There's been a lot of talk of Pittsburgh's "new economy" as a key reason for the city's star turn as host of this week's G-20 summit, but little has been said about the region's "next economy" -- what comes after the current slump.

It's beginning to be created under our noses.

Though seemingly abstract, the G-20's big-picture decisions -- on dialing down the extraordinary fiscal and monetary steps taken in the past year, building a new regulatory architecture for global finance, and starting the process towards a more balanced global economy and sustainable future -- have big implications for metropolitan areas.

Pittsburgh's stake in the G-20 deliberations goes beyond filling up local hotels and restaurants or hiring additional police -- and even beyond showcasing the region's resilience to the recession.

The fact is that Pittsburgh already is a global metropolis, with deep and growing ties to many of the G-20 countries because of its position as a supplier to the global steel industry (and still a maker of some types of steel), its burgeoning involvement in clean-energy sectors and its established position as a global center of education and health care.

Bayer, the German pharmaceutical conglomerate, has its U.S. headquarters in Pittsburgh, employing some 2,700 workers, including 1,200 at local medical-device manufacturer Medrad. Gamesa, the Spanish wind-energy giant, opened its first North American plant in Ebensburg, about 75 miles east of Pittsburgh. All told, more than 300 international firms from 26 different countries operate in the region, employing tens of thousands of people.

Pittsburgh's goods and services exports make up more than 14 percent of the region's gross metropolitan product, with the lion's share of goods headed to Canada, China, Japan and major economies in Europe -- all G-20 partners.

Given Pittsburgh's global status, the G-20 discussions have substantial implications for the future of the region's $100 billion economy.

The big question, at this summit and others in the future, is how to rebalance the global economy. The Great Recession followed a period of excessive consumption in the United States as Americans spent more on homes and consumer goods than they produced.

The fix is easy to state, but difficult to engineer. As Larry Summers, the head of the White House National Economic Council, said recently, "The rebuilt American economy must be more export-oriented and less consumption-oriented."

This rebalancing will require major and sustained action on currency values and trade policy in the United States as well as in large export economies like China, Germany and Japan (which will need to consume more). As this occurs, U.S. metro areas like Pittsburgh could benefit substantially given their unique assets and special niches.

While this won't quite be a 21st-century version of the equation "what Pittsburgh makes, the world takes," the combination of a more export-oriented trade policy and higher costs for carbon emissions (also to be discussed at the G-20 summit) present the region's economy with both opportunities and threats.

On the plus side, Pittsburgh could export more to the rest of the world and its steel-industry suppliers could benefit from increased exports by U.S. steelmakers. Higher prices for gasoline and jet fuel could mean that manufacturers and retailers in the United States would move away from far-flung networks of global suppliers and rely more on U.S. companies.

There is a potential downside for Pittsburgh, as well: for instance, as steelmakers in Germany and other countries export less and face higher costs of using U.S.-based suppliers, they might rely less on machinery and repair services from Pittsburgh.

To help ensure that the benefits of a rebalanced U.S. economy and a new climate regime outweigh the costs to the Pittsburgh area, local corporate, labor, political, university and civic leaders need a sharp regional business plan to guide the economic policies and innovation investments that they and the federal and state governments make in the Pittsburgh area.

Pittsburgh will have to continue to reclaim polluted industrial "brown fields" for post-industrial use -- an example for cities around the country and world.

Pittsburgh also will need to figure out how to draw more international traffic to its metropolitan airport, which currently offers only one direct flight to Europe.

The upshot: It is time for U.S. metropolitan regions to become more globally fluent and for national leaders to connect their big-picture policies to the fortunes of the urban areas that drive their economies. Only in this way can the United States, and Pittsburgh, move to the next stage of their economic evolution.

This week will bring a cornucopia of new data, an econo-nerd's dream. Unfortunately for some of us nerds, there won't be any releases on state and local government finances. (The Census Bureau generally has to wait for all states to report and, as you can imagine, some states are laggards.)

