The International Financial Institutions: Collaboration for Development and Growth

[caption id="attachment_3173" align="alignright" width="175"] Jim Yong Kim[/caption]

Leaders of the African Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, International Monetary Fund, and the World Bank Group pledged on February 26, 2013 close collaboration to support development and growth.

The leaders emphasized the need for coordinated efforts to achieve the Millennium Development Goals by 2015, which aim to end poverty and hunger, increase access to education and health care, improve gender equality, and ensure environmental sustainability.

“Nothing could be more important than ensuring young people get the right start in life. We aim to make 2015 the year in which children no longer negotiate access to basic education, mothers to the most basic health care, households to water and sanitation, or girls to the most fundamental opportunities for schooling, work, or voice in their communities. And we aim to ensure these gains are permanently sustained in the post-2015 era” said Donald Kaberuka, President of the African Development Bank.

The leaders pledged strong support for and collaboration with the UN-led process of defining the Post-2015 Development Framework. They voiced support for an approach that integrates concepts of economic, social and environmental sustainability. Noting that even recent gains in social indicators are at risk in the absence of a long term financing plan, leaders pledged to work together to develop options for long term investment to strengthen the foundations of growth. They called for a renewed focus on financing for development - with greater leveraging of official development assistance and private sector investment, as well as better domestic resource mobilization and management and stronger institutions. They pledged cooperation to build the statistical capacity of governments, to enable better policies, for example by deploying the latest techniques for monitoring poverty and inequality, and factoring natural wealth accounting into decision making.

“We are at a critical time where working together, we can bend the arc of history - eliminating absolute poverty, boosting shared prosperity, and defining a pattern of growth that demonstrates that we care for our planet and all its people”

- Jim Yong Kim, President of the World Bank Group.

“In these tough economic times, we’ll only reach our goals by pulling together. We will work with a wide variety of partners to reach our goals, thoughtfully and creatively. Civil society, business, and government need to think and work together. Our institutions aim to create an atmosphere for open dialogue and imaginative solutions to emerge” added Luis Alberto Moreno, President of the Inter-American Development Bank.

Issues of inclusive growth, environmental sustainability, and long term financing are global in nature. They affect richer and poorer countries alike. Recognizing this, the leaders of the Institutions welcomed the G-20 and G-8 analysis of related issues, and committed to harnessing their own institutions’ analytical and convening power to identify solutions to such pressing global issues, and making developing country issues thoroughly and clearly understood.

“Recent economic crises, which have put so many people at a risk of falling into poverty, mean we need to do more to promote macroeconomic stability, and to build strong and transparent financial systems. The very large gaps in development finance mean we’ll need to search for ever better ways to encourage investment, including building more resilient and effective financial systems to support more effective domestic resource mobilization and management” said Min Zhu, Deputy Managing Director of the International Monetary Fund.

The leaders committed to excellence in management and organization of their own institutions. In this respect they shared experiences with organizational change, and reiterated their commitments to the highest standards in serving clients, excellence in staffing and professional development, and collaboration on the ground among the Institutions.

“The development challenges we face at the global and national levels are of such scale that we must work together. It’s not only a question of financial resources, but of ensuring we can deliver the best available knowledge, best people, and best models of cooperation to our clients. They expect nothing less, and we aim to deliver nothing short of their expectations” said Suma Chakrabarti, President of the European Bank for Reconstruction and Development.


Nigeria's Ngozi Okonjo-Iweala: Fearless Opponent of Corruption

[caption id="attachment_3184" align="alignright" width="285"] Ngozi Okonjo-Iweala, Minister of Finance, Nigeria[/caption]

When Dr. Okonjo-Iweala departed the World Bank in 2011 to become Nigeria’s finance minister, she was managing director and second in charge. It was no surprise that in the following year her name appeared on a short-list for the WB presidency. She didn’t get the job but it is widely considered that she was by far the best candidate. At CFI.co we believe that the World Bank’s loss was Nigeria’s gain.

Okonjo-Iweala had also been finance minister (2003 – 2006) in an earlier administration. These were very different times and her crowning glory was in securing an $18 billion debt write-off from Nigeria’s creditors. She also ensured Nigeria’s first sovereign debt rating which resulted in significant foreign investment in the country.

Nigeria is now experiencing strong economic growth and her challenge is to see that the distribution of its benefits is fair. Income inequality would hinder sustainable growth but CFI.co believes that this strong leader is in the right place at the right time. She is a fearless opponent of corruption in all its forms.

Ngozi Okonjo-Iweala is a world renowned economist but more than this a role model for all talented and ambitious women in Nigeria and throughout the continent of Africa. We also believe she has much more to offer the world.


Flight Links: UK risks Billions in Trade with Fast Growing Economies

According to the Confederation of British Industry, the United Kingdom is likely to miss out on billions of pounds in trade unless it boosts direct flights to the fastest growing world economies.

New analysis published by the UK’s leading business group, reveals that adding just one additional daily flight to each of the eight largest high-growth markets would increase UK trade by as much as £1billion a year, with every increase in 1000 passengers generating up to £920,000 in new business.

In their report, Trading Places, the CBI warns the UK is failing to keep pace with major European competitors in winning new direct connections to Brazil, Russia and China, hitting long-term export potential, damaging competitiveness and deterring inward investment.

“Boosting exports is critical to our long-term growth."

- Katja Hall, the CBI Chief Policy Director

The CBI is calling on the interim report of the International Airports Commission – led by Sir Howard Davies – to support a thriving aviation network by proposing urgent investment in the poor road and rail links to the UK’s international airports, as well as taking action on hub capacity.

Katja Hall, the CBI Chief Policy Director, said: “Boosting exports is critical to our long-term growth. Every day we delay expanding our connections, we risk falling further behind our competitors. Firms in high-growth economies are not waiting for us to make a decision before taking their business to countries with much better flight links. For too many businesses, our lack of direct connections means selling abroad to the fast-growing markets is simply not a realistic option. Firms need frequent direct flights to the widest range of markets.”


Joyce Banda: Showing Solidarity with the People of Malawi

[caption id="attachment_3202" align="alignright" width="208"] Joyce Banda[/caption]

In April 2012, Joyce Banda, 62 years, became the first female president of Malawi following the death of Bingu wa Mutharika. She was minister of Foreign Affairs (2006 -9) and then vice president under Mutharika in one of the poorest countries in the world.

Her vice presidency and the transition of power was fraught with difficulties and danger but revealed her as a politically powerful, resourceful and determined woman who may be able to bring real improvement to the lives of her people. Mutharika’s administration was characterised by nepotism and chronic economic mismanagement which appalled donors – particularly the United Kingdom which was providing the largest share of aid.

Mutharika wanted his brother Peter as his successor and did his best to completely undermine Banda. She was expelled from the ruling Democratic Progression Party and there were attempts to seize her government vehicle and prevent her from registering her own party. The role of vice president was withdrawn during a cabinet reshuffle but according to the constitution she could not be removed from this office. With Malawi in disarray after Mutharika’s death she sought the support of the army commander who placed troops around her home.

Upon assuming the presidency, Banda decided to sell the presidential jet and reduce the government’s fleet of cars. She would also need to devalue the currency by 40 per cent in order to restore donor funding and correct the country’s relationship with the IMF. The president is keen to show solidarity with her countrymen – three quarters of whom are living on less than one dollar per day. She has said that, ‘The time has come to move from aid to trade’ and has hopes for the agriculture, tourism and mining sectors.

Amnesty International commended Joyce Banda for an ‘historic step forward’ when, in November, she suspended anti-gay laws pending a debate to repeal existing legislation. This followed international outcry when a gay couple were arrested in 2009.


International Chamber of Commerce: G20 Openness Could Improve

[caption id="attachment_3207" align="alignright" width="210"] Gerard-Worms[/caption]

Presenting pre-findings of an ICC Open Markets Index at an international business dialogue in Paris on March 4th, ICC Chairman Gerard Worms said that government authorities equipped with better information on their country’s market performance were better able to honour commitments on open trade and investment and resist taking protectionist measures to ‘protect’ domestic industries and jobs.

ICC’s Open Markets Index provides a balanced and reliable measurement of a country’s openness to trade and investment uniquely combining indicators of actual, de facto, openness of markets with those reflecting government measures considered barriers to market entry.

"At a time when the world economy remains at risk, protectionism undermines policies for economic recovery and job creation."

“At a time when the world economy remains at risk, protectionism undermines policies for economic recovery and job creation. We hope governments find the Open Markets Index to be a useful guide for concentrating on what needs to be improved, as well as assessing their own progress over time,” Mr Worms said during the first session of the event hosted by the Organisation for Economic Co-operation and Development (OECD).

ICC will publish the second edition of its Open Markets Index in the lead up to this year’s G20 Summit in St Petersburg, Russia.

“While G20 leaders play a key role in ensuring that governments around the world work collectively to lower trade barriers and stimulate growth and job creation, the Open Markets Index reveals that rather than leading by example, most G20 countries achieve only average scores for openness,” said Mr Worms. “In particular, high-growth BRIC economies tend to perform below average on most measures of openness.”


Hugging Hero is Embracing the World

[caption id="attachment_3234" align="alignright" width="131"] Mata Amritanandamayi[/caption]

Mata Amritanandamayi is an Indian spiritual leader known as ‘Mother’ and many regard her as a saint. Her message is delivered via a hug and in this way she has touched the lives of millions around the world.

