World Exchanges Agree Enhanced Sustainability Guidance

Guidance is culmination of year-long project by WFE’s Sustainability Working Group

WFE sets out ‘material ESG metrics’ to include in disclosure guidance

Guidance lists 33 indicators as measures of best sustainability practice

WFE stresses exchanges are unique nexus between issuers and investors

New guidance follows WFE survey of sustainability policies

The World Federation of Exchanges has presented recommendations to its member exchanges on how to implement their sustainability policies, the culmination of a year-long project by its Sustainability Working Group.

The guidance, presented at the WFE’s General Assembly in Doha on October 20, is designed to be implemented by member exchanges on a voluntary basis.

The WFE Guidance & Recommendations identifies material ESG metrics which exchanges can incorporate into disclosure guidance to companies listed on their markets. Specifically, the enhanced guidance highlights 33 key performance indicators, including energy consumption, water management, CEO pay ratio, gender diversity, human rights, child and forced labour, temporary worker rate, corruption and anti-bribery, tax transparency in addition to other corporate policies.

It also offers practical advice on how to roll-out enhanced sustainability disclosure. In addition, for those exchanges signed up to the UN’s Sustainable Stock Exchanges initiative, the adoption of the WFE guidance is a way to meet their SSE commitments.

Policy-makers, regulators and investors around the world have become increasingly focused on the issue of sustainability. Bank of England Governor Mark Carney recently drew attention to climate change as a potential source of financial instability and investors are increasingly asking for more disclosure of companies’ ESG policies and practices. The EU has also recently announced plans to require publication of non-financial information by companies.

The topic is likely to gather momentum following the recently announced UN Sustainable Development Goals and in light of the looming climate change negotiations in Paris.

Exchanges - recognizing the role they play in ensuring transparent and resilient markets – continue to seek meaningful yet practical ways in which to play their part in this area.

The Sustainability Working Group is the largest working group within the WFE. It was established in 2014 and has a mandate to disseminate and foster best practice among its member exchanges on sustainability.

Other recent WFE SWG projects have included a survey of exchanges’ best practice on sustainability around the world and the group also provided input into the UN’s SSE Model Guidance which was published in September.

“Exchanges operate orderly markets, seek to foster investor trust and invest in promoting good corporate governance standards. As an industry, exchanges are seeking to connect the dots for investors, companies, regulators and the wider community,” WFE CEO Nandini Sukumar said.

“The guidance provides exchanges which want it with practical advice on how to take their sustainability policies to the next level and will help them meet the international sustainability benchmarks to which they are committed,” she added.

“The guidance is flexible, effective and practical,” said Evan Harvey, director of corporate responsibility at Nasdaq and chairman of the WFE’s SWG.

“The SWG recommendation does not compete with or supersede any of the existing sustainability reporting frameworks or methodologies; it highlights certain aspects that seem to be most essential for stock exchanges to consider.’’

WFE Background

The World Federation of Exchanges is the global trade association for exchanges and clearing houses. The WFE represents 64 public stock, futures and options exchanges, as well as CCPs, including those not affiliated with a single exchange. WFE promotes the development of fair, efficient and transparent markets. We work with policy makers, regulators and standard-setters around the world to support the development of effective rules and standards for exchanges and market participants.

Over 44,000 companies - representing a total market capitalisation of US $64 trillion, trading value of US $76 trillion and equivalent to more than 75% of global GDP - list on WFE member exchanges.

WFE Member Exchanges Already Providing Sustainability Reporting Guidance

BM&FBOVESPA S.A. (Brazilian Exchange)

 Borsa Istanbul (Istanbul Exchange)

 BSE India Ltd. (Bombay Stock Exhhange)

 Bursa Malaysia (Malaysian Exchange)

Bolsa de Valores de Colombia (Colombian Securities Exchange)

 Deutsche Börse AG (German Exchange)

 Hong Kong Exchanges

 Johannesburg Stock Exchange

 National Stock Exchange of India

 Shenzhen Stock Exchange

 Singapore Exchange

 Taiwan Stock Exchange

 The Stock Exchange of Thailand

 TMX Group Inc. (Toronto Stock Exchange)

For further information please contact:
David Thomas
Head of Communications
The World Federation of Exchanges Ltd
125 Old Broad Street
London EC2N 1AR – United Kingdom
Tel: +44 (0) 20 7151 4158
Mob: +44 (0) 7887 950 933


Ross Jackson: Eurozone - The End Game

It has become clear to most EU citizens, but not yet to the EU leaders, that neoliberal economics has been a total fiasco for the environment, increased inequality, and decreased the overall sense of well-being for over thirty years. When will the EU leadership recognise this reality and get more in line with the desires and concerns of EU citizens?

Not quite yet, apparently. The neoliberal line of prioritising the repayment of bank loans over the interests of real people – the centrepiece of the negotiations between the EU and Greece – constitutes the very essence of neoliberalism. This priority seems logical enough if we are to assume that saving the euro is the overriding priority of the EU’s leadership.

When currency devaluation becomes impossible, there is no other route than internal devaluation which leads inevitably to forced austerity. A growing number as citizens is questioning this line of economic thinking. Is it not time to acknowledge that the euro project is killing the EU and that a continuation essentially implies that we are all now working for the benefit of the corporatocracy. We are now well on our way to becoming part of a neo-feudal global empire. We are approaching a point where either the euro or the union goes. Either the EU continues to align itself with a failed economic philosophy in opposition to its own citizens, or it risks a violent breakup when some member states jump ship. Over the long run, the current situation is untenable.

The Unification Dream

Total unification has never been the aspiration of most EU citizens. They are primarily interested in maintaining their local culture and national priorities, living a joyful life in peace and with a maximum of self-determination. The two goals – unification and self-determination – are of course mutually exclusive.

The EU’s leadership has always been aware of this but hoped that citizens’ attitudes would gradually change. Hence the need for subterfuge, hidden agendas, and outright lies. The EU’s strategy has always been to assure the people that their leaders had no such intention, all the while planning the next step on the way to full integration and the centralisation of power. The pacifying pronouncements uttered from time to time by politicians, exemplified by the Danish Prime Minister’s proclamation to his sceptical countrymen and -women in 1986 that the union is “stone dead”, did not stand in the way of greater integration.

“The euro was a big mistake
A backdoor to a Eurostate
That citizens would rather be without.”
 (Occupy World Street: The Song)

The greatest fear of the EU’s leadership has always been that voters, if given the chance, would reject their unification plans. Indeed, there is little doubt that a majority of people would reject a proposal for transforming the current union into a single Eurostate. Fortunately, for the powers that be in Brussels, only a few member states require a referendum when ceding sovereignty.

By using the salami technique of small incremental change, the EU is now well on its way to achieving the objective of the integrationists. The few member states with restrictions on ceding sovereignty – Denmark, Ireland, France, and The Netherlands – are the same that have rejected the most far-reaching initiatives on a number of occasions (e.g. Maastricht in 1992) thus slowing down progress. Even so, these countries have been unable to stop the relentless drive towards a single Eurostate.