However, there will still be a lot in this week's numbers for those who follow state and local government finances, pay into state and local coffers, or consume predominantly state and local public services like education, roads, and health care. Here are a few trends worth watching:

First, Tuesday's March S&P/Case Shiller house price indexes will be important for states whose fortunes are tied to real estate, especially in the West and Southwest. Macroeconomic forecasters are predicting home prices will decline slightly compared to one year ago but continue to increase month-to-month, suggesting that perhaps the market has hit bottom.

That would be good news for the housing sector. However, research from Federal Reserve Board economists Byron Lutz, Raven Molloy, and Hui Shan suggests that any boon to state and local revenues would be minor. They calculate the housing bust per se generated only a $22 billion drop in taxes over three years, equivalent to roughly 3 percent of annual state and local revenues excluding federal funds.

Meanwhile, the latest Census data suggest that state taxes are growing, but at a pace that is slower than usual. More worrisome, the pace appears to be moderating. In recent weeks, California, New York, New Jersey, Pennsylvania, and Rhode Island have all reported taxes coming in below projections. Also, local property taxes are likely to remain in the doldrums for some time. They tend to respond to house price changes with a delay and thus just started showing the effects of the housing bust in late 2010. Property taxes recently turned positive again, but these gains are anemic by historical standards and likely caused by rate hikes in some jurisdictions rather than improving property values.

Next up this week are Bureau of Economic Analysis revisions to first quarter GDP. Macroeconomists will be attuned to how the revisions compare to advance estimates and what this portends for the recovery. They might also take note of whether these governments are detracting from growth - as they have done by an average of 0.2 percentage points in each quarter since 2008 - or contributing to it as usual. State and local watchers will be more focused on state and local spending, which unlike previous downturns, has declined in real per capita terms and not yet recovered.

That leads us to the biggest number to watch this week - Friday's jobs report. State and local employment is already down by 665,000 jobs or about 3.5 percent from its pre-recession peak. Recent trends suggest that cuts may be abating, but this total masks differences across subsectors - state education has been adding jobs while losses continue in all other subsectors, especially at the local level.

Ongoing state and local job losses also distinguish this recession from previous downturns in the modern era. This may be in keeping with the depths of this Great Recession. However, it's hard to imagine state and local residents aren't feeling the pinch of higher property tax burdens or lower services. To take one example, Governor Jerry Brown has proposed closing California's $16 billion budget gap by converting state employees to a four day work week and closing state parks. From a macro perspective, the fiscal tightening may be over. But that doesn't mean state and local governments aren't still a real drag.

Key messages and Policy Pointers

• Given the stalemate in U.N. climate negotiations, the best arena to strike a workable deal is among the members the Major Economies Forum on Energy and Climate (MEF).

• The 13 MEF members—including the EU-27 (but not double-counting the four EU countries that are also individual members of the MEF)—account for 81.3 percent of all global emissions.

• This proposal devises a fair compromise to break the impasse to develop a science-based approach for fairly sharing the carbon budget in order to have a 75 percent chance of avoiding dangerous climate change.

• To increase the likelihood of a future climate agreement, carbon accounting must shift from pro­duction-based inventories to consumption-based ones.

• The shares of a carbon budget to stay below 2 °C through 2050 are calculated by cumulative emis­sions since 1990, i.e. according to a short-horizon polluter pays principle, and national capability (income), and allocated to MEF members through emission rights. This proposed fair compromise addresses key concerns of major emitters.

• According to this accounting, no countries have negative carbon budgets, there is substantial time for greening major developing economies, and some developed countries need to institute very rapid reductions in emissions.

• To provide a ‘green ladder’ to developing countries and to ensure a fair global deal, it will be crucial to agree how to extend sufficient and predictable financial support and the rapid transfer of technology.

The most urgent and complicated ethical issue in addressing climate change is how human society will share the work of reducing greenhouse gases (GHG) emissions. Looking ahead to 2015 when a new international treaty on climate change should be agreed upon, we fear we are headed towards a train wreck.

