Opinion

A Better Investment Framework for Africa

BERLIN – Africa’s enormous economic potential is not news. But, until now, policymakers around the world have not successfully defined the political and economic steps that must be taken to enable Africa to realize this potential fully. That is why the German G20 presidency has launched its G20 Africa Partnership initiative.


At the core of this effort to intensify cooperation with Africa lies the G20 Compact with Africa (CWA). The CWA offers interested African countries the opportunity to improve conditions for private investment, including in infrastructure.

The CWA’s structure is straightforward: African countries, together with their bilateral partners and international financial organizations with proven expertise on Africa (such as the African Development Bank, the World Bank Group, and the International Monetary Fund), will jointly develop, coordinate, and implement tailor-made measures. The main aim is to lower the level of risk for private investments, by improving economic and financial conditions and strengthening institutions. Over time, the resulting increase in investment will boost growth and productivity, create jobs, and raise living standards, as envisioned in the African Union’s own Agenda 2063 program.

The CWA stands for a new approach in international development policy. Of course, we are not reinventing the wheel. But the mode of cooperation and coordination among the many bilateral and multilateral players, as well as the commitment of the African countries, is something new.

We view the CWA as a long-term, demand-driven process. It is open to all African countries that are interested in improving their investment environment on a sustainable basis. But, most important, the decision-makers are the African countries themselves. They will determine what they want to do to improve conditions for private investment, with whom they want to cooperate, and in what form. Only if the African countries “own” the initiative will it be a success.

So far, five African countries – Côte d’Ivoire, Morocco, Rwanda, Senegal, and Tunisia – have committed to full participation in the CWA. Ghana and Ethiopia will join this month.

CWA countries, the international financial organizations, and bilateral partners are working closely together on the details of the country-specific compacts. At the G20 meeting in Baden-Baden in March, some members – and also non-G20 countries – indicated that they would like to become bilateral partners. The German government will also contribute via the bilateral framework – called a “Marshall Plan with Africa” – developed by our Federal Ministry for Economic Development and Cooperation.

Our main job, however, is to bring private investors and African countries together. With the upcoming G20 Africa Partnership Conference in Berlin on June 12-13, we will provide a platform for these African countries to reach out to investors in order to enhance the continent’s engagement with the private sector. CWA countries will present the key elements of their investment compacts in a roundtable with investors. They will also outline the key industries and infrastructure projects for which they are seeking private funds.

After the Berlin meeting, the implementation phase of the CWA initiative will start. The country teams will further specify their compact measures and consider the milestones for their implementation. At this point, dialogue with investors will be particularly significant, because such conversations will help African countries to establish which measures and instruments are crucial for engagement with the private sector.

To be successful, this initiative cannot focus on short-term results. It needs to continue beyond Germany’s G20 presidency in 2017/2018 and to be supported by the G20 over the longer term. Germany, of course, will continue to take responsibility for the CWA’s implementation. The G20 will be informed on a regular basis about how the investment compacts develop.

Most important, by sending a signal to other African countries, progress in the participating countries will determine whether the CWA becomes a success for all of Africa. If all parties involved – African countries, international organizations, bilateral partners, and, not least, investors – collaborate closely, the CWA has the capacity to promote sustainable, robust, and inclusive economic growth throughout the continent. Wolfgang Schäuble is Germany’s Federal Minister of Finance.

By Wolfgang Schäuble

The Truth Behind Today’s US Inflation Numbers

BERKELEY – In December 2015, the US Federal Reserve embarked on a monetary-tightening cycle, by raising the target range for the short-term nominal federal funds rate by 25 basis points (one-quarter of a percentage point). At the time, the Federal Open Market Committee (FOMC) – the Fed body that sets monetary policy – issued a median forecast predicting three things.


First, the FOMC indicated that the December 2015 rate increase would be the first of five such increases that it would make within the subsequent year, and the first of nine that would take place by, say, September 2017. Second, the federal funds rate would reach 2.25-2.5% within three months of the December 2015 increase. And, third, the Fed’s preferred measure of inflationary pressure – the core personal consumption expenditures (PCE) price index – would be at 1.9% per year by now.

All told, the FOMC’s forecast has not been borne out. If the Fed actually does increase interest rates this month, it will have undertaken only four of the nine anticipated rate hikes. Moreover, it believed that nine rate hikes before the end of this summer would be necessary to keep inflation below its target of 2% per year. But inflation is expected to rise at an annual rate of just 1.5% for the rest of this year, and next year.

In terms of inflationary pressure, the Fed’s forecast seems to have significantly overstated the strength of the US economy. Even with the Fed’s change of course (it is now pursuing a federal funds rate that is 1.5 percentage points below its December 2015 plan), inflationary pressure is still relatively weak. Indeed, despite the economic boost implied by slower policy tightening, the rate of inflation is still no higher than it was in the 2013-2014 period, when many worried that the Fed wasn’t providing enough stimulus.

