Financial Markets

Over the past decade, technology has begun to revolutionize industries ranging from education and healthcare to financial services and commerce. These transformations are not limited to the developed world – in emerging economies rapid mobile technology proliferation and internet penetration have had profound and unforeseen effects, including expanding financial inclusion through mobile banking services and facilitating employment through online and mobile job platforms. These changes are just the start. Technology can be a powerful tool for neutralizing many of the challenges to emerging countries’ efforts to alleviate poverty, improve quality of life, and expand economic opportunities. Infrastructure failings, including poor road networks, inadequate power grids, and limited internet connectivity, often leave vulnerable communities outside major cities isolated. Low state capacity and finite state resources undermine efforts to administer social programs or deliver basic public services. Even identifying target populations can be difficult, as many never receive a birth certificate, a government ID, or other sort of official recognition. It is here where some organizations and public institutions are leveraging technology. One such example, written about extensively by my former colleague Isobel Coleman, is GiveDirectly, a philanthropic organization that leverages satellite imagery and mobile payment systems to identify poor beneficiaries in Kenya and Uganda and to send them cash transfers digitally. Last week, I hosted a CFR meeting on harnessing technology in the service of development with Michael Faye, GiveDirectly cofounder, and Tariq Malik, former chairman of the National Database and Registration Authority (NADRA) in Pakistan and a leading expert on applying technology to development issues. Faye discussed his new company Segovia Technology, which designs engineering platforms to address last-mile challenges of delivering services and goods to citizens in developing countries. With global spending on social cash transfers to unbanked populations totaling a half trillion every year, a World Economic Forum report estimates leakage rates for these programs range from 5 to 25 percent. This translates into $25 to $150 billion in benefits lost due to misidentification, misdirection, or fraud. The same report estimates that migrating government payments, including cash transfers, onto a digital platform could save as much as $46 billion per year. Malik’s experience with NADRA in Pakistan speaks to the broader promise of integrating technology into government. NADRA’s biometrically enabled identification systems, widely issued smart identification cards, and direct payment systems have helped the Pakistani government improve its social programs. The state successfully used NADRA technology to administer disaster relief to 20 million citizens after a devastating flood in 2010 and to enroll poor women in a national financial assistance scheme. NADRA’s digital system has provided powerful tools for exposing fraud and corruption, and enabling greater accountability, better ensuring that target beneficiaries in Pakistan receive their social aid intact. Still the benefits – in terms of efficiency and transparency – create potential adversaries in those that gain from opacity and leakages. Both speakers alluded to these potential challenges to the transformative use of technologies employed by NADRA and Segovia. Malik and Faye’s work digitizing social programs are examples of creating sophisticated solutions to development challenges, and reflect the broad opportunities for governments, nonprofits, and donor agencies to think outside the usual development toolbox to make progress on poverty alleviation, inclusive growth, and greater economic prosperity.

Snap elections are a staple of parliamentary democracy, and every now and then, ruling politicians decide that an election is needed to ensure that they continue to have a popular mandate if they change course. Prime Minister Abe has just announced he will dissolve the Diet on November 21, and hold a snap election in December to gain the Japanese public’s endorsement of his leadership of Japan’s economic recovery. Prompted by worse than expected economic results for the third quarter of this year, Abe has decided to postpone a second tax hike that would have raised the consumption tax to 10 percent, and instead focus on stimulating Japan’s economy. Over the past two years, the Abe Cabinet has championed an economic policy designed specifically to stimulate economic growth. Yet Japan’s economy is struggling. After an initial quarter of growth, two consecutive quarters of negative growth have brought the country again to the verge of recession - the third time in the past four years. The Abe Cabinet’s efforts to stimulate growth were undermined by a simultaneous effort to curb Japan’s debt, now estimated at 240 percent of GDP. Japan’s long term fiscal health was the focus of a revision of the Consumption Tax Act of 2012, adopted while the Mr. Abe’s Liberal Democratic Party (LDP) was in opposition but with their explicit support. This year, the Abe Cabinet began with the first of two tax hikes, raising it from 5 to 8 percent, and this fall, Mr. Abe was expected to approve a second increase from 8 to 