Another Failed Currency Zone

Which brings us to the euro. The introduction of the euro in 1999 represented a major chunk of salami. It was conceived to force integration onto unwilling citizens via a common currency. This was a fully political project – not an economic or financial one. Any economist that supported the official line was either supremely naïve, a self-deluded optimist, or so deeply a part of the establishment that good judgement was impaired.

I say this because economists are fully aware that a currency zone is not a good idea. All previous attempts at forging a currency union has failed miserably. The reasons for this ought to be fairly obvious: any two or more economies will always develop a little differently, in particular as regards price inflation.

Thus, the one with higher inflation becomes less and less competitive and is forced to undergo an “internal devaluation” since a depreciation of its currency is now no longer possible. Hence, harsh measures such as wage freezes, rising unemployment, spending cuts, etc. are required, often for several years on end, before competitiveness can be re-established.

Compare this scenario to one in which two currencies are free to float. In this case the higher inflation automatically results in a slightly lower foreign exchange rate via a very effective negative feedback process that is relatively quick, simple, and painless. This is hardly rocket science. Why then go ahead with a common currency zone? Well, it’s all about politics.

“The people want a deal that’s fair
Where bankers pay their rightful share
Until that day they’ll roam the streets and shout.”
(Occupy World Street: The Song)

The euro planners were of course aware of the risks. However, rather than allowing for the possibility of a troubled country to exit from the zone – if even only temporarily – they did not incorporate such a possibility at all. This was a major mistake not unlike an attempt to outlaw divorce. Couples will split up anyway. The planners’ thinking, no doubt, was perhaps motivated by the fear that the mere existence of such an exit clause might encourage it to be used.

The euro was meant to be a permanent state of affairs and the forerunner of the Eurostate to follow. The thinking was that limits on budget deficits and debt-to-GDP ratios would suffice to keep the members’ economies in line. That was seriously naïve. In the real world, budget deficits are notoriously unpredictable and are bound to get out of hand every so often with such a colourful array of member states.

Their very distinct economies, work ethic, competitiveness, and cultures meant that continual crises were entirely predictable and will continue to occur as long as the EU refuses to acknowledge reality.

The Alternatives

What is that reality? As I have stated on more than one occasion, there is one – and only one – stable long-term solution and that is for the EU to ask each member state to determine by a referendum either to join a new Eurostate (with single currency, government, treasury department, central bank, president, etc.) or to maintain national sovereignty which includes a national currency.

If the EU’s leadership had been totally honest, it would have already done this back in 1999. However, they were rightly afraid that such a vote would derail the entire unification process. The new Eurostate that is in the work will in reality be a Germany +. It will of course be christened the United States of Europe or some equally Orwellian name.

The Greek debt crisis has demonstrated to everyone willing to see that the EU in its current guise has already degraded into a Germany +. Recall Henry Kissinger’s question to the EU many years ago: “Who should I call in a crisis?” Today we know the answer: call Angela Merkel.

An Optimistic Note

The reality is that few EU member states would vote yes to such a referendum; maybe three or four at most would merrily join Germany. That would not necessarily be a tragedy. The euro is not the EU and, conversely, the EU is not the euro. Germany + would easily become the largest of the EU member states. However, the EU as such could continue to function as a free trade zone among sovereign nations.

If the EU does not opt for the referendum route, then I suspect it will eventually break up and leave a terrible mess behind. Either way would offer relief from the constant crises that we can expect as long as the current structures are maintained.

Best of all, a restructuring along the above lines would open up a very important game-changing possibility: sovereign EU member states would be able to reject neoliberalism as a failed concept, demand a new EU treaty giving first priority to sustainability and survival, rather than to uneconomic growth, insisting on the right to take back control of their economies from non-EU corporations – including control over the flow of goods and capital. For once, there would be an alignment between the political leadership and the people – a most powerful combination that could inspire real global reform.

If other non-EU countries were inspired to follow suit, and I think they would, it could be the beginning of the end of the domination of the 0.1% and could, if done properly, put humanity on a new pathway towards the kind of future that the people want – local democracy, thriving local communities, more equality, preservation of cultures, a clean and healthy environment, a meaningful life, and freedom from exploitative and destructive multinational corporations with no social or environmental dimensions. i

About the Author

Ross Jackson, PhD, worked for 25 years in the foreign exchange world as currency adviser to international corporations, currency fund manager, and research head of a team of mathematicians and IT experts. He is author of Occupy World Street: A Roadmap for Radical Economic and Political Reform (Chelsea Green, 2012).


Grand Old Party: Wacky Is the New Normal

[caption id="attachment_10628" align="alignright" width="261"] Photo: Brendan McDermid /Reuters[/caption]

In contemporary US politics, reality is whatever the eye of the beholder wishes to ignore. Though the art and science of spin has expert practitioners on both sides of the congressional aisle, Republicans seem particularly adept at working the facts to fit their preferred view of the world, as often as not derived from fair-and-balanced Fox News – itself of course nestled at the very epitome of antagonistic journalism.

Point-man of the Republican Party’s offensive against Obamacare, former Speaker of the House John Boehner (R-OH) christened the health care act a “budget-busting job-killer”. In fact, for much of 2011 and 2012 Mr Boehner used that phrase on average every two minutes while a guest on talk shows and newscasts. He repeatedly predicted that the Patient Protection and Affordable Care Act of 2010 would “bankrupt” the nation, thus setting the shrill tone of a shouting match that is still ongoing as the US moves towards its election season.

The allegations are doggedly maintained even in the face of inconvenient truths. In its latest employment report, the US Department of Labor announced that some 271,000 jobs were added to the economy in October, marking 68 consecutive months of job growth that got over 13.5 million people (back) to work. Never before in recorded US history has the job market continuously expanded over such an extended period.

"The maverick entrepreneur showcased his smarts when he slammed the recently proposed Trans-Pacific Partnership (TPP) – a free trade agreement between twelve countries bordering the Pacific Ocean – over China’s “currency manipulations”, not quite realising that the Chinese are not part of the pact."

Similarly, the rather timid Wall Street Reform and Consumer Protection Act – also signed into law in 2010 and since then better known as Dodd-Frank – was vociferously derided by the Republican collective as the root of all economic evil. The full might of the GOP was promptly mobilised to defend the beleaguered bankers of Wall Street with Mitt Romney, Newt Gingrich, and Michele Bachman investing almost savagely against the “assault on job-creators”. Dodd-Frank merely aims to discourage banks from again endangering the public purse by engaging in predatory financial practices.

In yet another flight of conservative fancy, Speaker of the House Paul Ryan regularly predicts doom and gloom over the encroachment of environmental legislation on the sacrosanct freedoms of US enterprise. Formerly a dedicated disciple of Ayn Rand and her objectivist philosophy of ulterior selfishness, Mr Ryan now seeks solace in the works of Thomas Aquinas. However, he has apparently not yet gotten to the bit where the philosopher priest condemns the laws of supply and demand as immoral[i]. Mr Ryan derives particular pleasure from blasting the “job-crushing over-regulation” imposed by the US Environmental Protection Agency (EPA) which he holds responsible for driving up prices. It has not come to the speaker’s attention that the US job market is rather buoyant while inflation continues to hover around zero.

