emissions targets and instead developing a framework where all countries contribute to maximizing technology creation and diffusion.
This working paper examines the relationship between high inequality and liberalization of the financial sector in Latin America from 1975 to 2000. Using panel data, the authors find that increases in financial liberalization were associated with bank crises and other domestic and external shocks, and that higher schooling inequality reduces the impetus for liberalization brought on by bank crises.
Shared growth—growth that helps to build a middle class—is now widely embraced as a central economic goal for developing countries. In this new working paper CGD president Nancy Birdsall reviews how macroeconomic policies shape incentives for inclusive growth, focusing on fiscal discipline; fair revenue and expenditure practices; and a business-friendly exchange rate. Relying heavily on the experience in Latin America and drawing lessons for other parts of the developing world, Birdsall argues that growth that strengthens the middle classes helps poor people, too.