The hugs are completely free of charge but involve a long wait in line as there is no shortage of takers. Visitors to the hugging sessions will have the opportunity to purchase Mata merchandise: the usual guru fare - some of which is gloriously over-priced – but there is no pressure or obvious efforts at salesmanship from her blissfully relaxed helpers. CFI.co understands that most of the profit generated by the Mata organisation funds worthy projects in India and other parts of the world. This seems to be a reasonable if relatively small-scale redistribution of wealth from the fairly affluent to the very needy.

We have no doubt that Mata Ammritandamayi is responding to a genuine human need and becomes our Hero given the incredible number of hugs during her typical 18 hour working day. Could it be that the visitor about to be hugged contributes as much himself to the magic of the moment? Most likely this is the case - and all the more wonderful if it should be so.

"The first step in spiritual life is to have compassion. A person who is kind and loving never needs to go searching for God. God rushes toward any heart that beats with compassion - it is God's favourite place."

The Mata Amritandamayi Math (MAM) is an international charity created in 1981 for the spiritual and material improvement of mankind irrespective of caste, creed or religion. It extends disaster relief, provides healthcare and education for the poor, supports the environment and feeds the hungry. MAM, and all other Amritanandamayi centres and organisations function collectively under the umbrella title of Embracing the World.

In July 2005, the charity’s disaster-relief work and other humanitarian activities were recognised by the United Nations which conferred Special Consultative Status to MAM with its Economic and Social Council [ECOSOC], thus enabling collaboration with UN agencies. Three years later, the UN’s Department of Public Information approved MAM as an associated non-governmental organisation to help its work of disseminating information and research into humanitarian issues.


IDB Hero Al-Madani: Resources, Creativity and Credibility

[caption id="attachment_3242" align="alignright" width="300"] Ahmad Mohamed Ali Al-Madani[/caption]

‘Today’s world is fragile and needs a new strategy for the post-crisis era. It is time to mainstream Islamic finance to address the myriad weaknesses inherent in the present global financial system. Islamic finance is ethical financing which is based on risk sharing and links the growth of credit to the growth of the real sector in the economy.  Islamic financial products and services are opening up new opportunities for businesses in the financial and non-financial sectors. During the financial crisis of 2008 a number of Islamic financial institutions proved themselves to be more resilient than conventional financial institutions.’

Ahmed Mohammed Ali Al-Madani, president of the Islamic Development Bank (IDB) since its establishment thirty eight years ago, was born in Madina, Saudi Arabia in 1934. He was appointed acting rector of King Abdulaziz University, Jeddah and served his country from 1972 to1975 as Deputy Minister of Education. He held the post of Secretary General of the Muslim World League from 1993 to 1995.

"It is time to mainstream Islamic finance to address the myriad weaknesses inherent in the present global financial system."

IDB is a regional lender promoting trade finance, economic cooperation and poverty alleviation in the Muslim world. The bank addresses both the symptoms and root causes of poverty by employing either short-run solutions - such as promoting economic growth that is expected to trickle down to the poor - or long-term strategies, mostly for the delivery of infrastructure and social services including healthcare and education. The Bank is an observer at the United Nations General Assembly.

In September this year, The IDB President and Bill Gates joined Secretary-General Ban Ki-moon and a number of heads-of-state at a high-level event during the UN General Assembly. Dr. Al-Madani announced IDB’s full commitment to ending polio forever. Bill Gates commented at the time, ‘ I am enthusiastic about the Islamic Development Bank joining this important effort because I’m confident we can defeat polio if three things happen: existing and new donors like the IDB commit the necessary long-term funding; global polio eradication partners continue to apply innovative best practices including adopting new technology and financing solutions; and, there is continued leadership and accountability at all levels of government in polio endemic countries. I believe the IDB brings resources, creativity and credibility that can meet each of these goals.’


Higher Growth When More Women Work

[caption id="attachment_3250" align="alignright" width="300"] Christine Lagarde[/caption]

"Employers who don’t offer equal opportunities to women simply ignore a large part of the skilled workforce. In many countries, growth could be much higher if more women were in paid employment. In Japan, for example, raising the female labour force participation rate to Northern European levels would permanently raise per capita GDP by 8 per cent. Women also have great entrepreneurial potential. For instance, women-owned companies represent between 30 and 40 per cent of formal small and medium-sized enterprises in emerging markets. Also, raising women’s incomes will improve education levels, as research shows that women spend a larger share of their income on the welfare of their children."

Christine Lagarde, President, IMF

International Women’s Day, March 8th 2013


Oxford University: Asset Stranding Risks in the High-Carbon Sector

The University of Oxford launch a new research programme to help businesses and policy-makers future proof against investments in assets that might become devalued or written off, otherwise known as ‘stranded’. Assets become stranded for a number of different reasons: they can be supplanted by greener alternatives or technological innovations; or in sectors experiencing change due to new regulations or resource constraints.

Asset stranding is currently little understood, but the implications are potentially very significant for polluting investments. The programme researchers, based at the Smith School of Enterprise and the Environment, aim to find out which assets and sectors are most at risk and evaluate how investors, businesses and policy makers can best respond to the challenges.

To mark the launch, Rt Hon John Gummer, Lord Deben, Chairman of the Committee on Climate Change, will give a lecture at the School, highlighting the need for businesses and policy makers to adapt to the new economic landscape. He said:  ‘Investors continue to deploy hundreds of billions of pounds into polluting and unsustainable sectors. In many cases these investments will not be worth what investors think. Climate change, scarcer resources, and new disruptive technologies will reduce value and strand assets. If investors better understand the risks of investing in these assets they will be attracted to greener alternatives and see them as better business propositions and safer places for their funds. The programme is doing the further research necessary to help underpin this vital transition.’

"Investors continue to deploy hundreds of billions of pounds into polluting and unsustainable sectors."

Professor Gordon Clark, Director of the Smith School, said: ‘We are looking at how changes in regulation, pricing, technology, society and climate could be a risk to a range of polluting assets and how this could be a material risk to the investors and businesses involved, as well as for policy makers and regulators. Our new programme is creating a critically important space for these issues to be understood and for appropriate responses to be developed.’

The four-year research programme aims to identify high-carbon sectors and assets that could be dramatically devalued or written off. The first project will focus on the international supply chain for the agricultural sector, examining methods of transportation and production. Other studies, to be commissioned as the programme develops, are likely to include transport, power generation, real estate and a range of commodities.

Through the programme, the researchers will better understand and inform current policy debates, particularly around issues like systemic risk and financial regulation. They aim to create new, robust tools to actively understand and manage the risks of asset stranding. They will also conduct analyses of investor portfolios to build an understanding of risk exposures and develop relevant best practice case studies to inform decision-making.

Ben Caldecott, a Visiting Fellow at the Smith School and Head of Policy at Climate Change Capital (an investment manager and advisory group specialising in the opportunities generated by the transition to a low carbon economy) said: ‘The implications of an economy-wide over-exposure to fossil fuel investments could be even more severe and wide-ranging than those of the recent financial crisis. Regulators need to figure out how to make the transition from the old high-carbon economy and carefully deflate a bubble in environmentally unsustainable assets.’

The programme is being supported by Aviva Investors, Bunge Ltd, Climate Change Capital Ltd and HSBC Holdings plc, with non-financial partners including the Carbon Tracker Initiative, Trucost and WWF-UK.


Our Hero Melinda Gates: No Little Woman

[caption id="attachment_3280" align="alignright" width="195"] Melinda Gates[/caption]

The Bill & Melinda Gates Foundation is the largest transparently operated private foundation in the world. Its global aims are to enhance healthcare and reduce extreme poverty. Melinda Gates is one of the three trustees that control the Foundation. The other trustees are Bill Gates and Warren Buffett. Currently the Foundation has an endowment of some $36.2 billion.

CFI.co has taken the somewhat controversial decision to single out Melinda as the philanthropic Hero rather than naming the Foundation or husband Bill. We do so in the confident belief that Melinda has been a full partner in controlling the foundation from its very earliest days. She also hastened the birth of the Foundation thus winning time in the battle against poverty and the struggle for improved healthcare. Melinda’s attitudes and focus have resulted in changes of direction for the Foundation which are significant.

"You have to let capitalism work the way it works. I don't think you want to make a fundamental change to capitalism. It would be different if we were taking all the wealth we had and, as Warren says, building pyramids to ourselves. We are not."

(Melinda Gates responding to the suggestion that because of growing income inequality in the US, the Gates family and their ‘Billionaire Club’ friends are giving with one hand and taking with the other.)

We credit Melinda with pushing Bill Gates to change the world through giving when he was personally committed to bringing change from a desk at Microsoft. It took a while for Bill to make the move but it would have taken much longer without Melinda’s interventions. Lives have been saved and lifestyles improved.

In 2010, Melinda influenced a Foundation shift in focus – from vaccines to mother and child – which recognised that technologies must engage with the complex needs of the beneficiary if they are fully to take hold.

The Foundation finances half of the world’s HIV treatment, has promised $10 billion for a ten year programme to provided vaccines for the world’s poorest, is supporting a green revolution in Africa and assisting mothers during childbirth in the most needy countries.


