Opinion

Central Bankers’ Shifting Goalposts

BRUSSELS – The theme of this year’s meeting of the world’s central bankers in Jackson Hole, Wyoming, had little to do with monetary policy. “Fostering a Dynamic Global Economy” is, of course, an important topic. But it is telling that the European Central Bank chose, for its own annual gathering, a similar “non-monetary” topic (“Investment and Growth in Advanced Countries”).


There is nothing wrong with central bankers considering challenges in areas like growth, trade, and investment. But central banks were made independent precisely because it was understood that they would be held accountable for achieving their own objective of maintaining price stability, regardless of the economy’s underlying growth rate. So why is it that central bankers would rather look at external issues than focus on their own area of responsibility?

The answer, it seems, is that they cannot quite explain their current approach.

Conditions today are very favorable for monetary policymaking, particularly for the ECB – as a brief look at history makes clear. Since the creation of the Economic and Monetary Union (EMU) in January 1999, the ECB has been solely responsible for determining the EMU’s monetary policy. (Although national currencies remained in circulation until 2002, exchange rates were “irrevocably” fixed from 1999.)

The ECB’s job was hard from the beginning. After all, when the euro was born, global financial markets were in turmoil, owing to the Asian crisis of 1997 and the Russian default of 1998. The VIX index, which measures stock-market volatility, had hit 44% in August 1998, and during the euro’s first few years, it hovered around 25-30%, compared to around 12% today. While unemployment in the eurozone was declining, the rate was close to 10%, and it remained higher than today’s level, 9.3%, for all of 1999.

From a monetary-policy perspective, there was also a need to cope with the deflationary legacy of financial crisis. Indeed, when the eurozone was established, prices were increasing by less than 2%, and headline inflation was stuck at around 1%. Those two key indicators of monetary policy are at almost exactly the same levels today, but financial markets are significantly more settled now than they were then.

In 1999, despite slightly below-target inflation, high unemployment, and financial-market volatility, the ECB Governing Council did not even consider zero or negative interest rates, much less unconventional policy measures. Instead, its first action, in 1999, was to fix the main policy rate at 2%.

Over the course of that year, the ECB did cut the benchmark rate by 50 basis points, to the then-unprecedented level of 1.5%. But it did so just to give the economy a chance to recover. After a few months, it reversed course, putting the year-end policy rate back at 2%. Over the next year, the rate was raised to 3.75%, even though inflation had not accelerated by more than a few dozen basis points.

Today, the ECB is facing a much more comfortable situation. While inflation is undershooting the 2% target by a similar amount, the labor market appears to be in much better shape.

But is it? It is widely assumed that a deep recession induces many of the unemployed to leave the labor market, because looking for a job seems useless. If many such discouraged workers have left the labor market, a recovery of the unemployment rate to pre-recession levels can be misleading. That is why the unemployment rate needs to be considered in conjunction with the labor-force participation rate.

By that measure, the eurozone is actually doing much better today than in 1999. With the labor-force participation rate five percentage points higher that it was back then, it seems clear that fewer workers have been discouraged from job-seeking today than at the start of the EMU, and thus that there is less underused potential in the economy.

Against this background, it is difficult to explain why the ECB continues to insist that unconventional monetary-policy measures – such as negative rates and continued bond purchases – are needed. The long-term inflation outlook might be somewhat more uncertain today. But can a few dozen basis points in (poorly measured) long-term inflation expectations justify the need for massive quantitative easing and a policy rate 250 points lower than it was at a time of weaker market fundamentals?

This incongruity is not limited to Europe. In the United States, too, one finds a similar combination of inflation and unemployment today and two decades ago. In 1999, a core inflation rate of around 2%, combined with unemployment below 5%, justified a federal funds rate of 5% (and a “normal” balance sheet). Today, the Federal Reserve has kept its benchmark rate below 1.5% – 350 basis points lower than in 1999 – and has postponed any reduction in its bloated balance sheet.

In Japan, inflation is now higher than it was in the wake of the Asian financial crisis; unemployment is at its lowest level in 50 years; and the labor-force participation rate continues to reach record highs. Yet Japan, like the US and Europe, continues to display a quixotic tendency to tilt at deflation windmills, with rock-bottom interest rates and purchases of massive amounts of government debt.

Central bankers surely wish for a dynamic global economy. But that is not something they can influence much. Rather than discussing unrelated issues, they should be focused on explaining why their goalposts have shifted so much – and whether it is time to start moving them back. Daniel Gros is Director of the Center for European Policy Studies.

By Daniel Gros

China’s Shift to City-Led Growth

SHANGHAI – China has achieved some four decades of rapid economic growth. But one powerful source of growth has yet to be fully tapped: urbanization. Now, the potential of megacities as an engine of dynamism and increased prosperity is finally getting the high-level attention it deserves.


Over the last decade, China has been working to shift from a manufacturing-led growth model fueled by low-cost labor to an innovation-led, higher-value-added model underpinned by strong productivity gains. Urbanization will be critical to facilitate this shift, not least by enabling economies of scale.

Currently, though China is the world’s most populous country and its second-largest economy, only half the population lives in urbanized areas, and less than 10% reside permanently in megacities. And the country’s urbanization rate remains well below the global average.

Growth in China’s megacities – metropolitan areas with a population exceeding ten million – has long been heavily constrained by rigid state administrative divisions and planning agencies. Indeed, in pursuing rapid industrialization, megacities have often been less successful than smaller cities – which have largely evaded such constraints – in accumulating productive capital, attracting foreign direct investment (FDI), and demonstrating entrepreneurial spirit.