Key developed countries have made it clear they will not accept any regime excluding emerging economies such as China and Brazil, and the U.S. and other ‘umbrella’ countries are calling for only voluntary, bottom-up com­mitments. Yet the major developing countries have made equity the sine qua non for any kind of agreement: they will not take on mandatory emission reduction targets with perceived implications for their economic growth and social development, unless the wealthier countries commit to deep emissions cuts and act first.

These entrenched positions between the different blocs have led to the current impasse, but as Nobel laureate economist and philosopher, Amaryta Sen pointed out, the perfect agreement that never happens is more unjust than an imperfect one that is obtainable.

What is a fair and feasible way to break the impasse, given that all efforts are faltering? The most difficult task is determining a country’s fair share of the required emissions reductions in a way that is politically feasible. After 20 years of negotiations and gridlock, it is clear that many conflicting principles of equity are brought to the table, so a solution will have to be based on some kind of ‘negotiated justice,’ or a ‘fair compromise,’ which will not be one preferred by just one group of countries.

A few basic requirements must be met. A feasible, fair and effective climate agreement must involve the largest emitters from both the developed and developing countries. Such an agreement must find a way to engage the latter without penalizing them or the former countries too much. In order to secure progress, above all it must be acceptable to the two world superpowers and top carbon emitters, China and the U.S.; with this leadership, in fact, other emitters will likely follow. This agreement could be forged in a ‘plurilateral’ setting where a limited number of countries come together first, and then be brought into the formal U.N. negotiations as the basis for a future deal, perhaps by 2015.

How can future negotiations on emissions reductions overcome such political inertia? We suggest that taking three manageable steps to a fair compromise will unlock progress.

First, negotiate a core agreement between the 13 members in the MEF (including the EU-27), which accounts for 81.3 percent of all global emissions. This makes the negotiations feasible, where deals can be struck that would be impossible in the vast U.N. forum.

Second, use consumption-based emissions accounting, which is much fairer than the cur­rent production/territorial-based accounting that all past agreements and negotiations have been based upon. These are relatively new numbers developed by the Norwegian research center CICERO, and have been vetted by the top scientific journals and increasingly utilized by policymakers.

Third, forge a fair compromise to allocate emissions rights. We propose a compromise based on a short-horizon ‘polluter pays principle’ and an indicator of national capability (income).

This third step in particular is a genuine compromise for both developed and developing countries, but it is re­quired to break the current gridlock. Each MEF member gives and takes something from this simple, workable framework and all gain a liveable planet in the future.

Throughout the paper we first explain why counting carbon emissions by consumption is far better and the im­plications of doing so, and we then introduce the MEF and why it is a promising arena for forging a bold compro­mise like the one so badly needed before 2015. We then calculate what the numbers actually mean for that group of countries and develop a proposal for a fair compromise that embodies a feasible but fair operationalization of the central equity principles of the U.N. climate treaty, i.e. action by countries according to their responsibility and capability. We conclude with a discussion of how a start in the MEF could lead to a new framework being brought into those broader negotiations.

Downloads

• Download the paper

SUMMARY

Replacing inefficient kerosene lighting with electric lighting or other clean alternatives can rapidly achieve development and energy access goals, save money and reduce climate warming. Many of the 250 million households that lack reliable access to electricity rely on inefficient and dangerous simple wick lamps and other kerosene-fueled light sources, using 4 to 25 billion liters of kerosene annually to meet basic lighting needs. Kerosene costs can be a significant household expense and subsidies are expensive. New information on kerosene lamp emissions reveals that their climate impacts are substantial. Eliminating current annual black carbon emissions would provide a climate benefit equivalent to 5 gigatons of carbon dioxide reductions over the next 20 years. Robust and low-cost technologies for supplanting simple wick and other kerosene-fueled lamps exist and are easily distributed and scalable. Improving household lighting offers a low-cost opportunity to improve development, cool the climate and reduce costs.