Vitali Klitschko: Punching Above His Weight

[caption id="attachment_3286" align="alignright" width="142"] Vitali Klitschko, Ukraine, Boxer & Politician[/caption]

One of the greatest heavyweight boxing champions of all time, Klitschko retained his WBC title in September this year. Known as Dr. Ironfist, he is the son of a Soviet general, speaks four languages, is passionate about chess and earned a PhD in sports science. And he wants to change the political landscape of the Ukraine.

A strongly pro-European figure, Klitschko made his first political statement in the ring eight years ago by wearing an orange flag on his shorts to protest an election fraud. He went on to win a seat on Kiev council and in 2011 formed the UDAR party, whose initials form the Russian word "punch".

Klitschko and UDAR are campaigning for improved services and against town hall corruption and the powers of business cliques. UDAR, now the country's fourth largest political bloc is also pushing for improved human rights, privatisation and European standards of governance.

"Sport has made me realise that you have to be stubborn and persevere to get results. It might take longer in politics, but once you have the right goal and desire, you will reach it."

The post-Soviet era experiences of Poland have been an inspiration to Klitschko. He believes that the comparison between that county’s recent achievements and the limited progress to be seen in Ukraine is lamentable. Both counties faced similar problems after communism but Poland overcame them in a way that led to stability and prosperity as a member of the European Union.

Working alongside his brother, Vitali Klitschko has established a charitable trust ‘to breathe new life into Ukrainian society.’ At CFI.co we like the cut of his jib and wish him well. What is Klitschko’s long term goal? Could he be sailing in the direction of the presidency?


Our Hero Ariyaratne: Truly Empowering People

Dr. A.T. (Ari) Ariyaratne founded the Sarvodaya Shramadana Movement in Sri Lanka in the 1960s and still serves as its President. It is the world’s largest spiritually-based people’s development movement and is at work in 15.000 villages throughout Sri Lanka.

Since those early days, Sarvodaya has brought together tens of thousands of people to create housing, solar energy, food production, pre-school, legal services, women’s projects, orphanages, child welfare agencies and village banks.

Ari was strongly influenced by the economist Ernst Schumacher whose 1973 book Small is Beautiful proposes smaller appropriate technologies that truly empower people - and this notion informs the Sarvodaya attitude to development aid. Dr. Ariyaratne has described the goal of Sarvodaya as a "dual awakening" - that of the individual and that of society. Sarvodaya means “the awakening of all” and Shramadana means “sharing”.

"Sarvodaya is the essence of religion because it seeks to unite all people so that they may work together to build a non-violent and cooperative society. Everybody wakes up through sharing labour, energy, resources, and love."

Dr. Ariyaratne is a Buddhist who cooperates with all – irrespective of religious and ethnic groupings - and has worked tirelessly to address the conflict in his country. Among his most treasured international accolades for development and peace efforts is the Mahatma Ghandi Peace Prize awarded by the government of India (1966).


Michelle Bachelet and the Right of a Woman to Decide

[caption id="attachment_3327" align="alignright" width="300"] Michelle Bachelet, Former President, Chile[/caption]

When Chile’s government was ousted by Augusto Pinochet in 1973, Michelle Bachelet’s father (a supporter of the deposed Salvador Allende) was arrested, tortured in prison and died in custody at the age of 51. Security forces later arrested Bachelet herself, then a 23-year-old medical student, jailing her at Villa Grimaldi, a house of horrors which she has never described in any detail. It has been reported that she would encourage the other prisoners to sing in order to keep hold of their sanity and cared for women raped by the guards.

Michelle Bachelet was the first female defence minister of Chile and then the first female president (2006-10) of this South American country. She is currently head of UN Women, the high profile United Nations organisation dedicated to gender equality and female empowerment. Among others, U.S. Secretary of State Hillary Clinton urged Bachelet to accept the post.

"The world's increasing population leads to poverty and scarcity of resources. This is due in part because women are denied access to contraception and education about family planning, which would counteract these problems. That the right of a woman to decide if and when and how many children she wants to have is still up for debate is a sign of the work that still lies ahead of us."

Her presidential election campaign in 2005 addressed poverty, called for a reform of the pension system and the improved rights of women and indigenous communities. This platform supported a continuation of Chile’s free-market policies and demanded improved social benefit programmes.

As president she insisted on equal representation of women in her cabinet. Her fiscal policies ensured that Chile was not overly affected by the global economic crisis and she left office as one of the most popular presidents of all time.


Financial Stability in the European Union: IMF Assessment

In its first ever European Union-wide assessment of the soundness and stability of the financial sector, the International Monetary Fund this month pointed to the need to step up regional efforts to manage financial crises and risks to keep the 27 countries that form the world’s largest economy safe and stable.

“Restoring financial stability in the European Union has not been easy, and the priority is now to establish single frameworks for crisis management, deposit insurance, supervision and resolution, with a common fiscal backstop for the banking system, especially for the monetary union,” said Charles Enoch, Deputy Director in the IMF’s Monetary and Capital Markets Department and head of the mission that conducted the assessment.

"The IMF said policymakers and banks have made good headway to fix recent financial problems in the European Union."

Repair and Reform

The IMF said policymakers and banks have made good headway to fix recent financial problems in the European Union. But the region remains vulnerable, and policymakers and banks need to intensify their efforts across a wide range of areas:

Bank balance sheet repair.

Banks need to build strong capital buffers. Greater disclosure requirements, especially of impaired assets, would buttress credibility in the improvement in banks’ health. National authorities and the prospective Single Supervisory Mechanism should undertake selective asset quality reviews, coordinated at the European Union level. This would add credibility to the stress tests envisaged by the Single Supervisory Mechanism and the European Banking Authority.

An effective banking union.

[caption id="attachment_3341" align="alignleft" width="210"] Bank of England[/caption]

Maintaining momentum to establish an effective Banking Union will anchor financial stability and ongoing crisis management. Allowing the European Stability Mechanism to directly recapitalize banks would help break the adverse link between government finances and banks, which has caused so much trouble in several European countries now undergoing painful adjustment. It will be critical for the Single Supervisory Mechanism to deliver supervision of the highest quality from the outset. Ultimately, its effectiveness will depend on strong governance and common safety nets in the form of a single resolution authority and deposit guarantee scheme. This recommendation builds on IMF research released in February 2013.

Stronger European Union financial oversight framework.

Prompt passage and implementation of capital requirements and resolution directives and regulations, as well as strong coordination across the various oversight institutions are important to achieve policy consistency, including with national policies. The IMF underscored that standards adopted through these directives should be well above internationally agreed minima.

The IMF’s assessment of the European Union covers a region rather than a single country and draws on the analysis and findings in individual European country reports, as well as visits to the key European Union and euro area financial oversight institutions in November and December 2012.

"Banks need to build strong capital buffers."

Main Risks

The IMF outlined three main financial risks facing the European Union:

Further declines in growth leading to deterioration in the balance sheets of banks and governments.

Stresses and dislocations in wholesale funding markets that could lead to adverse liquidity and refinancing conditions.

A major further drop in asset prices.

The IMF said uncertainty about the regulatory environment and the burden it may place on banks and financial institutions are also sources of risk. In several countries, the high degree of concentration in the banking sector creates too-big-to-fail problems that could amplify the country’s vulnerability.

Mind the Gaps

Policymakers are urged to promptly agree and implement proposals by the European Commission to harmonize capital requirements, bank resolution, and insurance supervision frameworks, according to the IMF.

Separating banks’ retail activities from those deemed more risky, along the lines of proposals set out in the Liikanen and Vickers reports, and currently being examined or implemented in a number of European Union member states, may assist authorities to resolve banks if necessary, but they are no panacea and should not substitute for other ways to improve loss-absorption capacity, the IMF said.

The IMF assessment found that the present weak economic outlook provides a challenge to the life insurance and pensions industries, parts of which have also been affected by exposures to weak banks and sovereigns. Careful attention will be needed by the supervisory authorities, particularly as the European Commission’s insurance supervision proposals are implemented.

Strong coordination across Europe’s various supranational agencies will be critical, the IMF said. This will help ensure smooth decision making and make policies consistent, especially for crisis management.

The IMF said European officials expressed interest in another assessment within about three years to assess progress in setting up the banking union and the changes to the financial oversight framework envisaged for 2014.


Gro Harlem Brudtland: Doctor, Politician and Our Hero

[caption id="attachment_3349" align="alignright" width="169"] Dr. Gro Harlem Brudtland, Norwegian Politician[/caption]

Born in 1939 to an Oslo family in which politics and medicine were part and parcel of daily life, Dr. Gro Harlem Brundtland, has been Director General of the World Health Organisation for the past fourteen years. Prime minister of Norway for much of the 1980s and 90s, she was the first female to take up this role and, at 42 years, the youngest ever to be appointed.

Her father, a doctor specialising in rehabilitation medicine was also a member of the Norwegian Labour Party and for a time minister of Defence. The family encouraged Brundtland to join the party when she was seven years old and convinced her that women can expect to achieve as much in life as men. Her husband, Arne Olaf, a political opponent who has a prominent role in the country’s conservative party is also an expert in international relations. According to Bruntland, ‘this makes for interesting breakfast debates.’

After graduating from medical school in 1963, Bruntland received a Master of Public Health from Harvard University. Her career then concentrated on paediatrics. In 1983, she set up the World Commission on Environment and Development, chairing the convention which coined the term ‘sustainable development’.

"There is a very close connection between being a doctor and a politician. The doctor tries to prevent illness, but treats it if it comes. It's exactly the same as what you try to do as a politician, but with regard to society."