In the 1990s, the small city of Kunshan became China’s leading center for manufacturing electronic products. By integrating themselves into global supply chains, small cities in Guangdong province – including Dongguan, Huizhou, Shunde, and Zhongshan – have played a critical role in establishing China as the “Factory of the World.”

But while the success of smaller cities is to be celebrated, it is China’s megacities where the greatest potential to fuel future progress in productivity – and thus GDP growth – is to be found. So far, China has just four “first-tier” cities (with populations exceeding 20 million): Beijing, Shanghai, Guangzhou, and Shenzhen.

Given the size of China’s population and economy, that is not a lot. And, in fact, there is no reason to believe that these megacities have reached their capacity, in terms of population or contribution to economic growth. Moreover, China has many dynamic second-tier cities – such as Chengdu, Tianjin, Hangzhou, Wuhan, and Suzhou – that are capable of reaching first-tier status, if given the chance.

In order to maximize the potential of China’s cities, the government will need to be much more adaptive and flexible, especially regarding its notoriously strict control of urban land-development ratios. In particular, China must abandon its land-quota system, which not only limits the amount of land cities can develop for future productivity growth, but also allocates a disproportionate share of land to factories. Otherwise, urbanization will continue pushing up already-high housing costs, but not efficiently enough to power sustained growth and development.

The good news is that local governments are already working with the central government to alleviate or even eliminate existing administrative constraints. In China, cities’ administratively defined boundaries include both urban and rural jurisdictions, with the latter – called the “county” – engaged mainly in agriculture. For example, about half of Shanghai’s administrative jurisdiction of 6,340 square kilometers (2,448 square miles) is rural.

Local governments are now introducing so-called county-district conversions, in order to expand urban districts into rural jurisdictions. Such efforts, which the central government broadly supports, will enable more housing construction and industrial and commercial expansion.

Another strategy for advancing China’s transition toward a city-led growth model is to expand the role played by urban clusters that leverage the strength of first-tier cities to boost growth in less-developed areas. From an economic standpoint, the Yangtze and Pearl River Deltas – which encompass megacities like Guangzhou, Shanghai, and Shenzhen – are undoubtedly the most important such urban agglomerations, set to generate the higher future productivity gains from economies of scale and complementarity.

Here, too, China’s leadership has already caught on. This past March, Chinese Premier Li Keqiang announced a plan for the development of a city cluster in the Guangdong-Hong Kong-Macau Greater Bay Area, which covers nine cities, including Guangzhou and Shenzhen, as well as the special administration regions of Hong Kong and Macau.

From 2010 to 2016, the annual GDP of the Greater Bay Area soared from CN¥5.42 trillion ($82 billion) to CN¥9.35 trillion ($1.42 trillion), making it the world’s third-largest urban economy, after Tokyo and New York. Yet the population of the Guangdong-Hong Kong-Macau Greater Bay Area is growing fast, and its GDP per capita is less than half that of Tokyo, suggesting that its potential is nowhere near depleted.

Moreover, China’s leaders seem to be eyeing a second greater bay area, centered on Hangzhou Bay, which, because it overlaps with the Yangtze River Delta, could go a long way toward integrating that already-prosperous region. Such a cluster could cover the coastal megacity of Shanghai, as well as about ten more important cities across the Zhejiang and Jiangsu provinces. It would include world-class ports, such as the Port of Ningbo-Zhoushan (the world’s busiest in terms of cargo tonnage). And it would cover two of China’s 11 existing free-trade zones. The result would be a bay area on the scale of San Francisco and Tokyo.

The pace of China’s economic growth over the last four decades has been unprecedented. But China has yet to complete its rise to rich-country status. As it upgrades its economy to become more knowledge-based and technology-driven, it is again leveraging its strengths. There is no better example of this than the ongoing effort to tap the potential of megacities. Zhang Jun is Professor of Economics and Director of the China Center for Economic Studies at Fudan University.

By Zhang Jun

This Thing Called the American Dream

NEW YORK – In 1968, gonzo journalist Hunter S. Thompson mused about “this Death of the American Dream thing.” But what was this thing called the American Dream? What made it uniquely American?


For some, the Dream was Americans’ belief that their economy was a cornucopia of goods sure to bring a standard of living unimaginable in other economies: the dream of unrivaled plenty and comfort. But, while America had a superior wage level in the 1700s, Britain nearly closed the wage gap with America by the 1880s, and Germany came almost as close by 1913. Germany and France caught up with America by the 1970s.

For some economists, the Dream was the hope of an improving standard of living: the dream of progress. The economist Raj Chetty has been gauging the improvement people have made over what their parents had. He found that in 1940, nearly all young Americans – 90% of them, to be precise – had a household income higher than their parents had when they were young. That high percentage largely reflects America’s rapid productivity growth, which boosted wage rates. Yet from 1890 to 1940, rapid productivity growth was normal in Britain, Germany, and France as well – as it was in the “30 Glorious Years” from 1945 to 1975. So if the Dream was progress, Europeans could have dreamed of progress, too.

For many others, the Dream referred to the hope of America’s deprived – stirred by Eleanor Roosevelt, Martin Luther King, Jr., John Rawls, and Richard Rorty – that their country would somehow end the injustice of pay so low that it isolates them from the life of the country: the dream of inclusion. Yet such a dream could not be unique to the poor and marginalized in America. Certainly Arabs and Roma in Europe have dreamed of being integrated into society.

