This originally appeared in “Insight,” a publication of Grantmakers for Children, Youth, and Families.

For many in the United States, American poverty conjures images of urban blight or remote Appalachian hardship that motivated the War on Poverty in the 1960s. But the geography of poverty in the U.S. has shifted well beyond its historical confines (Kneebone and Berube, 2013). During the first decade of the 2000s, the poor population living in suburbs of the nation’s largest metropolitan areas for the first time outstripped the poor population living in central cities, and poverty continues to grow faster today in the suburbs.¹ This trend has been even more pronounced for those living below twice the federal poverty line—equivalent to $48,500 for a family of four in 2015—which roughly mirrors the population eligible to receive the federal Earned Income Tax Credit (EITC).

Although it was not originally billed as an antipoverty program, in its 40 years, the EITC has become one of the nation’s most effective tools for lifting low-income workers and their families above the poverty line. In 2013 alone, Brookings estimates that the EITC lifted 6.2 million people, including 3.1 million children, out of poverty (Kneebone and Holmes, 2014). What follows is a discussion of the EITC’s growing importance to recipients in light of the new geography of poverty, its role in boosting local economies, and how expanding participation in the program and paying the credit differently could enhance its effectiveness as a local economic stabilizer.

The shifting geography of poverty challenges traditional approaches to combat poverty through investments in place.

When President Johnson declared a War on Poverty in 1964, poverty in the U.S. was primarily urban or rural. This was also the case in 1975 when the EITC was created: Nearly a million more low-income individuals at that time lived in rural areas or big cities than in the suburbs of major metropolitan areas.² Place-based antipoverty interventions dating to the War on Poverty were thus designed with these two geographies—especially cities—in mind. Brookings estimates that today, the federal government spends about $82 billion per year across more than 80 place-focused antipoverty programs, spread across 10 agencies (Kneebone and Berube, 2013). Many are not well-suited to suburban contexts, for several reasons.

First, suburban poverty is more geographically diffuse than urban poverty. Suburban communities tend to be less densely populated than cities and larger in size, and cover more total area. Whereas centralized services might be appropriate in an urban context because they are easily accessible to many in need, it is more difficult to achieve those economies of scale in the suburbs, where residents live farther apart and have limited access to transit. Many competitive federal grant programs allocate points based on population served and population density, implicitly favoring large central cities.

Second, suburban municipalities may lack the experience and administrative capacity needed to sustain services for low-income families and communities. Cities have dealt with poverty longer, and have had more time to develop strategies and structures to support their poor populations. Some of this capacity stemmed explicitly from Community Action Agencies, one of the original War on Poverty programs, which was intended to spur local innovation. Small suburban communities by and large did not have this same experience. Because of their relatively small size, suburban governments may not be able to achieve the administrative scale needed to deliver effective safety-net programs.

Third, many suburban communities lack the economic scale and fiscal structure needed to fund services for low-income residents. Because many small municipalities are limited in how they are permitted to raise revenues—typically through a combination of property and sales taxes—they are especially prone to financial instability caused by the very economic conditions that also generate greater need for services. As poverty suburbanizes, small suburban communities simultaneously face rising demand and falling tax revenues to support those services. Moreover, tax “competition” among many small suburbs within a metro area can further erode the fiscal capacity and political will for these jurisdictions to support people in need.

The new geography of poverty makes direct investments in low-income individuals and families—like the EITC—even more important.

The mismatch between existing place-based antipoverty strategies and the places where poverty is growing fastest heightens the importance of investing directly and effectively in low-income individuals and families through programs such as the EITC. Following its expansion in the mid-1990s, the EITC became the most significant cash transfer program available to low-income working families. The Internal Revenue Service (IRS, 2014) estimates that approximately 79 percent of EITC-eligible taxpayers nationally claim the credit each year—a remarkably strong participation rate among federal safety-net programs.

The high program participation rate and growth over time in EITC expenditures reflects both increases in the credit’s generosity and growing need. In 2000, according to our analysis of IRS Stakeholder Partnerships, Education and Communities (IRS-SPEC) data, total EITC expenditures topped $42 billion (in 2013 dollars). In 2013, they approached $65 billion, equivalent to approximately 80 percent of the amount spent by the federal government on place-based poverty interventions.³

Analysis of IRS-SPEC data further suggests that the EITC’s geographic incidence closely tracks the shifting geography of need. From 2000 to 2013, the number of suburban filers claiming the EITC rose by 62 percent, compared to 33 percent in cities. Changes in the distribution of EITC claims mirrored changes in the location of poor and near-poor populations, particularly growth in the suburbs.⁴ And because lower-income suburban communities (where at least 40 percent of residents are poor or near-poor) are becoming more diverse, too—60 percent of their residents are non-white or Hispanic—the EITC also effectively reduces growing race-based income gaps in suburbs.⁵

EITC dollars support local economies.

The EITC benefits not only low-income families, but also the wider communities in which they live. Although it is widely regarded today as one of the country’s most successful antipoverty programs, the EITC was originally designed to be a temporary economic stimulus measure, in the Tax Reduction Act of 1975 (Nichols and Rothstein, 2015). During the 2000s, more local and state governments made a concerted push to expand participation in the EITC among eligible filers, in part to inject more federal dollars into their local economies (Berube, 2006a).

There are several mechanisms through which the EITC could benefit local economies. California State University researchers categorize the local economic impact of EITC refunds as the sum of direct effects (EITC recipients spending their refunds), indirect effects (business spending in response to EITC recipient spending), and induced effects (changes in household income and spending patterns caused by direct and indirect effects). Together, these effects represent the local “multiplier” effect (Avalos and Alley, 2010). Their estimates for California counties suggest that, in many cases, the credit creates local economic impacts equivalent to at least twice the amount of EITC dollars received.

Direct economic effects result from EITC recipients spending a portion of their refund locally, supporting local businesses and jobs. Consumer surveys show that low-income families spend a relatively large share of their income on groceries and other necessities, which tend to be purchased locally. Analysis of those surveys links tax refund season to increased likelihood of consumer activity as well as larger purchases (Adams, Einav, and Levin, 2009). People spend more, and more frequently, during tax refund season.

The EITC also supports local communities in less obvious ways. The concept of “tax incidence” reflects that the party being taxed, or receiving a tax credit, may not bear its full costs (or reap its benefits) because others shift their behavior in response to the tax. Along these lines, Jesse Rothstein estimates that as much as 36 cents of every dollar of EITC received flows to employers, because by enabling workers to better make ends meet on low wages, the credit effectively lowers the cost of labor. Those lower labor costs may, in turn, allow local employers to hire more local workers (Nichols and Rothstein, 2015).

Finally, emerging evidence suggests that progressive tax expenditures like the EITC can enhance intergenerational income mobility for local children, possibly by counteracting credit constraints that many low-income families face (Chetty, Hendren, Kline, and Saez, 2015). In areas with larger state EITCs, low-income children are more likely to move up the income ladder over time.

The local impact of the EITC depends on how, and how many, eligible filers claim the credit.

The local impact of the EITC also depends on whether eligible workers and families file tax returns and claim the credit. As noted above, the IRS estimates that 79 percent of those eligible to receive the EITC nationally claim it. Given local variation in characteristics associated with uptake, there is likely also considerable local variation in EITC participation (Berube, 2005). Efforts to increase participation locally can thus increase the level of investment communities receive from the program.

Research has identified several factors associated with EITC participation rates among the eligible population. Eligible filers less likely to claim the credit include those who live in rural areas, are self-employed, do not have qualifying children, do not speak English well, are grandparents, or recently changed their filing status (IRS, 2015). One study suggests that communities with moderately sized immigrant populations may exhibit lower EITC participation rates, due perhaps to less robust social networks or more dispersed/heterogeneous populations that may limit awareness of the credit (Berube, 2006b).

Recent research also suggests that EITC participation is higher in areas with more tax preparers, who may promote greater local awareness of the credit (Chetty, Friedman, and Saez, 2012). While individuals who enlist the help of tax preparers are more likely to receive the EITC, they may face significant fees that blunt the credit’s overall impact (Berube, 2006a). Expanding access to volunteer tax preparation services or simple, free online filing could help preserve more of the credit’s value for low-income families and their communities.

To maximize the EITC’s role as a local economic stabilizer, we should consider periodic payment options.

 The EITC already functions as an important antipoverty tool for low-income workers and families, and a boon to local economic stability. Communities should nonetheless be interested in efforts to connect taxpayers to a portion of their EITC throughout the year, rather than only as a lump-sum refund at tax time.

Debt features significantly on the balance sheets of EITC recipients. Recent research finds that about 95 percent of EITC recipients have debt of some kind, and that large shares of refunds are dedicated to debt payments or deferred expenses (such as car repair). Recipients do not use the majority of EITC refunds to pay for monthly expenses, despite the fact that their wages typically cover only two-thirds of those expenses (Halpern-Meekin, Edin, Tach, and Sykes, 2015).

Paying a portion of filers’ anticipated EITC periodically (and directly, rather than through employers like the defunct Advance EITC program) in smaller amounts over the course of a year could help them cope with these spending constraints and avoid taking on debt (Holt, 2008). By enabling families to better keep up with spending on regular items most often purchased locally—rent, food, vehicle maintenance—periodic payments could also support local economies. And by improving families’ liquidity, such payments could reduce reliance on high-cost financial products such as payday loans.

The EITC continues to gain importance as place-based strategies lag behind poverty’s suburbanization, and communities seek ways to maximize public investment in the face of budget constraints at all levels. The program lifts millions of working individuals and families out of poverty each year regardless of their location, and in doing so also supports community financial stability. An expanded EITC—at the federal, state, or local level—with options for periodic payment and better alternatives to high-cost tax preparation could provide even stronger support to low-income families and the places where they live.

References

Adams, W., Einav, L., and Levin, J. (2009). Liquidity constraints and imperfect information in subprime lending. American Economic Review. 99(1), 49–84. Retrieved from http://web.stanford.edu/~jdlevin/Papers/Liquidity.pdf

Avalos, A., and Alley, S. (2010). The economic impact of the Earned Income Tax Credit (EITC) in California. California Journal of Politics and Policy. 2(1). Retrieved from http://escholarship.org/uc/item/2jj0s1dn

Berube, A. (2005). Earned income credit participation—What we (don’t) know. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/metro/eitcparticipation.pdf

Berube, A. (2006a). Using the Earned Income Tax Credit to stimulate local economies. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/~/media/research/files/reports/2006/11/childrenfamilies-berube/berube20061101eitc.pdf

Berube, A. (2006b). ¿Tienes EITC? A study of the Earned Income Tax Credit in immigrant communities, Washington, DC: Brookings Institution. Retrieved from  http://www.brookings.edu/~/media/research/files/reports/2005/4/childrenfamilies-berube02/20050412_tieneseitc.pdf

Chetty, R., Friedman, J., and Saez, E. (2012). Using differences in knowledge across neighborhoods to uncover the impacts of the EITC on earnings (NBER Working Paper Series no. 18232). Retrieved from http://eml.berkeley.edu/~saez/chetty-friedman-saezNBER13EITC.pdf

Chetty, R., Hendren, N., Kline, P., and Saez, E. (2015). The economic impacts of tax expenditures: Evidence from spatial variation across the U.S. Retrieved from http://www.irs.gov/pub/irs-soi/14rptaxexpenditures.pdf

Halpern-Meekin, S., Edin, K., Tach, L., and Sykes, J. (2015). It’s not like I’m poor: How working families make ends meet in a post-welfare world, Oakland, CA: University of California Press.

Holt, S. D. (2008). Periodic payment of the Earned Income Tax Credit. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/research/papers/2008/06/0505-metroraise-supplement-holt

Internal Revenue Service. (2014). Statistics for tax returns with EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/eitcstats

Internal Revenue Service. (2015). About EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/abouteitc

Kneebone, E., and Berube, A. (2013). Confronting suburban poverty in America. Washington, DC: Brookings Institution Press.

Kneebone, E., and Holmes, N. Fighting poverty at tax time through the EITC. Retrieved from http://www.brookings.edu/blogs/the-avenue/posts/2014/12/16-poverty-tax-eitc-kneebone-holmes

Nichols, A., and Rothstein, J. (2015). The Earned Income Tax Credit (EITC) (NBER Working Paper Series no. 21211). Retrieved from http://www.nber.org/papers/w21211.pdf

       

As the holiday season rolls around each year, it often carries a hefty price tag that can strain family budgets. In a survey of low-income taxpayers using volunteer tax preparation services, three-quarters of respondents listed December as a time of year when it’s hardest to make ends meet. But it’s not the only one. Low-income families go through a constant year-round balancing act of juggling bills, going without, asking family and friends for help, and taking on debt when they fall behind.

Many of these families benefit from the Earned Income Tax Credit, which supplements earnings for low-income workers. The EITC has proven to be one of the nation’s most effective anti-poverty programs, and for some families can represent up to 40 percent of their annual income. For the one in five American households that receive the EITC in their refunds, tax time gives them a chance to catch up financially as they start the New Year. But by summer, many recipients once again find themselves struggling paycheck to paycheck to shore up budget gaps, or scrambling to deal with unforeseen financial shocks, like a car breaking down or an unplanned medical expense.

Providing alternative payment options that deliver the credit outside of tax time would go a long way toward boosting economic stability year round for these families. In his new paper “Periodic payment of the Earned Income Tax Credit revisited,” Steve Holt explores the range of proposals that have emerged in recent years to provide more options for delivering the EITC during the year, and shares some lessons learned from early experiments to test those options.

Most notably, the Center for Economic Progress in Chicago recently completed a year-long pilot which offered 343 households the option of receiving half of their expected EITC in four payments in advance of tax time. The results of the pilot were overwhelmingly positive. Compared to EITC recipients in the control group, participants who received periodic payments missed fewer bills and racked up fewer late fees. They were less likely to resort to payday lenders or have to borrow money from family and friends. And they reported less food insecurity and decreased financial stress throughout the year. What’s more, after completing the pilot, 90 percent of the participants reported a preference for periodic payment over the standard lump sum.

More experimentation needs to be done to determine effective ways to replicate and expand on the advanced-payment pilot in Chicago. And future experimentation should also include pilots that test proposals for deferred savings mechanisms. These options, like CFED’s Rainy Day EITC proposal, would allow EITC filers to put a portion of their credit in a savings account and receive a bonus match as an incentive to save. Though structured differently than advanced payment options, the end goal of deferred savings proposals is the same: providing greater financial stability to low-income families outside of tax time.

A growing share of our economy’s jobs are in the low-wage industries and occupations in which many EITC-eligible taxpayers work (as illustrated by new national, state, and metro data from Brookings MetroTax model on characteristics of the EITC-eligible population). The EITC is an incredibly effective policy tool that helps bridge the gap between what the labor market provides and what it takes to support a family. But we can make the EITC work better for working families by offering alternative payment options that can help promote economic security year round.

       

       

       

EXECUTIVE SUMMARY

In November 2008, President George W. Bush convened the first G-20 summit in Washington to address the worst global financial economic crisis since the Great Depression. This summit provided a long-overdue opportunity for a dramatic and lasting change in global governance. This was followed by the election of Barack Obama, who had campaigned on a distinctly different foreign policy platform compared with his Republican rival, Senator John McCain. These two events were no mere coincidence.

The global crisis has moved the United States, along with the rest of the world, toward a new global economic order, with the G-20 summit as one of the principal manifestations of the new global governance system. Of course, movement toward this new economic arrangement and progress toward reformed global governance are not inevitable. It will take a clear and sustained commitment to a new set of values and strong leadership, especially from President Obama and the United States, to ensure that the G-20 summit is not a short-lived exception to what had been a long-standing stalemate in global governance reform. The effectiveness of the G-20 in addressing the global economic crisis could lay the foundation for a new global order and provide the impetus for the many other necessary global governance reforms. Whether or not this happens will depend to a significant extent on the direction chosen by President Obama.

The president’s vision of inclusion and openness and his approach to governing, which favors innovative and far-reaching pragmatic responses to key national and global challenges, make him a great candidate for this role. In due course the G-20 summit can also serve as a platform for addressing other pressing global issues, including trade, climate change, energy and food security and reform of global institutions. To achieve such an outcome, President Obama and other world leaders need to demonstrate a clear vision and strong leadership starting at the G-20 Summit in Pittsburgh and beyond.

“Old Economic Order” versus “New Economic Order”

From recent debates on foreign policy and global governance, we have identified two different perspectives or sets of principles underlying the approaches toward U.S. and global foreign policy. Table 1 summarizes the key elements of what we call the “Old Economic Order” in juxtaposition to the “New Economic Order.”

Table 1: Old versus New Economic Order

(Note: This table is adapted from one first presented by the authors in a seminar at the IMF in June 2007. See www.imf.org/external/np/seminars/eng/2007/glb/bl030607.pdf )

In the Old Order, the nation state is the point of departure, stressing the importance of sovereignty and national interest as the key principles driving a unilateral and assertive foreign policy. In contrast, the New Order’s starting point considers that we live in a global society, where interdependency and recognition of common interests are the key principles to be pursued in reciprocal relations and with mutual respect across borders. Under the Old Order the rules of national power politics prevail, as competing blocs and fixed alliances strive for predominance, with “hard power” if necessary. Instead, the New Order operates on the basis of a new multilateralism, which builds on the prevalence of global networks in all spheres of life and multiple coalitions across borders, where bargaining for compromise and the tools of “soft power” prevail. Finally, the Old Order promotes the notion that a single economic and political model should prevail, while the New Order accepts that different economic and political models coexist and compete side by side.

In the most simple terms, the Old Order broadly reflects the principles underlying the foreign policy agenda of the Bush administration and Senator John McCain’s presidential platform, while the New Order approximates those underpinning the platform of Senator Barack Obama’s presidential campaign and of his administration’s foreign policy stance. Key elements of the Old Order (except the last one) have also been attributed to the current foreign policy approach of Russia, while New Order principles can be ascribed to the European Union.

In fact, what is reflected in these two approaches is the difference between twentieth-century principles of foreign policy versus principles appropriate to today’s realities. We believe there are three interrelated sets of drivers of change that necessitate moving from the Old Order to the New Order. These drivers include the changing global demographic and economic balance, emerging global threats and the need for a more effective global governance system.

Drivers of Change

The first driver of change is the shifting global demographic and economic balance. By 2050, the world population is projected to reach 9.1 billion, up from 6.4 billion today, with the increase occurring almost entirely in today’s developing countries. China is widely predicted to be the largest economy in the early 2040s, with the U.S. economy in second place and India’s in third. Other emerging market economies, including Brazil, Indonesia and Russia, will be important economic players, while individual European countries will recede in importance. Continental Eurasia will be the new hub of global integration as China, India, Russia, the European Union and the Middle East’s energy-producing countries knit their economies ever closer together. The United States will remain a superpower, but only one among others. Together, the major world powers will have to confront the fact that people in poorer and weaker states will feel left behind. Simultaneously, cross-border networks—economic and political, public and private, elite and grassroots, legitimate and illegitimate—will continue to grow and will weaken the traditional hold states have over the economic, financial, social and political actions of their citizens. These networks will create bonds that will either reinforce or undermine global stability.

The second driver of change is a set of emerging global threats:

• The current financial and economic crisis—triggered by poor macroeconomic management and lax financial regulation—reflects the realities of long-term financial imbalances among key economies. It proves the difficulties of managing a highly interdependent global financial system in the absence of agreed-upon global financial surveillance, supervision and regulation. It is likely that risks of global financial stress will continue in the coming decades.
• Global disparities will increase as the rich and the rapidly growing economies do well, while many poor and stagnating countries are left behind. There is potential for rising disparities within countries, too. These inequities will reinforce risks of domestic and cross-border conflict and terrorism. At the same time, the United States and other industrialized countries face a progressive loss of traditional industries, jobs and wages. Aging populations and overburdened pension systems will challenge their fiscal stability and may lead to groundswells of anti-globalization sentiments.
• Rising food and energy prices, environmental threats and the risks of global epidemics—reinforced by population pressures—particularly affect the poorest countries.
• Growing global interdependencies across borders and sectoral lines mean that individual countries can no longer address these threats alone and that a global response has to be coordinated across sectors.

The third driver of change is the growing and widespread recognition that the current system of global governance has become increasingly fragmented, ineffective, outdated and resistant to change. This systemic weakness is reflected in the persistent stalemate on many of the pressing global issues—most notably the Doha trade round—but also on global poverty, climate change and the risk of pandemics. Moreover, global institutions have become unrepresentative in the face of the changed global economic and political balances. Hence their legitimacy is suffering badly, and yet there is stalemate in the reform of individual international organizations.

Together, these three factors have made the principles of the Old Order irrelevant and strongly point in the direction of a New Order. They represent the new reality for governments, citizens and international institutions and force them to adopt new principles and reform existing institutions.

While the drivers are strong and the new global reality is seemingly unassailable, change is not inevitable. Old habits die hard. In the United States, traditions of self-reliance and “exceptionalism” continue to shape Americans’ views of the rest of the world. At the same time, the widespread belief in the virtues of unfettered markets and low taxes, the influence of special interests for protection (agriculture, labor, old industry, banking) and the prevailing fractiousness of political decision-making may well undermine President Obama’s efforts to move toward a new global paradigm. Compounding the entrenchment of the Old Order, new nations that are still recovering from centuries of colonialism—facing economic and political instability and wishing to catch up with the successful industrial countries—are lured to a strong sovereign nation state, unfettered control over their borders and their citizens, and a confrontational approach to foreign policy. Even the much admired willingness of the Europeans to give up sovereignty in favor of supranational institutions has its limits, not least when it comes to giving up their prerogatives of dominating the governing boards of the international financial institutions and other global forums.

