As the biological basis of more diseases are fully revealed, and the drugs targeting medical problems become more focused and effective, more patients are finding themselves on costlier specialty medicines. At the same time, consumers find themselves paying a growing portion of their drug bills out of pocket as the structure of insurance changes. These two developments have combined to result in significant consumer hardship.

In response to these trends, there has been political pressure to enact policies giving federal and state governments authority to set drug prices or limit price increases. However, these policies could have the unintended consequence of reducing the incentive to develop more effective drugs.

In Europe, government price-setting authorities systematically overpay for some older, less innovative drugs while reducing the prices of and access to newer, more significant breakthroughs. Many worry that enacting a similar policy in the United States would reduce the profitability of new, innovative research endeavors.

We believe that certain regulatory reforms can address these concerns and encourage more robust competition within the drug market. These policies would allow prices to more easily adjust to reflect how medicines are prescribed and the outcomes they deliver, and thus would help control rising spending and reduce the burden of drug costs for consumers. One way to make drug pricing more competitive is to implement selling models that tie the price of drugs more closely to the usefulness of the clinical setting in which they are being prescribed. However, existing regulations obstruct this type of market-oriented approach.

Pricing Based On Indication And Outcomes

The Centers for Medicare and Medicaid Services (CMS) recently announced that as early as 2017, it plans to pursue changes in the way Medicare pays for injectable drugs under its Part B program to give drug makers more flexibility to price products based on indications and outcomes. Yet the Medicare program left open how the relative value of different indications would be determined. Would drug makers be free to vary prices based on clinical demand and the benefits being offered in different clinical settings? Or as the rule suggests, will CMS try to influence these conclusions with an assessment of clinical value?

CMS’ proposed rule also does not address several challenges associated with a value-based pricing framework. For example, the proposal did not address the small molecule drugs that are the focus of much of the price scrutiny, only injectable drugs paid for as part of the medical benefit. Moreover, enabling such a framework for value-based pricing would require simultaneous regulatory reforms at the Food and Drug Administration (FDA), as well as the Office of the Inspector General. Because the impediments to this sort of policy effort cut across multiple agencies, it will likely require a legislative remedy to fully enable.

Inside CMS, enabling drug makers to adjust prices based on the purpose for which medicines are being prescribed will require changes to the existing rules that govern drug pricing. For example, federal regulators will need to relax the way that they implement current price-setting constructs like the calculation for Medicaid best price, the ceiling price for the 340B program, and the reporting rules for Medicare’s Part B average sales price. These rules complicate the ability of companies to price the same drug differently, based on how it’s being prescribed, or to enter into “value-based’ contracts that tie drug prices and discounts to measures of how a population of patients benefit from a given treatment.

Take, for example, the Medicaid Best Price rules. Best price is the lowest manufacturer price paid for a drug by any purchaser. It’s defined by the Medicaid statute as “any wholesaler, retailer, provider, health maintenance organization, or nonprofit or government entity” with some exceptions (Note 1). In short, it’s the cheapest price at which a drug is sold. A drug’s reported best price is required to reflect all discounts, rebates, and other pricing adjustments. It’s the benchmark that the government uses to make sure that state Medicaid programs are receiving the lowest price for which a drug is being offered to any purchaser.

Under these rules, if a drug maker enters into a contract with a private health plan to discount a drug based on how it’s being used (or the clinical results that it achieves) then the discount that’s offered when the drug is used in settings that are judged to yield less value would become the new benchmark for calculating the Medicaid best price. The rebates offered to a private insurer under the terms of just one value-based contract would establish the new price offered to all Medicaid programs, regardless of whether or not the Medicaid plans were also entering into similar contracting arrangements. So Medicaid plans that did not contract to pay higher prices when drugs were used in certain higher value settings, and lower prices when they were prescribed for lower value indications, would nonetheless pay a price for all of their prescriptions that reflected the lowest price offered under a value-based arrangement. This new Medicaid price could, in turn, influence other price schedules.

Consider a drug maker that offered a 90 percent discount on a drug when it didn’t produce any of its expected benefit. Under current rules, that deeply discounted price would become the new Medicaid best price, but not necessarily the blended price that reflects the average price being paid under a contract where the price fluctuated based on how a drug was being prescribed. This could create a significant disincentive for manufacturers to offering indication and outcome-based prices. For these reasons, enabling drug makers to adjust prices based on these parameters will require changes to rules on how drug makers must track and report prices to the government under Medicaid and to the 340B drug program.

Similar challenges to value-based pricing are posed by Medicare’s calculation of average sales price (ASP) as part of its framework for reimbursing injectable drugs paid under Part B. The ASP is defined as a manufacturer’s sales of a drug to all U.S. purchasers in a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter (Note 2). The ASP is net of any price concessions, such as volume discounts, prompt pay discounts, cash discounts, free goods contingent on purchase requirements, chargebacks, and rebates other than those obtained through the Medicaid drug rebate program.

Manufacturers that offer discounts under commercial, value-based contracts would probably face reductions in their calculated ASP as a result of the concessions. In turn, they would see their reimbursement under Medicare Part B also decline, regardless of whether Medicare entered into the same outcome or indication-based contracts. Since the private market pegs its own pricing off of the ASP, a single value-based contract that served to lower the ASP could have the effect of reducing a drug maker’s reimbursement across every other contract. For drug manufacturers, this is another disincentive to entering into these arrangements.

Moreover, without significant regulatory changes, it is unlikely that Medicare would participate in a value-based system due to both legal and practical limitations. In the past, CMS has avoided these contracting arrangements when sponsors have approached the agency with such proposals. Even if CMS asserts the legal authority to enter into such arrangements, it is unclear whether the agency has the informational capacity to implement them. Managing a value-based system would require careful tracking of how and when drugs are prescribed, and collecting information to measure outcomes. Currently, CMS probably lacks the capacity to carry out this level of measurement and analysis. So for now, it will mostly be left to private payers to pursue value-based arrangements.

Reducing Regulatory Barriers

To reduce obstacles to value-based pricing, new regulations would need to be issued to clarify how drug makers, insurance plans, and health systems can rationalize value-based and indication-based contracts with their price reporting calculations. Medicare probably has the requisite authority to do so under constructs created by the Affordable Care Act. Additionally, Congress could provide clear authority and direction through legislation addressing these policy opportunities.

The Medicare and Medicaid programs could exempt value-based contracts that meet certain criteria from the requirement that the resulting prices, and the discounts, be used toward calculating Medicaid best price. CMS recently signaled that it had the existing authority to address some of these issues through a pilot program designed under the Center for Medicare and Medicaid Innovation (CMMI). Such a program could enable commercial health plans to adapt their reporting obligations to test how value-based and indication-based contracts would impact overall spending and outcomes. While the proposed regulation lays out Medicare’s general intent to pursue these strategies, it does not outline the parameters needed in order to go forward.

