Economics

Financial Markets

  • India
    Five Questions on Evaluating Progress to End Poverty with Dean Karlan
    This post features a conversation with Dean Karlan, professor of economics at Yale University, president and founder of Innovations for Poverty Action, and founder of ImpactMatters, a newly-launched organization that assesses how well nonprofits use and produce evidence of impact. 1) How have development economics and the study of poverty evolved in recent years? Until about fifteen years ago, there were two different strands of development work, both with limitations. The first asked a big, monolithic policy question—“does aid work?—and compared how aid affected development outcomes across countries. But the cross-country research lacked the necessary data and an understanding of critical micro-level mechanisms, or the obvious first step of why some countries get more aid than others. It led to big debates, but failed to determine causality. The other strand in academia focused on understanding markets and decision-making at the individual and household-level, an approach that was valuable for understanding the world, but was often fairly removed from policy implications. Then, we saw major shifts with the availability of cheaper and better data, and intensified pressure on development economists to deliver policy prescriptions. These shifts allowed us to rigorously evaluate specific projects to find out what was working, what was not, and what to do about it. Perhaps as a byproduct of the cross-country data debate, development economists started focusing on asking when aid works, not whether aid works. The point being: there is no simple answer. This led to a blossoming of work using randomized control trials (RCTs) to test specific policies on the ground with NGOs, the private sector, and governments. We also began to see academic analysis that was more prescriptive than descriptive, and could help to guide policy.   2) In your randomized control trials (RCTs), what were some surprising findings about what’s working and what’s not? Several hot development debates have led to surprises. But, of course, since these were “hot debates,” some were surprised while others were not. Microcredit is a perfect example. Some oversold microcredit as the tool to fight poverty and to increase income for the world’s poorest, benefiting low-income households, which would ultimately lead to better healthcare and education. On the other side, critics claimed that it led to negative outcomes, such as suicides among poor farmers who could not repay loans. Despite anecdotal evidence, there was equally bad analysis on both sides and neither could establish causality, or prove what would have happened if people had not received the loans. There was no counterfactual, as economists call it. Wading into the debate using evidence, we saw strikingly similar results from seven RCTs across seven countries, several of them conducted by researchers with Innovations for Poverty Action. The punchline: microcredit loans were not typically reaching world’s poorest, and they were not increasing income on average. So, they were not meeting their main goal (though they were not causing much harm either). Once we saw the evidence, we said: “we’re a fan of microcredit, but as it’s currently done, it’s best for private investors, not for donors.” Donors should either look elsewhere or use their charitable dollars to push for more innovation, to figure out how to improve the microcredit model.   3) So what is an effective investment for donors? After we found that microcredit is not reaching the world’s poorest, donors asked us: what might? Through RCTs we found one approach that works quite well to move people out of poverty: a graduation program. At its core is the transfer of a “productive asset”—a way to make a living that has a positive impact on household consumption, savings, income, food security, and other life outcomes even years after the initial asset transfer. We have completed six RCTs on graduation programs in six countries (Ethiopia, Ghana, Honduras, India, Pakistan, and Peru). Other researchers completed a seventh in Bangladesh, and there are several similar studies from Uganda. The program first gave the asset, along with training on how to use it. We also set up a savings account, provided healthcare access, offered life coaching, and supplied food for up to six months (so recipients wouldn’t be forced to kill and eat livestock right away). Because graduation programs are expensive, at around $1,000 per person, our research focused on cost effectiveness. We had no doubt the program would create a bump in income, but would it last? In six of the seven RCTs we found strikingly similar results proving both cost effectiveness and a sustained impact—up to three years after assets were transferred in all of our RCT sites. In one of the sites, India, where we now have seven years of results, the effects are getting bigger over time rather than dissipating. This trend suggests that those in the graduation program were previously stuck in a poverty trap, and that a holistic and integrated approach combining income with social and economic support helped to get them out of it.   4) What have you found on cash transfers, another area of growing interest and investment? The most prominent study Innovations for Poverty Action did on unconditional cash transfers (UCTs) was with GiveDirectly, a nonprofit that does exactly what it says. They donate 91 cents of every dollar to poor households using mobile money for the transfers, which makes for a low-cost, lean operation. People critical of this approach at first were concerned that money would be used for alcohol and tobacco, rather than for food and other necessities. We said, “let’s go get the facts,” and set up a carefully-designed study. Our randomized evaluation found that households receiving cash transfers spent them on food, education, and medical expenses, as well as on family obligations, resulting in higher assets and better psychological well-being. There was no increase on alcohol and tobacco spending. Yet even with evidence of positive outcomes, we are seeing that cash transfers work best for short-run problems—catastrophes or conflicts where the challenge is not long-term development. They work best for helping people in a moment of need.   5) What do you say to RCT critics who argue they are too expensive, or take too long? First, it is critical to note that randomization is not the reason RCTs can be expensive (and I’ll explain why they are not always). Costs are driven by tracking and surveying people over time to see if the program affected lives, which is necessary even for non-randomized studies. While RCTs are more expensive than simple studies that ask beneficiaries—“were you happy with the program?”—I would argue that overall they are far cheaper than non-RCT evaluations, because they allow us to zoom in on what is working and what is not much faster and more accurately, ultimately saving money on bad measurement and ineffective programs. RCTs allow the testing of multiple versions of a program at once, too. For example, in Uganda we tested four variations of a classroom savings program, and found that three that did not work, but one did. The variations shed insight into why the program was working. Regarding timing, it is also critical to point out that an RCT need not be a long-term study, nor does it need to be expensive. We have done cheap, rapid-fire tests on getting people to save more by sending text messages reminding them to save, and a few months later, comparing savings rates for those that received the messages versus those that did not. Many operational questions, such as how to enroll people in a program, can and should be rapid-fire studies to give immediate feedback that improves operations. For example, MIT’s Abdul Latif Jameel Poverty Action Lab just released a toolkit that helps organizations run RCTs through data they may already be collecting. Full, long-term RCTs aren’t always appropriate. But when they are, getting good data that both establishes causality and illuminates why something works can put programs on the right track to maximize impact, and save money in the long run.
