Banking on Acceptance: China and the Asian Infrastructure Investment Bank

The Beijing-headquartered Asian Infrastructure Investment Bank (AIIB) opened in January 2016, establishing itself as the newest member of the multilateral development bank community. Commonly billed as “China’s answer to the World Bank,” the AIIB aims to invest in infrastructure and other productive sectors across the Asian continent. Concerns about China using the AIIB as a front for its strategic and economic objectives plagued the bank’s planning stages and initial months of operations, but such concerns were difficult to substantiate before the bank had funded any projects. The recent announcement of the AIIB’s first four funding projects suggest that, while China is using the bank to its advantage, it is also maintaining the bank’s legitimacy as a multilateral institution.

China officially proposed a multilateral infrastructure bank for Asia in 2013, an announcement that received an unenthusiastic response from the United States and Japan. Both countries were concerned that founding a new bank, not necessarily beholden to “international standards of governance and transparency,” could provide China with the opportunity to exert disproportionate influence over Asia’s development agenda.

These concerns were substantiated in 2015 when it was announced that China would be the largest stakeholder in the bank, with a 26% voting share, after funding $29.78 billion of the AIIB’s $100 billion capital. Given that major changes to the bank, including capital increases or alterations to the governing structure, must be approved by a supermajority totaling 75% of the voting share, China effectively possesses an informal veto power over many AIIB decisions. However, Beijing has been keen to assuage worries of Chinese dominance. The chief of the bank stated that China will not seek to increase its voting share – in fact, he alluded that China’s voting share may decrease over time as more members join. In addition, China will not possess a formal veto power, a stark contrast to the United States’ formal veto over structural changes within the World Bank.

That said, Chinese interests were clearly supported when the AIIB began to consider development project proposals, the first of which were approved in June 2016. They included revitalizing slums in Indonesia and upgrading the power grid in Bangladesh, as well as constructing and improving roads in Pakistan and Tajikistan. While these projects will undoubtedly benefit China, they also show that AIIB’s reputation as a multilateral bank will not be undermined to serve solely Chinese interests.

To understand how the AIIB benefits China, it is necessary to look at Chinese development in the larger context of the country’s One Belt, One Road (OBOR) initiative. Inspired by the ancient Silk Road, OBOR seeks to connect China with trading partners through Asia, the Middle East, and Africa via an “economic land belt” and a “maritime road” that links Chinese ports to those of other countries.

The AIIB, as a formal investment institution with international support to increase regional prosperity, is partly a way to fund OBOR. It is therefore unsurprising that the AIIB’s projects for Pakistan and Tajikistan are directly related to OBOR.  Both projects call for the construction and improvement of roads, which is critical to trade between China and other Asian countries.

But consistency with OBOR’s objectives does not mean that these projects are simply moves by China to increase its regional influence. Rather, the AIIB has chosen to co-finance all of these projects, except the one for Bangladesh, with other multilateral agencies including the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the World Bank. Co-financing mitigates the risk that the young AIIB and its stakeholders are accepting and eases concerns in the international community regarding the transparency and governance standards of the AIIB. Cooperating with respected multilateral agencies ensures that the AIIB will, at least for these projects, comply with accepted international standards. This compliance strengthens the bank’s standing among multilateral institutions.

Still, some are convinced that the AIIB is prioritizing Chinese interests at the expense of regional prosperity. In particular, there is concern that AIIB rejected a project for India in favor of a road construction project for its strategic ally, Pakistan. However, the president of the ADB, which is the lead financer of the project, stated that there are “so many projects in the list in many countries. It just happened that the Pakistan project was approved first because it could be done quickly.” That this statement comes from the ADB strongly suggests that financing for the Pakistan project was not a case of the AIIB favoring China’s regional allies. Given Japan’s tenuous relationship with China, the Japan-backed ADB would have little incentive to finance a project in Pakistan if it believed that it would solely aide Chinese interests.