Leadership, conviction and persistence will be required among many actors on the global stage to ensure there is progress toward effective reform of global institutions. This potential for change is exemplified by the recent emergence of the G-20 summit as a vehicle for global governance.

The G-20 Summit—Origins, Options and Obstacles

Origins. The G-20 summit had its origins in the annual meetings of the G7—the leaders of a group of seven major Western industrial countries who gathered annually starting in the 1970s, initially to enhance economic and financial policy coordination in reaction to a major financial crisis. After the break-up of the Soviet Union, the G8 was formed by the addition of the Russian Federation. The G8 increasingly became preoccupied with global economic and political issues—in effect assuming the role of a global steering group. But widespread criticism began to mount about its role. The G8 summits were seen as ritualistic in process, ineffective in impact and increasingly unrepresentative in the face of global population and economic shifts, and hence lacking in legitimacy as a global steering group. The onset of the global financial crisis in mid-2008 pushed President George W. Bush into convening the G-20 Summit on November 15, 2008.

The ministerial-level G-20 was first created in the aftermath of the 1997-98 East Asia financial crisis. By convening representatives from 10 industrialized economies and 10 emerging market economies, the G-20 presented a much more geographically and culturally diverse group than the G8. With about 90 percent of the world’s economy and two thirds of the world’s population, the G-20 is also much more representative than the G8. Emerging market economies have been fully engaged in managing the proceedings of the meetings of G-20 finance ministers and central bank governors. It is therefore not surprising that there had been persistent calls by some experts and politicians for using the G-20 as a platform to replace the G8. While moving from G8 to G-20 summit might not create an optimal global steering group, it is a pragmatic and effective step, especially in response to crisis.

Options. Will the G-20 be a short-lived experiment or will it prove an effective tool of global governance? Various options are under debate among experts and practitioners. One possibility is to return to the G8 summits like the one Italy hosted in 2009 and Canada plans to host in 2010. There is concern that the G-20 format is too unwieldy for effective exchanges among the key players. Hence, there will be continuing debates about reducing the size of the summit to somewhere between thirteen and sixteen members, as reflected in the recent proposal by the French President, Nicolas Sarkozy, to create a G14. However, there are pressures to expand the number of participants to include more countries and to expand regional representation. Then there are proposals to develop a constituency-based approach to membership, with universal participation as in the case of the international financial institutions. Further, German Chancellor Angela Merkel and a United Nations Commission chaired by Nobel laureate Joseph Stiglitz propose to establish an Economic Security Council at the UN.

None of these options will likely materialize in the foreseeable future. Instead there are two probable outcomes: The first is the continuation of the G-20 summit with a gradually expanding mandate beyond the current crisis. For this to be successful, it is critical that the G-20 format proves its effectiveness in the coming months and years. This outcome has three requirements: that the number of participants does not expand; that participants focus on a limited number of action items; and that a small but effective secretariat is established to support and monitor the G-20 summit with logistics and technical expertise.

The most likely alternative to the G-20 summit is what is frequently referred to as “variable geometry.” Under this scenario, selected world leaders would convene on specific topics in shifting constellations, with participation of the most important actors decided separately for each topic. For example, the G-20 might continue to meet on global financial and economic matters for some time to come, while different groups would convene for action on climate change, nuclear proliferation or other topics. Support for this plan appears to be emerging from the Obama administration. It co-convened the summit on climate change at the tail-end of the 2009 G8 Summit, hosts the September 2009 G-20 economic summit in Pittsburgh and has called for a summit on nuclear non-proliferation in the spring of 2010. The challenge for summits of “variable geometry” is the ever-shifting number and composition of participants, the difficulty of systematic organization and follow-up and continuing debates about who would convene the summits, when, and with what participation.

Obstacles. As we look ahead, we see a number of challenges for the evolution of global summits beyond the G8, whether toward an effective G-20 or some alternative, especially summits of variable geometry. These challenges emanate from the diverging interests of four sets of players: the United States, Europe, the new emerging powers and the rest of the world.

For the foreseeable future, active U.S. leadership is needed to overcome inertia and collective action problems in addressing global challenges and breaking the stalemate in global governance reform. The Obama administration appears to strongly support a paradigm shift toward a new global order, but so far has not announced its position on summit modalities.

Europe is a key player and has proven a major obstacle to global governance reform as it continues to claim far too many chairs at the G-20 (and in other global forums and institutions) for its economic and demographic weight. In effect, Europeans can either retain their over-representation, which gives them a fragmented voice and weakens their influence while also weakening the global institutions; or they can bundle their votes, chairs and voice for greater impact and to ensure more effective international organizations. Unfortunately, the current stalemate on internal EU governance reform blocks any new European approach to global governance reform.

The new emerging powers, especially China, India and Brazil, will face the challenge of moving beyond their traditional role of the “excluded” and “representatives of the South.” They will need to accept co-responsibility for solving global problems and creating effective global governance institutions. They will have to look beyond issue-specific South-South coalitions to North-South coalitions where it is in their and the global interest (e.g., the push for international financial institution reform, for EU for consolidation, for the completion of the Doha Round, etc.). There are hopeful signs that this is beginning to happen. South Korea’s leadership of next year’s G-20 represents a critical test of whether the new powers are ready to participate and conduct a G-20 forum at the leaders’ level, not only ministerial.

Finally, there is the challenge of how to include the “excluded.” The G-20 is much more inclusive than the G8, but it still leaves out a majority of countries with a third of the world’s population. Options for associating the rest of the world with the summit include ad hoc outreach (as the G8 has done), expanding regional representation (as already practiced with the EU), introducing a constituency approach (as for the IFIs) and seeking a closer alignment with the UN (perhaps through an Economic Security Council). With the exception of the first two—which risk further expanding the number of participants at G-20 summits—none of the other options are likely to materialize soon. However, G-20 leaders will have to be sensitive to the needs of the “excluded” and ensure that the interests of the poorest countries are not neglected.

Conclusion

Great changes in the economic and political balance among countries, global threats and an antiquated global governance system confront the world community today. With the economic crisis as an immediate driver and a new U.S. president, the G-20 summit format has the potential to make a real shift in the global economic order in which a new set of values underpin the way countries and people cooperate across borders. To the extent that President Obama has articulated his vision of the global order and America’s role in it, we believe he is headed in the direction that stresses common interests in a global society, the need for multilateral action and understanding for alternative approaches to economic and political development. This is very promising. The effectiveness of the G-20 in addressing the global economic crisis could lay the foundation for a new global order and provide the impetus for the many other necessary global governance reforms.

However, Europe, China and India are also critical for progress. Moreover, if President Obama is believed to fail the test of competence at home or a major shock hits the United States, a reversal is possible in the U.S. In any case, significant changes in global governance will take time to transpire. We may well see a long period of transition with only gradual improvement in current institutions. In the meantime, pressures for increased regionalism, bilateral deals among the big players, geopolitical competition among power blocs and growing instability and threats from the “excluded” will undermine international cooperation and the whole idea of a global order.

The G-20 summit forum represents a great opportunity for world leaders to begin to put into action the principles of a new global order. It will allow them to address the immediate global financial and economic crisis in a collaborative spirit. And in due course the G-20 summit can also serve as a platform for addressing other pressing global issues, including trade, climate change, energy and food security, and reform of global institutions. To achieve such an outcome, President Obama and other world leaders need to demonstrate a clear vision and strong leadership at the G-20 Summit in Pittsburgh and beyond.

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Policy Brief #172

Why Institutions Matter

When experts and pundits are asked what the president and Congress should do to promote economic growth, they typically respond with a list of policies, often mixed with stylistic and political suggestions. Few focus on institutional change, which is too easy to conflate with yawn-inducing “governmental reorganization.”

This neglect of institutions is always a mistake, never more than in times of crisis. Throughout American history, profound challenges have summoned bursts of institutional creativity, with enduring effects. The dangerous inadequacies of the Articles of Confederation set the stage for a new Constitution. The Civil War resulted in three amendments that resolved—at least in principle—our founding ambivalence between the people and the states as the source of national authority, between the states and the nation as the locus of citizenship, and between slavery and the equality the Declaration of Independence had proclaimed and promised. Similarly, the Federal Reserve Board, Bretton Woods international economic system, Department of Defense, National Security Council, CIA, Congressional Budget Office and Department of Homeland Security all arose through changes occasioned by great challenges to the nation.

Today’s economic crisis is reflected in three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. 

	RECOMMENDATIONS
	Today’s economic crisis is characterized by three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. The following institution-based recommendations would help the nation meet the current economic crisis and could help prevent future crises of similar destructiveness. To promote fiscal sustainability, change longterm budget procedures and create empowered commissions—answerable to Congress but largely insulated from day-to-day politics. To boost savings, consider new mandatory individual retirement accounts as a supplement to Social Security. To improve public investment, create a National Infrastructure Bank with public seed capital—this entity would mobilize private investment and force proposed projects to pass rigorous cost-benefit analysis as well as a market test. Today’s polarized political system is an obstacle to reform in every area, including the economy. A multi-year collaboration between Brookings and the Hoover Institution produced a series of suggestions. At least two of those suggestions are worth adopting: Alter redistricting authority, so state legislatures can no longer practice gerrymandering. Experiment, in a few willing states, with compulsory voting—to move politicians away from the red-meat politics of appealing only to their bases, which now dominate elections, and toward a more moderate and consensual politics.

Institutional reform

Promoting fiscal sustainability

Setting the federal budget on a sustainable course is an enormous challenge. If we do nothing, we will add an average of nearly $1 trillion to the national debt every year between now and 2020, raising the debt/ GDP ratio to a level not seen since the early 1950s and sending the annual cost of servicing the debt sky-high. Restoring pay-as-you-go budgeting and putting some teeth in it are a start, but not nearly enough. We need radical changes in rules and procedures.

One option, recently proposed by a bipartisan group that includes three former directors of the Congressional Budget Office, would change the giant entitlement programs: Social Security, Medicare and Medicaid. The new rules would require a review every five years to determine whether projected revenues and outlays are in balance. If not, Congress would be required to restore balance through dedicated revenue increases, benefits cuts or a combination. After a financial crisis in the early 1990s, Sweden introduced a variant of this plan, which has worked reasonably well.A number of Brookings scholars—including Henry Aaron, Gary Burtless, William Gale, Alice Rivlin and Isabel Sawhill—have suggested a Value Added Tax (VAT) as part of a program of fiscal and tax reform. Burtless offers an intriguing proposal that would link a VAT to health care finance. Revenue from the VAT would be dedicated to—and would cover—the federal share of health care programs. If the federal cost rises faster than proceeds from the VAT, Congress would have to either raise the VAT rate or cut back programs to fit the flow of funds. The system would become much more transparent and accountable: because the VAT rate would appear on every purchase, citizens could see for themselves the cost of federal support for health care, and they could tell their representatives what balance they prefer between increased rates and reduced health care funding.

Another option draws on the experience of the Base Realignment and Closure Commission, which enables the military to surmount NIMBY politics and shut down unneeded bases. The basic idea is straightforward: once the independent commission settles on a list of proposed closures, Congress has the option of voting it up or down without amendment. A similar idea undergirds the president’s “fast-track” authority to negotiate proposed trade treaties, which Congress can reject but cannot modify.

Suitably adapted, this concept could help break longstanding fiscal logjams. Here is one way it might work. Independent commissions with members from both political parties could submit proposals in designated areas of fiscal policy. To increase bipartisan appeal, each proposal would require a super-majority of the commission. In the House and Senate, both the majority and the minority would have the opportunity to offer only a single amendment. This strategy of “empowered commissions” changes the incentive structure in Congress, reducing negative logrolling to undermine the prospects of proposals that would otherwise gain majority support.

Empowered commissions represent a broader strategy—using institutional design to insulate certain activities from regular and direct political pressure. For example, the Constitution mandates that federal judges, once confirmed, hold office during “good behavior” and receive salaries that Congress may not reduce during their term of service. (By contrast, many states subject judges to regular election and possible recall.) In another striking example, members of the Board of Governors of the Federal Reserve Board are appointed to 14-year non-renewable terms, limiting the ability of the executive branch to change its membership rapidly and removing governors’ incentives to trim their policy sails in hopes of reappointment. Additionally, action by neither the president nor any other entity in the executive branch is required to implement the Fed’s decisions, and Fed chairmen have been known to take steps that vex the Oval Office.

This strategy is controversial. Officials with populist leanings often argue that fundamental decisions affecting the economy should be made through transparent democratic processes. The counterargument: experience dating back to the founding of the republic suggests that when interest rates and the money supply are set at the whim of transient majorities, economic growth and stability are at risk.

Boosting savings

An adequate supply of capital is a precondition of long-term economic growth, and household saving is an important source of capital. During the 1960s, U.S. households saved 12 percent of their income; as recently as the 1980s, that figure stood at 8 percent. By 2005–2006, the savings rate dipped into negative territory, and today it stands at a meager 3 percent. In recent years, funds from abroad—principally Asia— filled the capital gap. But evidence is accumulating that foreign governments have reached the limit of their appetite (or tolerance) for U.S. debt. To avert a capital shortage and soaring interest rates, which would choke off growth, we must boost private savings as we reduce public deficits.

For a long time, tax incentives for saving have been the tool of choice. But as evidence mounts that these incentives are less effective than hoped, policy experts are turning to alternatives. One rests on a key finding of behavioral economics: default settings have a large impact on individual conduct and collective outcomes. If you require people to opt in to enter a program, such as 401(k) retirement plans, even a modest inconvenience will deter many of them from participating. But if you reverse the procedure— automatically enrolling them unless they affirmatively opt out—you can boost participation.

To achieve an adequate rate of private saving, we may need to go even further. One option is a mandatory retirement savings program to supplement Social Security. Workers would be required to set aside a fixed percentage of earnings and invest them in generic funds—equities, public debt, private debt, real estate, commodities and cash. For those who fail to designate a percentage allocation for each fund, a default program would take effect. (Participants always would have the option of regaining control.) As workers near retirement age, their holdings would be automatically rebalanced in a more conservative direction. One version of this proposal calls for “progressive matching,” in which low-earning individuals receive a subsidy equal to half their payroll contributions; those making more would get a smaller match along a sliding scale, and those at the top would receive no match at all.

This strategy requires careful institutional and programmatic design. To ensure maximum benefits to wage earners, the private sector would be allowed to offer only funds with very low costs and fees. To ensure that the program actually boosts net savings, individuals would be prohibited from withdrawing funds from their accounts prior to retirement; except in emergencies, they would not be allowed to borrow against their accounts; and they would be prohibited from using them as collateral. And a clear line would be drawn to prevent government interference in the private sector: while government-administered automatic default investments would be permitted, government officials could not direct the flow of capital to specific firms.

Improving public investment

The investment deficit has a public face as well. Since the early 19th century, government has financed and helped build major infrastructure projects—roads, bridges, ports and canals, among others, have spurred economic growth and opened new domestic and international markets. Recently, however, public infrastructure investment has fallen well short of national needs, and often has been poorly targeted. Americans travelling and working abroad are noticing that U.S. infrastructure is falling behind not only advanced countries’ but rapidly developing countries’ as well. A study by Emilia Istrate and Robert Puentes of Brookings’s Metropolitan Policy Program, presented in a December 2009 report entitled “Investing for Success,” documents three key shortcomings of federal infrastructure investment: it lacks long-term planning, fails to provide adequately for maintenance costs, and suffers from a flawed project selection process as benefits are not weighed rigorously against costs.

Istrate and Puentes explore several strategies for correcting these deficiencies. One of the most promising is a National Infrastructure Bank (NIB), to require benefit-cost analyses of proposed projects, break down financial barriers between related types of investment (facilitating inter-modal transportation, for example), and improve coordination across jurisdictional lines. The NIB could be funded through a modest initial infusion of federal capital designed to attract private capital. Projects receiving loans from the NIB would have to provide for depreciation and document the sources of funds to repay the face amount of each loan, plus interest. In short, the NIB would be more than a conduit for the flow of federal funds; it would function as a real bank, imposing market discipline on projects and making infrastructure investments attractive to private capital, partly by providing flexible subordinated debt.

Istrate and Puentes identify diverse problems that designers of an NIB would confront. Insulating the selection process from political interference would pose serious difficulties, as would providing federal seed capital without increasing the federal deficit and debt. Requiring the repayment of loans could skew project awards away from projects that cannot easily charge user fees—wastewater and environmental infrastructure projects, for example. Despite these challenges, a properly designed bank could increase the quantity of infrastructure investment while improving its effectiveness, reducing bottlenecks and promoting economic efficiency. The potential benefits for long-term growth would be considerable.

Creating the Political Conditions for Reform

The rise of political polarization in recent decades has made effective action much more difficult for the U.S. government. Polarization has impeded efforts to enact even the progrowth reforms sketched in this paper. A multiyear collaboration between the Brookings and Hoover Institutions—resulting in a two-volume report, Red and Blue Nation?, with Volume One published in 2006 and Volume Two in 2008— has mapped the scope of the phenomenon. This effort has shown that, while political elites are more sharply divided than citizens in general, citizens are more likely now to place themselves at the ends of the ideological spectrum than they were as recently as the 1980s. With a smaller political center to work with, even leaders committed to bipartisan compromise have been stymied. The fate of President Bush’s 2005 Social Security proposal illustrates the difficulty of addressing tough issues in these circumstances.

It might seem that the only cure for polarization is a shift of public sentiment back toward moderation. The Brookings-Hoover project found, however, that changes in institutional design could reduce polarization and might, over time, lower the partisan temperature. Here are two ideas, culled from a much longer list.

Congressional redistricting

While population flows account for much of the growth in safe seats dominated by strong partisans, recent studies indicate that gerrymanders account for 10 to 36 percent of the reduction in competitive congressional districts since 1982. This is not a trivial effect.

Few Western democracies draw up their parliamentary districts in so patently politicized a fashion as do U.S. state legislatures. Parliamentary electoral commissions, operating independently and charged with making reasonably objective determinations, are the preferred model abroad.

Given the Supreme Court’s reluctance to enter the thicket of redistricting controversies, any changes will be up to state governments. In recent years, voter initiatives and referenda in four states—Washington, Idaho, Alaska and Arizona—have established nonpartisan or bipartisan redistricting commissions. These commissions struggle with a complicated riddle: how to enhance competitiveness while respecting other parameters, such as geographic compactness, jurisdictional boundaries, and the desire to consolidate “communities of interest.” Iowa’s approach, where a nonpartisan legislative staff has the last word, is often cited as a model but may be hard to export to states with more demographic diversity and complex political cultures. Arizona has managed to fashion some workable, empirically based standards that are yielding more heterogeneous districts and more competitive elections.

Incentives to participate

Another depolarizing reform would promote the participation of less ideologically committed voters in the electoral process. Some observers do not view the asymmetric power of passionate partisans in U.S. elections as a cause for concern: Why shouldn’t political decisions be made by the citizens who care most about them? Aren’t those who care also better informed? And isn’t their intensive involvement an indication that the outcome of the election affects their interests more than it affects the interests of the non-voters? While this argument has surface plausibility, it is not compelling. Although passionate partisanship infuses the system with energy, it erects road-blocks to problem-solving. Many committed partisans prefer gridlock to compromise, and gridlock is no formula for effective governance.

To broaden the political participation of less partisan citizens, who tend to be more weakly connected to the political system, several major democracies have made voting mandatory. Australia, for one, has compulsory voting; it sets small fines for non-voting that escalate for recidivism, with remarkable results. The turnout rate in Australia tops 95 percent, and citizens regard voting as a civic obligation. Near-universal voting raises the possibility that a bulge of casual voters, with little understanding of the issues and candidates, can muddy the waters by voting on non-substantive criteria, such as the order in which candidates’ names appear on the ballot. The inevitable presence of some such “donkey voters,” as they are called in Australia, does not appear to have badly marred the democratic process in that country.

Indeed, the civic benefits of higher turnouts appear to outweigh the “donkey” effect. Candidates for the Australian Parliament have gained an added incentive to appeal broadly beyond their partisan bases. One wonders whether members of Congress here in the United States, if subjected to wider suffrage, might also spend less time transfixed by symbolic issues that are primarily objects of partisan fascination, and more time coming to terms with the nation’s larger needs. At least campaigns continually tossing red meat to the party faithful might become a little less pervasive.

The United States is not Australia, of course. Although both are federal systems, the U.S. Constitution confers on state governments much more extensive control over voting procedures. While it might not be flatly unconstitutional to mandate voting nationwide, it would surely chafe with American custom and provoke opposition in many states. Federalism American-style also has some unique advantages, including its tradition of using states as “laboratories of democracy” that test reform proposals before they are elevated to consideration at the national level. If a few states experiment with compulsory voting and demonstrate its democracy- enriching potential, they might, in this way, smooth the path to national consideration.  

Conclusion

In challenging times, political leaders undertake institutional reform, not because they want to, but because they must. Our own era—a period of profound economic crisis—is no exception. Even in circumstances of deep political polarization, both political parties have accepted the need to restructure our system of financial regulation.

As well, recognition is growing that we face three key challenges—a fiscal deficit, a savings deficit and an investment deficit—that have eluded control by existing institutions and, unless checked, will impede long-term economic growth. The question is whether we will be able to adopt the needed changes in an atmosphere of reflection and deliberation, or whether we will delay until a worse crisis compels us to act.

