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

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

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

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

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

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

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

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

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

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

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

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

Chinese President Xi Jinping is paying a US visit to attend the 4th Nuclear Security Summit. A US-based scholar noted that the trip not only shows China’s will to beef up cooperation with the rest of the world, but also signals that China, which has kept a low-profile, is ready to play a bigger role in global governance.

During the two-day summit starting from Thursday, President Xi will also meet with his US counterpart Barack Obama.

Li Cheng, director of the John L. Thornton China Center of the Brookings Institute, said that Xi’s second visit to Washington DC in six months highlights that the two major powers are seeking cooperation rather than confrontation.

The new type of major-power ties between the two nations, with win-win cooperation and mutual respect at its core, advocates collaboration rather than conflict, saidLi, explaining that such a relationship emphasizes a desire for cooperation.

He also pointed out that Xi’s attendance at the summit shows China's willingness to further collaborate with the international community. "His attendance will be greatly welcomed," Li stressed, adding that China now plays a crucial role in climate change, cyber security, nuclear security and global economic governance.

"As a major power, China's voice should be heard, and views should be delivered," said Li. He also noted that the international community will continue to respect China's growing role in international affairs.

Though China has previously maintained a low-profile in global governance, its role has since increased, the scholar commented.

Along with its rising international status, China also shoulders more responsibilities and obligations in narrowing the rich-poor gap, promoting South-South Cooperation and other global affairs, he added.

Li also applauded the momentum of Sino-US ties, saying that the leaders of both nations are making far-sighted choices based on an expandedworld view and their fundamental interests.

Though some disputes emerged, they are far outweighed by bilateral cooperation, he noted, especially praising their collaboration in global issues.

"I believe their worldwide cooperation will generate a spillover effect, so that the two will better understand each other and advance cooperation," said Li. 

This piece originally appeared in People's Daily.

Event Information

As China presides over the G-20 for the first time, the country has the significant opportunity to impact a system of global governance under increasing stress. At the same time, while enduring the costs and realizing the benefits of its leadership role, China can address critical issues including innovation, global security, infrastructure development, and climate change. Even as China recently has made its own forays into regional institution-building with the launch of the Asia Infrastructure Investment Bank and the “One Belt, One Road” initiative, its G-20 presidency presents a new platform from which the country can advance its own agenda as part of a broader global agenda. As the first and second largest economies in the world, the United States and China can benefit enormously by understanding each other’s perspective.

Think tanks like the Brookings-Tsinghua Center have been playing an important role in this bilateral and multilateral exchange of views. On March 22, in celebration of the 10th anniversaries of the Brookings-Tsinghua Center and the John L. Thornton China Center at Brookings, Tsinghua University hosted a conference to examine how China can realize the 2016 G-20 theme of “an innovative, invigorated, interconnected, and inclusive world economy.” The event began with introductory keynote remarks on the substantive advancements China and the United States have made in think tank development and people-to-people diplomacy, followed by an additional set of keynote remarks and panel discussions presenting Chinese and American perspectives on the G-20 agenda and the state of global governance.

Event Materials

• Chinas G20 Presidency Transcript

For the past several years, international affairs have been analyzed through two lenses. One lens has focused on geopolitics: in particular, the question of how great power relations are evolving at a time of redistribution in the world’s economic and now also political power. The second lens considers the framework of global governance, especially the question of whether or not the existing formal and informal institutions have the tools and the ability to manage complex global challenges.

China's presidency of the G-20 bridges the issues of global governance and great power relations. At a basic level, the G-20 will set a tone for how major powers attempt to tackle the challenges that confront us all.

China’s assumption of the G-20 chairmanship in 2016 marks an important symbolic threshold. It is the first time a major non-Western power will chair the world’s premier body for international economic cooperation—not to mention one of the world’s most important geopolitical bodies, as well. China’s presidency comes at an important time in the substance of the G-20’s agenda, too, as a slowing Chinese economy is integral to the dynamics of an overall slowing global economy. As such, this event offers an opportunity to reflect on geopolitics and global governance—and the way forward. In short, what is the state of international order? 

Heading down a bumpy road?

There is little doubt that we are at an important inflection point in international order. For the past 25 years, the international system—with its win-win economic structures—has been relatively stable. But this order is under challenge and threat, and it is eroding. We risk the rise of a lose-lose international system, encompassing a deterioration of the security relations between great powers, and a breakdown of the basic structures of international cooperation. 

That may be the worst-case scenario, but it is a plausible one. Countries must be vigilant about preventing this outcome. Even though the established powers and the so-called emerging powers (clearly China is an emerged power) may not hold the same views about the content of international order, all sides have a stake in pursuing intense negotiations and engaging in debate and dialogue. It is imperative that parties find a middle ground that preserves key elements of the existing order while introducing some degree of adaptation, such that this order does not collapse.

For the past 25 years, the international system—with its win-win economic structures—has been relatively stable. But this order is under challenge and threat, and it is eroding.

A version of this kind of negotiation may occur later this year. Japan’s presidency of the G-7 will begin just ahead of China's presidency of the G-20, putting important issues into sharp relief. As the older, Western-oriented tool for managing global issues, the G-7 still focuses on global economics but increasingly tackles cross-cutting and security issues. The G-20 is the newer, multipolar tool through which both emerged and emerging powers collaborate—but, so far, members have limited their deliberations to economic issues. The two processes together will reveal the tensions and opportunities for improvement in great power relations and in geopolitics. 

Of particular note is where political and security issues fall on the dockets of these two bodies. Although the G-20 did tackle the Syria crisis at its St. Petersburg meeting in 2013, political and security issues have otherwise not been part of the group’s agenda. But these topics form an important part of the landscape of great power politics and global governance, and they are issues for which we find ourselves in very difficult waters. Tensions between the West—particularly Europe—and Russia are running high, just as disputes are mounting in Northeast Asia. The question of America’s naval role in the Western Pacific and China’s claims of a nine-dash line are serious flash points in the U.S.-China relationship, and we should not pretend that they are not increasingly difficult to manage, because they clearly are.

I believe it is shortsighted for the G-20 not to take up some of these tense security issues.

These are not part of the formal agenda of the G-20, but they should be. Although many economists may disagree with me, I believe it is shortsighted for the G-20 not to take up some of these tense security issues. The group’s argument has been to focus on economic issues, for which there are shared interests and progress can be made, which is a fair point. But history tells us that having difficult, tense issues involving a number of stakeholders leads to one of two scenarios: either these issues are managed in a credible forum, or tensions escalate and grow into conflict. There is no third option. Moreover, these are not issues that can be resolved bilaterally. They have to be settled in a multilateral forum.

In 2016, Japan will take up the issue of the South China Sea in the G-7—a scenario that is far from ideal, since key stakeholders will not be present. Even so, the G-20 refuses to take up security issues, leaving countries without an inclusive forum to deal with these tense security concerns. Of course, they could be raised in the U.N. Security Council, but that is a crisis management tool. We should be building political relations and involving leaders in preventing great power conflict, all of which, by and large, does not happen at the U.N. But it could happen at the G-20. 

With great power comes great responsibility

A better dynamic is at work with respect to the issues of climate change and global energy policy. The Paris climate accords are counted as a major breakthrough in global governance. To understand how the outcome in Paris was achieved, we have to look again at great power relations. What really broke the logjam of stale and unproductive negotiations was the agreement struck between President Xi and President Obama. Their compact on short-lived climate pollutants transformed the global diplomacy around climate change, yielding the broader agreement in Paris.

[G]reat power status primarily entails a responsibility to act first in resolving tough global challenges and absorbing costs.

Why did the U.S.-China agreement on climate change facilitate the Paris climate accords? The United States and China did not impose a framework, nor did they insist on a particular process or stipulate a set of rules. What they did was lead. They acted first and they absorbed costs. This is the essence of the relationship between great power politics and global governance.

Great power status confers a certain set of privileges, not least of which is a certain degree of autonomy. To that end, the United States has avoided multilateral rules more than other countries, and other countries may aspire to that status. But the larger point is that great power status primarily entails a responsibility to act first in resolving tough global challenges and absorbing costs. That is how great powers lead through a framework of global governance. In today’s world, where global governance will necessarily be more multipolar than in the past, we have to find new approaches to sharing the burdens of moving first and absorbing costs. That is, far and away, the most likely way to maintain a relatively stable but continuously adapting international order—one that is empowered to tackle global challenges and soothe geopolitical tensions.

One of the foundational notions of digital financial services has been the distinction between payment rails and services running on the rails. This is a logical distinction to make, one easily understood by engineers who tend to think in terms of hierarchies (or stacks) of functionalities, capabilities, and protocols that need to be brought together. But this distinction makes less sense when it is taken to represent a logical temporal sequencing of those layers.

It is not too much of a caricature to portray the argument —and, alas, much common practice— like this: I’ll first build a state-of-the art digital payments platform, and then I’ll secure a great agent network to acquire customers and offer them cash services. Once I have mastered all that, then I’ll focus on bringing new services to delight more of my customers. The result is that research on customer preferences gets postponed, and product design projects are outsourced to external consultants who run innovation projects in a way that is disconnected from the rest of the business.

This mindset is understandable given limited organizational, financial and human resource capabilities. But the problem with such narrow sequencing is that all these elements reinforce each other. Without adequate services (a.k.a. customer proposition), the rails will not bed down (a.k.a. no business case for the provider or the agents). In businesses such as digital payments that exhibit strong network effects, it’s a race to reach a critical mass of users. You need to drive the entire stack to get there, as quickly as possible. Unless, you develop a killer app early on, as M-PESA seems to have done with the send money home use case in the Kenyan environment.

It is tough for any organization to advance on all these fronts simultaneously. Only superhero organizations can get this complex job done. I have argued in a previous post that the piece that needs to be parceled off is not the service creation but rather cash management: that can be handled by independently licensed organizations working at arms length from the digital rails-and-products providers.

What are payment rails?

Payment rails are a collection of capabilities that allow value to be passed around digitally. This could include sending money home, paying for a good or a bill, pushing money into my or someone else’s savings account, funding a withdrawal at an agent, or repaying a loan. The first set of capabilities relates to identity: being able to establish you are the rightful owner of the funds in your account, and to designate the intended recipient in a money transfer. The second set of capabilities relates to the accounting or ledger system: keeping track of balances held and owed, and authorizing transactions when there are sufficient funds per the account rules. The third set of capabilities relates to messaging: collecting the necessary transaction details from the payment initiator, conveying that information securely to the authorizing entity, and providing confirmations.

Only the third piece has been transformed by the rise of mobile phones: we now have an increasingly inclusive and ubiquitous real-time messaging fabric. Impressive as that is, this messaging capability is still linked to legacy approaches on identity and accounting. Which is why mobile money is still more an evolution than a revolution in the quest for financial inclusion.

The keepers of the accounts —traditionally, the banks— are, of course, the guardians of the system’s choke points. There is now recognition in financial inclusion circles that to expand access to finance it is not enough to proliferate the world with mobile phones and agents: you need to increase the number and type of account keepers, under the guise of mobile money operators, e-money issuers or payment banks. But that doesn’t change the fundamental dynamics, which is that there still are choke point guardians who need to be convinced that there is a business case in order to invest in marketing to poor people, that there are opportunities to innovate to meet their needs, and that perhaps all players can be better off if only they interoperated. A true transformation would be to open up these ledgers, so anyone can check the validity of any transaction and write them into the ledger.

That’s what crypto-currencies are after: decentralizing the accounting and transaction authorization piece, much in the same way as mobile phones have decentralized the transaction origination piece. Banks seek to protect the integrity of their accounting and authorizations systems —and hence their role as arbiters of financial transactions— by hiding them behind huge IT walls; crypto-currencies such as Bitcoin and Ripple do the opposite: they use sophisticated protocols to create a shared consensus for all to see and use.

The other set of capabilities in the digital rails, identity, is also still in the dark ages. Let me convince you of that through a personal experience. My wallet was stolen recently, and it contained my credit card. I can understand the bank wanting to know my name, but why is the bank announcing my name to the thief by printing it on the credit card, thereby making it easier for him to impersonate me? The reason is, of course, that the bank wants merchants to be able to cross check the name on the card with a piece of customer ID. But as you can imagine, my national ID got stolen along with my credit card, and because of that the thief knows not only my name but also my address. That was an issue because I also kept a key to my house in the wallet. None of this makes sense: why are these “trusted” institutions subverting my sense of personal security, not to mention privacy?

The problem is that the current financial regulatory framework is premised on a direct binding of every transaction to my full legal identity. As David Porteous and I argue in a recent paper, what we need is a more nuanced digital identity system that allows me to present different personas to different identity-requesting entities and choose precisely which attributes of myself get revealed in each case, while still allowing the authorities to trace the identity unequivocally back to me in case I break the law.

The much-celebrated success of mobile money has so far really only transformed one third (messaging) of one half (payment rails) of the financial inclusion agenda. We ain’t seen nothin’ yet.

Expanding formal financial services—including traditional services (offered by banks) and digital services (provided via mobile money systems)—to individuals previously excluded from their access can improve their capacity to save, make payments swiftly and securely, and cope with economic shocks. Importantly, having access to financial services is also considered a critical component of women’s full economic participation and empowerment. Many countries, therefore, are working to increase accessibility to and usage of formal financial services as important strategies to improving individuals’ financial stability and, at a macro-level, supporting inclusive development and growth.

In sub-Saharan Africa, where the provision and uptake of traditional financial services is limited due to a wide range of factors (including poverty, lack of savings, and poor infrastructure, among others), a number of governments are working to promote digital financial service offerings by creating an enabling environment for various entities (including bank and non-bank formal providers) to offer them. In turn, the region is leading global progress in the adoption of digital financial services: 12 percent of sub-Saharan African adults have a mobile money account (nearly half of whom exclusively use digital services) compared with only 2 percent of adults at the global level. In fact, in five African countries (Cote d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe) more adults have mobile money accounts than have conventional bank accounts.