We can draw three conclusions about the current situation. First, today’s weak inflation outlook suggests that the Fed’s monetary policies, in combination with fiscal policies, are not providing sufficient stimulus for the US economy – as was the case in 2013. Unfortunately, the FOMC does not appear to be particularly concerned about this possibility. Among FOMC members, Neel Kashkari, the impressive president of the Federal Reserve Bank of Minneapolis, is the only one who has dissented, calling on the Fed to pursue more stimulative policies.

The FOMC’s blind spot stems from the fact that it is relying more on its assessment of the labor market, which it considers to be at or above “full employment,” than on noisy month-to-month inflation data. But “full employment” is a rather tenuous and unreliable construct. It has now been 20 years since economists Douglas Staiger, James Stock, and Mark Watson showed that Fed policymakers should not be so confident in estimates of “full employment.” And yet, for some reason, the Fed community has not let this essential message sink in.

A second conclusion to be drawn from the current situation is that the Fed has now overestimated the strength of the US economy for 11 consecutive years. Elementary mathematics dictates that credible forecasts should at least overestimate half the time and undershoot half the time. If each year of Fed forecasting were a coin toss, we would now have had eleven heads in a row, and zero tails. The odds of that happening are one in 2,048.

The Fed clearly needs to take a deep look at its forecasting methodology and policymaking processes. It should ask if the current system is creating irresistible incentives for Fed technocrats to highball their inflation forecasts. And it should ensure that its policymakers view the 2% target for annual inflation as a goal to aspire to, rather than a ceiling to avoid.

A final conclusion is that the past two years have provided still more data to support former US Secretary of the Treasury Larry Summers’ grave suspicion that the economies of the global North are now trapped in a state of “secular stagnation.” Those who disagree, such as Kenneth Rogoff of Harvard University, tell us that all will soon be well, and that nobody will be talking about “secular stagnation” eight years hence. They may turn out to be right – but only if the Fed can bring itself to pursue stimulus policies that are as radical as they are necessary.

J. Bradford DeLong, a former deputy assistant US Treasury secretary, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research.

By J. Bradford DeLong

New Paths for Leadership in International Development

SEATTLE – Official development assistance (ODA) helps to save lives, build more stable and safer societies, and project soft power around the world. That is a point that my boss, Bill Gates, drove home recently, when he addressed the United Kingdom’s leading military and security thinkers at the Royal United Services Institute in London.


Bill had been asked how he would respond to anyone in the UK who felt “demoralized” by the fact that Britain is one of only a few countries that meet the United Nations-mandated commitment to spend 0.7% of its gross national income on development aid. But highlighting the impact of British ODA was just part of the answer; Bill also emphasized the many other countries that are also meeting their aid commitments.

In Europe, Denmark, the Netherlands, Norway, Luxembourg, and Sweden have been meeting the UN threshold for a while, and Germany recently joined their ranks. France is not there yet, but it is increasing its contribution.

Beyond Europe, Saudi Arabia, the United Arab Emirates, and Qatar are also among the world’s largest significant ODA donors – a reality of which not many people are aware. They are all donors to the Lives & Livelihoods Fund, the Middle East’s biggest multilateral development initiative. The fund’s other donors are the Islamic Development Bank, the Islamic Solidarity Fund for Development, and the Bill & Melinda Gates Foundation.

The $2.5 billion Lives & Livelihoods Fund is supporting critical projects targeting disease eradication, primary health care, support for farmers, and basic infrastructure in the poorest communities throughout the Muslim world. It began last year with $363 million in approved funding for six large projects in Arab and African countries. In February, the first initiative, a $32 million project to combat malaria in Senegal, got underway, and another round of projects was approved earlier this month, taking the total authorized funding to more than $600 million.

Aid cannot solve all the problems facing Muslim countries in the Middle East and Africa. But it can support the emergence of more stable, more prosperous, and healthier societies that are less vulnerable to civil war or terrorism. The Gates Foundation believes that donors from the Muslim world, in particular, have an integral role to play in addressing poverty and instability. Far more can be achieved together – by combining resources and sharing expertise – than separately.

Domestic projects can support these countries’ capacity to lead the way on international development. For example, the Shaghaf fellowship program, supported by the King Khalid Foundation and the Gates Foundation, is designed to encourage some of the brightest young Saudis – many of them women – to pursue careers in the non-profit sector that focus on local and global social impact.

But the real key to success in international development is cooperation. By combining resources and sharing expertise, organizations like the Gates Foundation and donor governments, from the UK to the UAE, can achieve far more than would be possible alone.

Fortunately, governments in the Middle East seem to recognize this, and are increasingly seeking development partnerships. And there are plenty of opportunities. The UAE has been a major champion of polio eradication, an endeavor that the UK has funded generously. Qatar has joined recently as a donor to Gavi, the Vaccine Alliance, to which the UK has been the largest donor in recent years. Saudi Arabia is a longstanding donor to the Global Fund for AIDS, Tuberculosis and Malaria, another partnership in which the UK is a significant player.

Observers often point to the soft-power benefits of providing aid to developing countries. But they often fail to notice the advantages brought about by strengthening relationships among donor countries that work together to advance international development. Donor countries would do well to embrace this reality and seize opportunities to build ties with new global partners that share their commitment to fighting poverty. Mark Suzman is Chief Strategy Officer and President of Global Policy and Advocacy at the Bill & Melinda Gates Foundation.