    Blog Post by Guest Blogger for Shannon K. O'Neil February 11, 2016 Development Channel
  • Chile
    A Conversation with Julie Katzman and Daryl Collins
    Podcast
    Julie Katzman and Daryl Collins joined presider Rachel Vogelstein to address the importance of inclusive finance.
    Event with Daryl Collins, Julie T. Katzman and Rachel B. Vogelstein January 19, 2016 Women and Foreign Policy Program
  • Sub-Saharan Africa
    Some Good News From South Africa
    It is unduly gloomy in sunny South Africa. The national currency, the rand, is falling; the economy is hardly growing at all; the Zuma administration appears mired in corruption and mismanagement. There has been an upsurge in racist rhetoric. Hence the South African surprise and delight at the announcement that two of the richest South Africans, Allan and Gill Gray, are essentially giving away their wealth to their family foundation. The Daily Maverick says, “The total value of this endowment is currently unknown, but it will run into billions of rands, and is certainly to be the largest philanthropic foundation established by any South African in history." The gift is seen as a ringing endorsement for the future of a democratic South Africa—and the future of South African business Another Gray foundation already funds hundreds of high school and university scholarships. Gray and his wife have also endowed a Center and a Chair in Values-Based Leadership at the University of Cape Town’s Graduate School of Business. Allan Gray is #1226 on the Forbes 2015 list of world billionaires and #7 in South Africa, with an estimated net worth of 1.4 billion dollars. His investment management firm, Allan Gray Ltd., is the largest privately owned asset manager in South Africa, overseeing 40 billion dollars, according to Forbes. Patrice Motsepe, the richest black person in South Africa with a Forbes net worth of 2.2 billion dollars, in 2013 took the Warren Buffett and Bill Gates pledge to give to charity one half of his wealth. Gray and Motsepe are also reminders of the enormous wealth in South Africa, and its concentration.
    Blog Post by John Campbell January 14, 2016 Africa in Transition
  • Financial Markets
    Global Economics Monthly: January 2016
    Bottom Line: Summer has seemingly brought a new optimism about the Russian economy. Russia’s economic downturn is coming to an end, and markets have outperformed amidst global turbulence.  But the coming recovery is likely to be tepid, constrained by deficits and poor structural policies, and sanctions will continue to bite. Brexit-related concerns are also likely to weigh on oil prices and demand. All this suggests that Russia’s economy will have a limited capacity to respond to future shocks.           Recovery’s Green Shoots Summer has seemingly brought a new optimism about the Russian economy. Markets have soared: the ruble is the best-performing emerging market currency this year, up over 20 percent since late January against the dollar, and equities have posted double-digit gains. Russian markets have benefited from a range of macroeconomic and technical factors—a moderate pickup in oil prices, a search for yield by investors punished by low or negative interest rates in the industrial world, and a sense that the worst effects of the sanctions are in the past. Also, perhaps counterintuitively, sanctions themselves have provided support for asset prices by limiting (until recently) new issuance from Russian corporations and the government and reducing the supply of investible assets as maturing bonds are repaid. Last month’s decision by the central bank to cut interest rates for the first time since August 2015, and the hope of more cuts to come, has further boosted demand for domestic assets while reducing pressure for appreciation of the ruble. More recently, Brexit concerns had little impact on Russian markets, as the country was seen as largely insulated from global financial market contagion following its turn inward in recent years. At the same time, there are recent signs of stabilization in the economy. Growth in the first quarter was down 1.2 percent compared to last year, consistent with a bottoming out of the economy in early 2016. Activity has been boosted by improved consumer spending, as well as a shift toward domestic demand and away from imports. Capital outflows also have slowed significantly, helped by firmer oil prices, and the fiscal deficit has been contained (see figure 1). A number of market analysts are predicting that growth will turn positive in the second half of the year, producing full-year growth in 2017 on the order of 1.5 percent after three years of recession. Both the International Monetary Fund (IMF) and World Bank also have recently upgraded their forecast and complimented the government and central bank for their strong macroeconomic policy management—including a flexible exchange rate regime, banking sector capital and liquidity, sensible fiscal policies, and regulatory forbearance to keep lending going. FIGURE 1. Russia’s Federal Government Revenue and Fiscal Balance (percent of GDP, left axis) Adding to the optimism is a growing expectation that European sanctions will be eased when they are next up for renewal at the end of 2016. During the June 2016 decision by the European Council to renew the financial, energy, and defense sanctions for another six months, council members reportedly disagreed over