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Policy Brief #173

America needs to transform its energy system, and the Great Lakes region (including Minnesota, Wisconsin, Iowa, Missouri, Illinois, Indiana, Ohio, Michigan, Kentucky, West Virginia, western Pennsylvania and western New York) possesses many of the needed innovation assets. For that reason, the federal government should leverage this troubled region’s research and engineering strengths by launching a region-wide network of collaborative, high intensity energy research and innovation centers.

Currently, U.S. energy innovation efforts remain insufficient to ensure the development and deployment of clean energy technologies and processes. Such deployment is impeded by multiple market problems that lead private firms to under-invest and to focus on short-term, low-risk research and product development. Federal energy efforts—let alone state and local ones—remain too small and too poorly organized to deliver the needed breakthroughs. A new approach is essential.

	RECOMMENDATIONS
	The federal government should systematically accelerate national clean energy innovation by launching a series of “themed” research and commercialization centers strategically situated to draw on the Midwest’s rich complex of strong public universities, national and corporate research laboratories, and top-flight science and engineering talent. Organized around existing capacities in a hub-spoke structure that links fundamental science with innovation and commercialization, these research centers would engage universities, industries and labs to work on specific issues that would enable rapid deployment of new technologies to the marketplace. Along the way, they might well begin to transform a struggling region’s ailing economy. Roughly six compelling innovation centers could reasonably be organized in the Great Lakes states with total annual funding between $1 billion and $2 billion. To achieve this broad goal, the federal government should: Increase energy research funding overall. Adopt more comprehensive approaches to research and development (R&D) that address and link multiple aspects of a specific problem, such as transportation. Leverage existing regional research, workforce, entrepreneurial and industrial assets.

America needs to transform its energy system in order to create a more competitive “next economy” that is at once export-oriented, lower-carbon and innovation-driven. Meanwhile, the Great Lakes region possesses what may be the nation’s richest complex of innovation strengths—research universities, national and corporate research labs, and top-flight science and engineering talent. Given those realities, a partnership should be forged between the nation’s needs and a struggling region’s assets.

To that end, we propose that the federal government launch a distributed network of federally funded, commercialization-oriented, sustainable energy research and innovation centers, to be located in the Great Lakes region. These regional centers would combine aspects of the “discovery innovation institutes” proposed by the National Academy of Engineering and the Metropolitan Policy Program (as articulated in “Energy Discovery-Innovation Institutes: A Step toward America’s Energy Sustainability”); the “energy innovation hubs” created by the Department of Energy (DOE); and the agricultural experiment station/cooperative extension model of the land-grant universities.

In the spirit of the earlier land-grant paradigm, this network would involve the region’s research universities and national labs and engage strong participation by industry, entrepreneurs and investors, as well as by state and local governments. In response to local needs and capacities, each center could have a different theme, though all would conduct the kinds of focused translational research necessary to move fundamental scientific discoveries toward commercialization and deployment.

The impact could be transformational. If built out, university-industry-government partnerships would emerge at an unprecedented scale. At a minimum, populating auto country with an array of breakthrough-seeking, high-intensity research centers would stage a useful experiment in linking national leadership and local capacities to lead the region—and the nation—toward a more prosperous future.

The Great Lakes Energy System: Predicaments and Possibilities

The Great Lakes region lies at the center of the nation’s industrial and energy system trials and possibilities. No region has suffered more from the struggles of America’s manufacturing sector and faltering auto and steel industries, as indicated in a new Metropolitan Policy Program report entitled “The Next Economy: Rebuilding Auto Communities and Older Industrial Metros in the Great Lakes Region.”

The region also lies at ground zero of the nation’s need to “green” U.S. industry to boost national economic competitiveness, tackle climate change and improve energy security. Heavily invested in manufacturing metals, chemicals, glass and automobiles, as well as in petroleum refining, the Great Lakes states account for nearly one-third of all U.S. industrial carbon emissions.

And yet, the Great Lakes region possesses significant assets and capacities that hold promise for regional renewal as the “next economy” comes into view. The Midwest’s manufacturing communities retain the strong educational and medical institutions, advanced manufacturing prowess, skills base and other assets essential to helping the nation move toward and successfully compete in the 21st century’s export-oriented, lower-carbon, innovation-fueled economy.

Most notably, the region has an impressive array of innovation-related strengths in the one field essential to our nation’s future—energy. These include:

• Recognized leadership in R&D. The Great Lakes region accounts for 33 percent of all academic and 30 percent of all industry R&D performed in the United States.
• Strength and specialization in energy, science and engineering. In FY 2006, the Department of Energy sent 26 percent of its federal R&D obligations to the Great Lakes states and is the second largest federal funder of industrial R&D in the region. Also in 2006, the National Science Foundation sent 30 percent of its R&D obligations there.
• Existing clean energy research investments and assets. The University of Illinois is a key research partner in the BP-funded, $500 million Energy Biosciences Institute, which aims to prototype new plants as alternative fuel sources. Toledo already boasts a growing solar industry cluster; Dow Corning’s Michigan facilities produce leading silicon and silicone-based technology innovations; and the Solar Energy Laboratory at the University of Wisconsin-Madison, the oldest of its kind in the world, has significant proficiency in developing practical uses for solar energy. Finally, the region is home to the largest U.S. nuclear utility (Exelon), the nation’s largest concentration of nuclear plants and some of the country’s leading university programs in nuclear engineering.
• Industry potential relevant to clean energy. Given their existing technological specializations, Midwestern industries have the potential to excel in the research and manufacture of sophisticated components required for clean energy, such as those used in advanced nuclear technologies, precision wind turbines and complex photovoltaics.
• Breadth in energy innovation endeavors and resources. In addition to universities and industry, the region’s research laboratories specialize in areas of great relevance to our national energy challenges, including the work on energy storage systems and fuel and engine efficiency taking place at Argonne National Laboratory, research in high-energy physics at the Fermi National Accelerator Laboratory, and the work on bioenergy feedstocks, processing technologies and fuels occurring at the DOE-funded Great Lakes BioEnergy Research Center (GLBRC).
• Regional culture of collaboration. Finally, the universities of the Great Lakes area have a strong history of collaboration both among themselves and with industry, given their origins in the federal land-grant compact of market and social engagement. GLBRC—one of the nation’s three competitively awarded DOE Bioenergy Centers—epitomizes the region’s ability to align academia, industry and government around a single mission. Another example is the NSF-supported Blue Waters Project. This partnership between IBM and the universities and research institutions in the Great Lakes Consortium for Petascale Computation is building the world’s fastest computer for scientific work—a critical tool for advancing smart energy grids and transportation systems.

In short, the Great Lakes states and metropolitan areas—economically troubled and carbon-reliant as they are—have capabilities that could contribute to their own transformation and that of the nation, if the right policies and investments were in place.

Remaking America’s Energy System within a Federal Policy Framework

America as a whole, meanwhile, needs to overcome the massive sustainability and security challenges that plague the nation’s energy production and delivery system. Transformational innovation and commercialization will be required to address these challenges and accelerate the process of reducing the economy’s carbon intensity.

Despite the urgency of these challenges, however, a welter of market problems currently impedes decarbonization and limits innovation. First, energy prices have generally remained too low to provide incentives for companies to commit to clean and efficient energy technologies and processes over the long haul. Second, many of the benefits of longrange innovative activity accrue to parties other than those who make investments. As a result, individual firms tend to under-invest and to focus on short-term, low-risk research and product development. Third, uncertainty and lack of information about relevant market and policy conditions and the potential benefits of new energy technologies and processes may be further delaying innovation. Fourth, the innovation benefits that derive from geographically clustering related industries (which for many years worked so well for the auto industry) have yet to be fully realized for next-generation energy enterprises. Instead, these innovations often are isolated in secure laboratories. Finally, state and local governments—burdened with budgetary pressures—are not likely to fill gaps in energy innovation investment any time soon.

As a result, the research intensity—and so the innovation intensity—of the energy sector remains woefully insufficient, as pointed out in the earlier Metropolitan Policy Program paper on discovery innovation institutes. Currently, the sector devotes no more than 0.3 percent of its revenues to R&D. Such a figure lags far behind the 2.0 percent of sales committed to federal and large industrial R&D found in the health care sector, the 2.4 percent in agriculture, and the 10 percent in the information technology and pharmaceutical industries.

As to the national government’s efforts to respond to the nation’s energy research shortfalls, these remain equally inadequate. Three major problems loom:

The scale of federal energy research funding is insufficient. To begin with, the current federal appropriation of around $3 billion a year for nondefense energy-related R&D is simply too small. Such a figure remains well below the $8 billion (in real 2008 dollars) recorded in 1980, and represents less than a quarter of the 1980 level when measured as a share of GDP. If the federal government were to fund next-generation energy at the pace it supports advances in health care, national defense, or space exploration, the level of investment would be in the neighborhood of $20 billion to $30 billion a year.

Nor do the nation’s recent efforts to catalyze energy innovation appear sufficient. To be sure, the American Recovery and Reinvestment Act (ARRA) provided nearly $13 billion for DOE investments in advanced technology research and innovation. To date, Great Lakes states are slated to receive some 42 percent of all ARRA awards from the fossil energy R&D program and 39 percent from the Office of Science (a basic research agency widely regarded as critical for the nation’s energy future). However, ARRA was a one-time injection of monies that cannot sustain adequate federal energy R&D.

Relatedly, the Great Lakes region has done well in tapping two other relatively recent DOE programs: the Advanced Research Projects Agency–Energy (ARPA-E) and Energy Frontier Research Centers (EFRCs). Currently, Great Lakes states account for 44 and 50 percent of ARPA-E and EFRC funding. Yet, with ARPA-E focused solely on individual signature projects and EFRC on basic research, neither initiative has the scope to fully engage all of the region's innovation assets.

The character and format of federal energy R&D remain inadequate. Notwithstanding the question of scale, the character of U.S. energy innovation also remains inadequate. In this respect, the DOE national laboratories—which anchor the nation’s present energy research efforts—are poorly utilized resources. Many of these laboratories’ activities are fragmented and isolated from the private sector and its market, legal and social realities. This prevents them from successfully developing and deploying cost-competitive, multidisciplinary new energy technologies that can be easily adopted on a large scale.

For example, DOE activities continue to focus on discrete fuel sources (such as coal, oil, gas or nuclear), rather than on fully integrated end use approaches needed to realize affordable, reliable, sustainable energy. Siloed approaches simply do not work well when it comes to tackling the complexity of the nation’s real-world energy challenges. A perfect example of a complicated energy problem requiring an integrated end-use approach is transportation. Moving the nation’s transportation industry toward a clean energy infrastructure will require a multi-pronged, full systems approach. It will depend not only upon R&D in such technologies as alternative propulsion (biofuels, hydrogen, electrification) and vehicle design (power trains, robust materials, advanced computer controls) but also on far broader technology development, including that related to primary energy sources, electricity generation and transmission, and energy-efficient applications that ultimately will determine the economic viability of this important industry.

Federal programming fails to fully realize regional potential. Related to the structural problems of U.S. energy innovation efforts, finally, is a failure to fully tap or leverage critical preexisting assets within regions that could accelerate technology development and deployment. In the Great Lakes, for example, current federal policy does little to tie together the billions of dollars in science and engineering R&D conducted or available annually. This wealth is produced by the region’s academic institutions, all of the available private- and public-sector clean energy activities and financing, abundant natural resources in wind and biomass, and robust, pre-existing industrial platforms for research, next-generation manufacturing, and technology adoption and deployment. In this region and elsewhere, federal policy has yet to effectively connect researchers at different organizations, break down stovepipes between research and industry, bridge the commercialization “valley of death,” or establish mechanisms to bring federally-sponsored R&D to the marketplace quickly and smoothly.

A New Approach to Regional, Federally Supported Energy Research and Innovation

And so the federal government should systematically accelerate clean energy innovation by launching a series of regionally based Great Lakes research centers. Originally introduced in the Metropolitan Policy Program policy proposal for energy discovery-innovation institutes (or e-DIIs), a nationwide network of regional centers would link universities, research laboratories and industry to conduct translational R&D that at once addresses national energy sustainability priorities, while stimulating regional economies.

In the Great Lakes, specifically, a federal effort to “flood the zone” with a series of roughly six of these high-powered, market-focused energy centers would create a critical mass of innovation through their number, size, variety, linkages and orientation to pre-existing research institutions and industry clusters.

As envisioned here, the Great Lakes network of energy research centers would organize individual centers around themes largely determined by the private market. Based on local industry research priorities, university capabilities and the market and commercialization dynamics of various technologies, each Great Lakes research and innovation center would focus on a different problem, such as renewable energy technologies, biofuels, transportation energy, carbon-free electrical power generation, and distribution and energy efficiency. This network would accomplish several goals at once:

• Foster multidisciplinary and collaborative research partnerships. The regional centers or institutes would align the nonlinear flow of knowledge and activity across science and non-science disciplines and among companies, entrepreneurs, commercialization specialists and investors, as well as government agencies (federal, state and local) and research universities. For example, a southeastern Michigan collaboration involving the University of Michigan, Michigan State University, the University of Wisconsin and Ford, General Motors, and Dow Chemical could address the development of sustainable transportation technologies. A Chicago partnership involving Northwestern and Purdue Universities, the University of Chicago, the University of Illinois, Argonne National Lab, Exelon and Boeing could focus on sustainable electricity generation and distribution. A Columbus group including Ohio State University and Battelle Memorial Institute could address technologies for energy efficiency. Regional industry representatives would be involved from the earliest stages to define needed research, so that technology advances are relevant and any ensuing commercialization process is as successful as possible.
• Serve as a distributed “hub-spoke” network linking together campus-based, industry-based and federal laboratory-based scientists and engineers. The central “hubs” would interact with other R&D programs, centers and facilities (the “spokes”) through exchanges of participants, meetings and workshops, and advanced information and communications technology. The goals would be to limit unnecessary duplication of effort and cumbersome management bureaucracy and to enhance the coordinated pursuit of larger national goals.
• Develop and rapidly deploy highly innovative technologies to the market. Rather than aim for revenue maximization through technology transfer, the regional energy centers would be structured to maximize the volume, speed and positive societal impact of commercialization. As much as possible, the centers would work out in advance patenting and licensing rights and other intellectual property issues.Stimulate regional economic development. Like academic medical centers and agricultural experiment stations—both of which combine research, education and professional practice—these energy centers could facilitate cross-sector knowledge spillovers and innovation exchange and propel technology transfer to support clusters of start-up firms, private research organizations, suppliers, and other complementary groups and businesses—the true regional seedbeds of greater economic productivity, competitiveness and job creation.
• Build the knowledge base necessary to address the nation’s energy challenges. The regional centers would collaborate with K-12 schools, community colleges, regional universities, and workplace training initiatives to educate future scientists, engineers, innovators, and entrepreneurs and to motivate the region’s graduating students to contribute to the region’s emerging green economy.
• Complement efforts at universities and across the DOE innovation infrastructure, but be organizationally and managerially separate from either group. The regional energy centers would focus rather heavily on commercialization and deployment, adopting a collaborative translational research paradigm. Within DOE, the centers would occupy a special niche for bottom-up translational research in a suite of new, largely top-down innovation-oriented programs that aim to advance fundamental science (EFRCs), bring energy R&D to scale (Energy Innovation Hubs) and find ways to break the cost barriers of new technology (ARPA-E).

To establish and build out the institute network across the Great Lakes region, the new regional energy initiative would:

• Utilize a tiered organization and management structure. Each regional center would have a strong external advisory board representing the participating partners. In some cases, partners might play direct management roles with executive authority.
• Adopt a competitive award process with specific selection criteria. Centers would receive support through a competitive award process, with proposals evaluated by an interagency panel of peer reviewers.
• Receive as much federal funding as major DOE labs outside the Great Lakes region. Given the massive responsibilities of the proposed Great Lakes energy research centers, total federal funding for the whole network should be comparable to that of comprehensive DOE labs, such as Los Alamos, Oak Ridge and others, which have FY2010 budgets between $1 and $2 billion. Based on existing industry-university concentrations, one can envision as many as six compelling research centers in the Great Lakes region.

Conclusion

In sum, America’s national energy infrastructure—based primarily upon fossil fuels—must be updated and replaced with new technologies. At the same time, no region in the nation is better equipped to deliver the necessary innovations than is the Great Lakes area. And so this strong need and this existing capacity should be joined through an aggressive initiative to build a network of regional energy research and innovation centers. Through this intervention, the federal government could catalyze a dynamic new partnership of Midwestern businesses, research universities, federal laboratories, entrepreneurs and state and local governments to transform the nation’s carbon dependent economy, while renewing a flagging regional economy.

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• Research Strength in the Great Lakes
• Pursuing Large Scale Innovation

      

Policy Brief #174

A nation’s education system is a pillar of its economic strength and international competitiveness. The National Bureau of Economic Research analyzed data from 146 countries, collected between 1950 and 2010, and found that each year of additional average schooling attained by a population translates into at least a two percent increase in economic output. A 2007 World Bank policy research working paper reported similar results. Based on these findings, if the United States increased the average years of schooling completed by its adult population from the current 12 years to 13 years—that is, added one year of postsecondary education—our gross domestic product would rise by more than $280 billion.

The story also can be told by focusing on the returns to education for individuals. The difference in income between Americans who complete high school and those who drop out after 10th grade exceeds 50 percent. Large income differentials extend throughout the continuum of education attainment, with a particularly huge gap occurring between an advanced degree and a four-year college degree.

Although education clearly pays, the education attainment of the nation’s youth has largely stagnated, falling substantially behind that of countries with which we compete. In 1960, the United States led the world in the number of students who graduated from high school. Today young adults in many countries, including Estonia and Korea, exceed their U.S. counterparts in education attainment.

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	America’s economic productivity and competitiveness are grounded in education. Our public schools and our higher education institutions alike are falling behind those of other nations. Four policy proposals offer substantial promise for improving American education, are achievable and have low costs: Choose K–12 curriculum based on evidence of effectiveness. Evaluate teachers in ways that meaningfully differentiate levels of performance. Accredit online education providers so they can compete with traditional schools across district and state lines. Provide the public with information that will allow comparison of the labor market outcomes and price of individual postsecondary degree and certificate programs.

The problem of low education attainment is particularly salient among students from low-income and minority backgrounds. The graduation rate for minorities has been declining for 40 years, and majority/minority graduation rate differentials have not converged. Hispanic and black students earn four-year or higher degrees at less than half the rate of white students.

The economic future of the nation and the prospects of many of our citizens depend on returning the United States to the forefront of education attainment. Simply put, many more of our students need to finish high school and graduate from college.

At the same time, graduation standards for high school and college must be raised. Forty percent of college students take at least one remedial course to make up for deficiencies in their high school preparation, and a test of adult literacy recently given to a random sample of graduating seniors from four-year U.S. institutions found less than 40 percent to be proficient on prose and quantitative tasks.

Barriers to Innovation and Reform

Our present education system is structured in a way that discourages the innovation necessary for the United States to regain education leadership. K-12 education is delivered largely through a highly regulated public monopoly. Outputs such as high school graduation rates and student performance on standardized assessments are carefully measured and publicly available, but mechanisms that would allow these outputs to drive innovation and reform are missing or blocked. For example, many large urban districts and some states are now able to measure the effectiveness of individual teachers by assessing the annual academic growth of students in their classes. Huge differences in teacher effectiveness are evident, but collective bargaining agreements or state laws prevent most school district administrators from using that information in tenure or salary decisions.

Further complicating K-12 reform is the fact that authority for education policy is broadly dispersed. Unlike countries with strong national ministries that can institute top-down reforms within the public sector, education policy and practice in the United States are set through a chaotic network of laws, relationships and funding streams connecting 16,000 independent school districts to school boards, mayors, and state and federal officials. The lack of central authority allows the worst characteristics of public monopolies to prevail—inefficiency, stasis and catering to interests of employees—without top-down systems’ offsetting advantage of being capable of quick and coordinated action.

The challenges to reforming higher education are different. The 6,000-plus U.S. postsecondary institutions have greater flexibility to innovate than do the public school districts—and a motive to do so, because many compete among themselves for students, faculty and resources. However, while output is carefully measured and publicly reported for public K-12 schools and districts, we have only the grossest measures of output for post secondary institutions.

Even for something as straightforward as graduation rates, the best data we have at the institutional level are the proportion of full-time, first-time degree-seeking students who graduate within 150 percent of the normal time to degree completion. Data on critical outputs, including labor market returns and student learning, are missing entirely. In the absence of information on issues that really matter, postsecondary institutions compete and innovate on dimensions that are peripheral to their productivity, such as the winning records of their sports teams, the attractiveness of their grounds and buildings, and their ratio of acceptances to applications. Far more information is available to consumers in the market for a used car than for a college education. This information vacuum undermines productive innovation.

Examining Two Popular Reforms

Many education reformers across the political spectrum agree on two structural and governance reforms: expanding the public charter school sector at the expense of traditional public schools and setting national standards for what students should know. Ironically, the evidence supporting each of these reforms is weak at best.

Charter schools are publicly funded schools outside the traditional public school system that operate with considerable autonomy in staffing, curriculum and practices. The Obama administration has pushed to expand charter schools by eliminating states that don’t permit charters, or capping them, from competition for $4.35 billion in Race to the Top funding. Both President Obama and Education Secretary Arne Duncan have proposed shuttering poorly performing traditional public schools and replacing them with charters.

What does research say about charter schools’ effects on academic outcomes? Large studies that control for student background generally find very small differences in student achievement between the two types of public schools.