The AIIB is increasingly perceived as an institution that complements other development efforts, as evidenced by co-financing and support from other multilateral banks and the membership of other global powers such as Australia and Germany. Such acceptance is beneficial to both the multilateral development industry and China. Increased membership could augment the capacity of the AIIB to contribute to infrastructure development, leading to greater prosperity for China and the rest of the continent. Such a prospect is certainly motivation for the AIIB to continue to seek success not only in its project outcomes, but also in the eyes of the global development community.

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The Economics of Migration

In the current debate surrounding refugee migration, most people seem to fall into one of two camps: those who favor hosting refugees, and those who oppose it. But many seem to have forgotten that human migration has supported human progress and contributed to global development for centuries.

For opponents of migration, the large influx of foreign born laborers seeking jobs, education, and security is something to be feared. They fear that refugees and other migrant groups are low skilled workers hoping only to benefit from social welfare programs and decrease the standard of living in their host country.  Evidence suggests, however, that on average over a third of migrants entering the workforce have completed post-secondary education, and that in most countries, migrants contribute more in taxes and social contributions than they receive in individual benefits.

We must rise above this seemingly instinctual reaction and consider the benefits that migration has had in those countries that migrants and refugees leave behind. Not only does migration increase wages for workers that stay behind, but migrant workers often remit money to their families back home. This supplementary income is, in turn, invested in education and health care, important indicators of a country’s development that can lift people out of poverty. The Migration and Remittances Factbook 2016 suggests that total remittances were estimated to have reached $601 billion in 2015, of which $441 billion went to developing countries, a total that is almost three times larger than official development aid flows. These remittance flows to developing countries have grown significantly in recent years, from $325 billion in 2010, to $372 billion in 2011 and $401 billion in 2012.

Nevertheless, the high financial costs of international migration and the transmission of remittances are inhibiting the benefits of migration. The 2015 Sustainable Development Goals (SDGs) address these issues. Target 8.8 notes that labor rights, including those of migrant workers, should be protected, and Target 10.7 calls for the facilitation of the orderly, safe, regular and responsible migration of people through the implementation of planned and well-managed migration policies. In addition, Target 10.c strives to reduce the costs associated with remittances to 3% by 2030. Taken all together, these innovative targets would reduce the cost of remittances and encourage sustainable and profitable international migration.

As the Sustainable Development Goals suggest, we need to recognize what technology can do today and use it to redesign the world for a more inclusive and prosperous tomorrow. Modern technology requires specialized knowledge, and the easiest way to gather such knowledge is to recruit from outside of the system. It is easier to move brains than it is to move knowledge and expertise. As such, migration is key to the diffusion of knowledge and its long-term positive impact on worldwide development. In short, we cannot have global markets, trade, products, and services without global migration.

The European Migrant Crisis: A Silver-Lining for German Industry and Society?

As migrants flood into Europe from countries like Afghanistan, Iraq, Nigeria, Kosovo, and especially Syria, European leaders and policymakers face a great challenge.  Coming on the heels of the Greek debt crisis, the recent influx of migrants is testing the European Union once again. The responses and policy proposals from EU member states vary greatly, but the majority are focused on securing borders rather than protecting the rights of migrants and refugees.  In the short run, the migrant crisis may be a burden on most of Europe, but in the long run, it could present an economic opportunity.

A Silver-Lining

Europe’s surging migrant population could be a valuable resource for sustained economic growth in those countries that possess the foresight to invest in them now.  Many European economies face demographic challenges as fertility rates fall to 1.3 – below the replacement rate of 2.1 – while the average age increases.  In 2014, 19 of the top 20 countries with percent of population ages 65 and above were European countries.  This dramatic demographic change poses a serious threat to future productivity.  Europe is in need of fresh young workers to counter its feeble birth rate and aging population.

Germanys Response

So far, Germany has led the humanitarian charge, unveiling some of the most generous asylum policies in the EU.  One week ago, Germany’s Chancellor Angela Merkel pledged to spend $6.6 billion to cope with the roughly 800,000 migrants and refugees expected to enter the country this year.  Unfortunately, without similar refugee support from nearby countries—most notably Hungary—Germany was overwhelmed by the flow of asylum seekers and decided to temporarily close its border with Austria.

