INTRODUCTION

Over the past decade, the focused attention of African nations, the United States, U.N. agencies and other multilateral partners has brought significant progress toward achievement of the Millennium Development Goals (MDGs) in health and malaria control and elimination. The potential contribution of these strategies to long-term peace-building objectives and overall regional prosperity is of paramount significance in sub-regions such as the Horn of Africa and Western Africa that are facing the challenges of malaria and other health crises compounded by identity-based conflicts.

National campaigns to address health Millennium Development Goals through cross-ethnic campaigns tackling basic hygiene and malaria have proven effective in reducing child infant mortality while also contributing to comprehensive efforts to overcome health disparities and achieve higher levels of societal well-being.

There is also growing if nascent research to suggest that health and other humanitarian interventions can result in additional benefits to both recipients and donors alike.

The social, economic and political fault lines of conflicts, according to a new study, are most pronounced in Africa within nations (as opposed to international conflicts). Addressing issues of disparate resource allocations in areas such as health could be a primary factor in mitigating such intra-national conflicts. However, to date there has been insufficient research on and policy attention to the potential for wedding proven life-saving health solutions such as malaria intervention to conflict mitigation or other non-health benefits.

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Egypt needs a new inclusive and equitable economic growth model. Unemployment has spiked since the 2011 revolution, clearing over 12 percent, a figure which is not expected to decrease for several years at least and the situation is even more dire for the country’s youth. While the likely IMF program will offer the macroeconomy a measure of relief, it cannot reverse decades of mismanagement. Egypt’s private sector may therefore not experience a recovery in the near future. The government’s situation looks similarly stressed as its gross debt is projected to rise from 73 percent of GDP in 2010 to 79 percent this year. Combined with the confusion surrounding the government’s structure and organization, it is unlikely that the public sector can fill the jobs gap or provide the needed high quality and affordable goods and services. However, the legal limbo surrounding inclusive business models (IBs) as well as intermediary support organizations (ISOs), which are supposed to provide the needed support to IBs, has unnecessarily shrunk this sector of the economy and disabled it from playing its necessary role.

In his inaugural speech, Egyptian President Mohamed Morsi portrayed himself as a president for all Egyptians, including the menial and underprivileged rickshaw drivers. The Muslim Brotherhood’s Al-Nahda Program emphasizes social justice and a consensus vision across all groups in society. The new leadership is committed to social innovation with “a national strategy to develop mechanisms to support innovation dealing with community issues.”

Although the constitution has not yet been drafted and there is currently no parliament, this moment in time contains a golden opportunity for the government of Egypt to capture the energy, civic engagement and entrepreneurial spirit in the country. Under Mubarak, Egypt’s economic growth and business policy reforms helped foster the private sector, but 85 percent of the population continued to live under $5/day and this ratio did not change during the decade of growth prior to 2008. Safeguards against abuse and incentives for inclusiveness were missing, and the economy became dominated by crony capitalism with wealth concentrated in the hands of a few. People’s perception of inequity and dissatisfaction with public services increased. The governance indicators of “Voice & Accountability” and “Control of Corruption” deteriorated from 2000 to 2010, even though there was a steady improvement in “Regulatory Quality.”

Egypt needs an enabling legal framework to promote a more equitable growth model. Such a framework should encourage forms of inclusive businesses (such as cooperatives) and ISOs that could help micro and small enterprises. These firms (with less than 50 employees) represent nearly 99 percent of all non-public sector, non-agricultural firms and provide about 80 percent of employment in Egypt. But their expansion has been restricted because of the weakness of the ecosystem of incubators, angel investor networks, microfinance institutions (MFIs) and impact investors necessary to allow young entrepreneurs to start up and grow. This policy paper argues that legal and regulatory reforms that encourage ISOs and allow new forms of inclusive business to register and operate are a necessary first step towards a new inclusive growth model.

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Human activity has dramatically accelerated the extinction of species. Man-made habitat alteration has been the leading cause, in combination with direct exploitation. Now climate change threatens to increase extinction rates even more. Adaptation to climate change requires integration of climate impacts in planning and action for biodiversity conservation, and the overall task requires funding and action similar to that discussed—but not yet delivered—under the Framework Convention on Climate Change (FCCC) or the Convention on Biological Diversity (CBD). Preservation in the wild—in situ—is the top priority, but it is clear that many more species will disappear and we will lose access to the genetic information they contain unless their DNA is also kept ex situ—in captivity, cultivation, or preserved storage.

A global network of facilities should be organized to preserve DNA for every known species and for new species as they are described. This “DNA Net Earth” will be a safety net for biodiversity that can provide genetic libraries for research and commerce, be used to recover species that are endangered, and offer the potential to selectively restore species that have gone extinct. Only a small fraction of the 1.9 million known species are currently maintained as living organisms in cultivation or captivity, or maintained frozen as viable seeds or cells. Just a fraction more species have DNA in dead cells or in an extracted form that are held in long-term frozen storage. Progress towards DNA Net Earth is limited by a lack of shared priorities. Three steps can provide a way forward: developing a website to track progress on preservation whose key information is managed directly by contributing facilities; establishing new incentives and mandates for contributing specimens, including grant, publication and permit requirements; and engaging the public in collection.

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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.

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Editor’s Note: An interactive feature, highlighting the key findings from this report, can be found here.

Over a billion people worldwide live on less than $1.25 a day. But that number is falling. This has given credence to the idea that extreme poverty can be eliminated in a generation. A new study by Brookings researchers examines the prospects for ending extreme poverty by 2030 and the factors that will determine progress toward this goal. Below are some of the key findings:

1. We are at a unique point in history where there are more people in the world living right around the $1.25 mark than at any other income level. This implies that equitable growth in the developing world will result in more movement of people across the poverty line than across any other level.

2. Sustaining the trend rate of global poverty reduction requires that each year a new set of individuals is primed to cross the international poverty line. This will become increasingly difficult as some of the poorest of the poor struggle to make enough progress to approach the $1.25 threshold over the next twenty years.

3. The period from 1990 to 2030 resembles a relay race in which responsibility for leading the charge on global poverty reduction passes between China, India and sub-Saharan Africa. China has driven progress over the last twenty years, but with its poverty rate now down in the single digits, the baton is being passed to India. India has the capacity to deliver sustained progress on global poverty reduction over the next decade based on modest assumptions of equitable growth. Once India’s poverty is largely exhausted, it will be up to sub-Saharan Africa to run the final relay leg and bring the baton home. This poses a significant challenge as most of Africa’s poor people start a long way behind the poverty line.

4. As global poverty approaches zero, it becomes increasingly concentrated in countries where the record of and prospects for poverty reduction are weakest. Today, a third of the world’s poor live in fragile states but this share could rise to half in 2018 and nearly two-thirds in 2030.

5. The World Bank has recently set a goal to reduce extreme poverty around the world to under 3 percent by 2030. It is unlikely that this goal can be achieved by stronger than expected growth across the developing world, or greater income equality within each developing country, alone. Both factors are needed simultaneously.

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INTRODUCTION

If you are one of those government officials, finance experts, development professionals or NGO members whose eyes glaze over when you see an article on procurement, you are the audience I want to address. Procurement is the purchase of works, goods and services by individuals or firms, or government entities in the case of public procurement. We all make procurement decisions in our everyday lives. We pride ourselves on making good decisions and being able to apply discretion and judgment. Now imagine if you were improving your home and were constrained by pages and pages of legal and technical regulations that take away that discretion. You would soon question whether those regulations were relevant and whether they provide any value or simply delayed and jeopardized good decision-making. Worse yet, imagine if you had to follow rules that someone else outside your family, your community or your country set for you. While public procurement requires a higher standard of governance than personal procurement, developing countries and other stakeholders are raising these questions regarding the policies set by multilateral aid institutions.

In November 2013, the World Bank released the report of its first stage efforts in reforming its procurement policy as it relates to the projects it finances. As the World Bank enters the second stage in designing the actual reforms, the “development community” faces a crucial moment and opportunity to refine and reform a fundamental instrument in the development toolbox—one that has been treated for too long as a “plumbing and wiring” issue that ignores the broader public policy implications and the growing burden of conflicting objectives, regulations, incentives and political polemics. The purpose of this paper is to examine concerns regarding reform of multilateral agencies’ public procurement policies, enhance awareness of what is at stake and lay the groundwork for the reform discussions at development institutions that will take place over the next year.

I should alert you, however, that I am neither a procurement specialist, nor am I a lawyer or an engineer. I would describe myself as a development practitioner. After decades of working on infrastructure projects and on multilateral operational policy, I have maintained a deep respect for my procurement colleagues who have protected my proverbial “backside.” One quickly learns in this business that a mistake in procurement can result in serious consequences as one sits in the middle of the converging, and often conflicting, interests of governments, donors, private sector and, of course, affected communities. The procurement policies applied by the multilateral finance institutions have been responsible for enhancing competition, deepening transparency and raising the integrity of investment in developing countries, as well as opening markets for developed and developing countries’ businesses. As the world of public procurement has evolved, however, one also learns that procurement is becoming more than just getting the “plumbing and wiring” right. Indeed, the role and application of public procurement policies and practices is an essential element of design and implementation with crucial consequences for the quality of outcomes. The case set forth in this paper lays out the factors driving the need for major reform of multilateral banks’ procurement policies—rather than simply adapting existing policies. This paper also presents the major challenges to be addressed in designing the reforms and the tensions to be resolved or balanced as the World Bank enters the more detailed design stage of its reform effort.

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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.

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It has been nearly three years since the New Deal for Engagement in Fragile States (“the New Deal”) was endorsed at the Fourth High-Level Forum on Aid Effectiveness in Busan in 2011. Given the minimal progress of fragile states in achieving the Millennium Development Goals1 (MDGs) and that conflict and fragility are part of the deliberations on the post-2015 global development agenda, it is appropriate to assess New Deal implementation to date and see what early lessons can be learned. This review is intended to provide insights on current efforts and provoke thought and discussion on how implementation could be improved.

Since the New Deal was endorsed in Busan, a group of fragile states known as the g7+ has emerged to champion support for fragile states. The group started in 2010 with seven members but by May, 2014, its membership spanned 20 countries from four continents. The g7+ represents the first time a genuine constituency of fragile states has begun to engage with one other and with the international community about the causes of fragility and how to address it. Despite the modest progress that has been made and the enthusiasm of New Deal focal points among donors, civil society, and g7+ pilot countries, implementation of the New Deal to date is characterized by unmet conditions, unrealistic expectations about timeframes, and a lack of sustained dialogue about the causes of conflict and fragility. Overall, the Peacebuilding and Statebuilding Goals (PSGs) are being adopted into national development plans (Figure 1), but donors and civil society have concerns about the g7+ pilot countries’ commitment to use these goals as the basis for an inclusive and sustained dialogue about the causes of conflict and fragility. Conversely, although some elements of the TRUST component (Figure 1) are being implemented, g7+ pilot country governments have concerns about donors’ commitments to share risk and increase the use of country systems. Progress has been made in the implementation of the FOCUS elements (Figure 1), in terms of the number of fragility assessments conducted and compacts or mutual accountability frameworks established, but concern exists at the global level that there has been an overemphasis on the technical exercises and insufficient effort put toward political dialogue at the country level. The effort put into technical processes should not overshadow sustained political dialogue, and the tendency to rely on conditionality as the basis for New Deal partnership should be consciously avoided.