Download the full paper »

Downloads

• Download the full paper

In July 2013, the World Bank decided to phase-out lending for new coal-fired power plants in middle-income countries, except in rare circumstances where no financially feasible alternatives to coal exist. This decision was made for a combination of reasons including concerns about local air pollution and global climate change, as well as evidence that these projects have little trouble attracting private capital without World Bank involvement. Now, policymakers are considering whether the World Bank’s policy should also cover projects designed to retrofit existing coal-fired power plants in middle-income countries by adding scrubbers and other technologies that increase efficiency and reduce air pollution. 

There are several fundamental questions underlying this debate: Is financing coal power plant retrofits a good use of World Bank resources? If so, should the World Bank insist on the use of best available technologies when it finances these retrofits? These questions are vitally important, as retrofit technologies are designed to minimize toxic air pollutants, including soot and smog, which are both dangerous for human health and the world’s climate. Older coal plants without retrofit technologies are less efficient, and emit more pollutants per unit of coal burned than those with retrofits applied. Evidence shows that soot and smog can cause respiratory illness and asthma, especially in children and elderly people, and can diminish local agricultural production by reducing sunlight. Furthermore, in many countries coal plants are the single largest source of carbon dioxide emissions driving climate change. 

To help inform the policy debate, this analysis surveys the technologies in use in more than 2,000 coal-fired power plants currently in operation, under construction, or planned in middle-income countries. The findings reveal that roughly 70 percent of these power plants rely on old, inefficient technologies. Retrofitting these plants would reduce pollution, increase efficiency and save lives. In middle-income countries that do not mandate coal retrofits, the World Bank could play a helpful role in financing those improvements, particularly as part of broader policy reforms designed to reduce climate pollution and increase efficiency across the power sector.

Importantly, however, the data also show that important qualifications should be made. First, because coal is a major source of greenhouse gas emissions and retrofits are likely to keep coal plants operating longer, the World Bank should insist that retrofit projects occur within a context of national and local policy reforms designed to abate greenhouse gas pollution. Toward this end, the World Bank should continue to help countries build capacity to adopt and enforce climate pollution controls and other offsetting actions and policies. Second, the World Bank should insist that projects it finances use best available pollution control technologies. Already, the substantial majority of coal retrofits completed to date in middle-income countries have used best available technologies. These retrofits were almost universally financed exclusively by private capital. The World Bank should not use its capital to support inferior retrofit technologies that are below the standards already adopted by the private sector in middle-income countries.

Downloads

• Download the full report (PDF)

Most sub-Saharan African countries have long had to rely on foreign assistance or loans from international financial institutions to supply part of their foreign currency needs and finance part of their domestic investment, given their low levels of domestic saving. But now many of them, for the first time, are able to borrow in international financial markets, selling so-called eurobonds, which are usually denominated in dollars or euros. 

The sudden surge in the demand for international sovereign bonds issued by countries in a region that contains some of the world’s poorest countries is due to a variety of factors—including rapid growth and better economic policies in the region, high commodity prices, and low global interest rates. Increased global liquidity as well as investors’ diversification needs, at a time when the correlation between many global assets has increased, has also helped increase the attractiveness of the so-called “frontier” markets, including those in sub-Saharan Africa. At the same time, the issuance of international sovereign bonds is part of a number of African countries’ strategies to restructure their debt, finance infrastructure investments, and establish sovereign benchmarks to help develop the sub-sovereign and corporate bond market. The development of the domestic sovereign bond market in many countries has also help strengthen the technical capacity of finance ministries and debt management offices to issue international debt.

Whether the rash of borrowing by sub-Saharan governments (as well as a handful of corporate entities in the region) is sustainable over the medium to long term, however, is open to question. The low interest rate environment is set to change at some point—both raising borrowing costs for the countries and reducing investor interest. In addition, oil prices are falling, which makes it harder for oil-producing countries to service or refinance their loans. In the medium term, heady economic growth may not continue if debt proceeds are only mostly used for current spending, and debt is not adequately managed.

Download the full paper (PDF) »

This presentation by Alan Berube to the Cleveland EITC Forum explains how boosting low-income families' participation in tax credits can help put the city's workers, neighborhoods, and the local economy itself on more solid financial ground.