Some of the regulatory discretion that is required to change drug-pricing systems may be outside of the Medicare agency’s direct control. For example, the Office of the Inspector General (OIG) would have to change its interpretation of anti-kickback rules to enable drug makers to provide discounts based on the clinical indications for which drugs are prescribed, as well as the outcomes they deliver. Otherwise, under the OIG’s existing interpretation of its authority, these arrangements could be perceived as inducements to prescribing.

Fostering outcomes-based and indication-based pricing will also require FDA to adapt some of its existing rules and practices. Currently, drug makers are largely prevented from offering price concessions based on how a drug is used unless all of the prescribing options are listed precisely and completely on the drug’s label. When a drug maker secures approval for a new medicine, what appears on its drug label forms the basis for any outcomes-based contracts with health plans or Pharmacy Benefit Managers (PBMs), even if it would make more sense to contract for drugs based on measuring outcomes for which the drug is not explicitly approved. So far, FDA’s sometimes-purposeful ambiguity over the scope of its authority in these areas of commercial speech creates enough legal risk to discourage these sorts of business interactions.

In order to enable these arrangements, FDA would have to concede that commercial, contract-related communications constitute protected speech under the First Amendment and thus are not subject to the agency’s active regulation. At the least, FDA could stipulate that it does not forfeit its authority to regulate these and similar forms of commercial communication, but as a matter of policy will exercise enforcement discretion when it comes to value-based contracts and their negotiation. Better still, Congress can more firmly establish the same safe harbors in legislation, rather than leaving it up to FDA to stipulate these important legal principles in non-binding guidance or regulation.

Another impediment to contracting based on outcomes measurement is uncertainty over the FDA’s regulation of pre-approval communication. FDA prohibits pre-approval communication, but has not specified whether these restrictions extend to discussions between drug makers and drug purchasers that are conducted as part of contracting discussions prior to a drug’s launch. Pre-market commercial discussions are an important part of the ability to negotiate these complex, value-based contracts, as the contracts would need to be put into place at the time of approval. Because targeted pre-approval conversations between manufacturers and health plans are not inherently promotional, FDA as a matter of policy should not seek to regulate them.

Absent these collective regulatory impediments, drug makers and those who pay for medicines could have more ability and incentive to engage in price negotiations based on the indication for which a medicine is being prescribed by providers and the variable outcomes that it delivers to patients. In the absence of reforms to make drug pricing more competitive, the political alternative may well be regulated pricing. This approach would end up skewing investment because it would inevitably allocate capital based on political priorities rather than scientific priorities and clinical goals.

The discussion over drug prices is driven by a fair degree of politics, but the debate arose because of secular changes in the political economy of health care, and increasing costs to consumers. These challenges need to be addressed with constructive measures that foster access to and competitive pricing of medicines, while preserving market-based rewards for innovation, and the efficient allocation of capital to these efforts.

Note 1: Exceptions to the best price include prices that are charged to certain federal purchasers (sales made through federal supply schedule, single award contract prices of any federal agency, federal depot prices, and prices charged to the Department of Defense, Department of Veterans Affairs, Indian Health Service, and the Public Health Service), eligible state pharmaceutical assistance programs, and state-run nursing homes.

Note 2: Section 1847A(c) of the Social Security Act (the Act), as added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), P.L. No. 108-173, defines an ASP as a manufacturer’s sales of a drug to all purchasers in the United States in a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter.

Editor's Note: Both authors consult with and invest in life science and healthcare services companies.

Editor's note: This piece originally appeared in Health Affairs Blog.

This week, the richest business leaders and investors from around the world will gather in Davos, Switzerland, for the annual meeting of the World Economic Forum. In keeping with tradition, a small portion of the agenda will be devoted to global development and the plight of people living at the other end of the global income distribution.

Philanthropy is one way of linking the fortunes of these disparate communities. What if some of the mega-rich could be persuaded to redistribute their wealth to the extreme poor?

This question may feel hackneyed, but it deserves a fresh hearing in light of a dramatic reduction in the global poverty gap over the past several years (Figure 1). The theoretical cost of transfers required to lift all poor people’s income up to the global poverty line of $1.90 a day stood at approximately $80 billion [1] in 2015, down from over $300 billion in 1980. (Values expressed here are in 2015 market dollars.)

Source: Authors’ calculations based on OECD, World Bank

This reduction can be unpacked into two parts. The first is a steep decline in the number of people living below the global poverty line. This is increasingly recognized as one of the defining features of the era. A U.N. goal to halve the poverty rate in the developing world between 1990 and 2015 was nearly achieved twice over. The second and lesser-known factor is the shrinking average distance of the world’s poor from the poverty line. In 1980, the mean daily income of those living below $1.90 was $1.09. In 2012 it was 25 cents higher at $1.34. (Values expressed here in 2011 purchasing power parity dollars.)   

Despite this good news, global poverty still demands attention. Hundreds of millions of people continue to suffer this most acute form of deprivation. In several countries, the prospects for ending poverty over the next generation, in line with a recently endorsed successor U.N. goal, appear challenging at best.

Figure 1 illustrates that in 2006, global aid flows exceeded the cost of the global poverty gap for the first time. This suggests that the elimination of extreme poverty should be possible simply through a more efficient allocation of aid. However, this confuses foreign aid’s goals and functions. The bulk of official foreign aid is used in the provision of public goods, such as physical infrastructure and strengthening institutions. Only 2 percent is directed to social payments and their administration. If the elimination of extreme poverty is to be achieved through targeted transfers, it depends on sources other than foreign aid.

The main source of transfers to the poor is welfare programs run and financed by developing countries themselves. These social safety nets have emerged as an increasingly prominent instrument in the toolkit of developing economy governments. Eighty-three percent of developing economies employ unconditional cash transfer programs, although many are small in scale. Several countries are in the process of building the apparatus for more accurate targeting and authentication through the assembly of beneficiary registries and the rolling out of identity programs. In at least 10 developing countries, social safety nets have succeeded in establishing a social floor by lifting all those people under the poverty line up above the threshold. In the vast majority, however, safety nets are insufficiently targeted or generous for that purpose, reflecting not only resource constraints, but also political choices that can be resistant to change.

A complementary approach is to consider the role of private mechanisms and wealth. NGOs were among the original pioneers of cash transfers in the developing world. More recently, the NGO GiveDirectly has designed a compelling new method of charitable giving that sends money directly to the poor using digital monitoring and payment technology. Its approach has received strong endorsements from independent charity assessors and has been validated by impact evaluations. Yet the scale of its existing donations remains tiny relative to the global poverty gap.

