Harsh geopolitical realities and historic legacies have pushed the South Caucasus states of Armenia, Azerbaijan, and Georgia back onto the foreign policy agendas of the United States, the European Union (EU), and Turkey, at a time when all three have pulled back from more activist roles in regional affairs. The South Caucasus states have now become, at best, second-tier issues for the West, but they remain closely connected to first-tier problems. To head off the prospect that festering crises in the Caucasus will lead to or feed into broader conflagrations, the United States, EU, and Turkey have to muster sufficient political will to re-engage to some degree in high-level regional diplomacy. In “Retracing the Caucasian Circle Considerations and Constraints for U.S., EU, and Turkish Engagement in the South Caucasus,” authors Fiona Hill, Kemal Kirişci, and Andrew Moffatt explore the rationale and assess the options for Western reengagement with Armenia, Azerbaijan, and Georgia given the current challenges and limitations on all sides. Based on a series of study trips to the South Caucasus and Turkey in 2014 and 2015, and numerous other interviews, the authors review some of the current factors that should be considered by Western policymakers and analysts.

Constraints and considerations for U.S., EU, and Turkish engagement in the South Caucasus:

• Divergent trends in the South Caucasus
• Russia’s influence in the South Caucasus
• Regional conflicts
• The United States’ diminishing role in the South Caucasus
• Failure to integrate the South Caucasus into the EU
• Foundering relations with Turkey
• Dashed expectations in the South Caucasus of Western engagement

Despite the challenges that have beset the West’s relations with the South Caucasus and the growing disillusionment in Armenia, Azerbaijan, and Georgia, giving up on engagement is not an option.

Policy options for the future:

• The United States, EU, and Turkey must work together, rather than separately
• “Under the radar” coordination on creative interim solutions and working with other mediators
• Focus on the development of “soft regionalism”
• Work with Georgia as the hub for furthering soft regionalism
• Devise adaptable policies as relations with Iran and China develop in the region

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• Retracing the Caucasian Circle: Considerations and constraints for U.S., EU, and Turkish engagement in the South Caucasus

       

I write this as I learn of the beating death of an Azerbaijani journalist Rasim Aliyev. His “crime” was to post a Facebook item about football. What follows seems insignificant compared to his murder.

Two articles have appeared in prominent Western outlets in the past month addressing developments in the South Caucasus and the need for adjustments in U.S. (and Western) policy toward the region. The first was an excellent, in-depth Brookings report titled "Retracing the Caucasian Circle—Considerations and Constraints for U.S., EU, and Turkish Engagement in the South Caucasus"; the second was a shorter essay that Bill Courtney, Denis Corboy, and I penned for Newsweek on the need to reboot policy toward Armenia, Azerbaijan, and Georgia. Both reflected the difficulty of writing about the “South Caucasus” as if the three countries had common interests and objectives. Increasingly these interests and objectives are diverging, except for a growing unhappiness with the United States and the West for not paying attention to—or doing enough to support—the region. In the case of Azerbaijan, the frustration stems from U.S. leaders paying too much attention to the appalling human rights situation in the country.

What’s making the Azerbaijanis so upset with the West?

The authors of the Brookings report point to elite cynicism over Western disinterest and policy failures in the region as sources of Azerbaijani leaders’ unhappiness. This, in their view, is causing Armenia, Georgia, and Azerbaijan—for different reasons and in different ways—to tack toward Russia.

We have a different take in our Newsweek piece. We argue that the unhappiness results from governing elites recognizing that U.S. and Western policy regarding human rights, democracy building, corruption, and conflict resolution (especially the Nagorno-Karabakh conflict) threaten regime stability. Therefore, the tacking toward Russia is a conscious choice to avoid pressure and the transparency that closer association with the United States and Europe would involve.

The new orientation of these countries requires serious adjustment in Western policies. There are four new drivers prompting change (beyond the role of Russia): the regional consequences of the Iran nuclear agreement; the growing economic crisis, which is affecting the South Caucasian states in different ways; the threat of renewed military conflict between Armenia and Azerbaijan; and the internal security implications of suppression of human rights. While each country responds to these drivers in different ways, they are the source of a new dynamic in the South Caucasus that requires a fresh Western policy approach.

Three wild cards will shape these drivers and the Western approach to them: First, how hard will Russian President Vladimir Putin push his objective of rolling back the degree of Western influence achieved since the fall of the Soviet Union? Second, how well will Iran play the nuclear agreement card, especially regarding its reentry into global energy markets? Third, how distracting will Turkey’s military response to the Islamic State and the Kurdistan Workers’ Party (PKK) be for Turkey’s interests in the South Caucasus and its objective of becoming a regional energy hub?

The shortcomings of soft regionalism

What is to be done? Faced with such a challenging situation, the default policy response is to provide more assistance (economic and military), dispatch senior officials from Western capitals to visit the region, and indulge (rather than criticize) democracy and human rights abuses, all in the name of developing a strategic partnership. In other words: Show more love.

That business-as-usual approach is inappropriate for these challenging times. In the case of Azerbaijan, it is an inappropriate response to the continued violations by the Baku regime of basic human rights and freedom of expression.

The Brookings paper suggests a multilateral approach (involving the United States, EU, and Turkey) based on soft regionalism. I do not believe that soft regionalism will work. The best we can hope for is parallel bilateral engagement on the basis of common interests (e.g. conflict prevention) and shared values (e.g. democratic evolution, observance of human rights). We need to treat the energy issue in the region as a commercial rather than geopolitical one. Changes in the global energy market have undermined the geopolitical significance of Caspian energy resources compared to two decades ago. With low energy prices likely the norm for the near future, energy no longer plays a strategic role for the region. Among other weaknesses, the soft regionalism prescription implies coordinated interests with Turkey—this will be difficult absent an opening in Turkish-Armenian relations.

Who needs who more?

The burden of choice in this relationship with the West must shift from the outside parties to the South Caucasian states themselves. The outsiders should stop talking about “strategic” partnerships, trans-Caspian pipelines and Silk Roads because this perpetuates a “you-need-us-more-than-we-need-you” starting point. Rather, the time has come for Armenia, Azerbaijan, and Georgia to decide on their own where their interests coincide with those of the West. That’s where we and they can begin to develop meaningful relationships, rather than trying to invent a veneer to cover differences—as in the case of Azerbaijan’s record on human rights.

Another recent article in Newsweek, by Theodore Gerber and Jane Zavisca, raised questions about promoting democracy and human rights where populations and elites are skeptical of U.S. motivations in promoting these issues. Fairly, the article questions the effectiveness of the traditional instruments of promoting opposition political parties and local NGOs as a way of winning “hearts and minds” in the former Soviet Union. Unfortunately, these traditional instruments tend to emphasize the attractiveness of the “American way of life” through student and scientific exchanges. This offers a variant on the soft regionalism theme advanced in the Brookings paper. Both require a receptivity to change that both elites and populations increasingly find threatening. Developing a values-based relationship is difficult when values diverge.

To the extent our interests do not coincide, then the Western policy focus must be transactional and rest exclusively on conflict prevention and/or amelioration. It also should not shy away from pressing all three South Caucasian states on their obligations to observe international standards regarding human rights, democracy, and freedom of expression.

       

       

       

       

       

       

       

There has been no shortage of news about South Africa’s recent economic and political turmoil—from its plummeting currency and slowing economy, to President Zuma’s cabinet shake-up, to weeks-long student protests over rising tuition fees in October.

Understanding what is driving political volatility requires understanding the central economic challenge facing South Africa’s major metropolitan regions: insufficient labor market opportunities for young people.

A recent Brookings report found that the unemployment rate among youth (ages 15 to 34) in Gauteng, the home province of the Johannesburg region, was nearly 40 percent, exceeding the 37 percent national rate. Young people continue to flock to Johannesburg, and the broader Gauteng City-Region that surrounds it, in search of economic opportunity. But the city-region has only created jobs at a 1.3 percent annual clip since 2000, far lower than peer regions like Shenzhen (8.2 percent), Istanbul (2.8 percent), and Santiago (2.4 percent), limiting its ability to absorb young workers. At the same time, the skills demands of the labor market have shifted as the region’s economy has transitioned from mining to more advanced services, creating a mismatch between what education and training systems are providing and what the labor market demands. This employment crisis matters for both economic competitiveness (output per worker growth, a rough measure of productivity, has stagnated since 2010) and economic justice (the unemployment rate for black South Africans is four times the rate for whites).

At a recent Global Cities Initiative event in Johannesburg local private, public, and civic leaders discussed both the immense scale of the youth unemployment challenge and an ambitious proposed solution: the youth skills empowerment initiative “Vulindlel’ eJozi” (a Zulu phrase meaning “open the way in Johannesburg”) created by the city of Johannesburg in partnership with the Harambee Youth Employment Accelerator. Of the approximately 1.6 million Johannesburg residents aged 19-34, just under half are not engaged in employment, education, or training. Vulindlel’ eJozi’s seeks to “reach 200,000 of these young people to meaningfully include and engage them in our economy over the next year.”