In the first of a series of publications exploring and sharing information that can improve financial inclusion around the world, the Brookings Financial and Digital Inclusion Project (FDIP) takes stock of progress toward financial inclusion in 21 countries from various economic, political, and geographic contexts and scores them along four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services. The interactive rankings and report were launched on Wednesday, August 26 at an event entitled, “Measuring progress on financial and digital inclusion.” According to the report’s findings, four out of the five top-scoring countries are located in sub-Saharan Africa. On the other hand, some of the lowest ranked countries were also African, demonstrating regional diversity in the pathways toward financial inclusion and their subsequent outcomes.

Here are some of our main takeaways from four of the nine African case studies featured in the report: Ethiopia (ranked #21 overall), Kenya (ranked #1), Nigeria (ranked #9), and South Africa (ranked #2). Kenya and Ethiopia are the highest- and lowest-ranked African countries in the report, respectively, while Nigeria and South Africa represent the continent’s two largest economies, which have achieved disparate outcomes in terms of financial inclusion. (For the overall rankings of the nine African countries included in the report, see Figure 1.)

Figure 1. Overall FDIP rankings of African countries

• Ethiopia’s overall financial and digital inclusion score was low due in large part to its poor mobile capacity and the low adoption rates of formal (particularly digital) financial services. The World Bank’s Global Financial Inclusion Index (Findex)—one of the major datasets highlighted in the report—reveals that only 22 percent of adults in Ethiopia had a formal financial account and about 0.03 percent of adults had a mobile money account in 2014.
• In addition, limited development of the information and communications technologies (ICT) sector and mobile communications infrastructure have inhibited mobile and digital access, reducing the array of financial products and services available to underserved populations.
• However, Ethiopian digital financial inclusion has the potential and political support to grow: The government is taking steps to address shortcomings in the enabling environment for digital financial service provision, for example, by adopting a mobile and agent banking framework in 2013. This framework sets the foundation for allowing banks and microfinance institutions to provide services through mobile phones and agents. The government is also in the process of developing a dedicated Financial Inclusion Council and secretariat in order to enhance participation from non-financial institutions (namely, mobile network operators) in developing policies for achieving greater digital financial inclusion.

Kenya: Mobile money innovations drive uptake

• Kenya scored highest in the overall rankings due to its highly accessible mobile networks, regulatory framework conducive to the development of digital financial services, and products that cater to consumer needs and so promote adoption. Kenya also has the highest rate of financial account penetration among women.
• Between 2011 and 2014, Kenya increased its levels of formal financial and mobile money account penetration by 33 percentage points owing mostly to robust take-up within the country’s vibrant mobile money ecosystem. Nearly 90 percent of Kenyan households reported using mobile money services as of August 2014, and the M-Pesa system (operated by Safaricom) is widely considered the leading driver of success in adoption of mobile money usage.
• Innovative services that have helped spur financial inclusion among marginalized groups have been developed within Kenya’s mobile network operator-led (MNO-led) approach: For example, in 2012, the Commercial Bank of Africa and Safaricom partnered together to provide the M-Shwari service, which offers interest-bearing mobile money accounts and microfinance.
• Still, one aspect of the mobile money system upon which the Kenyan government could improve is consumer protection of clients of credit-only institutions, such as microfinance institutions (MFIs) and savings and credit cooperatives (SACCOs). Lack of oversight could potentially leave users without adequate consumer protection as these institutions are not adequately regulated and supervised.

Nigeria: A stalled bank-led approach

• Nigeria achieved a moderate score in the FDIP rankings because, despite a number of country commitments in recent years, low levels of adoption persist. In fact, Nigeria’s increase in financial inclusion has not been driven by uptake of mobile money services: While the proportion of adults age 15 and older who have a mobile money or traditional bank account increased from 30 percent in 2011 to 44 percent in 2014, only 0.1 percent of adults had a registered mobile money account in 2014 and had used it at least once in the 90 days prior, according to an Intermedia survey.
• The Central Bank of Nigeria (CBN) has taken a bank-led approach to mobile money, in which banks promote their traditional services via the mobile network. This is an alternative approach to the MNO-led approach seen in Kenya, where MNOs provide the network of agents and manage customer relations. Some experts have noted that in cases where a bank-led approach is adopted, for example in India, the financial incentives are not strong enough for banks to expand their services to the unbanked, while mobile network operators on the other hand have greater “assets, expertise, and incentives” to launch and scale mobile money services.

South Africa: Strong mobile capacity, yet room for growth in adoption

• South Africa was ranked highest of all countries in the report in mobile capacity for its robust mobile infrastructure and large proportions of the population subscribing to mobile devices (70 percent) and covered by 3G mobile networks (96 percent). It also tied for the highest score of formal account penetration, including among rural, low-income, and female groups.
• In the past decade, financial inclusion (as measured by the proportion of the population using financial products and services—formal and informal) has increased dramatically from 61 percent in 2004 to 86 percent in 2014. This uptick can be partially attributed to the increase in banking and ownership of ATM/debit cards. Disparities in penetration exist, however, among gender and race, with women and white populations being more likely to be banked than men and black populations.
• As cited in the Brookings FDIP 2015 report, the 2014 Global Findex found that 14 percent of adults (age 15 and older) possessed a mobile money account in 2014. The top 60 percent of income earners were more than twice as likely to have accounts as the bottom 40 percent of the income scale. So despite strong mobile capacity, there is still room for growth in terms of mobile money penetration especially among low-income adults.

The FDIP case studies offer a number of insights into the policies and frameworks conducive to the uptake of formal financial services. In several of African countries considered to be mobile money “success stories,” for example, in Kenya (also see the Rwanda country profile in the report), mobile network operators play a substantial role in spearheading the drive toward financial inclusion and have collaborated closely with central banks, ministries of finance and communications, banks, and non-bank financial providers. Ensuring the participation of all stakeholders—not just governments and banks—in setting the national financial inclusion priorities and agenda, then, is critical. Furthermore, actively participating in multinational financial inclusion networks can enhance knowledge-sharing among members and lead to further country commitments. Finally, leading surveys of the national financial inclusion landscape can also help governments and financial service providers better target their strategies and services to the local needs and context.

La monnaie électronique a émergé dans les pays de l'Union Economique et Monétaire Ouest Africaine, à la faveur de l'adoption, en 2006, d'une Instruction de la Banque Centrale, instaurant un cadre réglementaire souple et incitatif pour l’exercice de cette activité. L'implication des opérateurs de télécommunications dans l'offre de services financiers basés sur la téléphonie mobile a donné,  dès 2009, une nouvelle dimension à cette activité par l'accroissement du nombre des utilisateurs et des volumes de transactions.

Une activité en expansion

A fin septembre 2015, 22 millions de personnes, soit près d'un quart de la population de l'Union, ont souscrit à des services financiers via la téléphonie mobile. Environ 30% de ces abonnés réalisent au moins une opération sur une période de 90 jours.

Près de 500 millions de transactions ont été aussi réalisées au cours des neuf premiers mois de l'année 2015. La valeur cumulée des transactions atteint 5000 milliards de FCFA (8,5 milliards USD) à fin septembre 2015. De septembre 2013 à septembre 2014, cette valeur est passée de 1000 milliards à 2068 milliards de F CFA, soit une hausse de 107%.

Le réseau de distribution des services financiers via la téléphonie mobile suit également cette tendance haussière, en passant de 93 621 points de services en 2014 à plus de 132 658 points de services à fin septembre 2015.

Source: BCEAO

Le contexte socioéconomique de l'Union explique pour une large part, le succès des services de paiement via la téléphonie mobile. En effet, ce mode de prestation des services de transfert ou de paiement se révèle particulièrement adapté pour les personnes n'ayant pas accès au système bancaire classique, tout en offrant l'opportunité à des institutions non bancaires, en contrepartie de dépôt d'espèces, de mettre à la disposition des usagers une monnaie autre que fiduciaire, dont l'encours leur permet d'effectuer des transactions financières diverses.

L'implication croissante des opérateurs de télécommunications

Les partenariats entre les banques et les opérateurs de télécommunications occupent une place dominante sur le marché. En fin 2015, sur les 33 émetteurs de monnaie électronique sous licence, 25 appartenaient aux dits partenariats.

Au titre du modèle non bancaire, sept acteurs non bancaires ont été agréés pour émettre la monnaie électronique en qualité d'Etablissement de Monnaie Electronique (EME).[1]

Source: BCEAO

Un cadre réglementaire rénové

A la faveur de l'expansion des services financiers via la téléphonie mobile et de l'implication croissante des opérateurs de télécommunication, la Banque Centrale a rénové son cadre réglementaire afin de renforcer la sécurité et la qualité des services de paiement adossés à la monnaie électronique. Les principaux axes d'amélioration portent sur:

• une responsabilisation accrue des émetteurs en clarifiant leurs rôles dans les partenariats avec des prestataires techniques. Ainsi, les activités de prestataire technique sont limitées, sous la responsabilité de l'émetteur, au traitement technique de la monnaie électronique ou à sa distribution. De même, les émetteurs demeurent responsables, de l’intégrité, de la fiabilité, de la sécurité, de la confidentialité et de la traçabilité des transactions réalisées par chacun de leurs distributeurs;


• une stimulation de la concurrence par la transparence de la tarification avec l'obligation faite aux émetteurs de publier leurs tarifs;


• la formulation d'exigences spécifiques en matière de gouvernance et de contrôles interne et externe pour les établissements de monnaie électronique, en exigeant l'honorabilité des dirigeants, le respect du secret professionnel et des audits réguliers des infrastructures;


• une protection accrue des détenteurs de monnaie électronique avec d'une part, le cantonnement des fonds dans  des comptes dédiés, et l'exigence d'une équivalence continue entre l'encours de monnaie électronique et les soldes des comptes de cantonnement et d'autre part, l'obligation de la mise en place d'un mécanisme de recueil et de traitement des réclamations des porteurs de monnaie électronique;


• le renforcement du dispositif de supervision, par la réduction des délais de reporting des activités des émetteurs à la Banque Centrale, et l'adoption de sanctions pour les infractions aux dispositions réglementaires.

L'offre de services financiers via la téléphonie mobile

L'offre de services financiers via la téléphonie mobile comprend trois catégories de services. Il s'agit des services qui impliquent l'usage des espèces (monnaie fiduciaire), de ceux qui sont effectués en monnaie électronique et des services dits de « deuxième génération ».

Le premier type de services concerne essentiellement les dépôts d'espèces ou rechargements de porte-monnaies électroniques, ainsi que les retraits. Ils représentent 24% des transactions effectuées par les utilisateurs. Les dépôts d'espèces sont prédominants et permettent aux clients d'approvisionner leurs comptes de monnaie électronique.

La monnaie électronique rechargée est utilisée à hauteur de 76%, prioritairement pour les achats de crédit téléphonique, les paiements de factures, l'exécution de transferts de personne à personne, de personne à entreprise et aux Administrations publiques. Les principaux services de paiement dans l'UEMOA sont liés au règlement des factures relatives à la consommation d'eau, d'électricité, l'abonnement à des chaînes de télévision satellitaires, l'achat de marchandises dans les grandes surfaces ou de carburant dans les stations-service.

Des paiements d'impôts et taxes auprès des Administrations publiques et le remboursement des échéances de microcrédit sont également effectués, mais de façon très marginale.

Dans l'UEMOA les services dits de « deuxième génération », à savoir la micro-assurance, la micro-épargne et le micro-crédit, font leur apparition. Leur développement pourrait constituer une opportunité de bancarisation des utilisateurs de ces services.

Enfin, un début d'interopérabilité est mis en œuvre sur la base de conventions bilatérales entre les acteurs, notamment en vue d’offrir des services de paiement transfrontaliers entre les Etats membres de l'Union.

Les défis à relever

L'examen de l’évolution des services financiers via la téléphonie mobile dans l'UEMOA fait ressortir quelques obstacles à un développement plus rapide de ces services financiers au sein de l'UEMOA. Il s'agit de:

• la faiblesse du taux d'utilisateurs actifs, en raison du coût élevé des services;
• la méconnaissance des services, du fait d'une éducation financière insuffisante;
• la faible digitalisation des circuits de paiement des Administrations publiques;
• l'insuffisance des partenariats entre les émetteurs bancaires et non-bancaires pour le développement d'une offre de services plus inclusifs, dits de « seconde génération »

En collaboration avec toutes les parties prenantes, la Banque Centrale a développé une stratégie d’inclusion financière visant à améliorer l’accès et l’utilisation de divers services financiers personnalisés et aux prix abordables. La mise en place de ces actions, comme décrite dans la stratégie d’inclusion financière conçue par la BCEAO, devrait résoudre les défis mentionnés ci-dessus.

Lire en anglais »

[1] EME: toute personne morale, autre que les banques, les établissements financiers de paiement, les systèmes financiers décentralisés, habilitée à émettre des moyens de paiement sous forme de monnaie électronique et dont les activités se limitent à l'émission et la distribution de monnaie électronique.

Electronic money, or e-money, emerged in the countries of the West African Economic and Monetary Union (WAEMU) following the adoption, in 2006, of a Central Bank Instruction establishing a flexible regulatory framework aimed at encouraging e-money business. The activity expanded in 2009 with the involvement of telecommunications operators in the provision of mobile telephone-based financial services, which increased the number of users and the volume of transactions.

A growing business

At the end of September 2015, 22 million people, or nearly a quarter of the people in the union, subscribed to financial services via mobile phone. Approximately 30 percent of those subscribers carried out at least one transaction per 90-day period.

Some 500 million transactions took place over the first nine months of 2015. The cumulative value of the transactions was 5 trillion CFA francs ($8.5 billion) by the end of September 2015, a growth of 142 percent from September 2014. Between September 2013 and September 2014, this value grew from CFA 1 trillion to CFA 2.068 trillion, an increase of 107 percent.