Former presidential candidate Mitt Romney famously claimed that addressing the perceived excesses of the Obama Administration – repealing Obamacare and Dodd-Frank, cutting government spending, and reining in the wicked tree-huggers of the EPA – would soon drive unemployment levels down to under six percent. Even though Mr Romney lost the election and the Republicans failed to impose their agenda, the US jobless rate dropped to 5.0% in October.

With a line-up of wannabe presidents that reads like a veritable who’s who of assorted crackpots, the Republican Party seems determined to alienate all but born again voters. Leading the pack, for now, is real estate tycoon Donald Trump who considers himself exceptionally smart and everybody else exceedingly dumb. Heavy on rhetoric and light on substance, Mr Trump lives by soundbites. With an attention span as short as his temper, the businessman is perhaps best known for his enthusiastic firing of people in the US version of the television franchise The Apprentice.

During the fourth Republican debate, Mr Trump again suggested the building of a wall along the US/Mexican border to stem illegal immigration. He also reiterated his intention to throw some eleven million undocumented aliens over that wall. The maverick entrepreneur showcased his smarts when he slammed the recently proposed Trans-Pacific Partnership (TPP) – a free trade agreement between twelve countries bordering the Pacific Ocean – over China’s “currency manipulations”, not quite realising that the Chinese are not part of the pact.

Other Republican hopefuls fared little better. Enumerating the federal agencies he would shutter, Senator Ted Cruz expressed an interest in closing down the Department of Commerce twice over. The gaffe bore an eerie resemblance to Rick Perry’s hilarious performance in 2011 when the Republican candidate pompously declared that he would immediately eliminate three federal departments. However, when queried, Mr Perry could only remember the names of two departments to be axed. Aiming to oblige with a helping hand, fellow contender Mitt Romney kindly suggested the Environmental Protection Agency whereupon Mr Perry memorably exclaimed: “EPA there you go” before acknowledging that was not it.

Not to be outdone, another contestant for the Republican nomination, Ben Carson eagerly shared his knowledge about the pyramids of Egypt on national television, explaining that the structures were erected at the behest of Joseph, the 11th born of the Israelite patriarch Jacob’s 12 sons and consultant to Senusret II, the fourth pharaoh of the Twelfth Dynasty. Foreseeing a famine, Joseph suggested building pyramids to store grain. At least, that is what Mr Carson makes of it in a remarkable rewrite of history. The retired neurosurgeon took some convincing but eventually acceded, albeit reluctantly, that the pyramids may indeed have been built for other than grain storage purposes.

Amongst the lesser Republican candidates are birthers such as Andy Martin whose claim to fame includes suing the State of Hawaii for the release of President Obama’s birth certificate and Michael Bickelmeyer who proposes to deploy an orbital weapon platform that concentrates solar power and sends it to earth as a lethal beam capable of killing a single person or frying an entire country. Eric Cavanagh, somewhat of an oddity as a self-described progressive Republican, is courting the religious right with his proposal to levy a 100% surtax on all forms of porn. With his idea to scrap all taxes on liquor, Mr Cavanagh hopes to appeal to an altogether different constituency.

While the outer left field is an entertaining addendum to mainstream politics, and usually makes the business of choosing leaders a bit more palatable as well, the GOP is slowly becoming an asylum for oddballs, certified or otherwise. Mr Trump, a serial abuser of Chapter 11 bankruptcy protection and competent only at playing a broken system, is but a clown beset by megalomania. He is the polar opposite of Socrates’ wise man who humbly recognises that he knows nothing.

The other frontrunner, Ben Carson – as many of his fellow Republicans blinded by faith – may have been a brilliant neurosurgeon at John Hopkins; he also is an intellectual midget with no discernible knowledge of world affairs, only a modest grasp of economics, and on social issues a throwback to a bygone era not far removed from the Puritans.

In a worrying sign that normal doesn’t cut it any longer on the right, former Hewlett-Packard CEO Carly Fiorina – the lone woman vying for the GOP nomination and arguably the only one without wacky ideas – doesn’t stand a chance. Too boring.

Hillary it is then. The alternative is just too scary a thought.

[i] Thomas Aquinas - Summa Theologiae: “Of Cheating, Which Is Committed in Buying and Selling.”


Dambisa Moyo: Looking From a Unique Angle

Growing up in Zambia, amid a failing economy where prospects were far from plentiful, Dambisa Moyo was constantly told that she would not be able to achieve anything. But when her dream of being educated at places like Harvard or Oxford was laughed at, it was all the incentive she needed to succeed.

Dedicating her younger years to education, the determined Ms Moyo became a chemistry student at the University of Zambia, being able to complete her degree through a scholarship at Washington’s American University where she landed a Chemistry BSc. This was quickly followed by a Masters in Finance. Not content with reaching impressive academic heights, Ms Moyo then headed to Harvard where she acquired a Master of Public Administration degree.

Most scholars would have stopped there, realising their CV would make them profoundly employable. Not Dambisa Moyo. She had one more mountain to climb before believing her education to be complete – Oxford. With the doctoral dissertation Savings Rates in Developing Countries, she gained a PhD in Economics from St Antony’s College after studying macroeconomics – a subject she would later become a world authority on.

Ms Moyo then served a demanding apprenticeship as a consultant at the World Bank for two years. Before that, she worked for just under a decade at Goldman Sachs as a research economist and consultant. Throughout her time with both organisations she kept herself below the radar, content with using the experience to learn her trade thoroughly. Then, six years ago, she was propelled onto the world stage with her first book Dead Aid: Why Aid Is Not Working and How here Is a Better Way for Africa. It was an instant hit and became a New York Times bestseller, as would two more of her works.

Within months of the book flying off the shelves, she was being courted by some of the world’s biggest financial institutions. Ms Moyo now sits on the board of Barclays, Lundin Petroleum, Barrick Gold, and SABMiller. Although her tireless work has taken her to more than 70 countries, Ms Moyo proudly describes herself as one of the original NyLon brigade, splitting most of her time between New York and London.

Such has been the impact of her books, that she was recently named in the exclusive Time magazine list of the 100 most influential people in the world.

But what is the essence of that success? What sets Dambisa Moyo apart from her peers? No doubt many commentators would be quick to suggest it is the very fact that she has risen from a start in life that doesn’t normally lead to such dizzying heights, or that she has carried the flag for womankind through the thick mire of a largely male-dominated environment. Perhaps there is a small element to be mined from both Column A and Column B in that respect, but the most obvious answer comes from Ms Moyo’s education – science.

The 46-year-old author can offer such tantalisingly unique viewpoints on the financial infrastructure of the US and UK because she sees economics as a science, rather than a guessing game full of opinions and well-informed conjecture. “The gap between science and finance is narrow,” she declares at every opportunity. “It’s not a science in its purest form, but we do believe there are closeform solutions to many of the world’s economic problems, which means we can take a scientific approach.”

It is this modus operandi which gives her an almost unique angle on translating market trends, regulatory matters, and world economics into their anticipated impacts on business. Add this to her expert insights into the frontier and emerging markets, and it isn’t difficult to see why she’s a leader in her field.

This also explains the runaway success of her books. Not only can Ms Moyo offer discerning dialogue; she can also interlace it with her pet hate – international aid. She has long been a critic of what she describes as “short term myopic policy” and the damage it can cause.