This is where Davos’s global elite could come into play: What difference could a philanthropic donation from the world’s richest people make?

To explore this question, we begin by identifying those developing countries that are home to a least one billionaire. (Our analysis is restricted to billionaires by data, not by the potential largesse of the world’s multi-millionaires. We focus our attention on billionaires in the developing world given the traditional focus of philanthropy on domestic causes.) Let’s assume that the richest billionaire in each country agrees to give away half of his or her current wealth among his or her fellow citizens, disbursed evenly over the next 15 years, roughly in accordance with the Giving Pledge promoted by Bill Gates. That money would be used exclusively to finance transfers to poor people based on their current distance from the poverty line. Transfers would be sustained at the same level for the full 15-year period with the aim of providing a modicum of income security that might allow beneficiaries to sustainably escape from poverty by 2030.

Table 1 summarizes the key results. In each of three countries—Colombia, Georgia, and Swaziland—a single individual's act of philanthropy could be sufficient to end extreme poverty with immediate effect. Swaziland is an especially striking case as it is among the world’s poorest countries with 41 percent of its population living under the poverty line. In Brazil, Peru, and the Philippines, poverty could be more than halved, or eliminated altogether if the billionaires could be convinced to match Mark Zuckerberg’s example and increase their donation to 99 percent of their wealth.

Source: Authors’ calculations based on Forbes, International Monetary Fund, PovcalNet, and the World Bank. Poverty rates post-transfer calculated based on average distance of the poor from the poverty line.  

In other countries—Nigeria, Tanzania, Uganda, and Angola—the potential impact on poverty is only modest. A number of factors account for differences between countries, but two factors that penalize African countries are especially noteworthy. First, the depth of poverty in Africa remains high, with 15 percent of the population living on less than $1.00 a day; and second, Africa has relatively high prices compared to other poor regions, which means more dollars are required to deliver the same amount of welfare.  

For those nations that have more than one billionaire, an alternative scenario is that the country’s club of billionaires makes the pledge together and combines resources to tackle domestic poverty. This would end poverty in China, India, and Indonesia—countries that rank first, second, and fifth globally in terms of the absolute size of their poor populations. The last two columns of Table 2 describe the results.

Table 2. The potential impact on poverty of collective billionaire giving pledges

Source: Authors’ calculations based on Forbes, IMF, PovcalNet, and the World Bank. Poverty rates post-transfer calculated based on average distance of the poor from the poverty line.

This exercise is of course laden with simplifying assumptions. [2] It is intended to provoke discussion, not to provide definitive figures. Moreover, it is open to debate whether transfers represent the most cost-effective way of sustainably ending poverty, the extent to which transfers ought to be targeted, the efficacy of building private transfer programs alongside public safety nets, and whether cash transfers represent the most appropriate use of billionaires’ philanthropy.  

What is less contestable is that a falling global poverty gap presents an opportunity for more systematic efforts for poverty reduction. This raises the question: How low does the poverty gap have to fall before we explicitly design programs to bring the remaining poor above the poverty line? We would argue that we are already beyond this point, not least in countries that remain a long way from ending poverty. Were a billionaire at Davos to commit to using his or her wealth in this fashion, it could trigger a powerful demonstration effect of innovative solutions—not just for other billionaires, but for countries that are currently at risk of being left behind.

[1] The cost of the global poverty gap in 2015 is an overestimate compared with the World Bank’s tentative poverty estimate for the same year. This is due to a different treatment of Nigeria. For this exercise, we rely on data from the 2009/10 Harmonized Nigeria Living Standards Survey reported in PovcalNet, despite its well-documented problems, whereas the Bank draws on the 2010/11 General Household Survey.

[2] Simplifying assumptions include: zero administrative costs in identifying the poor, assessing their income, and administering payments with no leakages, or no portion of those costs being borne by billionaires; the efficacy of administering miniscule transfers to those who stand on the margin of the poverty line; and no change in the cost of closing the poverty gap in a country over time, whether due to population growth, an increase or decrease in poverty, or a change in prices relative to the dollar.   

The Pakistani intelligence service is behind the recent attack on a major Indian air force base in Punjab using a terrorist group it created 15 years ago, according to well-informed press and other knowledgeable sources. The attack is designed to prevent any detente between India and Pakistan after Prime Minister Narendra Modi’s surprise Christmas Day visit to Pakistan.

The escalating violence between the two nuclear-weapons states, which have already fought four wars, threatens to get worse. The Pakistani intelligence service has the capability to launch more attacks with little notice, at some point prompting a vigorous Indian response.

On Dec. 31, a team of terrorists infiltrated across the Pakistani border into India. On Saturday they assaulted the Pathankot air base, one of India’s largest air force installations near the border. At least seven Indian soldiers were killed in the fighting, which lasted for days. On Sunday, the Indian Consulate in Mazar-e Sharif in northern Afghanistan was also attacked by gunmen.

Both attacks are the work of the Pakistani terror group Jaish e Muhammad, according to reliable press reports. JEM was created in 2000 by Mualana Masoud Azhar, a longtime Pakistani terrorist leader. Azhar was captured in India in 1994 after taking western hostages in Kashmir. In December 1999 a group of terrorists hijacked an Air India jet flying from Nepal to India and diverted it to Afghanistan. They demanded the release of Azhar and his colleagues in return for the passengers and crew.

And they got it, thanks to help from the Pakistani intelligence service ISI and al Qaeda leader Osama bin Laden, according to accounts of the hijacking based on the Indian officials who negotiated with the terrorists for the hostages’ freedom.

The Afghan Taliban assisted the hijackers once they got to Afghanistan. Once Azhar was traded for the hostages, the ISI took him on a public victory tour through Pakistan to raise money for the jihad against India, and he announced the formation of Jaish e Muhammad, or the Army of Muhammad, in early 2000. JEM received training and weapons from the ISI and worked closely with al Qaeda.

In December 2001, JEM terrorists working with terrorists from another ISI-backed group, Lashkar e Tayyiba (LET), attacked the Indian parliament building in New Delhi. That attack prompted India to mobilize its military, and a tense standoff went on for nine months. Only intense mediation by President Bush’s national security team averted war.

Azhar kept a low profile for several years after LET’s 2008 attack on Mumbai, but he reappeared publicly in 2014, giving fiery calls for more attacks on India and the United States. His group is technically illegal in Pakistan but enjoys the continuing patronage of the ISI.