the future course of sanctions policies and many members felt that full compliance with Minsk II, the political framework for addressing the conflict between Russia and Ukraine, was not going to be an effective test for future decisions on sanctions. These are the building blocks of an improving outlook. But I have a less sanguine view: Russia’s recovery may not be enough to bring the country out of its protracted economic crisis. Three Reasons to Worry About the Russian Economy The first reason for tempered optimism on the Russian economy is that the macroeconomic developments underpinning the recent boost to growth are running out of steam. The rebound in energy prices this year has produced a welcome influx in foreign exchange, but energy prices are still well below the price needed to balance the budget or provide stability to the balance of payments. Meanwhile, the 37 percent depreciation of the ruble against the U.S. dollar in 2015 provided a price advantage for Russia’s export sector that continued to support demand even as the ruble began to rebound this year. This lag in the response of trade to the exchange rate (called the “J-curve”) is transitory, and the benefits from this earlier depreciation are now largely exhausted at the same time as the more recent appreciation is beginning to bite. Further, the drag to global growth from Brexit is likely to weigh more heavily on oil prices and demand later this year. Thus, although the IMF sees Russia as having an exchange rate policy that is appropriate for the current setting, the policy is not sufficiently competitive to sustain a strong cyclical recovery in growth. Second, as shown in figure 1, in the past few years deficits have forced a significant running down of Russia’s international funds, a process that cannot continue indefinitely. Russia will empty its Reserve Fund, one of its two sovereign funds (set up to save oil wealth when prices were high), during 2017 and will start dipping into the National Welfare Fund. That fund holds over $70 billion, but it includes illiquid investments in the Russian state development bank Vnesheconombank and other state-favored projects. This suggests the reserves available for budgetary financing are less than they seem. Unsustainable deficits need not lead to crisis, but they do mean that in future years there will need to be some combination of fiscal tightening and external borrowing to fill fiscal and external gaps. Recent reports suggest that the Finance Ministry is expected to increase domestic borrowing significantly, assuming that international borrowing will remain constrained by sanctions. At the same time, non-sanctioned Russian companies are returning to international bond markets with a wave of new issuance (nearly $2 billion in June alone). In addition, a debate in the Duma over a tightening of capital controls in the fall will be an early test of whether the politics of deficits are changing. Third, and most important, Russia’s economic downturn reflects deep-seated structural problems that had come to the surface well before the downturn in energy prices in 2014–2015, challenges that will continue to constrain growth. Weak institutions, extensive government intervention in labor and product markets, and disincentives to invest all create an excessive reliance on exports of natural resources. In addition, the prevalence of corruption and weak rule of law will continue to deter investors and businesses from entering the market, especially non-resource sectors, hindering competiveness and innovation. The government’s anti-crisis plan in 2016 speaks to the need for reform: in addition to fiscal stimulus, it contains measures to improve the investment climate by reducing regulatory uncertainty and strengthening judicial processes. But little has been done so far in terms of concrete measures, and I am far from convinced that this program, if implemented, will address the fundamental structural challenges that are preventing the creation of a diversified, market-oriented economy—changes that are needed to sustain above-trend growth and raise real incomes in coming years. Conclusion A rebound in oil prices, coupled with sound macroeconomic policies, has moderated the economic downturn and supported domestic financial markets. A modest economic recovery may now be in train. But the fundamentals of the Russian economy remain weak; markets are distorted and too dependent on energy exports. Without a far more comprehensive reform process, tough budget cuts will be necessary over the next few years, and the recovery could prove transitory. In this context, policy uncertainty and political reality weigh heavily on the economic outlook for Russia.   Looking Ahead: Kahn's take on the news on the horizon Brexit Attention now turns to informal discussions that could set the stage for a British invocation of Article 50 (beginning the formal exit process) before the end of the year. Italian Banks The Bank of Italy’s stress test will likely reveal a large capital hole in major Italian banks, forcing a confrontation with European leaders over whether a government injection of capital will require a bail-in of these bank’s private creditors. Interest Rate Cuts The Bank of England has held back on a rate cut, for now, but the Bank of Japan and European Central Bank meet with interest rate cuts on the table amid growing concerns of a Brexit-induced slowdown.