Greater investment should be made in rolling out the New Deal to reduce the amount of confusion surrounding it at the country level. This would perhaps best be accomplished by building the capacity within the different stakeholder groups, and especially by bolstering dedicated staffing for the New Deal. Donors and the g7+ should increase their domestic advocacy and educate stakeholders about the expectations inherent to New Deal participation, the potential risk-benefit tradeoffs, and the underlying assumptions about their willingness to do things differently. A combination of fewer conditions, increased investment, more inclusive political dialogue, and better domestic advocacy could render the New Deal a transformative approach to addressing the challenges and opportunities that exist in fragile and conflict-affected states.

This paper is an independent assessment of New Deal implementation. It is based on a review of New Deal documentation and interviews with focal points in g7+ pilot countries, lead donor agencies, and civil society. The interviews were conducted during April, May, and June 2014. This review focuses on the original seven pilot countries that volunteered to implement the New Deal: Afghanistan, the Central African Republic, the Democratic Republic of Congo (DRC), Liberia, South Sudan, Sierra Leone and Timor Leste. The review also includes Somalia, given that a compact was developed there in 2013.

In the United States, the official poverty rate for 2012 stood at 15 percent based on the national poverty line which is equivalent to around $16 per person per day. Of the 46.5 million Americans living in poverty, 20.4 million live under half the poverty line. This begs the question of just how poor America’s poorest people are.

Poverty, in one form or other, exists in every country. But the most acute, absolute manifestations of poverty are assumed to be limited to the developing world. This is reflected in the fact that rich countries tend to set higher poverty lines than poor countries, and that global poverty estimates have traditionally excluded industrialized countries and their populations altogether.

An important study on U.S. poverty by Luke Shaefer and Kathryn Edin gently challenges this assumption. Using an alternative dataset from the one employed for the official U.S. poverty measure, Shaefer and Edin show that millions of Americans live on less than $2 a day—a threshold commonly used to measure poverty in the developing world. Depending on the exact definitions used, they find that up to 5 percent of American households with children are shown to fall under this parsimonious poverty line.

Methodologies for measuring poverty differ wildly both within and across countries, so comparisons and their interpretation demand extreme care.

These numbers are intended to shock—and they succeed. The United States is known for having higher inequality and a less generous social safety net than many affluent countries in Europe, but the acute deprivations that flow from this are less understood. A crude comparison of Shaefer and Edin’s estimates with the World Bank’s official $2 a day poverty estimates for developing economies would place the United States level with or behind a large set of countries, including Russia (0.1 percent), the West Bank and Gaza (0.3 percent), Jordan (1.6 percent), Albania (1.7 percent), urban Argentina (1.9 percent), urban China (3.5 percent), and Thailand (4.1 percent). Many of these countries are recipients of American foreign aid. However, methodologies for measuring poverty differ wildly both within and across countries, so such comparisons and their interpretation demand extreme care.

This brief is organized into two parts. In the first part, we examine the welfare of America’s poorest people using a variety of different data sources and definitions. These generate estimates of the number of Americans living under $2 a day that range from 12 million all the way down to zero. This wide spectrum reflects not only a lack of agreement on how poverty can most reliably be measured, but the particular ways in which poverty is, and isn’t, manifested in the U.S.. In the second part, we reexamine America’s $2 a day poverty in the context of global poverty. We begin by identifying the source and definition of poverty that most faithfully replicates the World Bank’s official poverty measure for the developing world to allow a fairer comparison between the U.S. and developing nations. We then compare the characteristics of poverty in the U.S. and the developing world to provide a more complete picture of the nature of poverty in these different settings. Finally, we explain why comparisons of poverty in the U.S. and the developing world, despite their limitations and pitfalls, are likely to become more common.

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This policy brief explores the economic rationale and strategic imperative of an ambitious domestic and global trade agenda from the perspective of the United States. International trade is often viewed through the relatively narrow prism of trade-offs that might be made among domestic sectors or between trading partners, but it is important to consider also the impact that increased trade has on global growth, development and security. With that context in mind, this paper assesses the implications of the Asia-Pacific and European trade negotiations underway, including for countries that are not participating but aspire to join. It outlines some of the challenges that stand in the way of completion and ways in which they can be addressed. It examines whether the focus on "mega-regional" trade agreementscomes at the expense of broader liberalization or acts as a catalyst to develop higher standards than might otherwise be possible. It concludes with policy recommendations for action by governments, legislators and stakeholders to address concerns that have been raised and create greater domestic support.

It is fair to ask whether we should be concerned about the future of international trade policy when dire developments are threatening the security interests of the United States and its partners in the Middle East, Asia, Africa and Europe. In the Middle East, significant areas of Iraq have been overrun by a toxic offshoot of Al-Qaeda, civil war in Syria rages with no end in sight, and the Israeli-Palestinian peace process is in tatters. Nuclear negotiations with Iran have run into trouble, while Libya and Egypt face continuing instability and domestic challenges. In Asia, historic rivalries and disputes over territory have heightened tensions across the region, most acutely by China’s aggressive moves in the South China Sea towards Vietnam, Japan and the Philippines. Nuclear-armed North Korea remains isolated, reckless and unpredictable. In Africa, countries are struggling with rising terrorism, violence and corruption. In Europe, Russia continues to foment instability and destruction in eastern Ukraine. And within the European Union, lagging economic recovery and the surge in support for extremist parties have left people fearful of increasing violence against immigrants and minority groups and skeptical of further integration.

It is tempting to focus solely on these pressing problems and defer less urgent issues—such as forging new disciplines for international trade—to another day, especially when such issues pose challenges of their own. But that would be a mistake. A key motivation in building greater domestic and international consensus for advancing trade liberalization now is precisely the role that greater economic integration can play in opening up new avenues of opportunity for promoting development and increasing economic prosperity. Such initiatives can help stabilize key regions and strengthen the security of the United States and its partners.

The last century provides a powerful example of how expanding trade relations can help reduce global tensions and raise living standards. Following World War II, building stronger economic cooperation was a centerpiece of allied efforts to erase battle scars and embrace former enemies. In defeat, the economies of Germany, Italy and Japan faced ruin and people were on the verge of starvation. The United States led efforts to rebuild Europe and to repair Japan’s economy. A key element of the Marshall Plan, which established the foundation for unprecedented growth and the level of European integration that exists today, was to revive trade by reducing tariffs. Russia, and the eastern part of Europe that it controlled, refused to participate or receive such assistance. Decades later, as the Cold War ended, the United States and Western Europe sought to make up for lost time by providing significant technical and financial assistance to help integrate central and eastern European countries with the rest of Europe and the global economy.

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In the developing world, more than 200 million children under the age of five years are at risk of not reaching their full development potential because they suffer from the negative consequences of poverty, nutritional deficiencies and inadequate learning opportunities. Overall, 165 million children (one in four) are stunted, and 90 percent of these children live in Africa and Asia. And though some progress has been made globally, child malnutrition remains a serious public health problem with enormous human and economic costs. Worldwide, only about 50 percent of children are enrolled in preprimary education, and in low-income countries a mere 17 percent. And though more and more children are going to school, millions have little to show for it. By some accounts, 250 million children of primary school age cannot read even part of a sentence. Some of these children have never been to school (58 million); but more often, they perform poorly despite having spent several years in school, which reflects not only the poor quality of many schools but also the multiple disadvantages that characterize their early life.

Ensuring that all children—regardless of their place of birth and parental income or education level—have access to opportunities that will allow them to reach their full potential requires investing early in their development. To develop their cognitive, linguistic, socioemotional and physical skills and abilities, children need good nutrition and health, opportunities for play, nurture and learning with caregivers, early stimulation and protection from violence and neglect.

The Case for Early Interventions 

The arguments for investing in children early are simple and convincing. Early investment makes sense scientifically. The brain is almost fully developed by age three, providing a prime opportunity to achieve high gains. We know that the rapid rate of development of the brain’s neural pathways is responsible for an individual’s cognitive, social and emotional development, and there is solid evidence that nutrition and stimulation during the first 1,000 days of life are linked to brain development. 

Early investment makes sense in terms of equity. The playing field has the highest chances of being leveled early on, and we know that programs have a higher impact for young children from poorer families. In the United States, for example, increasing preschool enrollment to 100 percent for low-income children would reduce disparities in school readiness by 24 percent between black and white children and by 35 percent between Hispanic and white children. We also know that equalizing initial endowments through early childhood development (ECD) programs is far more cost-effective than compensating for differences in outcomes later in life. 

Early investment makes sense economically. Investing early prevents higher costs down the road, and interventions yield a high return on investment. There is evidence of the benefits for the individual and for society more broadly. For instance, at the level of the individual, in Jamaica children participating in an early childhood stimulation program were found to have 25 percent higher earnings 20 years later compared with children who did not participate. At the economy-wide level, eliminating malnutrition is estimated to increase gross domestic product by 1 to 2 percentage points annually, while countries with school systems that have a 10-percentage-point advantage in the proportion of students

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The Girls’ Education Imperative

In 1948, the world’s nations came together and agreed that “everyone has a right to education,” boys and girls and rich and poor alike. This vision set forth in the Universal Declaration of Human Rights has been reinforced over the decades and today the girls who still fight to be educated are not cases for charity but actively pursuing what is rightfully theirs. In recent years, girls’ education has also received attention because, in the words of the United Nations, “education is not only a right but a passport to human development.” Evidence has been mounting on the pivotal role that educating a girl or a woman plays in improving health, social, and economic outcomes, not only for herself but her children, family, and community. Educating girls helps improve health: one study published in The Lancet, the world’s leading medical journal, found that increasing girls’ education was responsible for more than half of the reduction in child mortality between 1970 and 2009. The economic benefits are clear: former chief economist at the World Bank and United States Secretary of the Treasury Lawrence Summers concluded that girls’ education “may well be the highest-return investment available in the developing world” due to the benefits women, their families and societies reap. And because women make up a large share of the world’s farmers, improvements in girls’ education also lead to increased agricultural output and productivity.