The mobile phone financial services distribution network followed a similar upward trend, rising from 93,621 points of services in 2014 to more than 132,658 at the end of September 2015.

Figure 1. Trends in the value of transactions

The socioeconomic environment in the union goes a long way to explaining the success of mobile telephone payment services. Indeed, this method of providing money transfer or payment services is particularly well suited to people who lack access to the mainstream banking system, and also affords non-bank institutions the opportunity to offer users non-cash money against cash deposits, which can then be used for a variety of financial transactions.

The growing involvement of telecommunications operators

The market is increasingly dominated by partnerships between banks and telecommunications operators, which represented 25 of the 33 licensed or authorized e-money issuers at the end of December 2015. In the framework of this model, known as the bank model, the bank has responsibility for issuing the e-money.

The other seven non-bank institutions, under the non-bank model, are authorized to issue electronic money as “Electronic Money Institutions” (EMIs) [1].

In WAEMU, e-money issuers are supported by a regulatory framework that was revised in 2015 to ensure increased security and quality of payment services backed by electronic money.

Figure 2. E-money issuers in WAEMU

Note: DFS denotes microfinance institutions.

A revised regulatory framework

With the expansion of mobile phone financial services and the growing involvement of telecommunications operators, the Central Bank has revised its regulatory framework with the aim of enhancing the security and quality of payment services backed by electronic money. The most salient improvements must focus on:

• Increasing issuer accountability by clarifying users’ roles in partnerships with technical service providers. With this goal in mind, the activities of technical service providers have been restricted to technical processing or the distribution of e-money under the responsibility of the issuer. In addition, issuers are responsible for the integrity, reliability, security, confidentiality, and traceability of all transactions carried out by all of their distributors; Stimulating competition through transparent pricing with an obligation for issuers to publish their rates;


• Specific requirements in terms of governance and internal and external audits for electronic money institutions, standards of integrity on the part of the management, professional secrecy and regular infrastructure audits;


• Increased protection for bearers of electronic money, including keeping funds in dedicated accounts, requiring a constant equivalence between the amount of e-money and the balances in the dedicated accounts, and mandatory creation of a mechanism to take in and deal with complaints by bearers of electronic money;


• Reinforcement of the supervisory mechanism by reducing deadlines for reporting on issuers’ activities to the Central Bank and adopting sanctions for violations of regulatory provisions.

Provision of mobile-phone-based financial services

Mobile-phone-based financial services provided in WAEMU include three categories of services, namely services involving the use of cash (banknotes and coins), e-money services, and so-called “second generation” services.

The first type of service essentially involves deposits of cash or refilling of electronic wallets, as well as withdrawals. This type of service represents 24 percent of user transactions. Cash deposits predominate; they allow customers to provision their electronic money accounts.

Seventy-six percent of the funds deposited into e-money accounts are used, above all, for purchases of telephone credit, payment of bills, person-to-person money transfers, and money transfers from individuals to businesses and from individuals to government agencies. The main payment services found in WAEMU pertain to payment of water or electricity bills, payment of satellite television subscriptions, and purchases of goods in supermarkets or fuel at service stations.

Payments of taxes or income taxes to government agencies and payments of micro-loan installments are also made through mobile phone financial services, but are much less common.

So-called “second generation” services, namely micro-insurance, micro-savings, and micro-credit, are currently emerging in WAEMU. Their development could be an opportunity to provide access to the banking system for the users of the services.

Finally, interoperability is just beginning to be implemented based on bilateral agreements between stakeholders, particularly with a view to offering cross-border payment services between member states of the union.

Challenges

A review of the development of mobile phone financial services in WAEMU reveals some obstacles to the rapid development of this type of financial service within WAEMU. They include:

• a low number of active users, due to the high cost of the services;
• the fact that the services are not well known due to inadequate financial education;
• the low rate of digitization of government agencies’ payment systems; and
• insufficient partnerships between bank and non-bank issuers with a view to developing a more inclusive range of “second-generation” services.

In collaboration with all stakeholders, the Central Bank has developed a financial inclusion strategy to continuously improve, access to and use of diverse, tailored and affordable financial services. The implementation of these actions as described in the Central Bank of West African States (BCEAO) financial inclusion strategy should support the challenges mentioned above.

Read in French »

[1] EMI: any legal entity, other than a bank, financial payment institution, or decentralized financial system, that is authorized to issue payment instruments in the form of electronic money and whose business activities are restricted to electronic money issuing and distribution.

There is a lively debate today over whether or not campaign finance reforms have weakened the role of political parties in campaigns. This seems an odd argument in an era of historically high levels of party loyalty — on roll calls in Congress and voting in the electorate. Are parties too strong and unified or too weak and fragmented? Have they been marginalized in the financing of elections or is their role at least as strong as it has ever been? Does the party role in campaign finance (weak or strong) materially shape the capacity to govern?

In addition, the increasing involvement in presidential and congressional campaigns of large donors – especially through Super PACs and politically-active nonprofit organizations – has raised serious concerns about whether the super-wealthy are buying American democracy. Ideologically-based outside groups financed by wealthy donors appear to be sharpening partisan differences and resisting efforts to forge agreement across parties. Many reformers have advocated steps to increase the number of small donors to balance the influence of the wealthy. But some scholars have found evidence suggesting that small donors are more polarizing than large donors. Can that be true? If so, are there channels other than the ideological positioning of the parties through which small donors might play a more constructive role in our democracy?

In this paper, Thomas Mann and Anthony Corrado attempt to shed light on both of these disputed features of our campaign finance system and then assess whether campaign finance reform offers promise for reducing polarization and strengthening American democracy. They conclude that not only is campaign finance reform a weak tool for depolarizing American political parties, but some break in the party wars is probably a prerequisite to any serious pushback to the broader deregulation of campaign finance now underway.

Downloads

• Download the paper

The Supreme Court’s recent McCutcheon decision has reinvigorated the discussion on how campaign finance affects American democracy. Seeking to dissect the complex relationship between political parties, partisan polarization, and campaign finance, Tom Mann and Anthony Corrado’s new paper on Party Polarization and Campaign Finance reviews the landscape of hard and soft money in federal elections and asks whether campaign finance reform can abate polarization and strengthen governing capacity in the United States. The paper tackles two popular contentions within the campaign finance debate: First, has campaign finance reform altered the role of political parties as election financiers and therefore undermined deal making and pragmatism? Second, would a change in the composition of small and large individual donors decrease polarization in the parties?

The Role of Political Parties in Campaign Finance

Political parties have witnessed a number of shifts in their campaign finance role, including McCain-Feingold’s ban on party soft money in 2002. This has led many to ask if the breakdown in compromise and governance and the rise of polarization has come about because parties have lost the power to finance elections. To assess that claim, the authors track the amount of money crossing national and state party books as an indicator of party strength. The empirical evidence shows no significant decrease in party strength post 2002 and holds that “both parties have compensated for the loss of soft money with hard money receipts.” In fact, the parties have upped their spending on congressional candidates more than six-fold since 1980. Despite the ban on soft money, the parties remain major players in federal elections.

Large and Small Donors in National Campaigns

Mann and Corrado turn to non-party money and survey the universe of individual donors to evaluate “whether small, large or mega-donors are most likely to fuel or diminish the polarization that increasingly defines the political landscape.” The authors map the size and shape of individual giving and confront the concern that Super PACs, politically active nonprofits, and the super-wealthy are buying out American democracy. They ask: would a healthier mix of small and large donors reduce radicalization and balance out asymmetric polarization between the parties? The evidence suggests that increasing the role of small donors would have little effect on partisan polarization in either direction because small donors tend to be highly polarized. Although Mann and Corrado note that a healthier mix would champion democratic ideals like civic participation and equality of voice.

Taking both points together, Mann and Corrado find that campaign finance reform is insufficient for depolarizing the parties and improving governing capacity. They argue forcefully that polarization emerges from a broader political and partisan problem. Ultimately, they assert that, “some break in the party wars is probably a prerequisite to any serious pushback to the broader deregulation of campaign finance now underway.”

Click to read Mann and Corrado’s full paper, Party Polarization and Campaign Finance.

Tom Mann and Anthony Corrado recently argued that campaign finance reform will likely have little effect on political polarization. Their new paper has sparked a host of debate over campaign finance, the strength of parties, and the ideological motivations of donors. Today, the Monkey Cage blog hosted Mann and Corrado’s response to a critique from Ray LaRaja and Brian Schaffner.

LaRaja and Schaffner argue that pumping more funding to parties and changing the rules to facilitate that practice will provide a respite from polarization; to argue their point, they examine polarization at the state legislative level. In their response, Mann and Corrado argue that the critique is off point, noting that “no causal link to campaign finance laws (and polarization) is demonstrated.” Ultimately, Mann and Corrado explain: “The link between party financial practices and regulatory regimes is often a matter of strategy than law, and the evidence offered in their (LaRaja and Schaffner) response certainly falls well short of making a case that greater party resources would reduce the polarization that undermines the capacity to govern.”

For more on this debate:

Read Mann and Corrado’s paper, “Party Polarization and Campaign Finance”

Read LaRaja and Schaffner’s critique, “Want to reduce polarization? Give Parties Money”

Read Mann and Corrado’s response, “Don’t expect campaign finance reform to reduce polarization”

And check out some other great research on Washington Post’s Monkey Cage Blog

One of the fundamental arguments in the “Political Realism” debate is whether or not strong political parties could make government work better. One way to assess party strength is to look at how much money parties can raise and spend.

In this vein, political scientists Ray LaRaja and Brian Schaffner have claimed that removing limits on party funding activity would make politics less polarized. I’ve been skeptical of this claim. In fact, in a short analysis, I found that the opposite is more likely the case—that states with limits on party fundraising appear to be less polarized, though I cautioned against inferring too much from this pattern.

LaRaja and Schaffner have now responded and previewed their forthcoming book, Campaign Finance and Political Polarization: When Purists Prevail, which will be out this fall from the University of Michigan Press. So, a response to their response is now in order.

I’ll start by granting a point of agreement: LaRaja and Schaffner note that I didn’t re-produce their analysis. I didn’t do this because, based on what they’ve written, it’s not clear exactly which states they consider to be “Parties Unlimited” and “Parties Limited” states. So, until they make their list public, it will be impossible to conduct a precise replication of their analysis.

The good news is they’ve promised to make their data public in the future. As they write in their recent post, “we will be posting all the data necessary to replicate (and challenge) our results upon publication of our book this fall, and we look forward to seeing what others find when they dig into the data.” They also note in their analysis that “11 states changed their laws on party limits during the period of our study (1993-2012).” Assembling this list, they note, was “possibly the most painstaking work we did on this book.” For now, their list of changes remains a well-kept secret, though the changes appear to be driving their analysis. So it will be good when all the relevant data and categorization choices are clear and on the table.

A lot depends on which states fall into which categories. But, there is a more fundamental question: does it make sense to dichotomize states into “Parties Unlimited” and “Parties Limited” states? States with limits vary considerably. Some states limit the money into parties, but allow unlimited flows to candidates; some states allow unlimited money into parties, but limit money from parties to candidates. Some limits are high, some are low. Some have exceptions for party-building activities. Rules vary between primary and general elections, as well.

Consider California. There are limits on how much parties can raise from individuals, but those limits are quite high (they are now at $35,200), and also only cover the party accounts that go to state candidates (so, for example, ballot measures are exempt or general party activities are exempted). California also has no limits on how much parties can transfer to candidates. So should California be a “limits” or “no limits” state? California also has the most polarized legislature, as measured by the distance between party medians. Depending on how you choose to classify states, you can get very different results, especially when you are only working with 20 states (LaRaja and Schaffner limit their claims to the 20 states with the most professionalized legislatures, as per the Squire Index).

LaRaja and Schaffner’s response presents a time series regression model to “calculate the predicted level of polarization over time in a state that limited party fundraising … and spending to on where those limits were removed.” But if states that removed limits became less polarized following the removal of those limits, why not tell us what those states were, and report the actual polarization trends in the states? Put another way: Why rely on model predictions when there are real world data? Grounding this debate in the trajectories of actual states would lend some realism to the claims. Then we could debate examples.

For example, as Thomas Mann and E.J. Dionne note in a recent Brookings paper, two of the states with no limits are Texas and North Carolina. As Mann and Dionne write, “The behavior of their legislatures in recent years cannot, on any plausible definition, be described as 'moderate.'” However, neither Texas nor North Carolina shows up as excessively polarized when polarization is merely a measure of voting patterns. Moreover, if parties are so pragmatic, why did the North Carolina Republican Party (which could raise and spend unlimited sums of money) fail to stop a takeover by multi-millionaire right-wing extremist Art Pope?

This takes us to questions of how party leaders actually behave. LaRaja and Shaffner show evidence in their response that parties give more money to moderate incumbents than to extreme incumbents. This should not be surprising. Presumably, moderate incumbents are more likely to be in competitive races, since moderates are more likely to represent competitive districts.

The more relevant question is what types of candidates parties recruit. Thankfully, we have answers to this courtesy of excellent work by David Broockman, Nicholas Carnes, Melody Crowder-Meyer, and Christopher Skovron, who surveyed 6,000 county-level political party leaders. They found that, “party leaders…use their influence to discourage moderates from seeking office: they strongly prefer candidates at least as ideologically polarized as their median party member. Republican party leaders show this preference especially.”

Their findings also reinforce something that should be apparent to students of polarization—that polarization is asymmetric. Republicans have moved far to the right. Democrats have mostly stayed in place. Let me quote Broockman et al.’s paper at further length, because the findings are extremely relevant to this debate:

“Republicans are much more likely to, unprompted, mention ideology as an important factor for candidates. Our evidence suggests that not only do Republicans care more about ideology, it is also readily accessible when they think of candidate recruitment. It seems likely, then, that Republicans are much more active in recruiting ideologically polarized candidates than Democrats are.”