For other scholars, such as Richard Reeves and Isabel Sawhill, the American Dream is about mobility more generally. It is a hope held by Americans, in the working and middle classes as well as the working poor, of being lifted to a higher rung on the socioeconomic ladder, not a rise of the ladder itself: the dream of a higher income or social station relative to the average. In fact, from the mid-nineteenth century well into the twentieth, structural shifts wrought by technological change and demographics in America’s market economy lifted many partici-pants – while dropping others. Yet it is doubtful that this “musical chairs” was unique to Americans. From 1880 well into the 1920s, Germans and French saw their economies trans-formed by globalization; Britons had that experience even earlier.

What made the American Dream distinctive was neither the hope of winning the lottery nor of being buoyed by national market forces or public policy. It was the hope of achieving things, with all that that entails: drawing on one’s personal knowledge, trusting one’s intui-tion, venturing into the unknown. It reflected the deep need of these Americans to have the experience of succeeding at something: a craftsman’s gratification at seeing his mastery result in better work, or a merchant’s satisfaction at seeing “his ship come in.” It was success that mattered, not relative success (would anyone want to be the sole achiever?). And the process may have mattered more than the success.

There is abundant evidence of this goal, as Americans worked it into their books and plays. Mark Twain, though a dark writer, appreciated the quest for success of his young subjects. At the end of his 1885 classic, The Adventures of Huckleberry Finn, Finn aims to “light out for the Territory ahead of the rest...” Hollywood writers found other words for it. In the film Lit-tle Caesar (1931) Rico says, “Money’s okay, but it ain’t everything. Be somebody….Have your own way or nothing.” In A Star is Born (1937), the aspiring singer Esther Blodgett ex-claims that “I’m going out and have a real life! I’m gonna be somebody!” And in On the Wa-terfront (1954), Terry Malloy laments to his brother Charley “I coulda had class. I coulda been a contender. I coulda been somebody...”

Of course, dreaming of success could not have been widespread – a national phenomenon – had working Americans not had an economy that gave participants the freedom to be enter-prising: to try new ways and conceive new things. And dreams of success could not have be-come as widespread as they did had Americans not perceived that they could succeed regard-less of their national origin and their social status.

Observing that enterprise, exploration, and creation could be engaging, even engrossing, and deeply gratifying, Americans came to view working in businesses, from rural areas to cities, as a path to the Good Life. And that life’s rewards were not just money. To suppose that money was their focus – even in their dreams – is to miss what was distinctive in American life.

From the early nineteenth century to the middle of the twentieth, Americans were proving the wisdom of philosophers from Montaigne and Voltaire to Hegel and –a hit in America – Nie-tzsche: that the good life is about acting on the world and making “your garden grow,” not padding your bank account. Edmund S. Phelps, the 2006 Nobel laureate in economics, is Director of the Center on Capitalism and Society at Columbia University and author of Mass Flourishing.

By Edmund S. Phelps

How to Renew the European Project

BERLIN – The French presidential and legislative elections earlier this year have instilled new hope in the European integration project, by raising the prospect of deeper Franco-German cooperation. And yet some forms of cooperation, not least shared-liability schemes, would be a mistake. As long as member states have sovereignty over fiscal and economic policymaking, France and Germany should focus their efforts on making the eurozone itself more resilient.


French President Emmanuel Macron has started to pursue urgently needed reforms to boost economic growth, and it is crucial that he succeeds in this effort. France is suffering from high structural unemployment and low potential growth, and its public finances are unsustainable in the medium term. Improving this state of affairs will require factor- and product-market reforms, together with deep reductions in public-sector deficits.

From France’s standpoint, there is no better time than now to implement economic reforms. Although the eurozone is showing signs of a solid economic recovery, the European Central Bank is feeling increasing pressure to taper its ultra-expansionary monetary policies. Macron’s government thus has no time to lose, especially given that economic reforms can take time to deliver results, and the next elections are always just around the corner.

In light of this small window of opportunity, the last thing France needs is more joint investment schemes, as some have proposed. Economic growth requires not just capital investments, but also a business environment where innovation is encouraged and rewarded. And at any rate, it wouldn’t make sense for France to rely on other member states for investments. How can France claim to have restored its past grandeur if it is asking for Germany’s help?

Beyond implementing domestic reforms, France can still work with Germany to send a powerful message in support of European integration. But as both countries seek areas where they can cooperate, they must be careful to avoid policies that would threaten the eurozone’s long-term stability.

Unfortunately, some proposals currently being discussed would do precisely that. For example, establishing a shared eurozone-level budget or unemployment-insurance regime would, at this stage, sow the seeds of future conflicts. It is inconceivable that national policymakers, seeing to their countries’ own interests, would prevent these arrangements from mutating into permanent asymmetric transfer schemes.

To avoid distributional conflicts that would only poison the European project, any institutional reform that is proposed in the name of Franco-German cooperation should have to pass a strict sustainability test. European policymakers must ensure that there is congruence between the power to make decisions and the liabilities associated with any decisions that are made. It would be naive to think that member states will not offload the costs of their choices onto other member states if given the chance.

And besides, there are many other areas where France and Germany can strengthen cooperation and give new momentum to European integration. To determine where to focus their efforts, French and German leaders should keep three related principles in mind. First, any joint endeavor must respect diversity. The central strength of the European project is that it unites its member states in pursuit of peace and prosperity. But this requires a rich reservoir of ideas, not a single, unified approach.

The second principle is subsidiarity, which holds that decision-making should be decentralized whenever possible. This ensures that local and regional preferences are considered alongside the effects of eurozone-wide harmonization and economies of scale.