Vulindlel’ eJozi stands out for at least two reasons. Most glaringly is its sheer scale. Through its work with Harambee and other initiatives, the city of Johannesburg provided over 45,000 opportunities for youth to move towards employment during the first quarter of 2015. Second, the partnership leverages the resources and competencies of the private and civic sectors. Harambee has successfully trained and placed 20,000 youth in sustained formal employment with over 200 employers and ambitiously wants to engage 500,000 South African youth in their training programs. Constant employer feedback on what skills are demanded is one of the accelerator’s hallmarks, helping Harambee achieve higher trainee retention rates than industry averages.  

Youth unemployment, of course, is not a problem unique to South Africa. Recent Brookings research found that labor force participation, employment, and median earnings among American teens and young adults all declined between 2000 and 2014. How effectively the city of Johannesburg can build the institutional architecture to engage with private and NGO actors on a youth employment initiative at this scale will ultimately determine its success. These lessons could serve other cities well as they seek to deliver economic opportunity to their young people.

      

MEDIA RELEASE

Low-Income Boys in Higher Inequality Areas Drop Out of School More Often than Low-Income Boys in Lower Inequality Areas, Limiting Social Mobility, New Brookings Paper Finds
“Economic despair” may contribute if those at the bottom do not believe they have the ability to achieve middle class status

Greater income gaps between those at the bottom and middle of the income distribution lead low-income boys to drop out of high school more often than their counterparts in lower inequality areas, suggesting that there is an important link between income inequality and reduced rates of upward mobility, according to a new paper presented today at the Brookings Panel on Activity. The finding has implications for social policy, implying a need for interventions that focus on bolstering low-income adolescents' perceptions of what they could achieve in life.

In “Income Inequality, Social Mobility, and the Decision to Drop Out Of High School,” Brookings Nonresident Senior Fellow and University of Maryland economics professor Melissa S. Kearney and Wellesley economics professor Phillip B. Levine propose a channel through which income inequality might lead to less upward mobility—often assumed to be the case but not yet fully proven. The conventional thinking among economists is that income inequality provides incentives for individuals to invest more in order to achieve the higher income position in society, but Kearney and Levine observe that if low-income youth view middle-class life as out of reach, they might decide to invest less in their own economic future.

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See an interactive map of inequality by state, plus more findings »

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The authors focus on income inequality in the lower half of the income distribution, as measured by income gaps between the 10th and 50th percentiles of the income distribution rather than income gaps between the the top and bottom of the income distribution, which has been more of a focus in popular culture. They show this "lower-tail" inequality is more relevant to the lives of poor youth because the middle is a more realistic ambition. Furthermore, their research could reconcile a puzzle: social mobility does not appear to be falling, despite the rise in income inequality. But, as Kearney and Levine point out, U.S. income inequality has been rising because the top of the distribution has been pulling away from the middle, not because the bottom is falling farther behind the middle.

The authors look specifically at high school drop-out rates through a geographic lens, noting the link between highly variable rates of high school completion and income inequality across the country. One-quarter or more of those who start high school in the higher inequality states of Louisiana, Mississippi, Georgia, and the District Columbia fail to graduate in a four-year period, as compared to only around 10 percent in Vermont, Wisconsin, North Dakota, and Nebraska—lower inequality states. Their econometric analysis goes on to show that low-income youth—boys in particular—are 4.1 percentage points more likely to drop out of high school by age 20 if they live in a high-inequality location relative to those who live in a low-inequality location.

Kearney and Levine examine a number of potential explanations for this link, including differences in educational inputs, poverty rates, demographic composition, and other factors. Ultimately, the evidence suggests that there is something specific about areas with greater income gaps that lead low-income boys there to drop out of school at higher rates than low-income boys elsewhere. The authors' research suggests that adolescents make educational decisions based on their perceived returns to investing in their educational development: a greater distance to climb to get to the middle of the income distribution could lead to a sense that economic success is unlikely—what they term “economic despair.”

"Income inequality can negatively affect the perceived returns to investment in education from the perspective of an economically disadvantaged adolescent,” they write. “Perceptions beget perceptions."

Digging into reasons students themselves give for dropping out, they find that low-income students from more unequal places are more likely to give up on their educational pursuits. Surprisingly, survey evidence shows that academic performance does not have as large an impact on low-income students in high inequality states: 51 percent of dropouts in the least unequal states reported that they dropped out because they were performing poorly, as compared to only 21 percent of students who dropped out in the most unequal states.

The finding suggests that economic despair could play an important role: if a student perceives a lower benefit to remaining in school, then he or she will choose to drop out at a lower threshold of academic difficulty. They also note that while the wage premium of completing high school should reduce the dropout rate, household income inequality has an offsetting negative effect.

The choice between staying in school and dropping out may reflect actual or perceived differences from the benefits of graduating. For instance, the authors note their past research showing that youth from low-income households who grow up in high lower-tail inequality states face lifetime incomes that are over 30 percent lower than similar children in lower inequality states. They also highlight other research showing that the overwhelming majority of 9th graders aspire to go to college, but by 11th grade, low-SES students are substantially less likely to expect they will enroll in college, even among those students with high test scores.

"There are important policy implications for what types of programs are needed to improve the economic trajectory of children from low-SES backgrounds," they write. "Successful interventions would focus on giving low income youth reasons to believe they have the opportunity to succeed. Such interventions could focus on expanded opportunities that would improve the actual return to staying in school, but they could also focus on improving perceptions by giving low-income students a reason to believe they can be the "college-going type." For example, interventions might take the form of mentoring programs that connect youth with successful adult mentors and school and community programs that focus on establishing high expectations and providing pathways to graduation. They could also take the form of early-childhood parenting programs that work with parents to create more nurturing home environments to build self-esteem and engender positive behaviors."

Read the full paper from Kearney and Levine here »

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• Download the full paper

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• How “economic despair” affects high school graduation rates for America’s poorest students

       

Income and wealth inequality in the U.S. is a stark reality.  Research from a variety of fields demonstrates that children born into poor families tend to end up less educated, less healthy, more prone to contact with the police, and less likely to accumulate wealth over a lifetime.  In contrast, children born into well-off families tend to exhibit better outcomes on all of these dimensions.

How should social scientists and policymakers understand and address intergenerational mobility in the U.S.? This question is difficult to answer—and highly politicized.  To start with, there are several possible mechanisms driving high intergenerational persistence of economic outcomes.  These are often characterized as factors related either to “nurture” or “nature.” 

The “nurture” hypothesis asserts that poor parents lack critical resources such as wealth or information.  Such parents may therefore find it difficult to make the education and time investments that would promote better economic outcomes for their children.  If this is true, then children born into poor families never reach their full potential because of a lack of household resources. 

A second possible mechanism is often referred to as the “nature” hypothesis.  Economically successful parents might be more likely to have successful children.  Such an account hinges on the idea that there are heritable biological traits or abilities that more successful parents “pass on” to their children.

To complicate the matter further, the mechanisms of nature and nurture almost certainly operate at the same time.  Moreover, it is likely that abilities and investments interact in complicated ways. For example, a particular investment might do more to improve the outcomes of a lower-ability child than a higher-ability child, or vice versa.  Understanding this process, and how it affects intergenerational mobility, is notoriously difficult.  However, greater clarity is precisely what is needed to guide effective policy. 

If a lack of investment is the dominant mechanism explaining intergenerational persistence in economic outcomes, then we as a society may be wasting human potential.  Policies correcting under-investments in human capital could therefore be justified as economically efficient. In contrast, if the intergenerational transmission of ability plays a role, then investments in poor children’s human capital may not be enough.  To clarify, it is critical to state that the distinction we make here between “high-ability” and “low-ability” individuals should not be interpreted as a claim that some people are naturally or biologically superior to others.  We use “ability” as shorthand to describe those traits that are rewarded in the existing labor market.  Even if these abilities are linked to heritable biological factors, this does not mean that their impact on life outcomes is immutable or fixed.  Modifying environments could substantially affect genetic disparities. The case of vision and eyeglasses offer one classic example.  There may well be biological factors that explain variation in eyesight “ability,” but these biological differences will matter more or less for life outcomes depending on the availability of glasses and other medical interventions.  In short, it is very possible that the consequences of biological differences can be moderated by appropriate changes in the environment.     

Until now, researchers have typically used variables such as cognitive test scores to measure ability endowments related to human capital.  Yet, these traditional measures are subject to the critique that they are the products of earlier investments in human capital. This makes it difficult to distinguish between the “nature” and “nurture” hypotheses using such data.  Two individuals with similar ability endowments but different levels of household resources are likely to exhibit different cognitive test scores, for example. 

Using genetic information to measure ability endowments can help us better understand the intergenerational transmission of human capital.  As a measure, genetic information has a clear advantage over cognitive test scores because it is fixed at conception. Advances in measuring differences in DNA across individuals, together with very recent advances in behavioral genetics research, now make it possible to link genetic differences across people to behavioral traits.  These new discoveries have even extended to educational attainment, which was once thought to be too complicated and removed from direct biological processes for genetic analysis.