10 percent. Today, stepping back from that second tax hike, Abe argued instead to postpone the tax and seek the public’s approval for his broader economic growth strategy. Yet Abe cannot avoid raising Japan’s taxes altogether, he can only postpone a difficult choice. The LDP has been hurt before by popular fury over the consumption tax. Twice in the past the LDP has been punished for its decisions to raise this unpopular tax. A notable setback at the polls confronted former Prime Minister Nakasone in the upper house election of 1987, and former Prime Minister Ryutaro Hashimoto was greeted with a resounding “No, thank you,” on election day in 1998. Both elections were in the Upper House, however, and thus neither fundamentally challenged the ruling party’s ability to govern. Instead, both prime ministers – popular at the time – stepped down, and allowed someone else to take their place as party leader. Today, Abe announced that if his ruling coalition of the LDP and Komeito did not regain a majority in the Diet, he would step down. At critical moments in the past, however, Abe’s predecessors have sought – and received – popular support for reforming Japan. The most recent example of that calculated risk was in the 2005 Lower House election when Junichiro Koizumi threw down the gauntlet against members of his own party who threatened his program of postal savings reform. Koizumi’s appeal to the Japanese public offered them a chance to weigh in on his vision for Japan’s future, and he artfully presented it as a choice between his vision and that of the Japanese bureaucrats. Today, Mr. Abe is asking the Japanese voter to approve of his decision to postpone the consumption tax, a policy that many in the Ministry of Finance have advocated for years. Abe’s announcement today emphasized his broader recipe for restoring Japan’s economic vitality – Abenomics, the defining priority of his cabinet. He too, like Koizumi before him, is presenting this election as a referendum on Japan’s future, and on his leadership of economic recovery. Two factors could complicate Prime Minister Abe’s plan to appeal to the Japanese people for support for his economic policy vision. The first is that this will be an election driven by the consumption tax, but Mr. Abe is not saying that he will eliminate the 2 percent   hike mandated by the 2012 law. He is simply saying he wants to postpone it. For many economists, delaying the consumption tax hike is “sensible.” But the political question is whether or not he needs to dissolve the Diet to do it. This referendum will be about postponing a difficult decision rather than about offering an alternative option. In addition, as Abe pointed out today, the decision to raise Japan’s taxes was endorsed by his party while they were out of government, and his Cabinet implemented the tax hike after they had returned to power. Thus, this is not a policy that belongs to someone else, and in light of today’s economic numbers, Japan’s voters may feel that Abe and his party helped cause this dilemma rather than seeing him as part of the solution. Much will depend on how Japan’s voters view the current state of the economy and who is responsible for it. It will also depend on how Japan’s voters view the LDP’s ambitions. Second, it is not clear that the ruling coalition will be in a better position to govern after election day  in December. Today, Mr. Abe’s party has a considerable majority in the Diet. The LDP alone has 294 seats, and with its coalition party, the Komeito, can muster a two-thirds super majority in the Lower House, making it easy to govern. A new election risks losing that advantage. So why not simply go back to the Diet with a new amendment to the existing legislation that postpones the tax hike? Here is where the rationale for an election seems less about economic policy and more about the LDP’s political future. An election that brings the LDP back with the same or even more seats in the Lower House will mean that Mr. Abe’s party will extend their time in office for another four years. Tactically, the current weakness of Japan’s opposition parties could allow the LDP to capitalize on the moment to prolong their time as ruling party of Japan. Even if Japanese voters see the LDP as responsible for the current state of Japan’s economy, the opposition parties will be hard pressed to persuade them to vote their way instead. Calling an election now will put a broad array of other policy initiatives on hold for the remainder of 2014. Abe has been seen abroad as a decisive and energetic leader. His support rating has dipped of late to 55 percent, according to the Yomiuri Shimbun’s latest poll. Yet his popularity seems to be holding at levels that would make leaders in many democracies around the globe green with envy. Popular sentiment in any democracy is rarely in favor of higher taxes, and in Japan, the latest polls show that over 80 percent of Japanese do not want another consumption tax increase. Who can blame them? The challenge for the ruling coalition, however, will be in presenting this election as a referendum on more than the consumption tax. The LDP and Komeito will need to go back to their constituencies and persuade the voters that this election, in fact, matters to their futures as much as it does to those in Tokyo who govern them.