The last principle is congruity, to ensure that decision-makers are accountable for the outcomes of their decisions. This means that as long as European electorates insist on retaining sovereignty over fiscal and economic policymaking, shared liability will be a pipe dream.

With these principles in mind, France and Germany could take joint action on a variety of issues, such as climate change, the refugee crisis, and counter-terrorism. Coordinating efforts on these fronts would revitalize the integration process and contribute to Europe’s long-term stability and prosperity.

On economic policy, France and Germany should look for ways to fortify the eurozone and complete the single market. The privilege that government debt enjoys under current banking regulations should be eliminated, and an independent banking regulator, separate from the European Central Bank, should be established within the eurozone. Beyond that, it is time to start phasing in a viable sovereign-insolvency scheme for the bloc.

All of these initiatives could be implemented simultaneously with domestic reforms in France. But there is a risk that they will take a back seat to other proposals, such as shared-liability schemes. To avoid this pitfall, policymakers should consider the roots of the eurozone’s low growth potential, which is not a result of insufficient solidarity, but of individual member states abnegating their national responsibilities. Rather than provide a cure for these problems, shared liability would make them worse.

Proponents believe that more shared liability could pave the way for individual responsibility. But that is an illusion. Once in place, a shared liability scheme would reduce the incentives to deliver on structural reforms. And among German voters, nothing could undermine support for the European project more than yet another set of broken promises.

Christoph M. Schmidt is Chairman of the German Council of Economic Experts and President of the RWI – Leibniz Institute for Economic Research, one of Germany’s leading economic research institutes.

The Rising Price of Trump’s Border Wall

WASHINGTON, DC – As a candidate, Donald Trump insisted on one signature issue above all: the United States will build a wall along its border with Mexico, and Mexico will pay for it. Seven months after taking office, however, Trump has made no progress on either front: political support for a new wall is diminishing, and the chance that Mexico will pay anything for it is essentially zero and seems to be off the agenda.


Now, Trump is doubling down – and threatening to shut down the government, or even default on the federal debt, unless Congress provides funding for a wall that he promised would cost US taxpayers nothing. If Trump escalates this confrontation, the costs for Americans – in terms of economic uncertainty and slower growth – are likely to pile up.

The amounts of money involved are not large relative to the overall size of the US government. In Trump’s first full-year budget, initial spending on the wall was put at $1.6 billion, with the president estimating that the total cost will be $12 billion (although other estimates are considerably higher). Compared to total US government spending of $3.9 trillion in 2016, that is a drop in the bucket. The argument here is about principles: what would a border wall really achieve from a practical standpoint, and what would it symbolize? But the precise rules about purse strings determine how this argument will play out.

The president does have some discretion on spending – and the Department of Homeland Security has already shifted funds from other programs to pay for the development of prototypes. But a fundamental principle of the US Constitution is that Congress controls the purse strings – meaning that discretionary spending, such as outlays for a border wall, is subject to the formal appropriations process. Building a border wall, or significantly extending what is already there, is not feasible without congressional approval.

The appropriations process is complex and not always transparent to outsiders. Regular appropriations are supposed to be enacted by October 1 (the beginning of the government’s fiscal year). But there is now a long tradition of “continuing resolutions,” which provide funding for just part of a year. And supplemental appropriations bills can provide additional funding at any time in response to particular situations – such as the aftermath of a major hurricane.

The Republicans control both the Senate and the House of Representatives. And the House already granted approval for exactly what Trump wanted on the wall – the $1.6 billion was included in a broader $788 billion spending package, so the wall did not have to be debated separately.

Under current rules, 60 votes would be needed in the 100-member Senate to fund the wall, and the Democrats, with 48 seats, already managed to exclude this item from the spending bill earlier this year, which funded the government through September 30.

Now Trump has issued an ultimatum: fund the wall, or face a shutdown of the federal government – meaning that he and the Republicans would refuse to conclude any appropriations deal by October 1. Or perhaps the wall will become part of a showdown over how the debt ceiling for the federal government should be raised, with the deadline for doing so also likely to come around the end of September.

Complicating the issue further, some congressional Republicans – such as Senator Paul Rand of Kentucky and Congressman Mark Meadows of North Carolina – seem not to oppose some form of partial default or other reneging on debt by the US government. And remember that John Boehner stepped down as Speaker of the House in 2015 in part over similar budget struggles with the right wing of his party.

The impact of a debt default would be cataclysmic, and it seems unlikely that Trump would be foolish enough to go so far. But Goldman Sachs, a politically well-connected bank, puts the odds of a government shutdown at 50/50 – up from around 30% in May.

Government shutdowns are costly, impacting services and potentially payments to suppliers and citizens. But politicians never know exactly who will be blamed, and how much, until the shutdown happens. Although this approach didn’t go well for Republicans in 1995-96 or in 2013, there are clearly some people in the party who would like to try it again.

The costs to the economy of a shutdown are definitely negative. But, whereas a debt default by the federal government would amount to falling off a cliff, the costs of a shutdown build more gradually over time. It seems entirely consistent with Trump’s personality and style that he would try such a maneuver and see how it plays with his (slowly dwindling) electoral base.

Of course, there are many wildcards – including the apparently bad relationship between Trump and Mitch McConnell, the Republican leader in the Senate. The massive flooding in Texas – and the important helping role that the federal government can play – may also convince the White House that now is not the time for further disruption.

One thing is certain: Mexico is not going to pay for the border wall. What is less clear is how much Americans will be forced to pay – with uncertainty, disruption, and even a government shutdown – if Trump’s version of the wall is ever built.

Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

By Simon Johnson

Odiousness Ratings for Public Debt

CAMBRIDGE – On Friday August 25, the US government imposed financial sanctions on Venezuela, restricting the ability of President Nicolás Maduro’s government and its oil company, PDVSA, to issue new debt in American capital markets. The sanctions were imposed in response to the regime’s unconstitutional and fraudulent election of a constituent assembly and the de facto closure of the constitutionally elected National Assembly, with its two-thirds opposition majority.


Well-functioning markets should have shut down the Maduro regime’s access to finance long ago. The fact that they didn’t not only shocked the moral sentiments of many, but also revealed a fundamental defect in sovereign debt markets’ institutional architecture. Little good will come from Venezuela’s economic catastrophe, but one positive outcome would be a reform that puts such markets on a more solid financial – and moral – footing.

All debts imply a commitment by the borrower to repay what was borrowed, with interest. In the case of public debt, the pacta sunt servanda principle implies that future governments are obliged to respect the commitments assumed by their predecessors. But, as Alexander Sack argued in 1927, successor governments should not always do so: “When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc., this debt is odious for the people of the entire state.”

According to this doctrine, debt incurred by “odious” regimes should not be enforceable, because the lender should have known that the debt was incurred without the consent of the people or for their benefit. As Sack put it: “This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime.”

The odious debt idea was revived in an influential 2006 article by Seema Jayachandran and Michael Kremer, and in a 2010 report by the Center for Global Development (CGD), which proposed that economic sanctions include a mechanism aimed at preventing the accumulation of odious obligations. The mechanism would take the form of a declaration that debt issued by a particular government would be considered odious. In effect, this is what the Trump administration has just done.

Such a declaration reduces the flow of funds to odious regimes, owing to the risk that successor governments will renounce their predecessor’s debts without incurring legal and reputational costs (because participating countries’ courts will not enforce the debt contracts).

The CGD report proposes that a regime should be considered odious if it abuses the human rights of the population, employs military coercion, perpetrates electoral fraud, and mismanages or misappropriates public funds.

Clearly, the Venezuelan regime has ticked each of these boxes, making it a poster child for odiousness. But it did not tick them all at once: the plundering of Venezuela’s wealth, the gross violation of human rights, and the unconstitutionality of its decisions did not begin with the election of the new Constituent Assembly on July 30. It was a slow process that started many years earlier.

For example, it is difficult to argue that the destruction of the Venezuelan oil industry, which lost almost half its global market share since President Hugo Chávez took power nearly 20 years ago, was carried out in the interest of the Venezuelan people. And it happened amid the biggest and longest oil-price boom in history, at a time when the country was sitting on the world’s largest reserves and PDVSA was borrowing on a massive scale.

It is even harder to argue that PDVSA’s dollar-denominated debt was legitimate when it was sold for local currency at below-market prices, to politically connected individuals, who often borrowed the needed bolivars overnight from public-sector banks, just to flip the bonds immediately to Wall Street. As Barclay’s Alejandro Grisanti documented in 2008, beneficiaries pocketed an instant profit equal to 20-30% of the face value of the debt.

None of these considerations prevented the Venezuelan regime from borrowing, often at the ridiculous rate of 50%, as happened in May with Goldman Sachs’s purchase of “hunger bonds.” It also did not stop institutions such as JP Morgan from including Venezuelan bonds in their emerging-market bond indexes and purchasing more than $1 billion dollars of these bonds for the exchange-traded and mutual funds that it offers to the public as investment vehicles.

That is why we propose the adoption of an odiousness rating system, akin to credit ratings. While the latter focus on the ability and willingness of the borrower to pay, the odiousness rating would provide an estimate of how likely it is that a court would decide that the debt falls with the regime. The scale would be continuous, going from, say, O (odious repressive dictatorships) to W (well-managed and fully functioning democracies). There would be intermediate notches: dictatorships that promote economic development and thus benefit the population (think of South Korea in the 1970s) and corrupt democracies characterized by economic mismanagement and graft (think of Argentina during the Kirchner administration).

Odiousness ratings could become part of soft international law, used by courts when deciding how to enforce debt contracts, and they could help determine which bonds are included in the calculation of emerging-market indexes. The same country could have bonds which, being issued in different periods, have different odiousness ratings and enforcement probabilities. Because a more odious rating would reduce investors’ appetite for bonds, downgrades could limit the irresponsible debt accumulation and economic disasters brought about by regimes such as Venezuela’s – and possibly accelerate their demise.

There are many open questions. Who should issue the rating? What should the methodology be? How can the rater be protected from political pressure? But all of these questions can be answered. The best way to do that is to start the discussion.

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. Ugo Panizza is Pictet Chair and Professor of Economics at the Graduate Institute, Geneva.

By Ricardo Hausmann and Ugo Panizza

How to Achieve the SDGs

MEDELLÍN – In September 2015, the leaders of 193 countries agreed to achieve the Sustainable Development Goals (SDGs) – the most ambitious plan ever to promote human development – by 2030. Nearly two years into the process, there are plenty of reasons for concern: the amount of financing raised so far is unlikely to be sufficient, and not all countries have adequate data to measure progress on the ground. It is enough to test even the most diehard optimist.


But there is still plenty of reason for hope. I recently visited Colombia, which, at long last, is leaving behind its decades-long civil conflict with the Revolutionary Armed Forces of Colombia (FARC) and setting itself up for SDG success.

In any country, achieving the SDGs will require government, business, aid agencies, multilateral banks, and civil society to work together, adopt flexible approaches, share knowledge, measure progress effectively, and recognize that the various targets are interconnected. Colombia seems to understand this, and is pursuing an integrated approach that leverages the strengths of each actor.