By Mark Suzman

America’s Broken Democracy

NEW YORK – US President Donald Trump’s ravings against the 2015 Paris climate agreement are partly a product of his ignorance and narcissism. Yet they represent something more. They are a reflection of the deep corruption of the US political system, which, according to one recent assessment, is no longer a “full democracy.” American politics has become a game of powerful corporate interests: tax cuts for the rich, deregulation for mega-polluters, and war and global warming for the rest of the world.


Six of the G7 countries worked overtime last week to bring Trump around on climate change, but Trump resisted. European and Japanese leaders are accustomed to treating the US as an ally on key issues. With Trump in power, it is a habit they are rethinking.

But the problem goes beyond Trump. Those of us living in the United States know first-hand that America’s democratic institutions have deteriorated markedly over the last several decades, beginning perhaps as far back as the 1960s, when Americans began to lose confidence in their political institutions. US politics have become increasingly corrupt, cynical, and detached from public opinion. Trump is but a symptom, albeit a shocking and dangerous one, of this deeper political malaise.

Trump’s policies embody mean-spirited priorities that are widely backed by the Republican Party in the US Congress: slash taxes for the rich at the expense of programs to help the poor and working class; increase military spending at the expense of diplomacy; and allow for the destruction of the environment in the name of “deregulation.”

And, indeed, from Trump’s perspective, the highlights of his recent trip abroad were signing a $110 billion arms deal with Saudi Arabia, berating other NATO members for their supposedly insufficient military spending, and rejecting the pleas of US allies to continue in the fight global warming. Congressional Republicans broadly cheer these frightening policies.

Meanwhile, Trump and the Republican-controlled Congress are trying to rush through legislation that would deprive more than 20 million people of health care, in order to cut taxes for the richest Americans. Trump’s newly proposed budget would slash Medicaid (health insurance for the poor), the Supplemental Nutrition Assistance Program (food for the poor), foreign assistance (aid for the world’s poorest), funding for the United Nations, and spending on science and technology. Trump would, in short, gut the federal programs for education, training, the environment, civilian science, diplomacy, housing, nutrition, and other urgent civilian priorities.

These are not the priorities shared by most Americans – not even close. A majority wants to tax the rich, maintain health coverage, stop America’s wars, and fight global warming. According to recent polling data, Americans overwhelmingly want to stay in the Paris Climate Agreement, which Trump has pledged to leave. Trump and his cronies are fighting public opinion, not representing it.

They are doing this for one reason, and one reason only: money. More precisely, Trump’s policies serve the corporate interests that pay the campaign bills and effectively run the US government. What Trump signifies is the culmination of a long-term process whereby powerful corporate lobbies have bought their way to power. Today, companies like ExxonMobil, Koch Industries, Continental Energy, and other mega-polluting companies no longer need to lobby; Trump has handed them the keys to the State Department, the Environmental Protection Agency, and the Energy Department. They also hold senior congressional staff positions.

Much of the corporate money can be traced; the rest flows anonymously, as “dark money” that avoids public scrutiny. Supreme Court justices who themselves were frequently wined and dined by corporate donors gave the green light to keep these corrupt flows secret in their infamous Citizens United decision.

As investigative journalist Jane Mayer has documented, the largest source of dark money is the tandem of David and Charles Koch, who inherited the highly polluting Koch Industries from their father, a man whose business history included building a major oil refinery for Germany’s Nazi regime. The Koch brothers, with a combined net worth of some $100 billion, have spent freely for decades to take over the US political system, mobilizing other right-wing corporate interests as well.

When it comes to tax policy and climate change, the Republican Party is almost completely in the hands of the Koch brothers and their oil-industry cronies. Their immoral aim is simple: to cut corporate taxes and deregulate oil and gas, regardless of the consequences for the planet. To achieve these goals, they are prepared to try to remove millions of poor people from health-care coverage, and even more shockingly, to put the entire planet at dire risk of global warming. Their evil is chilling, but it is real. And Trump is their factotum.

Before Trump’s recent foreign trip, 22 Republican senators sent him a letter calling for the US to withdraw from the Paris climate accord. Almost all receive significant campaign funding from the oil and gas industry. Most of them probably depend directly on donations from the Koch brothers and the lobbying organizations that they secretly finance. As the Center for Responsive Politics, a public-interest group, has shown, spending by oil and gas companies on federal candidates in the 2016 election totaled $103 million, with 88% going to Republicans. This of course includes only the funds that can be tracked to particular donors.

The rest of the world urgently needs to understand America for what it has now become. Behind the formal structures of a once-functioning democracy is a political system run by corporate interests with the cynical aims of cutting taxes on the rich, selling weapons, and polluting with impunity. In Trump, they have found a shameless frontman and TV personality who will do their bidding.

It is now the job of the rest of the world to say no to America’s reckless corporate greed, and of Americans themselves to reclaim their democratic institutions by pushing dark money and corporate malevolence from their midst. Given the small (52-48) Republican majority in the Senate, the Democrats and just three honest Republicans would be in a position to block most or all of the Trump-Koch agenda. The situation is therefore salvageable, though it remains highly dangerous. Americans –and the world – deserve much better.