The ISI is under the generals’ command and is composed of army officers, so the spies are controlled by the Pakistani army, which justifies its large budget and nuclear weapons program by citing the Indian menace. Any diminution in tensions with India might risk the army’s lock on its control of Pakistan’s national security policy. The army continues to distinguish between “good” terrorists like JEM and LET and “bad” terrorists like the Pakistani Taliban, despite decades of lectures from American leaders.

The army has long distrusted Prime Minister Nawaz Sharif, who has advocated a detente with India since the 1990s. An army coup in 1999 sent him into exile in Saudi Arabia for a decade. His warm embrace of Modi on Christmas Day in his home in Lahore undoubtedly angered the generals.

Modi’s visit was the first by an Indian prime minister in more than a decade. It was also Sharif’s birthday and the birthday of Pakistan’s founder, Muhammad Jinnah. Modi’s decision to visit and the warm family greeting Sharif extended set the stage for a planned resumption of formal diplomatic negotiations between the two countries scheduled for later this month.

So far New Delhi has not canceled the planned talks. Modi’s advisers are well aware of the double game the Pakistani army plays and the differences inside the Pakistani establishment. After four wars with Pakistan and a nuclear arms race, Indian experts understand the complexity of the dynamics inside Islamabad. The Indians have accepted Prime Minister Sharif’s public condemnation of the attack and promised to provide evidence of JEM’s role to his government, including cellphones captured in the attack.

Washington put JEM on the terrorist sanctions list years ago—but it continues to coddle the Pakistani army. Gen. Raheel Sharif, the army’s boss (and no relation to the prime minister) got a warm embrace from the Pentagon last fall—despite the ISI’s support for the Afghan Taliban’s offensive against the Kabul government and despite the Pakistani military’s backing of terror groups like JEM.

This piece was originally published by The Daily Beast.

This weekend the United States will assume the chairmanship of the Arctic Council for a two-year term. While the Obama administration has been preparing for this for several years, it remains to be seen how the president will balance the concerns of most Arctic residents who view development of the region as vital to improving their economic and social livelihood and those individuals inside and outside the administration who want to limit development out of concern for the how economic development may cause local environmental degradation while also accelerating climate change.

As part of this preparation, in May 2013, the president launched a new National Strategy for the Arctic Region based on three principles

1. Advancement of U.S. security interests defined as ensuring the ability of our aircraft and vessels to operate, in a manner consistent with international law through, under, and over the airspace and waters of the Arctic; to support lawful commerce; to achieve greater awareness of activities in the region; and to intelligently evolve our Arctic infrastructure and capabilities including ice-capable platforms as needed;
2. Pursue responsible Arctic regional stewardship defined as protection of the Arctic environment and conservation of its resources, establishment of an integrated Arctic management framework, charting of the Arctic region, and employment of scientific research and traditional knowledge to increase understanding of the Arctic;
3. Strengthen international cooperation defined as working through bilateral relationships and multilateral institutions, including the Arctic Council, to advance collective interests, promote shared Arctic state prosperity, protect the Arctic environment, and enhance regional security, and to work toward U.S. accession to the United Nations Convention on the Law of the Sea.

Undergirding these principles were commitments to make decisions using the best available information, to foster cooperation with the state of Alaska, other international partners, the private sector, and to consult and coordinate with Alaskan natives to gain traditional knowledge. As part of this new strategy, the president appointed Admiral Robert J. Papp Jr. as the U.S. special representative for the Arctic in July 2014. Shortly after his appointment, and in several major speeches since, including one at Brookings, the admiral has stated that the administration’s agenda centers on stewardship of the Arctic Ocean including insuring its safety and security, improving economic and living conditions for the regions’ inhabitants, and addressing the impacts of climate change on the region. 

The administration’s new policy was buttressed in January 2015 by an executive order designed to enhance coordination of all the various agencies responsible for different aspects of federal oversight of the Arctic (Alaska). Paradoxically, however, the fact that the reorganization came nearly in tandem with the announcement of new wilderness restrictions on the exploration of oil and gas in the Arctic National Wildlife Refuge (ANWR) and the Arctic Coastal Plain. This announcement left many Alaskans skeptical on how further restrictions on development of the state’s resources could be viewed as improving economic and living conditions of people in the region. In a February 2015 meeting of Arctic Council Senior Arctic Officials (SAOs) in Yellowknife, Canada, the administration looked to put meat on the bones of what it intended to pursue upon assumption of the chairmanship of the Arctic Council. This resulted in an additional elucidation of 15 broad themes that had originally been presented in a Virtual Stakeholder Outreach Forum on December 2, 2014 in Washington, D.C..

The announced reorganization of government agencies and lines of authority dealing with U.S. Arctic and Arctic Council policy has done little or nothing to streamline the overlapping and sometimes conflicting policies governing natural resource development or energy projects in Alaska. These overlapping jurisdictions are well highlighted in a major new National Petroleum Council (NPC) report, Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources. This report was prepared at the request of Energy Secretary Moniz to address how best to pursue prudent development of Alaska’s offshore oil and gas resources and ironically issued shortly after the president’s closing of ANWR. Whether or not the White House was even aware of the NPC’s report, which represented months of substantive work by many people, remains open to question.

The Arctic reorganization plan did little to resolve some key questions as to actually who is in charge of Arctic policy in the United States. While Admiral Papp was named “Coordinator” of the U.S. Arctic Council Chairmanship, this position is not listed in the Council’s enabling documents. Historically, the foreign minister or the secretary of state of the country chairs the Council while a career diplomat chairs the meetings of the senior officials dealing with the day-to-day activities of the Council. It appears that Admiral Papp has neither of these positions. In any case, it looks from the organizational chart that the White House science advisor will be the real coordinator of U.S. Arctic policy.

The chief problem that U.S. Arctic policy must resolve is that while in the Arctic Council we have to address issues affecting the entire Circumpolar North, our domestic Arctic policy centers only on Alaska, where a slew of domestic agencies have overlapping and often conflicting oversight and regulatory responsibilities. The situation is made still more complex by the large amount of the state that is owned by the federal government. This makes it almost inevitable that any resource development project by private or state interests will run into federal government restrictions, in terms of needing to cross federal land to get a resource to market, permitting to ensure that water resources are not polluted, or making sure that fish and wildlife habitats are not disturbed, etc.

Our Arctic policy also suffers from an acute lack of awareness by most Americans that we are an Arctic nation with a huge maritime boundary and very limited resources (ice-worthy ships, proper navigation charts and aids, lack of port facilities, lack of search and rescue capabilities, lack of knowledge of what fishery resources we possess) to protect it. While many of these issues lie outside the scope of the Arctic Council, many are cross-cutting with our Arctic neighbors, most notably with increased traffic in the region (from tourism, fishing, energy development, and shipping) comes the increased possibility of an accident. Currently, the United States does not have the capable means (both in terms of timely response and adequate infrastructure) to respond to an accident in the Arctic, which could be catastrophic, as all of these industries are active and gaining popularity every day.