Her first book – Dead Aid – is a detailed explanation of the wastefulness involved in huge foreign aid operations and the multiple limitations faced when trying to simultaneously reduce poverty yet create some form of economic stability and growth. She concedes that the failures in foreign policies are purely unintended consequences, but those consequences are failures nonetheless.

Not one to retreat to the shadows when controversy casts its light, Dambisa Moyo has also waded in to a recent polarising debate involving China’s colossal business interests in Africa. The adopted New Yorker comes down on the side of China when it comes to deciding who possesses the best policy for Africa. She says Africa has the commodities that China needs, and China is best place to provide the infrastructure that Africa needs. They are, she says, the best match.

Before considering if Ms Moyo deserves economic thinker status, remember this… she rose from nothing to become one of the most influential thinkers on the planet. All because people told her she couldn’t.


BRIC-à-Brac: Requiem for a Wishful Thought

In the end, it may have been nothing more than a flash in the pan. Unable to fulfil the promise of a new world order, the BRICS countries have largely ceased to be of note. With sputtering economies and political leaders inclined towards pomp rather than substance, the world’s emerging market powerhouses are being relegated, again, to the margins of global affairs.

China, now and again haunted by the spectre of a domestic financial implosion, offers perhaps a saving grace inasmuch as the country remains a force to reckon with – albeit a slightly less impressive one. Questions are being asked about the country’s economic growth rate. Official figures currently have Chinese GDP expanding at a still remarkable clip of around seven percent annually. However, over the past few months import volumes have contracted by almost twenty percent, casting doubt on the numbers reported by Beijing.

Meanwhile, the economic performance of Brazil, Russia, and South Africa is rather underwhelming. India is registering solid growth – boosted by a few statistical adjustments – and is led by a pro-business no-nonsense government that may yet unlock the country’s vast, but chronically underused, potential.

"Unable to fulfil the promise of a new world order, the BRICS countries have largely ceased to be of note."

Investment bank Goldman Sachs, until recently almost recklessly bullish on the BRICS prospects and indeed the bank that originally coined the acronym, earlier this month announced the folding of its Bric Fund after it repeatedly missed all applicable benchmarks and suffered from chronic underperformance. The fund’s assets under management had dwindled to a paltry $100m which will now be folded into a generic emerging markets fund.

Over the past decade, the MSCI BRIC Index lagged only slightly behind the 6.4% annualised return offered by the World Index. It has, however, been outperformed by the broader global MSCI Emerging Markets Index. While pioneer and emerging markets barrelled ahead, the BRIC(S) countries saw investors depart in droves. Albert Edwards, a famously grumpy strategist at French Société Générale, may feel vindicated. Mr Edwards was one of the first to identify the high expectations surrounding the group as a pie-in-the-sky. He promptly rebranded it as Bloody Ridiculous Investment Concept.

The Washington-based Center for Strategic and International Studies (CSIS) recently published a paper in which its experts and analysts conclude that the BRICS countries much-touted attempts to forge a new geopolitical reality remains an exercise in rhetoric. Grandstanding may impress domestic audiences; it does not create or change global realities.

Six summit meetings in, the collective has yet to produce a set of policy objectives or a strategic agenda. Apart from a half-hearted attempt at setting up a development bank – complete with a vintage-style website and brilliantly named New Development Bank – no institutional apparatus has been formed. For all their diplomatic posturing, the BRICS countries have not been overly successful in defining, let alone pursuing, common foreign policy objectives. True, there have been a number of magnificent photo-ops.

CSIS researcher Marcos Degaut did not mince words in his conclusion: “Not many concepts have done more to muddle strategic and academic thinking about the global economy and international politics in the last decade than that of the BRICS.”

Home to about 42% of the world population, the BRICS countries were supposed to pick up the slack when the global economy plunged into recession after the 2008/9 financial crisis. That hope was short-lived as the economies of Russia, Brazil, South Africa, and India nosedived in succession. Since then, India has recovered reasonably well, while China is doing it level best to stave off a full-blown banking crisis.

If there is a lesson in here, it could be that command on the world stage does not come from acronym-inspired summits or the peddling of good intentions. Countries that aspire to greatness would be well advised to get their house in order first – raising living standards, abiding by the rule of law, fostering competition, and implementing sustainable policies aimed at wealth creation. Without exception, each one of the BRICS nations sought for a shortcut in one form or another, and all failed.

As developing nations attempt to adjust to the end of the resources boom – with lower demand from China creating global glut that severely depresses prices – good governance will mark the boundary between national success and failure.

On which side of the line Brazil and Russia will fall seems abundantly obvious. The former is saddled with a government despised domestically while the latter with one reviled internationally. The Zuma Administration of South Africa does try to put on a good show but falls woefully short on delivering the goods. A government that cannot even manage to keep the lights on need not really bother with the pursuit of more ambitious development goals.

Out of India come all the right noises: it is a nation set for take-off, if only someone would dare press the launch button. China never needed the other BRICS to begin with. In fact, some have argued that the whole idea was merely an exercise of the other four to gain access to China’s deep pockets.

Thus, the world will not shed a tear over the demise of the BRICS – the block that never was. With the Trans-Pacific Partnership almost ready to be deployed, the Pacific Alliance quietly unifying the four most successful economies of Latin America, and Europe back on track thanks to massive quantitative easing; who needs the BRICS anyway?


Keiko Honda, CEO MIGA: Crucial Role for Investment Guarantees

[caption id="attachment_10643" align="alignright" width="169"] Keiko Honda[/caption]

The Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, is a financial institution exclusively dedicated to political risk insurance and credit guarantees that offer investors a hedge against risk in developing countries. The agency was established in 1988 with the mission to promote direct foreign investment in countries shunned by investors due to perceived non-commercial risk. MIGA particularly focuses on the member countries of the International Development Association – also member of the World Bank Group – and countries ravaged by war.

MIGA CEO and Executive Vice-President Keiko Honda joined the agency in 2013 from McKinsey and Co where she was a director. Mrs Honda has much experience in public and private sector banking with an emphasis on corporate finance and private equity. She served on a number of government committees in her native Japan such as the Council of Regulatory Reform and the Committee on the Promotion of Free Trade Agreements.

In this interview, Mrs Keiko explains the workings of MIGA and its outlook.

What is MIGA’s role in, and contribution to, financing for development?

The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector. In fact, I believe that a good deal of the success of the Financing for Development push will be up to organisations like ours. By this I mean that our role as a bridge between the private sector’s resources and countries’ development goals is absolutely vital.

In particular, there is a good deal of attention to public-private partnerships, de-risking, and blended finance in the Financing for Development discussions, which I welcome. But I want to emphasise that, at MIGA, we’ve been executing these models on the ground for some time now.

“The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector.”

Political risk insurance is a very effective, market-tested tool. At MIGA, we hear time and again from clients that they would not have invested in a given country unless they are backed by our guarantees. This is a significant impact that strikes at the heart of the discussions around capital mobilisation that we’re having right now.

What are the benefits of MIGA’s sovereign credit enhancement solutions and which countries and organisations may benefit? What are the charging models?