Jeffrey D. Sachs, Professor of Sustainable Development and Professor of Health Policy and Management at Columbia University, is Director of Columbia’s Center for Sustainable Development and the UN Sustainable Development Solutions Network.

By Jeffrey D. Sachs

Trump’s Magic Budget

CAMBRIDGE – US President Donald Trump’s administration has now released its budget plans for fiscal year 2018. Among the details provided in the document, entitled America First – A Budget Blueprint to Make America Great Again, are projections for the expected path of gross federal debt as a percentage of GDP, which is shown to decline from its current level of about 106% to about 80% in 2027. Debt held by the public is expected to mirror this path, shrinking from 77% to 60% over this period.


Unfortunately, neither projection is credible. A sustained and marked decline in government debt (relative to GDP) would be welcome news for those of us who equate high indebtedness with the kind of fiscal fragility that reduces the government’s ability to cope with adverse shocks. But, as many critics have pointed out, the economic assumptions underlying the Trump administration’s benign scenario appear improbable. In fact, they are also internally inconsistent.

The Trump budget assumes a steady spell of 3% GDP growth, which appears to be at odds with the prevailing trends of weakening productivity performance, slowing population growth, and a significantly lower level of labor force participation. These factors are all reflected in recurrent downward revisions to potential GDP growth by institutions such as the Federal Reserve and the Congressional Budget Office (CBO).

A new study by the non-partisan Committee for a Responsible Budget presents a very different outlook for US deficits and debt from the one contained in Trump’s budget blueprint. It estimates that under realistic economic assumptions from the CBO, debt in Trump’s budget would remain roughly at current levels, rather than falling precipitously (as deficits would remain above 2% of GDP, rather than disappear by 2027). Furthermore, the study shows that relying on assumptions that are more in sync with the consensus economic outlook implies a deficit of 1.7-4% of GDP by 2027, with debt at 72-83% of GDP.

So far, the chorus of criticism directed at the administration’s budget document has largely focused on its optimistic forecasts for GDP growth. But let’s accept, for the sake of argument, that the United States economy is operating well within its production possibility frontier, owing to various tax and other inefficiencies, and that eliminating or significantly reducing such distortions could significantly boost growth. (A recent IMF study, for example, concludes that countries can raise productivity by improving the design of their tax system, and that eliminating such barriers would, on average, lift countries’ annual real GDP growth rates by roughly one percentage point over 20 years.)

But, even giving the administration the benefit of the doubt and accepting the possibility of sustained 3% GDP growth for the US, another set of critical assumptions drive the rosy deficit and debt projections produced by the Office of Management and Budget (OMB): the expected level and path of interest rates. To state the obvious, lower interest rates imply lower debt servicing costs, which in turn mean lower nondiscretionary outlays, smaller deficits, and lower debt.

On the surface, the projections for short- and long-term (ten-year) interest rates embedded in the 2018 budget are in line with the prevailing Blue Chip forecasts. In effect, for fiscal year 2018, the budget assumes slightly higher short-term rates than the consensus.

In fact, the budget assumes the best of all worlds, not the Blue Chip one in which interest rates remain low but GDP growth ambles along at around 2%. With real (inflation-adjusted) interest rates remaining near record lows, a marked increase in long-term growth, as the administration forecasts, would be historically anomalous.

In the OMB document, the real interest rate on three-month Treasuries is expected to stay below 1% over the decade. Furthermore, in that projection, the term premium disappears almost entirely. At present, ten-year Treasuries offer more than three times the yield on three-month Treasuries. Over the medium term, the budget assumes that ten-year rates will be barely above their three-month counterpart. Historically, flat yield curves have been associated with tight money and high-interest-rate policies.

What kind of policies and environment can deliver significantly faster growth and inflation, without any pressure on interest rates?

A combination of solid growth and sustained low real interest rates was the norm in the US for much of the 1940s-1970s, when (as I have documented elsewhere) financial repression prevailed, owing to heavily regulated capital markets and an accommodative central bank.

In contrast, if history is a guide, a policy mix characterized by financial de-regulation (a Trump favorite) and an independent central bank facing potential full employment and overheating would be a harbinger of higher interest rates. And with higher interest rates comes a heavier debt-service burden (substantially heavier than in the past, given current debt levels), wider deficits, and higher debt.

There seems to be a serious internal inconsistency in the high-growth/low-real-interest-rate scenario presented in Trump’s 2018 budget plan. If not, contrary to the administration’s public statements, financial markets will have to live with a heavy dose of financial repression in the years ahead. Carmen M. Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government.

By Carmen M. Reinhart

The Best Investments We Can Make

DUBAI – The desire to make a difference is born of a fundamental belief in something greater than ourselves, and by the concern that we all have for the wellbeing of our fellow humans.


As an Arab woman, I find it impossible to sit back and watch – or worse, turn away – as parts of the Middle East suffer through such a difficult time in the region’s already troubled history. Millions of innocent people have been displaced from their homes, and millions more are being driven across national borders into an uncertain and unstable future. Their need for help is clear.