“Democratic chairs are most inclined to support candidates who are middle-of-the-road or slightly left with respect to the party, while Republicans prefer candidates who espouse an ideology matching or more conservative than their party. In fact, while Democratic chairs are less likely to support very liberal candidates than those nearer to their party average, Republican chairs seem to give very conservative primary candidates the same boost that Democrats give to moderates.”

This does suggest that perhaps giving parties more money and therefore more control over candidates would produce moderation in blue states, but exacerbate polarization in red states. Unfortunately, there is nothing in LaRaja and Schaffner’s analysis that addresses this possibility.

The importance of recruitment also suggests that what we really want to know is who controls the actual recruitment mechanisms in the first place. It’s possible that states with limits might have strong party recruitment mechanisms. If what we really care about is the strength of party machines, why not try to measure that more directly?

LaRaja and Schaffner seem to envision parties being run by hard-headed pragmatists who can determine outcomes with money alone. They seem to assume that if parties can get billionaires to fund them, this will enable party leaders to support more moderate candidates. They seem to ignore that the billionaires may have a few ideas of their own about how they think government should be run (see, e.g. North Carolina).

This gets to a final point, about whether we ought to care if parties rely on small or large donors. LaRaja and Schaffner dismiss the case for small donors, noting that: “the endless romanticizing of small donors as being emblematic of American voters has no empirical grounding.” They go on to note that the ideological distribution of small donors and the ideological distribution of large donors “are nearly identical,” and therefore, “[p]utting more emphasis on ideological small donors may even make our politics worse as politicians streamline their messages to cater to this minority of individuals with more extreme views.”

Let’s grant that large and small donors have the same ideological distribution. If there is no difference, then there’s no reason to think that relying more on small donors would make politics any more extreme. However, since there are many more small donors than there are large donors, a small-donor matching system would allow less extreme candidates the ability to seek out less extreme donors from a larger population of potential donors. We know large donors are polarized, so relying more heavily on them doesn’t give parties much room to moderate. Of course, this presumes that large donors want to shape party positions. But that seems a safe bet.

There are also good (small-d) democratic reasons to support small-donor programs: they bring more participants into the political process; they orient politicians to think differently about whom they represent, and they probably make politics an attractive profession for a broader set of potential candidates. I’d even trade off some polarization for a small donor system. Fortunately, based on their data, it doesn’t appear that I’d even have to.

Finally, and perhaps most importantly, polarization is a function of many, many things, and it’s hard to imagine how changing limits on what parties can raise and spend would have much of an influence given the many other factors. Consider this thoughtful systems map developed by the Hewlett Foundation to analyze American politics as a system: it describes multiple factors that might influence levels of polarization. Systems thinking warns us to be careful of putting too much focus on a single point of leverage without thinking about the larger systems dynamics. This is why many reform skeptics are cautious about unintended consequences—thinking about a single variable in the absence of a larger context usually has unexpected results.

Moreover, as Mann and Dionne explain, we need to be cautious of applying lessons from the states to Washington:

"The gridlock in Washington is a consequence of the ideological polarization of the parties buttressed by vast party networks, their strategic opposition to one another throughout the legislative process fueled by the intense competition for control of the White House and Congress, the prevalence of divided party government, and the asymmetry between the parties that leads Republicans to eschew negotiation and compromise."

"The situation in the states is dramatically different. Most now have unified party governments, and gridlock is the exception, not the rule. There is little evidence of moderation in the Republican- controlled states, whatever their campaign finance laws."

I’m sure we will continue this debate for many months to come, especially after the publication of Campaign Finance and Political Polarization: When Purists Prevail this fall. I’m glad that LaRaja and Schaffner are bringing valuable data to this important question. It’s certainly far from settled.

The use of economic resources to support election campaigns is an essential ingredient of democratic competition. Often viewed as a malady of democracy, campaign finance is actually part of the normal workings of democratic life. However, it is indisputable that money is capable of inflicting significant distortions on politics and policymaking. When there is a failure to regulate money in the political process or existing regulation is ineffectual, the legitimacy of democratic processes can be jeopardized.

These concerns are particularly relevant to Latin America, a region plagued by a highly unequal income distribution, and where organized crime has a major presence, transacts billions of dollars each year in illicit business, and has the potential to corrupt democratic institutions. In this policy brief, Kevin Casas-Zamora and Daniel Zovatto offer practical guidance for making campaign finance regulation feasible and increasing its likelihood of success. In undertaking reform, countries should prioritize the most urgently needed changes with the broadest political consensus. Proposals for reform include:

• Establish greater control over private funding of parties and election campaigns;

• Create a public subsidy system to ensure fair access for parties and candidates to adequate funding to finance both regular day-to-day operations and election campaigns;

• Adopt mechanisms to keep campaign spending from skyrocketing;

• Craft party and candidate reporting systems to increase accountability, transparency, and disclosure; and

• Establish a graduated and credible system of sanctions for the chief financial officers of political parties in the event of violations of the rules in force.

Downloads

• The cost of democracy: Campaign finance in Latin America

Hillary Clinton’s release of her campaign finance proposals on Tuesday confirms there will be no significant substantive differences on political reform among the aspirants for the Democratic presidential nomination but a huge gulf between the two parties, whoever the nominees.

Harvard law professor and activist Larry Lessig announced his candidacy for the Democratic nomination this past weekend based on the single issue of political reform, but his quixotic and gimmicky campaign is akin to carrying coals to Newcastle. His only difference with the other Democratic candidates is his insistence that political reform (primarily on campaign finance) should be of the highest priority and other concerns (immigration, wages, climate change, economic inequality, infrastructure, national security) should play second fiddle. Lessig apparently believes that Republican and independent voters will rally to his call and create a broad base of public support for bipartisan cooperation on changing the rules of the electoral game.

If only it were that simple. The gaping differences between the parties on campaign reform are both ideological and strategic. Republicans are more philosophically disposed to elevate free speech over political equality. They also realize that as presently constituted, their party is advantaged by fewer or no restrictions on money in politics, lower turnout among minorities and youth, and single-member districts. Democrats instinctively reject the argument that money is speech and are comfortable with using public authority to set and enforce the rules of democracy. But they also know that they would benefit from restrictions on big money in elections, guaranteed voting rights for all citizens, and a more proportional translation of votes into seats.

The Clinton campaign finance proposals generally follow the thrust of liberal reformers: building a counterforce to big money through multiple matching funds for small donors, increasing transparency by requiring timely disclosure of mega-contributions and transfers that now evade public scrutiny, and overturning Citizens United, which set the stage for a Wild West of outsized contributions and spending. Her support for a constitutional amendment to accomplish the latter is a pipedream and probably wouldn’t work if it were adopted. As she acknowledges, appointing Supreme Court justices to change the current 5-4 majority is the more promising route to the desired change.

Lessig’s dream notwithstanding, this particular agenda will be achieved only if and when Democrats manage to control both ends of Pennsylvania long enough to put the policies and a sympathetic Supreme Court in place. It’s an important choice for voters to consider in the 2016 elections but by no means the only or most pressing one.

I was honored today to speak at the kick off meeting of the new ReFormers Caucus. This group of over 100 former members of the U.S. Senate, the House, and governors of both parties, has come together to fight for meaningful campaign finance reform. In the bipartisan spirit of the caucus, I shared speaking duties with Professor Richard Painter, who was the Bush administration ethics czar and my predecessor before I had a similar role in the Obama White House. 

As I told the distinguished audience of ReFormers (get the pun?) gathered over lunch on Capitol Hill, I wish they had existed when in my Obama administration role I was working for the passage of the Disclose Act. That bill would have brought true transparency to the post-Citizens United campaign finance system, yet it failed by just one vote in Congress.  But it is not too late for Americans, working together, to secure enhanced transparency and other campaign finance changes that are desperately needed.  Momentum is building, with increasing levels of public outrage, as reflected in state and local referenda passing in Maine, Seattle and San Francisco just this week, and much more to come at the federal, state and local level.

The rise of SuperPACs, the decision in Citizens United, and intensified polarization in Congress has ignited a flame under the already robust academic debate over the role of money in elections. Last week, Lee Drutman wrote an article for Vox outlining the recent contribution of Raymond J. La Raja and Brian Schaffner made to the debate with their book, Campaign Finance and Political Polarization: When Purists Prevail.

The crux of the book argues that allowing political parties to control more money, not less, is the key to reducing polarization. This runs counter to many pro-reform writings, focused chiefly on empowering small donors in order to counter big-money politics. La Raja and Schaffner counter this narrative, suggesting parties channel money to create moderation, rather than small donors, which are polarizing.

Drutman pushes back on both accounts by taking issue with some of the underlying assumptions in When Purists Prevail, including the weight they place on median voter theory and the extent parties will spend money on moderate candidates in primary elections. He marshals a host of recent research to support the critique, including: a recent Brookings paper on the strength of political parties, data on the power of outside money in congressional elections, and research showing moderate districts do not necessarily produce moderate candidates.

Click here to read the full article on Vox.

Event Information

As the sixth anniversary of Citizens United v. FEC approaches on January 21, both experts and ordinary citizens believe the United States is confronting a campaign finance crisis. Citizens United and related court cases have unleashed a flood of dark money that many believe could drown our democracy. It is estimated that over $5 billion will be spent on the 2016 presidential race—more than 3 times the amount spent in 2008 (already the most expensive election cycle in history). A comprehensive poll conducted by the New York Times and CBS News in the spring of 2015 showed that 84 percent of adults—including 90 percent of Democrats and 80 percent of Republicans—believe that money has too much influence in American political campaigns. Even the richest Americans agreed: 85 percent of adults making $100,000 or more share that same belief.

There has been much handwringing about this state of affairs. But there has been too little public attention paid to finding solutions. On the sixth anniversary of Citizens United, the Governance Studies program at Brookings hosted current and former government officials, lobbyists, donors, advocates, and other experts to discuss how to resolve the campaign finance crisis. They focused on innovative reform efforts at the federal, state, and local levels which offer the hope of addressing the problem of big money in politics.

Panelists will included:

Cheri Beasley, Associate Justice, North Carolina Supreme Court
Daniel Berger, Partner, Berger & Montague, P.C.
John Bonifaz, Co-Founder and President, Free Speech for People
Norman L. Eisen, U.S. Ambassador to the Czech Republic (2011-2014); Special Assistant and Special Counsel to the President (2009-2011); Visiting Fellow, The Brookings Institution
Bruce Freed, Founder and President, Center for Political Accountability
Steve Israel, Member, U.S. House of Representatives (D-NY)
Roger Katz, Chair, Government Oversight Committee, Maine State Senate (R)
Allen Loughry, Justice, Supreme Court of Appeals of West Virginia
Chuck Merin, Executive Vice President, Prime Policy Group; Lobbyist
Connie Morella, Ambassador to OECD (2003-2007); Member, U.S. House of Representatives (R-Md., 1987-2003)
Jeffrey Peck, Principal, Peck Madigan Jones; Lobbyist
Nick Penniman, Executive Director, Issue One
Trevor Potter, Commissioner, Federal Election Commission (1991-1995; Chairman,1994)
John Pudner, Executive Director, Take Back Our Republic
Ann Ravel, Commissioner, Federal Election Commission (Chairwoman, 2015)
Timothy Roemer, Ambassador to India (2009-2011); Member, U.S. House of Representatives (D-Ind., 1991-2003); member 9/11 Commission; Senior Strategic Advisor to Issue One
John Sarbanes, Member, U.S. House of Representatives (D-Md.)
Claudine Schneider, Member, U.S. House of Representatives (R-R.I.,1981-1991)
Peter Schweizer, President, Government Accountability Institute
Zephyr Teachout, CEO, Mayday PAC
Lucas Welch, Executive Director, The Pluribus Project
Fred Wertheimer, Founder and President, Democracy 21
Tim Wirth, Member, U.S. Senate (D-Colo.,1987-1993); Member, U.S. House of Representatives (D-Colo.,1975-1987)
Dan Wolf, Chair, Committee on Steering and Policy, Massachusetts State Senate (D)

Click here for a full agenda.

Video

• The campaign finance crisis in America and how to fix it - Part 1
• The campaign finance crisis in America and how to fix it - Part 2
• The campaign finance crisis in America and how to fix it - Part 3
• The campaign finance crisis in America and how to fix it - Part 4

Audio

• The campaign finance crisis in America and how to fix it: A solutions summit (Part 1)
• The campaign finance crisis in America and how to fix it: A solutions summit (Part 2)
• The campaign finance crisis in America and how to fix it: A solutions summit (Part 3)
• The campaign finance crisis in America and how to fix it: A solutions summit (Part 4)

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• Solution Summits Agenda120
• 20160121_campaign_finance_summit_transcript

We have received many emails and calls in response to our blog last week about our campaign finance reform “Solutions Summit," so we thought we would share some pictures and quotes from the event. Also, Issue One’s Nick Penniman and I just co-authored an op-ed highlighting the themes of the event, which you can find here.

Ann Ravel, Commissioner of the Federal Election Commission and the outgoing Chairwoman kicked us off as our luncheon speaker. She noted that, “campaign finance issues [will] only be addressed when there is a scandal. The truth is, that campaign finance today is a scandal.”

(L-R, Ann Ravel, Trevor Potter, Peter Schweizer, Timothy Roemer)

Commenting on Ann’s remarks from a conservative perspective, Peter Schweizer, the President of the Government Accountability Institute, noted that, “increasingly today the problem is more one of extortion, that the challenge not so much from businesses that are trying to influence politicians, although that certainly happens, but that businesses feel and are targeted by politicians in the search for cash.” That’s Trevor Potter, who introduced Ann, to Peter’s left.