For example, on the 2005 National Assessment of Educational Progress (the “Nation’s Report Card”), white, black and Hispanic fourth graders in charter schools performed equivalently to fourth-graders with similar racial and ethnic backgrounds in traditional public schools. Positive findings do emerge from recent studies of oversubscribed New York and Boston area charter schools, which use lotteries to determine admission. But these results are obtained from children whose parents push to get them into the most popular charter schools in two urban areas with dynamic and innovative charter entrepreneurs.

What about common standards? Based on the belief that high content standards for what students should know and be able to do are essential elements of reform and that national standards are superior to individual state standards, the Common Core State Standards Initiative has signed up 48 states and 3 territories to develop a common core of state standards in English-language arts and mathematics for grades K-12. The administration has praised this joint effort by the National Governors Association and Council of Chief State School Officers, made participation in it a prerequisite for Race to the Top funding, and set aside $350 million in American Recovery and Reinvestment Act funding to develop ways to assess schools’ performance in meeting common core standards.

Does research support this approach? The Brown Center on Education Policy at Brookings examined the relationship between student achievement outcomes in mathematics at the state level and ratings of the quality of state content standards in math. There was no association. Some states with strong standards produce high-achieving students, such as Massachusetts, while other states with strong standards languish near the bottom in terms of achievement, such as California. Some states with weak standards boast high levels of achievement, such as New Jersey, while others with weak standards experience low levels of achievement, such as Tennessee.

Four Ideas

For every complex problem there is one solution which is simple, neat, and wrong. — H. L. Mencken

I will avoid Mencken’s approbation by proposing four solutions rather than one. Although education has far too many moving parts to be dramatically reformed by any short list of simple actions, we can start with changes that are straightforward, ripe for action and most promising, based on research and past experience.

Link K-12 Curricula to Comparative Effectiveness

Little attention has been paid to choice of curriculum as a driver of student achievement. Yet the evidence for large curriculum effects is persuasive. Consider a recent study of first-grade math curricula, reported by the National Center for Education Evaluation and Regional Assistance in February 2009. The researchers randomly matched schools with one of four widely used curricula. Two curricula were clear winners, generating three months’ more learning over a nine-month school year than the other two. This is a big effect on achievement, and it is essentially free because the more effective curricula cost no more than the others.

The federal government should fund many more comparative effectiveness trials of curricula, and schools using federal funds to support the education of disadvantaged students should be required to use evidence of effectiveness in the choice of curriculum materials. The Obama administration supports comparative effectiveness research in health care. It is no less important in education.

Evaluate Teachers Meaningfully

Good education outcomes for students depend on good teachers. If we have no valid and reliable system in place to identify who is good, we cannot hope to create substantial improvements in the quality of the teacher workforce.

A substantial body of high-quality research demonstrates that teachers vary substantially in effectiveness, with dramatic consequences for student learning. To increase academic achievement overall and address racial, ethnic and socioeconomic achievement gaps, we must enhance the quality of the teacher workforce and provide children from poor and minority backgrounds with equitable access to the best teachers.

Despite strong empirical evidence for differences in teacher performance—as well as intuitive appeal, demonstrated when we remember our own best and worst teachers—the vast majority of public school teachers in America face no meaningful evaluation of on-the-job performance. A recent survey of thousands of teachers and administrators, spanning 12 districts in four states, revealed that none of the districts’ formal evaluation processes differentiated meaningfully among levels of teaching effectiveness, according to a 2009 report published by The New Teacher Project. In districts using binary ratings, more than 99 percent of teachers were rated satisfactory. In districts using a broader range of ratings, 94 percent of teachers received one of the top two ratings, and less than one percent were rated unsatisfactory. In most school districts, virtually all probationary teachers receive tenure—98 percent in Los Angeles, for example—and very small numbers of tenured teachers are ever dismissed for poor performance.

Conditions of employment should be restructured to recruit and select more promising teachers, provide opportunities for them to realize their potential, keep the very best teachers in the profession, and motivate them to serve in locations where students have the highest needs. The precondition for these changes is a valid system of evaluating teachers.

The federal government should require school districts to evaluate teachers meaningfully, as a condition of federal aid. Washington also should provide extra support to districts that pay substantially higher salaries to teachers demonstrating persistently high effectiveness and serving in high-needs schools. But, because many technical issues in the evaluation of on-the-job performance of teachers are unresolved, the federal government should refrain, at least for now, from mandating specific evaluation components or designs. The essential element is meaningful differentiation—that is, a substantial spread of performance outcomes.

Accredit Online Education Providers

Traditional forms of schooling are labor-intensive and offer few economies of scale. To the extent that financial resources are critical to education outcomes, the only way to improve the U.S. education system in its current configuration is to spend more. Yet we currently spend more per student on education than any other country in the world, and the appetite for ever-increasing levels of expenditure has been dampened by changing demographics and ballooning government deficits. The monies that can be reasonably anticipated in the next decade or two will hardly be enough to forestall erosion in the quality of the system, as currently designed. The game changer for education productivity will have to be technology, which can both cut labor costs and introduce competitive pressures.

Already, at the college level, online education (also termed “virtual education” or “distance learning”) is proving competitive with the classroom experience. Nearly 3.5 million students in 2006—about 20 percent of all students in postsecondary schools and twice the number five years previously—were taking at least one course online, according to a 2007 report published by the Sloan Consortium.

In K-12, online education is developing much more slowly. But, the case for online K–12 education is strong—and linked to cost control. A survey reported on page one of Education Week (March 18, 2009) found the average per-pupil cost of 20 virtual schools in 14 states to be about half the national average for a traditional public school.

Local and state control of access to virtual schooling impedes the growth of high-quality online education and the competitive pressure it contributes to traditional schooling. Development costs are very high for virtual courseware that takes full advantage of the newest technologies and advances in cognitive science and instruction—much higher than the costs for traditional textbooks and instructional materials. These development costs can only be rationalized if the potential market for the resulting product is large. But, states and local school districts now are able to determine whether an online program is acceptable. The bureaucracy that may be most disrupted by the introduction of virtual education acts as gatekeeper.

To overcome this challenge, K-12 virtual public education would benefit from the model of accreditation used in higher education. Colleges and universities are accredited by regional or national bodies recognized by the federal government. Such accrediting bodies as the New England Association of Schools and Colleges and the Accrediting Council for Independent Colleges and Schools are membership organizations that determine their own standards within broad federal guidelines. Once an institution is accredited, students residing anywhere can take its courses, often with the benefit of federal and state student aid.

Federal legislation to apply this accreditation model to online K-12 education could transform public education, especially if the legislation also required school districts to cover the reasonable costs of online courses for students in persistently low-performing schools. This approach would exploit—and enhance—U.S. advantages in information technology. We are unlikely to regain the international lead in education by investing more in business as usual; but we could leapfrog over other countries by building new, technology-intensive education systems.

Link Postsecondary Programs to Labor Market Outcomes

On a per-student basis, the United States spends two and one-half times the developed countries’ average on postsecondary education. Although our elite research universities remain remarkable engines of innovation and are the envy of the world, our postsecondary education system in general is faltering. The United States used to lead the world in higher education attainment, but, according to 2009 OECD data, is now ranked 12th among developed countries. We have become a high-cost provider of mediocre outcomes.

Critical to addressing this problem is better information on the performance of our postsecondary institutions. As the U.S. Secretary of Education’s Commission on the Future of Higher Education concluded in 2006:

Our complex, decentralized postsecondary education system has no comprehensive strategy, particularly for undergraduate programs, to provide either adequate internal accountability systems or effective public information. Too many decisions about higher education—from those made by policymakers to those made by students and families—rely heavily on reputation and rankings derived to a large extent from inputs such as financial resources rather than outcomes. Better data about real performance and lifelong working and learning ability is absolutely essential if we are to meet national needs and improve institutional performance.

Ideally, this information would be available in comparable forms for all institutions through a national system of data collection. However, achieving consensus on the desirability of a national database of student records has proved politically contentious. One of the issues is privacy of information. More powerful is the opposition of some postsecondary institutions that apparently seek to avoid accountability for their performance.

The way forward is for Congress to authorize, and fund at the state level, data systems that follow individual students through their postsecondary careers into the labor market. The standards for such state systems could be recommended at the federal level or by national organizations, to maximize comparability and eventual interoperability.

The public face of such a system at the state level would be a website allowing prospective students and parents to compare degree and certificate programs within and across institutions on diverse outcomes, with corresponding information on price. At a minimum, the outcomes would include graduation rates, employment rates and average annual earnings five years after graduation. Outcomes would be reported at the individual program level, such as the B.S. program in chemical engineering at the University of Houston. Price could be reported in three ways: advertised tuition,average tuition for new students for the previous two years, and average tuition for new students for the previous two years net of institutional and state grants for students eligible for federally subsidized student loans. These different forms of price information are necessary because institutions frequently discount their advertised price, particularly for low-income students. Students and families need information about discounts in order to shop on the basis of price.

Many states, such as Washington, already have data that would allow the creation of such college search sites, at least for their public institutions. The primary impediment to progress is the federal Family Educational Rights and Privacy Act (FERPA), which makes it very difficult for postsecondary institutions to share data on individual students with state agencies, such as the tax division or unemployment insurance office, in order to match students with information on post-graduation employment and wages. Congress should amend FERPA to allow such data exchanges among state agencies while maintaining restrictions on release of personally identifiable information. To address privacy concerns, Congress also should impose substantial penalties for the public release of personally identifiable information; FERPA currently is toothless.

Creating a higher education marketplace that is vibrant with transparent and valid information on performance and price would be a powerful driver of reform and innovation. Easily addressed concerns about the privacy of student records and political opposition from institutions that do not want their performance exposed to the public have stood in the way of this critical reform for too long. America’s economic future depends on returning the United States to the forefront of education attainment. Simply put, many more of our students need to finish high school and graduate from college. Investments in improved data, along with structural reforms and innovation, can help restore our leadership in educational attainment and increase economic growth.

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Policy Brief #175

As the nation strives to recover from the “Great Recession,” job creation remains one of the biggest challenges to renewed prosperity. Small businesses have been among the most powerful generators of new jobs historically, suggesting the value of a stronger focus on supporting small businesses—especially high-growth firms—and encouraging entrepreneurship. Choosing the right policies will require public and private decision-makers to establish clear goals, such as increasing employment, raising the overall return on investment, and generating innovations with broader benefits for society. Good mechanisms will also be needed for gauging their progress and ultimate success. This brief examines policy recommendations to strengthen the small business sector and provide a platform for effective programs. These recommendations draw heavily from ideas discussed at a conference held at the Brookings Institution with academic experts, successful private-sector entrepreneurs, and government policymakers, including leaders from the Small Business Administration. The gathering was intended to spur the development of creative solutions in the private and public sectors to foster lasting economic growth.

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	What incentives and assistance could be made available to “gazelles” and to small business more generally? What policies are likely to work most effectively? In the near term, government policies aimed at bolstering the recovery and further strengthening the financial system will help small businesses that have been hard hit by the economic downturn. Spurred by the interchange of ideas at a Brookings forum on small businesses, we have identified the following more targeted ideas for fostering the health and growth of small businesses (and, in many cases, larger businesses) over the longer run: Improve access to public and private capital. Reexamine corporate tax policy with an eye toward whether provisions of our tax code are discouraging small business development. Promote education to help businesses struggling with shortages of workers with particular skills, and promote research to spur innovation. Rethink immigration policy, as current policy may be contributing to shortages of key workers and deterring entrepreneurs who wish to start promising businesses in our country. Explore ways to foster “innovation-friendly” environments, such as regional cluster initiatives. Strengthen government counseling programs.

The term “small business” applies to many different types of firms. To begin, the small business community encompasses an enormous range of “Main Street” stores and services we use every day, such as restaurants, dry cleaners, card shops and lawn care providers. When such a business fails, it is often replaced by a similar firm. The small business community also includes somewhat bigger firms—in industries such as manufacturing, consulting, advertising and auto sales—that may have more staying power than Main Street businesses, but still tend to stay relatively small, with under 250 employees. While these two kinds of small businesses contribute relatively little to overall employment growth, they are a steady source of mainstream employment. If economic conditions do not support the formation of new businesses to replace the ones that fail, there would be a significant net destruction of jobs and harm to local communities.

Yet another type of small business has an explicit ambition for rapid growth. These high-growth companies are sometimes known as “gazelles.” According to the Small Business Administration, small businesses account for two-thirds of new jobs, and the gazelles account for much of this job creation. The most striking examples—such as Google and eBay—have tended to be in high-tech industries and were gazelles for a significant time before they graduated to be very large businesses. However, gazelles exist in all industry types and in all regions of the country, and the large majority are not grazing in the nation’s technology-dominated Silicon Valleys. According to one expert, the three largest industry categories for high-growth companies are restaurant chains, administrative services and health care companies. One non-high-tech example is Potbelly Sandwiches, a restaurant chain that began in Chicago. Another is the San Francisco-based Gymboree Corporation, a provider of child development programs and children’s clothing.

 

Fostering the Development of High-Growth Companies

High-growth small businesses represent only about 5 percent of total startups, making it important to determine how to spot and foster them. A key common characteristic is that growth is critically dependent on the entrepreneurs who start these companies; they are people on a mission, charismatic leaders who can inspire creativity and commitment from their staffs.

The age of these firms is highly correlated with when their growth is highest. Generally, the most dramatic growth occurs after at least four years of existence—and coincidentally lasts about four years—before it slows again to a more typical pace for small businesses. Of course, some firms such as Google defy this pattern and continue to experience high growth for many years.

Although dynamic small businesses can be found nearly everywhere and in many industries, some regions spawn more of them than others. These regions may have especially supportive features, such as a critical mass of potential workers with relevant skills, a social climate and network that encourage idea generation, locally available venture capital, or some combination of these factors.

Unfortunately, attempts to anticipate which companies or even industries are likely to produce gazelles are prone to error. Thus, excessive emphasis on national industrial policies that favor specific industries are likely misplaced. Without knowing how to target assistance precisely, broad strategies, such as assistance with funding, knowledge, contacts and other essential resources, may be the best approach to fostering high-growth businesses. Such support has the added value of also aiding Main Street businesses.

Many of the most promising policies focus on removing obstacles that hinder entrepreneurs with solid business plans from launching and expanding their businesses.

Funding

As a result of the burst of the dot.com bubble in early 2000 and the recent financial crisis, small businesses have found the availability of venture capital funds drastically diminished. The crisis has also made it more difficult to obtain funding from banks and other conventional means. These trends particularly affect the “missing middle” of small businesses—roughly, those with between 10 and 100 employees.

The venture capital market. Historically, venture capital has financed only a relatively small portion of small businesses, but those financed have tended to be the ones with the greatest growth potential. In recent years, firms that eventually grew to where they could issue initial public stock offerings generally relied more heavily on venture capital financing than the average small business.

The dollar value of venture capital deals funded today is only about one-fifth the size it reached at its peak. While the peak amount may have been too large, today’s value is probably too small. With their capital heavily invested in a small range of industries and locales, it seems likely that venture capital firms have missed a high proportion of potential investment opportunities. Further, “once burned, twice shy” funders have increasingly focused on larger, later-stage ventures. Consequently, mezzanine financing, which new companies need to survive and thrive in the critical early stages, is scarce.

The funding problems partly stem from venture capital firms today having less money to invest. Some investors who formerly contributed to such firms have become more risk-averse, and worse performance figures have discouraged new investors. Lack of venture capital affects some industries more than others, and even some green energy companies—viewed by some as one of the nation’s more promising industry sectors—have moved to China, where financial support is more readily available.

Bank lending. In contrast to large businesses, which can turn to capital markets for funding, many small businesses are dependent on banks for financing. Although the worst of the 2008–09 credit crunch is behind us, many small businesses still find it difficult to obtain bank loans. Community banks, a key source of small business financing, have been hard hit by losses in commercial real estate, which have limited their lending capacity. Further, many small business owners who historically would have used real estate assets as collateral for expansion loans can no longer do so because of declines in real estate prices. In addition, small businesses that have, in the past, used credit cards to purchase equipment and supplies have been hindered by reductions in credit limits.

Overall economic conditions

The high degree of uncertainty currently surrounding the economic and financing climate may have prompted many entrepreneurs and would-be entrepreneurs to hold off on growth plans. Despite their reputation as high-flying risk-takers, good entrepreneurs take only calculated risks, where the benefits outweigh the dangers. Uncertainties about the future trajectory of the economy merely increase risk without raising potential rewards.

Government policies

Government policies affect the climate for small businesses in many ways. For example, small businesses face substantial hurdles when entering the complicated world of federal grants and contracts. At the state level, severe budget shortfalls mean that even well-designed initiatives to boost small businesses may founder.

The Small Business Administration (SBA) assists the full continuum of small businesses through a variety of means. These include: an $80 billion loan guarantee portfolio; specialized counseling and training centers; specialized business development programs targeting the socially and economically disadvantaged; oversight to ensure that at least 23 percent of federal government contracts go to small businesses (with certain preferences for minority and women-owned businesses); and the Small Business Innovation Research and Small Business Investment Companies programs.

The Obama administration is attempting to broaden support for small businesses by bringing the SBA into multi-agency initiatives that tackle common problems. For example, the Departments of Energy, Commerce, Housing and Urban Development, Education, and Labor, along with the National Science Foundation and the SBA, are supporting a five-year, nearly $130 million Energy Regional Innovation Cluster.

Strength of “social capital”

Through the 1990s, the United States was a worldwide leader in fostering innovation and entrepreneurship and reaped the reward of employment growth. Current international comparisons suggest that we are now closer to tenth place among some 70 nations in our ability to support innovation. Much of what has kept our nation from remaining in the top spot appears to relate to insufficient cultural support for entrepreneurship.

Strong social networks in specific geographic regions appear to substantially bolster the growth of innovative businesses. These networks are built around entrepreneurial dealmakers who serve as the nodes of the network, forming connections among researchers, entrepreneurs and investors. Unfortunately, many regions and industries lack strong networks.

Access to decision-making information. Entrepreneurs need an array of information and advice about how to tackle the problems that arise at different stages in business development. The SBA reports that companies that have taken advantage of their long-term counseling programs, for example, have higher growth than companies that have not.

Opportunity for all. Social networks are self-selecting, and some people have to work extra hard to gain entry to a region’s network of entrepreneurs. While various organizations exist to help women and people of color access entrepreneurial skills and information, these efforts may not suffice. Under-representation of any group presumably would filter out a number of potential high-growth companies.

Workforce issues

A long-time strength of the American workforce, worker mobility has declined. This trend has been attributed in part to an aging population and in part to the current difficulty people have in selling their homes. Businesses report difficulty finding employees with the right training, especially at the technician level, where straightforward vocational training could help.

Global competition

Increasing global competition for good projects, entrepreneurs and capital is a positive trend from an international perspective, but runs counter to the national goal of promoting rapid growth in U.S. industry and employment. Today, many entrepreneurs can choose among starting a business here, in their home country, or even in a third, more hospitable nation. At the same time, current U.S. immigration policy hinders entrepreneurs from coming here to launch their companies. A recent report from The Brookings- Duke Immigration Policy Roundtable concluded that “educated workers with the knowledge and skills to innovate are critical” to the United States and recommended increasing the annual number of skilled visas.

 

Policy Goals for Small Business

Measuring Results

More work is needed to identify key policy goals and priorities related to small business success. Critically, what would constitute “improvement” in public policy regarding small business employment, and how would we measure it? Clearly, increasing the total number of jobs created each year (by both small and large businesses, net of job destruction) would be a positive outcome, all else being equal. Another potential goal would be improving the “quality” of the jobs created, as measured by average compensation or by job creation in new industries or geographic areas where unemployment is high. Creating “good jobs” that bring generous compensation would seem to be always desirable, but this outcome could conflict with other social goals, for example, if the jobs created required skills out of the reach of groups that are traditionally difficult to employ.

Slowing job destruction could be as important as increasing the creation of new jobs, but discouraging layoffs without increasing performance would do more harm than good. The trick is to raise the quality of marginal firms so that their improved performance allows them to retain employees they would otherwise have to let go.

A final key factor in setting policy goals that would support small businesses is measuring the cost to taxpayers of the initiatives that flow from the goals. This includes the subsidy cost contained in the federal budget, as well as costs and tradeoffs in society at large.

Changing Key Policies

Small businesses face both short-run and long-run challenges. With regard to the former, many small businesses have been hard hit by the recession and appear to be lagging behind larger businesses in their recovery. The cyclical struggles of this sector in part reflect the dependence of many small firms on the still-strained banking system for their financing; they also reflect the high toll that our extremely soft labor markets have taken on demand for Main Street goods and services. Thus, government policies aimed at broadly bolstering the recovery and further strengthening the financial system will yield important benefits to small businesses.

The government, in conjunction with the private sector, can also take steps that will foster an economic environment that is supportive of entrepreneurship and economic growth over the long run. Specific policy steps that might help small businesses (and, in many cases, large businesses) include:

Improve access to public and private capital. Implementing serious financial reform will reduce the likelihood that we will see a repeat of the recent credit cycle that has been so problematic for the small business sector. When credit market disruptions do occur, policymakers should be attentive to whether temporary expansions of the SBA loan guarantee program are needed to sustain lending to creditworthy borrowers. The SBA should also consider expanding the points of access to its loan programs through an expansion of its lending partners. Finally, the SBA (or a similar entity) might encourage venture capital funds to broaden their investments beyond familiar areas by systematically bringing these investors together with entrepreneurs from neglected geographic regions and business sectors.