Progress in Girls’ Education

Given the importance of girls’ education, for girls’ own dignity and rights and for a broad sweep of development outcomes, it is no surprise that global agendas have focused heavily on it. For more than two decades, girls’ education has been recognized as a global priority and incorporated into development targets, which has rallied governments, nongovernmental organizations (NGOs), foundations and international organizations. From the 1990 Education for All (EFA) Goals to the 1995 Fourth World Conference on Women in Beijing and to the 2000 Millennium Development Goals (MDGs), girls’ education has been a priority, particularly in international development communities. Perhaps the most influential of these has been the MDGs, which reinforce parts of the EFA goals by focusing two of their eight goals on education, namely on achieving universal primary education and achieving gender parity in both primary and secondary school.

Progress in enrolling children, especially girls, into primary school is seen by many as a development success story. Indeed there is much to celebrate. Since 1990, the number of girls in low-income countries enrolling in primary school has increased two-and-a-half times, from 23.6 million to nearly 63 million in 2012. This has translated into a large increase in the girl-boy ratio in low-income countries, from 82 to 95 girls per 100 boys in primary school. For low- and lower-middle-income countries combined, the number of girls enrolled reached over 200 million girls in 2012, an almost 80 percent increase, and globally two-thirds of countries have near-equal numbers of boys and girls enrolled at the primary level. 

In 1990, in South and West Asia, there were only 74 girls enrolled in primary school for every 100 boys, but by 2012 the region had achieved equal numbers of boys and girls in school.

This progress was largely made by the leadership of developing country governments that prioritized expansion of primary schooling opportunities and by the global community’s support of governments focused on reaching the MDGs. Some of the biggest gains have been in regions struggling the most. In 1990, in South and West Asia, there were only 74 girls enrolled in primary school for every 100 boys, but by 2012 the region had achieved equal numbers of boys and girls in school. Similarly, sub-Saharan Africa, which had the lowest levels of girls in school in 1990, has experienced marked improvement, with the girl-boy ratio increasing from 83 to 92 girls per 100 boys in primary school.

The focus on getting girls into school has helped close gender gaps in relation to other factors too, such as wealth and location of residence. The fact that family income and urban or rural locality are now the most likely indicators of school enrollment is a big victory for girls’ education. The World Inequality Database on Education (WIDE) shows that in India, for example, 38 percent of girls and 25 percent of boys of primary school age were not in school in 1992. By 2005, that gap had narrowed to 24 percent of girls and 22 percent of boys. However, today the gap between the richest and poorest children’s attendance is much starker—37 percent of children from the poorest 20 percent of families versus just 11 percent of the richest 20 percent are out of school. And in many areas, girls actually outpace boys, especially at higher levels of education. In one third of countries, there are now more girls than boys enrolled in secondary school. Also, girls often do better once in school, with boys making up 75 percent of grade-repeaters in primary school.

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The United Nations will convene a major international conference on Financing for Development (FfD) in Addis Ababa, Ethiopia from July 13 to 16, 2015, to discuss financing for the post-2015 agenda on sustainable development. This conference, the third of its kind, will hope to replicate the success of the Monterrey conference in 2002 that has been credited with providing the glue to bind countries to the pursuit of the Millennium Development Goals (MDGs).

The analogy is pertinent but should not be taken too far. The most visible part of the Monterrey Consensus was the commitment by rich countries to “make concrete efforts towards the target of 0.7 percent of gross national product” as official development assistance (ODA). This was anchored in a clear premise that “each country has primary responsibility for its own economic and social development,” which includes support for market-oriented policies that encourage the private sector. While not all of the Monterrey targets have been met, there has been a considerable increase in resources flowing to developing countries, as a central plank of efforts to achieve the MDGs.

Today, aid issues remain pivotal for a significant number of countries, but they are less relevant for an even larger number of countries. The core principles of Monterrey need to be reaffirmed again in 2015, but if the world is to follow-through on a universal sustainable development agenda, it must address the multi-layered financing priorities spanning all countries. A simple “30-30-130” mnemonic helps to illustrate the point. There are 193 U.N. member states. Of these, only around 30 are still low-income countries (33 at the latest count). These are the economies that are, and will continue to be, the most heavily dependent on aid as the world looks to how it should implement the sustainable development goals (SDGs). Conversely, there are only around 30 “donor” countries (including 28 members of the OECD Development Assistance Committee, or DAC) that have made international commitments to provide more aid. For the remaining 130 or so emerging middle-income economies that have achieved higher levels of average prosperity, aid discussions risk forming a sideshow to the real issues that constrain their pursuit of sustainable development. The bottom line is that for most countries, the Financing for Development conference should unlock finance from many different sources, including but not exclusively aid, to implement the SDGs.

Addis will take place in the context of sluggish global growth, an upsurge in conflict, considerable strains in multilateral 2 political cooperation, and challenging ODA prospects in many countries.

There are other differences between Addis and Monterrey. Monterrey took place after agreement had been reached on the MDGs, while Addis will precede formal agreement on the SDGs by a few months. Monterrey was focused on a government-to-government agreement, while Addis should be relevant to a far larger number of stakeholders—including businesses, academics, civil society, scientists, and local authorities. Monterrey was held against a backdrop of general optimism about the global economy and widespread desire for intensified international collaboration following the terrorist events of September 11, 2001. Meanwhile, Addis will take place in the context of sluggish global growth, an upsurge in conflict, considerable strains in multilateral political cooperation, and challenging ODA prospects in many countries. In addition, regulators are working to reduce risk-taking by large financial institutions, increasing the costs of providing long-term capital to developing countries.

Against this backdrop, an Intergovernmental Committee of Experts on Sustainable Development Finance (ICESDF) crafted a report for the United Nations on financing options for sustainable development. The report provides an excellent overview of issues and the current state of global financing, and presents over 100 recommendations. But it falls short on prescribing the most important priorities and action steps on which leaders should focus at Addis.

This paper seeks to identify such a priority list of actions, with emphasis on the near-term deliverables that could instigate critical changes in trajectories towards 2030. At the same time, the paper does not aim to describe the full range of outcomes that need to be in place by roughly 2025 in order to achieve the SDGs by their likely deadline of 2030. Addis will be a critical forum to provide political momentum to a few of the many useful efforts already underway on improving global development finance. Time is short, so there is limited ability to introduce new topics or ideas or to build consensus where none already exists.

We identify three criteria for identifying top priorities for agreement in Addis:

• Priorities should draw from, and build on, on-going work—including the ICESDF report and the outputs „„of several other international workstreams on finance that are underway.
• Agreements should have significant consequences for successful implementation of the SDGs at the coun„„try, regional or global level.
• Recommendations should be clearly actionable, with next steps in implementation that are easy to under„„stand and easy to confirm when completed.

It is not necessary (or desirable) that every important topic be resolved in Addis. In practical terms, negotiators face two groups of issues. First are those on which solutions can be negotiated in time for the July conference. Second are those for which the problems are too complex to be solved by July, but which are still crucial to be resolved over the coming year or two if the SDGs are to be achieved. For this second group of issues, the intergovernmental agreement can set specific timetables for resolving each problem at hand. There is some precedent for this, including in the 2005 U.N. World Summit, which included timetables for some commitments. What is most critical is that the moment be used to anchor and advance processes that will shift toward creating a global financing system for achieving sustainable development across all countries. Committing to timetables for action and building on reforms already undertaken could be important ways of enhancing the credibility of new agreements.

In this paper, we lay out nine areas where we believe important progress can be made. In each area, we start from identifying a gap or issue that could present an obstacle to the successful implementation of the SDGs if left unattended. In some cases the gaps will affect all countries, in other cases only a subset of countries. But we believe that the package of actions, taken as a whole, reflects a balance of opportunities, responsibilities and benefits for all countries. We also believe that by making the discussion issue-focused, the needs for financing can be balanced with policy actions that will be required to make sure financing is effectively and efficiently deployed.

In addition to the nine areas listed below, there are other commitments already made which have not yet been met. We urge renewed efforts to meet these commitments, but also recognize that political and financial realities must be managed to make progress. Such commitments include meeting the Monterrey Consensus target to provide 0.7 percent of GNI in official development assistance (ODA), the May 2005 agreement of all EC-15 countries to reach that target by 2015, and bringing the Doha Development Round of trade talks to a successful conclusion. These remain important and relevant, but in this paper we choose to focus on new areas and fresh ideas so as to avoid treading over well-worn territory again.

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.

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Strong Growth and Changing Composition 

External financial flows to sub-Saharan Africa (defined as the sum of gross private capital flows, official development assistance (ODA), and remittances to the region) have not only grown rapidly since 1990, but their composition has also changed significantly. The volume of external flows to the region increased from $20 billion in 1990 to above $120 billion in 2012. Most of this increase in external flows to sub-Saharan Africa can be attributed to the increase in private capital flows and the growth of remittances, especially since 2005 (see Figure 1).

Figure 1. Sub-Saharan Africa: External Flows (1990-2012, in USD billions)

As also displayed in Figure 1, in 1990 the composition of external flows to sub-Saharan Africa was about 62 percent ODA, 31 percent gross inflows from the private sector, and about 7 percent remittances. However, by 2012, ODA accounted for about 22 percent of external flows to Africa, a share comparable to that of remittances (24 percent) and less than half the share of gross private capital flows (54 percent). Also notably, in 1990, FDI flows were greater than ODA flows in only two countries (Liberia and Nigeria) in sub-Saharan Africa excluding South Africa, but 22 years later, 17 countries received more FDI than ODA in 2012—suggesting that sub-Saharan African countries are increasingly becoming less aid dependent (see Figure 2).

Figure 2. Sub-Saharan Africa: Number of Countries Where FDI is Greater than ODA (1990-2012)

But to what extent have these changes in the scale and composition of external flows to sub-Saharan Africa equally benefited countries in the region? Did the rising tide lift all boats? Is aid really dying? Are all countries attracting private capital flows and benefiting from remittances to the same degree? Finally, how does external finance compare with domestic finance? 

The False Demise of ODA

A closer look at the data indicates that, clearly, ODA is not dead, though its role is changing. For instance, middle-income countries (MICs) are experiencing the sharpest decline in ODA as a share of total external flows to the region, while aid flows account for more than half of external flows in fragile as well as low-income countries (LICs) and resource-poor landlocked countries (see Figure 3 and Appendix).

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The Central African Republic (CAR), a landlocked country roughly the size of Texas, has endured a nearly constant state of political crisis since its independence from France in 1960. In fact, in the post-colonial era, the CAR has experienced only 10 years of rule under a democratically elected leader, Ange-Félix Patassé, from 1993 to 2003. Four of the CAR’s past five presidents have been removed from power through unconstitutional means, and each of these transitions has been marred by political instability and violence. Fragile attempts to build democratic political institutions and establish the rule of law have been undermined by coups, mutinies, and further lawlessness, making cycles of violence tragically the norm in the CAR.