Our credit enhancement product suite – what we call non-honouring of financial obligations coverage – is used for investments involving sovereign and sub-sovereign entities, as well as state-owned enterprises. Commercial lenders that provide loans to developing-country public sector entities with a satisfactory credit rating are our target clients. The product has become an increasingly important tool, especially for large infrastructure investments.

One of the primary advantages to MIGA’s credit enhancement is that it complies with Basel II, meaning that banks can receive capital relief and, as a result, boost their lending capacity in a given country. This allows them to fund strong projects that cannot be financed in the traditional markets with the needed tenors.

I want to underline that this additional lending capacity is especially critical in a post-global financial crisis world where an unfortunate and unintended by-product of regulation has been tightening of lending for large infrastructure projects in developing countries.

Can you give some examples of MIGA’s financial innovation?

I just mentioned capital relief as it relates to our credit enhancement projects. But we have also deployed our coverage against expropriation to achieve capital relief for global retail banks with significant exposures to central banks in developing markets. With this model, a parent bank obtains coverage against the expropriation of mandatory reserves by the host country. This results in a reduction of the risk weight and frees up capacity that can be used to grow a loan book in these developing countries.

Germany-based ProCredit, which operates an emerging-market network of 21 microfinance subsidiaries, was our first client to use this capital optimisation product. To streamline the process we used a portfolio approach to insure a maximum amount of more than €200 million in guarantees for the bank’s subsidiaries across the globe.

Other innovations involve our work around bond issuances. In Senegal, MIGA’s credit enhancement backs a US dollar cross-currency swap arrangement between Standard Bank Plc and the government. Senegal entered into the swap with Standard Bank as a hedge against currency risk exposure related to a 10-year, $500 million Senegal Eurobond. The proceeds of the Eurobond are being used to finance new infrastructure projects, including an extension of the toll road to the airport and critical energy sector investments.

Also, MIGA’s credit enhancement support to Hungary’s Export-Import Bank (EXIM) helped it achieve a savings that it will use to directly support Hungarian exporters. MIGA’s backing for a €400 million bond issue by EXIM went so far as to raise the bond issue from non-investment to investment grade.

What is the role for traditional risk insurance for infrastructure investments?

Before we launched our credit enhancement product line in 2010, we had more than twenty years of experience supporting infrastructure investments, so the role of what we call our traditional political risk insurance is certainly significant.

Our coverage protects against the risks of currency inconvertibility and transfer restriction; expropriation; war, terrorism, and civil disturbance; and breach of contract.

The reality is that, while the world looks increasingly to the private sector to take the lead in delivering infrastructure, investors and lenders are often wary of entering these relatively untested markets. The risks that concern them often relate to low confidence in the judiciary system, weak or untested regulatory frameworks, poor governance, lack of enforcement of contracts, and macroeconomic instability. In some countries, the threat of political instability, war, and civil disturbance poses a danger to physical assets and makes financing difficult and expensive.

MIGA’s guarantees help companies overcome this risk aversion, knowing they’ll be compensated in the event of a loss. But our guarantees also carry a very important intangible benefit that comes from our status as an arm of the World Bank Group: once a deal is in place, MIGA guarantees provide an added measure of security that can help keep a project stable and reinforce positive relations with host governments.

While all of our coverages have been used for infrastructure investments, I’d like to highlight that MIGA’s breach of contract coverage can be designed to cover selected contract clauses that are of particular concern to infrastructure investors, including performance-related clauses and payment obligations of the government related to output-based assistance and termination amounts.

Can you please elaborate on the impact of Programmes that are designed to promote foreign direct investment in small and medium-sized enterprises?

Cheese production in the West Bank, cashmere-scouring in Afghanistan, bottle manufacturing in Libya, tilapia farming in Zambia – these are all very recent examples of the productive investments MIGA has supported through our Small Investment Programme.

We established this programme more than ten years ago to fill an unmet demand for political risk coverage for small investment projects that was largely unavailable from commercial insurers. With this programme, we offer a streamlined approval process and aim to get MIGA coverage in place for investors quickly. The projects we insure under the Small Investment Programme are highly relevant for MIGA’s mission, as they are often located in markets where small investments have the potential for a much larger impact on private sector development through upstream and downstream economic linkages – as well as demonstration effects.

Myanmar was one of the most recent countries to join MIGA (2014). As a case study, how does MIGA fit into Myanmar’s development policy framework and how may the country benefit from its MIGA membership?

Myanmar is a country at a crossroads and we are eager to support investments that help the country succeed in its transformation. I was in the country a year ago and met with government officials, members of parliament, and the private sector to emphasise that MIGA is ready to assist Myanmar in meeting its urgent need for electricity, other infrastructure, and a thriving finance sector. These are critical elements of the country’s development policy framework.

While the government is promoting an ambitious economic reform agenda to drive stronger growth, challenges remain. Here the involvement and attention of the international community is key. MIGA-supported investments into the country will have an important signalling effect for other investors that are watching conditions and opportunities in the country very closely. Our involvement will also ensure that investments meet social and environmental standards that are considered global best practice.

I’m very excited that we’re on the verge of announcing the first use of MIGA guarantees in the country. We may have already announced it by the time this interview is published.

What will the future hold for MIGA – i.e. are there any new / novel policy initiatives underway?

We are looking very closely for ways in which we can work with institutional investors to get more capital into developing countries. As we’ve been discussing in Financing for Development circles, this is an important frontier with huge resources that we need to explore more deeply. This past year, MIGA insured our first investment in the pension-funds sector, so we have some momentum here.

We also want to use our guarantees to support investments that have a positive impact on climate change. For this, we need investors who have feasible projects in renewable energy, mass transit, sustainable agriculture, and much more. We urge more of these investors to bring their projects for MIGA’s consideration, as we need all hands on deck to shift the climate change trajectory.


Robert J Shiller: Mastering Data

One of the elite Sterling professors at Yale University, he predicted both the dot-com bubble and the collapse of the housing market. Two years ago, he was the joint recipient of a Nobel Prize. There are few people more on top of their game in the world of economics than Robert J Shiller.

Right now, the 69-year-old son of an engineer from Detroit is hot property. Governments, think-tanks, and financial bodies the world over queue for his counsel. And that’s no surprise, given his startling insight into the patterns of world economics, coupled with an uncanny ability to always be right.

Back in 2005, Mr Shiller started urging caution as house prices on both sides of the Atlantic began to soar, with no real end in sight for how high they might go. On CNBC, Mr Shiller firmly laid down his belief that house values could not surpass long-term inflation because values were likely to be pulled more towards building costs and their attachment to typical economic profit. Basically, on live television, he had predicted the housing bubble.

Remarkably, people didn’t buy it. Money was still being made during the property boom, and raw greed itself may have caused a mass blindness to the warnings. Sadly, and despite Mr Shiller stating it would hit within a year to eighteen months, many investors had overlooked one particular devil in the detail that would leave them ruing the day they hadn’t bowed to his wisdom. The general price level of nationwide real estate in the US tends not to accurately reveal itself immediately. This is due to a – at the time – little known lag in price prediction of about twelve months. People didn’t believe what Mr Shiller had predicted with frightening accuracy, because they couldn’t see it.