Refugees arrive at the train station in Saalfeld, Germany (Source: Jens Meyer)
Refugees arrive at the train station in Saalfeld, Germany (Source: Jens Meyer)

In spite of the border closure, the continued acceptance of refugees is economically sensible.  As of 2014, Germany had the world’s third highest percentage of individuals 65 years and older (21%), coupled with the world’s fourth lowest percent of population between the ages of 0 and 14 (13%).  According to the German government’s Federal Institute for Research on Building, Urban Affairs and Spatial Development, if this trend continues, the number of working age people in Germany (about 45 million) will shrink by 8.5 million by 2030 and another 8.7 million by 2050. Put another way, Germany will lose over 37 percent of its working age population in just 35 years.  The largest economy in Europe cannot be sustained without more workers.

Industry as a Catalyst for Integration

As migrants and refugees enter a host country, one of the main issues that they face is integration with and acceptance by the native population.  A successful way to avoid this problem is to provide opportunities for migrants and refugees to quickly contribute to the workforce and the country’s overall welfare.  Private-sector investment is crucial in this process.  Fortunately, several corporations have already started to make an impact on the refugee and migrant populations in Germany.

Ulrich Grillo, Head of the Federation of German Industries (BDI), said last week: “If we can integrate [refugees] quickly into the jobs market, we’ll be helping the refugees, but also helping ourselves.” In addition to speaking about the economic benefits of refugees, BDI has proposed changes to Germany’s labor laws and regulations and even sought assurances that migrants who do find employment will not be deported.

Corporate leaders in the automobile industry, one of the largest sources of employment in the country, have been the most outspoken in their support of migrant and refugee employment programs.  Dieter Zetsche, the CEO of Daimler-Benz and a global leader in corporate philanthropy and human capital investment, said that his company would take steps to recruit new employees from the incoming pool of refugees.  In addition to investing in refugee capital, the famous automobile maker also joined in the relief effort.  A few months ago, Daimler Trucks, in collaboration with the Frankfurt-based aid organization “Wings of Help”, initiated a mobile relief effort in the Turkey-Syria border region. A fleet of eight Actros semitrailer trucks, provided by Daimler-Benz, carried some 120 tons of relief supplies to those in need.

More recently, Matthias Müller, the CEO of Porsche AG, called for industry leaders to “take a clear stand against xenophobia and extremism.” Muller’s statement is especially important in light of the recent attacks on refugee residences. VW’s Porsche luxury-car division will also provide language training and counseling to refugees. The impact of language instruction, in particular, cannot be understated.  The ability to communicate in German is a necessary step towards successful societal and workforce integration.

Europe’s refugee crisis may be viewed as a political problem, but it can be an economic and social opportunity. The actions of corporations like Porsche and Daimler, as well as organizations like BDI, demonstrate that refugees can be invaluable contributors to economic and social development. Moreover, by encouraging private-sector investment in refugees governments can transform the current migrant crisis into an economic and social turning point for both Germany and the European Union.

Beyond ODA: Integrating Philanthropy into the Post-2015 Development Agenda

Last month, representatives at the United Nations Third International Conference on Financing for Development agreed to a number of proposals to fund the upcoming Sustainable Development Goals. Collectively known as the Addis Ababa Action Agenda, these proposals cover a range of financing sources, from domestic tax revenues and official development assistance to private sector financing and philanthropy. The Agenda also included measures to support international trade and capacity building. World leaders now hope that the financing mechanisms laid out in the AAAA will encourage countries to adopt both the SDGs and a climate change accord scheduled for negotiation in Paris this December.

 

Secretary General Ban Ki-Moon congratulates delegates on adopting the Addis Ababa Action Agenda. Source: UN Economic Commission on Africa
Secretary General Ban Ki-Moon congratulates delegates on adopting the Addis Ababa Action Agenda. Source: UN Economic Commission on Africa

 

The SDGs are a proposed set of 17 goals that are meant to provide benchmarks for a variety of development issues over the next 15 years. The goals cover poverty, hunger, health, education, gender equality, energy, the environment, and a host of other global challenges. Each goal is accompanied by a number of targets that serve as tangible metrics of a country’s progress towards the SDGs. These new goals are a follow up to the Millennium Development Goals, a 15-year set of eight benchmarks that world leaders agreed to back in 2000. To improve their drafting process for the new goals, the UN organized the largest consultation program in its history that combined government input with surveys of the general public.