Kicking off the first panel, a deep dive into the elements of the campaign finance crisis, was Tim Roemer, former Ambassador to India (2009-2011), Member of the U.S. House of Representatives, (D-IN, 1991-2003) Member of the 9/11 Commission and Senior Strategic Advisor to Issue One. He explained that “This is not a red state problem. It’s not a blue state problem. Across the heartland, across America, the Left, the Right, the Democrats, the Republicans, Independents, we all need to work together to fix this.”

(L-R, Fred Wertheimer, John Bonifaz, Dan Wolf, Roger Katz, Allen Loughry, Cheri Beasley, Norman Eisen)

Our second panel addressed solutions at the federal and state level.  Here, Fred Wertheimer, the founder and President of Democracy 21 is saying that, “We are going to have major scandals again and we are going to have opportunities for major reforms. With this corrupt campaign finance system it is only a matter of time before the scandals really break out. The American people are clearly ready for a change. The largest national reform movement in decades now exists and it’s growing rapidly.”

Our third and final panel explained why the time for reform is now. John Sarbanes, Member of the U.S. House of Representatives (D-MD) argued that fixes are in political reach. He explains, “If we can build on the way people feel about [what] they’re passionate on and lead them that way to this need for reform, then we’re going to build the kind of broad, deep coalition that will achieve success ultimately.”

(L-R in each photo, John Sarbanes, Claudine Schneider, Zephyr Teachout)

Reinforcing John’s remarks, Claudine Schneider, Member of the U.S. House of Representatives (R-RI, 1981-1991) pointed out that “we need to keep pounding the media with letters to the editor, with editorial press conferences, with broad spectrum of media strategies where we can get the attention of the masses. Because once the masses rise up, I believe that’s when were really going to get the change, from the bottom up and the top down.”

Grace Abiera contributed to this post.

Campaign finance is a key issue for the quality of democracy. As we noted in a recently-published book of which we are co-authors, and which we had the honor to present in the Hall of Former Presidents of the Legislative Assembly last February 11 (El costo de la Democracia: Ensayos sobre el financiamiento político en América Latina, UNAM, Mexico City, 2015), it is important because of an inescapable fact: While democracy has no price, it does have an operating cost. The use of economic resources is an essential element for democratic competition. More than a pathology of democracy, political financing, when well-regulated, is a normal part of democratic life.

Yet it is undeniable that money is capable of introducing distortions in the democratic process. Its unequal distribution impacts, first, on the real possibilities enjoyed by the parties and the candidates to take their message to the voters. Second, having money gives individuals and social groups a differentiated possibility of participating in elections and exercizing their influence over the candidates through their contributions. This is vital for democracy. When political power is simply a reflection of economic power, the principle of “one person, one vote” loses meaning. Third, fundraising efforts offer obvious opportunities for the articulation of exchanges between donors and those who make decisions on public affairs, or at least for the continual appearance of conflicts of interest. This can be very problematic in the case of Latin America, where there is a risk of money from organized crime penetrating the campaigns.

And so it is not surprising that the issue is on the political agenda in many countries of the region, just as it has been for a long time in Costa Rica. Costa Rica introduced public financing for political parties in 1956, making it the second country in the world to do so, after Uruguay. Nonetheless, the generosity of the government contribution did not avoid a long succession of scandals associated with the issue, a history that includes figures ranging from Robert Vesco and Manuel Antonio Noriega to Carlos Hank González and the illegal donations from the government of Taiwan. 

The wounds left by each of these episodes gave way to worthy yet incomplete regulatory efforts. Most important has been the reform of the Electoral Code approved in 2009, which among many necessary changes prohibited corporate contributions to the political parties. And not only legislative action has made a difference. The Constitutional Chamber of the Supreme Court has also made a difference by lifting bank secrecy on financing, a very important decision that has been pointed to internationally.

Each of these steps has been moving the country in the right direction. This is worth underscoring: At a time when it is so easy to revile the Costa Rican political system, it should be recognized that in terms of political financing the country is, in general, better situated than it was 20 or 30 years ago. All the evidence we have indicates that private contributions today are less important in our campaigns than one generation ago. We can state with great certainty that our parties are financing more than 80% of the cost of their campaigns with the state contribution. That is good news.

However, the current regulatory framework presents problems such as:

a) It continues to be a regulatory system that is somehow upside down: It meticulously keeps tabs on the use of the state contribution by the parties, which does not give rise to conflicts of interest, while it is much less effective when it comes to verifying the truth of the information the parties provide about their private sources of financing, which do have the potential to compromise the autonomy of the political system. Correcting this imbalance, getting the Supreme Electoral Tribunal to prioritize monitoring private financing and to devote more resources to it, would not only be a way to straighten out its priorities, but frankly, all the parties would also breathe a sigh of relief.

b) The system of advances on the state contribution continues to be very limited (only 15% of the subsidy is disbursed before the presidential election and nothing in the case of municipal elections). It is time to admit that eliminating the system whereby the contributions were distributed in advance payments, which existed from 1971 to 1991 (when 50% was disbursed in advances), caused grave prejudice to the political system. The weakness of the advanced disbursement has ended up leaving the parties at the mercy of banks and lenders during the campaigns. Worse still, today the possibility of a party receiving loans during the campaign against its electoral expectations depends entirely on the fickle behavior of the opinion polls. This is unfair and risky, as the OAS electoral observation missions have noted.

c) The legal framework does little to limit parties’ spending on advertising, one of the most effective ways to reduce outlays during campaigns and to bring about fairness in electoral competition, which is one of the most important objectives in improving the current system. One must evaluate the advisability of adopting a system of advertising slots (provided free of charge by those holding concessions for the radio spectrum or purchased by the Supreme Electoral Tribunal and then made available to the parties) as has been done, with a positive outcome, by other democracies in the region such as Argentina, Brazil, Chile, Ecuador, and Mexico.

d) The current regulatory framework has serious vulnerabilities at the local level. Requiring the parties to file a single financial report with the contribution they receive nationwide (the same system that exists for the presidential election) is insufficient when in practice there are 81 local elections in which each candidate raises and spends money autonomously. Let’s be clear: Relatively little is known about who finances the campaigns at the local level in Costa Rica. This would not matter much except that the experience of other countries – from Mexico to Colombia – shows that local campaigns are the preferred point of entry for organized crime to penetrate the electoral structures. Reinforcing the financial controls on municipal elections is one of the country’s most urgent tasks in relation to campaign finance.

Costa Rica has made major strides in regulating political financing. Yet there is an urgent need to address the weaknesses in the current regulatory framework. There are bills in the legislative pipeline, such as No. 18,739, introduced by the Supreme Electoral Tribunal in April 2013, that incorporate almost all the reforms suggested here and that provide an excellent basis for moving this inevitable discussion forward. 

We will have to address the problems in the current regulatory framework sooner or later. The question is whether we will do so before or after the next scandal. Let’s hope that, for once, we act on time.

This piece was originally published by International IDEA. 

In his state of the union and his budget, the President spoke of the stagnation of middle class incomes. Whatever growth we have had has not been broadly shared.  More than 78% of the growth in GDP between 1979 and 2013 has gone to the top one percent. Even Republicans are beginning to worry about this issue although they have yet to develop concrete proposals to address it.

Slow Growth in Incomes

Middle class incomes were growing slowly before the recession and have actually declined over the past decade.   In addition, according to the New York Times, the proportion of the population with incomes between $35,000 and $100,000 in inflation-adjusted terms fell from 53% in 1967 to 43% in 2013.  During the first four decades this was primarily because more people were moving into higher income groups, but more recently it was because they have moved down the ladder, not up.  One can define the middle class in many different ways or torture the data in various ways, but there is plenty of evidence that we have a problem.

What to Do

The most promising approach is what I call “the second earner solution.”  For many decades now, the labor force participation rate of prime age men has been falling while that of women has been rising.  The entry of so many women into the labor force was the major force propelling whatever growth in middle class incomes occurred up until about 2000. That growth in women’s work has now levelled off.  Getting it back on an upward track would do more than any policy I can think of to help the middle class.

Imagine a household with one earner making the average wage of today’s worker and spending full-time in the job market.  That household will have an income of around $34,000. But if he (or she) has a spouse making a similar amount, the household’s income will double to $68,000. That is why the President’s focus on a second-earner credit of $500, a tripling of the child care tax credit, expanding the Earned Income Tax Credit, and providing paid leave are so important. These policies are all pro-work and research shows they would increase employment.

No Marriage = No Second Earner

One problem, of course, is that fewer and fewer households contain two potential workers.  So it would also help to bring back marriage or at least its first cousin, a stable cohabiting relationship.  My ideas on this front are spelled out in my new book, Generation Unbound. In a nutshell, we need to empower women to not have children before they have found a committed partner with whom to raise children in a stable, two-parent family. Whatever the other benefits of two parents, they have twice as much time and potentially twice as much income.    

Other Needed Responses

Shouldn’t we also worry about the wages or the employment of men?  Of course.  But an increase in, say, the minimum wage or a better collective bargaining environment or more job training will have far smaller effects than “the second earner solution.”  In addition, the decline in male employment is related to still more difficult problems such as high rates of incarceration and the failure of men to take advantage of postsecondary education as much as women have. 

Still the two-earner solution should not be pursued in isolation. In the short-term, a stronger recovery from the recession is needed and in the longer-term, more effective investments in education, research, infrastructure, and in labor market institutions that produce more widely-shared growth, as argued by the Commission on Inclusive Prosperity. But do we really expect families to wait for these long-term policies to pay off?  It could be decades. 

In the meantime, the President’s proposals to make work more appealing to existing or potential second earners deserves more attention.  

Executive Summary

At the invitation of President George W. Bush, the G20 leaders met on November 15, 2008, in Washington, DC, in response to the worldwide financial and economic crisis. With this summit meeting the reality of global governance shifted surprisingly quickly. Previously, major global economic, social and environmental issues were debated in the small, increasingly unrepresentative and often times ineffectual circle of G8 leaders. Now, there is a larger, much more legitimate summit group which can speak for over two-thirds of the world’s population and controls 90% of the world’s economy.

The successful first G20 Summit provides a platform on which President-elect Obama can build in forging an inclusive and cooperative approach for resolving the current financial and economic crisis. Rather than get embroiled in a debate about which country is in and which country is out of the summit, the new U.S. administration should take a lead in accepting the new summit framework for now and focus on the substantive issues. Aside from tackling the current crisis, future G20 summits should also drive the reform of the international financial institutions and address other major global concerns—climate change, poverty and health, and energy among others. With its diverse and representative membership of key countries and with a well-managed process of summit preparation and follow-up the new G20 governance structure would allow for a more inclusive deliberation and more effective response to today’s complex global challenges and opportunities.

Policy Brief #168

A Successful G20 Summit—A Giant Step Forward

Once announced, there was speculation that the G20 Summit would be at best a distraction and at worst a costly failure, with a lame duck U.S. president hobbled by a crisis-wracked economy and a president-elect impotently waiting at the sidelines, with European leaders bickering over seemingly arcane matters, and with the leaders of the emerging economies sitting on the fence, unwilling or unprepared to take responsibility for fixing problems not of their making.

As it turned out, the first G20 Summit was by most standards a success. It served as a platform for heads of state to address the current financial turmoil and the threats of the emerging economic crisis facing not only the U.S. and Europeans, but increasingly also the rest of the world. The communiqué unmistakably attributes blame for the crisis where it belongs—to the advanced countries. It lays out a set of principles and priorities for crisis management and an action plan for the next four months and beyond, and it promises to address the longer-term agenda of reform of the global financial system. Very importantly, it also commits the leaders to meet again in April 2009 under the G20 umbrella. This assures that the November G20 Summit was not a one-off event, but signified the beginning of a new way of managing the world economy. The U.S. Treasury, which apparently drove the decision to hold the G20 rather than a G8 summit and which led the brief preparation process, deserves credit for this outcome.

A Long Debate over Global Governance Reform Short-circuited

With this successful summit a number of unresolved issues in global governance were pushed aside virtually overnight:

• The embarrassing efforts of past G8 summits to reach out to the leaders of emerging market economies with ad hoc invitations to join as part-time guests or through the well-meaning expedient of the “Heiligendamm Process”—under which a G8+5 process was to be institutionalized—were overtaken by the fact of the G20 summit.
• A seemingly endless debate among experts about what is the optimal size and composition for an expanded summit—G13, G14, G16, G20, etc. —was pragmatically resolved by accepting the format of the already existing G20 of finance ministers and central bank presidents, which has functioned well since 1999. With this, the Pandora’s Box of country selection remained mercifully closed. This is a major accomplishment, which is vitally important to preserve at this time.
• The idea of a “League of Democracies” as an alternative to the G8 and G20 summits, which had been debated in the U.S. election, was pushed aside by the hard reality of a financial crisis that made it clear that all the key economic players had to sit at the table, irrespective of political regime.
• Finally, the debate about whether the leaders of the industrial world would ever be willing to sit down with their peers from the emerging market economies as equals was short circuited by the picture of the U.S. president at lunch during the G20 Summit, flanked by the presidents of two of the major emerging economies, Brazil and China. This photograph perhaps best defines the new reality of global governance in the 21st Century.

Is the G20 Summit Here to Stay?

The communiqué of the November 15, 2008 Summit locked in the next G20 summit and hence ordained a sequel that appears to have enshrined the G20 as the new format to address the current global financial and economic crisis over the coming months and perhaps years. Much, of course, depends on the views of the new U.S. administration, but the November 2008 Summit has paved the way for President Obama and his team to move swiftly beyond the traditional G8 and to continue the G20 format.

In principle there is nothing wrong with exploring options for further change. However at this juncture, we strongly believe that it is best for the new U.S. administration to focus its attention on making the G20 summit format work, in terms of its ability to address the immediate crisis, and in terms of subsequently dealing with other pressing problems, such as global warming and global poverty. There may be a need to fine-tune size and composition, but more fundamental changes, in our view, can and should wait for later since arguments about composition and size—who is in and who is out—could quickly overwhelm a serious discussion of pressing substantive issues. Instead, the next G20 Summit in the United Kingdom on April 2, 2009 should stay with the standard G20 membership and get on with the important business of solving the world’s huge financial and economic problems.