For the past century or so, big mining corporations have pursued their operations in Africa, but their senior management, marketing, and sales have been in Europe or North America. That is changing. The government of Botswana and De Beers Group, the diamond company, agreed in 2011 that the latter would sort, value, and sell diamonds produced by the company Debswana, a joint 50/50 business venture between Botswana and De Beers that accounts for a third of Botswana’s GDP. For its part De Beers agreed to transfer its London based rough diamond sales to Botswana. The move involves the transfer of professionals, equipment and technology from London to Botswana’s capital, Gaborone. In November 2013, De Beers started diamond sales in Gaborone in a state-of-the-art facility. Batswana, nationals of Botswana, are about 50 percent of the de Beers’ employees in the sales division. The outlook for the diamond industry is good, with new consumers from China, especially.  But few new diamond mines have come on stream over the past decade, raising the possibility of a shortage of supply.  The Botswana-De Beers deal appears to be win/win.  Botswana retains direct access to the world market for its diamonds while De Beers has long-term and uninterrupted access to one of the largest diamond supplies in the world. Over the long term, the De Beers move sets the stage for Botswana to emerge as a major participant in all aspects of the diamond industry, not just diamond mining.  That’s good for the continued development of the country, already one of Africa’s success stories.

This post is from Isobel Coleman, Council on Foreign Relations (CFR) senior fellow and director of the Civil Society, Markets, and Democracy initiative, and Dina Habib Powell, global head of corporate engagement at Goldman Sachs and president of the Goldman Sachs Foundation.  A staggering six hundred million new jobs are needed globally over the next fifteen years to keep employment rates at their current level. This is especially daunting given slowing global growth rates. One bright spot in this enormous challenge is a powerful, and often overlooked, source of job creation: women entrepreneurs. In the United States, women-owned businesses account for approximately 16 percent of all jobs in the economy, and with women graduating from university at higher rates than men, that percentage is expected to grow in coming years. Governments around the world are beginning to wake up to the economic benefits of women’s empowerment. Kathy Matsui of Goldman Sachs first wrote about "womenomics" in 1999 when she advocated that Japan could increase GDP by as much as 15 percent by tapping the potential of women. Fifteen years later, Prime Minister Shinzo Abe has made greater female workforce participation the cornerstone of his strategy to accelerate the Japanese economy and has proposed new policies that will address childcare, tax distortions, and female representation in government. In most economies, significant barriers inhibiting women from reaching their full potential remain. A recent International Monetary Fund paper shows a GDP per capita loss as high as 27 percent in some regions as a result of not fully engaging women in the labor force. In certain countries, the loss is even bigger. The IMF paper estimates that in Egypt, for example, raising women’s workforce participation rate to that of men would lift the country’s GDP by more than a third. Globally, gains in women’s participation in the labor force have stalled; women continue to work in lower paying and less productive sectors than men; and there are still laws in many countries that restrict women’s movements and choices. A World Bank study shows that almost 90 percent of the 143 economies researched still have at least one legal restriction on women’s economic opportunities, including seventy-nine economies that restrict the types of jobs women can perform. There is also a lack of role models to inspire more women to join the workforce and change societal attitudes.  In addition, women are less likely than men to know other entrepreneurs and more likely to have weaker professional networks. Finally, access to capital remains a significant constraint to engaging women productively in the world economy. The International Finance Corporation (IFC) estimates that 70 percent of women-owned SMEs in the formal sector in developing countries lack access to capital, resulting in a global financing gap of $285 billion. In 2008, Goldman Sachs launched the 10,000 Women initiative to address the constraints facing women entrepreneurs in emerging markets by providing them with business training, mentoring, and networking opportunities. A new evaluation of the program conducted by Babson College, and released at the Council on Foreign Relations today, demonstrates that targeted interventions can indeed help women grow their businesses and create jobs. The study found that nearly 60 percent of graduates created new jobs, on average more than doubling the size of their workforce. Eighteen months after graduation, nearly 70 percent of the women had increased revenues, and the average growth across all participants was 480 percent. The potential to replicate these results on a broader scale by providing more women with greater access to business training, mentoring, networking, and capital is enormous. Goldman Sachs 10,000 Women is expanding its efforts and has recently launched a new partnership with IFC, a member of the World Bank Group, to create the first ever global finance facility dedicated to women entrepreneurs. The facility will enable approximately one hundred thousand women entrepreneurs around the world to access capital and grow their businesses. With 126 million women starting or running businesses in sixty-seven economies around the world, improving their growth prospects will reverberate throughout the global economy and ultimately lead to healthier, safer, and more prosperous communities—for everyone.