In a recent research paper, we use genetic information to better understand the nature of intergenerational mobility.  We follow the cutting edge in behavioral genetics research, which guides us in computing a type of genetic “score” for any individual.  We compute this so-called “polygenic score” for each person in a sample of over 8,000 individuals from the Health and Retirement Study (HRS). The score, which appears to be related to cognition, personality, and facility with learning, has some predictive power for educational attainment. In particular, it explains between 3.2 percent and 6.6 percent of the variation across individuals (depending on the specification). Thus, knowing the exact value of an individual’s score will tell you very little about that person (over 90 percent of the variation is explained by other factors).  However, the average relationship in the population between the score and human capital outcomes can offer some important lessons.  

Using the polygenic score, we believe we can gain new insights into how ability endowments interact with an individual’s environment to generate economic outcomes.  There is a long-standing debate in the economics literature about how ability and investments interact.  One idea is that both ability and investments are needed for success, i.e., that they complement one another. Though our findings show evidence of this type of interaction, the story that emerges from our analysis is somewhat more nuanced.  We show that ability and the environment (measured by parents’ socioeconomic status or SES) complement one another for generating higher degrees, such as college completion, but substitute for one another in generating lower levels of educational attainment such as a high school degree.  In other words, our findings suggest that ability or being born into a well-off family are enough to get an individual through high school.  For college, however, ability and a well-off family are important predictors of success.

"In other words, our findings suggest that ability or being born into a well-off family are enough to get an individual through high school. For college, however, ability and a well-off family are important predictors of success."

Another set of results concerns the wages of high-ability individuals.  We show that individuals who completed college earned substantial returns on their ability starting in the early 2000s.  Individuals without a college degree did not. The post-2000 rise in returns may be driven in part by “skill-biased technological change.”   As new technologies are adopted in the workplace, the people who benefit most are those with the skills required to adapt to and master new ways of working.  It is not difficult to imagine that people with genetic variants associated with higher education may have found it easier to adapt to computers and other new technologies.  However, we also find that a higher polygenic score was not helpful for individuals who did not complete college, likely because the lack of a college degree shut them out of careers that would have allowed them to creatively use new technologies.  This is a troubling finding given the role of childhood SES in predicting college completion.  It means that poor children with high abilities are less likely to attend college and, subsequently, are less likely to benefit from their ability.  Again, these findings suggest wasted human potential.

Using genetic data to compare individuals from different socioeconomic backgrounds, we also find that children from lower SES backgrounds systematically acquire less education when compared to similarly capable individuals from high SES backgrounds.  Among other things, this suggests that access to education may be an important obstacle, even for the highest ability children.  Our analysis offers some suggestive evidence regarding which environments are especially harmful. For example, acute negative events like physical abuse in childhood can lead to a dramatic loss of economic potential—reducing financial wealth in late adulthood for the highest ability individuals by over 50 percent.

Of course, one must be very cautious when interpreting any genetic association.  In particular, it is important to think carefully about correlation versus causality.  The same parents that pass along genetic material predicting educational attainment may also be more likely to have the resources to invest in their children.  Still, since we base our comparisons on individuals from different socioeconomic backgrounds, but with similar polygenic scores, we offer evidence that economic disparities are not solely due to nature.

In summary, recent advances in behavioral genetics have identified specific genetic variants that predict educational attainment.  The fact that such genes exist confirms previous work (largely using data on twins) showing that “nature” matters for economic outcomes.  Our research demonstrates that “nurture” matters, too.  Perhaps more importantly, our research demonstrates that the roles of “nature” and “nurture” are intertwined and that understanding the role of “nurture” (in the form of human capital investments over the life-cycle) is key to understanding how “nature” (in the form of ability endowments) operates.  In particular, we show that similarly apt individuals with different childhood SES see very different returns to their ability.  This means that policies helping children born into disadvantaged circumstances may be justified not solely for ethical reasons rooted in social justice, but perhaps also as an economically efficient way to mitigate wasted human potential.

Finally, we believe that continued progress in understanding the mechanisms underlying how “nature” affects economic outcomes will eventually lead to policies that help people who are born with different abilities.  For example, our findings suggest that some individuals had more difficulty than others in adapting to new workplace technologies, such as computers. With a fuller understanding of this process, policymakers may be able to devise better training programs or improved school curricula that help individuals of all levels of ability to better respond to a changing technological environment.  In other words we believe that our research shows that learning more about the specifics of “nature” may help us to better “nurture” all individuals in society to help them to reach their full potential.      

Editor’s note: The authors contributed equally to this posting and to the research upon which the posting is based. They are listed alphabetically by last name.

       

It is no secret that American elections are getting wildly expensive. If you are unlucky enough to live in a swing state or a state with a competitive race for US House, US Senate or Governor, you know that every even numbered year means frequent phone calls, a barrage of campaign mail, and endless television ads. Candidates want your vote, and sometimes it seems their strategy is to annoy the average voter into turning out to the polls.

However, beyond direct candidate appeals, outside groups are now spending heavily on competitive races of all types. Many statewide campaigns now cost tens of millions of dollars, and interest groups, PACs, and other organizations are ponying up with substantial sums to try to reach voters and do one of two things. They either try to convince you one candidate deserves your vote or dissuade you from voting for the other candidate.

How much money is flowing into races beyond what candidates themselves spend? The answer is staggering. Below we profile the 20 most expensive Senate races since 2010 in terms of independent expenditures. The chart shows not only how expensive races are, but the extent to which outside groups seek to influence electoral outcomes.  

This chart shows that races are getting more expensive. Among these races, only two (Colorado and Pennsylvania) are from 2010. Half (10) of the races are being waged this cycle, and even though data are updated through Sunday, the totals are certain to rise. Those ten races alone have totaled over $435 million in spending in those states.

The totals provide a small picture into the magnitude of money in American politics. The totals exclude direct candidate spending and spending by other, outside groups not subject to as rigorous FEC disclosure requirements.

As campaigns continue to become more expensive and outside groups see participation in elections as a path toward influencing outcomes of both races and policy, there is one political certainty: over the next two to four years, many of the campaigns on this list will be displaced by future, more expensive campaigns for the Senate.

      

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.

       

Researchers from the Brookings Metropolitan Policy Program have released new Earned Income Tax Credit (EITC) data from the IRS on federal individual income tax filers. The interactive data are available for all ZIP codes, cities, counties, metropolitan areas, states, state legislative districts, and congressional districts in the U.S. Users can also find new MetroTax model estimates of the EITC-eligible population in 2012 based on the latest American Community Survey data.

From the 2012 MetroTax model, here are 10 facts about EITC-eligible tax filers

• 71.1 million people live in tax units that are eligible
• 31.1 million children live in eligible households
• 72.8% of eligible filers speak English
• 50.9% are white
• 36.1% received food stamps at some point in the last year
• 25.8% are married filing jointly
• 13.2% have earned a bachelor’s degree or higher
• The median adjusted gross income is $13,638
• 12.7% of eligible filers work in the retail trade industry
• 13.6% work in office and administrative occupations

Read the blog post by Jane Williams and Elizabeth Kneebone to learn more and also visit the EITC interactive.

      

Policy Brief #172

Why Institutions Matter

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

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

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

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

Institutional reform

Promoting fiscal sustainability

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

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

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

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

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

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

Boosting savings

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

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

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

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

Improving public investment

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

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

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

Creating the Political Conditions for Reform

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

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

Congressional redistricting

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

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

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

Incentives to participate

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

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

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

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

Conclusion

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

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

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This is the fourth in a series of reports on the demographic and political dynamics under way in key “battleground” states, deemed to be crucial in deciding the 2008 election. As part of the Metropolitan Policy Program’s Blueprint for American Prosperity, this series will provide an electoral component to the initiative’s analysis of, and prescriptions for, bolstering the health and vitality of America’s metropolitan areas, the engines of the U.S. economy. This report focuses on two major battleground states in the South, Virginia and Florida, which serve as bookends to an emerging New South.

Virginia and Florida have eligible voter populations that are rapidly changing. White working class voters are declining sharply while white college graduates are growing and minorities, especially Hispanics and Asians, are growing even faster. These changes are having their largest effects in these states’ major metropolitan areas, particularly Miami and rapidly-growing Orlando and Tampa in Florida’s I-4 Corridor and the suburbs of Washington, D.C. in Northern Virginia. Other large metro areas in these states are also feeling significant effects from these changes and will contribute to potentially large demographically related political shifts in the next election.

In Virginia, these trends will have their strongest impact in the fast-growing and Democratic-trending Northern Virginia area, where Democrats will seek to increase their modest margin from the 2004 election. The trends could also have big impacts in the Richmond and Virginia Beach metros, where Democrats will need to compress their 2004 deficits. Overall, the GOP will be looking to maintain their very strong support among Virginia’s declining white working class, especially in the conservative South and West region. The Democrats will be reaching out to the growing white college graduate group, critical to their prospects in Northern Virginia and statewide. The Democrats will also be relying on the increasing number of minority voters, who could help them not just in Northern Virginia, but also in the Virginia Beach metro and the Richmond and East region.