Start with government. According to Colombia’s finance minister, Mauricio Cárdenas Santamaría, the country is localizing the SDGs through the planning department, using the SDG framework to guide reforms relating to the implementation of the peace agreement with the FARC, OECD accession, the National Development Plan, and the Paris climate agreement.

Meanwhile, Cárdenas points out, Colombia’s policymakers are taking care to highlight the benefits of these efforts – in areas ranging from health care and education to employment – for the public. They recognize that a top-down approach will not work: to achieve the SDGs, all levels of the government, economy, and society must feel connected to the goals, understanding the concrete impact that achieving them will have.

To get business on board, the Bogotá Chamber of Commerce, led by Monica de Greiff, is raising awareness of the SDGs among its 640,000 members and providing skills training in sectors like construction and health care. The aim is to achieve the SDGs’ targets while increasing the economy’s overall competitiveness.

The good news is that, as Bruce MacMaster of the Bogotá-based business advocacy and think tank ANDI noted, businesses have a strong incentive to consolidate the gains of the peace process, especially in remote areas that have traditionally been cut off from government services. And, indeed, in Medellín, once the illicit drug capital of the world, the leaders of small and large businesses with whom I met are already integrating the SDGs into their business plans and supply chains.

ANDI is working to support that effort, including by raising awareness among diverse industries, from mining to beverages, regarding their interest in keeping their water resources clean and abundant. The result will be more robust protection of watersheds – crucial to meet Goal 6, on water and sanitation, among others.

Of course, in a truly bottom-up process, strong engagement with local communities and civil society is vital. And Colombian youth are already deeply involved in promoting and implementing the SDGs. On my visit, youth leaders in Medellín’s Comuna 13 proudly showed off the progress in their low-income neighborhood.

In the 1990s, when Medellín had the world’s highest homicide rate, Comuna 13 was among the city’s most dangerous areas. Today, it is a vibrant area benefiting from strategic investments in public transportation (including cable cars and new metro stations), education (libraries and schools), and security. Similar strategic investments will be needed throughout the country to ensure that nobody is left behind; the empowerment of women and girls being one crucial objective.

Leadership by municipal and regional governments to facilitate such local-level progress is particularly important. All of the SDGs have targets directly related to the responsibilities of local and regional governments, particularly regarding their role in delivering basic services. But it is SDG 11 – which focuses on making cities inclusive, safe, resilient, and sustainable – that is the lynchpin of the localization process.

That process has the support of the World Bank, the United Nations, and other international development partners, which are working to provide more effective and coordinated support to all levels of government. But success will demand that local governments urgently improve their own capacity in key areas, such as expenditure control, revenue expansion, responsible fund-raising, and creditworthiness.

In Colombia, the municipal development bank FINDETER is aiming to promote such learning, as it strengthens local governments’ public finances and their management and planning capacity. This will enable local governments to invest more effectively in infrastructure and service delivery, thereby advancing local development objectives. Enabling institutions like FINDETER will be critical to localizing the SDG-implementation process to leverage the efforts of local governments elsewhere.

Beyond capacity-building, local governments must engage in smart innovation. In Colombia, innovation has been essential to Medellín’s progress in reducing urban crime and violence, improving mobility, and mitigating social exclusion. The same is true of the city of Bucaramanga’s success in attracting private investment and forging public-private partnerships to improve its competitiveness.

Careful planning processes, including a strong national framework and effective monitoring, are needed to support such innovation and anticipate potential challenges and shocks. For example, in Colombia, obstacles may arise from continued drug trafficking, as well as from the ongoing crisis in Venezuela, which is causing thousands of desperately poor people to pour across Colombia’s border.


Colombia still has a long way to go before achieving the SDGs. But its localized and integrated approach has put it on the right path. Other countries would do well to follow suit.

Mahmoud Mohieldin is the World Bank Group’s Senior Vice President for the 2030 Development Agenda, United Nations Relations, and Partnerships, and is a former minister of investment of Egypt.

By Mahmoud Mohieldin

This Thing Called the American Dream

NEW YORK – In 1968, gonzo journalist Hunter S. Thompson mused about “this Death of the American Dream thing.” But what was this thing called the American Dream? What made it uniquely American?


For some, the Dream was Americans’ belief that their economy was a cornucopia of goods sure to bring a standard of living unimaginable in other economies: the dream of unrivaled plenty and comfort. But, while America had a superior wage level in the 1700s, Britain nearly closed the wage gap with America by the 1880s, and Germany came almost as close by 1913. Germany and France caught up with America by the 1970s.

For some economists, the Dream was the hope of an improving standard of living: the dream of progress. The economist Raj Chetty has been gauging the improvement people have made over what their parents had. He found that in 1940, nearly all young Americans – 90% of them, to be precise – had a household income higher than their parents had when they were young. That high percentage largely reflects America’s rapid productivity growth, which boosted wage rates. Yet from 1890 to 1940, rapid productivity growth was normal in Britain, Germany, and France as well – as it was in the “30 Glorious Years” from 1945 to 1975. So if the Dream was progress, Europeans could have dreamed of progress, too.

For many others, the Dream referred to the hope of America’s deprived – stirred by Eleanor Roosevelt, Martin Luther King, Jr., John Rawls, and Richard Rorty – that their country would somehow end the injustice of pay so low that it isolates them from the life of the country: the dream of inclusion. Yet such a dream could not be unique to the poor and marginalized in America. Certainly Arabs and Roma in Europe have dreamed of being integrated into society.