    Report by Robert Kahn January 11, 2016 Greenberg Center for Geoeconomic Studies
  • Development
    This Week in Markets and Democracy: Modi’s Reform Agenda, the WTO, and 2015 UN Development Report
    Modi’s Reforms at Odds A senior official in Indian Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) is pushing a corruption probe that threatens to derail his own party’s Goods and Services Tax (GST). A linchpin of Modi’s economic platform, the reform would replace numerous local and state taxes with a single nation-wide tax. The government expects GST to boost government revenue, attract foreign investment, and add up to two percent to GDP. With the corruption case’s targets—opposition Congress Party leaders Sonia and Rahul Gandhi—denouncing the investigation as politically motivated, the fallout will likely halt Modi’s tax reform in India’s opposition-led upper house. As the Gandhi case advances, the GST may not, putting Modi’s ambitious pro-business and anticorruption agendas at odds. Does the WTO Still Matter? This week’s failure to advance the Doha Round of trade talks further diminishes the World Trade Organization’s (WTO) clout in setting global trading rules. Stuck for over a decade on issues of market access for poor countries and sharing globalization’s gains more equally, the United States and others have already refocused their energies on bilateral and regional trade agreements (RTAs)—completing nearly two hundred such deals during fourteen years of Doha negotiations, most recently the Trans-Pacific Partnership (TPP). U.S. Trade Representative (USTR) Michael Froman made the shift official this week, publicly calling for WTO members to move beyond Doha. Where the WTO’s strength remains is in trade dispute resolution as businesses and nations still turn to it for arbitration. Last week alone, the WTO ruled in favor of Canada and Mexico against U.S. meat labeling with up to $1 billion in damages, and the United States lodged a formal complaint against China for discriminatory aircraft pricing—reflecting the WTO’s evolution from setting the rules to enforcing them. New United Nations Development Report The 2015 Human Development Index (HDI) released this week reflects on the report’s twenty-five year history, with the United Nations Development Program (UNDP) finding that living standards improved for two billion people as dozens of countries climbed the development ladder. Measuring income, life expectancy, and education across 188 countries, Norway leads and Niger lags in the HDI, while Rwanda and China are most improved overall since 1990. Focused on “work for human development,” this year’s report argues for employment’s broader value, offering not only economic but development gains. It also illuminates the still major challenges—the 21 million people in forced labor, 74 million unemployed youth, and the threat to whole categories of workers from technological change.
    Blog Post by Shannon K. O'Neil December 18, 2015 Development Channel
  • United States
    A Conversation With Alan Greenspan
    Play
    Alan Greenspan discusses the U.S. economy.
    Event with Alan Greenspan and Steve Liesman December 17, 2015 C. Peter McColough Series on International Economics
  • United Kingdom
    A Conversation With George Osborne
    Play
    George Osborne lays out his roadmap for the future of the UK economy and argues that Britain and its allies must continue to play a major role in the Middle East and elsewhere around the world. 
    Event with George Osborne and Stephen J. Friedman December 7, 2015 C. Peter McColough Series on International Economics
  • China
    Want to Borrow From the IMF? China Just Made It More Expensive.
    On November 30 the International Monetary Fund made its long-awaited announcement that it would add the Chinese RMB to its basket of globally important reserve currencies – the Special Drawing Right (SDR). The impact is largely symbolic for China, although from October 2016 it will mean that even if U.S., eurozone, Japanese, and UK interest rates were to remain flat the rate on normal IMF loans will be 21 basis points higher–a 20 percent jump from the current 1.05 percent rate. This is because the Fund’s borrowing rate is set by a formula based on a weighted average of 3-month government borrowing rates for the countries whose currencies comprise the SDR basket (plus 100bp). And China’s rates are much higher than those of the incumbents, as shown in the figure above. What difference will this make? Well, take Greece. Back in June, it was unable to pay back €300 million owed to the Fund. If its borrowing rate had been 21bp higher, it would have owed an additional €65 million. Not only will IMF borrowing rates be higher in the future, thanks to the RMB’s new status, but they will also be more volatile – since Chinese rates are far more variable than U.S. and other SDR incumbent rates. So if you’re thinking of borrowing from the Fund – be prepared to pay more next October.
    Blog Post by Benn Steil and Emma Smith December 4, 2015 Geo-Graphics
  • Cybersecurity
    No, the FDIC Doesn’t Insure Your Bank Account Against Cybercrime (and Why That Is OK)
    2016 may be the year when financial services regulators “get tough” on cybersecurity. The head of the Commodity Futures Trading Commission recently said that his organization would likely push out cybersecurity standards. The Securities and Exchange Commission recently put out new examination priorities. And the New York Department of Financial Services sent a letter to federal regulators outlining its proposal for regulation. All these regulators are well intentioned. They want to keep cybersecurity from becoming the same kind of systemic risk that high-risk mortgages were in the lead up to the 2008 financial crisis and recession. The only problem is that the sets of requirements that they are turning to are not likely to improve security very much. I am a big fan of the NIST Cybersecurity Framework and other standards-based efforts when they are used as tools for companies to help themselves become more secure. They are much less effective when imposed from the outside, generally by a regulator, and used as an assessment tool. That which checks a box, is not that which protects thy data. Where regulation is deemed to be necessary, regulators should find ways to specify the outcomes that they want to achieve, and craft incentives and penalties