In Florida, these trends will have their strongest impacts in the fast-growing I-4 Corridor (36 percent of the statewide vote), which, while Democratic2 trending, is still the key swing region in Florida, and in the Miami metro, largest in the state and home to 27 percent of the vote. The trends could also have big impacts in the South and North, where Democrats will be looking to reduce their 2004 deficits in important metros like Jacksonville (North) and Sarasota and Cape Coral (South). Across the state, the GOP needs to prevent any erosion of support among white working class voters, especially among Democratic-trending whites with some college. They will also seek to hold the line among white college graduates, whose support levels for the GOP are high but declining over time. Finally, the support of the growing Hispanic population is critical to GOP efforts to hold the state, but this group is changing generationally and in terms of mix (more non-Cuban Hispanics), which could open the door to the Democrats.

Both of these states are near the top of the lists of most analysts’ list of battleground states for November 2008. Florida was a very closely contested state in both 2000 and 2004 (especially 2000). But Virginia’s status as a battleground is new to 2008. Yet in both states the contested political terrain reflects the dynamic demographic changes occurring within them. With 27 and 13 electoral votes, respectively, all eyes will be on Florida and Virginia on election night.

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

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

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

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

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

      

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U.S. policy towards South Asia has changed considerably over the last seven decades. The nature of U.S. engagement with different countries in the region has varied over time, as has the level of U.S. interest. While India and Pakistan have received the most attention from Washington, the United States has also been engaging with Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, and Sri Lanka, albeit to different degrees. 

On May 19, The India Project at Brookings hosted a panel discussion exploring the past and present U.S approaches towards South Asia, based on Senior Fellow Stephen Cohen’s new book, “The South Asia Papers: A Critical Anthology of Writings” (Brookings Institution Press, 2016). Panelists also assessed the Obama administration’s policies toward the region, and the challenges and opportunities that lie ahead for the next U.S. administration. Fellow Tanvi Madan, director of The India Project, moderated the discussion.

After the discussion, the panelists took questions.

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While the South African labor market faces many large challenges, some more subtle trends might also be developing that undermine the country’s growth. Yes, the current level of unemployment stands at 24 percent. True, school dropout rates remain high: Only 50 percent of students will make it to the last year of high school, which means that the number of skilled workers in the country remains low. In addition, income inequality in South Africa is an overwhelming obstacle—with the country having one of the highest Gini coefficients (a statistical tool commonly used to measure inequality) in the world—and has been slowing its fight against poverty.

In their recent paper, Demographic, employment, and wage trends in South Africa, Haroon Bhorat, Karmen Naidoo, Morné Oosthuizen, and Kavisha Pillay examine important, perhaps precarious, trends in South African employment, such as the combination of South Africa’s weak educational system and labor demand biased toward skilled workers and the significant rise in temporary employment over full-time positions. However, the authors argue that perhaps the most interesting is the spike in public sector employment and the subsequent development of a new segment of the labor market, what they call a “new elite”: the unionized public sector employee.

The shift to services and the public sector

Like so many of sub-Saharan African countries, South Africa’s labor makeup (as well as contributions to GDP) has swiftly been shifting towards the services sector, especially since 2001. Table 1 clearly shows the dramatic shift in labor towards community, social, and personal (CSP) services and financial services: These two areas accounted for 73 percent of the shift in employment between 2001 and 2012 (Column 3). 

Employment Shares            Share of Change (ΔEi/ΔE) (a)
	2001	2012	(2001-2012)
Primary	0.15	0.07	-0.28
Agriculture	0.1	0.04	-0.2
Mining	0.05	0.02	-0.08
Secondary	0.2	0.21	0.21
Manufacturing	0.14	0.12	0.04
Utilities	0.008	0.008	0.004
Construction	0.05	0.07	0.16
Tertiary	0.63	0.71	1.08
Trade	0.21	0.21	0.2
Transport	0.04	0.6	0.11
Financial	0.09	0.13	0.31
CSPS	0.17	0.22	0.42
Private households	0.09	0.08	0.04
Total	1	1	1

Note: 1. CSPS stands for community, social, and personal services, which is predominantly made up of public sector employment.⁾

2.^(a) The ratio of the percentage change in the share of employment to the overall change in employment over the period (share of change in employment). This measure shows, within each broad sector, where the sources of employment growth are. For example, employment in the tertiary sector is 1.08 times (or 108 percent of) the level of employment in 2001, which is the sum of the changes for all the industries within this sub-sector. CSPS then is the greatest contributor to employment growth in the tertiary sector.

Source: Bhorat et al. (2014) using PALMS dataset (2012).

Importantly, the authors emphasize, the CSP sector, which accounted for 42 percent of this shift, is mostly made up of public sector jobs—hinting that expansion of the public sector has contributed to this trend. The share of public sector employment rose to 17.5 percent by the end of 2014 from 14.2 percent in 2004. In addition, they note that the largest expansion of the public sector came in 2009, just after the global financial crisis, showing that the public sector was more capable of absorbing” excess unskilled and medium-skilled labor at times of economic and labor market distress.”

Another important trend the authors point to within the shift to the public sector between 2008 and 2014 is that a great number of jobs in which employment grew quickly involve unskilled workers (such as sweepers, farmhands and laborers, helpers and cleaners, construction and maintenance laborers, and garbage collectors) and medium-skilled workers (such as police and traffic officers, institution and home-based care workers, prison guards, cooks, and childcare workers) (Figure 1). For a deeper analysis of South African labor market’s skill needs, see the full paper.

Figure 1: Share of change in public sector jobs by detailed occupation (2008 Q1-2014 Q4)

Notes: These occupations are the largest 42 public sector occupations, making up 80 percent of total employment in the public sector in 2014, and 97 percent of the change in the number of public sector jobs over the 2008-14 period.

Source: StatsSA QLFS 2008Q1; StatsSA QLFS 2014Q4; own calculations.

From these trends, the authors infer that the South African government’s Expanded Public Works Program (EPWP)—which “creates jobs through government-funded infrastructure projects, through its non-profit organization and community work program, as well as through its public environment and culture programs”—has played a major part in the expansion of the public sector.

Interestingly, though, the authors also find that overall the public sector has a bigger proportion of high-skilled employees than the private sector), though, between 2008 and 2013 the public sector barely saw a change in its proportion of high-skilled workers. Rather, it experienced its largest growth in the medium- and low-skilled jobs, as noted in Figure 1. They note that this phenomenon suggests that “the state [is] able to absorb excess unskilled and medium-skilled labor at times of economic and labor market distress.” The private sector’s proportion of high-skilled workers, on the other hand, grew by 25 percent. There is then, they say, a “mismatch” between the supply and demand of South Africa’s labor market when it comes to high-skilled workers.

After exploring this trend, the authors also delve into the demographic differences between public and private sector workers. For example, they find that the average public sector worker is older (41 versus 38) and likely to have a higher educational level on average. There are more women in the public sector—52 percent compared to 44 percent. There are also more Africans—77 percent in the public sector (up from 72 percent in 2008) and 66 percent in the private sector (unchanged). The authors argue that these two statistics demonstrate that public sector has “transformed” its labor force at a faster pace since both are groups that historically have been marginalized in the South African labor market.

The impact of unions in the South African labor market

The public sector in South Africa also has a higher unionization rate: 69.2 percent compared to the private sector’s 24.4 percent rate in 2013). As public sector employment has grown, the authors say, so has its proportion of workers in unions. Unions in South Africa are influential, as the authors note, “Powerful labor unions are often associated with creating a wage premium for their members, given their ability to mobilize industrial action and negotiate in favor of their members during times of wage negotiations.”

Indeed, this seems to be the case. Past studies have found that bargaining power—as part of a bargaining council or a union—presents a wage premium.  The authors have similar results: The average public sector worker makes 11,668 rand ($1,209) per month compared to an average private sector employee (7,822 rand per month). Most importantly, though, when the authors disaggregate based on participation in a union, they actually find that, among non-unionized workers, the private sector employee actually receives a higher wage than the public sector worker, by about 952 rand per month. This finding, they say, suggests that the public sector premium might be tied to public sector union membership.

The authors admit a caveat: Public sector union workers tend to be white, older, and better educated than their non-unionized public sector counterparts. In fact, non-union public sector workers are 80 percent African and 10 percent colored[1] (two groups more likely to be under the EPWP). In addition, non-union occupations are usually less skilled (elementary occupations, service and sales occupations, and technical and associate professional occupations). However, they emphasize, “Ultimately though, the wage distributions above suggest that, at least in terms of earnings, a dual labor market may indeed be prevalent in the South African labor market.”  (For the authors’ full quantitative analysis, including an examination of how this trend interacts with state-owned enterprises and temporary workers, see the full paper.)

Thus, they argue, a “new labor elite” is forming.