In hindsight, the disbelief was itself unbelievable, considering that Mr Shiller had form for extraordinary predictions. Previously, he had watched cautiously as the NASDAQ Composite Index began to ascend to what he could see was a dramatic spike, and not a whole new level of wealth created by a raft of companies putting “.com” at the end of their name. He immediately hit the alarm button, urging caution and highlighting the financial world’s apparent lack of a Plan B.

“People still place too much confidence in the markets,” he said, soon after the dot-com dust had settled. “They have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes.”

Years later, as stock exchanges began to tumble, the words from Mr Shiller’s best-selling book Irrational Exuberance (2005) came back to haunt the markets. As part of his warning of a house price collapse, he stressed: “A long-run consequence could be a decline in consumer and business confidence, and another, possibly, worldwide recession.” Like a modern-day Nostradamus, he’s called all the shots with exceptional veracity.

In recent years, Mr Shiller hasn’t lost any of his ability to make prophecies. He’s been completely engrossed in spotting trends that will allow the stock markets to identify the mid-term moves in asset prices that will allow exchanges to remain stable. Eventually, his work could become like a magical back-up, ever in line with Mr Shiller’s obsession with having a Plan B in place.

But that doesn’t mean his work hasn’t already been spellbinding. Far from it. The Nobel Prize Committee were so impressed with Mr Shiller’s work on trend spotting in asset markets that they awarded him the 2013 Nobel Memorial Prize in Economic Sciences, together with Eugene F Fama and Lars Peter Hansen.

Mr Shiller’s enigmatic appeal isn’t restricted to what he can produce after weeks of pondering over graphs, charts, and assorted historical data. In this modern digital age, he possesses some serious clout as a practitioner of social media. His following on Twitter is a staggering 61,000. That’s an impressive figure for someone who only follows 23 accounts himself, and has written just 124 tweets in little over three years.

He also keeps the professional world well informed by making all his research and data available online – free of charge. Economists the world over send the Internet into a frenzy the moment he uploads his latest figures.

Day-to-day, he controls two charts which are in themselves financial superstars. Firstly, the CAPE Ratio (cyclically-adjusted price-earnings) offers a reliable prediction of returns over periods of up to ten years. The second is closer to Mr Shiller’s heart – a long-term forecast on house prices, with some intricate adjustments for inflation. They may not sound like the sexiest charts in the world, but the clamour to see the data they provide is almost inconceivable.

Robert J Shiller is a man who has the complete respect of the financial world. And so he should – he is the economist equivalent of a crystal ball. And what a better place the world might be if more people had heeded his advice over the years.


CFI.co Picked as Knowledge Partner for AIM 2016 for the Second Time, alongside Investment Consulting Associates (ICA) and UN ESCWA.

The theme of the sixth edition of the Annual Investment Meeting 2016 will be “The New World of FDI, Key Features and Best Practices”. The event will be held from 11 – 13 April 2016 at the Dubai International Convention and Exhibition Center. It will be the occasion to gather the world's leading FDI experts, investors, business professionals and practitioners to discuss how the FDI landscape has changed dramatically in recent years as well as the new sources of foreign direct investment. It will tackle the importance of New Forms of Investment (NFI) and discuss the policies that promote and facilitate such investments and best practices therein. AIM 2016 will be the occasion to examine these developments in the world of FDI and discuss ways and means to attract investment from new investment reservoirs coming from emerging markets.

The Annual Investment Meeting 2016 (AIM) is an initiative from the UAE Ministry of Economy to be held in Dubai, United Arab Emirates from 11 April – 13 April 2016 at the Dubai International Convention and Exhibition Centre.


Thomas Piketty: Courting Controversy

If there was one person who could be likened to a rock star in the world of economics, then Thomas Piketty is it. He’s a showman, an artist, and professional ruffler of feathers. Just like any rock star, he also has a huge fan base and an army of followers who hang on his every word. But, just as everyone has their own particular style in music, there are many who find Mr Piketty leaves an uneasy taste on the more sophisticated palate. The way he plays up to the adulation and struts like a cocky lead singer doesn’t always sit well among his peers.

But does that necessarily have to be viewed as a bad thing? In a world that is notoriously grey and often profoundly dull, isn’t the odd colourful character, waving the proverbial microphone stand at the establishment, a welcome crash of the cymbals in an otherwise sombre ensemble? There are many who think so, and just as many who think not.

One thing for certain with Thomas Piketty, however, remains the fact that he isn’t going away. He can’t. He gets too many things right. Whether the establishment likes him or not, it can’t be denied that Mr Piketty has a real knack for hitting the right notes in the financial world.

At 44, several peers regard him as a young upstart. Yet, Mr Piketty boasts an impressive list of qualifications betraying a lifetime of resolute study that cannot go ignored. After scientific preparatory classes, he gained a Baccalaureate by the age of 18 before entering mathematics and economics studies at École Normale Supérieure.

By age 22, he had a PhD and the undying praise of the London School of Economics before crossing the Atlantic to become an assistant professor at the Massachusetts Institute of Technology. He currently holds professor status at both the Paris School of Economics and the London School of Economics, as well as being directeur d’études at the École des Hautes Études en Sciences Sociales in France.

As left wing as they come, Mr Piketty penned his anti-capitalist thoughts in the 577-page book Capital in the 21st Century. In the tome, he rails against a world obsessed with wealth accumulation and clarifies this obsession’s effects on global inequality. He clearly has a point – the book sold 1.5 million copies worldwide in five languages, catapulting him to even more international stardom and guaranteeing him top billing as he delivers the Nelson Mandela Lecture in Johannesburg later this year.

With such a colossal number of people buying into Piketty’s views, there must be something in his outspoken theories.
His protestations against unfettered capitalism are based on impressive research. Mr Piketty has ploughed through a century’s worth of income and wealth data for the United States and Great Britain, as well as about 150 years of French tax returns to arrive at his conclusions.

His work hinges on rates of return and growth. Mr Piketty charts a pronounced rise in wealth inequality up to the 1929 Great Depression when disparities abruptly lessened only to stabilise during the period of post-war global prosperity. From the 1970s, the gap has gradually broadened again reaching similar levels to those recorded in 1929.

Mr Piketty argues that a critical point is reached once the rate of return on capital surpasses the clip of overall economic growth as expressed by the productivity of labour. This, says the Parisian, is when inequality begins to rise as capital reaps increasingly higher rewards than labour. His narrative will often cite the US as the classic example to prove this point, reminding his followers that more than a third of US wealth is now owned by just 1% of the population.

In short, Mr Piketty’s life goal is to urge the world to restrain its penchant for prizing the accumulation of capital over and above the value of productive labour, thus recognising that rising inequality is not an accidental by-product of capitalism, but is in fact an essential part of a skewed system which, left to its own devices, tends to self-destruct.

As well as calling for the state to redress wealth disparity – and thus save capitalism from its internal contradictions (thank you, Karl) – Mr Piketty also proposes a supranational, and very polarising, solution: a global tax on wealth. As popular as his beliefs are, he has plenty of experts queuing up to shoot him down.