to motivate regulated entities to achieve it. For instance, the Consumer Financial Protection Bureau (CFPB) could come up with a lengthy list of cybersecurity requirements for consumer banks to protect consumers from account takeovers and financial loss. The CFPB might require the banks have governance processes in place, patch vulnerabilities on a regular cycle, and exercise incident response. It might require them to force two-factor authentication on all their consumers’ online accounts. These measures might or might not be effective but the focus it would create on compliance would take away time, attention, and money from efforts to actually secure systems. Another model, what regulators call outcome-based regulation, is a better approach. Instead of mandating security requirements, regulators who want to protect consumers from financial loss could simply require that banks reimburse consumers for any fraudulent transactions. Then banks can make business decisions about how much they want to spend on security, how much they are willing to inconvenience their account holders with security measures, and how much fraud they can accept as the cost of doing business. That is in fact the law today. Contrary to what many people believe, the Federal Deposit Insurance Corporation (FDIC) doesn’t reimburse banks for fraud perpetrated against accounts. The FDIC only insures your account against the failure and collapse of the bank. As the FDIC explains, most banks have private insurance for fraud loss. The reason they carry this insurance is that Regulation E under the Electronic Funds Transfer Act makes them responsible for the losses. Unfortunately, Regulation E only applies to consumer bank accounts, not those of small businesses and banks are pushing back against an expectation that they will reimburse small business-related losses. Banks argue that identifying and stopping fraudulent business transactions is much more difficult and prone to error than identifying and stopping fraudulent consumer transactions—individual businesses are in the best position to determine fraudulent activity. While both banks large and small have been sticking to their guns, it’s possible that the banking industry could solve this problem on its own through competition. Banks that offer fraud protection for business accounts might be much more attractive to potential customers than those that don’t. Third party payment companies like MineralTree offer insurance as an incentive to use their tools. It just might be possible for the market to solve this problem before regulators need to step in. If not, copying and pasting Regulation E will be much faster and more effective than a long list of security requirements for banks to meet.
    Blog Post by Robert K. Knake December 2, 2015 Net Politics
  • International Organizations
    China’s Symbolic Currency Win
    Earlier today, the International Monetary Fund (IMF) Board approved the inclusion of the Chinese renminbi (RMB) as a fifth currency in the special drawing rights (SDR), the IMF’s currency, as of October 2016.  The move was expected and IMF Board approval was never in doubt once the U.S. government signaled that it would not oppose the step. My read is that the Fund staff acted properly in arguing that the RMB now meets the test of being freely useable for international transactions by its members (though some have argued that the IMF was bending its rules for political reasons). Of course, Chinese financial markets remain significantly restricted for private investors, but the SDR’s current primary use is for transactions between members of the IMF (governments). From that narrow perspective the RMB can be judged to be widely used and widely traded because a country receiving RMB as a result of IMF transactions should be able to switch it to any other basket currency at low cost, at any time of the day or night, somewhere in the world. So too perhaps are more than a dozen other currencies freely useable by this measure, but the SDR is for now limited to the largest of those currencies by a separate (export share) measure. Consequently, next year the RMB goes into the basket with a weight of 10.9 percent (compared to today’s weights, most of China’s share comes from the U.S. dollar which will retain a 41.7 percent share; the other shares will be 30.9 percent for the euro, 8.3 percent for the yen, and 8.1 percent for the pound sterling). While some have argued that the move is a “significant” step for the international monetary system, it is more properly seen as a quite small and largely symbolic step in a long and gradual path of internationalization of the RMB, a reform process that is likely to slow following this summer’s market turmoil. Indeed, even prior to the crisis the IMF and others had warned that Chinese financial market liberalization needed to be cautious and sequenced, with a more urgent priority in bringing market discipline to large borrowers. Nonetheless, the announcement validates and perhaps reinforces the argument for expanding the RMB’s role in markets, and is consistent with measures from the Chinese in recent months to move in this direction. In this regard, the far more important announcement this week was the creation of a working group led by Michael Bloomberg aiming to provide a framework for RMB trading and clearing in the United States, as this could influence the private use of the RMB and SDR. The door for this initiative was opened during the recent state visit by Chinese President Xi, and operationally is independent of the IMF’s announcement though fueled by the same reform momentum. In the near term, the main economic impact of the inclusion of the RMB in the SDR is to raise the SDR interest rate (because Chinese interest rates are higher than rates on other currencies in the basket). Consequently, IMF borrowers will pay more, an amount that has been predicted by the IMF staff to be 27 basis points, but which could well average far more over the cycle. While this may seem small compared to normal swings in the interest rates of the major currencies during the process of normalization, it’s worth remembering that countries such as China in the process of convergence to industrial country levels of income are expected to have higher real rates than developed countries (i.e., interest rate differentials should not be expected to be offset by exchange rate moves). Conversely, if the RMB remains stable relative to the dollar, the exchange rate dynamics of the new SDR will be largely unchanged relative to the old basket. Finally, an important question will be the political impact in the United States, where Chinese and IMF-related legislation (such as IMF quota reform) already faces rough sledding.   FIGURE 1. SDR INTEREST RATE (IN PERCENT) Source: IMF "Review of the Method of Valuation of the SDR" 1/ Using proposed weighting formula