For other scholars, such as Richard Reeves and Isabel Sawhill, the American Dream is about mobility more generally. It is a hope held by Americans, in the working and middle classes as well as the working poor, of being lifted to a higher rung on the socioeconomic ladder, not a rise of the ladder itself: the dream of a higher income or social station relative to the average. In fact, from the mid-nineteenth century well into the twentieth, structural shifts wrought by technological change and demographics in America’s market economy lifted many participants – while dropping others. Yet it is doubtful that this “musical chairs” was unique to Americans. From 1880 well into the 1920s, Germans and French saw their economies transformed by globalization; Britons had that experience even earlier.

What made the American Dream distinctive was neither the hope of winning the lottery nor of being buoyed by national market forces or public policy. It was the hope of achieving things, with all that that entails: drawing on one’s personal knowledge, trusting one’s intuition, venturing into the unknown. It reflected the deep need of these Americans to have the experience of succeeding at something: a craftsman’s gratification at seeing his mastery result in better work, or a merchant’s satisfaction at seeing “his ship come in.” It was success that mattered, not relative success (would anyone want to be the sole achiever?). And the process may have mattered more than the success.

There is abundant evidence of this goal, as Americans worked it into their books and plays. Mark Twain, though a dark writer, appreciated the quest for success of his young subjects. At the end of his 1885 classic, The Adventures of Huckleberry Finn, Finn aims to “light out for the Territory ahead of the rest...” Hollywood writers found other words for it. In the film Little Caesar (1931) Rico says, “Money’s okay, but it ain’t everything. Be somebody….Have your own way or nothing.” In A Star is Born (1937), the aspiring singer Esther Blodgett exclaims that “I’m going out and have a real life! I’m gonna be somebody!” And in On the Waterfront (1954), Terry Malloy laments to his brother Charley “I coulda had class. I coulda been a contender. I coulda been somebody...”

Of course, dreaming of success could not have been widespread – a national phenomenon – had working Americans not had an economy that gave participants the freedom to be enterprising: to try new ways and conceive new things. And dreams of success could not have become as widespread as they did had Americans not perceived that they could succeed regardless of their national origin and their social status.

Observing that enterprise, exploration, and creation could be engaging, even engrossing, and deeply gratifying, Americans came to view working in businesses, from rural areas to cities, as a path to the Good Life. And that life’s rewards were not just money. To suppose that money was their focus – even in their dreams – is to miss what was distinctive in American life.

From the early nineteenth century to the middle of the twentieth, Americans were proving the wisdom of philosophers from Montaigne and Voltaire to Hegel and –a hit in America – Nietzsche: that the good life is about acting on the world and making “your garden grow,” not padding your bank account. Edmund Phelps, the 2006 Nobel Laureate in Economics and author of Mass Flourishing, is Director of the Center on Capitalism and Society at Columbia University.

The Achilles Heel of Putin’s Regime

WASHINGTON, DC – Russian President Vladimir Putin’s authority is weaker than it seems. In fact, the bedrock of Putin’s power – the clientelist economic arrangements that he has assiduously consolidated over the past generation – has become the main threat to his political survival. The reason is simple: the lack of credible property rights under Putin’s system of crony capitalism forces senior Russian officials and oligarchs to hold their money abroad, largely within the jurisdictions of the Western governments against which Putin rails.


With the help of carefully selected loyalists, Putin has established three circles of power: the state, state-owned corporations, and loyalists’ “private” companies. The process began during his tenure as chairman of the Federal Security Service, from 1998 to 1999, when he wielded control over the secret police.

But it was Putin’s first term as president, from 2000 to 2004, that amounts to a true masterpiece of power consolidation by a budding authoritarian. First, in the summer of 2000, he took charge of Russian television. Next, he established his “vertical of power” over the state administration and the regional administrations, as well as his “dictatorship of law” over the judicial system. And then, in the 2003 parliamentary election, Putin gained solid control over both the State Duma (the lower house) and the Federation Council (the upper house) of the Russian legislature. At the pinnacle of state power, the Security Council, he installed three KGB generals: Sergei Ivanov, Nikolai Patrushev, and Aleksandr Bortnikov.

To strengthen the second circle of his power, Putin seized control over the state corporations one by one, beginning with Gazprom in May 2001, by appointing loyalists as chief executives and chairmen. The three top managers of state-owned companies are Igor Sechin of Rosneft, Aleksei Miller of Gazprom, and Sergei Chemezov of Rostec.
Putin clinched his authority over the state sector in 2007, during his second term, with the creation of vast corporations that have since expanded substantially, with cheap state funding, often securing monopolies in their industries. Because these companies are treated as a source of power and rents, rather than of economic growth, they are peculiarly disinterested in competition, innovation, entrepreneurship, and productivity. The only relevant standard of corporate governance is loyalty to Putin.

Then there is the third circle of power, comprising Putin’s most powerful cronies – the top four appear to be Gennady Timchenko, Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov – and their companies. Their behavior is usually viewed as kleptocratic, though Putin has used his legislative authority to ensure that many of their dubious activities are technically legal. For example, cronies are entitled to buy assets from state companies at discretionary prices and fill government procurement orders with no competition.

The system Putin has created is strikingly similar to the czarist system that prevailed until the “Great Reforms” of the 1860s. Indeed, Putin is often called a new czar, because his power is legally unlimited (though his preoccupation with opinion polls shows that public sentiment does matter). Rather than promoting institutional development, he has pursued far-reaching deinstitutionalization, aimed at concentrating executive, legislative, and judicial powers in his own hands.