One change, however, would be desirable: At the Washington Summit in November 2008 two representatives for each country were seated at the table, usually the country’s leader and finance minister. There may have been good reasons for this practice under the current circumstances, since leaders may have felt more comfortable with having the experts at their side during intense discussions of how to respond to the financial and economic crisis. In general, however, a table of 40 chairs undoubtedly is less conducive to an open and informal discussion than a table half that size. From our experience, a table of 20 can support a solid debate as long as the format is one of open give and take, rather than a delivery of scripted speeches. This is not the case for a table with 40 participants. The G8 format of leaders only at the table, with prior preparation by ministers who do not then participate in the leaders level summits, should definitely be preserved. To do otherwise would dilute the opportunity for informal discussion among leaders, which is the vital core of summit dynamics.

What Will Happen to the G8 Summit and to the G7 and G20 Meetings of Finance Ministers?

As the world’s financial storm gathered speed and intensity in recent months, the inadequacy of the traditional forums of industrial countries—the G8 group of leaders and the G7 group of finance ministers—became obvious. Does this mean that the G8 and G7 are a matter of the past? Most likely not. We would expect these forums to continue to meet for some time to come, playing a role as caucus for industrial countries. In any event, the G20 finance ministers will take on an enhanced role, since it will be the forum at which minister-level experts will lay the ground on key issues of global financial and economic management to ensure that they are effectively addressed at summit level by their leaders. The G20 Summit of November 15 was prepared by a meeting of G20 finance ministers in this fashion.

It may well be that the dynamics of interactions within the G20 will cause coalitions to be formed, shifting over time as issues and interests change. This could at times and on some issues involve a coalition of traditional G7 members. However, with increasing frequency, we would expect that some industrial countries would temporarily team-up with emerging market country members, for example on agricultural trade policies, where a coalition of Argentina, Australia, Brazil and Canada might align itself to challenge the agricultural protection policies of Europe, Japan and the United States. Or in the area of energy, a coalition among producer states, such as Indonesia, Mexico, Russia and Saudi Arabia might debate the merits of a stable energy supply and demand regime with an alliance among energy users, such as China, Europe, Japan, South Africa and the United States. It is this potential for multiple, overlapping and shifting alliances, which creates the opportunities for building trust, forcing trade-offs and forging cross-issue compromises that makes the G20 summit such an exciting opportunity.

What Should Be the Agenda of Future G20 Summits?

The communiqué of the November 2008 G20 Summit identified three main agenda items for the April 2009 follow-up summit: (1) A list of key issues for the containment of the current global financial and economic crisis; (2) a set of issues for the prevention of future global financial crises, including the reform of the international financial institutions, especially the IMF and World Bank; and (3) a push toward the successful conclusion of the Doha Round of WTO trade negotiations.

The first item is obviously a critical one if the G20 is to demonstrate its ability to help address the current crisis in a meaningful way. The second item is also important and timely. The experience with reform of the global financial institutions in the last few years has demonstrated that serious governance changes in these institutions will have to be driven by a summit-level group that is as inclusive as the G20. We would hope that Prime Minister Gordon Brown, as chair—with his exceptional economic expertise and experience in the international institutions, especially the IMF—will be able to forge a consensus at the April 2 summit in regard to reform of the international financial institutions. The third agenda item is also important, since the Doha Round is at a critical stage and its successful conclusion would send a powerful signal that the world community recognizes the importance of open trade relations in a time of crisis, when the natural tendency may be to revert to a protectionist stance.

However, we believe three additional topics should be added to the agenda for the April 2009 G20 Summit:

• First, there should be an explicit commitment to make the G20 forum a long-term feature of global governance, even as the group may wish to note that its size and composition is not written in stone, but subject to change as circumstances change.
• Second, the communiqué of the November summit stated that the G20 countries are “committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease”. This needs to be acted upon. These issues cannot be left off the table, even as the global financial and economic crisis rages. If anything, the crisis reinforces some of the key challenges which arise in these other areas and offers opportunities for a timely response. The U.K.-hosted summit should launch a G20 initiative to develop framework ideas for the post-Kyoto climate change agreement at Copenhagen.
• Third, assuming the April 2009 summit commits itself—as it should—to a continuation of the G20 summit format into the future, it must begin to address the question of how the summit process should be managed. We explore some of the possible options next.

How Should the G20 Summit Process Be Managed?

So far the G7, G8 and G20 forums have been supported by a loose organizational infrastructure. For each group the country holding the rotating year-long presidency of the forum takes over the secretariat function while a team of senior officials (the so-called “sherpas”) from each country meets during the course of the year to prepare the agenda and the communiqué for leaders and ministers. This organization has the advantage of avoiding a costly and rigid bureaucracy. It also fosters a growing level of trust and mutual understanding among the sherpas.

The problem with this approach has been two-fold: First, it led to discontinuities in focus and organization and in the monitoring of implementation. For the G20 of finance ministers, this problem was addressed in part by the introduction of a “troika” system, under with the immediate past and future G20 presidencies would work systematically with the current G20 presidency to shape the agenda and manage the preparation process. Second, particularly for the countries in the G20 with lesser administrative capacity, the responsibility for running the secretariat for a year during their country’s presidency imposed a heavy burden.

For the G20 summit, these problems will be amplified, not least because these summits will require first-rate preparation for very visible and high-level events. In addition, as the agenda of the G20 summit broadens over time, the burden of preparing a consistent multi-year agenda based on strong technical work will be such that it cannot be effectively handled when passed on year to year from one secretariat in one country to another secretariat in another country, especially when multiple ministries have to be engaged in each country. It is for this reason that the time may have come to explore setting up a very small permanent secretariat in support of the G20 summit.

The secretariat should only provide technical and logistical support for the political leadership of the troika of presidencies and for the sherpa process, but should not run the summit. That is the job of the host member governments. They must continue to run the summits, lead the preparations and drive the follow-up. The troika process will help strengthen the capacity of national governments to shoulder these burdens. Summits are the creatures of national government authorities where they have primacy, and this must remain so, even as the new summits become larger, more complex and more important.

Implications for the Obama Administration

The November 2008 G20 Summit opened a welcome and long-overdue opportunity for a dramatic and lasting change in global governance. It will be critical that the leaders of the G20 countries make the most of this opportunity at the next G20 Summit on April 2. The presence of U.S. President Obama will be a powerful signal that the United States is ready to push and where necessary lead the movement for global change. President-elect Obama’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.

We would hope that President Obama would make clear early on that:

• He supports the G20 summit as the appropriate apex institution of global governance for now;
• He may wish to discuss how to fine-tune the summit’s composition for enhanced credibility and effectiveness but without fundamentally questioning the G20 framework;
• He supports cooperative solutions to the current financial crisis along with a serious restructuring of the global financial institutions;
• He will look to the G20 summit as the right forum to address other pressing global issues, such as climate change, energy, poverty and health; and
• He is ready to explore an innovative approach to effectively manage the G20 summit process.

These steps would help ensure that the great promise of the November 2008 G20 Summit is translated into a deep and essential change in global governance. This change will allow the world to move from a governance system that continues to be dominated by the transatlantic powers of the 20th century to one which reflects the fundamentally different global economic and political realities of the 21st century. It would usher in a framework of deliberation, consultation and decision making that would make it possible to address the great global challenges and opportunities that we face today in a more effective and legitimate manner.

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Executive Summary

Tax increment finance (TIF) is a popular and potentially powerful tool for places that need economic development the most yet have the least to spend. By allowing jurisdictions to use portions of their tax base to secure public-sector bonds, the mechanism allows fiscally strapped localities to finance site improvements or other investments so as to "level the playing field" in economic development.

However, poorly designed TIF programs can cause problems. Not only can they increase the incentives for localities to engage in inefficient, zero-sum competition for tax base with their neighbors. Also, lax TIF rules may promote sprawl by reducing the costs of greenfield development at the urban fringe. It is therefore critical that state legislatures design TIF rules well.

In view of this, an analysis of the way TIF is designed and utilized in Missouri shows that:

• Missouri law creates the potential for overuse and abuse of TIF. Vague definitions of the allowable use of TIF permit almost any municipality, including those market forces already favor, to use it. Weak limits on its use for inefficient inter-local competition for tax base touch off struggles between localities. And the inclusion of sales tax base in the program tilts it toward lower-wage jobs and retail projects, which rarely bring new economic activity into a region.
  
  
• Thanks to these flaws, TIF is used extensively in high-tax-base Missouri suburban areas with little need for assistance in the competition for tax base. This is especially true in the St. Louis metropolitan area. There, TIF money very frequently flows to purposes other than combating "blight" in disadvantaged communities' its classic purpose. In fact, less than half of the 21 St. Louis-area cities that were using TIF in 2001 were disadvantaged or "at-risk" when evaluated on four indicaters of distress. On another measure, just seven of the 20 suburban areas using TIF fell into the "at-risk" category.
  
  
• TIF is also frequently being used in the outer parts of regions' particularly in the St. Louis area. Most notably, only nine of the St. Louis region's 33 TIF districts lie in the region's core. Conversely, 14 of the region's 38 TIF districts lie west of the region's major ring road (I-270). These districts, moreover, contain 57 percent of the TIF-captured property tax base in the region. By contrast, the Kansas City region shows a pattern more consistent with the revitalization goals of TIF. The vast majority of the districts lie in the region's center city, though the huge size of the city means many are still geographically far-flung.

In sum, poorly designed TIF laws are being misused at a time when state and local fiscal pressures require every dollar be spent prudently. As a result, a potentially dynamic tool for reinvestment in Missouri's most disadvantaged communities threatens to become an engine of sprawl as it is abused by high-tax-base suburban areas that do not need public subsidies.

For these reasons, Missouri would be well-served by significant reforms in the laws governing TIF:

• The allowable purposes for TIF should be more strictly defined to target its use to places with the most need for economic development.
  
  
• Higher level review of local determinations that TIF subsidies will support net contributions to the regional or state economy (the "but-for" requirement) should be implemented.
  
  
• Local TIF administrators should be required to show that TIF subsidies are consistent with land-use and economic development needs both locally and in nearby areas.

If such reforms were put in place, TIF could be returned to its attractive main purpose: that of providing resources that would not otherwise be available to localities that badly need them to promote needed economic development and redevelopment.

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EXECUTIVE SUMMARY

In the face of unprecedented global challenges, effective global cooperation increasingly requires a partnership between state and non-state actors. Many international institutions now involve non-state actors in arenas that were once the exclusive province of states. The paper analyzes the evolution of civil society participation in the governance of international institutions and highlights the shift from a model based on consultation toward a model of multistakeholder governance. The paper argues that consultation is a less effective approach to involving civil society in achieving the mission of these institutions and suggests that more robust forms of multi-stakeholder participation by civil society can foster greater accountability and better deliberation. It analyzes competing claims about the desirability of including civil society in the governance of international institutions and suggests that an emerging constituency model can promote more effective multi-stakeholder governance. Constituency structures are already central features of several global health institutions and are now being contemplated by institutions in other sectors, including by the Education for All—Fast Track Initiative.

Multi-stakeholder approaches to governance are likely to become more widespread in the years to come in order to harness the contributions of a plethora of private actors engaged in responding to a wide range of global challenges. Even with enhanced cooperation between states, it is increasingly clear that non-state actors are essential to responding to key challenges across a wide range of sectors. Although it is possible to imagine expanded cooperation between state and non-state actors without opening up the governance structures of international institutions, it is less likely that these institutions will be successful in the longrun without a shift toward greater multi-stakeholder involvement in the institutions themselves.

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INTRODUCTION

In August, 2010 the government of Kenya adopted a new constitution. This followed a referendum in which an overwhelming majority of Kenyans voted for change. The decisive impetus for reform came from the widespread violence and political crisis that followed the 2007 election. While claims of electoral fraud provided the immediate catalyst for violence, the deeper causes were to be found in the interaction of a highly centralized ‘winner-take-all’ political system with deep social disparities based in part on group identity (Hanson 2008).

Provisions for equity figure prominently in the new constitution. Backed by a bill of rights that opens the door to legal enforcement, citizenship rights have been strengthened in many areas,including access to basic services. ‘Equitable sharing’ has been introduced as a guiding principle for public spending. National and devolved governments are now constitutionally required to redress social disparities, target disadvantaged areas and provide affirmative action for marginalized groups.

Translating these provisions into tangible outcomes will not be straightforward. Equity is a principle that would be readily endorsed by most policymakers in Kenya and Kenya’s citizens have provided their own endorsement through the referendum. However, there is an ongoing debate over what the commitment to equity means in practice, as well as over the pace and direction of reform. Much of that debate has centered on the constitutional injunction requiring ‘equitable sharing’ in public spending.

On most measures of human development, Kenya registers average outcomes considerably above those for sub-Saharan Africa as a region. Yet the national average masks extreme disparities—and the benefits of increased prosperity have been unequally shared.

There are compelling grounds for a strengthened focus on equity in Kenya. In recent years, the country has maintained a respectable, if less than spectacular, record on economic growth. Social indicators are also on an upward trend. On most measures of human development, Kenya registers average outcomes considerably above those for sub-Saharan Africa as a region. Yet the national average masks extreme disparities—and the benefits of increased prosperity have been unequally shared. Some regions and social groups face levels of deprivation that rank alongside the worst in Africa. Moreover, the deep fault lines running through society are widely perceived as a source of injustice and potential political instability.

High levels of inequality in Kenya raise wider concerns. There has been a tendency in domestic debates to see ‘equitable sharing’ as a guiding principle for social justice, rather than as a condition for accelerated growth and enhanced economic efficiency. Yet international evidence strongly suggests that extreme inequality—especially in opportunities for education— is profoundly damaging for economic growth. It follows that redistributive public spending has the potential to support growth.