Remarkably, liberal economist and Nobel Prize winner Paul Krugman laid down his Piketty flag and tore into the Frenchman’s latest book – an English language release of his 1997 effort The Economics of Inequality – as it climbed the hardback charts. Normally a reliable banner man of Piketty, Mr Krugman took issue with the fact that his counterpart originally wrote the work while in his twenties and was re-releasing it with very few changes, almost going as far as suggesting it was a lazy attempt to rake in some book sales.

“I’m sorry to be so negative about a book by such an important figure in our economic thinking,” slammed Krugman. “Releasing this youthful effort as if it were a new contribution does a disservice to readers and I’d argue that with the author himself.” Mr Krugman, however, utterly failed to find fault with any of Mr Piketty’s findings and conclusions.

Love him or loathe him, you can’t argue that such a controversy-prone figure as Thomas Piketty has a place in the hall of fame of modern economics.


IFC: Capital Markets Key to Development

[caption id="attachment_10695" align="alignright" width="241"] Author: Ethiopis Tafara[/caption]

Ending extreme poverty for good and building shared prosperity across the developing world takes money – a lot of money. Take infrastructure: for the foreseeable future, an estimated $50 billion per year is needed in Africa alone to deliver basic services such as clean running water and electricity, and to build roads connecting communities to markets.

Annual infrastructure financing needs in Latin America amount to over $300 billion between now and 2020; and in populous Asia the price tag is $8 trillion over 2010-2020 period. These numbers are equivalent to seven percent of these region’s GDP. This is double the percentage of GDP the developed countries spend on their infrastructure and it highlights the magnitude of the challenge the emerging economies face in advancing their development.

This is only part of the story. Small and medium-sized enterprises in emerging economies – and counting only the minority in the formal sector – are also starved for finance. Their needs are over $250 billion in Latin America, $200 billion in Asia, and at least half that in Africa.

It is clear that developing country governments cannot provide financing on this scale, neither can donor governments, nor local financial institutions. For the answer, one must turn to the capital markets.

“It is clear that developing country governments cannot provide financing on this scale, neither can donor governments, nor local financial institutions.”

Consider the supply side of the equation – the amount of money available for investment around the world. In 2013, assets controlled by institutional investors in OECD countries grew to over $92 trillion dollars – a number that keeps rising. The world’s largest 300 pension funds control almost $15 trillion, while sovereign wealth funds have amassed about $6.5 trillion.

Imagine if the emerging economies could capture just a fraction of these funds. Then consider the rapidly growing domestic savings rates across emerging economies. In Africa, there are now nearly $400 billion dollars in pension fund assets, and in Latin America the pension funds of the five largest economies alone controlled over $720 billion in 2013. In Asia’s growing economies the figures are even more impressive.

There is enough capital in the world. The question is how to channel these funds to meet development needs more effectively in a way that works for investors. Capital markets are a big part of the solution.

Time and time again capital markets have proven to be effective intermediaries in channelling savings and other funds to countries’ national development priorities that fuel economic growth and create jobs. As such, capital markets serve as an alternative to the banking sector. In this role, they not only mobilise additional financing that drives economic growth, but by virtue of providing an alternative, capital markets also introduce financial stability into economies. They do this by taking a different approach to risk allocation, making economies more resilient in the face of capital outflows and banking crises.

Capital markets in developing countries – many of which are still in their infancy – hold tremendous potential. Local bond markets in some regions, for example, have been growing at a robust rate in the last decade. The Asian bond market has expanded more than fourfold since 2008 to $3tn, representing almost a quarter of GDP. In Sub-Saharan Africa, only South Africa had issued a sovereign bond before 2006, but now over $25bn dollars have been raised across the continent with $7bn issued in 2014 alone.

While these numbers fall short of the financing needs, they do point to the trajectory of growth that has gained considerable momentum in a short time. Similarly, the size of domestic bond markets in the largest Latin American countries has more than doubled since 1995. However, apart from Brazil and Mexico, the pool of capital is still relatively small.

What would it take for the emerging economies to develop robust capital markets to finance the growth of private enterprise, economy, jobs, and improve the lives of millions?

Today, when we think about global capital markets, we focus on the great financial centres – New York, London, Tokyo, and Hong Kong. But this focus on the largest and most modern markets misses an important point: every market is both similar and unique – similar in that they all respond positively to certain fundamentals, but unique in the environment and tradition in which they develop and prosper.

For example, the US capital market stands at approximately $60tn dollars. This is a huge number connected to a complex market. But its size and complexity obscure the simple fact that the US capital market is still just a market. Markets, in one form or another, have existed in every society since the dawn of recorded history. And, despite the size and complexity of modern trading places, market fundamentals today are similar to those that permitted markets to function thousands of years ago in ancient Sumer, Egypt, and China, or in the Bantu and Swahili cities of Africa.

These fundamentals are simple and include a place where buyers and sellers can meet. This place can be a simple bench under a buttonwood tree, which is where the New York Stock Exchange got its start, or an old-fashioned trading floor or, increasingly, the virtual space of the Internet.

Second, there must be property rights. Buyers and sellers must have some legal right to control and transfer the items traded. In ancient times, these rights were recognized by custom or possession. Today, they usually involve laws. Either way, without these rights, markets cannot exist.

Third, and most importantly, markets require trust. Trust is the lubricant that keeps the wheels of a market from grinding to a halt. It is the faith that a buyer is buying what he expects, and the faith that the seller will receive the payment promised at the agreed-upon time. Without this basic trust, no market in the world, no matter how technologically sophisticated, will succeed.

In Africa’s informal markets trust is based on your family, reputation, and the relationships you have built within a small community. In the diamond markets of New York and Amsterdam, trust is based on ethnicity, religion, and the personal interaction of a handful of traders. These markets work because of the value and reputation prevalent in their tight knit communities. With the anonymous trading that characterises modern capital markets, this personal trust has been replaced by a surrogate — best practices, securities laws, regulations, and their vigorous enforcement.

So how do we go about building trust in these new capital market? The answer lies not so much in the number of laws or regulations, but rather in the principles and behaviours they seek to establish. These need to reflect a thorough understanding of the investors’ perspectives and needs – it’s their capital at stake, after all.

One of the underlying principles governing trust is transparency. To earn trust, participants in the market need to be completely transparent to their investors, clients, and regulators about their practices, their conflicts of interest, and their risk profile.

Reliability and credibility are also essential. Investors need to have assurances that the information disclosed to them is accurate, complete, and verified. It gives them confidence that they have a sound basis to judge the value of what they are buying. So accountants and auditors serve a critical role in enabling the transparent and accurate financial reporting that underpins investor confidence and trust. Credit rating agencies are also key actors in rebalancing information asymmetries by providing information about the creditworthiness of companies to lenders and investors alike.

And, finally, trust is built on knowing that there is a public or private cop on the beat. Clear rules are necessary but their credible enforcement is equally crucial.

Without a doubt, governments have to play a central role in creating and enforcing the regulatory framework that fosters trust. But that takes time. Different market players – private companies, accountants, auditors, and rating agencies – a can do a lot on their own. Today, we benefit from the enormous body of knowledge and experience that stems from market successes and failures and has been translated into global principles and standards.