The country’s current crisis (2012–present) stems from political tensions and competition for power between the predominantly Muslim Séléka rebel coalition and the government of President Francois Bozizé, as well as unresolved grievances from the CAR’s last conflict (2006–2007). Since the Séléka’s overthrow of the government in March 2013 and concurrent occupation of large areas of the country, the conflict has evolved to encompass an ethno-religious dimension: So-called Christian defense militias named the anti-balaka emerged to counter the Séléka alliance, but in effect sought revenge against the CAR’s Muslim minority (about 15 percent of the population), including civilians. During a March 2014 trip to the Central African Republic, United Nations High Commissioner for Human Rights Navi Pillay remarked that “the inter-communal hatred remains at a terrifying level,” as reports of atrocities and pre-genocidal indicators continued to surface. Even today, horrific crimes against civilians are still being committed at a frightening frequency in one of the poorest countries in the world: The CAR has a per capita GNI of $588 and a ranking of 185 out of 187 on 2013’s United Nations Human Development Index.

Amid the escalating insecurity in 2013, African Union (AU), French, and European forces were deployed under the auspices of the African-led International Support Mission in Central Africa (MISCA) to disarm militant groups and protect civilians at a critical juncture in December, and their efforts contributed to the relative stabilization of the capital in early 2014. Meanwhile, in January 2014, Séléka leaders relinquished power to a transitional government led by former mayor of Bangui, Catherine Samba-Panza, who was then tasked with preparing for national elections and establishing security throughout the country. In September 2014, the United Nations incorporated the MISCA forces into the larger Multidimensional Integrated Stabilization Mission in the Central African Republic (MINUSCA) and then in 2015 extended and reinforced its presence through 2016, in response to the ongoing violence. Despite the international military intervention and efforts of the transitional authorities to address the pervasive insecurity, reprisal killings continue and mobile armed groups still freely attack particularly remote, rural areas in the central and western regions of the country. The unguarded, porous borders have also allowed rebel forces and criminal elements to flee into distant areas of neighboring countries, including Chad and South Sudan, in order to prepare their attacks and return to the CAR.

This paper will explore the origins of the complex emergency affecting the CAR, with a particular focus on the economic causes and potential economic strategies for its resolution. It will begin by providing an overview of the core issues at stake and enumerating the driving and sustaining factors perpetuating the violence. Then it will discuss the consequences of the conflict on the humanitarian, security, political, and economic landscape of the CAR. Finally, it will highlight strategies for addressing the underlying issues and persisting tensions in the CAR to begin building a durable peace, arguing that the national authorities and international partners adopt a holistic approach to peace building that prioritizes inclusive economic recovery given the economic roots of the crisis.

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One of global society’s foremost structural changes underway is its rapid aggregate shift from farmbased to city-based economies. More than half of humanity now lives in urban areas, and more than two-thirds of the world’s economies have a majority of their population living in urban settings. Much of the gradual movement from rural to urban areas is driven by long-term forces of economic progress. But one corresponding downside is that city-based societies become increasingly disconnected—certainly physically, and likely psychologically—from the practicalities of rural livelihoods, especially agriculture, the crucial economic sector that provides food to fuel humanity.

The nature of agriculture is especially important when considering the tantalizingly imminent prospect of eliminating extreme poverty within a generation. The majority of the world’s extremely poor people still live in rural areas, where farming is likely to play a central role in boosting average incomes. Agriculture is similarly important when considering environmental challenges like protecting biodiversity and tackling climate change. For example, agriculture and shifts in land use are responsible for roughly a quarter of greenhouse gas emissions.

As a single word, the concept of “agriculture” encompasses a remarkably diverse set of circumstances. It can be defined very simply, as at dictionary.com, as “the science or occupation of cultivating land and rearing crops and livestock.” But underneath that definition lies a vast array of landscape ecologies and climates in which different types of plant and animal species can grow. Focusing solely on crop species, each plant grows within a particular set of respective conditions. Some plants provide food—such as grains, fruits, or vegetables—that people or livestock can consume directly for metabolic energy. Other plants provide stimulants or medication that humans consume—such as coffee or Artemisia—but have no caloric value. Still others provide physical materials—like cotton or rubber—that provide valuable inputs to physical manufacturing.

One of the primary reasons why agriculture’s diversity is so important to understand is that it defines the possibilities, and limits, for the diffusion of relevant technologies. Some crops, like wheat, grow only in temperate areas, so relevant advances in breeding or plant productivity might be relatively easy to diffuse across similar agro-ecological environments but will not naturally transfer to tropical environments, where most of the world’s poor reside. Conversely, for example, rice originates in lowland tropical areas and it has historically been relatively easy to adopt farming technologies from one rice-growing region to another. But, again, its diffusion is limited by geography and climate. Meanwhile maize can grow in both temperate and tropical areas, but its unique germinating properties render it difficult to transfer seed technologies across geographies.

Given the centrality of agriculture in many crucial global challenges, including the internationally agreed Sustainable Development Goals recently established for 2030, it is worth unpacking the topic empirically to describe what the term actually means today. This short paper does so with a focus on developing country crops, answering five basic questions: 

1. What types of crops does each country grow? 

2. Which cereals are most prominent in each country? 

3. Which non-cereal crops are most prominent in each country? 

4. How common are “cash crops” in each country? 

5. How has area harvested been changing recently? 

Readers should note that the following assessments of crop prominence are measured by area harvested, and therefore do not capture each crop’s underlying level of productivity or overarching importance within an economy. For example, a local cereal crop might be worth only $200 per ton of output in a country, but average yields might vary across a spectrum from around 1 to 6 tons per hectare (or even higher). Meanwhile, an export-oriented cash crop like coffee might be worth $2,000 per ton, with potential yields ranging from roughly half a ton to 3 or more tons per hectare. Thus the extent of area harvested forms only one of many variables required for a thorough understanding of local agricultural systems. 

The underlying analysis for this paper was originally conducted for a related book chapter on “Agriculture’s role in ending extreme poverty” (McArthur, 2015). That chapter addresses similar questions for a subset of 61 countries still estimated to be struggling with extreme poverty challenges as of 2011. Here we present data for a broader set of 140 developing countries. All tables are also available online for download.

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Executive Summary

Census 2000 underscores the many social, demographic, and economic challenges facing the City of Cleveland and its residents.

Between 1980 and 2000, Cleveland lost fully one-sixth of its population. Like other older cities in the nation's "Rust Belt," Cleveland's metropolitan area also lost residents over this period, although it managed to grow modestly in the 1990s.

What little growth there was in the region occurred far from the core. The city's downtown area grew, but nearly every other neighborhood in the city and its close-in suburbs lost residents. To be sure, Cleveland actually gained modest numbers of black, Hispanic, and Asian residents in the last decade. But at the same time it lost almost three times as many white residents. As a result, the number of married couples living in Cleveland dwindled, while households not traditionally associated with the suburbs—single persons and single parents—proliferated there. A similar evacuation of jobs has occurred, and today fewer than one-third of the region's workers are employed in the City of Cleveland.

The demographic and economic impacts of decentralization in the Cleveland metro area are striking. Segregation levels between blacks and whites, and blacks and Hispanics, remain among the highest in the U.S. Cleveland ranks 96th out of the 100 largest cities in the share of adults who have a bachelor's degree, and the educational attainment of each racial/ethnic group in Cleveland significantly lags that in other cities. Not coincidentally, the city's unemployment rate is the second-highest among large U.S. cities, and median household income is the third-lowest. In the 1990s, income among Cleveland households did rise, but nearly half of all families with children still lived below or near the poverty line in 2000. With such low incomes, many of Cleveland's families fail to benefit from the city's relatively affordable rental and ownership opportunities. In many city neighborhoods today, a lack of market demand leaves senior citizens as the largest group of homeowners.

Along these lines and others, then, Cleveland in Focus: A Profile from Census 2000 concludes that:

• The Cleveland metro area continued to decentralize in the 1990s amid slow growth region-wide. Between 1980 and 2000, the City of Cleveland lost 17 percent of its population, although the pace of decline slowed in the last decade. Meanwhile, the region's suburbs grew modestly, but the locus of that growth occurred far from the core. In the 1990s, a few neighborhoods in downtown Cleveland gained residents, but population loss was widespread throughout the remainder of the city and most inner suburbs. The city lost households of all types: The number of married couples living in the city dropped by 16,000, and for every additional single-person household the city gained, the suburbs added more than 40. Today, only one in five residents of the Cleveland region lives in the central city, and less than one-third of the region's workers are employed there.

• Cleveland remains highly segregated and profits from little international immigration. The number of whites living in Cleveland plummeted in the 1990s, and modest gains in black, Hispanic, and Asian populations were not enough to compensate for these losses. The city's foreign-born population grew by a mere 400 persons over the decade, signaling that while modest numbers of immigrants continued to arrive in Cleveland (9,300 in the 1990s), an equivalent number of earlier arrivals left the city for the suburbs or beyond. In addition, the metro area remains highly stratified along racial and ethnic lines, with blacks confined to the city's east side and eastern suburbs, Hispanics clustered on the west side, and whites located in the downtown and southern/western suburbs.

• Cleveland lacks a young, highly-educated population. During the 1990s, the number of 25-to-34 year-olds nationwide declined by 8 percent, due to the aging of the Baby Boom generation. In Cleveland, this age group shrank nearly three times as fast. Consequently, the share of adults with a college degree grew more slowly than elsewhere in the 1990s, and Cleveland now ranks 96th out of the 100 largest cities in college degree attainment. Efforts to retain students attending its own universities may help accelerate growth in educational attainment, but since Cleveland's college-student population is one of the smallest among the Living Cities, strategies to increase educational access for existing residents may be needed. Unlike in many other cities, low educational attainment is not confined to Cleveland's minority groups—whites, blacks, and Hispanics all have below-average rates of college completion.

• Incomes grew in Cleveland during the 1990s, although the city remains home to a primarily low-wage workforce. As in other Midwestern cities, median household income grew at an above-average rate in Cleveland during the 1990s. However, the city's median income still ranks 98th out of the 100 largest cities. Middle-income households declined over the decade, while the ranks of moderate-income "working poor" families grew. In fact, some 62 percent of the city's households made do with incomes below $34,000 in 2000. Families with children were especially likely to earn low wages; nearly half had incomes below or near the federal poverty line.