    Blog Post by Robert Kahn November 30, 2015 Macro and Markets
  • China
    Africa Taps Global Bond Markets at Rapid Rate
    This is a guest post by Aubrey Hruby and Jake Bright. They are the authors of The Next Africa: An Emerging Continent Becomes a Global Powerhouse. Sub-Saharan African governments are tapping global capital markets at a rapid pace, issuing $18.1bn in dollar denominated eurobonds from 2013-2015, nearly triple the $7.3bn issued in the previous three years. While government bond markets rarely capture the allure of stocks, each year international investors purchase trillions of dollars in sovereign securities around the world. Whether U.S. Treasuries or Chinese 10-year bonds, these fixed-income instruments generally provide more stable (though typically lower) returns than stocks, while offering nations financing for services and infrastructure. Sovereign bonds also bring greater accountability to governments through national credit ratings and variable yields, both of which go up or down based on good or bad economic policies. Historically, with the exception of South Africa, Africa has largely been a non-factor in sovereign bond markets. Few countries in sub-Saharan Africa even had sovereign credit ratings (a basic requisite for issuing national bonds) deep into the 2000s, reflecting the region’s past as one of the global economy’s most financially disconnected areas. Africa’s recent boom in global bond issuances, many maiden, is changing this picture. Today, many national issuers are getting first time credit ratings from Moody’s and S&P, as they’ve become more accountable and transparent. African governments are also benefiting by inclusion in standard indicators, such as J.P. Morgan’s Emerging Market Bond Index Global (EMBIG). Many Americans are already holding African bonds in their investment accounts. Institutional investors such as PIMCO and Fidelity have been increasingly buying them, attracted to higher yields, improved sovereign risk profiles, and a new regional asset class to diversify portfolios. Connecting to global bond markets has given African governments, who are scrambling to deliver infrastructure, a source of financing other than private loans or foreign aid. Nigeria is funding greater electricity output with its recent $1.5 billion issuances. Zambia plans to spend on improved health care and railways. Ethiopia is using eurobond proceeds to finance a 6000 watt hydroelectric dam and industrial parks toward its goal of becoming an African manufacturing hub. Inevitably, sub-Saharan Africa’s entry into global bond markets has its critics. Given the previous fiscal woes of African governments, it’s no surprise that some business journalists and economists have sounded alarms regarding SSA’s recent sovereign borrowing. They point to the possibility of a new African debt crisis or warn that bonds impose less conditionality and monitoring on governments than MDB financing. There are certainly always risks to sovereign debt markets (see Argentina). But the critics of Africa’s new global bonds have yet to suggest better ways for governments to pay for crucial infrastructure. To graduate from “frontier” to “emerging” market status sub-Saharan African nations need sovereign bonds, just as China or Brazil did. When African governments meet the same criteria as other countries to receive national credit ratings, list on benchmark indexes, and pass the scrutiny of the world’s leading investment funds, why shouldn’t they finance their development through international bonds? If certain governments, through poor fiscal and economic management, bring on the scrutiny of ratings agencies and investors, that reflects a greater degree of financial accountability. Sovereign credit ratings and variable bond yields provide instant and economically tangible feedback. Investors and Africa’s citizens will be watching keenly how these new bond funds are spent compared to original commitments. Too much corruption or bad economic policy will cause investors to dump certain bonds and drive up borrowing costs. The Nigerian government realized this during its 2014 central bank whistleblower scandal. When globally respected central bank governor Lamido Sanusi raised the issue of $20bn in missing state oil revenue to Nigeria’s parliament he was fired by then president, Goodluck Jonathan. The move sparked widening spreads on Nigeria’s new bonds, a drop in its stock market and currency, and a Standard & Poor’s sovereign credit downgrade. As sub-Saharan African governments further normalize their economies to global capital markets, investors can certainly expect more sovereign bond issuances. Americans will also be more likely to see African country names in the fixed income allocations of their 401k’s.
    Blog Post by Guest Blogger for John Campbell November 20, 2015 Africa in Transition
  • China
    Five Questions on Global Entrepreneurship with Elmira Bayrasli
    This post features a conversation with Elmira Bayrasli, the co-founder of Foreign Policy Interrupted and a lecturer at New York University. Bayrasli’s recently-published book, From the Other Side of the World: Extraordinary Entrepreneurs, Unlikely Places, profiles seven entrepreneurs from developing countries, deriving insights into obstacles they face as well as their proven potential to solve problems, create value, and draw investment. For her research, Bayrasli traveled to more than two dozen countries meeting with investors, government officials, and entrepreneurs themselves. The Development Channel sat down with Bayrasli to hear what these startups can teach the rest of the world about entrepreneurship—and what can be done globally to encourage it. 1) What are the biggest challenges for entrepreneurs in emerging markets, compared to those that entrepreneurs face in the United States? In the United States only 14 percent of the population is engaged in entrepreneurship. In emerging markets that