To be sure, we can only do so much as individuals. But by uniting around common goals, we have the power to create effective initiatives, and improve lives. And I have always believed that education and social entrepreneurship are two areas where we can have the greatest sustainable, long-term impact. Together, these sectors create opportunities at every level of society, from refugees who are unable to complete their studies, to professionals seeking to further their career prospects or pursue an innovative vision.

The ongoing conflict in Syria has driven a vast number of refugees into camps that have evolved from temporary dwellings into makeshift cities. A prime example is the Za’atari Camp in Jordan, which now hosts 80,000 residents; but similar camps can be found in Lebanon and other countries around the region. Mass forced migration is not just a challenge for Syria’s immediate neighbors. As refugee flows have turned a local crisis into a global issue, Europe’s political, economic, and social fabric has been tested, too.

When refugees are torn away from their daily lives, they lose the chance to pursue an education. To address this problem, organizations such as the Unite Lebanon Youth Project (ULYP) are now identifying children from refugee camps who have the potential to complete their formal education and influence those around them. With an education, these young people will be better equipped to effect positive change in their communities, now and in the future.

The ULYP has close ties to prestigious institutions such as the American University of Beirut, which has long been regarded as an incubator for successful entrepreneurs in the region. The ULYP, which I support by funding annual scholarships, acknowledges that education is neither the only solution nor a quick fix. Accordingly, the project takes a long-term approach, and makes investments in individuals who one day could benefit larger communities. After all, it is better to teach people to fish than simply to feed them.

Similarly, after someone has been empowered with the knowledge and financing to start their own company, they can start thinking about the greater good – at which point the true value of entrepreneurship becomes apparent. Entrepreneurship is powered by dreams and aspirations, vision and ideas. And although financial support is important, it is not the only ingredient in the recipe for success. Entrepreneurs also need access to talented mentors and support networks.

It was with this idea in mind that I joined the board of Endeavor UAE, a global nonprofit from the United States that empowers entrepreneurs around the world. Endeavor’s beneficiaries are not run-of-the-mill businesspeople, but rather those with the potential to become role models. We support individuals who can inspire their colleagues and peers, and improve their communities.

Not every entrepreneur will be successful. But by giving the brightest young business leaders financial support and access to a global network of mentors, we can help them realize their potential to transform the economies of entire countries. Moreover, this creates a virtuous circle, because today’s entrepreneurs can identify the entrepreneurs of tomorrow, and furnish them with the capital they need to change lives in the future.

I have always believed that with success comes a responsibility to think about the wider world. In July 2015, I returned to my alma mater, the London Business School, to launch a scholarship that will support students in the MBA and Executive MBA programs. In the same way that a Palestinian or Syrian refugee might complete their studies through the ULYP, or a young innovator might receive guidance through Endeavor, I hope that LBS students will be empowered to build a better future for us all.

We live in an ever more interconnected global economy, and on an increasingly unequal and unstable planet. Our goal should not be just to make money, but also to make a difference.

Muna Al Gurg, a businesswoman and philanthropist, is the chairwoman of Young Arab Leaders UAE, a member of the board of the Al Gurg Foundation and the Emirates Foundation, and a founding board member of the nonprofit initiatives Hub Dubai and Endeavor UAE.

By Muna Al Gurg

Trump’s Magic Budget

CAMBRIDGE – US President Donald Trump’s administration has now released its budget plans for fiscal year 2018. Among the details provided in the document, entitled America First – A Budget Blueprint to Make America Great Again, are projections for the expected path of gross federal debt as a percentage of GDP, which is shown to decline from its current level of about 106% to about 80% in 2027. Debt held by the public is expected to mirror this path, shrinking from 77% to 60% over this period.


Unfortunately, neither projection is credible.

A sustained and marked decline in government debt (relative to GDP) would be welcome news for those of us who equate high indebtedness with the kind of fiscal fragility that reduces the government’s ability to cope with adverse shocks. But, as many critics have pointed out, the economic assumptions underlying the Trump administration’s benign scenario appear improbable. In fact, they are also internally inconsistent.

The Trump budget assumes a steady spell of 3% GDP growth, which appears to be at odds with the prevailing trends of weakening productivity performance, slowing population growth, and a significantly lower level of labor force participation. These factors are all reflected in recurrent downward revisions to potential GDP growth by institutions such as the Federal Reserve and the Congressional Budget Office (CBO).

A new study by the non-partisan Committee for a Responsible Budget presents a very different outlook for US deficits and debt from the one contained in Trump’s budget blueprint. It estimates that under realistic economic assumptions from the CBO, debt in Trump’s budget would remain roughly at current levels, rather than falling precipitously (as deficits would remain above 2% of GDP, rather than disappear by 2027). Furthermore, the study shows that relying on assumptions that are more in sync with the consensus economic outlook implies a deficit of 1.7-4% of GDP by 2027, with debt at 72-83% of GDP.

So far, the chorus of criticism directed at the administration’s budget document has largely focused on its optimistic forecasts for GDP growth. But let’s accept, for the sake of argument, that the United States economy is operating well within its production possibility frontier, owing to various tax and other inefficiencies, and that eliminating or significantly reducing such distortions could significantly boost growth. (A recent IMF study, for example, concludes that countries can raise productivity by improving the design of their tax system, and that eliminating such barriers would, on average, lift countries’ annual real GDP growth rates by roughly one percentage point over 20 years.)