• Homeownership increased for some groups in Cleveland, but many families face difficulties paying for housing and moving toward homeownership. About half of Cleveland's households own their own homes. That share is typical among the 23 Living Cities, but it remains low for a city with such a large stock of single-family homes. Homeownership rose for the city's Hispanic households, 41 percent of whom now own. But black households in Cleveland did not share in these homeownership gains, and were likely impeded by their low incomes, which trail those for other racial/ethnic groups. Rents in Cleveland increased by almost 10 percent in the 1990s, but remain the lowest among the Living Cities—the median unit rents for only $465. Yet even so, 40,000 Cleveland renters still pay more than 30 percent of income on rent, suggesting that most earn too little to afford even a modestly-priced unit.

By presenting indicators like these on the following pages, Cleveland in Focus: A Profile from Census 2000 seeks to give readers a better sense of where Cleveland and its residents stand in relation to their peers, and how the 1990s shaped the cities, their neighborhoods, and the entire Cleveland region. Living Cities and the Brookings Institution Center on Urban and Metropolitan Policy hope that this information will prompt a fruitful dialogue among city and community leaders about the direction Cleveland should take in the coming decade.

Cleveland Data Book Series 1
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Executive Summary

Cities are creations of their states. Their boundaries, their powers, and their responsibilities are all substantially prescribed by state law. With the advent of the new federalism—beginning in the 1970s and resurgent today—the devolution of power from Washington to state capitals has increased the importance of state decision making for cities.

Yet, this shift occurred precisely as cities were losing political clout in state legislatures due to population decline within city limits and rampant growth in suburban jurisdictions.

This paper argues that in response to shifting population distributions within states, cities need to build new coalitions to effectively achieve their legislative goals within state legislatures. Case studies—New York City, Chicago, Detroit, and the three largest cities in Ohio (Cincinnati, Cleveland, and Columbus)—are used to more closely examine coalition-building methods.

Overall, the authors find:

• Cities' dependence on state government has increased as the federal government has ceded more power to the states. As cities' populations have declined, they have become weaker in state legislatures that have grown more powerful due to federal policy. In the peak year of 1978, about 15 percent of city revenues came from the federal government. By 1999 that had decreased to 3 percent. Concurrently, the federal government has shifted a number of programs to the states, which control the rules and revenue mechanisms cities operate under.

• Traditional political coalitions cities have used to achieve their state legislative goals are no longer as effective. Partisan (usually Democratic) coalitions are less reliable as focus has shifted to suburban swing districts. Moreover, as their power has decreased, cities' agendas have become more reactive, aiming to preserve the status quo in funding, infrastructure projects, and autonomy.

• Older, inner-ring suburbs are a logical new partner for cities in state legislatures. Increasingly, these suburbs, and some outer ones, have common interests with central cities as they address immigration, fiscal stress, and infrastructure woes. Such alliances would also better address metropolitan-wide issues on a metropolitan basis.

There remain many obstacles to forging such coalitions, however, including longtime distrust among big cities and their neighbors, racial disparities, and in some cases, growing investment in central cities while surrounding suburbs languish. Nonetheless, for cities to effectively influence their state governments more creative approaches to coalition building must be found.

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Thank you. I am honored to be here at the City Club of Cleveland, and I'd like to express my thanks to Jim Foster and Bud Talbott for extending the invitation. As you may know, Bud's son is now the president of Brookings, where I work. I'm told that Bud has particularly high standards, and I suppose if I don't live up to them this afternoon, I may hear about it back at work next week.

My topic today is the U.S. budget deficit and its effects. In 2003, the budget deficit amounted to slightly less than $400 billion. That's about 3½ percent of GDP. Under reasonable projections, the deficit is expected to remain about this share of the economy over the next decade – and then grow much larger as the costs mount from the retirement of the baby boomers.

The title of my talk asks whether these deficits matter. I assume that a simple "yes" would not suffice in this intellectually rigorous environment. So I'll spend most of my talk describing the various ways in which substantial budget deficits are economically harmful, and then provide some thoughts on how we can bring the deficit under control.

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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.

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Before the City Club in Cleveland, Bruce Katz emphasized the importance of Ohio's older industrial cities for the state's overall prosperity and outlined, despite seemingly grim statistics, why now is the time for a rebirth of those places and how it can be achieved.

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At a legislative conference in Cambridge, Ohio, Bruce Katz stressed the importance of cities and metro areas to the state's overall prosperity. Acknowledging the decline of Ohio's older industrial cities, Katz noted the area's many assets and argued for a focus on innovation, human capital, infrastructure, and quality communities as means to revitalize the region. 

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For over 100 years, the driving force of Ohio’s economy has been the state’s so-called Big Eight cities—Columbus, Cleveland, Cincinnati, Toledo, Akron, Dayton, Canton, and Youngstown. Today, though, the driving reality of these cities is sustained, long-term population loss. The central issue confronting these cities—and the state and surrounding metropolitan area—is not whether these cities will have different physical footprints and more green space than they do now, but how it will happen.

The state must adopt a different way of thinking and a different vision of its cities’ future—and so must the myriad local, civic, philanthropic, and business leaders who will also play a role in reshaping Ohio’s cities. The following seven basic premises should inform any vision for a smaller, stronger future and subsequent strategies for change in these places:

• These cities contain significant assets for future rebuilding
  
• These cities will not regain their peak population
  
• These cities have a surplus of housing
  
• These cities have far more vacant land than can be absorbed by redevelopment
  
• Impoverishment threatens the viability of these cities more than population loss as such
  
• Local resources are severely limited
  
• The fate of cities and their metropolitan areas are inextricably inter-connected
  

These premises have significant implications for the strategies that state and local governments should pursue to address the issues of shrinking cities.

Full Paper on Ohio's Cities » (PDF)
Paper on Shrinking Cities Across the United States »

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Should increasing exports be part of the solution to Greater Cleveland's -- and the nation's -- economic doldrums? Can export growth make this recovery job-filled rather than jobless?

That's a counterintuitive proposition, but one that is gaining traction in Northeast Ohio. Cleveland, Youngstown and other metros often see themselves on the losing end of globalization, as manufacturing has moved abroad and trade barriers and currency manipulations impede the entry of U.S.-made goods into foreign markets.

But exports bring tremendous benefits to workers, companies and the nation as a whole. Exporting companies tend to be more innovative. They pay higher wages across all skill levels. And they are a response to a new global reality: 95 percent of the world's customers live outside the United States.

Any successful export strategy, including the one that the Obama administration is developing, must start with where U.S. exports come from. Our major metropolitan areas are the nation's export hubs. In 2008, they produced about 64 percent of U.S. exports, including more than 62 percent of manufactured goods and 75 percent of services.

Northeast Ohio's major metros are leaders in exports, oriented toward global consumers in a way that most American regions are not. Exports contribute more than 12 percent of the gross metropolitan product in Akron, 13 percent in Cleveland, and a jaw-dropping 18 percent in Youngstown, compared to a national metro average of 10.9 percent.

Exports are also a source of much-needed jobs in these metros. As of 2008 (the most recent year for which we have data) there were 110,000 export jobs in the Cleveland metro and about 30,000 each in greater Akron and Youngstown. Every $1 billion in exports from the average metropolitan area in 2008 supported 5,800 jobs.

To leverage the powerful export activity already occurring in Cleveland and elsewhere, the Obama administration should connect its macroeconomic vision for export growth with the metro reality where the doubling will mostly occur.

For example, the president's export advisory council should include state and local leaders, and revamp export guidance and support to meet the needs of small firms, which find it hard to enter new markets.

But Northeast Ohio metros have their own work to do. The rate of export growth between 2003 and 2008 in Cleveland and Akron is lackluster when compared to the large metro average. U.S. companies dominate the global market in service exports, and the nation actually has a generous service trade surplus, but service exports' share of overall output in Northeast Ohio metros is smaller than the large metro average, and growth in service exports is slower.

Most troubling, Cleveland and its neighbors are underperforming when it comes to innovation, which is a critical ingredient for future international success. Metros that are manufacturing-oriented or export-intensive (or both) tend to create patents at a rate of just over five patents per 1,000 workers. But Cleveland, Akron and Youngstown fall short, with 2.8, 4.5, and 1 patent per 1,000 workers, respectively.

Northeast Ohio must accelerate its efforts to increase the region's innovation and export capacity, through regional organizations such as NorTech and JumpStart. Just as the president set an export goal for the nation, Northeast Ohio should embrace the opportunity to set its own aggressive export goals. Business groups, the Fund for Our Economic Future, universities and regional economic development organizations have made a start but need to devote more resources and collaborate to achieve those goals.

The region can make this happen. Organizations like the Manufacturing and Advocacy and Growth Network (MAGNET) and its partners, with support from the Fund and chambers, are working directly with companies to increase manufacturing innovation in Northeast Ohio, with increasing exports one of their major emphases.

China’s economic rise is one of the factors creating strains in the international financial order. China is already the largest trading nation and the second largest economy. It is likely to emerge in the next few years as the world’s largest net creditor. It is already #2 behind Japan. Until recently, China’s main foreign asset has been central bank reserves, mostly invested in U.S. Treasury bonds and similar instruments.

In the last couple of years, however, this pattern has started to change. China’s reserves peaked at about $4 trillion at the end of 2014. Since then, the People’s Bank of China has sold some reserves, but the country as a whole is still accumulating net foreign assets as evidenced by the large current account surplus. What is new is that the overseas asset purchases are coming from the private sector and state enterprises, not from the official sector. The Institute for International Finance estimated that the net private capital outflow from China was $676 billion in 2015. (That estimate includes outward investments by China’s state enterprises, which strictly speaking are not “private”; the point is to distinguish between official holding of foreign assets at the central bank and more commercial transactions.) As investment opportunities diminish in China owing to excess capacity and declining profitability, this commercial outflow of capital from China is likely to continue at a high level.

Tilted playing field

Most of the major investing countries in the world are developed economies; in addition to making direct investments elsewhere, they tend to be very open to inward investment. China is unusual in that it is a developing country that has emerged as a major investor. China itself is an important destination for foreign direct investment (FDI), and opening to the outside world has been an important part of its reform program since 1978. However, China’s policy is to steer FDI to particular sectors. In general, it has welcomed FDI into most but not all of manufacturing. However, other sectors of the economy are relatively closed to FDI, including mining, construction, and most modern services. It is not surprising that China is less open to FDI than developed economies such as the United States. But it is also the case that China is relatively closed among developing countries.

The OECD calculates an index of FDI restrictiveness for OECD countries and major emerging markets. The index is for overall FDI restrictiveness, and also for restrictiveness by sector. China in 2014 was more restrictive than the other BRICS countries (Brazil, Russia, India, and South Africa). Brazil and South Africa are highly open, similar to advanced economies with measures around 0.1 (on a scale of 0=open and 1=closed). India and Russia are less open with overall measures around 0.2. China is the most closed with an index above 0.4. Some of the key sectors in which China is investing abroad, such as mining, infrastructure, and finance, are relatively closed at home.