number can be much higher because there are fewer good jobs available—emerging-market entrepreneurs often start businesses because they have to. Lacking alternative educational or employment opportunities, people’s survival may depend on launching their own endeavors. But we hear fewer success stories of globally-competitive companies coming from developing countries, though I saw tremendously talented people leading interesting companies around the world. I embarked on this project because I wanted to learn more about these individuals and tell their stories. In researching startups and interviewing entrepreneurs from China to Nigeria, I saw that entrepreneurs in each place faced what I call “obstacles,” or barriers to growth in a specific country context. These obstacles include corruption in India, weak rule of law in Russia, monopolies that stifle competition in Mexico, and a lack of collaborative space in Pakistan. Interestingly, I found that the obstacles came into play not at the point when entrepreneurs tried to start their companies, but rather when they wanted to scale them. 2) What are differences between the types of companies entrepreneurs start in emerging markets, compared to what we see coming out of U.S. startup hubs, such as Silicon Valley? Because of the major growth obstacles, entrepreneurs in emerging markets focus on the basics. Instead of creating social apps or developing the self-driving car, they want to solve pressing problems that affect millions of people—starting businesses that fill gaps in society. In Nigeria, for example, an entrepreneur I profiled started a mobile payment company called Paga to overcome the country’s lack of financial framework. Initially, I thought Nigeria’s entrepreneurship obstacle was poor infrastructure, but that was only a symptom of a deeper problem. Nigeria’s weak financial connectivity (66% of Nigerians don’t have access to banking services, according the World Bank) was the main factor preventing reinvestment into infrastructure and other capital-intensive projects. Paga focused on expanding financial access for the poor and middle class by working to create this larger financial connectivity framework for Nigeria. Many of the entrepreneurs I profiled also looked at where they could add the most value in their markets. In Mexico, entrepreneurs who wanted to avoid competing directly with existing monopolies and major U.S. players decided to focus on green technology, alternative energy, and business-to-business (B2B) enterprises. Once entrepreneurs are able to overcome immediate market obstacles, the combination of a problem-solving approach with tapping unfilled niches creates the basis for thriving business models that can scale domestically and beyond. 3) Emerging markets received an influx of capital in recent years (now dwindling due to a slowdown in emerging-market growth). Did any of this capital make its way to entrepreneurs? In several countries I profile—including India, Turkey, and Russia—capital inflows helped to pull up the middle class over the past ten to fifteen years, and where I see entrepreneurship taking off now are markets with real middle-class growth. Because typically, it is not the elite or poor behind globally-competitive startups—it’s the educated middle class. There is also a changing tide in how some emerging-market elites view entrepreneurship. They realize that for their countries to stay competitive in attracting foreign direct investment (FDI), they need to pull entrepreneurs up with them. Family foundations in emerging markets are starting to invest in entrepreneurs, which is a new phenomenon. And in China and Mexico, two other countries with a rising middle class, governments are starting funds for entrepreneurs, guaranteeing investments in new companies. For instance, in Mexico, organizations like The National Entrepreneurship Institute (INADEM) and Nafinsa, a national development bank, encourage investors to lend to startups and local small- and medium-sized enterprises. There is a recognition that: “if we can pull in outside capital to invest in our entrepreneurs, it will ultimately help us grow.” 4) How can U.S. foreign policy support entrepreneurship as a path to economic growth in developing countries? Entrepreneurship is not only about a talented individual with a good idea—it is about networks. Traveling to two dozen countries confirmed how important it is to establish an ecosystem for entrepreneurs. So the best thing the U.S. Department of State and other agencies can do is offer space for entrepreneurs to come together and share ideas—through angel networks or mentoring collaborations, for example. They can also help to connect foreign entrepreneurs to investors and other innovators here in the United States. A crucial element of success for several entrepreneurs I profiled was the networks they formed while studying and working here. However, U.S. foreign policy should ultimately help encourage an emerging market “brain gain,” rather than a brain drain. As one venture capital investor I interviewed for my project said: “where you see a lot of expats going home, that’s a place you should invest.” Another aspect of our foreign policy that affects entrepreneurs globally are U.S. regulations that have extraterritoriality or create ripple effects in other markets. I found most successfully-scaling companies in emerging markets aim to expand to the United States, so they look to our business practices. Because of the U.S. focus on transparency, through the Foreign Corrupt Practices Act (FCPA) and similar laws (as well as U.S. tax filing and IPO requirements), companies that want to do business here follow similar standards. In India, where corruption is the major obstacle to entrepreneurship, the IT company Infosys replicated U.S. practices because they wanted U.S. customers. 5) What is the role of entrepreneurship in the global economy moving forward? The economy of the twenty-first century, whether ’globalized, ’new,’ or ’shared," is unprecedented. The twentieth-century models that made the assembly line and Fortune 500 companies thrive are no longer relevant, and new jobs increasingly come from businesses just five years old. Today’s digital and dynamic economy is not beholden to top-down corporate structures. Instead, it is contingent upon ideas and self-initiative. It is an economy being fueled and powered by entrepreneurs.      