 

The Addis Ababa Action Agenda, a vital part of the new development goal drafting process, is a step towards recognizing the role of international philanthropy and the private sector in supporting global development. The agreement makes several references to the importance of the private sector in economic growth, particularly the role of the financial sector in enabling small businesses. Furthermore, Article 10 of the agreement explicitly lists philanthropies and foundations as vital members of the “global partnerships” that are required to meet the SDGs. This is a substantial improvement over the funding section of the MDGs, which overwhelmingly relied on official development assistance and did not reference to international philanthropy.

 

However, there is still a lot more that the Addis Ababa Action Agenda and the SDGs could do to support philanthropy’s vital role in development. In June, the CGP cohosted the Conference on Policy Coherence for Mobilizing Private Financial Flows for Sustainable Development with the OECD Development Center. The purpose of this conference was to discuss how to best utilize private funding for the SDGs in the lead up to the Third International Conference on Financing for Development. Dr. Carol Adelman, director of the CGP, provided a number of recommendations, summarized below:

 

  • Efforts to measure private financial flows and to publicize philanthropic best practices should be increased
  • Private and philanthropic actors should be included in drafting the SDGs
  • Innovation should be the primary criteria for creating public-private partnerships as part of the SDG targets for global partnerships
  • Philanthropy should be recognized as a unique source of development practices rather just an additional funding source for official development goals
  • Countries should strive to improve their legal environments for investing in both for-profits and not-for-profits
  • Intergovernmental organizations should facilitate the distribution of private resources to developing countries by evaluating best practices and identifying successful ventures

 

Though these suggestions were not explicitly included in the Addis Ababa Action Agenda, countries looking for ways to finance their SDG efforts should still consider them. Many of these suggestions simply entail engaging with the private and philanthropic sectors, and collecting new data. However, some countries may balk at evaluating their legal environments. A major finding of the CGP’s new Index of Philanthropic Freedom is that laws created to serve the legitimate interests of the state, such as capital controls and illicit financial flows legislation, often hinder philanthropic efforts as well. Examining their legal requirements will require states to evaluate the benefits of combating illicit finance or managing volatile financial flows against the benefits that come from international philanthropy.

 

As Dr. Adelman noted in her comments, 80% of the developed world’s economic engagement with the developing world comes from the private sector, philanthropy, and remittances. The Addis Ababa Action Agenda is an important first step in acknowledging these essential flows and how they can help meet the SDGs. But the international community needs to go further in developing a more holistic funding plan for the SDGs, and the recommendations made at the Conference on Policy Coherence are an excellent place to start.

Overpromise and Under-Deliver: Growth in Mexico

Over the past three decades, and despite great hopes to the contrary, Mexico’s economy has under-performed. In the early 1908s, Mexico introduced aggressive political and economic reforms in an attempt to gain footing among the world’s strongest economies. These reforms embraced global markets and decreased the state’s role in the economy. An independent central bank was introduced along with more developed financial markets, as the country faced a tough macroeconomic stabilization period. Additionally, the country liberalized foreign trade and investment by privatizing nearly 1,000 state-owned enterprises. By 1994, Mexico joined the OECD, a sign that the country was on the right track. Despite these efforts, Mexico has  seen capita income grow by an anemic 1.1%  per annum over the past 25 years. Compared to other countries with similar economies (see below), Mexico’s relative stagnation seems all the more acute..

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 In 2012, Enrique Peña Nieto took office as Mexico’s 57th President, eager to tackle the country’s growth challenge. So far, President Nieto seems to be heading in the right direction promoting an ambitious reform agenda that seeks to not spur economic growth, but also develop and enforce anti-monopoly regulation. The President’s agenda highlights two main reforms: energy and education. His education reforms target the quality of working educators by introducing a series of rigorous tests that may cost teachers their jobs if they fail. The energy reforms aim to reduce the market share of Pemex , which will go along way in strengthening the energy sector through increased competition.