This lack of reciprocity creates problems for China’s partners. China has the second largest market in the world. In these protected sectors, Chinese firms can grow unfettered by competition, and then use their domestic financial strength to develop overseas operations. In finance, for example, China’s four state-owned commercial banks operate in a domestic market in which foreign investors have been restricted to about 1 percent of the market. The four banks are now among the largest in the world and are expanding overseas. China’s monopoly credit card company, Union Pay, is similarly a world leader based on its protected domestic market. A similar strategy applies in mining and telecommunications.

China is unusual in that it is a developing country that has emerged as a major investor.

This lack of reciprocity creates an unlevel playing field. A concrete example is the acquisition of the U.S. firm Smithfield by the Chinese firm Shuanghui. In a truly open market, Smithfield, with its superior technology and food-safety procedures, may well have taken over Shuanghui and expanded into the rapidly growing Chinese pork market. However, investment restrictions prevented such an option, so the best way for Smithfield to expand into China was to be acquired by the Chinese firm. Smithfield CEO Larry Pope stated the deal would preserve "the same old Smithfield, only with more opportunities and new markets and new frontiers." No Chinese pork would be imported to the United States, he stated, but rather Shuanghui desired to export American pork to take advantage of growing demand for foreign food products in China due to recent food scandals. Smithfield's existing management team is expected to remain intact, as is its U.S. workforce. 

The United States does not have much leverage to level the playing field. It does have a review process for acquisitions of U.S. firms by foreign ones. The Committee on Foreign Investment in the United States (CFIUS) is chaired by Treasury and includes economic agencies (Commerce, Trade Representative) as well as the Departments of Defense and Homeland Security. By statute, CFIUS can only examine national security issues involved in an acquisition. It reviewed the Smithfield deal and let it proceed because there was no obvious national security issue. CFIUS only reviews about 100 transactions per year and the vast majority of them proceed. This system reflects the U.S. philosophy of being very open to foreign investment.

A thorn in the relationship

Chinese policies create a dilemma for its partners. Taking those policies as given, it would be irrational for economies such as the United States to limit Chinese investments. In the Shuanghui-Smithfield example, the access to the Chinese market gained through the takeover makes the assets of the U.S. firm more valuable and benefits its shareholders. Assuming that the firm really does expand into China, the deal will benefit the workers of the firm as well. It would be even better, however, if China opened up its protected markets so that such expansions could take place in the most efficient way possible. In some cases, that will be Chinese firms acquiring U.S. ones, but in many other cases it would involve U.S. firms expanding into China. 

This issue of getting China to open up its protected markets is high on the policy agenda of the United States and other major economies. The United States has been negotiating with China over a Bilateral Investment Treaty (BIT) that would be based on a small negative list; that is, there would be a small number of agreed sectors that remain closed on each side, but otherwise investment would be open in both directions. So far, however, negotiations on the BIT have been slow. It is difficult for China to come up with an offer that includes only a small number of protected sectors. And there are questions as to whether the U.S. Congress would approve an investment treaty with China in the current political environment, even if a good one were negotiated.

The issue of lack of reciprocity between China’s investment openness and the U.S. system is one of the thorniest issues in the bilateral relationship.

The issue of lack of reciprocity between China’s investment openness and the U.S. system is one of the thorniest issues in the bilateral relationship. A new president will have to take a serious look at the CFIUS process and the enabling legislation and consider what combination of carrots and sticks would accelerate the opening of China’s markets. In terms of sticks, the United States could consider an amendment to the CFIUS legislation that would limit acquisitions by state enterprises from countries with which the United States does not have a bilateral investment treaty. In terms of carrots, the best move for the United States is to approve the Trans-Pacific Partnership and implement it well so that there is deeper integration among like-minded countries in Asia-Pacific. Success in this will encourage China to open up further and eventually meet the high standards set by TPP. Greater investment openness is part of China’s own reform plan but it clearly needs incentives to make real progress. 

For more on this and related topics, please see David Dollar's new paper, "China as a global investor."

Event Information

On May 24, the John L. Thornton China Center at Brookings hosted U.S. Undersecretary of the Treasury for International Affairs Nathan Sheets for a discussion on the U.S.-China economic relationship and engagement in preparation for the economic track of the upcoming eighth U.S.-China Strategic & Economic Dialogue (S&ED), to be held in Beijing in early June. Senior Fellow and Director of the Brookings China Center Cheng Li provided opening remarks and Senior Fellow David Dollar moderated the discussion.

Undersecretary Sheets was confirmed by the U.S. Senate as the Treasury Department’s undersecretary for international affairs in September 2014. In this position, he serves as the senior official responsible for advising the secretary of the Treasury on international economic issues. Previously, Sheets worked as global head of international economics at Citigroup, and at the Federal Reserve Board in a number of positions, including as director of the division of international finance.

Following the discussion, panelists took questions from the audience.

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• Introduction by Cheng Li, and remarks by Nathan Sheets
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The eighth and final Strategic and Economic Dialogue (S&ED) of the Obama administration will take place in Beijing next week. On the economic side, it will be difficult this year to make progress on specific outcomes; but it’s an important year for having a frank conversation about macroeconomic and financial policies.

One reason that it will be hard to get specific outcomes is that the Chinese leadership has shown that economic reform doesn’t rank very high on its list of priorities. After laying out an ambitious reform agenda in its Third Plenum resolution in 2013, implementation of reform has been slow, except in some aspects of financial reform. Recent speeches have emphasized the need to close zombie firms and clean up non-performing loans in the banking system, but specific plans have been modest. 

In terms of the agenda between China and the United States, the most important issue is negotiating a Bilateral Investment Treaty (BIT). Many important sectors are still closed to inward direct investment in China. It would help China’s transition to a new growth model to open up these sectors to competition and to private investment, and a BIT is a smart way to commit to these reforms. However, China has been slow to produce a credible offer on the BIT because enterprises and ministries with vested interests have opposed opening up and the leadership is apparently not willing to take them on.

Another factor affecting this S&ED is that it is the last for the Obama administration. I would argue that this is a good time for China and the United States to demonstrate that regular, high-level exchange produces results, increasing the likelihood that whatever administration comes next will want to maintain something similar. However, it is more likely that Chinese leaders will want to wait and see what administration they will be dealing with and to save deliverables for those future negotiations.

S&ED is an opportunity for the top economic officials in the two countries to frankly discuss their policy choices and to avoid mistakes that can come from miscommunication.

My experience with the first four S&EDs was that the conversation was more important than the deliverables, which have often been modest, incremental steps. This year, China will be very interested in hearing what the Federal Reserve thinks. May labor market data will be published on June 3, just in advance of the S&ED, so there may be more clarity about when the Fed is likely to raise interest rates. Regardless of when the Fed moves, both China and the United States have an interest in seeing a relatively stable exchange rate for the yuan. China’s central bank officials have emphasized that the country still has a large current account surplus, so depreciation of the trade-weighted exchange rate is not warranted. Depreciation would exacerbate imbalances and would work against the transformation of China’s growth model because it favors industry at the expense of services. 

But if the Fed continues to normalize interest rates and the dollar rises against other major currencies, China does not want to follow the dollar up. Hence, its emphasis on stable value of the currency relative to a basket. S&ED is an opportunity for the top economic officials in the two countries to frankly discuss their policy choices and to avoid mistakes that can come from miscommunication. The most important outcome of the S&ED may well be avoidance of policy mistakes, a subtle outcome that will not be reflected in headlines. 

Brexit has little direct effect on the Chinese economy though it does increase the risk of financial volatility. In the long run it is hard to see it as anything but a plus for China as the West continues to decline and China continues to rise.

In the immediate aftermath of the Brexit vote, stock markets all over the world tanked. The interesting exception was China: The Shanghai market fell 1 percent on Friday and then more than recovered it on Monday. In the short run, Brexit is a modest negative as Europe’s gross domestic product (GDP) and trade are likely to grow less rapidly, and the EU is China’s largest trading partner. But the Chinese economy is simply not that export-oriented anymore. In the aftermath of the global financial crisis, the contribution of net exports to China’s GDP growth has averaged around zero. China initially made up for lost external demand with a massive stimulus program aimed at investment. This has now led to excessive capacity in real estate, manufacturing, and infrastructure. As a result, investment growth is slowing (see figure below). But China’s GDP growth has held up well because consumption is now the main source of demand. It consistently delivers more than 4 percentage points of GDP growth and its contribution has been on an upward trend.

China has developed a virtuous circle in which wages are rising at a healthy rate (more than 10 percent over the past year), consumption is growing, consumption is mostly services so the service sectors expand, and they are more labor-intensive than industry so sufficient jobs are created to keep the labor market tight. There are plenty of things that could go wrong, but maintaining consumption is the big challenge for China, not the external sector.

Another feature of China’s new growth pattern is that there is a steady outflow of capital as investment opportunities at home diminish. The U.K. had been one of the favored destinations for China’s outward investment, seen as a welcoming location that could be used as a jumping off point for the rest of Europe. Chinese firms will now need to rethink that strategy but this should not be too difficult an adjustment. The United States has been the destination for the largest share of China’s overseas investment and it is likely that that trend will strengthen in the wake of Brexit.

Brexit does complicate China’s currency policy. The dollar and the yen have strengthened while the pound and euro decline. In past global crises, China has been a source of stability but the yuan fixing on Monday suggests that the central bank does not want to follow the dollar up if it is going to keep rising. Ideally they would like relative stability against a basket. There continues to be a risk that this policy will excite accelerating capital outflows so in that sense financial risks have increased somewhat. But probably the central bank will be able to manage the capital outflows so that the trade-weighted exchange rate is stable.

A U.K. no longer in the European Union will presumably be anxious to strengthen its ties with China so it may well be willing to make compromises on market-economy status and investment deals that a unified Europe would not have made.

Finally, from a larger geostrategic perspective, it would seem that China is the big winner from Brexit. Europe is likely to be a less influential player on the world stage and will be absorbed with internal issues of negotiating the British exit, controlling immigration, and keeping the periphery inside the eurozone. The United States is also likely to be distracted by these European challenges. This gives China more scope to pursue its reclamation activities in the South China Sea and to play divide and conquer with European states on various issues. For example, China would like to be recognized as a market economy, which is both symbolic and a practical matter for adjudicating anti-dumping cases. It is also negotiating investment treaties with both the United States and the EU, though so far China’s offers have not been very attractive in the sense that they exempt many important sectors from open investment. A U.K. no longer in the European Union will presumably be anxious to strengthen its ties with China so it may well be willing to make compromises on market-economy status and investment deals that a unified Europe would not have made. Brexit itself may not be that important but it may prove to be a good signal of the decline of Europe and the rise of China.