Note: The African Lions project is a collaboration among United Nations University-World Institute for Development Economics Research (UNU-WIDER), the University of Cape Town’s Development Policy Research Unit (DPRU), and the Brookings Africa Growth Initiative, that provides an analytical basis for policy recommendations and value-added guidance to domestic policymakers in the fast-growing economies of Africa, as well as for the broader global community interested in the development of the region. The six papers, covering Mozambique, Kenya, Ghana, South Africa, Ethiopia, and Nigeria, explore the key constraints facing African economies as they attempt to maintain a long-run economic growth and development trajectory.

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[1] In this paper, “African” is used to refer to people classified by the apartheid state as “native,” “Bantu,” or “black.” “Colored” refers mainly to people in the Western Cape province, and is an ethnic label for people of mixed ethnic origin who possess ancestry from Europe, Asia, and various Khoisan and Bantu tribes of Southern Africa.

       

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

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

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

Omid Abrishamchian contributed to this post.

       

       

       

       

       

Indian and Israeli relations are getting even friendlier: Indian Foreign Minister Sushma Swaraj visited Israel in January, and the trip is widely thought to precede higher level visits, including by Prime Minister Narendra Modi (he’d be the first Indian head of government to visit Israel). Israeli President Reuven Rivlin and Prime Minister Benjamin Netanyahu have both also indicated that they plan to travel to India “soon.”

The foreign minister’s visit was part of the ongoing Indian effort not just to broaden and deepen India’s relationship with Israel, but also to make it more public. But the trip—not just to Israel, but to what the Indian government now routinely calls the state of Palestine—also highlighted the Modi government’s attempt to de-hyphenate India’s relations with the Israelis and Palestinians. 

What is the state of India’s relationship with Israel, the Modi government’s approach toward it, and this de-hyphenated approach? 

A blossoming friendship

Since India normalized relations with Israel in 1992, the partnership has developed steadily. The countries have a close defense, homeland security, and intelligence relationship—one that the two governments do not talk much about publicly. Shared concerns about terrorism have proven to be a key driver; so have commercial interests (including Israel’s quest for additional markets and India’s desire to diversify its defense suppliers, get access to better technology, and co-develop and co-produce equipment). India has become Israeli defense companies’ largest customer. Israel, in turn, has shot up on India’s list of suppliers. 

In the early 1990s, Israel—like the United States—did not really figure on India’s list of defense suppliers. However, between 2005 and 2014, it accounted for 7 percent (in dollar terms) of military equipment deliveries—the third highest after Russia and the United States. As Indian President Pranab Mukherjee recently noted, Israel has crucially come through for India at times “when India needed them the most” (i.e. during crises or when other sources have not been available, for example, due to sanctions). The president referred to the assistance given during the Kargil crisis in 1999 in particular, but there has also been less publicly-acknowledged help in the past, including during India’s 1965 and 1971 wars with Pakistan. 

Beyond the defense and security relationship, cooperation in the agricultural sector—water management, research and development, sharing of best practices—might have the most on-the-ground impact, including in terms of building constituencies for Israel at the state level in India. Israeli ambassadors have indeed been nurturing this constituency and reaching out to the chief ministers of Indian states for a number of years. (Incidentally, India, for its part, has felt that the closer relationship with Israel has created a constituency for it in the United States.)

Economic ties have also grown: The two countries are negotiating a free trade agreement, and have been trying to encourage greater investments from the other. The success of Indian and Israeli information technology companies has particularly led to interest in collaboration in that sector. 

The governments have also been trying to increase people-to-people interaction through educational exchanges and tourism, with some success. Israeli tourism officials have highlighted the 13 percent increase in arrivals from India over the last year. And tourist arrivals to India from Israel have doubled over the last 15 years, including thousands of Israelis visiting after their compulsory military service. 

Let’s go public

The India-Israel relationship has developed under Indian governments of different stripes. It was normalized by a Congress party-led government and progressed considerably during the United Progressive Alliance coalition government led by the party between 2004 and 2014. However, while some ministers and senior military officials exchanged visits during that decade, there were not that many high-visibility visits—especially from India to Israel, with the foreign minister only visiting once. A planned 2006 trip by then Defense Minister Mukherjee was reportedly cancelled because of Israeli military operations in Gaza and then the Lebanon war. The last Israeli prime minister to visit India was Ariel Sharon in 2003, and no defense minister had ever visited despite those ties. 

The Israeli ambassador has talked about the relationship being “held under the carpet.” More bluntly, in private, Israeli officials and commentators have said that India has treated Israel like a “mistress”—happy to engage intimately in private, but hesitant to acknowledge the relationship in public. The explanations for this have ranged from Indian domestic political sensitivities to its relations with the Arab countries.

[I]n private, Israeli officials and commentators have said that India has treated Israel like a “mistress”—happy to engage intimately in private, but hesitant to acknowledge the relationship in public.

When the Bharatiya Janata Party (BJP)-led government took office in May 2014 with Modi at its helm, there was a belief that the partnership with Israel would be a priority and more visible. Relations under the BJP-led coalition government between 1998 and 2004 had been more conspicuous. When in opposition, BJP leaders had visited Israel, and also been supportive of that country in election manifestos and speeches. 

As chief minister of the state of Gujarat, Modi himself had expressed admiration for Israel’s achievements, including “how it has overcome various adversities to make the desert bloom.” Traveling there in 2006 with the central agricultural minister, he also helped facilitate trips for politicians, business leaders, and farmers from his state to Israel. His government welcomed Israeli investment and technological assistance in the agricultural, dairy, and irrigation sectors. And, at a time when Modi was not welcome in many Western capitals, Israelis reciprocated: Businesses and government engaged with him, with Israeli ambassadors and consul generals from Mumbai meeting with him long before European and American officials did so. Thus, Modi’s elevation to prime minister was welcomed in Israel, as was the appointment as foreign minister of Swaraj, a former head of the India-Israel Parliamentary Friendship Group.

However, the Modi government’s response to the Gaza crisis in summer 2014 left many perplexed and some of its supporters disappointed. The Indian government initially sought to avoid a debate on the crisis in the Indian parliament, on the grounds that it did not want “discourteous references” to a friend (Israel). After opposition complaints, there was a debate but the government nixed a resolution. In its official statements, the Modi government consistently expressed concern about the violence in general—and, in particular, both the loss of civilian life in Gaza and the provocations against Israel—and called for both sides to exercise restraint and deescalate. Yet, it then voted in support of the U.N. Human Rights Council (UNHRC) resolution that condemned Israel, a move that left observers—including many in the BJP base—wondering why the government didn’t instead abstain. 

Since then, however, the Modi government has moved toward the expected approach. The first sign of this was Modi’s decision to meet with Netanyahu on the sidelines of the opening of the U.N. General Assembly in 2014—despite reported hesitation on the part of some in the foreign ministry. Since then, there have been a number of high-level visits and interactions (and Twitter exchanges), including a few “firsts.” This past October, Pranab Mukherjee, for example, became the first Indian president to travel to Israel, where he declared the state of the relationship to be “excellent.” 

The Israeli ambassador to India has observed the “high visibility” the relationship now enjoys. Also noticed more widely was India abstaining in a July 2015 UNHRC vote on a report criticizing Israeli actions in the 2014 Gaza crisis. Indian diplomats explained the vote as due to the mention of the International Criminal Court (ICC) in the resolution, but observers pointed out that India has voted for other resolutions mentioning the ICC. Israeli commentators saw the abstention as “quite dramatic;” the Israeli ambassador expressed gratitude. Palestinian officials, on the other hand, expressed “shock” and criticized the vote as a “departure.” 

In the defense space, cooperation is only growing: The Indian government moved forward on (delayed) deals to purchase Spike anti-tank missiles and Barak missiles for its navy; it recently tested the jointly-developed Barak 8 missile system, along with Israel Aerospace Industries; and an Indian private sector company has reportedly formed a joint venture with an Israeli company to produce small arms. Cooperation is also continuing in the agricultural sector, with 30 centers of excellence either established or planned across 10 Indian states. More broadly, the two governments are seeking to facilitate greater economic ties, as well as science and technology collaboration. 

There have been questions about why Modi hasn’t visited Israel yet, despite the more visible bonhomie. But, in many ways, it made sense to have the Indian president take the first leadership-level visit during this government. Mukherjee’s position as head of state, as well as the fact that he was a life-long Congress party member and minister, helped convey to both Indian and Israeli audiences that this is not a one-party approach. This point was reinforced by the accompanying delegation of MPs representing different political parties and parts of the country. For similar reasons, it would not be surprising if there was a Rivlin visit to India before a Netanyahu one. 

De-hyphenation? 

The deepening—and more open—relationship with Israel, however, hasn’t been accompanied by a U-turn on the Indian government’s policy toward Palestine. What the Modi government seems to be doing is trying to de-hyphenate its ties with Israel and Palestine. Previous governments have also tried to keep the relationships on parallel tracks—but the current one has sought to make both relationships more direct and visible, less linked to the other, while also making it clear that neither will enjoy a veto on India’s relations with the other. 