But in the absence of credible property rights, wealthy Russians, including Putin’s own cronies, know that the only safe places to keep their assets are abroad. And, thanks to a fully convertible ruble and the absence of restrictions on capital outflows, they can transfer their gains to offshore tax havens. This has naturally created a fourth circle of power, over which Putin has no control: the offshore tax havens themselves. And those havens are no longer as secure as they once were.

With the Financial Action Task Force having reduced bank secrecy in Switzerland and cleaned up the many small island tax havens, there are two major remaining destinations: the United States and the United Kingdom, both of which permit anonymous currency inflows and allow asset owners to hide their identity. In the US, tens of billions of dollars move through law firms’ opaque bank accounts each year, facilitating money laundering.

In general, Western governments do not really exert much control over such activities within their borders. In fact, while the assets of Putin’s cronies in the US and the European Union are supposed to be frozen, according to the sanctions imposed after Russia’s illegal annexation of Crimea in 2014, hardly any have been found.
It is time to change this, by initiating comprehensive investigations into the assets of sanctioned people. The US and the UK, which presumably hold the vast majority of Russian offshore wealth, must also catch up with their counterparts in most of Europe by prohibiting the anonymity of beneficiary owners. The US should also proscribe the use of attorney-client privilege to transfer anonymous or dirty money into the country.

The good news is that progress may be on the horizon. A new bill, which US President Donald Trump signed into law on August 2, calls for far-reaching investigations into “senior foreign political figures and oligarchs in the Russian Federation” – including “spouses, children, parents, and siblings” – and their assets within 180 days.

As the veteran liberal Russian politician Leonid Gozman points out, “To judge from the statements of our propagandists, the Russian state is very valuable,” but it is also “a very fragile construct that can be destroyed by anything,” from the fight against corruption to efforts to oust kleptocratic officials. Given the vast stocks of Russian capital that have piled up in New York, London, and elsewhere, the West is ideally positioned to exploit this fragility.

Anders Åslund is a senior fellow at the Atlantic Council in Washington. He is the author of Ukraine: What Went Wrong and How to Fix It and, most recently, Europe's Growth Challenge (with Simeon Djankov). He is currently writing a book on Russia’s crony capitalism.

China’s Misguided Exchange-Rate Machinations

BEIJING – On August 11, 2015, the People’s Bank of China (PBOC) established that the central parity of the renminbi’s exchange rate against the US dollar would be set with reference to the previous trading day’s closing price, within a 2% band. It was a bold step toward a more flexible, market-driven exchange rate. But the announcement of the reform caused the market to panic, triggering a 3% decline in the renminbi in just four trading days. So it was quickly abandoned.


That policy reversal, while understandable, is regrettable. For the rest of 2015, the PBOC struggled to prevent the renminbi from weakening. Having spent a huge amount of foreign-exchange reserves, it decided in February 2016 to introduce a new rule for setting the central parity rate.

According to the replacement rule, the central parity rate would take into account not just the previous trading day’s closing price, but also the “theoretical exchange rate” that would keep the index of the China Foreign Exchange Trade System, a 24-currency basket, unchanged over the previous 24 hours. In other words, whenever there was a change in the US dollar index, the PBOC would have to intervene in the foreign-exchange market to align the market-determined renminbi-dollar exchange rate with the theoretical exchange rate that kept the CFETS index stable.

According to the PBOC, with an uncertain dollar index, the introduction of a basket of currencies into the price-setting process was needed to enable two-way fluctuations of the renminbi-dollar exchange rate. The market was allowed to verify whether the PBOC had followed the rate-setting rule, but it didn’t determine the exchange rate; that task was carried out by the PBOC.

In any case, when the dollar index is rising, the new rule seemed to work just fine. Given persistent downward pressure on the exchange rate, if the PBOC allowed the renminbi to fall against the rising dollar index, the CFETS index would stay more or less constant. This meant that the PBOC could follow the rate-setting rule without resorting to intervention too often.

But, all else being equal, if the dollar index was falling, the PBOC would have to set a higher central parity rate for the renminbi. This implies that the PBOC could be forced to sell its US dollar reserves, already substantially depleted, to push up artificially the closing price of the renminbi and keep the spot rate within the 2% band.

In July 2017, the PBOC decided to make an additional change to the rate-setting rule to correct for “big market swings” and “irrational herd behavior.” By introducing a so-called “countercyclical factor” to the rate-setting equation, the PBOC attempted to temper the disproportionate impact of depreciation expectations, relative to improvements in the Chinese economy’s fundamentals, on the exchange rate.

The logic is debatable. But the real problem with the change is that no one outside the PBOC knows how the countercyclical factor is quantified, much less how it is weighted against the previous day’s closing price or the theoretical exchange rate. As a result, the market does not merely have a substantially reduced role in setting the exchange rate; it can’t even check whether the PBOC is following its rate-setting rule for the central parity. This means that the monetary authorities have even more discretion than they had before.

The August 2015 reforms were rightly aimed at making China’s exchange-rate system more transparent, market-driven, and flexible. With the new rule, the PBOC effectively backpedaled. And it didn’t have to: with the benefit of hindsight, it seems reasonable to assume that, had the PBOC simply been more patient, it could have stuck with the August 2015 reform. Within a few weeks or even days, calm probably would have returned to the market, and the PBOC would have made important progress.

In recent months, the Chinese economy has shown credible signs of stabilization; capital outflows have ebbed, at least for the time being; and the financial market has remained much calmer than in 2015. In this more favorable context, the PBOC, rather than churning out unnecessarily complicated new rate-setting rules, needs to return to reform.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.

By Yu Yongding

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