But, even giving the administration the benefit of the doubt and accepting the possibility of sustained 3% GDP growth for the US, another set of critical assumptions drive the rosy deficit and debt projections produced by the Office of Management and Budget (OMB): the expected level and path of interest rates. To state the obvious, lower interest rates imply lower debt servicing costs, which in turn mean lower nondiscretionary outlays, smaller deficits, and lower debt.

On the surface, the projections for short- and long-term (ten-year) interest rates embedded in the 2018 budget are in line with the prevailing Blue Chip forecasts. In effect, for fiscal year 2018, the budget assumes slightly higher short-term rates than the consensus.

In fact, the budget assumes the best of all worlds, not the Blue Chip one in which interest rates remain low but GDP growth ambles along at around 2%. With real (inflation-adjusted) interest rates remaining near record lows, a marked increase in long-term growth, as the administration forecasts, would be historically anomalous.

In the OMB document, the real interest rate on three-month Treasuries is expected to stay below 1% over the decade. Furthermore, in that projection, the term premium disappears almost entirely. At present, ten-year Treasuries offer more than three times the yield on three-month Treasuries. Over the medium term, the budget assumes that ten-year rates will be barely above their three-month counterpart. Historically, flat yield curves have been associated with tight money and high-interest-rate policies.

What kind of policies and environment can deliver significantly faster growth and inflation, without any pressure on interest rates?

A combination of solid growth and sustained low real interest rates was the norm in the US for much of the 1940s-1970s, when (as I have documented elsewhere) financial repression prevailed, owing to heavily regulated capital markets and an accommodative central bank.

In contrast, if history is a guide, a policy mix characterized by financial de-regulation (a Trump favorite) and an independent central bank facing potential full employment and overheating would be a harbinger of higher interest rates. And with higher interest rates comes a heavier debt-service burden (substantially heavier than in the past, given current debt levels), wider deficits, and higher debt.

There seems to be a serious internal inconsistency in the high-growth/low-real-interest-rate scenario presented in Trump’s 2018 budget plan. If not, contrary to the administration’s public statements, financial markets will have to live with a heavy dose of financial repression in the years ahead. Carmen M. Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government.

By Carmen M. Reinhart

The Hunger Bonds

CAMBRIDGE – Investing often creates moral dilemmas over goals: Should we aim to do well or to do good? Is it appropriate to invest in tobacco companies? Or in companies that sell guns to drug gangs?


The recent popularity of so-called impact investment funds, which promise to deliver decent returns while advancing social or environmental goals, is based on this unease. Foundations often find that these investment vehicles help them to do good both with the money that they spend on philanthropy and with the endowment assets that yield the returns on which their philanthropy depends.

Nowadays, it is emerging markets as an asset class that should make people morally queasy. Should decent people put their money in emerging-market bond funds?

The returns of the JP Morgan Emerging Market Bond Index (EMBI+) are heavily influenced by what happens in Venezuela. The reason is simple: while Venezuela represents only about 5% of the index, it accounts for about 20% of its yield, because the yield on Venezuelan debt is about five times larger than that of other countries in the index, a reflection of the huge risk premium that Venezuela faces. Moreover, the price volatility of Venezuelan debt – the highest in the EMBI+ – accounts for a disproportionate share of the index’s daily price movements.

You might invest in the EMBI+ because it promises higher returns, or because you want to make your savings available to a larger segment of humanity. But if you do, you will root for Venezuelan debt, which means wishing for really bad things to happen to Venezuela’s people.

As has been widely reported in the media, Venezuela is experiencing one of the most calamitous economic collapses ever, accompanied by massive doses of political repression and human-rights violations. So investing in the EMBI+ means that you rejoice when Wall Street analysts inform you that the country is literally starving its people in order to avoid restructuring your bonds.

Your happiness is easily explained: Venezuelan imports, after having collapsed by 75% from 2012 to 2016, are down more than 20% in the first quarter of 2017. That’s good news for you as an EMBI+ investor, because it means that more money is left to service your bonds. Meanwhile, Venezuelans are involuntarily losing weight and searching for food in garbage piles. Sure, it’s a humanitarian catastrophe. But, to you, it’s a fabulous investment opportunity.

Now assume that you want to hold Venezuelan debt because you are hoping that President NicolásMaduro will lose power and that a more sensible, democratically minded government, more in line with your moral compass, will emerge. Even in that case, you will still want the gains from Venezuela’s future recovery to be used preferentially to service the old debt issued to finance the corruption and national destruction brought about by Maduro and his predecessor, Hugo Chávez. You will not be rooting for the recovery of livelihoods that Venezuelans deserve after having lived through this nightmare.

You will also be rooting for US judges to seize assets and impound money to pay you. In fact, analysts who are bullish on Venezuelan debt have been lobbying the government and opposition leaders with an implied threat: even considering a restructuring of your bonds, they point out, will allow those managing your assets to cause havoc in Venezuela.