Reexamine corporate tax policy. More thinking is needed about whether provisions in our tax code discourage small business development in a way that is harmful to the broader economy and that places the United States at a relative disadvantage internationally. For example, Congress might consider whether it would be beneficial, on net, to lower employment taxes as a way of spurring hiring at businesses with high-growth potential. In addition, some analysts believe there would be gains from increasing tax credits for research and development and further lowering taxes on capital equipment. A design priority in all cases should be simplicity, as complicated rules can limit take-up among smaller firms that do not have extensive accounting or legal expertise.

Promote education and research. Entrepreneurs report difficulty in finding workers with the skills they need for manufacturing, technology and other jobs that do not require four-year college degrees. Access to such educational opportunities, including tailored vocational training, should be affordable and ubiquitous.

At the university level, improvements are needed in the way academic research is brought to the commercial market. Continued public and private support for basic research might be wise, particularly if we are in a trough between waves of innovation, as some analysts believe. The large investments by the National Science Foundation, National Institutes of Health, Defense Advanced Research Projects Agency, and other ambitious public and private programs laid the groundwork for many of the high-growth businesses of today. It may be worth exploring whether support for research in “softer” areas than the sciences might do an equal or better job of inspiring innovations.

Rethink immigration policy. A reconsideration of limits on H1-B visas might help entrepreneurs struggling with shortages of workers with particular skills. In addition, current immigration policy discourages immigrants who want to establish entrepreneurial businesses in America. Any efforts to expand immigration are frequently perceived as “taking jobs away from Americans,” but studies have shown that new businesses create jobs for Americans.

Explore ways to foster “innovation-friendly” environments. Some regions of the United States clearly do a better job of encouraging innovation. Silicon Valley is the classic example, but there may be as many as 40 such clusters scattered around the country. While clusters often arise organically, typically near major universities, some states have made an explicit commitment to innovation and entrepreneurship. Examples include the Massachusetts Technology Collaborative and California’s Biological Technologies Initiative, involving community colleges statewide. Federal, state and local policymakers should keep a keen eye on ways of adapting best practices from these initiatives as information becomes available about which elements are most effective.

Strengthen government counseling programs. The SBA might do more to expand and tailor its already successful growth counseling programs to better meet the needs of both Main Street and potential high-growth businesses, as well as firms at different developmental stages. Any effort to expand small businesses’ opportunities for federal grants and contracts should be accompanied by significant streamlining of the application process.

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Editor's Note, Oct. 12, 2011: Congress has passed a trio of trade agreements negotiated during the George W. Bush administration and recently submitted by President Obama. The authors of this policy brief say the pacts with South Korea, Colombia and Panama will boost U.S. exports significantly, especially in the key automotive, agricultural and commercial services sectors.

Policy Brief #183

A trio of trade agreements now pending before Congress would benefit the United States both economically and strategically. Carefully developed accords with South Korea, Colombia and Panama will boost U.S. exports significantly, especially in the key automotive, agricultural and commercial services sectors.

Among the other benefits are:

• increased U.S. competitiveness
• enhancement of U.S. diplomatic and economic postures in East Asia and Latin America
• new investment opportunities
• better enforcement of labor regulation and
• improved transparency in these trading partners’ regulatory systems.

The pacts are known as Free Trade Agreements, or FTAs. The Korean agreement (KORUS) was negotiated in 2006-2007 and revised in 2010. The Colombian agreement (COL-US, sometimes known as COL-US FTA) was signed in 2006. The agreement with Panama (PFTA, sometimes known as the Panama Trade Promotion Agreement) was signed in 2007. All have the support of the Obama administration.

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	The three FTAs will substantially reduce these trading partners’ tariffs on U.S. goods, opening large markets for U.S. commerce and professional services. In combination, they will increase the size of the U.S. economy by about $15 billion. Furthermore, they will help reverse a slide in U.S. market influence in two important and increasingly affluent regions of the globe. Approval of all three agreements is in the national interest. To move forward, both Congress and the administration should take these appropriate steps: Congress should approve the trade agreements with Korea (KORUS), Colombia (COL-US) and Panama (PFTA) without additional delays.   To maximize the trade and investment benefits of KORUS, the administration should actively engage in the KORUS working groups, such as the Professional Services Working Group.   Similarly, the U.S. Trade Representative should participate in the Joint Committee’s scheduled annual meetings, in order to maintain a highlevel focus on U.S.-Korea trade, drive further trade liberalization and enable the committee to serve as a forum for broader discussions on trade in East Asia.   The Colombia-U.S. Joint Committee should include representatives of Colombia’s Trade and Labor Ministers with their US counterparts. The presence of the Labor minister should facilitate progress under the FTA through strengthened labor standards and timely implementation of all elements of the agreed-upon action plan. This Committee and specialized working groups could increase the pace of bilateral interaction and help officials identify important areas for discussion, negotiation and agreement.   Panama has ratified the Tax Information and Exchange Agreement which entered into force on April 2011. Panama and the US should strengthen bilateral communication so that collaboration in the battle against money laundering is pushed even further with greater cooperation.

Economic Effects of the Korea Agreement

The economic benefits to the United States from KORUS are especially significant, as the agreement will provide preferential market access to the world’s 11th largest—and a fast-growing—economy. In 2010, U.S.-Korea trade was worth $88 billion, comprising U.S. exports of $39 billion and imports of $49 billion, making Korea the United States’ seventh largest trading partner. According to the independent, quasi-judicial U.S. International Trade Commission (ITC), exports resulting from KORUS will increase the U.S. gross domestic product (GDP) by up to $12 billion. This constitutes a remarkable gain in both real and percentage terms.

To the United States, KORUS offers diverse economic advantages. Most strikingly, KORUS will open Korea’s service market to U.S. exports, allowing the United States to exploit its competitive advantages in financial services, education and information and communications technologies. The agreement also will lead to increased imports from Korea, which in turn will help the United States achieve greater economic specialization. The likely effects of more specialization—and of increased Korean investment in the United States—include greater U.S. efficiency, productivity, economic growth and job growth. Meanwhile, U.S. investors will gain new opportunities in the increasingly active Asia-Pacific region.

Lately, passage of KORUS has assumed enhanced importance with the impasse in the World Trade Organization’s Doha Round. No longer can the United States reasonably anticipate that Doha will lead to improved access to the Korean market. Moreover, an FTA between Korea and the European Union (EU) that took effect July 1st confers preferential access to European exporters, undermining the competitiveness of U.S. businesses in Korea. Even before the European FTA, the United States had been losing valuable ground in Korea. Between 2000 and 2010, the United States fell from first to third in the ranking of Korea’s trading partners (reversing positions with China), as U.S. products declined from 18 to only 9 percent of Korean imports. Failure to approve the agreement can be expected to lead to a further decline. These moves will strongly assist U.S. producers of electronic equipment, metals, agricultural products, autos and other consumer goods. For example, agricultural exports are expected to rise $1.8 billion per year.

On the services front, KORUS will increase U.S. businesses’ access to Korea’s $560 billion services market. Financial services providers, the insurance industry and transportation firms stand to benefit substantially. KORUS usefully builds on the link between investment and services by improving the ability of U.S. law firms to establish offices in Korea. In addition, the agreement establishes a Professional Services Working Group that will address the interests of U.S. providers of legal, accounting and engineering services, provided that U.S. representatives engage actively in the group. KORUS also requires that regulations affecting services be developed transparently and that the business community be informed of their development and have an opportunity to provide comments, which the Korean government must answer.

On the investment front, KORUS affords a chance to strengthen a bilateral investment relationship that probably is underdeveloped. In 2009, the U.S. foreign direct investment flow to Korea was $3.4 billion, while there was a net outflow of Korean foreign direct investment to the United States of $255 million. KORUS supports market access for U.S. investors with investment protection provisions, strong intellectual property protection, dispute settlement provisions, a requirement for transparently developed and implemented investment regulations and a similar requirement for open, fair and impartial judicial proceedings. All this should markedly improve the Korean investment climate for U.S. business. It will strengthen the rule of law, reducing uncertainty and the risk of investing in Korea.

On the governance side, KORUS establishes various committees to monitor implementation of the agreement. The most significant of these is the Joint Committee that is to meet annually at the level of the U.S. Trade Representative and Korea’s Trade Minister to discuss not only implementation but also ways to expand trade further. KORUS establishes committees to oversee the goods and financial services commitments, among others, and working groups that will seek to increase cooperation between U.S. and Korean agencies responsible for regulating the automotive sector and professional services. These committees and working groups, enriched through regular interaction between U.S. and Korean trade officials, should increase levels of trust and understanding of each county’s regulatory systems and help officials identify opportunities to deepen the bilateral economic relationship.

Strategic Effects of the Korea Agreement

Congressional passage of KORUS will send an important signal to all countries in the Asia-Pacific region that the United States intends to remain economically engaged with them, rather than retreat behind a wall of trade barriers, and is prepared to lead development of the rules and norms governing trade and investment in the region. KORUS will provide an important economic complement to the strong, historically rooted U.S. military alliance with Korea. It also will signal a renewed commitment by the United States in shaping Asia’s economic architecture.

The last decade has seen declining U.S. economic significance in Asia. Just as the United States has slipped from first to third in its ranking as a trading partner of Korea, similar drops are occurring with respect to Japan, Indonesia, Malaysia and other Asia-Pacific economic powers. In all of Northeast and Southeast Asia, the United States has only one FTA in effect, an accord with the Republic of Singapore. Passage of KORUS now would be particularly timely, both as a sign of U.S. engagement with Asia and as a mechanism for ensuring robust growth in U.S.-Asia trade and investment.

To illustrate how KORUS might affect U.S. interests throughout the region, consider regulatory transparency. The KORUS transparency requirements could serve as a model for how countries can set and implement standards. They might for example, influence the unfolding Trans-Pacific Partnership negotiations, talks that could set the stage for a broader Asia-Pacific FTA. U.S. producers, investors and providers of commercial and professional services could only benefit from a regional trend toward greater transparency and the lifting of barriers that would ensue. Other KORUS provisions favorable to the United States could function as similar benchmarks in the development of U.S. relations with Asia-Pacific nations and organizations.

Effects of the Colombia Agreement

COL-US will also strengthen relations with a key regional ally and open a foreign market to a variety of U.S. products. Bilateral trade between Colombia and the United States was worth almost $28 billion in 2010. COL-US is expected to expand U.S. GDP by approximately $2.5 billion, which includes an increase in U.S. exports of $1.1 billion and an increase of imports from Colombia of $487 million.

COL-US offers four major advantages:

• It redresses the current imbalance in tariffs. Ninety percent of goods from Colombia now enter the United States duty-free (under the Andean Trade Promotion and Drug Eradication Act). COL-US will eliminate 77 percent of Colombia’s tariffs immediately and the remainder over the following 10 years.
   
• It guarantees a more stable legal framework for doing business in Colombia. This should lead to bilateral investment growth, trade stimulation and job creation.
   
• It supports U.S. goals of helping Colombia reduce cocaine production by creating alternative economic opportunities for farmers.
   
• It addresses the loss of U.S. competitiveness in Colombia, in the wake of Colombian FTAs with Canada and the EU as well as Latin American sub-regional FTAs.

With respect to trade in goods, U.S. chemical, rubber and plastics producers will be key beneficiaries of COL-US, with an expected annual increase in exports in this combined sector of 23 percent, to $1.9 billion, relative to a 2007 baseline according to the ITC. The motor vehicles and parts sector is expected to see an increase of more than 40 percent. In the agriculture sector, rice exports are expected to increase from a 2007 baseline of $2 million to approximately $14 million (the corresponding increases would be 20 percent for cereal grains and 11 percent for wheat).

These and other gains will result from the gradual elimination of tariffs and from provisions that reduce non-tariff barriers as well. Among the latter, the most important changes would be increased transparency and efficiency in Colombia’s customs procedures and the removal of some sanitary and phytosanitary (or plant quarantine) restrictions. With respect to trade in services, Colombia has agreed to a number of so-called "WTO-plus" commitments that will expand U.S. firms’ access to Colombia’s $166 billion services market. For instance, the current requirement that U.S. firms hire Colombian nationals will be eliminated, and many restrictions on the financial sector will be removed.

On the investment front, the potential advantages to the United States also are substantial. In 2009, the U.S. flow of foreign direct investment into Colombia was $1.2 billion, which amounted to 32 percent of that nation’s total inflows. COL-US improves the investment climate in Colombia by providing investor protections, access to international arbitration and improved transparency in the country’s legislative and regulatory processes. These provisions will reduce investment risk and uncertainty.

COL-US presents significant improvements in the transparency of Colombia’s rule-making process, including opportunities for interested parties to have their views heard. COL-US also requires that Colombia’s judicial system conform with the rule of law for enforcing bilateral commitments, such as those relating to the protection of intellectual property. In addition to access to international arbitration for investors, COL-US includes dispute settlement mechanisms that the two governments can invoke to enforce each other’s commitments. Taken as a whole, these provisions offer an important benchmark for further developments in Colombia’s business environment. The transparency requirement alone could reduce corruption dramatically.

Labor rights have been a stumbling block to congressional approval of COL-US. The labor chapter of the agreement guarantees the enforcement of existing labor regulations, the protection of core internationally recognized labor rights, and clear access to labor tribunals or courts. In addition, in April 2011, Colombia agreed to an Action Plan strengthening labor rights and the protection of those who defend them. In the few months the plan has been in effect, Colombia has made important progress in implementation. It has reestablished a separate and fully equipped Labor Ministry to help protect labor rights and monitor employer-worker relations. It has enacted legislation authorizing criminal prosecutions of employers who undermine the right to organize or bargain collectively. It has partly eliminated a protection program backlog, involving risk assessments. And, it has hired more labor inspectors and judicial police investigators.

Besides economic benefits, COL-US offers sizable strategic benefits. It would fortify relations with an important ally in the region by renewing the commitment to the joint struggle against cocaine production and trade. Under the agreement, small and medium-sized enterprises in labor-intensive Colombian industries like textiles and apparel would gain permanent access to the U.S. consumer market. With considerable investments, Colombia would be able to compete with East Asia for these higher quality jobs, swaying people away from black markets and other illicit activities.

While Congress deliberates, the clock is ticking. Colombia is also looking at other countries as potential trade and investment partners in order to build its still underdeveloped infrastructure and reduce unemployment. Complementing its FTAs with Canada, the EU, and several countries in the region, Colombia has initiated formal trade negotiations with South Korea and Turkey and is moving toward negotiations with Japan. A perhaps more telling development is China’s interest in building an inter-oceanic railroad in Colombia as an alternative to the Panama Canal: on July 11th President Juan Manuel Santos signed a bilateral investment treaty with China (and the UK) and is expected to meet Chinese President Hu Jintao in the fall.

Effects of the Panama Agreement

Although Panama’s economy is far smaller than Korea’s or even Colombia’s, the PFTA will deliver important economic and strategic benefits to the United States. Considerable gains will take place in U.S. agriculture and auto manufacturing. Moreover, the PFTA will strengthen the U.S. presence in the region, allowing for the stronger promotion of democratic institutions and market-based economies.

U.S. merchandise exports to Panama topped $2.2 billion in 2009. The PFTA’s elimination of tariffs and reduction in non-tariff barriers will cause this figure to grow. For example, rice exports are expected to increase by 145 percent, pork exports by 96 percent and beef exports by 74 percent, according to the ITC. Exports of vehicles are expected to increase by 43 percent. The PFTA also guarantees access to Panama’s $21 billion services market for U.S. firms offering portfolio management, insurance, telecommunications, computer, distribution, express delivery, energy, environmental, legal and other professional services.

Panama’s trade-to-GDP ratio in 2009 was 1.39, highlighting the preponderance of trade in Panama’s economy and the international orientation of many of its sectors. Following passage of the PFTA, Panama will eliminate more than 87 percent of tariffs on U.S. exports immediately. The remaining tariffs will be removed within 10 years for U.S. manufactured goods and 15 years for agricultural and animal products.

PFTA protections to investors—similar to protections accorded under KORUS and COL-US—are especially valuable, as Panama receives substantial investments associated with sectors that will benefit from both from the expansion of the canal and from other infrastructure projects. A fair legal framework, investor protections and a dispute settlement mechanism, all features of the PFTA, are almost certain to increase U.S. investments in Panama. Panama’s Legislature also recently approved a Tax Information Exchange Agreement with the United States and amended current laws to foster tax transparency and strengthen intellectual property rights. These are crucial steps in preventing the use of Panamanian jurisdiction as a haven for money laundering activities.

Panamanian laws and regulations prohibiting strikes or collective bargaining were a concern that initially delayed implementation of the PFTA. But, these laws have been changed, with the exception of a requirement that 40 workers (not the recommended 20) are needed to form a union; the 40-worker requirement has been kept partly because labor groups in Panama support it. The PFTA’s labor chapter protects the rights and principles outlined in the International Labor Organization’s 1998 Declaration on Fundamental Principles and Rights at Work.

Besides offering economic advantages to the United States, the PFTA is a strategic agreement. Strengthening economic links with Panama should bolster the U.S. capacity to address cocaine trafficking in the region, in light of Panama’s location as Colombia’s gateway to North America. The importance of the canal, now undergoing an expansion that will double its shipping capacity, further underscores the U.S. need to strengthen bilateral relations with Panama.

The time to act is now. Like Colombia, Panama has been negotiating with economic powerhouses other than the United States. It recently signed a trade agreement with Canada and an Association Agreement with the EU. Delaying passage of the PFTA would generate a loss of market share for a variety of sectors of the U.S. economy.

Conclusion

All three FTAs encourage trade by removing tariff and non-tariff barriers. All the agreements provide access to large services markets, foster transparency and offer significant strategic advantages to the United States. Congress should approve each of them now.

The authors would like to thank Juan Pablo Candela for his assistance with this project.

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The news Monday from the Centers for Disease Control and Prevention (CDC) on the incidence of resistant infections is disturbing but not surprising. CDC estimates that over two million Americans every year are affected by drug-resistant infections and of those, 23,000 die annually. The report notes that these figures are conservative and are likely an underestimate of the burden of resistant infections. While these numbers reflect domestic rates, antibiotic resistance is a global issue as well.

To further compound the issue, today’s antibiotic pipeline is nearly dry and has been for some time, with only a handful of large pharmaceutical companies and smaller biotech firms still engaged in antibiotic development. The threat of a so-called ‘post-antibiotic era’ – a time when there are no longer any effective antibiotic treatments – could become a reality without a concerted and comprehensive effort to combat this global threat. The evolution of drug resistance is an inherent risk of antibiotic use. The CDC report cited the development of new antibiotics and diagnostic tools, as well as programs and policies to support appropriate use of antibiotics, as being among the core strategies to combat resistance.

Clinical effectiveness and the relatively low cost of antibiotics have had the unintended consequence of contributing to overuse, accelerating the development of antibiotic resistance to all major classes of antibiotics. While there are some diagnostic tools available to support targeted treatment, it is often more time- and cost-effective for a physician to prescribe a relatively inexpensive, broad-spectrum antibiotic than to conduct a diagnostic test (if one exists at all). Antibiotic overuse can also be driven by patients who see antibiotics as safe and often low-cost cure-alls. Recognizing that these past patterns of overuse are dangerous, the clinical community is working diligently to curb inappropriate use and promote public health through stewardship and education programs. However, given the weakness of the current antibiotic development environment, it may be too little-too late; rates of resistance continue to rise globally while the number of effective therapies to treat many pathogens is dwindling. According to the CDC, resistance can be ”slowed but not stopped” – there will always be a need for novel antibiotics that can combat the evolution of these pathogens.

The current system for manufacturer return on investment for antibiotics, which are typically reimbursed at very low levels, is oriented towards volume sales. As a result, stewardship and educational programs geared toward limiting use of novel antibiotics create an ‘antibiotic development paradox.’ How can we incentivize investment in developing new effective antibiotics and also have successful programs that limit the use of these antibiotics in an effort to prevent or delay the development of resistance? Unless this fundamental conflict in the current business model is addressed, pharmaceutical firms are unlikely to expand development efforts.

How do we turn the tide?

There are several proposals that address aspects of the antibiotic development paradox with the goal of reinvigorating the antibiotic drug development ecosystem in a way that maximizes our ability to stay ahead of resistance. While none of these proposals alone will solve this problem, each could support the long-term goal of reinvigorating antibiotic discovery, development, and treatment.

Creating incentives for drug development

Antibiotic drug development has been a losing prospect for drug developers and has driven many of them to exit the antibiotic innovation space in the last few decades in favor of other therapeutic areas that have much larger markets and are easier areas to study. In order to make antibiotic development more attractive, various mechanisms have been proposed to stimulate or better reward successful clinical development. Incentives that can lower the financial risks associated with development include grants, tax credits, public-private partnerships, and intellectual property protections. Post-approval, prizes, advanced market commitments, and value-based pricing could all potentially provide additional incentives to invest in this research. Some potential incentives were discussed at the Incentives for Change: Addressing the Challenges in Antibacterial Drug Development workshop convened by Brookings in February 2013.

Balancing benefit and risk for severely-ill patients

Other incentives are related to the drug approval process. Novel mechanisms for expedited development and approval can speed time to market while still meeting traditional evidentiary requirements for safety and efficacy. In the last several years, a number of proposals – including from the Infectious Diseases Society of America and the President’s Council of Advisors on Science and Technology – have sought to reduce development time and cost and increase regulatory clarity through a more targeted clinical trial process directed at the highest-risk patients. A narrower study population would allow the U.S. Food and Drug Administration to make a more targeted assessment of the product’s safety, efficacy, and benefit-risk profile that could accelerate innovation for patients with serious drug-resistant infections. The need to steward these antibiotics, which was noted as a core action in the CDC report, would be especially important to both prevent the growth of resistance and to reduce the risk of adverse effects in less seriously-ill populations. Additional information on the proposed limited-use pathway and appropriate use is available on the Brookings website.