As the United States takes the helm of the Arctic Council, there are several core issues that the administration must address. Some critical questions are: What is the U.S. position on the development of the Arctic’s oil, gas, mineral, and fishery resources? What specific action is the United States prepared to support in the Arctic Council to uplift the standard of living of Arctic people across the Circumpolar North? Given that each icebreaker costs at least $700 million and that we only have one in operation, what resources are we prepared to expand to build a fleet capable to respond to events in the Arctic? Should any of these expenses be viewed as vital to our national security and defense, and if so, which budget should they be taken out of? What role does the United States in its chairmanship role see for closer interaction between the Arctic Council and the Arctic Economic Council? Would the United States support the closing off of certain ecologically sensitive parts of the Arctic to all commercial exploitation? Finally, how does the administration in its Arctic Council leadership role get its Arctic policy in sync with that of the state of Alaska in its recently released Alaska Arctic Policy Implementation Plan?

Other Arctic nations surpass the United States in terms of Arctic policies. Norway, Russia, Canada, and even Denmark (through complicated ties with Greenland’s claim on the Arctic) all have the Arctic at the front and center of policymaking decisions. I hope to see these issues addressed as the United States moves to enact effective policy on the Arctic over the next two years as the alternative is too great a risk and too great a wasted opportunity. 

Event Information

On April 24, 2015, the United States assumed chairmanship of the Arctic Council for a two-year term. Over the course of the last year, the United States has outlined plans within three central priorities: improving economic and living conditions for Arctic communities; Arctic Ocean safety, security, and stewardship; and addressing the impacts of climate change. Working with partners on the Council, U.S. leaders have moved forward policies ranging from joint efforts to curb black carbon emissions to guidelines for unmanned aerial systems conducting scientific research. With half of its short chairmanship behind it, what has the United States accomplished over the last 12 months? What work remains to be done?

On April 25, the Energy Security and Climate Initiative (ESCI) at Brookings hosted U.S. Special Representative for the Arctic Admiral Robert J. Papp, Jr. for a keynote address on the state and future of U.S. leadership in the Arctic. ESCI Senior Fellow Charles Ebinger moderated the discussion and audience Q&A.

Join the conversation on Twitter using #USArctic

Video

• The halfway point of the U.S. Arctic Council chairmanship: Where do we go from here?

Audio

• The halfway point of the U.S. Arctic Council chairmanship: Where do we go from here?

Key messages and Policy Pointers

• Given the stalemate in U.N. climate negotiations, the best arena to strike a workable deal is among the members the Major Economies Forum on Energy and Climate (MEF).

• The 13 MEF members—including the EU-27 (but not double-counting the four EU countries that are also individual members of the MEF)—account for 81.3 percent of all global emissions.

• This proposal devises a fair compromise to break the impasse to develop a science-based approach for fairly sharing the carbon budget in order to have a 75 percent chance of avoiding dangerous climate change.

• To increase the likelihood of a future climate agreement, carbon accounting must shift from pro­duction-based inventories to consumption-based ones.

• The shares of a carbon budget to stay below 2 °C through 2050 are calculated by cumulative emis­sions since 1990, i.e. according to a short-horizon polluter pays principle, and national capability (income), and allocated to MEF members through emission rights. This proposed fair compromise addresses key concerns of major emitters.

• According to this accounting, no countries have negative carbon budgets, there is substantial time for greening major developing economies, and some developed countries need to institute very rapid reductions in emissions.

• To provide a ‘green ladder’ to developing countries and to ensure a fair global deal, it will be crucial to agree how to extend sufficient and predictable financial support and the rapid transfer of technology.

The most urgent and complicated ethical issue in addressing climate change is how human society will share the work of reducing greenhouse gases (GHG) emissions. Looking ahead to 2015 when a new international treaty on climate change should be agreed upon, we fear we are headed towards a train wreck.

Key developed countries have made it clear they will not accept any regime excluding emerging economies such as China and Brazil, and the U.S. and other ‘umbrella’ countries are calling for only voluntary, bottom-up com­mitments. Yet the major developing countries have made equity the sine qua non for any kind of agreement: they will not take on mandatory emission reduction targets with perceived implications for their economic growth and social development, unless the wealthier countries commit to deep emissions cuts and act first.

These entrenched positions between the different blocs have led to the current impasse, but as Nobel laureate economist and philosopher, Amaryta Sen pointed out, the perfect agreement that never happens is more unjust than an imperfect one that is obtainable.

What is a fair and feasible way to break the impasse, given that all efforts are faltering? The most difficult task is determining a country’s fair share of the required emissions reductions in a way that is politically feasible. After 20 years of negotiations and gridlock, it is clear that many conflicting principles of equity are brought to the table, so a solution will have to be based on some kind of ‘negotiated justice,’ or a ‘fair compromise,’ which will not be one preferred by just one group of countries.

A few basic requirements must be met. A feasible, fair and effective climate agreement must involve the largest emitters from both the developed and developing countries. Such an agreement must find a way to engage the latter without penalizing them or the former countries too much. In order to secure progress, above all it must be acceptable to the two world superpowers and top carbon emitters, China and the U.S.; with this leadership, in fact, other emitters will likely follow. This agreement could be forged in a ‘plurilateral’ setting where a limited number of countries come together first, and then be brought into the formal U.N. negotiations as the basis for a future deal, perhaps by 2015.

How can future negotiations on emissions reductions overcome such political inertia? We suggest that taking three manageable steps to a fair compromise will unlock progress.

First, negotiate a core agreement between the 13 members in the MEF (including the EU-27), which accounts for 81.3 percent of all global emissions. This makes the negotiations feasible, where deals can be struck that would be impossible in the vast U.N. forum.

Second, use consumption-based emissions accounting, which is much fairer than the cur­rent production/territorial-based accounting that all past agreements and negotiations have been based upon. These are relatively new numbers developed by the Norwegian research center CICERO, and have been vetted by the top scientific journals and increasingly utilized by policymakers.

Third, forge a fair compromise to allocate emissions rights. We propose a compromise based on a short-horizon ‘polluter pays principle’ and an indicator of national capability (income).

This third step in particular is a genuine compromise for both developed and developing countries, but it is re­quired to break the current gridlock. Each MEF member gives and takes something from this simple, workable framework and all gain a liveable planet in the future.