Upon joining the WHO, Brundtland's championed key programmes including "Roll Back Malaria", "Tobacco Free Initiative", “Stop TB Project” and the development of an AIDS vaccine. Work began on a sustainable health finance system to help nations provide the necessary financial support to combat disease.

She has confronted the disease of global poverty saying, ‘The WHO has to drive home the message that poverty remains the biggest source of ill health – and that ill health in turn breeds poverty. We need to present the evidence and develop the language to demonstrate that the right investments in health for all – but especially to children and women – means investing in a strong economy.’


Ellen Johnson Sirleaf: A Role Model in Africa

[caption id="attachment_3354" align="alignright" width="199"] Ellen Johnson Sirleaf, President of Liberia[/caption]

CFI.co strongly supports this sentiment from the Nobel committee in their announcement that Sirleaf would share the Peace Prize for 2011 in recognition of her non-violent struggle for women’s safety and full participation in peace-building. We consider her an exemplary role model for ambitious and talented women in Africa.

Ellen Johnson Sirleaf, whose supporters describe her as the ‘Iron lady’, became the first female African head of state after Liberia’s civil came to an end. During her campaign she said that that she wanted to become president in order "to bring motherly sensitivity and emotion to the presidency as a way of healing the wounds of war” and encourage other women to aim for high office in the continent. She had served at the head of the Governance Reform commission which was established as part of the deal to end the war in 2003 and talks constantly of the fight against corruption.

A developmental economist, Mrs Sirleaf’s career included an appointment as Liberia’s minister of finance in 1979 and she has been Africa director at the United Nations Development Programme. Despite facing a popular presidential opponent she was considered well placed to rebuild Liberia's economy. As president, Sirleaf renegotiated a $1bn contract with the world's largest steel company, Arcelor Mittal and approved a $2.6bn iron ore concession agreement entered into between the government and a consortium of Chinese companies.

"We cannot achieve democracy and lasting peace in the world unless women obtain the same opportunities as men to influence developments at all levels of society."

She was imprisoned in the 1980s for criticising the military regime of Samuel Doe and then backed Charles Taylor's rebellion. Sometimes a controversial figure, Liberia's Truth and Reconciliation Commission recommended in 2009 that she be barred from public office for backing Mr Taylor - who was facing trial for war crimes. She ignored the ruling but has apologised for backing Mr Taylor.

Ellen Johnson Sirleaf has helped bring peace to Liberia, promoting economic and social development and significantly strengthening the position of women.


Dr Mahathir Bin Mohamad says: "Face up to the New Economic Reality"

[caption id="attachment_3362" align="alignright" width="139"] Dr Mahathir Bin Mohamad, Former PM of Malaysia[/caption]

Dr Mohamad, an active man despite his 86 years, tends to lecture Europe on money matters. As a national developer of proven ability and great success we are inclined to at least listen. Our Hero from Malaysia has certainly done his bit to help world economies converge.

This resolute and accomplished Malaysian politician served as prime minister from 1981 to 2003 and masterminded the country's transition from a sleepy former colony to a highly successful industrialised state. He has been active in politics since the end of World War II, a member of the United Malays Organisation (UMNO) since 1946 and in 1964 became a member of parliament.

Mathir Mohamad was kicked out of UMNO for espousing ethnic Malay nationalism in 1969 but soon re-joined the party after the appointment of a new PM. Much of the New Economic Policy adopted by the government two years later drew on his ideas. Clearly the economic condition of Malays had to be addressed given the way in which the ethnic Chinese community were dominating the local economy.

In 1981, following a series of distinguished senior ministerial roles, Mahathir became president of UMNO and the fourth prime minister of Malaysia – the first commoner to hold that office. His long term in government brought stability to Malaysia and the opportunity to follow policies that would encourage strong economic growth. He brought in tax reforms, reduced tariffs and privatised state-owned enterprises - always keeping the door open for foreign investment.

"The Malays are spiritually inclined, tolerant and easy-going. The non-Malays, and especially the Chinese, are materialistic, aggressive and have an appetite for work. For equality to come about, it is necessary that these strikingly contrasting races adjust to each other."

Mahathir’s approach to the ethnic question in Malaysia was to increase prosperity for all and the New Development Policy (1991) embodied this vision. In the process manufacturing industries thrived and Malaysia became one of the most important economies in the region; the lifestyle of ordinary Malaysians was utterly transformed.

According to Mahathir Mohamad, the message for Europe is simple: it must face up to the new economic reality. In a recent BBC interview, he noted that, ‘In Asia we live within our means. So when we are poor, we live as poor people. I think that is a lesson that Europe can learn from Asia. You refuse to acknowledge you have lost money and therefore you are poor. And you can't remedy that by printing money. Money is not something you just print. It must be backed by something, either a good economy or gold. The West must restructure their economies to become less dependent on the financial sector."


PM Shinawatra: Power through the Democratic Process

[caption id="attachment_3369" align="alignright" width="153"] Yingluk Shiniwatra, PM Thailand[/caption]

PM Yingluck Shinawatra easily survived a vote of no confidence in the Thai House of Representatives on November 28th this year. Polls also show her as having the confidence of the electorate as she ponders her first eighteen months in office.

A youthful and highly photogenic 45 year old former businesswoman, Shinawatra became Thailand's first female prime minister last year and has the distinction of been the youngest PM in the country for the past sixty years. She is following on from her brother Thaskin, a former PM now in self-imposed exile but who still has effective control of her Pheu Thai party. Mr. Thaskin was ousted in a 2006 military coup.

Her election promises included higher wages, lower taxes and free computers. This was the first time she had run for office and had never before held a government post. However, she is the youngest child of a highly political family, has two university degrees in politics and is the product of a well-oiled political machine.

"I will utilise my femininity to work fully for our country."

It is to her credit that Shinwatra mobilised her power base through the democratic process rather than in the bloody street protests that have been commonplace in Thailand. Her campaign was one of great charm and humility in which she sometimes damned her opponents with faint praise. She seems to have an easy and natural connection with ordinary Thai people and said that she planned to use her attributes as a woman to promote national reconciliation. The well conducted election and smooth transition of power has done much to boost confidence in Thailand.


Pinpointing the Value in CSR

By Thomas Lys, James Naughton and Clare Wang

The Unexpected Link between CSR Spending and Financial Performance

Proponents of corporate social responsibility (CSR) initiatives tend to justify their position by arguing that these expenditures improve a company’s economic performance―allowing it to earn higher profits through enhanced brand reputation, more-productive employees, and insulation from regulatory penalties. In other words, executives promote the company’s own interests by pursuing a strategy of “doing well by doing good.”

In contrast, economist Milton Friedman proclaimed in 1970 (the relative infancy of the modern CSR movement) that in a free society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” The seeming contradiction between Friedman and CSR proponents lies in how each defines CSR. Friedman focuses on “true” CSR expenditures, which provide only social benefits. As a result, under Friedman’s view, companies undertaking CSR initiatives do so to the detriment of shareholder value.

Our research on the impact of CSR expenditures on financial performance suggests that the views of both CSR proponents and Friedman are incomplete. We find that CSR expenditures generate insufficient returns and hence reduce shareholder value, consistent with the Friedman view. However, we also find that companies whose CSR spending exceeds investor expectations experience positive stock returns, consistent with evidence promoted by CSR proponents.

"Executives promote the company’s own interests by pursuing a strategy of “doing well by doing good."

These findings should serve as a wake-up call to executives who are either currently undertaking CSR or considering future CSR investments.

We reconcile these conflicting results by identifying a signalling component to CSR expenditures. When investors see a firm withhold or devote resources to CSR initiatives, they infer that its executives are acting on private information about the future earnings and cash flows of the firm. For example, if a firm spends more on CSR than investors expect, the excess component of CSR is viewed as an indicator of positive future financial performance. We find that the positive stock returns experienced by CSR firms do not arise because the economic benefits of CSR exceed their costs but because investors interpret excess CSR expenditures as a precursor to positive future financial performance. To put it simply, CSR is what “rich” companies do!

At a time when more and more corporations pursue CSR initiatives, often untethered from business strategy or performance metrics, executives need to understand the long-term value of these efforts and recalibrate their strategies accordingly. They must consider whether the corporate benefits from CSR justify their costs. Our research shows that, on average, they do not.

A Growing Emphasis on Corporate Social Responsibility

Over the past decade, more companies have embraced CSR and now disclose their activities to investors on an annual basis. In 2011, for instance, 57 per cent of Fortune 500 companies issued corporate accountability reports, up from 20 per cent the previous year. The growth of CSR can be traced in part to the expectation that companies can profit by serving the greater social good. For example, one of the justifications for CSR is that it builds pride and cohesion among employees, which results in better operational performance.

Many corporations have sought to use social impact as a core element of business strategy, identifying benefits and making informed choices. Others have proceeded in a more slipshod way, assuming that markets and customers would reward them for their corporate citizenship and virtue. However, absent a direct connection between CSR and financial performance, Friedman and his followers would seem to be right: executives would be irresponsible to pursue CSR initiatives.

Motivations for CSR Expenditures

Our research addresses two primary issues. Is CSR associated with improved financial performance? If so, what is the direction of the causality? In other words, do CSR expenditures lead to improved financial performance or does the anticipation of improved financial performance lead to CSR expenditures. We address these issues by focusing on three broad categories of strategic goals for CSR expenditures.