De-link reimbursement from return on investment

In order to attract investment for new antibiotic research, we must develop a business model that can support ongoing and expanding development without compromising the effectiveness of new therapies. Recognizing the need to “de-link” return on investment from the volume of antibiotics sold, efforts to move away from the volume-based reimbursement system could become an attractive path forward. Promising models, which were discussed at the Brookings workshop in February, included several guaranteed payment schemes supported by public funding. Taken to an extreme, such a system could even allow new antibiotics to be reserved indefinitely until needed, removing the developer’s incentive to sell any drugs in the years following approval. While such a program would likely be expensive (with sufficient returns estimated on the order of $1.75-2.5 billion over five years), government intervention is needed to fix this public health crisis and dangerous market failure. Its societal value in curtailing resistance and providing critical drugs would outweigh the cost to taxpayers.

The antibiotic development paradox will require a multi-pronged strategy that includes incentives to support front-end drug discovery and development, and new reimbursement policies that de-link unit volume sales from return on investment. However, this is by no means a quick fix. Even if this approach is successful, it will take decades for manufacturers to rebuild lost antibiotic development infrastructure and expertise, and to successfully develop and market new treatments. For the few drugs currently in development, even with expedited development and review pathways, they are still years from reaching the market.

       

Antimicrobial resistance is one of the most significant threats to public health globally. It will worsen in the coming decades without concerted efforts to spur the development of new antibiotics, while ensuring the appropriate use of existing antibiotics. Antimicrobial therapy is essential for treating and preventing bacterial infections, some of which can be life-threatening and acquired as a result of
critical medical interventions, including surgery, chemotherapy and dialysis. However, the international rise in antimicrobial resistance has weakened our antibiotic armamentarium and multi-resistant bacteria now cause over 150,000 deaths annually in hospitals around the world (WHO, 2013). Unfortunately, the evolution of drug-resistant pathogens is unavoidable due to random genetic changes in the pathogens that can render antibiotics ineffective. While antibiotic therapy can succeed in killing susceptible pathogens, it also inadvertently selects for organisms that are resistant. Because each exposure to antibiotics contributes to this process, efforts to restrict antibiotic usage only slow the development of resistance. Ultimately, innovative antimicrobial drugs with diverse mechanisms of action will be needed to treat emerging resistant pathogens.

Combating resistance

Inappropriate use of antibiotics contributes significantly to the acceleration of resistance. Needlessly exposing patients to antibiotics (for example, for viral or mild infections likely to resolve on their own), the use of overly broad-spectrum antibiotics and suboptimal doses of appropriate therapy hasten the evolution of resistant pathogens. While affordable, rapid and accurate point-of-care diagnostics are essential for determining appropriate therapy for many bacterial diseases, routine clinical use will be limited if the tests are too expensive or not accessible during routine clinical encounters. In the absence of a clear diagnostic result, many health care providers prescribe empiric broadspectrum therapy without knowing exactly what they are treating. Although inappropriate use is widespread in many parts of the world, where antibiotics are available without a prescription or oversight by a health care provider or stewardship team, overuse abounds even where antibiotic prescribing is more tightly regulated.

Studies conducted in the USA indicate that around 258 million courses of antibiotics are dispensed annually for outpatient use (Hicks, 2013) and up to 75 per cent of ambulatory antibiotic prescriptions are for the treatment of common respiratory infections, which may or may not be bacterial in origin (McCaig,1995). Recent evidence suggests that over half of these prescriptions are not medically indicated. For example, 60 per cent of US adults with a sore throat receive an antibiotic prescription after visiting a primary care practice or emergency department, despite the fact that only ten per cent require treatment with antibiotics. This is particularly troubling given the availability of rapid tests that can detect Group A Streptococcus, the bacteria responsible for the ten per cent of cases that require antibiotic treatment.

The overuse of antibiotics has been driven largely by their low cost and clinical effectiveness, which has led many patients to view them as cure-alls with few risks. This perception is reinforced by the fact that antibiotics are curative in nature and used for short durations. However, the clinical effectiveness of these drugs decreases over time, as resistance naturally increases, and this process is accelerated with inappropriate use. Moreover, there are numerous consequences associated with the use of antibiotics, including over 140,000 emergency department visits yearly in the USA for adverse incidents (mostly allergic reactions; CDC, 2013a). In addition, antibiotics can eliminate protective bacteria in the gut,
leaving patients vulnerable to infection with Clostridium difficile, which causes diarrhoeal illness that results in 14,000 deaths every year in the USA (CDC, 2013b). It is estimated that antimicrobial resistance costs the US health care system over US$20 billion annually in excess care and an additional $35 billion in lost productivity (Roberts et al., 2009).

The inappropriate use of antimicrobial drugs is particularly concerning because highly resistant pathogens can easily cross national borders and rapidly spread around the globe. In recent years, strains of highly drug-resistant tuberculosis, carbapenem-resistant Enterobacteriaceae and other resistant pathogens have spread outside their countries of origin within several years of their detection. Because resistant bacteria are unlikely to stay isolated, stewardship efforts must be improved globally and international attention is needed to improve surveillance of emerging pathogens and resistance patterns.

A major challenge for clinicians and regulators will be to find stewardship interventions that can be scaled-up and involve multiple stakeholders, including providers, drug manufacturers, health care purchasers (insurers), governments and patients themselves. Such interventions should include practical and costeffective educational programmes targeted towards providers and patients that shift expectations for antibiotic prescriptions to a mutual understanding of the benefits and risks of these drugs.

Educational programmes alone, however, will not be sufficient to lower prescribing rates to recommended levels. Pushing down the inappropriate use of antibiotics also warrants stronger mechanisms that leverage the critical relationships between the stakeholders. For example, health care purchasers can play an important role by using financial disincentives to align prescribing habits with clinical guidelines that are developed by infectious disease specialists in the private and public sectors. This type of approach has the potential to be effective because it includes multiple stakeholders that share responsibility for the appropriate use of antibiotics and, ultimately, patient care.

Key obstacles to antibiotic development

The continual natural selection for resistant pathogens despite efforts to limit antibiotic use underscores the need for new antibiotics with novel mechanisms of action. To date, antimicrobial drug innovation and development have not kept pace with resistance. The number of approved new molecular entities (NME) to treat systemic infections has been steadily declining for decades (see Figure 1). Some infections are not susceptible to any antibiotic and in some cases the only effective drugs may cause serious side effects, or be contra-indicated due to a patient’s allergies or comorbidities (e.g. renal failure). There is significant unmet medical need for therapies that treat serious and life-threatening bacterial diseases caused by resistant pathogens, as well as some less serious infections where there are few treatment alternatives available (e.g. gonorrhoea).

Antibiotic development for these areas of unmet medical need has been sidelined by a number of scientific, regulatory and economic obstacles. While the costs and complexity of any clinical trial necessary for approval by drug regulators can be substantial, in part due to the large study samples needed to demonstrate safety and efficacy, the infectious disease space faces a number of unique clinical challenges. Patients with serious drug-resistant infections may be in need of urgent antibiotic therapy, which can preclude efficient consent and timely trial enrolment procedures; prior therapy can also confound treatment effects if the patient is later enrolled in a trial for an experimental drug. In addition, many patients with these pathogens are likely to have a history of longterm exposure to the health care setting and may have significant comorbidities that render them less likely to meet inclusion criteria for clinical trials.

Emerging infections for which there are few or no treatment options also tend to be relatively rare. This makes it difficult to conduct adequate and well-controlled trials, which typically enrol large numbers of patients. However, clinical drug development can take many years and waiting until such infections are more common is not feasible. Another issue is that it may also not be possible to conclusively identify the pathogen and its susceptibility at the point of enrolment due to the lack of rapid diagnostic technologies. Ultimately, uncertainty about the aetiology of an infection may necessitate trials with larger numbers of patients in order to achieve sufficient statistical power, further compounding the challenge of enrolling seriously ill infectious disease patients in the first place.

The need to conduct large trials involving acutely ill patients that are difficult to identify can make antibiotic development prohibitively expensive for drug developers, especially given that antibiotics are relatively inexpensive and offer limited opportunities to generate returns. Unlike treatments for chronic diseases, antibiotic therapy tends to last no longer than a few weeks, and these drugs lose efficacy over time as resistance develops, leading to diminishing returns. The decline in antimicrobial drug innovation is largely due to these economic obstacles, which have led developers to seek more durable and profitable markets (e.g. cancer or chronic disease) in recent decades. There are only a handful of companies currently in the market and the development pipeline is very thin. Changes to research infrastructure, drug reimbursement and regulation are all potentially needed to revitalise antibiotic innovation.

Opportunities to streamline innovative antibiotic development

In the USA, several proposals have been made to expedite the development and regulatory review of antibiotics while ensuring that safety and efficacy requirements are met. In 2012, the US President’s Council of Advisors on Science and Technology recommended that the US Food and Drug Administration (FDA) create a ‘special medical use’ (SMU) designation for the review of drugs for subpopulations of patients with unmet medical need. Drug sponsors would be required to demonstrate that clinical trials in a larger patient population would need much more time to complete or not be feasible. A drug approved under the SMU designation could be studied in subgroups of patients that are critically ill, as opposed to the broader population, under the condition that the drug’s indication would be limited to the narrow study population. The SMU designation was discussed at an expert workshop convened by the Brookings Institution in August 2013. Many participants at the meeting agreed that there is a pressing need to develop novel antibiotics and that such a limited-use pathway could support the appropriate use of newly approved drugs.

The Infectious Diseases Society of America developed a related drug development pathway called the Limited Population Antibacterial Drug (LPAD) approval mechanism. The LPAD approach calls for smaller, faster and less costly clinical trials to study antibiotics that treat resistant bacteria that cause serious infections. Both the SMU and LPAD approaches would allow drug developers to demonstrate product safety and efficacy in smaller patient subpopulations and provide regulatory clarity about acceptable benefit–risk profiles for antibiotics that treat serious bacterial diseases. The US House of Representatives is currently considering a bill¹ that incorporates these concepts.

A recent proposal from the drug manufacturer industry for streamlined antibiotic development is to establish a tiered regulatory framework to assess narrow-spectrum antibiotics (e.g. active versus a specific bacterial genus and species or a group of related bacteria) that target resistant pathogens that pose the greatest threat to public health (Rex, 2013: pp. 269–275). This is termed a ‘pathogen-focused’ approach because the level of clinical evidence required for approval would be correlated with the threat level and feasibility of studying a specific pathogen or group of pathogens. The pathogen-focused approach was also highlighted at a recent workshop at the Brookings Institution (Brookings Institution, 2014). Some experts felt that the approach is promising but emphasised that each pathogen and experimental drug is unique and that it could be challenging to place them in a particular tier of a regulatory framework. Given that pathogen-focused drugs would likely be marketed internationally, it will be important for drug sponsors to have regular interactions and multiple levels of discussion with regulators to find areas of agreement that would facilitate the approval of these drugs.

Antibiotics with very narrow indications could potentially support stewardship as well by limiting use to the most seriously ill patients. Safe use of these drugs would likely depend on diagnostics, significant provider education, labelling about the benefits and risks of the product, and the scope of clinical evidence behind its approval. Because these antibiotics would be used in a very limited manner, changes would potentially need to be made to how they are priced and reimbursed to ensure that companies are still able to generate returns on their investment. That said, a more focused drug development programme with regulatory clarity could greatly increase their odds of success and, combined with appropriate pricing and safe use provisions, could succeed in incentivising antimicrobial drug development for emerging infections.

Endnote
1 H.R. 3742 – Antibiotic Development to Advance Patient Treatment (ADAPT) Act of 2013.

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Brookings Institution, 2013. Special Medical Use: Limited Use for Drugs Developed in an Expedited Manner to Meet an UnmetMedical Need. Brookings Institution. Available at: www.brookings.edu/events/2013/08/01-special-medical-use

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McCaig, L. F. and Hughes, J. M., 1995. ‘Trends in antimicrobial drug prescribing among office-based physicians in the United
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President’s Council of Advisors on Science and Technology, 2012. Report to the President on Propelling Innovation in Drug
Discovery, Development and Evaluation. Available at:www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-fdafinal.pdf    [Accessed 5 March 2014].

Rex, J. H. et al., 2013. ‘A comprehensive regulatory framework to address the unmet need for new antibacterial treatments’. Lancet Infectious Diseases, 13(3), pp. 269–275.

Roberts, R. R., Hota, B., Ahmad, I. et al., 2009. ‘Hospital and societal costs of antimicrobial – Resistant infections in a Chicago
teaching hospital: Implications for antibiotic stewardship’. Clinical Infectious Diseases, 49(8), pp. 1175–1184.

WHO (World Health Organization), 2010. Fact Sheet: Rational Use of Medicines [webpage] WHO. Available at:
www.who.int/mediacentre/factsheets/fs338/en [Accessed 28 February 2014].

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https://extranet.who.int/sree/Reports?op=vs&path=/WHO_HQ_Reports/G2/PROD/EXT/MDRTB_Indicators_map [Accessed 28 February 2014].

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After decades of neglect, Latin American governments are increasingly focusing on urban slums. What often spurs their policy interventions is a desire to counter violent criminality leaking out from the poor marginalized slums controlled by gangs into the city centers the better-off residents want to keep safe. But tackling the socioeconomic dynamics of slums -- the trap of poverty, discrimination, lack of public goods and social services, and rule by nonstate actors -- is not only complex, but also costly. Governments, elites, and middle classes tend not to want to spend resources on slums. Effective policies have to be sustained for decades, and political will and tax revenues for such complex state-building are frequently scarce.

Focusing on a discreet intervention – providing low-cost housing – becomes tempting. Rarely is it sufficient. The condition of the buildings alone is not what makes a slum a slum. Moving residents from slums to better low-cost housing has encountered systematic challenges not just in Latin America, but also in other places where it has been tried, such as Kenya. Instead, policies need to focus on broader community dynamics, including public safety, legal job creation with sufficient income, human capital development, and robust connectivity of slums to economically-thriving areas, something residents of the latter often don’t want.

Paradoxically, real estate dynamics can have pernicious effects. If broader pacification does take hold and public safety in slums increases, some slum areas can become desirable real estate with vast development possibilities. Developers may well seek to buy the land by offering “better” low-cost housing to slum residents to get them to move. Since many slum residents do not have title to their residences, forced displacement also occurs, albeit under the cloak of being nice to the poor.

Instead of being limited to the provision of alternative residences, policies to address slums need to be about inclusion, economic growth, safety, and connectivity of slums with the thriving city parts, and accountability of city-governance authorities.

This commentary was originally published by the Inter-American Dialogue’s Latin America Advisor. 

      

Nigeria is facing a confluence of troubles: dramatically reduced oil prices have pummeled a country that depends on oil exports for two-thirds of its national revenues; the Boko Haram insurgency continues to wreak havoc particularly in the north of the country, where suicide bombings (many of which are now carried out by kidnapped girls) have killed hundreds; and corruption remains a drain on the country, which ranked 136th out of 168 countries on Transparency International’s 2015 Corruptions Perceptions Index.

But amidst this, Nigeria completed its first peaceful transition of power nine months ago—to Muhammadu Buhari, who has since made some progress in reforming the military, sacking corrupt leaders, and injecting energy into the counter-Boko Haram campaign. 

On February 29, the Africa Security Initiative at Brookings hosted a discussion on the current state of Nigeria, featuring EJ Hogendoorn of the International Crisis Group, Madeline Rose of Mercy Corps, Mausi Segun of Human Rights Watch, and Amadou Sy from Brookings. Brookings’s Mike O’Hanlon moderated the conversation.

As O’Hanlon argued at the start, Nigeria is one of the most important countries in the world, but appears little in policy debates. Nigeria is sub-Saharan Africa’s largest economy, and security risks emanating in the country can have spillover effects. All of the participants stressed that Nigeria should factor more centrally in conversations about international security, economic development, and humanitarian issues.

Nigeria’s ups and downs

O’Hanlon started by framing three overlapping challenges in Nigeria:

• The struggle against Boko Haram, which is more complicated than a pure terror group, but has also pledged loyalty to ISIS.
• The question of reform, to include the army, the police, and the entire government.
• The state of the economy, since Nigerian livelihoods need to be improved if there is any hope to handle the first two situations. 

Hogendoorn praised the peaceful transition of power to President Buhari, calling it a “stunning achievement” for the country and those who helped from the outside. However, the problems facing Nigeria—namely the insurgency in the Niger Delta, declining oil prices, and corruption and government mismanagement (at state and federal levels)—are large, he said. He argued that declining oil prices and income are impacting the government’s ability to fulfill promises, and that state governments are powerful and difficult to reform. He praised some anti-corruption institutions in Nigeria, as well as a number of effective governors who have changed corruption situation dramatically over a short period of time. But in the end, he said, it comes down to good leadership. The Nigerian people must demand accountability. 

Rose detailed how things have changed in Nigeria since Mercy Corps became heavily involved in the area in 2012. Mercy Corps’ main missions there include violence reduction, education, and creating opportunity for young girls, as well as humanitarian response. While there has been progress on chronic violence in Nigeria, particularly in the northeast of the country, Rose stressed that there is much to be done. She concluded that there is not enough attention to the human element of the crisis. For example, Rose noted that displacement is common across the Northeast. The displaced are mainly women and children. In the displaced groups, the eldest becomes de facto head of household—sometimes forcing leading adolescent girls to turn to selling sex for food or money for food. Rose called on the government to address this. 

Segun agreed that the focus needs to change regarding crisis response in Nigeria. In the past, the focus has been almost entirely on a military response. This has not been a workable plan, she said, partly because the “military operates above the law.” The reforms in Nigeria must have a social component, Segun argued. Lack of access to opportunity, economic problems, and desertification of major water bodies have all combined to drive farmers and fisherman from the Northeast and into the heart of the conflict. 

Sy returned to the importance of economic interests in resolving the crises in Nigeria. He reminded the audience that the country is the largest economy of sub-Saharan Africa, and that is important for the entire continent. Since two-thirds of the government revenue comes from oil, the oil shock has dealt a huge blow. But there is hope for Nigeria, Sy noted. One reason is stimulus via investment outside the oil sector. There has been an increase in infrastructure spending, as well as on human development (namely in education and health). In both cases, he said the biggest issue will be implementation. Sy gave four recommendations to the Nigerian government: 1) increase infrastructure expenditure, 2) make government more lean and cost-effective, 3) increase taxation in non-oil revenue items, and 4) reduce corruption. 

Overall, the participants expressed cautious hope for Nigeria despite the problems it faces. The government there still has a long list of to-do’s, but there is reason to believe that it is on the right general track.

      

Editor's note: This article is part of a series marking International Women's Day, on March 8, 2016. Read the latest from Global scholars on bridging the gender inequality gap, women’s well-being, and gender-sensitive policies in sub-Saharan Africa. 

This Tuesday, March 8, marks the first International Women’s Day since world leaders agreed last September to launch the Sustainable Development Goals (SDGs) for 2030. A more rounded conception of gender equality marks one of the SDGs’ most important improvements compared to their predecessor Millennium Development Goals (MDGs). Two SDG targets help to illustrate the broadening geopolitical recognition of the challenges. They also help to underscore how much progress is still required.

A new target: Eliminating child marriage

The inclusion of SDG target 5.3 adds one of the most important new priorities to the global policy agenda: to “eliminate all harmful practices, such as child, early and forced marriage, and female genital mutilation.” Until only a few years ago, the child marriage portion of this target had received only scant international attention. The driving force advancing the issue has been Girls Not Brides, a fast-gelling coalition that now includes more than 550 civil society organizations from over 70 countries. The initiative was first spearheaded by Mabel van Oranje, the dynamic international policy entrepreneur.

At a practical level, ending child marriage faces at least two major challenges. First, it is largescale. Every year, an estimated 15 million girls around the world are married before the age of 18. Second, it is highly complex. There are no simple solutions to addressing cultural practices with deep roots. Impressively, Girls Not Brides has already published a thoughtful theory of change to inform policy conversations, accompanied by a menu of recommended indicators for measuring progress. Regardless of whether this specific theory turns out to be correct, the coalition deserves significant credit for advancing public discussions toward practical action and outcomes. One can only hope that every constituency that lobbied for an SDG target presents similarly considered proposals soon. The advocates for ending child marriage have already registered some early gains. In 2015, four countries raised the age of marriage to 18: Chad, Guatemala, Ireland, and Malawi.

A renewed target: Protecting mothers’ lives

The SDGs are also carrying forward the previous MDG priority of maternal health. Target 3.1 aims as follows: “By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births.” Formally this falls under Goal 3 for health and wellbeing, but it certainly represents a gender equality objective too. Part of that is by definition; mothers are female. Part of it is driven by the need to overcome gender bias; male decision-makers at all levels might overlook key health issues with which they have no direct personal experience.

As of the early 2000s, maternal mortality was too often considered a topic only for specialist discussions. One of the MDG movement’s most important contributions was to elevate the issue to the center stage of global policy. For example, former Canadian Prime Minister Stephen Harper made it a centerpiece among his own foreign policy priorities, including at the G-8 Muskoka summit he hosted in 2010.

Figure 1 shows an initial estimate of the gains across developing countries since 2000, as measured by maternal mortality ratios (MMR). The solid line indicates the actual rate of progress. The dotted lines indicate how things would have looked if previous pre-MDG trends had continued as of 1990-2000 and 1996-2001, respectively. (This is the same basic counterfactual methodology I have previously used for child mortality trends here and here, noting that maternal mortality data remain considerably less precise and subject to ongoing updates in estimation.)