For years China has been known as a destination for foreign direct invest- ment, as multinationals flocked there to build export platforms and take advantage of its fast-growing market. Now, however, it is China’s outbound foreign direct investment (OFDI) that is shaping the world. In the first quarter of 2015, China claimed its largest-ever share of global mergers and acquisitions (M&A), with mainland companies’ takeovers of foreign firms amounting to US$101bn, or 15% of the US$682bn of announced global deals. In three months, China recorded more outbound investment transac- tions than in the whole of 2015, when US$109bn in deals were announced.

These figures probably overstate the true level of capital flows, since some announced deals inevitably fail to reach fruition. But whatever the levels, it is clear that China’s outbound investment is rapidly growing, and that its share of global direct investment flows is among the largest of any country.

The rise in China’s direct investment in Europe is especially striking. According to a recent report by law firm Baker & McKenzie and consultancy Rhodium Group, the total stock of Chinese investment in Europe increased almost ten-fold from US$6bn in 2010 to US$55bn in 2014. In 2015 alone, Chinese OFDI in Europe increased by 44 percent (with deals such as Italian tire manufacturer Pirelli’s US$7.7bn takeover by ChemChina). Total flow of US$23bn exceeded China’s investments in the US, which were US$17bn in the same year. This year could see an even more dramatic jump, if ChemChina’s pro- posed US$46bn takeover of Swiss agro-technology firm Syngenta is approved by regulators.

There are two main reasons why Chinese investors favor Europe over the US. First, the issue of Chinese direct investment is less politicized in Europe. A handful of high-profile Chinese investments in the US have been blocked for political reasons, and the national security review process of the Committee on Foreign Investment in the United States poses an obstacle for some types of acquisitions, especially by Chinese state-owned enterprises (SOEs). Europe lacks a similar review process, and this perhaps explains why SOEs represent nearly 70% of Chinese OFDI in Europe, but less than half in the US. Second, Europe’s ongoing economic and financial difficulties since the global financial crisis of 2008 mean there has been a hunger for Chinese cash to finance infrastructure or bail out debt-ridden firms.The flows are impressive, but it is important to remember that on a stock basis, China’s aggregate investment in Europe is still fairly modest. By the end of 2014, China’s cumulative OFDI represented only 3-4% of all FDI in Europe, and the pool of workers directly affected by Chinese FDI was a mere 2% of the number of Europeans working in American-owned firms in Europe. The rising trend of Chinese investment, however, raises some interesting economic and political questions for European leaders.

Moving up the value chain…

What motives, aside from the sheer availability of cash, are driving this enormous wave of Chinese outward investment? A review of China’s OFDI in Europe over the past decade points to five distinct strategies. Some of these are similar to the strategies seen in earlier waves of cross-border investment by Western, Japanese and South Korean companies; others seem to be more China-specific. They also display widely divergent reliance on political leverage—with SOE investments, unsurprisingly, being the most politically driven.

Authors research

The first strategy is driven by a desire to move from cheap products to more sophisticated ones. An exemplar is Haier, the world’s largest white goods manufacturer. Haier’s development closely tracks that of Japanese and South Korean consumer appliance makers: it first concentrated on making cheap copies of established products, for sale in the Chinese market. It gradually moved up to more sophisticated and innovate products and services and began to export more aggressively.

Haier came to cross-border M&A relatively late, and has used it main- ly to scale up its core “made-in-China” portfolio and accelerate its move up the value chain. Its first acquisitions came in 2012, when it bought a part of Sanyo’s Asian operations and New Zealand’s Fisher & Paykel. After a failed effort to acquire bankrupt European white-goods firm FagorBrandt in 2014, it bought GE’s consumer appliances business for US$5.4bn in January 2016. Political backing for Haier’s overseas expansion has been limited, probably because of the low political importance of the white goods sector.

A second strategy, exemplified by telecoms equipment maker Huawei Technologies, is a straightforward effort to raise margins by diversifying out of the low-margin Chinese market into higher-margin foreign ones. Huawei has derived more than half its sales from abroad for over a decade, and has gradually increased its presence in European markets, in part through loose alliances with major clients such as BT, Orange, Deutsche Telekom, and Telefónica. It has also moved quickly into the device sector. From tablets to smartphones and 3G keys, its products are now spreading across Europe, as are its greenfield investments in European R&D centers. Its efforts to expand through M&A have been hampered by its image as an arm of the Chinese state—although privately owned, it has benefited from huge lines of credit from Chinese policy banks, and has never put to rest rumors of close ties with the People’s Liberation Army.

…and acquiring technology

The third model essentially involves technology acquisition that enables a Chinese firm both to bolster its position at home and create strategic opportunities abroad. Notable examples include personal computer maker Lenovo (which bought IBM’s PC division), carmaker Geely (which acquired Volvo’s passenger-car unit), and more recently ChemChina (with its purchases of Pirelli and Syngenta). The technology-acquisition strategy is much more characteristic of Chinese firms than of Japanese or South Korean companies, which mainly preferred to build up their technological know-how internally, or through licensing arrangements. Even though many of the Chinese acquirers in these deals are private, they are often able to mobilize enormous state support in the form of generous and low-cost financing.

The fourth internationalization model is characteristic of the hospi- tality industry and is one we dub (perhaps controversially) “Orientalist.” Essentially this involves the acquisition of established high-end hotel and leisure brands, with the ultimate aim of reorienting them to cater to a growing Asian—and especially Chinese—clientele. Examples include Shanghai-based Jinjiang International’s recent purchase of the Louvre Hotels group and of 11.7% of Accor’s hotel business. Hong Kong hotel chains Shangri-La, Mandarin and Peninsula have focused their expansion over the past three years in Europe, buying high-end assets in Paris and London. Dalian Wanda, a conglomerate with interests in real estate, retail and cinemas has plans for a series of major mixed-use projects in the UK and France. Like many such projects in China, these are designed to offer a combination of commercial, residential, shopping and recreational facilities. These culturally-oriented acquirers have also benefited from generous financing from China’s state-owned banks.

Heritage Foundation, media reports

The final strategy is a “national champions” model, under which big SOEs use political and financial support from the government to make acquisitions that they hope will vault them into positions of global market leadership. A noteworthy recent example in Europe Dongfeng Motor’s purchase of 14% of PSA, the parent company of Peugeot.

The wave of Chinese investment creates several challenges for European companies and policymakers. For firms, the sudden appearance of hungry and well-financed Chinese acquirers has prompted incumbent multinationals to step up their own M&A efforts, in order to maintain their market dominance. Moves into the European market by China’s leading construction equipment firms, Zoomlion and Sany, most likely prompted the purchase of Finnish crane company Konecranes by its American rival Terex. Similarly, ChemChina’s unexpected bid for Syngenta has caused disquiet among European chemical firms, and probably motivated Bayer’s subsequent bid to take over Monsanto.

In the policy arena, two issues stand out. The narrower one relates to reciprocity: Chinese firms are pretty much free to buy companies in any sector in Europe, without restriction; foreign firms by contrast are barred from investment or majority control in a host of sectors in China, including banking, insurance, telecom, media, logistics, construction, and healthcare. One potential solution is to include reciprocity provisions in the EU-China bilateral investment treaty now under negotiation.

The broader question for Europe is whether some broader geopoliti- cal strategy lies behind China’s outward investment surge, and if so what to do about it. There can be little doubt that in recent years China has increased its political leverage in Europe, and has done so via a “divide and rule” approach of dealing as little as possible with the EU as a whole and as much as possible with individual states. Another tactic has been to create new multilateral forums in configurations favorable to China, the most prominent example being the “16+1,” which consists of 16 central and eastern European nations plus China. Beijing has tried—so far with- out success—to develop similar forums with the Nordic and Southern European countries.

Anxiety along the Belt and Road

A related issue is to what extent Europe should welcome Chinese investment that comes in the form of infrastructure spending. Part of China’s “Belt and Road Initiative” is about increasing connectivity between China and Europe, and this comes with clear financial benefits: China has pledged, for instance, to contribute to the European Commission’s European Strategic Infrastructure Fund; and Chinese-led logistics platforms such as Athens’ Piraeus Port are proliferating. 

But with increased connectivity comes an increased flow of Chinese goods—and especially a flood of low-priced products from China’s excess capacity industries such as steel and building materials. In response to the apparent dumping of Chinese industrial goods in Europe, the European Parliament on May 12 adopted a non-binding but pointed resolution asking the European Commission to reject China’s claim to “market economy status” in the World Trade Organization (WTO). That status—which China says should come to it automatically in December this year under the terms of its 2001 WTO accession—would make it much harder for the EU to impose anti-dumping duties on Chinese imports. The Commission now faces the delicate choice of accepting China’s claim (to the detriment of European producers) or rejecting it (an action that is likely to invite some form of economic retaliation from Beijing). A possible middle way would be to recognize China’s market economy status but to carve out a set of exceptions to protect key European industries. However this dispute plays out, it will simply mark the beginning of a long and complicated relationship between Europe and its fastest-growing investor.

The piece originally appeared in China Economic Quarterly. 

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.

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Since 2000, China has emerged as Africa’s largest trading partner and a major source of investment finance as well. Large numbers of Chinese workers and entrepreneurs have moved to Africa in recent years, with estimates running as high as one million. China’s engagement with Africa has no doubt led to faster growth and poverty reduction on the continent. It is also relatively popular: In attitude surveys, 70 percent of African respondents have a positive view of China, higher than percentages in Asia, the Americas, or Europe.

While China’s deepening engagement with Africa has largely been associated with better economic performance, its involvement is not without controversy. This is particularly true in the West, as typical headlines portray an exploitive relationship: “Into Africa: China’s Wild Rush,” “China in Africa: Investment or Exploitation?,” and “Clinton warns against ‘new colonialism’ in Africa.” 

My forthcoming study, "China’s Engagement with Africa: From Natural Resources to Human Resources," aims to objectively assess this important new development in the world. It has six main findings:

1. First, on the scale of China’s activities in Africa: The media often portrays China’s involvement as enormous, potentially overwhelming the continent. According to data from China’s Ministry of Commerce (MOFCOM), the stock of Chinese direct investment in Africa was $32 billion at the end of 2014. This represents less than 5 percent of the total stock of foreign investment on the continent. Stocks naturally change slowly. But the "World Investment Report 2015" similarly finds that China’s share of inward direct investment flows to Africa during 2013 and 2014 was only 4.4 percent of the total. Of course, direct investment is not the only form of foreign financing. The Export-Import Bank of China and China Development Bank have also made large loans in Africa, mostly to fund infrastructure projects. In recent years, China has provided about one-sixth of the external infrastructure financing for Africa. In short, Chinese financing is substantial enough to contribute meaningfully to African investment and growth, but the notion that China has provided an overwhelming amount of finance and is buying up the whole continent is inaccurate.