The deepening—and more open—relationship with Israel, however, hasn’t been accompanied by a U-turn on the Indian government’s policy toward Palestine.

The Modi government doesn’t demure from referring to the “state of Palestine” rather than “the Palestinian Authority.” It held the first-ever Foreign Office consultations with the Palestinians last spring, and the Indian foreign ministry made it a point to release separate press releases for the president’s and the foreign minister’s trips to Israel and Palestine. The Indian president became the first foreign head of state to stay overnight in Ramallah. Modi met with Mahmoud Abbas, whom the Indian government refers to as the “president of the state of Palestine, on the sidelines of both the U.N. General Assembly meeting in New York and the climate change summit in Paris in 2015. The Indian foreign minister met with Abbas in 2014 in New York, and again in Ramallah on her visit. During their trips, both she and the Indian president also went to the mausoleum of Yasser Arafat (who the BJP in the past called “the illustrious leader of the Palestinian people”).

The government has reiterated India’s traditional position on a two-state solution, indicating its belief in an independent Palestinian state with East Jerusalem as its capital. It voted in favor of the resolution on raising the Palestinian flag at the United Nations, and has continued to sign on to BRICS declarations “oppos[ing] the continuous Israeli settlement activities in the Occupied Territories.” In Ramallah, Sushma Swaraj emphasized that India’s support for Palestinians remained “undiluted.” 

The continuity on this front is not just driven by historic and domestic political factors, but also by India’s broader balancing act in the region. Even as India’s relations with Israel have deepened, it has maintained—and even enhanced—its relations with Iran and the Gulf Cooperation Council (GCC) countries. Modi has welcomed the emir of Qatar, visited the UAE, and met with Iran’s Hassan Rouhani. The first-ever Arab-India Cooperation Forum ministerial meeting also took place in January. It would not be surprising if the Indian prime minister visited Saudi Arabia this year or there were high-level visits exchanged between Delhi and Tehran. The government has emphasized its “strategic intent and commitment to simultaneously enhance relations with the Arab world as well as Israel, without allowing it to become a zero sum game.” And, overall, the Israelis, Palestinians, and GCC countries have not pushed for Delhi to make a choice. 

The de-hyphenated approach, in turn, potentially gives Indian policymakers more space to take India’s relationship with Israel further. But, as was evident during the Indian president’s visit to the region, it hasn’t been problem-free and it has not been feasible to keep the two relationships entirely insulated. An upsurge in violence reportedly caused Israel to nix a proposal for Mukherjee to visit the Al-Aqsa mosque in Jerusalem. There was also some heartburn about the Israeli delay in clearing 30 Indians' computers destined for an India-Palestine Centre for Excellence in Information and Communication Technology at Al-Quds University in Ramallah, as well as its refusal to allow communications equipment to be transferred. In the Israeli press, there was criticism of the president’s lack of mention of Palestinian violence. The Indian president and the foreign ministry also found themselves having to explain the president’s remark in Israel that “religion cannot be the basis of a state.”

There have been other differences between India and Israel as well, notably on Iran (something officials have tended not to discuss publicly). There might be other difficulties in the future, stemming, for example, from: negative public and media reaction in India if there’s another Israel-Palestine crisis; the stalled free trade agreement negotiations; potential Israeli defense sales to China; renewed questions about defense acquisitions from Israel; or the behavior of Israeli tourists in India. But the relationship is likely to continue to move forward, and increase in visibility, including with visits by Rivlin, Netanyahu, and Modi—potentially before the 25th anniversary of the two countries establishing full diplomatic relations on January 29, 2017.

      

       

       

       

Editor's note: This article appears in the April 2015 issue of Global Forum. Click here to view the full publication.

Since passage of the Affordable Care Act in 2010, the last several years have seen a groundswell in physician payment and delivery reforms designed to achieve higher value health care through incentivizing higher quality care and lower overall costs. Accountable care models, for example, are achieving marked progress by realigning provider incentives toward greater risk-sharing and increased payments and shared savings with measured improvements in quality and cost containment. Medical homes are introducing greater care coordination and team-based care management, while the use of episode-based or bundled payments is removing perverse incentives that reward volume and intensity.

These reforms are coming just as the number of highly targeted, highly priced treatments continues to expand. The U.S. Food and Drug Administration (FDA) approved a decade-high 41 novel new drugs in 2014, many of them targeted therapies approved on the basis of increasingly sophisticated progress in genomics and the understanding of disease progression. In areas like oncology, such targeted treatments have grown as a percentage of global oncology market size from 11% in 2003 to 46% in 2013. New brand specialty drug spending in the U.S. is estimated to have been $7.5 billion in 2013, or 69% of total new drug spending. The growing prevalence of these drugs and their cost to the health system are setting the stage for significant flashpoints between industry, payers, and providers, seen most clearly in the debate over hepatitis C treatment costs that roiled stakeholder interactions for most of the past year. 

More of these targeted treatments are in the development pipeline, and a growing number of public policy efforts taking shape in 2015 are focused on accelerating their availability. The House of Representatives' 21st Century Cures Initiative, for example, has released a slew of legislative proposals aimed at promoting breakthrough innovation by increasing the efficiency of drug development and regulatory review. These efforts have significant downstream implications for the pace at which targeted and specialty therapies will become available, their associated costs, and the growing importance of demonstrating value in the postmarket setting.

As payers and providers continue their push toward increased value-based care, more innovative models for connecting such reforms to drug development are needed. Earlier collaboration with industry could enable more efficient identification of unmet need, opportunities to add value through drug development, and clearer input on the value proposition and evidentiary thresholds needed for coverage. Equally important will be unique public-private collaborations that invest in developing a better postmarket data infrastructure that can more effectively identify high value uses of new treatments and support achieving value through new payment reforms.

Stronger collaboration could also improve evidence development and the coverage determination process after a targeted  treatment has gained regulatory approval. Facilitated drug access programs like those proposed by the Medicare Administrative Contractor Palmetto GBA create access points for patients to receive targeted anti-cancer agents off-label while payers and industry gather important additional outcomes data in patient registries. More systematic and efficient use of policies like Medicare's Coverage with Evidence Development (CED), which allows for provisional coverage for promising technologies or treatments while evidence continues to be collected, could enable industry and payers to work together to learn about a medical product's performance in patient populations not typically represented in clinical studies. A CED-type model could be especially useful for certain specialty drugs: data collected as a condition of payment could help payers and providers develop evidence from actual practice to improve treatment algorithms, increase adherence, and improve outcomes. 

Finally, collaborations that support stronger postmarket data collection can also support novel drug payment models that further reward value. Bundled payments that include physician-administered drugs, for example, could encourage providers to increase quality while also incentivizing manufacturers to help promote evidence-based drug use and lower costs for uses that generate low value. Outcomes-based purchasing contracts that tie price paid to a medical product's performance could be another promising approach for high-expense treatment with clearly defined and feasibly measured outcomes.

Many of these ideas are not new, but as manufacturers, payers, providers, and patients move into an increasingly value-focused era of health care, it is clear that they must work together to find new ways to both promote development of promising new treatments while also making good on the promise of value-based health care reforms.

      

       

       

Interpreting employment stats among young people can be tricky. No one expects employment rates among teens or people in their early 20s to reach those of prime-age workers. These are prime years for what economists call “investing in human capital,” an activity most people would describe as “going to school.”

Education requirements for good jobs are getting higher, so finishing high school and earning a post-secondary credential like two or four-year college degrees, apprenticeships, or certifications are top priorities. But early work experiences can allow young people to learn new skills, gain experience, and expand networks. Evidence suggests that it can improve employment prospects down the line. And the earlier that people are exposed to the workplace, the earlier they learn such skills as teamwork, communication, and dependability—skills that employers say are in short supply. 

The employment rate for teens fell from 43 percent in 2000 to 26 percent in 2014, and for young adults aged 20 to 24, it fell from 70 to 62 percent. These are big drops. In a new analysis, I take a deeper look at employment trends among young people. When employment rates are broken out by age and race/ethnicity, you see the same downward pattern, but also substantial variation among whites, blacks, Latinos, and Asians.

Do these declines spell trouble? The answer is, it depends:  on how young people spend their time, what resources and support are available to them, and how the person making the judgement values academics and enrichment relative to employment.

Some argue that workplace experience provides key developmental opportunities that benefit all young people. Robert Halpern, for example, wryly notes that high school students are isolated from the adult world “at just the moment when [they] need to begin learning about participating in it.” 

Others say that employment matters more for some young people than others. For example, disadvantaged youth—those not on track to earn a post-secondary credential and without strong family or community  networks to help them find jobs—can particularly benefit from formal programs that connect them to the labor market. As Jeylan Mortimer concluded about “low academic promise” high school students (those with poor grades and low educational goals): “[H]aving a positive work experience can help to turn you around.  For those who have a lot of disadvantages, any positive experience is likely to have a greater impact than on people with a lot of advantages already.” Research on Career Academies, high schools that combine academics with career development, support this view. Career Academy students, disproportionately low-income, black, and Latino, posted significant earnings gains eight years after graduation, and young male graduates also had higher rates of marriage and custodial parenthood.