Throughout the paper we first explain why counting carbon emissions by consumption is far better and the im­plications of doing so, and we then introduce the MEF and why it is a promising arena for forging a bold compro­mise like the one so badly needed before 2015. We then calculate what the numbers actually mean for that group of countries and develop a proposal for a fair compromise that embodies a feasible but fair operationalization of the central equity principles of the U.N. climate treaty, i.e. action by countries according to their responsibility and capability. We conclude with a discussion of how a start in the MEF could lead to a new framework being brought into those broader negotiations.

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The biggest news at the end of the Brisbane G-20 on Sunday will be to confirm for the first time in an official G-20 communique that China will indeed chair the G-20 Summit in 2016. 

Coming on the heals of a momentous week of great power realignments and breakthroughs at the APEC Summit in Beijing and other one-on-one meetings of heads of state, the timing of China’s presidency of the G-20 Summit in 2016 could not be a better follow-up to this week’s accomplishments. It puts China in play as a global leader at a critical moment in geopolitical relations and in terms of several global agendas that will culminate in the next two years. It also provides an unusual opportunity for the U.S. and China to collaborate on a broader set of societal issues affecting everyone everywhere building on their agreements this week.

One of the reasons why the G-20 Summits have yet to realize their full potential is that the leaders-level summits have been captured by the finance ministers’ agendas and discourse. Leaders at G-20 Summits have individually and collectively failed to connect with their publics; ordinary citizens do not see their urgent issues being dealt with. Exchange rates, current account balances, reserve ratios for banks, and the role of the IMF do not resonate with public anxieties over their lives and livelihoods.

Three streams of global issues will culminate in 2015:  the forging of a “post-2015 agenda” on sustainable development with a new set of global goals to succeed the Millennium Development Goals (MDGs); the agreement on  “financing for development” (FFD) arrangements and mechanisms to support the new post-2015 Sustainable Development Goals (SDGs) to be realized in 2030; and the achievement of a United Nations Framework Convention on Climate Change (UNFCCC) by the end of 2015, which looks more promising now than it did a week ago.

What has been learned from previous global goal setting processes is that building on the momentum for the goal-setting process in 2015 and carrying it directly into the mobilization of national political commitment, resources and policies for implementation is vital. China as a member of the G-20 troika in 2015 through 2017 will be in crucial position of bridging the goal-setting and implementation phases of the new SDGs for 2030 to be adopted at the United Nations in September of next year.

China, as one of the five permanent members of the U.N. Security Council, will be in a pivotal position to create complementarities between the G-20 forum for the major economies and the U.N. as a forum for all countries for this critical period of setting the global sustainability agenda for the next fifteen years.  

The post-2015 agenda for social, economic and environmental sustainability is of high interest to the United States, and the new China-U.S. climate change agreement in Beijing this week augurs well for collaboration between the two countries on the broader agenda. White House Chief of Staff John Podesta was on the high-level panel for the post-2015 development agenda last year, which signals high U.S. policy involvement. The Shanghai Institute for International Studies has argued in a recent paper for the U.N. Development Program that “the G-20 and the U.N. could have certain complementary roles. The development issue could become the one linking the major work of both the U.N. and the G-20.”  

The world should welcome the unique role that China can now play in bringing the international community and the global system of international institutions together in charting a common path forward building on the progress made in the various summits this week. 

Event Information

In an era of fluid geopolitics and geoeconomics, challenges to the global order abound: from ever-changing terrorism, to massive refugee flows, a stubbornly sluggish world economy, and the specter of global pandemics. Against this backdrop, the question of whether leader summitry—either the G-7 or G-20 incarnations—can supply needed international governance is all the more relevant. This question is particularly significant for East Asia this year as Japan and China, two economic giants that are sometimes perceived as political rivals, respectively host the G-7 and G-20 summits. 

On April 18, the Center for East Asia Policy Studies and the Project on International Order and Strategy co-hosted a discussion on the continued relevancy and efficacy of the leader summit framework, Japan’s and China’s priorities as summit hosts, and whether these East Asian neighbors will hold parallel but completely separate summits or utilize these summits as an opportunity to cooperate on issues of mutual, and global, interest.

Join the conversation on Twitter using #G7G20Asia

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• Japan’s G-7 and China’s G-20 chairmanships: Bridges or stovepipes in leader summitry?

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• 20160418_g7g20_transcript

The news that Charles and David Koch and their network of conservative activists plan to spend $889 million on the 2016 elections has sent shockwaves throughout the political landscape. Publicized this week at a California gathering hosted by the business group Freedom Partners, this declaration of financial war raises the question of whether billionaires and their allies can buy elections.

As I note in my Brookings Institution Press book Billionaires: Reflections on the Upper Crust, the answer in 2012 clearly was no. A few billionaires devoted several hundred million dollars seeking to defeat President Barack Obama yet lost. Republicans nominated a candidate who was easy to caricature as an out-of-touch plutocrat who did not share the values of ordinary Americans. The President was successful in using that stereotype to mobilize voters, expand the electorate, and appeal to basic fairness on the part of the general public.

Yet 2014 was a different story. Conservative billionaires were far more successful in helping Republicans regain control of the Senate, boost their House numbers, and increase their domination over governorships and state legislatures.  The country now has GOP control of the House and Senate, and 31 governorships across the country.

In analyzing why they lost the 2012 presidential campaign, conservative billionaires decided they needed to recalibrate their message and strategy for the midterms. For example, Americans for Prosperity (AFP) focused on ads that employed moving personal stories to deliver policy messages and a robust field operation. Central to their approach was the idea that Obamacare was a failure and hurting ordinary people.

Explaining this communications shift, AFP President Tim Phillips told a reporter that “too often, we did kind of broader statistical ads or messages, and we decided that we needed to start telling the story of how the liberals’ policies, whether it’s the administration or Congress, are practically impacting the lives of Americans every day.” Media expert Elizabeth Wilner of Kantar Media/CMAG correctly anticipated that those kinds of ads would have a greater likelihood of electoral success. “Ads that tell stories are more compelling than ads that don’t,” she said. “And ads that use sympathetic figures are more compelling, generally, than those that don’t.”

In looking ahead to 2016, there are ominous signs that big money may distort the election outcome. Wealthy interests were far more likely in 2012 to contribute to Republicans than Democrats. Even if Democrats mobilize liberal billionaires, the GOP nominee is going to have a substantial fundraising advantage.

Money alone, of course, does not dictate elections. Research shows clearly that public opinion, media coverage, campaign strategies, policy positions, and the nature of the times matter as well. However, during a time of rising campaign costs and limited public engagement in the political process, big money sets the agenda, affects how the campaign develops, and shapes how particular people and policy problems get defined. It takes skilled candidates, favorable media coverage, and strong organizational efforts to offset the power of great wealth.