The graph shows that developing countries’ average MMR dropped from approximately 424 deaths per 100,000 live births in 1990, down to 364 in 2000, and further to 233 in 2015. That works out to a 36 percent decline over the past 15 years alone, driven by acceleration in progress during the mid-2000s. Importantly, the value in 2015 was also at least 12 percent lower than it would have been under pre-MDG rates of progress—287 under 1990-2000 trends and 266 under 1996-2001 trends.

Figure 1: Developing country progress on maternal mortality, 1990-2015

A long road ahead

Whereas the MDGs focused on developing countries, the SDGs apply universally to all countries. In that spirit, and slightly different from the previous graph, Figure 2 shows an estimate of the current global MMR trajectory for 2030, extrapolating the rates of progress from 2005 to 2015. Drawing from available data for 174 countries with a current population of 200,000 or more, the world’s MMR is on course to drop from approximately 216 in 2015 to 163 in 2030. This would mark a 25 percent improvement, but falls far short of the global MMR target of 70. (These calculations follow a similar methodology to my assessment last year of under-5 mortality trajectories.)

Figure 2: Global maternal mortality - current trajectory to 2030

The mothers of nations

Although the SDG for maternal mortality is set at a global level (unlike the country-level target 3.2 for child mortality), it is worth assessing how many individual countries are trailing the MMR benchmark of 70. The geographic nature of the global challenge is underscored in Figure 3. It lists the number of countries with MMR above 70 across the respective years 2000, 2015, and—on current trajectory—2030. As of 2000, 90 countries still had MMRs greater than 70. By 2015, this was down to 77 countries. By 2030, on current rates of progress, the relevant figure drops only slightly to 68 countries.

Most notably, the figure for sub-Saharan Africa remains unchanged between 2015 and 2030, at 44 countries, even though most of the region is already experiencing major mortality declines. Rwanda, for example, saw its MMR plummet from 1,020 in 2000 to 290 by 2015. It is on track to reach 106 by 2030. Meanwhile, Sierra Leone saw a decline from 2,650 in 2000 to 1,360 in 2015, on a path toward 768 in 2030. The challenge is not a lack of progress. Instead, it is simply that these countries have huge ground to cover to reach the ambitious goal. On current trajectory, 11 African countries are on course to have MMRs of 500 or greater in 2030.

Figure 3: Scoping progress on SDG 3.1

Number of countries with maternal mortality ratios > 70

Women and girls deserve more

Although these two targets for child marriage and maternal mortality embody only a small portion of the SDGs’ broader gender equality imperatives, they reflect crucial aspects of the overall challenge. On the positive side, they provide inspiration for the ways in which long-overlooked issues can rapidly gain political and policy traction. But they also underscore the scale of the task ahead. The global challenges of gender inequality—ranging from discrimination to violence against women to inequalities of opportunity—all require dramatic accelerations in progress. On this International Women’s Day, we all need to recommit to break from business as usual. Our mothers, sisters, daughters, and partners around the world all deserve nothing less. 

Note: The maternal mortality figures presented above have been updated subsequent to the original post in order to correct for a coding error discovered in the original country-weighting calculations for global trajectories.

      

Extreme poverty around the world has decreased from around 2 billion people in 1990 living under $2 per day to 700 million today. Further, nine out of 10 children are now enrolled in primary schools, an increase over the last 15 years. Progress in both areas since 2000 has been part of the United Nations Millennium Development Goals, which set targets for reducing extreme poverty in eight areas, and which were the guiding principles for global development from 2000 to 2015. Today, the global community, through the UN, has adopted 17 Sustainable Development Goals to continue these poverty reduction efforts. 

In this new episode of Intersections podcast, host Adrianna Pita engages Brookings scholars Laurence Chandy and Rebecca Winthrop in a discussion of how digital technologies can be harnessed to bring poverty reduction and education to the most marginalized populations.

Listen:

Chandy, a fellow in the Global Economy and Development program at Brookings, says that the trends in getting people digitally connected "are progressing at such speed that they’re starting to reach some of the poorest people in the world. Digital technology is changing what it means to be poor because it’s bringing poor people out of the margins.”

Winthrop, a senior fellow and director of the Center for Universal Education at Brookings, says that "I think [education] access is crucial. And I do think that’s almost the first wave because without it we could work on all the ed tech—fabulous apps, great language translated content—but if you do not have the access it’s not going to reach the most marginalized."

Listen to this episode above; subscribe on iTunes; and find more episodes on our website.

Chandy was a guest on the Brookings Cafeteria Podcast in 2013; Winthrop has been a guest on the Cafeteria a few times to discuss global education topics, including: access plus education; investing in girls' education; and getting millions learning in the developing world.

       

In 2015 the international community agreed on a set of ambitious sustainable development goals (SDGs) for the global society, to be achieved by 2030. One of the lessons that the implementation of the Millennium Development Goals (MDG s) has highlighted is the importance of a systematic approach to identify and sequence development interventions—policies, programs, and projects—to achieve such goals at a meaningful scale. The Chinese approach to development, which consists of identifying a problem and long-term goal, testing alternative solutions, and then implementing those that are promising in a sustained manner, learning and adapting as one proceeds—Deng Xiaoping’s “crossing the river by feeling the stones”—is an approach that holds promise for successful achievement of the SDGs.

Having observed the Chinese way, then World Bank Group President James Wolfensohn in 2004, together with the Chinese government, convened a major international conference in Shanghai on scaling up successful development interventions, and in 2005 the World Bank Group (WBG ) published the results of the conference, including an assessment of the Chinese approach. (Moreno-Dodson 2005). Some ten years later, the WBG once again is addressing the question of how to support scaling up of successful development interventions, at a time when the challenge and opportunity of scaling up have become a widely recognized issue for many development institutions and experts.

Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.”

In parallel with the recognition that scaling up matters, the development community is now also focusing on social enterprises (SEs), a new set of actors falling between the traditionally recognized public and private sectors. We adopt here the World Bank’s definition of “social enterprises” as a social-mission-led organization that provides sustainable services to Base of the Pyramid (BoP) populations. This is broadly in line with other existing definitions for the sector and reflects the World Bank’s primary interest in social enterprises as a mechanism for supporting service delivery for the poor. Although social enterprises can adopt various organizational forms—business, nongovernmental organizations (NGOs), and community-based organizations are all forms commonly adopted by social enterprises—they differ from private providers principally by combining three features: operating with a social purpose, adhering to business principles, and aiming for financial sustainability. Since traditional private and public service providers frequently do not reach the poorest people in developing countries, social enterprises can play an important role in providing key services to those at the “base of the pyramid.” (Figure 1)

Figure 1. Role of SE sector in public service provision

Social enterprises often start at the initiative of a visionary entrepreneur who sees a significant social need, whether in education, health, sanitation, or microfinance, and who responds by developing an innovative way to address the perceived need, usually by setting up an NGO, or a for-profit enterprise. Social enterprises and their innovations generally start small. When successful, they face an important challenge: how to expand their operations and innovations to meet the social need at a larger scale. 

Development partner organizations—donors, for short—have recognized the contribution that social enterprises can make to find and implement innovative ways to meet the social service needs of people at the base of the pyramid, and they have started to explore how they can support social enterprises in responding to these needs at a meaningful scale. 

The purpose of this paper is to present a menu of approaches for addressing the challenge of scaling up social enterprise innovations, based on a review of the literature on scaling up and on social enterprises. The paper does not aim to offer specific recommendations for entrepreneurs or blueprints and guidelines for the development agencies. The range of settings, problems, and solutions is too wide to permit that. Rather, the paper provides an overview of ways to think about and approach the scaling up of social enterprise innovations. Where possible, the paper also refers to specific tools that can be helpful in implementing the proposed approaches. 

Note that we talk about scaling up social enterprise innovations, not about social enterprises. This is because it is the innovations and how they are scaled up that matter. An innovation may be scaled up by the social enterprise where it originated, by handoff to a public agency for implementation at a larger scale, or by other private enterprises, small or large. 

This paper is structured in three parts: Part I presents a general approach to scaling up development interventions. This helps establish basic definitions and concepts. Part II considers approaches for the scaling up of social enterprise innovations. Part III provides a summary of the main conclusions and lessons from experience. A postscript draws out implications for external aid donors. Examples from actual practice are used to exemplify the approaches and are summarized in Annex boxes.

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On Thursday, July 7, the International Monetary Fund (IMF) revised its economic outlook for South Africa. Despite “considerable economic and social progress” since 1994, the IMF report cited high income inequality, among other factors, in its projection of slow growth and increased unemployment in the medium term. Earlier this year, in the Brookings Africa Growth Initiative’s Foresight Africa 2016, we explored this pressing problem—high income inequality—across the continent. The initial takeaway was that sub-Saharan Africa has greater in-country income inequality than other developing countries around the world. However, after separating seven outlier economies—Angola, the Central African Republic, Botswana, Zambia, Namibia, Comoros, and South Africa—we noted that income inequality, measured by the Gini coefficient, in the rest of the region actually mirrors the rest of the developing world, which currently stands at 0.39. All seven outlier economies have Gini coefficients above 0.55, a level reached by only four other countries worldwide: Suriname, Haiti, Colombia, and Honduras. 

It is important to explore precisely why this disparity exists. Notably, sub-Saharan Africa is not only an outlier in income inequality, but also in the relationship between economic growth and poverty reduction. Generally, in the developing world, every 1 percent of growth reduces poverty 4 percent. In sub-Saharan Africa, however, every 1 percent of growth only reduces poverty by 3 percent. In Foresight Africa 2016, Brookings Nonresident Senior Fellow Haroon Bhorat suggests that this disparity may be because of the commodity booms that have sustained growth periods in African economies, which bring extraordinary returns to capital but limited job growth. Alternatively, these commodity booms may have accompanied a fall in manufacturing output; growth is thus concentrated in the low-productivity services sector. In any case, this graph forces us to consider exactly what type of structural transformation is necessary for continued economic growth and acknowledge that inequality in sub-Saharan Africa might require different solutions in different countries.

For a more in-depth discussion on this issue, see Foresight Africa 2016 and Bhorat’s discussion of African inequality in relation to the Sustainable Development Goals.

Omid Abrishamchian contributed to this post.

       

       

       

       

       

       

       

       

       

       

       

       

Let’s take a moment for a thought experiment. I do this days after more Palestinian attacks on Israelis, including the horrific murder of a mother of six children; soon after Israel announced the expropriation of another 370 acres of land near Jericho; and after Majed Faraj, the Palestinian security chief, announced that Palestinian security forces had intercepted 200 potential terrorist attacks against Israel. The thought experiment focuses on whether the “Plan B” for the Israel-Palestine dispute should be Israel’s annexation of the territories it occupied in 1967 and the extension of full citizenship rights to the Palestinians in those areas.

To be sure, I still count myself among the dying breed of those who believe fervently in the two-state solution—two states living side by side in peace and security, each enjoying sovereignty and political independence in part of the land that both claim as their exclusive national homes. This is still the best, by far, of all possible outcomes of the dispute. This is not to say that the two-state solution is without faults. Thus far, the two sides have not been able to agree on critical details, and there is no guarantee that achieving two states would assure peaceful relations. But the two-state solution, based on partition of the land, appears to offer the best chance for long term peace. I would dump all Plan B’s and C’s in a heartbeat if leadership emerged in Israel and Palestine—and in the United States—that proved willing to move toward a two-state outcome. 

I still count myself among the dying breed of those who believe fervently in the two-state solution.

But hoping for better, stronger, more farsighted leadership is not a substitute for policy. The fact is that both Israel and the Palestine Liberation Organization (PLO) are further today from bringing forth such leaders than at any time before. Even if Benjamin Netanyahu yields the prime minister’s office to another contender, no one in Israel is proposing the kind of far-reaching accommodation toward which Ehud Olmert was heading in 2008. None of Mahmoud Abbas’s likely successors has even articulated a reasonable peace plan. And none of the candidates for U.S. president is likely to be as committed to the search for peace as Barack Obama has been, and even his commitment has fallen far short of what is needed to move the recalcitrant parties toward peace. The sad reality is that politics—not policy, per se—is what blocks progress toward a two-state solution.

The sad reality is that politics—not policy, per se—is what blocks progress toward a two-state solution.

Regional solution?

In the absence of progress toward two states, are there better alternatives than throwing in the towel and looking at annexation as Plan B? The search for alternative Plan B’s is a fool’s errand. Some of those ideas are creative, but none of them will be accepted by both sides. For example, one Plan B variant du jour rests on the premise of a “regional solution”—that is, having Israel and the Arab world reach a comprehensive peace agreement that includes a resolution of the Palestinian issue. Sounds good, except it makes no sense. 

First, Israel has not accepted the Arab Peace Initiative (API) of 2002, the closest the Arab world has come to accepting Israel within the borders of the 1949 armistice line and agreeing to normalize relations with Israel once peace has been achieved. But no Israeli government has liked its terms, especially the paragraph on Palestinian refugees, the notion of a Palestinian capital in Jerusalem, and the API’s insistence on full Israeli withdrawal. Thus, the question to those who propose a regional solution today is whether there is a coalition in Israel ready to use the API as the basis for negotiating a comprehensive peace. I think not.

Second, the Arab world is in no position to deliver on what the API promises. The Arabs have never followed up the API by engaging Israel. And the premise of the API has been that the Arabs will recognize Israel and agree to normalize only after peace is concluded with the Palestinians (and the Syrians and Lebanese)– not a very attractive incentive for Israelis to enter a risky peace process.

[T]he Arab world of 2002, however dysfunctional, was far more stable than the Arab world of 2016.

And third, the Arab world of 2002, however dysfunctional, was far more stable than the Arab world of 2016. The opponents of the two-state solution in Israel point to this when describing the security dangers that Israel would face were it to concede anything now to the Palestinians. Even if a comprehensive solution were to rest on the shoulders of Egypt and Jordan, Israel’s peace treaty partners, would Israeli skeptics truly be assuaged that these countries could assure Israel’s security in the face of continued instability (Egypt) or the impact of refugees and economic distress (Jordan)? Indeed, the idea of a regional or comprehensive solution based on Arab stability today is chimerical. 

Status quo?

The alternatives to the regional idea are equally unrealistic. The idea of confederation rests on the agreement of Jordan (and potentially Egypt) to join a political entity with the Palestinians. However, neither state has indicated any interest in doing so. 

“Maintaining the status quo” is a non-starter, because status quos are never static—as the events of recent years prove, they tend to get worse. How many Intifadas or stabbings will it take for the people of Israel to believe their own security chiefs, who recognize that these actions are born of frustration over the occupation and related grievances? Why should Israelis believe that the majority of Palestinians are interested in peace when Hamas—opposed to Israel’s very existence—still rules Gaza and commands significant popular support, and while the Palestinian Authority is crumbling and hardly represents anyone anymore? And how long will it take Palestinian supporters of armed and violent resistance to recognize that their abortive efforts to destroy Israel and indiscriminate attacks on Israeli civilians are repugnant: targeting civilians is a morally unacceptable tactic for any resistance movement. 

Thus, the idea of “conflict management” or even “conflict mitigation”—staple products of those who support maintaining the status quo until somehow things change—is pernicious, for it rests on an assumption that the rest of us simply don’t understand the conflict.

[T]he idea of a regional or comprehensive solution based on Arab stability today is chimerical.

A futile search for alternatives

And so it is for all other Plan B’s. Several years ago, my Princeton graduate students embarked on an effort to find a viable alternative to the two-state solution; and they told me at the outset that they intended to prove that such an alternative existed. In the end, they failed and returned to the idea that the only viable solution was to partition the land into two states. Others, too, have tried to find alternatives, and some retain the hope that their policy proposal might win the day. I wish them well—for I really do believe in peace, whether it’s via two states or otherwise. But I have no confidence they will succeed.

[T]he idea of “conflict management” or even “conflict mitigation”—staple products of those who support maintaining the status quo until somehow things change—is pernicious, for it rests on an assumption that the rest of us simply don’t understand the conflict.

And so we are back to the thought experiment. This would take as a starting point what Israeli Minister Uri Ariel told my students several years ago: we (Israel) have won, and the land of Israel is ours. Under this scenario, Israel would:

• Formally annex the territories it occupied in 1967, basing its legal argument on its belief that these are “disputed” rather than “occupied” territories. 
• In connection with this act of annexation, Israel would offer full citizenship rights to all the Palestinians living in the territories. While Israel would probably want to include only the West Bank in this arrangement, excluding Gaza would make it impossible to secure any support internationally, in that Gaza is as much a part of Resolution 242 as is the West Bank.
• Those Palestinians who accept citizenship would then enjoy equal rights with all other Israelis; those Palestinians who reject citizenship would be offered permanent residency, a status that would include certain rights and privileges but not full citizenship rights (for example, voting in national elections). 
• Israel would then approach the United Nations Security Council to argue that these measures constituted an act of self-determination, and that the outcome represented an end of the conflict in accordance with Resolution 242. I am not a lawyer and I assume that many—including Palestinians and Arabs—would dispute this Israeli argument. But the process would change the status quo fundamentally and offer a real alternative to the two-state solution.

Could this work, and is it a real Plan B for the conflict? This is but a thought experiment. I suppose most Israelis will hate this idea for it exposes the most significant weakness of the Israeli right wing and the settlements movement, namely that it undercuts fundamentally the idea of a permanent Jewish majority state. Similarly, most Palestinians will also hate this idea because it forecloses the possibility of a real act of self-determination culminating in an independent state and forces Palestinians to confront the emptiness of the slogans that their leaders have employed over the years in the context of the Arab-Israeli dispute. 

The thought experiment is thus not very sound. Perhaps, then, it will scare everyone enough for leaders to get serious about peace.

      

The composition and track record of the current Israeli government leads Palestinians to expect very little from Israel in the way of advancing peace. After five decades of military occupation, and repeated failures of two decades of bilateral negotiations based on the Oslo Accords, there is a clear need for new ideas. But the proposals offered by Amos Yadlin’s post last month, “Two states, four paths for achieving them,” do not accord with basic realities on the Palestinian side, and as such do not offer a viable pathway to a two-state outcome.

Yadlin’s argument is premised on the belief that a negotiated two-state outcome is not possible today because of a Palestinian refusal to engage. He argues: “It appears that in 2016, the Palestinians do not view a two-state solution…as a preferred outcome.” Palestinians, by contrast, see their leaders’ actions, like the November 2012 UN General Assembly resolution that accorded Palestine observer state status, as efforts to save the two-state solution in the face of Israeli actions that undermine it.

The outcome Yadlin offers as one that would meet Israel’s needs would require Palestinians to forfeit basic components of statehood and basic principles of Israeli-Palestinian peace that are enshrined in international law, such as the right for Palestinian refugees to return to their or their families’ places of origin in what is today Israel. 

Similarly, Yadlin calls for Palestinians to accept “limitations on their sovereignty” to meet Israeli security concerns. From a Palestinian perspective, though, that sovereignty has been systematically constrained already by Israeli policies, including annexation of territory and the expanding settlement enterprise. These are but two examples of divergent viewpoints between Israelis and Palestinians that doom each of the “four paths” Mr. Yadlin proposes to reach a two-state solution. 

Each of Yadlin’s proposed paths for Israel—negotiations toward a final status agreement (with the expectation that they would fail due to Palestinian intransigence), pursuing a regional agreement, seeking an interim bilateral agreement, and taking unilateral action—is problematic.

“A negotiation process resulting in a final status agreement” – The Oslo Peace Accords and the 20 years of unconsummated negotiations that followed were an intensive effort to achieve just that. However, they failed in part because they did not address the fundamental asymmetry between the parties to those accords—Palestinians recognized a state, and Israel, in turn, recognized the representative body of a national movement seeking its right to self-determination. 

If Israelis were serious about two states, and heeded lessons from the failed interim agreements of the Oslo process, a good starting point would be for Israel to reciprocate the political recognition of Israel that the Palestine Liberation Organization (PLO) made back in 1993. Israel’s recognition of the state of Palestine is long overdue, especially after more than 130 countries—including the Vatican—have done so. 

This symmetrical recognition would also define the end game upfront as the outcome to which both sides are already formally committed—and then both sides can spend their negotiating energies on realizing two states living in peace.

“A regional agreement” – The notion that a regional track could substitute for the bilateral track suggests a failure to learn from the past. At many points throughout the history of this conflict, Israeli politicians and policymakers have sought to transfer the Palestinian issue onto other regional states—as in the Camp David I agreement with Egypt, or the suggestion that Palestinians should instead create their state in Jordan, a sovereign country. 

It is positive that Mr. Yadlin seems to embrace the Arab Peace Initiative (API) as a means for progress toward two states—but it can only play the role he envisions if it morphs into something it is not. 

The API is not a starting point for negotiations, but rather terms of reference for an agreement that Arab states would recognize as sufficient to gain Israel normalization within the Middle East. As such, Yadlin’s call for an “updated version” in which the “plan should be decoupled from the issue of the [occupied] Golan Heights” and “not be conditional on a solution to the refugee problem according to U.N. Security Council Resolution 194 from 1949,” do not take into account Arab governments’ own interests in these issues. Regional peace for Israel is unattainable without Israel first making peace with Palestinians.

“An interim bilateral agreement” – When Palestinians accepted the interim agreements of the Oslo bilateral process, there were 100,000 illegal settlers on the ground. Two decades of negotiations has left us with over 500,000 settlers and with the Palestinian community in the West Bank and Gaza further fragmented and battered. This is why the Palestinian leadership has been crystal clear in rejecting another interim agreement. 