President Peña Nieto intends to have all reforms approved by the end of 2014, but this is just half the battle. The most challenging part of these reforms will be enforcing all the regulations once implemented and winning over the general population.

Early last year, Elba Esther Gordillo, the powerful leader of Mexico’s teacher’s union, was arrested on massive charges of embezzlement of over 2 Billion Pesos (159 Million USD). The arrest came the day after President Nieto signed the education reforms into law. Shortly after, thousands of teachers stormed the streets to protest the education reform package. This forceful disapproval of the president’s reform agenda is a much-needed reminder that optimism for growth in Mexico is far from reality, and that Peña Nieto still has much to accomplish.

According to researchers at the Wilson Center’s Mexico Institute, the principal cause of Mexico’s stagnant growth is misguided education reform and dismal worker productivity. Worker productivity in Mexico has failed to increase over the past three decades despite the steady increase in school enrollment over the past five decades (see figure below). Educational facilities in Mexico focus on teaching cognitive skills rather than the technical skills that employers demand. The lack of technical skill-focused education in Mexico has lead to disappointing levels of worker productivity. This will continue unless the government seeks further reform focused on increasing the quality of educators and the type of education, not just the amount of people who receive an education.

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In the past, the government’s answer to dismal growth has been disjointed. The Mexican Government has managed isolated efforts with no comprehensive strategy to patch up the economy. This erratic policymaking has led to many conflicting reforms, hindering growth in an economy that has been dreaming of development for decades. President Peña Nieto’s aggressive reform agenda brings newfound optimism for growth in Mexico. In his four remaining years in office, Peña Nieto is expected to accomplish what many have failed to do. Is it finally Mexico’s time to shine?

 

 

 

What Narendra Modi Can Do for Development

 

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Nearly one month after the landmark 2014 Lok Sabha election, India waits for newly-elected Prime Minister Narendra Modi to make good on his election promises. During his campaign, former Chief Minister Modi vowed to catalyze economic growth, curtail corruption, and defend the poor, a platform that surely helped him earn the largest margin of victory in the country’s history. Now, in the face of slowing economic growth and rising income inequality, Modi is expected to apply his development prowess for the rest of India.

But how?

The answer is simple: subsidy reform.

Since India’s independence from Britain, subsidies have had a major presence in India’s budget. India’s 2014-2015 interim budget estimated $21.2 billion in subsidies for food and petroleum alone. Until Modi’s election, this trend showed no sign of changing.

Next month, the Modi government is set to unveil its first budget, the first likely indicator of Modi’s fulfillment of campaign promises. Recently, Mr. Modi has hinted that his economic policies and corresponding budget will be unpopular with India, most likely due in part to the diminishing role of petroleum and agriculture subsidies.

India is host to a myriad of subsidies. From petroleum to education, India even subsidizes Muslim citizens to make the Haj. Of these, some of the most controversial are food subsidies. Within this broad scope, there are subsidies for fertilizer, irrigation, and electricity as well as in-kind food subsidies. The Government of India has barely reformed its food subsidy policy since the mid-1970s, with the exception of the 2013 National Food Security Act. The National Security Act provides food to two-thirds of India’s population, though only 22% live beneath the poverty line.

Designed with combating poverty in mind, subsidies are expected to boost production and increase efficiency while bolstering India’s recently declining growth rates. However, in reality, the inverse is true. Indian subsidies in agriculture are distributed unequally across the states. For example, the states of Assam and Madhya Pradesh, receive disproportionate agricultural subsidies, with the former receiving 600 rupees per agricultural person and the latter receiving 40 rupees per agricultural person. Both states, with active agricultural sectors, receive unequal subsidies for their efforts, leaving Madhya Pradesh to be one of the country’s more prosperous states and Assam one of the least developed.

Further, it is unlikely that in-kind food subsidies even reach India’s poorest. As early as 1985, the public distribution system was responsible for a mere 15% of the allocations meant for the poor, a track record that has worsened over time.