There are no guarantees that the future Democratic nominee will replicate Obama’s 2012 success. If Republicans nominate someone who relates well to ordinary voters and they tone down policies that disproportionately benefit the wealthy, the money story in 2016 likely will turn out very different from the last time. Billionaire activism very well could tilt a close election in favor of conservative interests.

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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Thanks in large part to his decision to participate in the war in Iraq, former British Prime Minister Tony Blair is a controversial figure in Europe. Yet, Blair’s legacy as a center-left reformer is alive and well in two of Europe’s ruling center-left forces, France’s Socialist Party (PS) and Italy’s Democratic Party (PD).

Both Italy’s Prime Minister Matteo Renzi from the PD and French Prime Minister Manuel Valls of the PS bear strong similarities to the former leader of Britain’s “New” Labour Party. As Blair was when he took office, they are young–Valls is 52 and Renzi is just 39; they are centrists; and they have excellent communication skills that allow them to present themselves as harbingers of change.

Taking a Page Out of Prime Minister Blair’s Book

Renzi and Valls will have to take three pages out of Blair’s book if they want to replicate his electoral achievements: 

1. They must wrest control of their parties from the old guard; 
2. They must take control of the political agenda by giving it a centrist thrust (along the lines of Blair’s ‘Third Way’ between conservatism and social democracy); 
3. They must take control of the political center, even at the cost of shedding votes on the left.  

Renzi is far ahead of Valls in all three respects. He has taken over the PD (via an open primary election which he won resoundingly) after a bitter fight against the party’s old guard. Since taking office in early 2014, he has shown a remarkable ability to dictate the terms of the political debate. While he became prime minister via an inner party coup rather than a general election, he sailed triumphantly through his first electoral test: the European Parliament elections of May 2014. The PD won a larger share of the votes than any other Italian party since the 1950s (41 percent), tapping into constituencies such as entrepreneurs and businessmen who all have a long tradition of contempt for the left.

However, none of Renzi’s achievements rest on firm ground. The main reason is Italy’s appalling financial predicament. The economy has performed abysmally since the 2008 to 2009 recession. Unemployment is over 12 percent, the labor market is overly protective of certain categories and overly unfair to others (particularly the young), the public sector is costly and ineffective and the judicial system byzantine and not entirely reliable. Renzi continues to face harsh criticisms from within his party as his reform agenda flies in the face of traditionally left-leaning constituencies (a few weeks ago the main leftist trade union managed to get about a million people to the streets in protest against a labor market reform bill). Finally, Renzi’s room for maneuver is severely constrained by the tight fiscal rules imposed by the European Union (EU).

For Valls, the path to leadership is a more complicated matter. This is largely due to France’s constitutional set-up, in which the prime minister runs domestic policies but is second in authority to the president. This involves for Valls a variation from Blair’s three-step process—as prime minister, his most urgent priority is not leading the PS but pushing forward a political agenda capable of winning over the political center. He was appointed to the premiership by the current president, the socialist François Hollande, because his previous stint as a tough-talking interior minister and his profile as a business-friendly politician and skillful local manager made him fairly popular with the public. Hollande’s decision was a desperate attempt to revive his own popularity, which has plummeted to unprecedented lows only half-way into his 5-year term, by imparting a new, essentially more pro-market direction to his presidency. Since he stepped in, Valls has tried to change the political agenda by advocating reduced labor costs and lower taxes on businesses.

Like Renzi, Valls is confronted with both internal and external challenges. The first is of course that, although in charge of domestic policies, he is still second-in-command to a highly unpopular president. Because he does not control the PS, Valls faces stiffer opposition to his centrist agenda from within the party than does his Italian counterpart. His calls for a ‘common house’ for reform-oriented leftists and rightists have, unsurprisingly, met with acerbic criticism in the PS. France is in a better economic state than Italy and the government machine is as efficient as ever; yet the French have shown an idiosyncratic resistance to reform which Valls might lack the political authority to overcome. And Valls, just like Renzi, must also make decisions that both help France and comply with EU fiscal rules.

What to Make of Continental Europe’s New Blairs?

In spite of the huge challenges Renzi faces both at home and in the EU, he seems to be the better positioned. Realistically, the chances that he will successfully revive Italy’s economy are slim. Yet Italians do not dream of an era of prosperity, but one of action. Provided Renzi can show that he has begun to tackle the many roadblocks on the path towards growth, Italians are likely to see him as a safer bet than the opposition, which consists of Silvio Berlusconi’s much weakened center-right party and the comedian-turned-politician Beppe Grillo’s anti-establishment 5 Star Movement.

Valls has a harder road ahead. His approval ratings now hover at just around 36 percent (though no other center-left French politician fares much better). He certainly has a popularity problem in his own party during the last presidential campaign, he won only 5.5 percent of the votes in a PS primary contest. Yet Valls also stood out as a credible politician and is now in a position to attract more support. He encapsulates the second half of Hollande’s presidential term, which has made a decision to openly target centrist voters. If Valls manages to regain, at least in part, the favor of the public, the PS might in the end see him as a more appealing presidential candidate in 2017 than Hollande, whose credibility is in poor shape.

Appearing to the public the safer bet is the mark of shrewd politicians. But strong leadership requires one step further. Blair mapped out a course towards prosperity in the much more competitive world of globalization; this, the Iraq war notwithstanding, secured him three electoral victories in a row. For Renzi and Valls, the time to do something alike cannot come soon enough.

Good afternoon Chair Ayotte, Ranking Member Cantwell, and Members of the Subcommittee. Thank you very much for the opportunity to testify today on the important topic of domestic unmanned aircraft systems (UAS).

I am a nonresident senior fellow in Governance Studies and the Center for Technology Innovation at the Brookings Institution. I am also a National Fellow at the Hoover Institution at Stanford, and a professor at UCLA, where I hold appointments in the Electrical Engineering Department and the Department of Public Policy. The views I am expressing here are my own, and do not necessarily represent those of the Brookings Institution, Stanford University or the University of California.

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The biggest news at the end of the Brisbane G-20 on Sunday will be to confirm for the first time in an official G-20 communique that China will indeed chair the G-20 Summit in 2016. 

Coming on the heals of a momentous week of great power realignments and breakthroughs at the APEC Summit in Beijing and other one-on-one meetings of heads of state, the timing of China’s presidency of the G-20 Summit in 2016 could not be a better follow-up to this week’s accomplishments. It puts China in play as a global leader at a critical moment in geopolitical relations and in terms of several global agendas that will culminate in the next two years. It also provides an unusual opportunity for the U.S. and China to collaborate on a broader set of societal issues affecting everyone everywhere building on their agreements this week.