 Are CSR expenditures charitable donations? The truest form of CSR is when a company makes a direct monetary contribution for which it expects no return. An anonymous gift to a good cause would be one example.

Do corporations view CSR as a business investment? As noted above, many companies use CSR to address a social issue (such as the environment) while earning a positive economic return (for example, in the form of enhanced reputation). Although the benefits can sometimes be less tangible and thus harder to measure, executives expect some return on this investment. Spending need not be directly related to operations―McDonald’s establishment and support of the Ronald McDonald House charities is one example. By seeking to serve the greater social good, these efforts may increase the corporation’s image, boost revenues, and reduce costs (for example, if employees value such contributions and therefore accept lower direct wages).

Do CSR expenditures provide new information about future financial performance? Consider a business that has experienced a breakthrough that will cause profitability to soar in future periods. Information about this development is known only to the company’s executives. If executives were to increase the current level of CSR expenditures because of this information, then the CSR expenditures act as a mechanism that signals information about the company’s future prospects to investors.

To explore the link between CSR expenditures and financial performance, we collected information on CSR activities from the Thomson Reuters ASSET4 database, which provides comprehensive CSR data for companies in the Russell 1000. ASSET4 evaluates companies using 250 key performance indicators (KPIs) in four categories of performance: economic, environmental, social, and corporate governance. Our sample consists of hundreds of companies from 2002 to 2010 across a number of industries, and the primary measure of CSR investment relies on environmental and social factors only.

We compare a company’s CSR expenditures with its financial performance as measured by return on assets, operating cash flow, and size-adjusted stock returns. A key assumption in our analysis is that, based on a company’s current observable performance, operating characteristics, and industry, investors expect a certain level of CSR investment. To understand how CSR expenditures affect future performance, we distinguish between the expected and unexpected components of CSR expenditure. A positive association between financial performance and the expected component of CSR expenditures is consistent with CSR behaving much like a business investment, whereas a positive association between financial performance and the unexpected component is consistent with signalling. Our results are inconsistent with the investment explanation but consistent with the signalling explanation.

How CSR Sends a Signal to Investors

When investors see a company devote significant resources to CSR initiatives, they infer that its executives are acting on private information about future earnings and cash flows. In essence, only businesses that expect to have excess cash down the road can undertake such initiatives now. Even if a company took pains to communicate that it is a socially responsible enterprise, our results indicate that information in the corporate accountability report can be used as a more accurate predictor of future financial performance.

These findings contradict the current school of thought, which holds that CSR expenditures create value by being mutually beneficial to the company (through better operations or performance) and society (by helping to make a positive social impact). Our results show that CSR expenditures typically destroy shareholder value: the return they generate, on average, is below the company’s cost of capital. So while executives may believe that CSR creates goodwill among consumers and regulators—and it may do so in targeted circumstances —our research indicates that from the perspective of investors, these expenditures do not make a sufficient contribution to the bottom line to justify their capital costs.

Identifying Where the Value Lies

However, the overall level of CSR investment does have an impact on market perceptions. In short, investors expect that only successful companies have enough cash and resources to sustain CSR expenditures. Companies that exceed the expected level of CSR spending are perceived by investors as signalling better future performance. To highlight our approach and results, assume that in the previous year a company spent $9 million on CSR efforts. Investors, anticipating continued strong performance, might expect its level of CSR investment to be $10 million for the coming year. If executives spend $10.5 million—thus exceeding the expected level—investors interpret it as a positive sign and respond by bidding up the company’s stock price. Similarly, if CSR expenditures only total $9.5 million, investors will perceive this underinvestment as a negative indicator of future performance.

"In short, investors expect that only successful companies have enough cash and resources to sustain CSR expenditures."

These findings should serve as a wake-up call to executives who are either currently undertaking CSR or considering future CSR investments. Imagine that a company has a set amount to spend on CSR for the coming year and can choose between two options: support safe-water projects in Africa or simply give money away on a street corner. The choice seems ridiculous on its face. After all, the former would seem to confer reputational benefits, while the latter could result in derision or even serious misgivings about the judgment of the executive leadership. However, both choices provide comparable information about the company’s future cash flows: it would not engage in either activity unless it expected to have excess cash in the future. In simple terms, CSR is what “rich” companies can afford to do and “poor” companies cannot.

Striking a Better Balance

We recognize that our findings highlight a contradiction: while CSR expenditures do not create value for the typical business, investors expect that corporations will engage in a basic level of CSR, and deviations from this level will be interpreted as an indication of health and profitability. As executives reexamine their approach to CSR, they should keep the following lessons in mind:

Recognize the signaling power of CSR expenditures. Many executives have operated under the impression that CSR expenditures are indicators of their company’s virtue and progressive priorities and that investors would interpret these qualities as a sign of a high-functioning organization. Instead, these expenditures appear to be another channel through which a business communicates its financial prospects. Therefore, executives should be aware of how investors will perceive their organization’s level of CSR expenditure.

Become more strategic about CSR. Since our results indicate that CSR, on average, does not increase shareholder value, executives have the responsibility to be even more strategic about which CSR efforts to pursue. Some companies have made inroads in integrating CSR into business strategy. For example, when expanding into international markets, executives might choose to support causes or programs in these countries. Since investors expect successful companies to maintain CSR investment, corporate leaders should determine where these expenditures will make the greatest impact.

Our findings highlight a challenge around CSR: investors perceive it as discretionary spending unrelated to operational performance. Proponents of CSR cannot rely on general associations between financial performance and CSR expenditures in promoting these activities. Rather, they must clearly demonstrate the impact of specific initiatives in measurable terms to advance the merits of CSR.

About the Researchers

Thomas Lys

Eric L. Kohler Chair in Accounting, Professor of Accounting Information & Management

Department: Accounting Information & Management

James Naughton

Assistant Professor of Accounting Information & Management

Department: Accounting Information & Management

Clare Wang

Assistant Professor of Accounting Information & Management

Department: Accounting Information & Management

Reproduced with permission of the Kellogg School of Management and Kellogg Insight, http://insight.kellogg.northwestern.edu. © Kellogg School of Management at Northwestern University


Arab Countries In Transition: Where are they Heading?

By Masood Ahmed

Director of the IMF’s Middle East and Central Asia Department

"You can tell whether a man is clever by his answers. You can tell whether a man is wise by his questions."

— Egyptian Nobel Prize–winning author Naguib Mahfouz

The change that swept through the Arab world in spring 2011 unleashed a new optimism in the region, but many are now asking where the transition is headed.

The transformation in the Middle East presents a historic opportunity for the Arab countries in transition as they rethink not only their political but also their economic systems. Some of these countries have witnessed regime change (Egypt, Libya, Tunisia, Yemen) while others are undertaking political reforms from within (Jordan, Morocco). All of them can benefit from broad reforms to create more dynamic and inclusive economies that provide economic opportunity to all segments of society.

Toward a Guiding Vision

The year 2013 will be another difficult one for the Arab countries in transition. Only moderate economic recovery is in the cards—not enough to generate the jobs needed to meaningfully tackle the region’s substantial unemployment. And the tragic conflict in Syria is leading to a serious humanitarian crisis that is having spillover effects on neighboring countries too, especially Jordan and Lebanon.

Important as it is now to focus on maintaining economic stability, it is vital not to lose sight of the more fundamental medium-term challenge of modernizing and diversifying the region’s economies, creating more jobs, and providing fair and equitable opportunities for all. Restless populations’ growing impatience for quick results—in the form of new jobs and better incomes and social conditions—is an incentive for policymakers to proactively introduce changes to the existing economic systems (see “Freedom and Bread Go Together,” in this issue of F&D).

A comprehensive reform program needs to provide clear goals for the economic transition. Unlike the transformation of Eastern Europe more than 20 years ago, during which many countries turned toward the European Union (EU) and its economic model, today’s Arab countries in transition lack a clear role model for their final economic destination. But like oarsmen racing a rowboat, only if people act jointly, driven by a common goal, can they excel.

Comprehensive economic reforms are needed to change these economies from following a “rent-seeking” model—in which firms aim to prosper from special government privileges or monopoly rights—to one whose guiding principle is the creation of economic value and jobs. But while such transformations produce winners, they also create losers, many of them politically well connected. Such vested interests will fight reform. But during the political upheaval that accompanies the creation of a new order the influence of such interests could be reduced—opening a window to reform.

National policymakers are clearly responsible for defining their reform agendas, but the international community can help by offering financing, policy advice, and better market access for the region’s exports. The international community has already provided substantial financial assistance. Apart from sizable contributions from bilateral donors, especially the countries of the Gulf Cooperation Council, international financial institutions have committed $18.5 billion since the beginning of the transition, not counting the IMF’s commitment of more than $8 billion to support home grown economic programs in Jordan, Morocco, and Yemen. The IMF is also engaged in discussions on financial support for Egypt and Tunisia. More financing is clearly needed, and beyond financing, better trade access and technical policy advice will also be crucial. The economic challenges in the Arab countries in transition extend well beyond the IMF’s expertise. Development agencies such as the World Bank and other international and regional financial institutions, as well as bilateral partners, are also contributing and must continue to do so in the period ahead.

Structural Challenges

The Arab countries in transition have long suffered from a lack of dynamism, with high unemployment and—despite reform efforts—an inability to generate per capita growth on par with other emerging market and developing economies . The region’s labor force participation is low, and the responsiveness of employment to growth has been among the most sluggish in the world.