Without more than verbal commitments to a viable two-state solution, and without a clear pathway to get there, another interim agreement would only allow Israel to create more “facts on the ground” that would preclude such a solution. It is hard to understand how such a proposal would offer Palestinians any hope of progress, given the experience of the past two decades. 

“In the case a negotiated agreement cannot be realized, an independent Israeli determination of its own borders” – It is even harder to understand how a unilateral Israeli determination of its own borders could, as Yadlin argues, “reinforce the agreed two-state solution paradigm,” especially because this would likely require massive Israeli military force (along with continued blind support from the United States) to create more facts on the ground. It’s understandable why Israelis would prefer to negotiate this conflict with themselves rather than engage with their adversaries, but it is the vast disparity in power between Israelis and Palestinians, not the logic of conflict resolution, that gives Israelis the realistic ability to do so. Still, this does not mean that unilateral decisions by Israel will one day find support among Palestinians. 

It’s understandable why Israelis would prefer to negotiate this conflict with themselves rather than engage with their adversaries, but it is the vast disparity in power between Israelis and Palestinians, not the logic of conflict resolution, that gives Israelis the realistic ability to do so.

It is the nature of international conflicts that they can “end” only in one of two ways: either the two parties agree to a solution that meets their mutual interests, or the side with greater power dictates, imposes, and enforces an outcome over the objections of the weaker side. In proposing unilateralism as a “solution,” Yadlin abandons the more sustainable former pathway for the latter, which I see as doomed. 

If Israel’s leadership is serious about reaching a two-state solution, the road is defined and clear. It requires that Israelis grapple with the real interests and demands of Palestinians as of equal substance and value to their own, rather than wishing them away. Equality can be achieved in two, truly independent states; or this conflict will default to a single state—as warned by President Obama and Secretary Kerry—marred by a civil rights struggle that may take another 70 years to bear fruition, but whose result is pre-defined.

      

Editors’ Note: To salvage his Middle East legacy, advance American interests in the Arab world, and align with the position of the international community on this conflict, Ibrahim Fraihat argues, President Obama must make the long overdue decision of recognizing a sovereign and independent Palestinian state before leaving office. This post originally appeared on Middle East Eye.

Driven by the search for his legacy in the Middle East, it seems President Barack Obama has decided to spend additional political capital on reviving Israeli-Palestinian talks before the end of his second term in office.

Last month, the Wall Street Journal reported that the White House is working on a renewed peace push, including a possible Security Council resolution or other initiatives such as “a presidential speech and a joint statement from the Middle East Quartet.”

While it is still unclear where President Obama is going with this renewed effort, he must understand that using the same old techniques of U.S. mediation will only exacerbate the crisis, consequently tarnishing his legacy in the Middle East. To salvage his Middle East legacy, advance American interests in the Arab world, and align with the position of the international community on this conflict, he must make the long overdue decision of recognizing a sovereign and independent Palestinian state before leaving office.

[U]sing the same old techniques of U.S. mediation will only exacerbate the crisis, consequently tarnishing [Obama's] legacy in the Middle East.

First, Obama should learn from the mistakes of his predecessors, George W. Bush and Bill Clinton, who also tried to reach a mutually acceptable agreement between the Palestinian and Israelis with only a few months left in office.

Reaching an agreement between the two parties under severe time pressure will not work. A party that is not interested in a peace agreement can easily maneuver by using delaying tactics until Obama’s term ends. Israeli Prime Minister Benjamin Netanyahu already utilized this strategy when he publicly rejected an invitation from Obama to visit the White House to talk peace because he wanted to “avoid any perceived influence” in the forthcoming U.S. presidential election. These remarks came from the same person who meddled in domestic American affairs by aggressively lobbying against Obama during the last U.S. presidential election.

Obama has already put in the effort by working with the parties, but now he needs to make decisions. Unlike many American presidents, Obama made the resolution of this conflict a top priority. Despite the brutal civil wars engulfing the Middle East region in the past five years, Obama demonstrated a firm commitment and allocated the needed political capital to make a breakthrough in the Israeli-Palestinian conflict. During his time in office, Secretary of State John Kerry spent more time on Israeli-Palestinian negotiations than any other international conflict. However, the outcome of the Obama administration’s intensive diplomatic efforts has been a total failure. These negotiations ended without an accord or even a memorandum of understanding, agreements that could have built on Obama’s legacy in the Middle East.

Nonetheless, Obama knows very well who made him fail. Netanyahu repeatedly defied Obama: In Congress, he refused to engage in serious negotiations that could have led to an agreement, and he publicly lobbied against Obama’s election for a second term. Obama should not expect Netanyahu to change his position and cooperate on any renewed efforts that could save Obama’s failed legacy in the Middle East. This is the same Netanyahu whom Obama increasingly grew frustrated with throughout his presidency.

With the remaining few months in office, the time has come for Obama to shape his legacy in the Middle East the way he wants it, not the way that Netanyahu has lobbied to characterize it. Obama has an opportunity to take his place in history as the first American president to officially recognize an independent Palestinian state.

Obama has an opportunity to take his place in history as the first American president to officially recognize an independent Palestinian state.

Sooner or later, there will be a Palestinian state and the United States will recognize it. Obama knows that very well. So why should he miss this opportunity and let another president recognize it in the future? Obama should worry about his own legacy, not Netanyahu’s extremist views. Obama should never allow Netanyahu to shape his legacy in the Middle East and leave it stained with failure.

Obama’s Middle East legacy is equally bleak in other parts of the region. Syria could become Obama’s Rwanda; Benghazi and the late Ambassador Chris Stevens are witnesses to his legacy in Libya; al-Qaeda in Yemen is much stronger today than when Obama intensified his drone policy against the organization; only history will tell how the Iran nuclear deal turns out in the future. Unfortunately, Obama cannot change the facts in any of these countries with the limited time remaining for him in office. However, he can still restore his legacy in the Middle East by recognizing a Palestinian state.

By recognizing a Palestinian state now, Obama will have seized an historical opportunity to impact the future and establish a foundation for the next American administration in the Middle East. No matter who comes to the White House, they will have to deal with this new fact. Obama has the international community on his side in recognizing Palestine. France recently stated that it will recognize an independent Palestinian state if a final effort to bring about peace fails. Additionally, Sweden has officially recognized Palestine.

American diplomats have a tradition of balancing their views after they leave office as they become free from the pressure of the Israel lobby and domestic politics. President Jimmy Carter is a one example of this.

Obama should not fall into this trap. No matter how he adjusts his views after leaving office, he will never save his legacy in the Middle East and the Israeli-Palestinian conflict if he does not recognize a Palestinian state while he still has the power to do so. The time is now and he must act rather than regretting it later.

President Obama, if not for your legacy, at least recognize Palestine for the Nobel Peace Prize that you received in advance. The committee trusted you and awarded you the prize before you achieved any real peace; do not disappoint them. Make sure you earn the prize, Mr. President. If not for your legacy or the prestigious prize, then please do something for your own personal pride and be the one who laughs last, not Benjamin Netanyahu.

Mr. President, recognize Palestine now.

      

Are Turkey and Israel on the verge of signing a normalization agreement, after a six-year hiatus? Comments in recent days by senior officials in both countries suggest so. A senior Israeli official, quoted in the Times of Israel, stated that “95% of the agreement is completed,” while Turkish Foreign Minister Mevlüt Çavuşoğlu said the parties are “one or two meetings away” from an agreement.

Media outlets in both countries have revealed that a meeting between senior Turkish and Israeli officials is expected to be held in Turkey on June 26—and that shortly after, an agreement is likely to be signed and go into effect. 

For two of America’s closest allies in the Middle East to bury the hatchet, reinstate ambassadors, and resume senior-level dialogue would surely be a boost for U.S strategic interests in the region. It would contribute to greater cohesion in dealing with the Syrian crisis, for example, and in the fight against the Islamic State. 

A quick recap

Let’s first recall how the crisis between the two former strategic allies developed, when in the aftermath of the Mavi Marmara incident (May 31, 2010)—resulting in the deaths of 9 Turks—Turkey recalled its ambassador in Tel Aviv and suspended nearly all defense and strategic ties with Israel. Israel also called back its ambassador in Ankara. At the time, Turkey set three conditions for resuming dialogue with Israel: a formal apology, compensation for the families of the victims, and a removal of Israel’s Gaza naval blockade. Relations came to a practical standstill, except in the economic sphere: trade between the two countries exceeded $5 billion in 2014, an unprecedented level. 

Israel formally apologized to Turkey in 2013 and in 2014 committed to paying compensation to the families of the victims. But the Gaza naval blockade has not been lifted. Turkey further demands greater access and presence in Gaza. For its part, Israel demands that Turkey not allow Hamas operative Salah al-Arouri, who resides in Istanbul, to coordinate terrorist operations against Israeli targets in the West Bank. Israel also wants Ankara to pressure Hamas to return the remains of two Israeli soldiers killed in the 2014 war in Gaza. 

Since the flotilla incident, Turkey was not always convinced that repairing relations with Israel actually served its interests. As the Arab Spring unfolded, Turkey hoped to assume a leadership role in the Arab and Muslim worlds—having good relations with Israel did not serve that purpose. And as Turkey went through periods of some unrest in the political arena (whether during the Gezi Park protests in 2013 or the hotly contested local and national elections), many in the ruling AKP party saw restoring relations with Israel as a potential liability in domestic politics. Israel, for its part, was mostly in a reactive mode: sometimes it tried to initiate contacts with Turkey, and sometimes it denounced Turkish anti-Israeli or anti-Semitic rhetoric.

The times they are a-changing

Now, however, new developments have prompted Turkey to seek a rapprochement with Israel. One key factor is the crisis in the Turkish-Russian relationship—in the aftermath of the suspension of the Turkish Stream natural gas pipeline project, Israeli natural gas is viewed as a possible substitute in the medium term for some of Turkey’s natural gas imports from Russia. And as the impact of the war in Syria on Turkey (including the refugee crisis and terrorist attacks) has made clear to Turkey that it must enhance its intelligence capabilities, and Israel can help. Israel, meanwhile, is searching for an export destination for its natural gas (Israeli Energy Minister Steinitz stated recently that “Turkey is a huge market for gas…they need our gas and we need this market”). Israeli leaders also know that resuming a political and military dialogue with Turkey may contribute to a more comprehensive view of the challenges Israel faces in the region. 

Five years after Israel’s formal request to open a representation office at NATO’s Brussels headquarters, Israeli Prime Minister Benjamin Netanyahu announced last month that NATO has approved the Israeli request. Turkey had opposed it, blocking progress, since NATO decisions are adopted by consensus. In a move seen signaling a thawing of relations, Turkey recently removed its objection to Israel’s request, paving the way to NATO’s decision. Israel continues to be a partner in NATO’s Mediterranean Dialogue along with Egypt, Algeria, Tunisia, Jordan, Mauritania and Morocco. 

At a time when Turkish President Recep Tayyip Erdoğan is attempting to strengthen his country’s regional strategic position and enhance its economic opportunities, a rapprochement with Israel makes sense. Bilateral negotiations are in the final stretch, as they have reached a compromise on the complex issue of Gaza and Hamas (Turkey will reportedly not demand the full lifting of Israel’s naval blockade on Gaza, settling for greater access and presence in Gaza. Israel will acquiesce to continued Hamas political activities in Turkey and will not demand the removal of Hamas operative al-Arouri from Turkey, but will get Turkish assurances that al-Arouri’s involvement in terror will cease.)

Fixing the troubled Turkish-Israeli relationship has been a mighty task for senior negotiators on both sides over the last few years, and although an agreement seems around the corner, the experience of recent years suggests that there can be last minute surprises. Israel’s Prime Minister had to jump over several hurdles, holding off pressure from Russia and Egypt not to seek rapprochement with Turkey, and ensuring support of the deal with Turkey from his newly appointed Defense Minister Avigdor Liberman, a known opponent of a deal. On the Turkish side, it seems that President Erdoğan wants a rapprochement with Israel, and feels that he needs it. This is tied directly to the Turkish domestic arena: Erdoğan has recently completed his consolidation of power, ousting Prime Minister Ahmet Davutoğlu and paving the way to the election of his trusted confidant, Binali Yıldırım, as prime minister. In addition, his new allies—the military-judicial establishment—are in favor of mending ties with Israel. One caveat is that Erdoğan’s top priority is establishing a presidential system, and so if he feels at any point that reaching an agreement with Israel will somehow undermine those efforts, he may opt for maintaining the status quo. 

       

       

       

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As policy agendas for 2015 come into sharper focus, much of the national conversation is aimed at tackling challenges in biomedical innovation. The first two months of the year alone have seen landmark proposals from Congress and the Obama Administration, including the House’s 21^st Century Cures initiative, a bipartisan Senate working group focused on medical progress, President Obama’s Precision Medicine Initiative and a number of additional priorities being advanced by federal agencies and other stakeholders.

On March 13, the Engelberg Center for Health Care Reform hosted the State of Biomedical Innovation Conference to provide an overview of emerging policy efforts and priorities related to improving the biomedical innovation process. Senior leaders from government, academia, industry, and patient advocacy shared their thoughts on the challenges facing medical product development and promising approaches to overcome them. The discussion also examined the data and analyses that provide the basis for new policies and track their ultimate success.

 Join the conversation by following @BrookingsMed or #biomed

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• State of biomedical innovation conference: Panel 1
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• State of biomedical innovation conference

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• Uncorrected Transcript (.pdf)

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• 313 MASTER DECK2

      

Many proposals to accelerate and improve medical product innovation and regulation focus on reforming the product development and regulatory review processes that occur before drugs and devices get to market. While important, such proposals alone do not fully recognize the broader opportunities that exist to learn more about the safety and effectiveness of drugs and devices after approval. As drugs and devices begin to be used in larger and more diverse populations and in more personalized clinical combinations, evidence from real-world use during routine patient care is increasingly important for accelerating innovation and improving regulation.

First, further evidence development from medical product use in large populations can allow providers to better target and treat individuals, precisely matching the right drug or device to the right patients. As genomic sequencing and other diagnostic technologies continue to improve, postmarket evidence development is critical to assessing the full range of genomic subtypes, comorbidities, patient characteristics and preferences, and other factors that may significantly affect the safety and effectiveness of drugs and devices. This information is often not available or population sizes are inadequate to characterize such subgroup differences in premarket randomized controlled trials.

Second, improved processes for generating postmarket data on medical products are necessary for fully realizing the intended effect of premarket reforms that expedite regulatory approval. The absence of a reliable postmarket system to follow up on potential safety or effectiveness issues means that potential signals or concerns must instead be addressed through additional premarket studies or through one-off postmarket evaluations that are more costly, slower, and likely to be less definitive than would be possible through a better-established infrastructure. As a result, the absence of better systems for generating postmarket evidence creates a barrier to more extensive use of premarket reforms to promote innovation.

These issues can be addressed through initiatives that combine targeted premarket reforms with postmarket steps to enhance innovation and improve evidence on safety and effectiveness throughout the life cycle of a drug or device. The ability to routinely capture clinically relevant electronic health data within our health care ecosystem is improving, increasingly allowing electronic health records, payer claims data, patient-reported data, and other relevant data to be leveraged for further research and innovation in care. Recent legislative proposals released by the House of Representatives’ 21st Century Cures effort acknowledge and seek to build on this progress in order to improve medical product research, development, and use. The initial Cures discussion draft included provisions for better, more systematic reporting of and access to clinical trials data; for increased access to Medicare claims data for research; and for FDA to promulgate guidance on the sources, analysis, and potential use of so-called Real World Evidence. These are potentially useful proposals that could contribute valuable data and methods to advancing the development of better treatments.

What remains a gap in the Cures proposals, however, is a more systematic approach to improving the availability of postmarket evidence. Such a systematic approach is possible now. Biomedical researchers and health care plans and providers are doing more to collect and analyze clinical and outcomes data. Multiple independent efforts – including the U.S. Food and Drug Administration’s Sentinel Initiative for active postmarket drug safety surveillance, the Patient-Centered Outcomes Research Institute’s PCORnet for clinical effectiveness studies, the Medical Device Epidemiology Network (MDEpiNet) for developing better methods and medical device registries for medical device surveillance and a number of dedicated, product-specific outcomes registries – have demonstrated the potential for large-scale, systematic postmarket data collection. Building on these efforts could provide unprecedented evidence on how medical products perform in the real-world and on the course of underlying diseases that they are designed to treat, while still protecting patient privacy and confidentiality.

These and other postmarket data systems now hold the potential to contribute to public-private collaboration for improved population-based evidence on medical products on a wider scale. Action in the Cures initiative to unlock this potential will enable the legislation to achieve its intended effect of promoting quicker, more efficient development of effective, personalized treatments and cures.

What follows is a set of both short- and long-term proposals that would bolster the current systems for postmarket evidence development, create new mechanisms for generating postmarket data, and enable individual initiatives on evidence development to work together as part of a broad push toward a truly learning health care system.

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The biomedical innovation ecosystem continues to evolve and enhance the processes by which treatments are developed and delivered to patients. Given this changing biomedical innovation landscape, it is imperative that all stakeholders work to ensure that development programs, regulatory practices, and the policies that enable them are aligned on and achieving a common set of goals. This will require a thorough reexamination of our understanding of biomedical innovation – and the subsequent ways in which we seek to incentivize it – in order to more effectively bridge research and analysis of the process itself with the science and policy underpinning it.

Traditional research into the efficiency and effectiveness of drug development programs has tended to focus on the ‘inputs’ and process trends in product development, quantifying the innovation as discrete units. At the opposite end of the research spectrum are potential measures that could be categorized as “value” or “outcomes” metrics. Identifying the appropriate measures across this spectrum – from inputs and technological progress through outcomes and value – and how such metrics can be in conversation with each other to improve the innovation process will be the focus of this expert workshop. On October 14, the Center for Health Policy at Brookings, under a cooperative agreement with the U.S. Food and Drug Administration, convened a roundtable discussion that engaged key stakeholders from throughout the innovation ecosystem to explore the factors and characteristics that could improve our understanding of what constitutes modern “innovation” and how best to track its progress.

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• FINAL 1014 BrookingsFDA Agenda
• FINAL 1014 BrookingsFDA Participant List

       

       

       

       

       

On Monday, the White House Council of Economic Advisers (CEA) released a report examining the long-term decline in the share of prime-age men (aged 25 to 54) who are either working or actively looking for work. What economists call the labor force participation rate for this population decreased from 98 percent in 1954 to 88 percent today, the second largest decrease among OECD countries. This trend has raised concerns not only for its impact on economic growth, but also because it seems to track an increase in mortality over that time, particularly among white males, as economists Anne Case and Angus Deaton have found.

The CEA report documents a number of possible explanations for this trend, including increasing rates of women in the workforce, rising disability insurance claims, falling demand for less-skilled workers, and barriers to employment for those with criminal records.

The report’s national analysis alone, however, obscures tremendous variation across the United States in employment among this critical group.

According to data from the Census Bureau’s American Community Survey, in 2014, 81 percent of prime-age men nationwide were employed (this statistic differs from the labor force participation rate in that it omits those who are looking for, but not in, work). Yet among the nation’s 374 metropolitan areas for which data are available, that rate ranged from over 93 percent in the oil boomtown of Midland, TX, to just over 50 percent in Kings County in California’s Central Valley.

There are clear regional patterns to this important statistic. Many of the metro areas with the highest employment rates for prime-age men are smaller places located in the middle of the country, from the Upper Midwest, to energy-rich areas in Texas and the Plains states, to the Intermountain West. In several large, economically dynamic metro areas such as Denver, Houston, Minneapolis, San Jose, and Washington, D.C., rates of work among prime-age men are also very high.

Of much greater concern is the large number of metropolitan regions with very low rates of work among prime-age men. These include many small former industrial centers in states like Michigan, Indiana, and Ohio; areas of West Virginia and Louisiana that rely on declining-employment industries like mining; and long-struggling agricultural economies in Arkansas, Texas, and inland California.

These patterns echo findings from the CEA report that falling demand for labor is an important part of the long-term decline in prime-age male employment. In many places where a high school diploma alone once provided the gateway to a middle-class job, nearly one-third of men in this age group are out of work. This is also evident in the local relationship between educational attainment and work—where educational attainment rates are higher among prime-age men, members of that group are more likely to be employed. A 10-percentage point difference in employment rates separates the most highly-educated quarter of metro areas from the least highly-educated quarter.

Beyond education, size seems to matter, too. Large metro areas exhibit higher rates of work among prime-age men than small metro areas. Across the 100 largest U.S. metro areas, 83.2 percent of prime-age males are employed, compared to 79.8 percent in the smaller 274 metro areas. This relationship partly reflects that men in large metro areas have higher rates of educational attainment than those in small metro areas. Yet even men who have no more than a high-school diploma work at higher rates in large metro areas (64 percent) than similarly educated men in smaller metro areas (62 percent). Larger regional economies with greater economic diversity may stimulate stronger demand for workers at lower skill levels.

Several of the policies that the CEA report recommends to improve prime-age male labor force participation, such as bolstering investment in public infrastructure, reforming unemployment insurance, and boosting educational attainment could help boost rates of work in lagging U.S. metro areas. However, none directly addresses the fact that problems in male employment disproportionately affect small and often economically isolated U.S. regions. This evidence suggests that policies to help dislocated workers relocate to larger, more economically dynamic metro areas—particularly by improving the supply of affordable housing in those regions—should be part of a comprehensive strategy to help reverse the troubling long-term decline in men’s work.