One of the reasons why the G-20 Summits have yet to realize their full potential is that the leaders-level summits have been captured by the finance ministers’ agendas and discourse. Leaders at G-20 Summits have individually and collectively failed to connect with their publics; ordinary citizens do not see their urgent issues being dealt with. Exchange rates, current account balances, reserve ratios for banks, and the role of the IMF do not resonate with public anxieties over their lives and livelihoods.

Three streams of global issues will culminate in 2015:  the forging of a “post-2015 agenda” on sustainable development with a new set of global goals to succeed the Millennium Development Goals (MDGs); the agreement on  “financing for development” (FFD) arrangements and mechanisms to support the new post-2015 Sustainable Development Goals (SDGs) to be realized in 2030; and the achievement of a United Nations Framework Convention on Climate Change (UNFCCC) by the end of 2015, which looks more promising now than it did a week ago.

What has been learned from previous global goal setting processes is that building on the momentum for the goal-setting process in 2015 and carrying it directly into the mobilization of national political commitment, resources and policies for implementation is vital. China as a member of the G-20 troika in 2015 through 2017 will be in crucial position of bridging the goal-setting and implementation phases of the new SDGs for 2030 to be adopted at the United Nations in September of next year.

China, as one of the five permanent members of the U.N. Security Council, will be in a pivotal position to create complementarities between the G-20 forum for the major economies and the U.N. as a forum for all countries for this critical period of setting the global sustainability agenda for the next fifteen years.  

The post-2015 agenda for social, economic and environmental sustainability is of high interest to the United States, and the new China-U.S. climate change agreement in Beijing this week augurs well for collaboration between the two countries on the broader agenda. White House Chief of Staff John Podesta was on the high-level panel for the post-2015 development agenda last year, which signals high U.S. policy involvement. The Shanghai Institute for International Studies has argued in a recent paper for the U.N. Development Program that “the G-20 and the U.N. could have certain complementary roles. The development issue could become the one linking the major work of both the U.N. and the G-20.”  

The world should welcome the unique role that China can now play in bringing the international community and the global system of international institutions together in charting a common path forward building on the progress made in the various summits this week. 

Event Information

In an era of fluid geopolitics and geoeconomics, challenges to the global order abound: from ever-changing terrorism, to massive refugee flows, a stubbornly sluggish world economy, and the specter of global pandemics. Against this backdrop, the question of whether leader summitry—either the G-7 or G-20 incarnations—can supply needed international governance is all the more relevant. This question is particularly significant for East Asia this year as Japan and China, two economic giants that are sometimes perceived as political rivals, respectively host the G-7 and G-20 summits. 

On April 18, the Center for East Asia Policy Studies and the Project on International Order and Strategy co-hosted a discussion on the continued relevancy and efficacy of the leader summit framework, Japan’s and China’s priorities as summit hosts, and whether these East Asian neighbors will hold parallel but completely separate summits or utilize these summits as an opportunity to cooperate on issues of mutual, and global, interest.

Join the conversation on Twitter using #G7G20Asia

Audio

• Japan’s G-7 and China’s G-20 chairmanships: Bridges or stovepipes in leader summitry?

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• Uncorrected Transcript (.pdf)

Event Materials

• 20160418_g7g20_transcript

When the head of the world’s largest investment fund raises fundamental questions about U.S. corporations, we should all pay attention.

In a letter earlier this week to the Fortune 500 CEOs, BlackRock Chairman Larry Fink criticized the short-term orientation that he believes shapes too much of today’s corporate behavior. “It concerns us,” he declared, that “in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” And he concluded, “When done for the wrong reasons and at the expense of capital investment, [returning cash to shareholders] can jeopardize a company’s ability to generate sustainable long-term returns.”

Fink is correct on all counts. In a new Brookings paper out today, University of Massachusetts economist William Lazonick states that the 454 companies listed continuously in the S&P 500 index between 2004 and 2013 used 51 percent of their earnings to buy back their own stock, almost all through purchases on the open market. An additional 35 percent went to dividends. “Buybacks represent a withdrawal of internally controlled finance that could be used to support investment in the company’s productive capabilities,” he said.

This is bad for the economy in two ways. As the growth of the U.S. workforce slows dramatically, economic growth will depend increasingly on improved productivity, must of which comes from raising capital investment per worker. Failing to make productivity-enhancing capital investments will doom our economy to a new normal of slow growth.

Many business leaders say that they are reluctant to make long-term investments without reasonable expectations of growing demand for their products. That brings us to the second way in which corporate short-termism is bad for the economy. Most consumer demand comes from wages. If employers refuse to share gains with their employees, growth in demand is bound to be anemic.

Although he clearly cares about his country, Fink is also acting as the steward of $4.8 trillion in investments. In an article published by McKinzie earlier this month, he warns that although the return of cash to shareholders is juicing equity markets right now, investors “will pay for it later when the ability to generate revenue in the long term dries up because of the lack of investment in the future.”

Unlike most other corporate leaders who express concerns about these developments, Fink is unwilling to rely on moral suasion alone. Because current incentives are so perverse, he argued, “It is hard for even the most dedicated CEO to buck this trend.” The constant pressure to produce quarterly results forces executives to go along—or risk losing their jobs. That pressure comes from investors who are, in Fink’s words, “renters, not owners, who are going to trade your stock as soon as they can pocket a quick gain.”

This logic leads BlackRock’s chairman to propose changing the tax code by lengthening to three years the the period needed to qualify for capital gains treatment while taxing trading gains at an even higher rate than ordinary income for investment held less than six months. To encourage truly patient capital, the capital gains rate would be stepped down to zero over a period of ten years.

Event Information

In an era of fluid geopolitics and geoeconomics, challenges to the global order abound: from ever-changing terrorism, to massive refugee flows, a stubbornly sluggish world economy, and the specter of global pandemics. Against this backdrop, the question of whether leader summitry—either the G-7 or G-20 incarnations—can supply needed international governance is all the more relevant. This question is particularly significant for East Asia this year as Japan and China, two economic giants that are sometimes perceived as political rivals, respectively host the G-7 and G-20 summits. 

On April 18, the Center for East Asia Policy Studies and the Project on International Order and Strategy co-hosted a discussion on the continued relevancy and efficacy of the leader summit framework, Japan’s and China’s priorities as summit hosts, and whether these East Asian neighbors will hold parallel but completely separate summits or utilize these summits as an opportunity to cooperate on issues of mutual, and global, interest.

Join the conversation on Twitter using #G7G20Asia

Audio

• Japan’s G-7 and China’s G-20 chairmanships: Bridges or stovepipes in leader summitry?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20160418_g7g20_transcript