While many of these countries had moved over time to private sector–led systems, government jobs remain much more important than in other regions. The economic vitality that helped lead the transformation in emerging market and developing economies in other regions has been absent in many Arab countries.

To unlock the region’s vast potential, many factors come into play, and the recipe for reform will naturally vary across countries. But there are some common priorities (see IMF, 2012).

Greater trade integration, both within the region and in the world economy, will be essential not only to boost growth but also as a catalyst for other important reforms. Business regulation and governance reforms are needed to ensure simple, transparent, and even handed treatment for companies, and ultimately greater transparency and accountability of public institutions. Labor market and education reforms will ensure adequate skill building and protection of workers. Improving access to finance will help catalyze entrepreneurship and private investment. And public finance reform will help free up resources for high-priority expenditures and reduce vulnerability, which will also spur growth.

Boosting Trade

In recent decades, trade has not been a significant engine of growth for Arab countries in transition. The region’s exports are both proportionally smaller than in other economies and mainly to Europe. This has prevented the region from benefiting from the high growth of many emerging markets, particularly in Asia. And progress toward exporting more higher-value-added products remains limited.

Deeper trade integration could significantly boost the region’s economies, creating growth and jobs and helping maintain the momentum for broader reform. Such integration into the global economy would also help provide discipline and incentives to enact other reforms aimed at strengthening competitiveness.

"In recent decades, trade has not been a significant engine of growth for Arab countries in transition."

For the Arab countries in transition, trade integration will first and foremost require better access to advanced economy markets. For instance, high tariffs, quota restrictions, and farm subsidies remain a significant impediment to agricultural exports to the EU, and current agreements with the EU do not provide for liberalization in trade in services.

To fully reap the benefits of integrating into global trade, the Arab countries in transition should also further liberalize their own tariffs and nontariff barriers and diversify trade toward fast-growing emerging markets. Increased regional integration, by addressing nontariff barriers and harmonizing policies, would also help the Arab countries in transition integrate into the global supply chain.

Business Made Simpler

These Arab countries face a legacy of complex and burdensome business regulations. Egypt, for example, has 36,000 often overlapping regulations that affect the private sector. As a result, it is often a lengthy, expensive, and complicated proposition to start and run a business.

Most countries in the region fare poorly on global governance rankings, and increasingly so over the past decade. Corruption is a major problem: more than half the firms in the Middle East and North Africa region report that they have been asked for bribes—a much higher share than in any other region in the world (World Bank Enterprise Surveys).

Although many countries have already taken action, it will take continued and intensified efforts to improve business regulation and governance. Lasting success calls for a system of checks and balances to insulate key national and regional institutions from excessive government discretion and non-transparent intervention. The experience of east Asia, for example, shows that countries that are effective in creating accountable, rules-based institutions generate significantly more economic growth than those whose institutions remain subject to arbitrary intervention by political leaders and public officials (World Bank, 2009).

Although countries differ in their reform needs, strategies to reform business regulation should focus on removing the barriers to starting or closing a business. Entry requirements—such as sector-ministry approval, which gives officials substantial discretion over which investors to favor or exclude—should be reviewed and based on clear and transparent rules. Similarly, high minimum capital requirements and restrictions on foreign ownership should be relaxed, unless they reflect a particular regulatory concern. Reform efforts should also focus on removing exit difficulties and introduce modern bankruptcy codes that decriminalize business failure.

Jobs and School

Labor markets in the Arab countries in transition face substantial problems. High unemployment is compounded by significant demographic pressure as more of the young population enters the labor market. Youth unemployment is high, ranging from 18 percent to 30 percent in Egypt, Jordan, Morocco, and Tunisia, and women face particular problems in securing employment.

Although the roots of the problem vary across countries, there are some common factors. Labor regulations discourage firms from hiring and divert job seekers into the informal sector, where workers do not enjoy the same level of protection as in the formal economy. The (implicit and explicit) employment guarantees in government hiring—and mismatched salary expectations resulting from comparatively generous civil service compensation—have led to market segmentation and excess demand for public sector jobs. The education system’s strong focus on formal qualifications for entry into the civil service means that labor market entrants often do not have the right mix of skills for today’s job market.

Solutions to these employment problems will vary among countries, but should generally address five areas: reviewing labor market regulation to reduce disincentives for hiring while maintaining adequate worker protection; revisiting public sector hiring practices and compensation policies to reduce the public sector’s labor market dominance and bias; reforming the education system, aligning it better with the needs of private employers; pursuing active labor market policies to make quicker inroads into lowering unemployment; and emphasizing policies that promote youth and female employment.

Where’s the Money?

Access to finance is a major constraint in the Arab countries in transition. Private credit disproportionately benefits large, established companies, and, in some cases, private sector credit has been crowded out by the financing of government budget deficits. Only 10 percent of firms finance investment in the MENA region through banks—by far the lowest share among the world’s regions—and 36 percent of firms in the region identify access to finance as a major constraint, surpassed only in sub-Saharan Africa (World Bank Enterprise Surveys). Smaller firms in particular, deprived of bank credit, must rely on whatever limited alternatives they can find to carry out their investment plans.

The cost of lost opportunities from limited access to finance is large. Empirical estimates show that raising access to finance in the MENA region to the world average could boost per capita GDP growth by 0.3 to 0.9 percentage point.

Expanding access to finance is thus a priority for policymakers seeking higher growth and employment. Strategies for improving access to finance will differ among the Arab countries in transition given their different starting points, but must center on developing or strengthening alternatives to bank financing, improving the financial infrastructure, and strengthening competition in the financial sector.

Taxing Times

Since 2011, government expenditure in the Arab countries in transition has been driven by the wage bill and subsidies, both of which were raised substantially in response to social pressures and higher international prices for imports. This spending has come in part at the expense of capital expenditures, which does not augur well for these countries’ medium-term growth potential. Higher government expenditures have also increased deficits and debt, both of which make countries vulnerable.

IMF estimates indicate that untargeted subsidies now cost the MENA region’s budgets almost 8 percent of GDP. Generalized subsidies are an inefficient means of social protection: only about 20 to 35 percent of spending on subsidies reaches the lowest 40 percent of the income distribution. By contrast, in well-designed means-tested cash transfer systems, typically 50 to 75 percent of spending reaches the bottom 40 percent. If such transfer systems prove hard to implement, better targeting of price subsidies is the next best approach.

"IMF estimates indicate that untargeted subsidies now cost the MENA region’s budgets almost 8 percent of GDP."

Reforms on the revenue side will differ according to countries’ starting positions and preferences. Several countries, including Egypt, Jordan, and Yemen, have the capacity to raise additional revenue from direct taxes such as those on income, profit, and capital gains, which are now below the emerging market and developing economy average. Many countries could increase their income from a value-added tax by exempting only necessities and improving compliance. And in some cases—Egypt, for example—standard rates could be raised closer to international averages. Regardless of the choice of instrument, the objective should be a broad-based tax system that generates the necessary fiscal resources fairly and without discouraging economic activity.

Protecting the Poor

Reforms on both the expenditure and revenue side will raise money that can be spent on priorities such as infrastructure investment and health and education, which will increase growth and make it more inclusive. Some of the fiscal savings should also translate into lower fiscal deficits, which would reduce high debt—a key macroeconomic vulnerability in the region—and spur growth.

While generalized price subsidies are prevalent in the region, targeted safety nets to protect the poor and vulnerable are much less developed. Now that budgetary pressures make it all the more urgent to reform generalized subsidies, it has become equally urgent to develop better and more robust safety nets that target the needy. In some instances this will require a period of preparatory technical work, but in other areas immediate improvements can be had by leveraging existing nascent programs.

Getting the Politics Right

No doubt, implementing a comprehensive economic reform agenda will be tough, and getting the political economy right will be critical. More than ever, policymakers’ success will depend on listening to all stakeholders’ views when formulating policy agendas—including those whose voices were not heard under previous regimes.

An element of success is knowing who stands to lose as a result of reform—whether in certain regions or economic sectors or along demographic or income groups. Such knowledge can help predict opposition to proposed plans. In a second-best world, it may be necessary to move ahead with reforms that garner sufficient support and postpone others: some progress is better than none at all.

Reform plans need to be anchored in clear and measurable performance goals. Otherwise, governments risk talking about reform without implementing it.

Effective communication is key to successful change and—particularly in the era of electronic communication and social networking—needs to be an integral part of the planning process. People must understand the reasoning behind difficult decisions if they are to support tough changes. For example, when reforming subsidies, policymakers should explain how expensive and inefficient existing subsidies are and the costs they impose on other parts of the budget. And in any reform involving revenue increases or expenditure cuts, it is important to demonstrate that the proceeds are being used to good effect.

Give Change a Chance

Each country’s policymakers must articulate an agenda for economic transformation, drawing on the perspectives of various national stakeholders, the lessons of international experience, and the expertise of international agencies. The specifics will vary, but there are key common elements that respond to shared concerns. All must embark on this process with urgency, to build a shared national vision of how the economic framework will evolve and reassure hesitant investors on the future rules of engagement, thus accelerating the delivery of results that will sustain popular support for economic and social progress.