    Blog Post by Guest Blogger for Shannon K. O'Neil November 18, 2015 Development Channel
  • China
    Africa’s Middle Class
    According to a recent Credit Suisse report, the African middle class is almost seventeen times smaller than had been previously thought. For at least a decade it has been conventional wisdom among investors that Africa’s middle class is growing, that the “lions are on the move” (McKinsey’s phrase), and that the continent is the next China for frontier market investors. In 2011, the African Development Bank’s (AFDB) paper, “The Middle Pyramid: Dynamics of the Middle Class in Africa,” had classified 313 million Africans as middle class, further supporting the optimistic narrative. Now, however, the “rise of the African middle class” narrative is looking oversold. Rather than numbering 313 million, other research studies, notably those that inform the Credit Suisse Group’s “Annual Global Wealth Databook,” indicate the figure is nearer eighteen million. The food company Nestle’s Africa regional chief executive sums up the new pessimism: “We thought this would be the next Asia, but we have realized the middle class here in the region is extremely small and it is not really growing.” So, how big really is the African middle class? Part of the issue is defining “middle class.” In a press interview, Steve Kayizzi-Mugerwa, an author of the AFDB paper noted that his bank “took some effort to describe what it means by its definition of middle class. It was certainly not based on European or American norms.” In an interview with “Mail and Guardian Africa,” former AFDB President Donald Kaberuka said, “I think we are wasting too much time on the definition of the middle class and the cut-off point, it is a sterile debate.” The AFDB study measured income and consumption to determine middle class status, which it determined fell within a range of $2 to $20 per day. It then divided that range into three bands. It fully acknowledged that in the lower and largest band, middle class income and consumption was fragile, and that illness, job loss, or a variety of other factors could plunge a middle class individual or family back into the poor. They are particularly vulnerable to the current fall in commodity prices and contraction in China’s imports from Africa. Other economists, notably Anthony Shorrocks, Jim Davies, and Rodrigo Lluberals focus on assets rather than income to determine the size of the middle class. That approach, they argue “breaks new ground by defining the middle class in terms of a wealth band rather than an income range.” They conclude that 14 percent of the world’s population is middle class, but only 3.3 percent of Africa’s 572 million adults – or 18.8 million. (This includes North Africa in their African statistics.) Of the African middle class as defined by assets, one quarter, or 4.3 million, live in South Africa. In Nigeria, only 922,000 of its 83.3 million adults are middle class, using this method of calculation. According to a “Mail and Guardian” table based on the “CreditSuisse Wealth Databook 2015,” 38.8 percent of the North American population is middle class, 33.1 percent of Europe’s, and 10.7 percent of China’s. How to account for the continued and pervasive poverty in Africa following years of economic growth? There is a strong argument that it is primarily the African rich, even super-rich, that have been the primary beneficiaries. Based on the “CreditSuisse Wealth Data Book 2015,” as reported by the Mail and Guardian, the 3.2 percent of the population that is middle class accounts for 32.1 percent of Africa’s wealth. But the richest Africans, only 1.15 million adults or 0.2 percent of African adults, accounts for 30.6 percent of the continent’s wealth. That leaves the remaining 37 percent of the continent’s wealth for 96.6 percent of the continent’s population.
    Blog Post by John Campbell November 17, 2015 Africa in Transition
  • Sub-Saharan Africa
    M-Akiba: Kenya’s Revolutionary Mobile Phone Bond Offering 
    This is a guest post by Allen Grane, research associate for the Council on Foreign Relations Africa Studies program. The government of Kenya is tapping the country’s digital finance prowess to raise critical infrastructure funds. The National Treasury has teamed up with a local mobile money pioneer, Safaricom, to launch the so-called M-Akiba bond. It is the first government security carried exclusively on mobile phones. M-Akiba is a national economic solution that has the potential of filling-in for foreign investment. This is especially important in light of Standard & Poor’s recent lowering of Kenya’s credit rating outlook to negative due to depreciation of the Kenyan Shilling and a growing budget deficit. M-Akiba, like M-Pesa, which was developed in response to Kenya’s retail banking shortcomings, is another African tech-based solution to a regional finance challenge. This initiative is also significant in the aftermath of J.P. Morgan’s recent dropping of Nigeria from its local-currency emerging market bond index. That move could signal a waning of international interest in African bond markets, which have become more important to African government infrastructure financing over the last several years. Despite the continent’s rapid economic growth in the past decade, investors may be worried by the recent fall in commodity prices and China’s cooling economy, both of which are having secondary effects in Africa. In the midst of this potential downturn, African countries must find new ways to create investment. Kenya is seeking to do that with the M-Akiba bond, an original way to raise capital through its citizens while leveraging East Africa’s large, and ever-growing, mobile markets. Mobile platforms such as M-Pesa have been extremely successful in Kenya, where 75 percent of its citizens own cell phones and 60 percent of its population transact payments via M-Pesa. The Kenyan government argues that M-Akiba will not only help them tap into local investors for government bonds, but that it will allow more Kenyans to build personal savings (Akiba is the Swahili word for savings). M-Akiba lowers many of the hurdles to citizen investors purchasing government bonds. They no longer have to go through a financial intermediary (just their mobile phones) and the 3,000 Shillings ($29) entry price makes M-Akiba bonds more accessible than typical government bonds, priced at 50,000 Shillings (approximately $475). Similar to M-Pesa, which has become a leading example for digital payments providers around the world, the M-Akiba concept could become a model for developing economy government finance.
    Blog Post by Guest Blogger for John Campbell November 6, 2015 Africa in Transition
  • Emerging Markets
    Currency Crises in Emerging Markets
    Projected capital outflows are placing pressure on the currencies of some of the world most dynamic emerging markets. 
    Backgrounder by CFR Staff October 28, 2015