The metro program hosts and participates in a variety of public forums. To view a complete list of these events, please visit the metro program's Speeches and Events page which provides copies of major speeches, powerpoint presentations, event transcripts, and event summaries.

Downloads

• Download

Event Information

China’s economy has achieved astonishing growth over the past three decades, but it may be undergoing its most serious test of the reform era. In his newly published book, “China’s Guaranteed Bubble,” Ning Zhu argues that implicit Chinese government guarantees, which have helped drive economic investment and expansion, are also largely responsible for the challenges the country now faces. As growth slows, corporate earnings decline, and lending tightens for small and medium-sized businesses, the leverage ratios of China’s government and its corporations and households all have increased in recent years. How desperate is China’s debt situation, and what can be done to avert a major crisis?

On July 11, the John L. Thornton China Center at Brookings hosted Ning Zhu, deputy dean and professor of finance at the Shanghai Advanced Institute of Finance, Shanghai Jiaotong University. Zhu presented key findings from his research into Chinese sovereign, corporate, and household debt, and also introduced potential remedies to return China to the path of long-term sustainable growth. Following the presentation, Senior Fellow David Dollar moderated a discussion with Zhu before taking questions from the audience.

 Follow @BrookingsChina to join the conversation.

Video

• China’s economic bubble: Government guarantees and growing risks

Audio

• China’s economic bubble: Government guarantees and growing risks

Transcript

• Transcript (.pdf)

Event Materials

• China guaranteed bubble
• 20160711_china_economic_bubble_transcript

Editors’ Note: Outgoing British Prime Minister David Cameron once proudly stated that "there is no country in the Western world more open to Chinese investment than Britain." What will happen to the Sino-British relationship now that the U.K. will almost certainly leave the EU? This post originally appeared in the Nikkei Asia Review.

One of the many side effects of the June 23 British referendum on the European Union is that it will put an end to a honeymoon that had barely started less than a year ago, when George Osborne, the U.K.'s chancellor of the exchequer, declared on the eve of Chinese President Xi Jinping's state visit to Britain: "Let's stick together and make a golden decade for both our countries." Much has happened since the visit, during which Xi was feted as a guest of honor by Queen Elizabeth II at Buckingham Palace and at the British Parliament.

Over the past three years, British Prime Minister David Cameron and Osborne, (the man in effect running the country's China policy), seem to have partly anticipated the referendum's outcome by partnering with a few Asian countries outside the European Union—China especially—that would help finance some of the major infrastructure projects needed by the U.K., including nuclear plants, high-speed railways and airport infrastructure.

Now, in the turmoil following the referendum, Cameron is on the way out and Osborne's future remains uncertain. What will happen to the Sino-British relationship now that the U.K. will almost certainly leave the EU? Initial signals from China have been subdued. Foreign Ministry spokeswoman Hua Chunying recently said she believed that the impact of Brexit will be at all levels—not only in relations between China and Britain.

"China supports the European integration process and would like to see Europe playing a proactive role in international affairs. We have full confidence in the outlook for the development of China-EU ties," she said. This is a far cry from the enthusiastic comments in Chinese media on the Sino-British relationship in 2015, when Britain decided—much to the chagrin of Washington, Tokyo, Berlin and Paris—to be the first Western country to join the China-backed Asian Infrastructure Investment Bank (AIIB) and when it hosted Xi, hoping to attract massive Chinese foreign direct investment.

Cameron had proudly stated that "there is no country in the Western world more open to Chinese investment than Britain." The U.K. is currently Europe's top destination for Chinese FDI with a cumulative investment of $16.6 billion in the country since 2000 (including $3.3 billion in 2015 alone), and many memoranda of understanding signed during Xi's visit last fall. Will these be completed now that the British people have voted to leave the EU? A few months ago, Wang Jianlin, the head of China's Dalian Wanda Group—a commercial property and cinema chain operator—and a major investor in Europe warned: "Should Britain exit the EU, many Chinese companies would consider moving their European headquarters to other countries," adding that "Brexit would not be a smart choice for the U.K., as it would create more obstacles and challenges for investors and visa problems."