Though it may seem that business-centric Modi has neglected the poor in lieu of increasing foreign investment and freeing the labor markets, the new Prime Minister ’s policy reforms could be a key to reducing poverty. In a recent speech to Parliament, Modi alluded to administrative changes to increase the efficiency of the state-run Food Corporation of India. These reforms could come in the form of a nation-wide cash transfer system that could increase distribution efficiency and restore foodstuffs to market prices. With demonstrated effectiveness in neighboring Indonesia, cash transfers allow more targeted assistance and more effective poverty reduction. Though it is unlikely that Modi will eradicate subsidies altogether, it is clear that he is dedicated to their reform.

For better or for worse, Narendra Modi’s victory is a sign for changing times in Indian politics. The Modi government’s new budget is expected to be introduced in early July, but the transition from planning to implementation will be a challenge. Parliament must review and approve the budget, meaning that the Modi’s budget could be met with opposition before it even reaches the Rajya Sabha. Though scaling back subsidies and bolstering growth are ambitious, the greater obstacle could be a lack of political will.

 

 

Democracy and Development in Pakistan: Where are we headed?

On June 11th, 2014 the Center for International Private Enterprises hosted a panel discussion entitled “Strengthening Democracy through Economic Reform In Pakistan: Challenges and Opportunities.” Last May, the Pakistani Peoples Party (PPP) became the first democratic government to serve out a full term in the country’s 66-year history of independence. This historic accomplishment created a great deal of optimism and speculation about democracy and development in Pakistan. In light of this accomplishment, it may be important to question how successful democracy has been effective in Pakistan and whether or not democracy has promoted development.

The recent terrorist attack at the Karachi Airport, the arrest of Pakistani political leader Altaf Hussain in the UK, and the Karachi Riots in 2010 only highlight a share of the complicated political, economic, and social issues shaking the country’s fragile security. According to the panelists, the outlook for Pakistan is very pessimistic, unless the government recognizes these issues and takes action as soon as possible. According to Dr. Ehtisham Ahmad of the London School of Economics, the Pakistani government must address two core issues: the financing of political parties, and the management of state finances. The PPP and PLMN have both neglected these major issues, hindering institutional and political development.

The lack of a formal mechanism for funding political parties has led to politicians looking for funding from wealthy groups and individuals. As a result, purchasing votes and favors has become a regular occurrence. These factors have created an inefficient and corrupt tax system that does not generate revenue or demographic information. In order for a democratic country to run properly, tax revenue and demographic information is heavily relied upon.  According to panelist Moin Fudda of CIPE Pakistan, the government missed its tax collection target by 77% last year, which indicates a need for major reform. The graph below displays tax revenue for Pakistan and similar countries in South Asia. The data shows the decline of tax revenue in Pakistan over the last sixteen years to one of the lowest tax revenue percentages in South Asia.

Tax Revenue Pakistan

 

The population living below the poverty line has been hit the hardest. The central government has given the provinces the responsibility of providing public services for its citizens, such as healthcare and education, but the inefficient tax system has left them without enough funding. The provinces have no way of providing viable public services unless they do not pay taxes, inevitably leading to a tax war within the government. This inability to provide basic services has also hindered development.

Dr. Ahmad stresses that these issues need to be tackled immediately, but Pakistan has quite shockingly done nothing to find a viable solution. If the Pakistani government won’t act, then what else can be done  to remedy the situation? Dr. Ahmad believes that foreign investors can press for a level playing field in order to incentivize reform. The Pakistani government needs to implement a strong corporate income tax and provide public services for the poor, especially education. Most importantly, these core issues must be taken seriously by the government, and the population must strongly push for reform and public services. Despite these issues, the economy has performed quite well and has seen solid growth in the past four years according to the data below.

 

GDP Growth Rate

 

 

Pakistan GNI

 

At a time when political and economic  unrest is very high, people are wondering whether this growth is due to the development of an informal economy that is quietly keeping the formal economy afloat . This question is of great relevance and will unfold in the near future as the political demographics of the country either stabilize or spin out of control.