If you are a decent human being, investing in Venezuelan bonds should make you feel “mildly nauseous,” to borrow a phrase recently used by former FBI Director James Comey while testifying to the US Congress. Emerging-market fund managers feel a similar discomfort. They currently spend a disproportionate share of their time “getting the Venezuelan call right,” because their bonuses are based on their over-performance relative to the index – of which Venezuela is the main driver.

The less morally burdened among them bask in the recognition they receive for having been right to predict that Maduro’s government would decide to starve its people rather than restructure the bonds you hold. Analysts and bondholders have also lobbied the government and the opposition not to seek financial support from the International Monetary Fund, for fear that the international community will demand that you accept a significant “haircut” on your investment, as has been required of Greece’s creditors.

That would probably not be “good for the credit.” Analysts and bondholders have also lobbied the opposition-controlled National Assembly to recognize Venezuela’s external debt in exchange for the freedom of political prisoners, implying that the payment of your bonds can be secured through ransom.

So, should you stop investing in emerging-market funds just because 5% of your savings would go toward financing Venezuela? Clearly, this would punish other countries that are innocent bystanders in the Venezuelan mess. There must be a better way.

There is. The solution is to demand that JPMorgan immediately exclude Venezuela from the emerging market bond indexes it calculates, thereby freeing fund managers from the need to compare their performance with hunger bonds. Over time, JPMorgan should introduce a Decent Emerging Markets index, which would save you from moral anguish by ensuring that only countries adhering to minimal standards of respect for their citizens are included. The DEM would allow you to root for higher returns on your savings without wishing for human misery. You could do well, without feeling bad.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School. 

By Ricardo Hausmann

Manchester’s Bright Future

MANCHESTER – I am a proud Mancunian (as the people of Manchester are known), despite the fact I haven’t lived there permanently since I left school for university when I was 18. I was born in St. Mary’s hospital near the city center, was raised in a pleasant suburb in South Manchester, and attended a normal primary and junior school in a nearby, tougher neighborhood, before attending Burnage for secondary school. Thirty-eight years after I attended Burnage, so, apparently, did Salman Abedi, the suspected Manchester Arena bomber.


The atrocity carried out by Abedi, for which the Islamic State has claimed credit,is probably worse than the dreadful bombing by the Irish Republican Armythat destroyed parts of the city center 21 years ago, an event that many believe played a key role in Manchester’srenaissance. At least in that case, the bombers gave a 90-minute warning that helped avoid loss of life. Abedi’sbarbaric act, by contrast, killed at least 22 people, many of them children.

In recent years, I have been heavily involved in the policy aspects of this great city’s economic revival. I chaired an economic advisory group to the Greater Manchester Council, and then served as Chair of the Cities Growth Commission, which advocated for the “Northern Powerhouse,” a program to link the cities of the British north into a cohesive economic unit. Subsequently, I briefly joined David Cameron’s government, to help implement the early stages of the Northern Powerhouse.

I have never attended a concert at the Manchester Arena, but it appears to be a great venue for the city.Just as Manchester Airport has emerged as a transport hub serving the Northern Powerhouse, the arena plays a similar role in terms of live entertainment. As the sad reports about thoseaffected indicate, attendees came from many parts of northern England (and beyond).

In the past couple of years, Manchester has received much praise for its economic revival, including its position at the geographic heart of the Northern Powerhouse, and I am sure this will continue. Employment levels and the regional PMI business surveys indicate that, for most of the past two years, economic momentum has been stronger in North West England than in the country as a whole, including London.Whether this is because of the Northern Powerhouse policy is difficultto infer; whatever the reason, it is hugely welcome and important to sustain.

To my occasional irritation, manypeople still wonder what exactly the Northern Powerhouseis. At its core, it represents the economic geography that lies within Liverpool to the west, Sheffield to the East, and Leeds to the northeast, with Manchester in the middle. The distance from Manchester to the center of any of those other cities is less than 40 miles (64 kilometers), which is shorter than the London Underground’s Central, Piccadilly, or District lines. If the 7-8 million people wholive in those cities – and in the numerous towns, villages,and other areas between them – can be connected via infrastructure, they can act as a single unitin terms of their roles as consumers and producers.

The Northern Powerhouse would thenbe a genuine structural game changer forBritain’s economy.Indeed, along with London, it would be a second dynamic economic zone that registers on a global scale. It is this simple premise that led the previous government to place my ideas at the core of its economic policies, and why the Northern Powerhouse has become so attractive to business here in the United Kingdom and overseas.

It is a thrilling prospect, and, despite being less than three years old, it is showing signs of progress.In fact, given the broader economic benefits of agglomeration, the Northern Powerhouse mantra can be extendedto the whole of the North of England, not least to include Hull and the North East. But it is what I often inelegantly call “Man-Sheff-Leeds-Pool”thatdistinguishes the Northern Powerhouse, and Manchester, which sits at the heart of it, is certainly among the early beneficiaries.