The current paper focuses on a group of 12 counties located in Kenya’s Arid and Semi-Arid Lands (ASALs). They are among the most disadvantaged in the country. Most are characterized by high levels of income poverty, chronic food insecurity and acute deprivation across a wide range of social indicators.

Nowhere is the deprivation starker than in education. The ASAL counties account for a disproportionately large share of Kenya’s out-of-school children, pointing to problems in access and school retention. Gender disparities in education are among the widest in the country. Learning outcomes for the small number of children who get through primary school are for the most part abysmal, even by the generally low national average standards.

Unequal public spending patterns have played no small part in creating the disparities that separate the ASAL counties from the rest of Kenya—and ‘equitable sharing’ could play a role in closing the gap. But what would a more equitable approach to public spending look like in practice?

This paper addresses that question. It looks in some detail at education for two reasons. First, good quality education is itself a powerful motor of enhanced equity. It has the potential to equip children and youth with the skills and competencies that they need to break out of cycles of poverty and to participate more fully in national prosperity. If Kenya is to embark on a more equitable pattern of development, there are strong grounds for prioritizing the creation of more equal opportunities in education. Second, the education sector illustrates many of the wider challenges and debates that Kenya’s policymakers will have to address as they seek to translate constitutional provisions into public spending strategies. In particular, it highlights the importance of weighting for indicators that reflect need in designing formulae for budget allocations.

Our broad conclusion is that, while Kenya clearly needs to avoid public spending reforms that jeopardize service delivery in wealthier counties, redistributive measures are justified on the grounds of efficiency and equity.

The paper is organized as follows. Part 1 provides an overview of the approach to equity enshrined in the constitution. While the spirit of the constitution is unequivocal, the letter is open to a vast array of interpretations. We briefly explore the implications of a range of approaches. Our broad conclusion is that, while Kenya clearly needs to avoid public spending reforms that jeopardize service delivery in wealthier counties, redistributive measures are justified on the grounds of efficiency and equity. Although this paper focuses principally on basic services, we caution against approaches that treat equity as a matter of social sector financing to the exclusion of growth-oriented productive investment.

Part 2 provides an analysis of some key indicators on poverty, health and nutrition. Drawing on household expenditure data, the report locates the 12 ASAL counties in the national league table for the incidence and depth of poverty. Data on health outcomes and access to basic services provide another indicator of the state of human development. While there are some marked variations across counties and indicators, most of the 12 counties register levels of deprivation in poverty and basic health far in excess of those found in other areas.

Part 3 shifts the focus to education. Over the past decade, Kenya has made considerable progress in improving access to basic education. Enrollment rates in primary education have increased sharply since the elimination of school fees in 2003. Transition rates to secondary school are also rising. The record on learning achievement is less impressive. While Kenya lacks a comprehensive national learning assessment, survey evidence points to systemic problems in education quality. In both access and learning, children in the ASAL counties—especially female children—are at a considerable disadvantage. After setting out the national picture, the paper explores the distinctive problems facing these counties.

In Part 4 we look beyond Kenya to wider international experience. Many countries have grappled with the challenge of reducing disparities between less-favored and more-favored regions. There are no blueprints on offer. However, there are some useful lessons and guidelines that may be of some relevance to the policy debate in Kenya. The experience of South Africa may be particularly instructive given the weight attached to equity in the post-apartheid constitution.

Part 5 of the paper explores a range of approaches to financial allocations. Converting constitutional principle into operational practice will require the development of formulae-based approaches. From an equitable financing perspective there is no perfect model. Any formula that is adopted will involve trade-offs between different goals. Policymakers have to determine what weight to attach to different dimensions of equity (for example, gender, income, education and health), the time frame for achieving stated policy goals, and whether to frame targets in terms of outcomes or inputs. These questions go beyond devolved financing. The Kenyan constitution is unequivocal in stipulating that the ‘equitable sharing’ provision applies to all public spending. We therefore undertake a series of formula-based exercises illustrating the allocation patterns that would emerge under different formulae, with specific reference to the 12 ASAL focus counties and to education.

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• 08 financing kenya watkins

Demand for more walkable, mixed use neighborhoods is growing across the United States. However, the challenges associated with fi nancing these developments are allowing much of this demand to go unmet. This paper discusses how more, and more upfront, patient equity in walkable projects—from various sources and providers—would facilitate their development, and yield high returns over the long term. The paper also examines how patient equity contributed to the success of several such developments built over the past 15 years, illustrating untapped potential. Finally, it notes the role the public sector can play in providing patient equity investments.

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The use of economic resources to support election campaigns is an essential ingredient of democratic competition. Often viewed as a malady of democracy, campaign finance is actually part of the normal workings of democratic life. However, it is indisputable that money is capable of inflicting significant distortions on politics and policymaking. When there is a failure to regulate money in the political process or existing regulation is ineffectual, the legitimacy of democratic processes can be jeopardized.

These concerns are particularly relevant to Latin America, a region plagued by a highly unequal income distribution, and where organized crime has a major presence, transacts billions of dollars each year in illicit business, and has the potential to corrupt democratic institutions. In this policy brief, Kevin Casas-Zamora and Daniel Zovatto offer practical guidance for making campaign finance regulation feasible and increasing its likelihood of success. In undertaking reform, countries should prioritize the most urgently needed changes with the broadest political consensus. Proposals for reform include:

• Establish greater control over private funding of parties and election campaigns;

• Create a public subsidy system to ensure fair access for parties and candidates to adequate funding to finance both regular day-to-day operations and election campaigns;

• Adopt mechanisms to keep campaign spending from skyrocketing;

• Craft party and candidate reporting systems to increase accountability, transparency, and disclosure; and

• Establish a graduated and credible system of sanctions for the chief financial officers of political parties in the event of violations of the rules in force.

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• The cost of democracy: Campaign finance in Latin America

I was honored today to speak at the kick off meeting of the new ReFormers Caucus. This group of over 100 former members of the U.S. Senate, the House, and governors of both parties, has come together to fight for meaningful campaign finance reform. In the bipartisan spirit of the caucus, I shared speaking duties with Professor Richard Painter, who was the Bush administration ethics czar and my predecessor before I had a similar role in the Obama White House. 

As I told the distinguished audience of ReFormers (get the pun?) gathered over lunch on Capitol Hill, I wish they had existed when in my Obama administration role I was working for the passage of the Disclose Act. That bill would have brought true transparency to the post-Citizens United campaign finance system, yet it failed by just one vote in Congress.  But it is not too late for Americans, working together, to secure enhanced transparency and other campaign finance changes that are desperately needed.  Momentum is building, with increasing levels of public outrage, as reflected in state and local referenda passing in Maine, Seattle and San Francisco just this week, and much more to come at the federal, state and local level.

It’s easy to imagine a future in a decade or less when most people will have a smartphone. In our recent paper Pathways to Smarter Digital Financial Inclusion, we explore the benefits of extending financial services to the mass of lower-income people in developing countries who are currently dubious of the value that financial services can bring to them, distrustful of formal financial institutions, or uncomfortable with the treatment they expect to receive.

The report analyzes six inherent characteristics of smartphones that have the potential to change market dynamics relative to the status quo of simple mobile phones and cards. 

Customer-Facing Changes:

1. The graphical user interface.
2. The ability to attach a variety of peripheral devices to it (such as a card reader or a small printer issuing receipts).
3. The lower marginal cost of mobile data communications relative to traditional mobile channels (such as SMS or USSD).

Service Provider Changes:

4. Greater freedom to program services without requiring the acquiescence or active participation of the telco.
5. Greater flexibility to distribute service logic between the handset (apps) and the network (servers).
6. More opportunities to capture more customer data with which to enhance customer value and stickiness.

Taken together, these changes may lower the costs of designing for lower-income people dramatically, and the designs ought to take advantage of continuous feedback from users. This should give low-end customers a stronger sense of choice over the services that are relevant to them, and voice over how they wish to be served and treated.

Traditionally poor people have been invisible to service providers because so little was known about their preferences that it was not possible build a service proposition or business case around them. The paper describes three pathways that will allow providers to design services on smartphones that will enable an increasingly granular understanding of their customers. Each of the three pathways offers providers a different approach to discover what they need to know about prospective customers in order to begin engaging with them. 

Pathway One: Through Big Data

Providers will piece together information on potential low-income customers directly, by assembling available data from disparate sources (e.g. history of airtime top-ups and bill payment, activity on online social networks, neighborhood or village-level socio-demographic data, etc.) and by accelerating data acquisition cycles (e.g. inferring behavior from granting of small loans in rapid succession, administering selected psychometric questions, or conducting A/B tests with special offers). There is a growing number of data analytics companies that are applying big data in this way to benefit the poor.

Pathway Two: Through local Businesses

Smartphones will have a special impact on micro and small enterprises, which will see increasing business benefits from recording and transacting more of their business digitally. As their business data becomes more visible to financial institutions, local firms will increasingly channel financial services, and particularly credit, to their customers, employees, and suppliers. Financial institutions will backstop their credit, which in effect turns smaller businesses into front-line distribution partners into local communities.

Pathway Three: Through Socio-Financial Networks

Firms view individuals primarily as managers of a web of socio-financial relationships that may or may not allow them access to formal financial services. Beyond providing loans to “creditworthy” people, financial institutions can provide transactional engines, similar to the crowdfunding platforms that enable all people to locate potential funding sources within their existing social networks. A provider equipped with appropriate network analysis tools could then promote rather than displace people´s own funding relationships and activities. This would provide financial service firms valuable insight into how people manage their financial needs.

The pathways are intended as an exploration of how smartphones could support the development of a healthier and more inclusive digital financial service ecosystem, by addressing the two critical deficiencies of the current mass-market digital finance systems. Smartphones could enable stronger customer value propositions, leading to much higher levels of customer engagement, leading to more revelation of customer data and more robust business cases for the providers involved. Mobile technology could also lead to a broader diversity of players coming into the space, each playing to their specific interests and contributing their specific set of skills, but together delivering customer value through the right combination of collaboration and competition.

Recent reports have highlighted how mobile-based financial services are transforming banking and payments in Kenya, Bangladesh, and Peru, and all the hype about how they are about to explode everywhere else. For all of the promise that digital financial systems have for lowering costs and helping people all over the globe, it is unfortunate that their development is hampered by regulation that protects the interests of the largest providers. These regulations create significant barriers and raise the total costs to achieve universal financial inclusion.

It is indeed conceivable that purely digital financial transactions could be handled at vanishingly small unit costs, from anywhere. But the cost that won´t go away is that at the interface between the new digital payment system and the legacy payment system – hard cash. Cash in/cash out (CICO) points are like tollgates at the edge of the digital payments cloud.

Cash is Still King

Even in areas with flourishing mobile banking usage, people tend to cash in every time they want to make a mobile payment, and to cash out immediately and in full every time they receive digital money. Rather than displacing cash, digital platforms have made local cash ecosystems more efficient. Without full backward compatibility with cash, digital payment systems could not take root.

The bigger issue is not the size of the CICO toll, but the fact that small players cannot expect to have the transaction volume to sustain a widespread CICO network. The incumbent banks and telecommunications firms have built in competitive advantages. They can quickly form agreements with brick and mortar shops, attract users from the current customer base, threaten new entrants, and aggregate enough transactions to induce CICO outlets to maintain sufficient liquidity on hand.

Therefore, the competition in digital financial services will not be determined primarily by what happens within the digital payments market itself, but rather by what happens in the contiguous cash market. The power of digital services is their ability to transcend geography, and yet success in the digital payments space will go to whoever has the best physical CICO footprint.

Regulators treat the digital payments service and the CICO service as conjoined twins: each digital financial service provider must have its own base of contractually bound CICO outlets. When the two services are bundled it is not surprising that the tough economics of CICO —and, therefore, the incumbent— dominates.

A Two Market Regulatory Approach

In a recent paper, I argue it is necessary to split up these two markets, from a regulatory point of view. The market for effecting electronic payments (issuing payment instructions and debiting and crediting electronic accounts accordingly) is logically distinct from the market for exchanging two forms of money (hard cash versus electronic value).

Most regulators approve of stores receiving electronic money from customers in exchange for packs of rice on a store shelf. But, if that same electronic money was exchanged for cash then it would violate the law in many countries.

In the latter case, the store is presumed to be an agent of the customer’s financial service provider, and the store cannot offer the CICO service without an agency contract from that provider. But why? The cash that was offered was the store’s as is the account that would receive the electronic payment, and the transaction would have occurred entirely through a secure, real-time technology platform that banks offer all their clients.

A Regulatory Fix

Of course, purely financial transactions are usually held to higher consumer protection standards than normal commercial transactions. My proposal is not to deregulate CICO, but to create a new license type for CICO network managers. Holders of this license would carry certain consumer protection obligations (such as ensuring that tariffs are explicitly posted at all CICO outlets, and that they have a call center to handle any complaints that customers may have on individual CICO outlets) – entirely reasonable expectations for retailers, even if we normally don´t ask them of rice sellers.

But once you have a CICO license, then you could sign up any store you wanted and crucially, offer CICO services on the platform of any financial institution in which you have an account. In other words, you wouldn’t have to beg the incumbent to give you a special agent contract. All you would need to do is to open a normal customer account with them, which the incumbent couldn´t deny you.

This one little change would completely shift the competitive dynamics of digital financial services. Under the current direct agency model, incumbent firms have no incentive to make it easier for competitors to create CICO outlets. Whereas under the independent CICO network manager model, all licensed CICO networks would have the incentive to offer CICO services for all providers, no matter their size: with a full suite of available services, they will find it easier to sign up stores to work for them, and these stores will find it easier to convince more users to walk into their stores.

Incumbents would still be free to establish their own proprietary CICO networks, as today. But they would have to compete with independent CICO networks that are now able to aggregate business from all financial service providers, creating true competition.