The Queen of Jordan: More Than an Ornament

[caption id="attachment_3405" align="alignright" width="300"] Rania Al Abdullah, Queen of Jordan[/caption]

Born in 1970 in Kuwait to Palestinian parents, Rania, wife of King Abdullah II has been his Queen since 1999. Her concerns at home include environmental matters, health, education, youth and human rights.  She looks to ‘Righting the wrongs of the country and helping the people have better lives’. Much more than a royal ornament, Rania has made a good stand against terrorism and spoke eloquently after the bombings in Amman.

Her first venture was the establishment of the Jordan River Foundation (1995), an NGO which places the welfare of children above political considerations and social taboos. In 2002, Queen Rania was appointed as a member of the World Economic Forum’s Foundation Board, became a member of the UN Foundation Board of Governors four years later and Chair of the UN Girls Education Initiative in 2009. She is UNICEF’s advocate for children.

"She looks to ‘Righting the wrongs of the country and helping the people have better lives’."

After receiving a Business Administration Degree, Rania took up posts in Amman at Citibank and Apple. She is a respected author who writes mainly for children and in May 2010 topped the New York Times Best Seller List (Children’s Books).


Dilma Rousseff: Big Shoes Too

Dilma Rousseff became the first female president of Brazil in October 2010.  As successor to the popular and charismatic Luiz Inacio Lula da Silva, she had big shoes to fill. It can now be safely said that although their styles are different, Rousseff has not disappointed her people and has the approval ratings to prove it. The President has been able to keep up the momentum of the previous administration which was instrumental in lifting so many Brazilians out of poverty and creating a fast-growing and dynamic economy.

Before her election success, President Rousseff had been a career civil servant. She was a very effective chief-of-staff to Lula, her mentor, for five years and very much his choice for the job. They shared an unshakable belief that Brazil’s major challenges were at home and that the country needed to mobilise its considerable resources and potential for the benefit of all.

Efficiency, honesty and transparency are the watchwords of the Rousseff administration and she has always waged war on corruption. There is a sense of justice, opportunity and equality in contemporary Brazil that makes the people very proud. This contrasts with a sense of powerlessness and exasperation of many people in austerity Europe. Although the economy stalled in 2012, Brazilians are more than comforted by the fact that unemployment is at such a very low level (less than 5% as of December 2012).

"Efficiency, honesty and transparency are the watchwords of the Rousseff administration and she has always waged war on corruption."

Expectations in Brazil, the world’s sixth largest economy, are high and the creation of new jobs is, of course, of paramount importance. Significantly, Rousseff has been encouraging entrepreneurship in a big way and the number of start-ups is increasing dramatically. At CFI.co we believe this is the surest way for Brazil to move forward.

As soon-to-be hosts of the Soccer World Cup and the Olympics, Brazilian pride will take another boost and Rousseff and her government look set to deliver further on the aspirations of their people. As for the economy, Rousseff has certainly kept the train on the line during her presidency and avoided over-heating. She has promised a PIBao grandao (a big fat GDP) in 2013 to make up for the disappointment of last year and has the skills, authority and determination to see that this happens.


UNCTAD on Emerging Markets FDI Trends

Foreign direct investment (FDI) going into and out of the emerging economies of Brazil, Russia, India, China and South Africa – collectively known as BRICS – is mounting in global influence, according to a United Nations report released on March 25th.

The latest Global Investment Trends Monitor (GITM) shows that over the past decade, FDI going into BRICS has more than tripled, totalling $263 billion in 2012. This figure represents 20 per cent of world FDI flows, and is a significant increase considering it was only 6 per cent in 2000.

Meanwhile, investment from BRICS into other countries has climbed from $7 billion in 2000 to $126 billion in 2012, rising from 1 per cent of world flows to 9 per cent, with China and Russia accounting for the majority of these investments.

In particular, the report highlights that foreign investment from BRICS into Africa represented 25 per cent of Africa’s inflows last year, with most funds going to the manufacturing and services sectors.

"The latest Global Investment Trends Monitor (GITM) shows that over the past decade, FDI going into BRICS has more than tripled, totalling $263 billion in 2012."

While labour costs in Africa may not differ significantly from those in the firms’ home economies, the duty-free, quota-free access of African countries and China’s zero-tariff measures for African least developed countries (LDCs) have generated manufacturing investment.

Brazil, for example, has expanded its business in the new African ethanol industry in countries like Angola, Ghana and Mozambique; China is one of the top investing countries in LDCs such as Sudan and Zambia; an Indian company recently acquired an African mobile phone network; and Russian banks are expanding to countries such as Côte d’Ivoire and Nigeria.

The report notes that this growing relationship between BRICS and Africa is likely to be reinforced in the future due to the rapid economic growth and industrial upgrading currently taking place in BRICS countries.

“The rise of FDI in manufacturing, which has positive consequences for job creation and industrial growth, is becoming an important facet of South–South economic cooperation,” it says.

However, the main share of BRICS’ outward investment is still in developed economies, with 34 per cent of their stocks going to the European Union. The report notes that these investments are in large part driven by ‘market-seeking motives’ as well as mergers and acquisitions across borders.

The report, produced by the UN Conference on Trade and Development (UNCTAD), was released ahead of the 5th BRICS Summit in Durban, South Africa, and whose theme is “BRICS and Africa: Partnership for development, integration, and industrialization.”


WTO: China’s Role in Global Economic Governance

By WTO Director-General Pascal Lamy

Extracts from his Speech delivered at the China Development Forum in Beijing, 24 March 2013

[caption id="attachment_3438" align="alignright" width="300"] WTO Director-General Pascal Lamy[/caption]

Few could possibly disagree that China’s economic performance since 1979 has been miraculous. A poor and inward-looking economy with a per capita income of 180 USD has been transformed into a middle-income country with a GDP per capita of around six thousand dollars. Hundreds of millions of people have been lifted out of poverty. No other country has achieved an average of 10 per cent growth over such a long period of 30 years. The world has clearly benefited from China’s growth, its affluence, its strength and of course, it is feeling its increasing global impact. These achievements are not without challenges.

On the macroeconomic front, China faces some imbalances, including over-investment, over-production capacity in some sectors, and over-supply of liquidity.

High unemployment rates threaten social stability. So for a long time, China will need high growth rates to create sufficient jobs to ensure social harmony. With its not-well-developed private sector, the main responsibility of creating new jobs lies on the shoulders of the government.

China’s remarkable achievements and future challenges, combined with the size of the country, have understandably focused China’s leaders’ attention on domestic issues. Ensuring political stability and such formidable transformation and reforms has been priority number one for the government. But today, in China like elsewhere, the borders between domestic and international issues are cracking.

"Few could possibly disagree that China’s economic performance since 1979 has been miraculous."

In today’s globalised world, where countries are so closely interconnected, China cannot solve its problems alone. China’s problems are no longer China’s only. A large proportion of Chinese economic activities and production are intertwined with those of other trading partners, thanks to value chains.

For example, the cooling down of China’s real estate market has a direct impact on international steel prices and investment plans of Australian and Korean producers. The purchase decisions by COFCO impact US and Brazilian soybean producers.  Without China’s participation, there is no way that the world’s efforts to reduce CO2 emission could bear fruits. Without China’s participation, the expansion of the WTO’s Information Technology Agreement will not be commercially viable, as China already accounts for over 25 per cent of global trade in IT products.

In a rapidly changing world, it is increasingly hard for big powers such as US and China to address their domestic issues without global policy coordination or to devise domestic economic policies without them having a global impact.

But this new reality is also challenging the architecture of global governance as it has been shaped during the 20th century, with its distinction of North and South, of developed and developing countries.

Is China now a developed country? Yes, in the eyes of some. Or a developing country?  Yes, in the eyes of others. A superpower to replace the US in ten years’ time? Good in the eyes of some, bad in the eyes of others. A rich country with many poor?  Or a poor country with many rich?

In my view, there is no simple answer to these questions. China is unique. Never in human history have we seen a country featured both as the second-largest economy, while being an economy with a per capita income ranking number 100 in the world.  This is today’s China.

In the WTO Doha Round negotiations, Chinese negotiators have stressed the fact that its GDP per capita is very low, so it is entitled to benefit from flexibilities given to developing countries. While on the other side, advanced economies have argued that as Chinese products are so competitive globally, China should do much more than other poor and weak economies and should not use its developing country status as a cover to avoid taking more international obligations. The confrontation on what should be the appropriate balance of rights and obligations between advanced economies and emerging countries has largely contributed to the Doha Round stalemate.

This debate is not exclusive to the WTO. We have also seen it in the UN climate change negotiations.  It is no longer an economic issue but a political matter. If held as a matter of principle by both sides, any compromise will be extremely difficult to find. If not handled properly, it could turn into a major barrier for China to play a more influential role in the future agenda setting of global governance. However, I did notice some interesting signals by the new Chinese leadership. In a recent interview, President Xi Jinping said that “China will shoulder greater international responsibilities and make a greater contribution to peace and development”. I think we are all encouraged by these words.

As an increasingly heavy weight in the global economy, China definitely has a huge stake in making sure that multilateral systems work effectively. So far, China has actively participated in various configurations of global economic governance. But it has not yet taken a proactive role. China is still a “partial stakeholder” in global governance, although a member of the UN Security Council or of the G20.

Which are the trade-related areas where, in my view, both the world and China would benefit from China taking a more active role?

The first is on investment. As a large recipient and as a large investor in the next decades, China has a strategic interest in leading towards a Multilateral Investment Framework (MIF) in the WTO.