2. The second main finding from the study concerns China’s direct investment and governance. China has drawn attention by making large resource-related investments in countries with poor governance indicators, such as the Democratic Republic of Congo, Angola, and Sudan. These deals are certainly part of the picture when it comes to China’s engagement with Africa. But the more general relationship between Chinese direct investment and recipients’ governance environments is different. After controlling for market size and natural resource wealth, total foreign direct investment is highly correlated with measures of property rights and rule of law, as one might expect. This is true both globally and within the African continent. China’s outward direct investment, on the other hand, is uncorrelated with measures of property rights and the rule of law after controlling for market size and natural resource wealth. In this sense, Chinese investment is indifferent to the governance environment in a particular country. While China has investments in the Democratic Republic of Congo, Angola, and Sudan, those are balanced by investments in African countries that have relatively good governance environments. South Africa, for instance, is the foremost recipient of Chinese investment. Furthermore, some of the big resource deals in poor governance environments are not working out well, so Chinese state enterprises may well rethink their approach in the future.

3. A third main finding emerges from examining MOFCOM’s registry of Chinese firms investing in Africa. In the aggregate data on Chinese investment in different countries, the big state enterprise deals naturally play an outsized role. MOFCOM’s database on Chinese firms investing in Africa, on the other hand, provides a snapshot of what small- and medium-sized Chinese firms—most of which are private—are doing in Africa. Unlike the big state-owned enterprise investments, these firms are not focused on natural resource extraction. The largest area for investment is service sectors, with significant investment in manufacturing as well. Many African economies welcome this Chinese investment in manufacturing and services.

4. The fourth finding relates to infrastructure finance. In recent years infrastructure financing has expanded and helped many African countries begin to rectify infrastructure deficiencies. Africa has been receiving about $30 billion per year in external finance for infrastructure, of which China provides one-sixth. Chinese financing is a useful complement to other sources, particularly as traditional finance from multilateral development banks and bilateral donors is concentrated on water supply and sanitation. Likewise, private participation in infrastructure is primarily aimed at telecommunications. China has filled a niche by focusing on transportation and power.

   Chinese financing of infrastructure has also enabled Chinese construction companies to gain a firm foothold on the continent. Evidence suggests that Chinese companies have become highly competitive, crowding out African construction companies. This is an area where a trade-off seems to exist between, on the one hand, getting projects completed quickly and cheaply and, on the other, facilitating the long-term development of a local construction industry.

5. This point leads to the fifth finding of the study. There are a lot of Chinese workers in Africa; the total is disproportionately high when compared to the amount of financing that China has provided and compared to migrants from other continents. This is a tentative conclusion because the data on this issue are particular weak. But estimates of Chinese migrants in Africa exceed one million. Many migrants initially move to Africa as workers on Chinese projects in infrastructure and mining and then, perceiving good economic opportunities, stay on. Similar to the dilemma confronting the continent’s construction industry, African countries face a tradeoff here: Chinese workers bring skills and entrepreneurship, but their large numbers limit African workers’ opportunities for jobs and training. The popular notion that Chinese companies only employ Chinese workers is not accurate, but the overall number of Chinese workers in Africa is large. Africa may want to take a page from China’s playbook and limit the ability of foreign investors to bring in workers, forcing them to train local labor instead.

The popular notion that Chinese companies only employ Chinese workers is not accurate, but the overall number of Chinese workers in Africa is large.

6. A final important finding of the study is that the foundation for the Africa-China economic relationship is shifting. China’s involvement in Africa stretches back decades, but the economic relationship accelerated after 2000, when China’s growth model became especially resource-intensive. It made sense for resource-poor China to import natural resources from Africa and to export manufactures in return.

These patterns of trade and investment are now likely to gradually shift in response to changing demographics. The working-age population in China has peaked and will shrink over the coming decades. This has contributed to a tightening of the labor market and an increase in wages, which benefits Chinese people. Household income and consumption are also rising. Compared to past trends, China’s changing pattern of growth is less resource-intensive, so China’s needs for energy and minerals are relatively muted. At the same time, China is likely to be a steady supplier of foreign investment to other countries, and part of that will involve moving manufacturing value chains to lower-wage locations.

Africa’s demographics are moving in the opposite direction. In fact, they resemble China’s at the beginning of its economic reform 35 years ago. About half of Africa’s population is below the age of 20, which means the working-age population will surge over the next 20 years, and will probably continue growing until the middle of the century or later. Roughly speaking, Africa needs to create about 20 million jobs per year to employ its expanding workforce. Twenty years from now, it will need to create 30 million jobs per year. Africa’s demographics present both an opportunity and a challenge. It is unrealistic to expect the China-Africa economic relationship to change overnight. Nor would it be reasonable to expect large volumes of Chinese manufacturing to move to the continent in the near future; it would be more natural for value chains to migrate from China to nearby locations such as Vietnam and Bangladesh. But if even small amounts of manufacturing shift, this could make a significant difference for African economies, which are starting out with an extremely low base of industrialization. And it is useful to have a long-term vision that an economic relationship that started out very much centered on natural resources should shift over time to a greater focus on human resources.

For more on China’s engagement in Africa, check out the Brookings event hosted by the John L. Thornton China Center and the Africa Growth Initiative this Wednesday, July 13, at 3:30pm. 

China has provided foreign assistance since the 1950s, and is now the largest developing country to provide aid outside of the Development Assistance Committee (DAC), a forum of the world’s major donor countries under the Organization for Economic Cooperation and Development (OECD). Like its foreign policy more broadly, Chinese foreign assistance has adhered to the “Five Principles of Peaceful Coexistence” and emphasized the virtue of national self-reliance. At the same time, it has served a strategic purpose alongside other foreign policy priorities.

A slow start but a steady increase

Compared to top DAC donor countries, the scale of China’s foreign assistance is still relatively small. According to some estimates and OECD International Development Statistics, China’s gross foreign aid in 2001 was extremely limited, amounting to only about 1.8 percent of the total contribution by DAC donors. However, since launching its “Go Global” strategy in 2005, China has deepened its financial engagement with the world, and its foreign aid totals have grown at an average rate of 21.8 percent annually. In 2013, China contributed about 3.9 percent to total global development assistance, which is 6.6 percent of the total contribution by DAC countries and over 26 percent of total U.S. foreign aid. 

Millions of USD (Current)

Gross foreign aid provided by China versus major DAC donors

And the lion’s share goes to: Africa

Africa is one of China’s most emphasized areas of strategic engagement. Particularly since the establishment of the Forum on China-Africa Cooperation (FOCAC) in 2000, the relationship between China and Africa has gotten closer and closer. In 2009, African countries received 47 percent of China’s total foreign assistance. Between 2000 and 2012, China funded 1,666 official assistance projects in 51 African countries (the four countries that don’t have diplomatic relations with China—Gambia, Swaziland, Burkina Faso, and São Tomé and Príncipe—were left out), which accounted for 69 percent of all Chinese public and private projects. Among the 1,666 official projects, 1,110 qualified as Official Development Assistance (ODA)—defined by the OECD as flows of concessional, official financing administered to promote the economic development and welfare of developing countries. The remaining 556 projects could be categorized, also according to the OECD, as Other Official Flow (OOF)—transactions by the state sector that are not “development-motivated” or concessional (such as export credits, official sector equity and portfolio investment, and debt reorganization). (Note: in terms of dollar amounts, not included in the statistics here, most Chinese lending to Africa and other parts of the developing world is not concessional and is therefore not foreign aid.)

Zeroing in on infrastructure

About 61 percent of Chinese concessional loans to Africa are used for infrastructure construction, and 16 percent are for industrial development. The three areas that receive the largest allocations of Chinese concessional loans are transport and storage; energy generation and supply; and industry, mining, and construction. A small portion of the remaining allocations go to health, general budget support, and education. 

Some have interpreted these trends to mean that China is making an effort to export domestic excess capacity in manufacturing and infrastructure, especially considering the uncertainties of China’s economic transition. But the motivations are broader than that. China’s “Africa Policy”—issued in December 2015, in Johannesburg—clearly expresses the Chinese government’s belief that infrastructure construction is a crucial channel for African development. This notion could be connected to the domestic Chinese experience of having benefited from the technological diffusion of foreign aid and foreign direct investment in the construction sector. Moreover, in practice, China’s more than 20 years of experience in implementing international contract projects, as well as advanced engineering technologies and relatively low labor costs, have proved to be a comparative advantage in Chinese foreign assistance. In addition, by prioritizing the principles of non-interference and mutual benefit, China is more comfortable providing infrastructure packages (e.g., turn-key projects) than many other countries. 

Doing assistance better

Legitimate concerns have been raised about China’s tendency to facilitate authoritarianism and corruption, as well that its assistance does not always trickle down to the poor. As such, the state-to-state Chinese approach to providing assistance should be reformed. Globalization scholar Faranak Miraftab indicates that on-the-ground partnerships between communities and the private sector—mediated by the public sector—could achieve synergies to overcome certain shortcomings, creating a win-win situation. With deeper involvement by domestic assistance providers, Chinese foreign assistance could touch more people’s lives by tackling both the short- and long-term needs of the most under-resourced parts of civil society. Domestic assistance providers should exploring public-private partnerships, which among other benefits could yield increased foreign assistance services. By focusing on its comparative advantage in contributing to infrastructure projects that benefit the general public while also facilitating participation from civil society, Chinese foreign assistance could bring more concrete benefits to more individuals. 

China has already begun tackling these and other weaknesses. Although infrastructure and industry still account for the largest share of total official projects in Africa, China has intentionally strengthened its official development finance efforts in areas related to civil society. Projects have surged in the areas of social infrastructure and services, developmental food aid and food security, support to non-governmental organizations, and women in development, to name a few. Moreover, following President Xi Jinping’s promise at the United Nations summit in September 2015, an initial $2 billion has been committed as a down payment toward the China South-South Cooperation and Assistance Fund. The funding is primarily designed to improve the livelihoods of residents of recipient countries and diversify domestic aid providers (e.g., NGOs) qualified to participate or initiate assistance projects in the least-developed countries. 

In order to achieve positive results, it is critical for the Chinese government to carry out detailed management initiatives to engage civil society: for example, establishing a complete system for information reporting and disclosure (actions have already been taken in several ministries and bureaus), publishing guidelines for the private sector to develop assistance services overseas, and improving coordination and accountability among ministries and within the Ministry of Commerce. Although challenges still remain, Chinese foreign assistance is moving in a positive direction without abandoning its defining characteristics.