All players could then claim a comparable physical presence as the incumbent. They would all benefit from the same branded competition between CICO networks. They could compete strictly on the basis of the quality of their digital financial services offering.

Unbundling the regulatory treatment of digital financial services would help competition reach every segment of the business; the current integrated model only serves the interests of the largest telecommunication companies and banks in the land.

One of the foundational notions of digital financial services has been the distinction between payment rails and services running on the rails. This is a logical distinction to make, one easily understood by engineers who tend to think in terms of hierarchies (or stacks) of functionalities, capabilities, and protocols that need to be brought together. But this distinction makes less sense when it is taken to represent a logical temporal sequencing of those layers.

It is not too much of a caricature to portray the argument —and, alas, much common practice— like this: I’ll first build a state-of-the art digital payments platform, and then I’ll secure a great agent network to acquire customers and offer them cash services. Once I have mastered all that, then I’ll focus on bringing new services to delight more of my customers. The result is that research on customer preferences gets postponed, and product design projects are outsourced to external consultants who run innovation projects in a way that is disconnected from the rest of the business.

This mindset is understandable given limited organizational, financial and human resource capabilities. But the problem with such narrow sequencing is that all these elements reinforce each other. Without adequate services (a.k.a. customer proposition), the rails will not bed down (a.k.a. no business case for the provider or the agents). In businesses such as digital payments that exhibit strong network effects, it’s a race to reach a critical mass of users. You need to drive the entire stack to get there, as quickly as possible. Unless, you develop a killer app early on, as M-PESA seems to have done with the send money home use case in the Kenyan environment.

It is tough for any organization to advance on all these fronts simultaneously. Only superhero organizations can get this complex job done. I have argued in a previous post that the piece that needs to be parceled off is not the service creation but rather cash management: that can be handled by independently licensed organizations working at arms length from the digital rails-and-products providers.

What are payment rails?

Payment rails are a collection of capabilities that allow value to be passed around digitally. This could include sending money home, paying for a good or a bill, pushing money into my or someone else’s savings account, funding a withdrawal at an agent, or repaying a loan. The first set of capabilities relates to identity: being able to establish you are the rightful owner of the funds in your account, and to designate the intended recipient in a money transfer. The second set of capabilities relates to the accounting or ledger system: keeping track of balances held and owed, and authorizing transactions when there are sufficient funds per the account rules. The third set of capabilities relates to messaging: collecting the necessary transaction details from the payment initiator, conveying that information securely to the authorizing entity, and providing confirmations.

Only the third piece has been transformed by the rise of mobile phones: we now have an increasingly inclusive and ubiquitous real-time messaging fabric. Impressive as that is, this messaging capability is still linked to legacy approaches on identity and accounting. Which is why mobile money is still more an evolution than a revolution in the quest for financial inclusion.

The keepers of the accounts —traditionally, the banks— are, of course, the guardians of the system’s choke points. There is now recognition in financial inclusion circles that to expand access to finance it is not enough to proliferate the world with mobile phones and agents: you need to increase the number and type of account keepers, under the guise of mobile money operators, e-money issuers or payment banks. But that doesn’t change the fundamental dynamics, which is that there still are choke point guardians who need to be convinced that there is a business case in order to invest in marketing to poor people, that there are opportunities to innovate to meet their needs, and that perhaps all players can be better off if only they interoperated. A true transformation would be to open up these ledgers, so anyone can check the validity of any transaction and write them into the ledger.

That’s what crypto-currencies are after: decentralizing the accounting and transaction authorization piece, much in the same way as mobile phones have decentralized the transaction origination piece. Banks seek to protect the integrity of their accounting and authorizations systems —and hence their role as arbiters of financial transactions— by hiding them behind huge IT walls; crypto-currencies such as Bitcoin and Ripple do the opposite: they use sophisticated protocols to create a shared consensus for all to see and use.

The other set of capabilities in the digital rails, identity, is also still in the dark ages. Let me convince you of that through a personal experience. My wallet was stolen recently, and it contained my credit card. I can understand the bank wanting to know my name, but why is the bank announcing my name to the thief by printing it on the credit card, thereby making it easier for him to impersonate me? The reason is, of course, that the bank wants merchants to be able to cross check the name on the card with a piece of customer ID. But as you can imagine, my national ID got stolen along with my credit card, and because of that the thief knows not only my name but also my address. That was an issue because I also kept a key to my house in the wallet. None of this makes sense: why are these “trusted” institutions subverting my sense of personal security, not to mention privacy?

The problem is that the current financial regulatory framework is premised on a direct binding of every transaction to my full legal identity. As David Porteous and I argue in a recent paper, what we need is a more nuanced digital identity system that allows me to present different personas to different identity-requesting entities and choose precisely which attributes of myself get revealed in each case, while still allowing the authorities to trace the identity unequivocally back to me in case I break the law.

The much-celebrated success of mobile money has so far really only transformed one third (messaging) of one half (payment rails) of the financial inclusion agenda. We ain’t seen nothin’ yet.

Editor’s Note: Brookings will hold an event and live webcast on Wednesday, August 26 to discuss the findings of the 2015 Financial and Digital Inclusion (FDIP) Report and Scorecard. Follow the conversation on Twitter using #FinancialInclusion 

Access to affordable, quality financial services is vital both for ensuring the financial well-being of individuals and for fostering broader economic development. Yet about 2 billion adults around the world still do not have formal financial accounts.

The Financial and Digital Inclusion Project (FDIP), launched within the Center for Technology Innovation at Brookings, set out to answer three key questions:

• Do country commitments make a difference in progress toward financial inclusion?
• To what extent do mobile and other digital technologies advance financial inclusion?
• What legal, policy, and regulatory approaches promote financial inclusion?

To answer these questions, the FDIP team spent the past year examining how governments, private sector entities, non-government organizations, and the general public across 21 diverse countries have worked together to advance access to and usage of formal financial services. This research informed the development of the 2015 Report and Scorecard — the first in a 3-year series of research on the topic.

For the 2015 Scorecard, FDIP researchers assessed 33 indicators across four dimensions of financial inclusion: Country commitment, mobile capacity, regulatory environment, and adoption of selected basic traditional and digital financial services.

The 2015 FDIP Report and Scorecard provide detailed profiles of the financial inclusion landscape in 21 countries, focusing on mobile money and other digital financial services.

On August 26, the Center for Technology Innovation will discuss the findings of the 2015 Report and Scorecard and host a conversation about key trends, opportunities, and obstacles surrounding financial inclusion among authorities from the public and private sectors.

Register to attend the event in-person or by webcast, and join the conversation on Twitter at #FinancialInclusion.

The 2015 Brookings Financial and Digital Inclusion Project (FDIP) Report and Scorecard evaluates access to and usage of affordable financial services across 21 geographically and economically diverse countries.

The FDIP Report and Scorecard seek to answer a set of fundamental questions about today’s global financial inclusion efforts, including: 1) Do country commitments make a difference in progress toward financial inclusion?; 2) To what extent do mobile and other digital technologies advance financial inclusion?; and 3) What legal, policy, and regulatory approaches promote financial inclusion?

John D. Villasenor, Darrell M. West, and Robin J. Lewis analyzed the financial inclusion landscape in Afghanistan, Bangladesh, Brazil, Chile, Colombia, Ethiopia, India, Indonesia, Kenya, Malawi, Mexico, Nigeria, Pakistan, Peru, the Philippines, Rwanda, South Africa, Tanzania, Turkey, Uganda, and Zambia. Countries received scores and rankings based on 33 indicators spanning four dimensions: country commitment, mobile capacity, regulatory environment, and adoption.

The authors’ analysis also provides several takeaways about how to best expand financial inclusion across the world:

• Country commitment is fundamental.
• The movement toward digital financial services will accelerate financial inclusion.
• Geography generally matters less than policy, legal, and regulatory changes, although some regional trends in terms of financial services provision are evident.
• Central banks, ministries of finance, ministries of communications, banks, nonbank financial providers, and mobile network operators play major roles in achieving greater financial inclusion.
• Full financial inclusion cannot be achieved without addressing the financial inclusion gender gap.

This year’s Report and Scorecard is the first of a series of annual reports examining financial inclusion activities around the world.

View the full report and a full compendium of the country rankings here.

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• Download the report

Event Information

Approximately two billion adults across the world lack access to formal financial services. To address this particular economic challenge, many developing countries have made significant efforts to expand access to and use of affordable financial services for the world’s poor. Financial inclusion can be achieved via traditional banking offerings, but also through digital financial services such as mobile money, among other innovative approaches.

The Brookings Financial and Digital Inclu­sion Project (FDIP) Report and Scorecard seeks to help answer a set of fundamental questions about today’s global financial inclusion efforts, including;

1. Do country commitments make a difference in progress toward financial inclusion?
2. To what extent do mobile and other digital technologies advance finan­cial inclusion?
3. What legal, policy, and regulatory approaches promote financial inclusion? 

To answer these questions, Brookings experts John D. Villasenor, Darrell M. West, and Robin J. Lewis analyzed finan­cial inclusion in 21 geographically, economically, and politically diverse countries. This year’s report and scorecard is the first of a series of annual reports examining financial inclusion activities and assessing usage of financial services in selected countries around the world. 

On August 26, the Center for Technology Innovation at Brookings held a forum to launch the 2015 FDIP Report and discuss key research findings and recommendations. Financial inclusion experts from the public and private sectors also joined the discussion.

Join the conversation on Twitter at #FinancialInclusion and @BrookingsGov

Video

• Measuring progress on financial and digital inclusion

Audio

• Measuring progress on financial and digital inclusion

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150826_financial_inclusion_transcript

Editors Note: On August 23, the Center for Technology Innovation (CTI) released the 2015 Financial and Digital Inclusion Project Report and Scorecard. Brookings will hold an event and live webcast on Wednesday, August 26 to discuss the report’s findings. Follow the conversation on Twitter using #FinancialInclusion and submit comments on the report to FDIPComments@brookings.edu.

Around the world, some two billion adults lack access to an account at a formal financial institution. In order to shrink that number, many countries have made commitments to expanding financial services to the poor. These commitments include recognizing the importance of financial inclusion, developing an inclusion policy, and using data to measure progress toward inclusion goals. The Brookings Financial and Digital Inclusion Project (FDIP) evaluates access to and usage of affordable financial services by underserved people across 21 countries. Of these countries, Kenya, South Africa, Brazil, Rwanda and Uganda were the top scorers.

The 2015 FDIP Report and Scorecard rank these countries based on four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services. The findings indicate that country commitments do matter for achieving financial inclusion. Some regional trends are present, such as the relatively higher amount of money stored on mobile accounts in Africa. Mobile technology accelerates financial inclusion in places that lack legacy financial institutions. Additionally, a gender gap persists in ownership of financial accounts that could be reversed with greater access to mobile money services. The 2015 Report and Scorecard are the first in a series of publications intended to provide policymakers, the private sector, nongovernmental organizations, and the general public with information that can help improve financial inclusion in these countries and around the world.

 View the 2015 Brookings FDIP Report and Scorecard, watch the webcast of the live event, and send feedback on the report to FDIPcomments@brookings.edu.

On August 26, the Brookings Institution hosted a panel discussion of the findings of the 2015 Financial and Digital Inclusion Project Report and Scorecard. Chief among the report’s findings was the rapid growth of financial products and services targeted at the world’s unbanked population.  Much of the growth stems from innovations in digital payments systems and non-bank financial services.  For example, systems like M-Pesa in Kenya allow customers to store money on their mobile phones and easily transfer it to other M-Pesa users.  Advancing financial inclusion will greatly benefit the two billion people worldwide that still lack access to any financial services.

The report itself ranks a set of 21 countries on four continents chosen for their efforts to promote financial inclusion.  The criteria used to score each country include country commitment, mobile capacity, regulatory environment, and adoption.  The results show that several pathways to financial inclusion exist, from mobile payments systems to so-called “branchless” banking services.  Places that lack traditional banks have seen financial inclusion driven by mobile operators, while others have experimented with third-party agent banking in areas that lack bank branches.   

The panel drew financial inclusion and mobile payments experts from the government, industry, and non-profit groups.  Each panelist touted the benefits of financial inclusion from their own perspective.  Women especially have much to gain from financial inclusion since they have historically faced the most obstacles to opening financial accounts.  In developing countries, a mobile payments system grants women greater privacy, control, and safety compared to cash payments.  Traceable digital payments also make it easier to combat corruption and money laundering.  Salaries paid to government employees and transfer payments to low-income households can be sent straight to a mobile payment account, eliminating opportunities for bribe seeking and theft. 

According to the panelists, financial inclusion can also drive economic growth in developing countries.  As financial services expand, they will also increase in sophistication, allowing customers to do more with their money.  For example, a payments record can be used to establish a credit history for loan applications, and digital savings accounts with interest can help customers protect their wealth against inflation.  These same systems can also be used to provide insurance coverage, reducing financial uncertainty for low-income populations.

The proliferation of financial services has many benefits, but it will also create policy challenges if regulations do not keep up with financial innovation.  Requiring several forms of identification to purchase a mobile phone or open a bank account presents an obstacle to low income and rural customers that live far away from government offices that issue identification. Broad coordination between telecom regulators, ID issuers, banking authorities, and other government agencies is often necessary for lowering barriers to accessing financial services.

It is telling that many countries included in the report are looking to other developing countries for policies to promote financial inclusion.  The scarcity of traditional banks combined with new methods of accessing financial services opens avenues to financial inclusion not seen in most developed countries. Established banking industries and the accompanying regulations leave fewer opportunities for financial innovation, but countries with large unbanked populations can start with a clean slate. Over the next two years, FDIP will continue to monitor and report on developments in financial inclusion around the world.

Send comments on the 2015 FDIP Report and Scorecard and suggestions for future reporting to FDIPComments@brookings.edu.