The journey of China’s overseas investment has not been smooth. A new international investment agreement could help provide a predictable and safer framework for Chinese overseas investments. This is particularly important for China not only because of the barriers to entry but also because it will be more difficult for the Chinese government to support overseas operations through industrial policies or fiscal incentives. Creating a level playing field for Chinese investors will be a more effective option.

A second area is joining the WTO Government Procurement Agreement. China committed to start its GPA accession negotiations when it joined the WTO.  The negotiations are under way and I believe it would be beneficial for these negotiations to be concluded as soon as possible. It is a good means to ensure value for money. It is also an effective instrument to curb corruption which, as we all know, is a huge tax on the poor.

A third area might be China’s contribution to a more balanced and stable international monetary system, given the growing weight of the Renminbi in international exchanges of goods, services and capital.

A fourth area would be China’s active participation in fostering regulatory convergence in the area of technical standards, sanitary and phytosanitary measures, or food safety regulations. These are important domestic issues, as we know, for China. But also an area where the size of the Chinese market would allow China to influence global rules.

Let me conclude with four messages.

First, China’s continuous growth and its success in changing its growth model will be vital to the world’s economic prosperity. We have every reason to sincerely wish China success in this endeavour.

Second, China’s economic take-off benefited from a stable external environment. Its sustainability depends on a well-functioning global trading system. As a key stakeholder, China should take a more proactive role in international economic governance, including pushing for an early-harvest Doha Round package to be agreed at the Ninth WTO Ministerial Conference in Bali this December.

Third, a harmonious society in China will be difficult to achieve without a more harmonious world.  China has to become an agent of convergence in global issues. I listened carefully to Vice Premier Zhang this morning when he said that China will take a greater role in global governance.

And finally, the debate on the right balance between benefits and contributions to global economic governance is deeply rooted in values. To address this politically sensitive issue, mutual understanding of different values is a prerequisite. Differences in politics are often rooted in differences in perception. Perceptions are often rooted in different values. As an old civilization, China is well placed to promote a frank exchange on values among different civilizations. I believe this exercise could help in enhancing mutual understanding, in searching for common values and in laying down a firm basis for better global economic governance for the future.


Big Crowds Witnessed at Cityscape Egypt

[caption id="attachment_3458" align="alignright" width="300"] H.E. Dr. TarikWafik, Minister of Housing and Urban Communities and H.E. Dr. Osama Kamal, Cairo Governor.[/caption]

CAIRO – Cityscape Egypt has once again delivered a strong turnout of serious home buyers and investors packing the exhibition halls over the past three days.

Mr. Ashraf El Gharib, Marketing and Sales Director of Rooya Group speaking on the third day of the exhibition said “we are enjoying high traffic and great audience, who are serious buyers going into details.”

Many visitors commented that they weren't aware of the showcased projects before visiting Cityscape Egypt. The exhibition provides them with a platform to evaluate the various projects on showcase, connecting all of Egypt’s leading developers with potential home buyers under one roof.

“I find Cityscape Egypt to be the place that contains all alternatives for anything I need. It’s been very nice this year,” said Ranya, an interior designer visiting Cityscape Egypt.

“I am attending Cityscape Egypt for the first time, I decided to come to explore the new ideas and opportunities in the real estate market and what’s new to be offered at the exhibition in Egypt and it’s proved to be a useful experience. It’s been awesome,” said Yehia, a private business owner and visitor at Cityscape Egypt.

“We are certainly witnessing a high turn out this year especially during weekend days.”

“We are certainly witnessing a high turn out this year especially during weekend days,” said Mr. Chris Speller, Commercial Director for Informa Exhibitions.

“The strong attendance sends a positive message to investors around the globe and proves that the real estate industry will revive quickly in Egypt amid anticipation of an increase in business in the ever-changing real estate marketplace,” added Mr. Speller.

Several announcements were made alongside Cityscape Egypt by exhibitors, including SODIC releasing its EGP 1.8 billion sales figures over 2012. Moreover, SECON signed agreements with Hill International and EHAF Consulting Engineers to manage its “SECON Nile Towers” project.  Hyde Park Developments also held a press conference detailing the company’s participation in Cityscape Egypt with its New Cairo development Garden Heights.

Cityscape Egypt will return Cairo from 20th to the 23rd of March 2014 and showcase even more real estate projects from Egypt and all over the world. For more information on the next edition of Cityscape Egypt visit www.cityscapeegypt.com.


Technological Innovation Must Power Economic Growth in Africa

[caption id="attachment_3469" align="alignright" width="213"] Francis Gurry, DG of WIPO[/caption]

Technology, science and innovation play a key role in the development of Africa, United Nations officials stressed today, calling on policymakers to redouble their efforts to support this field and form partnerships that harness its power.

During a March 2013 meeting with more than 20 African ministers in Dar Es Salaam, Tanzania, the Director General of the World Intellectual Property Organization (WIPO), Francis Gurry, said policymakers had “a unique opportunity to define the key role that science, technology and innovation can play in achieving the development goals of the African continent.”

The UN Under-Secretary-General for Economic and Social Affairs, Wu Hongbo, underlined the link between technology and economic growth, and noted that technological progress can be used to achieve the anti-poverty targets known as the Millennium Development Goals (MDGs) by their 2015 deadline.

Green technologies can help facilitate access to energy, while innovations in the health sector can enhance service delivery. In addition, innovation in agricultural productivity can ensure food security to growing populations.

“Innovation is the essence of our modern society. Without harnessing its power, we will not be able to create healthy, educated or inclusive societies.”

- Francis Gurry

“With a fast approaching MDG deadline and transition to a post-2015 development era, innovation is a very timely topic,” Mr. Wu said. “Innovation is needed to meet our common development goals, it is important in the final push for the MDGs and in unleashing the potential for sustainable development.”

The President of the UN Economic and Social Council (ECOSOC), Néstor Osorio, said the African continent in particular holds a great and unexploited potential that with innovation could foster job creation and the development of cultural industries, leading to increased economic growth.

“Innovation is the essence of our modern society. Without harnessing its power, we will not be able to create healthy, educated or inclusive societies,” he said. “Greater efforts are needed to build partnerships among government, private sector, civil society, academia, philanthropic organizations and the international community, to promote and spread innovation for sustainable development in Africa,” he added.

The meeting was held in preparation for ECOSOC’s Annual Ministerial Review, which will take place in Geneva at the beginning of July.


UN: Education and Youth Unemployment Issues Must be Addressed Now

[caption id="attachment_3484" align="alignright" width="232"] Ban Ki-moon, UN Secretary-General[/caption]

The process of establishing a post-2015 development agenda must include youth input and participation to reflect the issues that concern them, UN Secretary-General Ban Ki-moon’s Envoy on Youth stressed in late March.

“We are at a crossroads. With 1,000 days left to meet the Millennium Development Goals (MDGs), we are discussing and trying to set the new priorities for the post-2015 development agenda,” said Ahmad Alhendawi, referring to the eight anti-poverty targets with specific objectives on poverty alleviation, education, gender equality, child and maternal health, environmental stability, HIV/AIDS reduction, and a ‘Global Partnership for Development.’

“This is definitely an opportunity where young people can participate in setting the agenda, and then own this agenda by being equal partners in its implementation and evaluation,” he told reporters in New York via satellite from Dakar, Senegal, where he is attending the World Education Forum.

Mr. Alhendawi stressed that with 1.2 billion young people globally – the largest ever population of young people – issues such as education and unemployment need to be addressed by policymakers.

“Youth unemployment figures are daunting,” he said. “Some 425 million jobs need to be created in the next 15 years, and the situation so far is not promising.”

Mr. Alhendawi said that during his mandate he would not only work with different UN agencies to enhance their programmes on youth, but he would also be a messenger between the world body and young people and would promote the creation of structured mechanisms for youth participation at a national, regional and international level.

“This is a two-way communication,” he said. “This includes carrying the voices and messages of young people back to the Organization and opening channels of communication between youth and the United Nations.”

He added that he would also work with marginalized youth, including women and girls, to involve them in development processes, and give them access to information, as well as advocate for a stronger, youth-friendly development agenda.


Chancellor Merkel: Saviour of Europe?

[caption id="attachment_3475" align="alignright" width="139"] Angela Merkel, German Chancellor[/caption]

Angela Merkel entered politics in 1989 with fall of the Berlin Wall. When she narrowly defeated Gerhard Shroder in the 2005 election, she became the first former citizen of the GDR to lead reunited Germany and the first woman to head the country since it was established in 1871. Germany is the largest country in the world to be led by a woman and the Chancellor and head of the Christian Democratic Union is also leader of the European Union in all but name. CFI.co is not ranking the politically powerful women be in this feature but few would deny that Merkel would take first place in any such list. It has even been suggested that she is the most important world leader of either gender.

"It has even been suggested that she is the most important world leader of either gender."

Merkel may one day be recognised as the saviour of Europe for backing the European Central Bank’s plan to buy back government bonds from distressed nations despite opposition from the Bundesbank. She is a strong and resolute woman who is often compared to Margaret Thatcher and has been called the Iron Frau. The past few years of Merkel’s leadership in Germany and support to the EU has been a balancing act of extreme skill and perseverance and things could so easily have gone very badly wrong.

A worthy successor to Helmut Koln, it may be that Angela Merkel will also be recognised as an outstanding visionary - albeit in very different times.