There are partners like the International Finance Corporation (IFC) to help make these principles and standards work across different environments in the emerging markets in order to build investor confidence as a foundation of capital markets. The development of domestic capital markets across the developing world has the potential to provide the funds necessary to drive economic growth, bring an end to extreme poverty, build shared prosperity, and bring robust returns for investors.

About the Author

Ethiopis Tafara is vice-president of Corporate Risk and Sustainability and General Counsel at the International Finance Corporation.


World Bank Group: Ask Citizens Where Public Money Should Go - The Surprising Results

As citizen engagement gains traction in the development agenda, identifying the extent to which it produces tangible results is essential. Participatory budgeting, a process in which citizens decide upon and monitor budget allocation, offers promising results, including increased local government revenues and reduced infant mortality.

Promoting Citizen Engagement: A Quest for Evidence

In recent years, there has been a growing interest in citizen engagement as a means to promote better development outcomes. The Open Government Partnership (OGP), for instance, is a multilateral platform where governments from 66 countries commit, amongst other things, to promote public state structures that are more open, participatory, and accountable to their citizens. Similarly, Making all Voices Count is an international initiative supported by private donors and development agencies that provides funding to projects which aim to promote “citizen engagement and open, responsive government.”

The rationale behind this renewed enthusiasm for civic engagement is seemingly simple: citizens know best what their needs are and how to address them. Or, as spelled out in the OGP declaration, public engagement “increases the effectiveness of governments, which benefit from people’s knowledge, ideas and ability to provide oversight.” Yet, the evidence on the benefits of citizen engagement often seems fuzzy, scattered, and – sometimes – contradictory.

“The rationale behind this renewed enthusiasm for civic engagement is seemingly simple: citizens know best what their needs are and how to address them.”

However, a clearer picture emerges when we examine some particular practices that fall under the general “citizen engagement” umbrella, of which participatory budgeting is one. Originating in the Brazilian city of Porto Alegre in 1989, participatory budgeting (PB) can be broadly defined as the participation of citizens in the decision-making process of budget allocation and in the monitoring of public spending. Experts estimate that up to 2,500 local governments around the world have implemented PB, from major cities such as New York, Paris, Seville, and Lima, to small and medium-sized cities in countries as diverse as Poland, South-Korea, India, Bangladesh, and the Democratic Republic of Congo.

Over the years, PB has attracted significant attention from scholars and development professionals. As it reaches over a quarter-century of existence, it is generating a substantial amount of evidence of the benefits of involving citizens in budgeting decisions. Here, we briefly examine some of this evidence.

Some argue – and there is growing evidence – that citizen participation increases government tax revenues. At the beginning of the 2000s, researchers studying participatory budgeting began to see an unexpected result, with some municipalities reporting substantive increases in their tax revenues. In 2004, for instance, a comparative study of 25 municipalities in Latin America and Europe found a significant reduction in levels of tax delinquency after the adoption of participatory budgeting. But, in reality, how surprising were these findings?

Mostly unknown, even among seasoned public engagement advocates, a growing body of evidence in the field of “tax morale” suggests a relationship between citizen participation and tax compliance. The argument, in an oversimplified manner, is as follows: citizens are more willing to pay taxes when they perceive that their preferences are properly taken into account by public institutions.

This argument finds ever-growing empirical support. For instance, a number of studies in Switzerland – notably those by the economists Bruno Frey and Benno Torgler – show that Swiss cantons with higher levels of democratic participation present lower tax evasion rates, even when controlling for other factors. Suggesting that this is not simply a Swiss exception, a cross-national study by Friedrich Schneider and Désirée Teobaldelli found that “the effect of direct democratic institutions on the shadow economy is negative and quantitatively important.”

These observational findings are increasingly supported by a growing number of controlled experiments across a variety of cultural settings. At odds with conventional economic reasoning, some evidence in the field of “tax morale” suggests that participation may be even more effective at curbing tax evasion than traditional and commonly adopted deterrence measures, such as fines and controls.

In the specific case of participatory budgeting, more robust data is also emerging. For example, a recent working paper by the Inter-American Development Bank presents similar effects of participatory budgeting on revenues in a randomised controlled trial in Russia. As noted by the authors, Diether Beuermann and Maria Amelina, these results are by no means negligible: “Implementing the planning cycle of participatory budgeting increased local revenues per capita by US$30.22 in regions without previous decentralised experience and by US$37.34 in regions with previous decentralized experience […]. These are sizeable effects as they represent differences of around seventy percent with respect to the control group mean.”

How Good Is It for Citizens Themselves?

Participatory budgeting promotes pro-poor spending, better access to services, and may even reduce infant mortality. The available evidence suggests that participatory budgeting leads to significant shifts in priorities and policies, towards expenditures that directly benefit the poor. A 2008 World Bank report demonstrated that participatory budgeting has a statistically significant impact on a number of social indicators. Among others, the report highlights that PB is positively and strongly associated with improvements in poverty rates and access to water services.

Despite producing evidence of its effectiveness on a number of fronts over the years, only 25 years after its initial implementation in Brazil do we start to see systematic evidence of sound development outcomes. This is mainly due to two recently released, major studies of participatory budgeting in Brazil. The first, published by Sonia Gonçalves in World Development, finds that municipalities that adopted participatory budgeting in Brazil “favoured an allocation of public expenditures that closely matched the popular preferences and channelled a larger fraction of their total budget to key investments in sanitation and health services.”

As a consequence, the author also finds that this change in the allocation of public expenditures “is associated with a pronounced reduction in the infant mortality rates for municipalities which adopted participatory budgeting.” Barely a year later, a study by Michael Touchton and Brian Wampler in Comparative Political Studies generated similar findings, demonstrating that the adoption of participatory budgeting in Brazil is strongly associated with increases in healthcare spending and decreases in infant mortality rates.

These studies also highlight another important takeaway for those working with development and public sector reform: the need to consider the fact that participatory institutions may take time to produce noticeable effects. As shown by Touchton and Wampler, for instance, the effects of PB adoption become significantly more visible after the fourth year of implementation.

As citizen engagement draws increasing interest in the development agenda, staying focused on which types of processes work and which do not will become particularly relevant. Participatory budgeting offers some promising evidence for policy reformers who want to see tangible impact on the ground, but it might take more than enthusiasm to get there. Determination, and a certain amount of patience, remain essential ingredients when it comes to delivering results.

The views expressed in this article are not necessarily those of the World Bank.

About the Author

Tiago Peixoto is a political scientist and team leader at the World Bank’s Digital Engagement Unit, focusing on technology-enabled participation for better public policies and services. As the lead of the Bank’s Digital Engagement Evaluation Team (DEET), he also coordinates evaluation and research activities on the effects of technology on participation, transparency, accountability, and government responsiveness.

Prior to joining the World Bank, Mr Peixoto managed projects and worked for various organisations, such as the European Commission, OECD, United Nations, and the Brazilian and UK governments. He is also a research director of the Electronic Democracy Centre at the University of Zürich and faculty member of NYU’s Governance Lab.

Mr Peixoto holds a PhD and a Masters in Political Science from the European University Institute, as well as a Masters in Organised Collective Action from Sciences-Po Paris.