And some would say that it’s appropriate to prioritize education over employment, especially for teens, who are typically not responsible for supporting themselves and their families.

So what do the data tell us? Voluntarily dropping out of the labor force to concentrate on academics as a young person can pay off when people enter their prime working years, generally considered to be 25 to 54. Though education and work are not necessarily incompatible, employment rates are generally lower among students than among those not enrolled in school. Among teens and young adults, Asians have the lowest employment rates, but they also have the highest school enrollment rates. 92 percent of Asian 16- to 19-year-olds and 63 percent of Asian 20- to 24-year-olds are in school, compared to 80 percent and 38 percent among all races. It follows, then, that Asians have high levels of educational attainment. In fact, 50 percent of 23- to 24-year-old Asians have a Bachelor’s degree, double the average rate. Given the strong correlation between education and employment, it is not a coincidence that prime-age Asians have high employment rates and low unemployment rates. Their low employment rates as young people do not, on the whole, seem to lead to problems as adults. (Of course, this is not to downplay the diversity of the Asian population and to suggest that all Asians are doing well economically.)

On the other hand, blacks have the second lowest employment rates as teens and young adults, and the lowest rate as prime age workers. They also have the highest unemployment rates, showing an active desire to work. Among black teens in 2014, the unemployment rate was 38 percent, compared to 23 percent overall, and it was 22 percent among black young adults, compared to 13 percent overall. The trend continues into prime working years: blacks have an unemployment rate of 11.4 percent, nearly double the overall rate of 6.2 percent.  The low employment rate among young black people is not driven by school enrollment. Latinos have similar (below-average) enrollment levels but higher employment rates, and whites have much higher employment rates but only slightly higher enrollment levels. The weaker employment outcomes of blacks at all ages is probably related to multiple factors: relatively low levels of educational attainment, discrimination, and the neighborhood effects of living in concentrated poverty.

Blacks and Latinos are disproportionately represented among so-called “disconnected youth,” young people aged 16 to 24 who are neither working nor in school. 17 percent of black young adults aged 20 to 24 are disconnected, as are 13 percent of Latinos, 7 percent of whites, and 4 percent of Asians. Half of disconnected young adults have a high school credential and another 20 percent have taken some college courses, suggesting that getting these young people on a better path involves not only reducing the high school dropout rate, but also strengthening the transition from high school to post-secondary education and the labor market. 

In short, employment rates among young people tell different stories that often track by race and ethnicity. Some voluntarily withdraw from the labor market to focus on academics and extra-curricular activities, others would really like a job but can’t find one, and some—the most disadvantaged—are alienated from both school and the labor market.

      

In a recent analysis, I highlighted how employment and disconnection among young people vary by age, race, and place. In this podcast, I dig deeper into the data on the Washington, D.C. region. Although the area generally performs well on employment measures, not all young people are faring equally well.

Listen to the full podcast segment here: 

       

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Youth summer jobs programs have experienced a resurgence of interest and investment since the Great Recession, driven by concerns about high unemployment rates among young people, particularly those who are low-income, black, or Hispanic. Recent research points to summer jobs programs as a positive lever for change by reducing violence, incarceration, and mortality and improving academic outcomes.They are often a jurisdiction’s most high-profile youth employment initiative.

But good intentions do not always lead to results. Research has not yet linked summer jobs programs to improved employment outcomes, evaluations to date are silent on effective program design, and in the absence of agreed-upon standards and best practices, there is no guarantee of quality.They are complicated and labor-intensive to operate, and many jurisdictions had to re-build their programs after a long hiatus following the end of dedicated federal funding in the late 1990s.

On Thursday, July 14, the Brookings Metropolitan Policy Program hosted an event that explored core elements associated with high-performing programs and made recommendations to strengthen summer jobs programs. The event featured a presentation on the finding of a new paper by Brookings fellow Martha Ross and co-author Richard Kazis, titled, “Youth Summer Jobs Programs: Aligning Ends and Means,” followed by a response panel, comprised of leaders from metro areas across the country.  

Join the conversation on Twitter at #SummerJobs

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Presentation by Martha Ross

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From left to right: Richard Kazis, Nonresident Fellow, The Brookings Institution; Kerry Sullivan, President, Bank of America Charitable Foundation; Honorable Michael A. Nutter, Former Mayor, City of Philadelphia;  Ana Galeas, Summer Camp Counselor, DC Scores, and Participant, Mayor Marion S. Barry Summer Youth Employment Program; Michael Gritton, Executive Directlor, KentuckianaWorks

Video

• Welcome and presentation
• Panel discussion
• Closing remarks

Audio

• Improving youth summer jobs programs

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20160714_youth_jobs_transcript

       

Summer jobs programs for young people have experienced a resurgence of interest and investment since the Great Recession, driven by concerns about high youth unemployment rates, particularly among low-income, black, and Hispanic youth. 

Summer jobs programs typically last five to seven weeks and provide work opportunities to teens and young adults who otherwise might struggle to find jobs. They offer a paycheck, employment experiences, and other organized activities in the service of multiple goals: increasing participants’ income, developing young people’s skills and networks to improve their labor market prospects, and offering constructive activities to promote positive behavior. Most young people are placed in subsidized positions in the public and nonprofit sectors, although most cities also secure unsubsidized and private-sector placements, which typically come with higher skill and work-readiness requirements. Recent research finds that summer jobs programs have positive effects: reducing violence, incarceration, and mortality and improving academic outcomes.

But a strong program does not automatically follow from good intentions. Program design and implementation carry the day and determine the results. Moreover, research has not yet linked summer jobs programs to improved employment outcomes; evaluations to date are silent on effective program design; and, in the absence of agreed-upon standards and best practices, there is no guarantee of quality.

This paper is written to help clarify what is known about summer jobs programs and to provide information and guidance to city leaders, policymakers, and funders as they consider supporting larger and better summer efforts. Many jurisdictions are rebuilding their summer programs after a long hiatus that followed the end of dedicated federal funding in the late 1990s. Summer jobs programs are complex endeavors to design and deliver. Local leaders and administrators make a multitude of choices about program design, implementation, and funding, and these choices have a direct impact on quality and results. It is an opportune moment to assess the knowledge base and gaps about the operations and impacts of summer jobs programs.

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• Summer Jobs Ross 7 12 16
• Press release

       

On Monday, July 18, 2016, the world celebrated Nelson Mandela International Day, a day recognizing the former president of South Africa’s commitment to fostering peace and freedom. Every year the Nelson Mandela Foundation hosts a lecture, inviting prominent individuals to discuss significant social issues affecting the African continent. For this year’s lecture, Bill Gates was selected to speak on the theme of “Living Together” in front of a packed stadium in Pretoria. Gates focused on a topic Mandela returned to repeatedly throughout his life—the power of the youth. In the words of Gates, “…young people are better than old at driving innovation because they are not locked in by the limits of the past… we must clear away the obstacles standing in young people’s way so that they can seize all of their potential.”

Unfortunately, South Africa, the second-largest economy on the continent, has the highest youth unemployment rate at 54 percent, as seen in the figure below. Surprisingly, according to the figure the highest rates of youth unemployment lie in the upper-middle-income countries as classified by GNI per capita. Additionally, these unemployment rates might be depressed due to the fact that unemployment refers to people looking for jobs, and many of Africa’s youth are forced into the informal sector after giving up on their search for employment.

Although youth unemployment in Africa is often seen as a growing challenge, a number of experts interpret the large youth population as an opportunity, as long as the youth have access to the economic opportunities through which they can channel their energy into progress. As Africa’s youth is predicted to grow exponentially, achieving broad-based economic growth and development will rely on breaking down the barriers to economic opportunity, by investing in human capital (through education) and in improving business environments. 

Figure 2.3. Youth unemployment will continue to be a growing challenge in 2016

Interestingly, GDP and income classification have little correlation with youth unemployment rates. For example, South Africa, which has the second-largest economy on the continent and is considered an upper-middle-income country based on its GNI per capita, has the highest youth unemployment rate at nearly 54 percent. Meanwhile, the Liberian economy, which is nearly 200 times smaller than South Africa’s, has a youth unemployment rate 10 times smaller. Youth unemployment is measured as the share of the labor force (ages 15-24) without work but available for and seeking employment. Estimates may be low in some low-income countries like Liberia because many young people cannot afford not to work to seek employment and as a result, end up in low-paying jobs.

Source: Youth unemployment figures from World Development Indicators and GDP data from the World Bank databank.

See the Brookings Africa Growth Initiative’s Foresight Africa 2016 report, from which the figure below comes, for more highlights on the growing challenge of youth unemployment in Africa. In addition, earlier this month the Brookings Institution hosted an Africa Policy Dialogue on the Hill on jobs in Africa, alluding to the shortcomings of the educational systems and the importance of infrastructure and electricity to support business and attract investment. For a summary of the conversation, see here.

Tor Syvrud contributed to this post.