The Global Times, an English-language publication that is part of the Chinese Communist Party's People's Daily, was even less sympathetic to the British situation, writing in an editorial after the referendum, that the vote would "probably be a landmark event that proves Britain is heading in the direction of being a small country with few people, writing itself off as hopeless and acting recklessly."

The Beijing leadership—which uniquely went out of its way to support the Remain camp on several occasions—is puzzled by the referendum's result, which has not only created some disorder (an unbearable word in official party language) but also led to the resignation of the country's prime minister and the risk of further pro-autonomy referenda (namely, in Scotland). In the eyes of a communist party fully focused on retaining all its powers, Cameron made a serious mistake as the leader of a major country.

After all, China has no soft intentions toward the U.K. The two countries have had a complicated history. The Chinese still call the period starting in the mid-1800s— which included the British-led Opium Wars—the "century of humiliation." And it has only been 19 years since Hong Kong was returned to the motherland as a Chinese "special administrative region (SAR)." Not that the Cameron government has done very much to support its former territory: As the "golden decade" was unfolding, Hong Kong faced one of its most difficult times, with arrests of dissidents and the disappearance of some booksellers—including Lee Bo, who holds dual Sino-British citizenship and had published controversial books about Chinese leaders.

Now that British voters have spoken, chances of a backlash are running high. For a start, China is keen on keeping close involvement with the EU—its second-largest trading partner after the U.S., a source of technology transfers, and an ally in Beijing's "One Belt, One Road" projects in Europe and Asia, or in initiatives such as the AIIB and the country' Silk Road fund. In this respect China will almost certainly want to continue its close partnership with both EU institutions and individual countries, especially in Eastern and Central Europe where "One Belt, One Road" has been warmly welcomed. (Two countries recently visited by Xi, Poland and the Czech Republic, received substantial financial commitments from the Chinese president.)

London will, of course, continue to play a key role in finance as one of the world's top international trading platforms with Chinese treasury bonds issued in renminbi. Chinese visitors (including property buyers looking for fresh opportunities) will continue to flock to the city. But when it comes to being China's bridge to the EU, it is clear that Beijing will look for alternatives, particularly Germany, which is China's top economic partner in Europe. German Chancellor Angela Merkel recently made her ninth visit to China and managed to address a long list of key issues, including trade, investment and reciprocity, as well as human rights, new laws regulating nongovernment organizations and territorial claims in the South China Sea. In a powerful speech to Nanjing University students in Beijing on June 12, she stressed that the trust of the citizens can only be achieved by the rule of law, "rather than rule by law." It has been many years since British leaders have used this language in China. Even though some British politicians are now calling for a reassessment of the country's China policy, it is unlikely that the U.K. will do anything but accommodate China in order to preserve trade and investment in the post-Brexit uncertainty.

For all its openness, the "new U.K." will become less attractive market-wise. After Brexit, China will also lose a proponent of free trade within the EU—that is bad news as the 28-nation block is pondering the decision to grant market economy status to China, in accordance with an agreement under the World Trade Organization. Market economy status affects the way anti-dumping duties are used. Job-wise, the European steel industry is vulnerable. Since the adoption by the European Parliament of a nonbinding resolution against granting market economy status to China on May 12, many European politicians fear that more Chinese economic involvement in their home countries would lead to more cheap goods competing with European-made products and fewer jobs at home—hence a less favorable context for China. The chances of an EU-China free-trade agreement are becoming more remote now as the EU is more focused on finalizing a comprehensive agreement on investment with China. European companies have been lobbying for such a pact.

Although it will almost certainly make the most of an autonomous U.K. after conducting its own assessment, China does not like uncertainty—especially in turbulent times both at home and abroad. It worries about challenges against ruling parties, as well as an anti-globalization attitude that could affect its own image as a beneficiary of globalization. As for Europe, both Germany and France have strong relations with China. With their backing, the European Commission has just published an ambitious new strategy on China. It looks like the U.K. will not be part of it.