Despite this, I have frequently said to local policy leaders, business people, those from the philanthropic world, and others that unless the areas lying outside the immediate vicinity of central Manchester benefit fromregional dynamism, Greater Manchester’s success will be far from complete. Anyone wholookslittle more than a mile north, south, east,or west of Manchester’s Albert Square – never mind slightly less adjacent parts such as Oldham and Rochdale – can see that much needs to be improved, including education, skills training, and inclusiveness, in order to ensure long-termsuccess.

Whatever the warped motive of the 22-year-old Abedi,who evidentlyblew himself up along with the innocent victims, his reprehensible act willnot tarnish Manchester’s bright, hopeful future. I do notclaimtounderstand the world of terrorism,but I do know that those who live in and around Manchester and other cities need to feel part of their community and share its aspirations. Residents who identify with their community are less likely to harm it – and more likely to contribute actively to itsrenewed vigor.

Now more than ever, Manchester needs the vision that the Northern Powerhouse provides. It is a vision that other cities and regions would do well to emulate.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Honorary Professor of Economics at Manchester University and former Chairman of the British government's Review on Antimicrobial Resistance.

By Jim O’Neill

The Plant-Based Solution to Hunger

BERLIN – The way we eat in the industrialized world is unhealthy, unjust, and unsustainable. Far too much of the meat we consume is produced under questionable ecological, ethical, and social conditions. And now our industrial model for meat production is being exported to the global south – especially India and China – where meat consumption is rising among these countries’ emerging middle classes.


Worldwide, 300 million tons of meat are produced each year, and the United Nations Food and Agriculture Organization estimates that the annual amount will increase to 455 million tons by 2050 if demand continues to grow at the current rate. Such large amounts of meat can be produced only on an industrial scale, and at high social, political, and ecological costs.

Meat production is a tremendously inefficient use of agricultural land, because considerably more plant-based food is needed to feed livestock than we would need to feed ourselves directly through a plant-based diet. For example, producing one kilogram of chicken meat, pork, or beef requires 1.6, three, and eight kilograms of animal feed, respectively. This pits farmers and animal-feed producers against one another in a fierce competition over land.

Meanwhile, the production of soy – the world’s most important animal-feed grain – rose from 130 million tons in 1996 to 270 million tons in 2015, with 80% of output going to meat production, especially in China (70 million tons) and Europe (31 million tons). This expansion of soy agriculture, as a result of the growing demand for meat, is driving up land values. Consequently, in the global south, common land is being privatized, rainforests are being destroyed to make room for agricultural cultivation, and international agribusinesses are expropriating the land that one-third of the world’s people still rely on for their livelihoods.

Animal-feed production, and the intensive cultivation of agricultural land that it requires, is not only destroying ecosystems and reducing biodiversity; it is also fueling climate change. Worldwide, our industrial agriculture system produces an estimated 14% of the world’s greenhouse-gas emissions; including emissions indirectly linked to deforestation, and those associated with fertilizer production, increases that share to 24%. Moreover, the extensive use of fertilizers and pesticides – 99% of the world’s soy is genetically modified, and is routinely treated with pesticides – is also contaminating ground-water sources, destroying biodiversity, and eroding the soil.

We can no longer ignore the external costs of this system. If we are serious about addressing climate change and securing every human being’s right to proper nutrition and food security, we must challenge the presumption that an industrial agricultural model, let alone meat, is necessary to feed the world.

In fact, that presumption has little merit. The UN Environment Programme estimates that, by 2050, an area between the size of Brazil and India will have to be repurposed into cropland if current food-consumption trends continue. But if the 9.6 billion people expected to inhabit the planet by then were to have a plant-based diet, industrial meat production could be abandoned and all of them could be fed without the need for any additional agricultural land.

For many people, the competition for land is a fight for survival. Land access, which is more unevenly distributed than incomes, is a deciding factor in whether someone suffers from malnutrition: 20% of households that experience hunger do not own land, and 50% of people who experience hunger are small-scale farmers.

The industrial agriculture system’s production chains must be replaced with local, decentralized, and sustainable production chains. It is incumbent upon governments to prioritize people’s right to food and nutrition above private economic interests. People should not lose their livelihoods and food security for the benefit of agribusiness profits.

To move toward an ecologically sustainable and socially equitable agricultural model, we can leverage existing political frameworks, such as the European Union’s Common Agricultural Policy. As it stands now, large-scale industrial meat producers are profiting extensively from EU subsidies; but these subsidies could be redirected as investments in decentralized meat and grain production chains that adhere to a more sustainable model.

Doing so requires recognizing that realistic alternatives to industrial agriculture do exist. For example, “agroecology” – a system based on traditional and indigenous knowledge that is passed down through the generations – is easily adaptable to all geographic circumstances. In fact, in 2006 Jules Pretty of the University of Essex found that this mode of production can increase harvest yields by 79%.

But, to implement this shift, governments must ensure that all people have guaranteed access to land and potable water, and they need to create political frameworks to promote ecologically and socially just agricultural models – which, by definition, excludes industrial agriculture.

The challenge of feeding every human being should not be viewed in opposition to – or as somehow ruling out – questions of social justice and the future of the planet. Poverty, malnutrition, and hunger are a result of politics, not scarcity. Barbara Unmüßig is President of the Heinrich Böll Foundation.

By Barbara Unmüßig

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