       

John Kerry to travel to Kenya and Djibouti next week

Exactly one year after U.S. Secretary of State John Kerry’s last multi-country tour of sub-Saharan Africa, he is preparing for another visit to the continent—to Kenya and Djibouti from May 3 to 5, 2015. In Kenya, Kerry and a U.S. delegation including Linda Thomas-Greenfield, assistant secretary of state for African affairs, will engage in talks with senior Kenyan officials on U.S.-Kenya security cooperation, which the U.S. formalized through its Security Governance Initiative (SGI) at the U.S.-Africa Leaders Summit last August. Over the past several years, the U.S. has increased its military assistance to Kenya and African Union (AU) troops to combat the Somali extremist group al-Shabab and has conducted targeted drone strikes against the group’s top leaders.  In the wake of the attack on Kenya’s Garissa University by al-Shabab, President Obama pledged U.S. support for Kenya, and Foreign Minister Amina Mohamed has stated that Kenya is currently seeking additional assistance from the U.S. to strengthen its military and intelligence capabilities.

Kerry will also meet with a wide array of leaders from Kenya’s private sector, civil society, humanitarian organizations, and political opposition regarding the two countries’ “common goals, including accelerating economic growth, strengthening democratic institutions, and improving regional security,” according to a U.S. State Department spokesperson. These meetings are expected to build the foundation for President Obama’s trip to Kenya for the Global Entrepreneurship Summit in July of this year.

On Tuesday, May 5, Kerry will become the first sitting secretary of state to travel to Djibouti. There, he will meet with government officials regarding the evacuation of civilians from Yemen and also visit Camp Lemonnier, the U.S. military base from which it coordinates its counterterror operations in the Horn of Africa region.

Protests erupt as Burundian president seeks third term

This week saw the proliferation of anti-government street demonstrations as current President Pierre Nkurunziza declared his candidacy for a third term, after being in office for ten years.  The opposition has deemed this move as “unconstitutional” and in violation of the 2006 Arusha peace deal which ended the civil war. Since the announcement, hundreds of civilians took to the streets of Bujumbura, despite a strong military presence. At least six people have been killed in clashes between police forces and civilians. 

Since the protests erupted, leading human rights activist Pierre-Claver Mbonimpa has been arrested alongside more than 200 protesters. One of Burundi’s main independent radio stations was also suspended as they were covering the protests.  On Wednesday, the government blocked social media platforms, including Twitter and Facebook, declaring them important tools in implementing and organizing protests. Thursday, amid continuing political protests, Burundi closed its national university and students were sent home. 

Amid the recent protests, Burundi’s constitutional court will examine the president’s third term bid. Meanwhile, U.N. secretary general Ban Ki-moon has sent his special envoy for the Great Lakes Region to hold a dialogue with president Nkurunziza and other government authorities. Senior U.S. diplomat Tom Malinowski also arrived in Bujumbura on Thursday to help defuse the biggest crisis the country has seen in the last few years, expressing disappointment over Nkurunziza’s decision to run for a third term.

China invests billions in African infrastructure

Since the early 2000s, China has become an increasingly significant source of financing for African infrastructure projects, as noted in a recent Brookings paper, “Financing African infrastructure: Can the world deliver?” This week, observers have seen an additional spike in African infrastructure investments from Chinese firms, as three major railway, real estate, and other infrastructure deals were struck on the continent, totaling nearly $7.5 billion in investments.

On Monday, April 27, the state-owned China Railway Construction Corp announced that it will construct a $3.5 billion railway line in Nigeria, as well as a $1.9 billion real estate project in Zimbabwe. Then on Wednesday, the Industrial and Commercial Bank of China (one of the country’s largest lenders) signed a $2 billion deal with the government of Equatorial Guinea in order to carry out a number of infrastructure projects throughout the country. These deals align with China’s “One Belt, One Road” strategy of building infrastructure in Africa and throughout the developing world in order to further integrate their economies, stimulate economic growth, and ultimately increase demand for Chinese exports. For more insight into China’s infrastructure lending in Africa and the implications of these investments for the region’s economies, please see the following piece by Africa Growth Initiative Nonresident Fellow Yun Sun: “Inserting Africa into China’s One Belt, One Road strategy: A new opportunity for jobs and infrastructure?”

      

       

       

Editor’s Note: This blog post is part of a series on the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, which were launched at a Brookings public event on August 26. Previous posts have highlighted five key findings from the 2015 FDIP Report and explored groundbreaking financial inclusion developments in India. Today’s post will compare financial inclusion outcomes and opportunities for growth across several Asian countries included in the 2015 Report and Scorecard.

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Of the 21 countries ranked in the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, no countries in Asia placed in the top 5 in the overall ranking. However, all of the FDIP Asian countries have demonstrated progress within at least one of the four dimensions of the 2015 Scorecard: country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services.

This blog post will dive into a few of the obstacles and opportunities facing FDIP countries in central Asia, the Middle East, and southeast Asia as they move toward greater access to and usage of financial services among marginalized groups. We explore these countries in order of their overall score: Turkey (74 percent), Indonesia (70 percent), the Philippines (68 percent), Bangladesh (67 percent), Pakistan (65 percent), and Afghanistan (58 percent). You can also read our separate post on financial inclusion in India, available here.

Turkey: Clear economic advantages, but opportunities for enabling regulation and greater equity remain

Turkey is one of the few upper-middle income countries in the FDIP sample, ranking in the top 5 in terms of gross domestic product (GDP) measured in US dollars. Turkey’s fairly robust banking infrastructure contributed to its relatively strong adoption rates: As of 2013, the International Monetary Fund’s Financial Access Survey found that Turkey had about 20 bank branches per 100,000 adults (the 4^th highest density rate among the 21 FDIP countries) and about 73 ATMs per 100,000 adults (the 2^nd highest density rate among the FDIP countries).

According to the World Bank’s Global Financial Inclusion (Global Findex) database, about 57 percent of adults in Turkey had an account with a mobile money provider or formal financial institution as of 2014. Turkey’s performance on the adoption dimension of the 2015 Scorecard contributed to its tie with Colombia and Chile for 6^th place on the overall scorecard.

With that said, Turkey received lower mobile capacity and regulatory environment scores, ranking 16^th and 17^th respectively. Although Turkey’s smartphone and mobile penetration levels are quite robust, a limited mobile money provider landscape, combined with a lack of regulatory clarity surrounding branchless banking regulations (particularly agent banking), constrained Turkey’s scores in those categories.

Nonetheless, there is promising news for Turkey’s financial inclusion environment. In 2015, Turkey assumed the G20 presidency and has renewed its focus on financial inclusion in association with this transition. Turkey’s 2014 financial inclusion strategy is one example of the country’s commitment to advancing inclusion.

To date, financial inclusion growth in Turkey has been limited, as evidenced by the results of the 2011 and 2014 Global Findex. However, if the country’s stated commitment translates into concrete initiatives moving forward, we can expect to see accelerated financial inclusion growth. This will be critical for facilitating access to and usage of quality financial services among the nearly 60 percent of women in Turkey without formal financial accounts. Reducing the approximately 25 percentage point gap in account ownership between men and women — one of the highest gender gaps among the 21 FDIP countries — should be a key priority for the country moving forward.

Indonesia: High mobile money potential, but enhanced awareness needed to drive adoption

Recent changes to Indonesia’s regulatory environment have facilitated a more enabling digital financial services ecosystem, although there is still room for improvement in terms of reducing supply-side barriers. Increasing mobile money awareness could help leverage Indonesia’s strong mobile capacity rates to increase access to and usage of formal financial services. However, moving from a heavily cash-based environment to greater use of digital financial services will take time: A 2014 InterMedia survey in Indonesia found that although 93 percent of bank account holders could access their accounts digitally, 73 percent preferred to access their accounts via an agent at a bank branch.

The differing mandates of Indonesia’s new financial services authority, Otoritas Jasa Keuangan (OJK), which focuses on branchless banking (specifically agent banking) and Bank Indonesia, which focuses on electronic money regulation, may have created some confusion regarding the regulatory environment. Solidifying the country’s financial inclusion strategy and clarifying the roles of the various financial inclusion stakeholders could provide opportunities for greater coherence in terms of financial inclusion objectives.

OJK’s recent branchless banking regulations have led to several positive changes within the regulatory environment. For example, these regulations enabled financial service providers to appoint individuals and business entities as agents and to provide simplified customer due diligence requirements. The 2015 FDIP Report highlights in greater detail some possible improvements to the branchless banking and e-money regulations.

On the mobile capacity side, Indonesia tied for the second-highest score on the 2015 Scorecard. Indonesia is one of the few countries where mobile money platform interoperability has been implemented, allowing different mobile money services to “talk” to one another in real time. Indonesia also boasted the third-highest 3G network coverage by population among all the FDIP Asian countries, as well as the third-highest unique subscribership rate among these countries. However, only about 3 percent of adults were aware of mobile money as of fall 2014, according to the InterMedia survey.

In terms of adoption, the 2014 Global Findex found that women in Indonesia actually had slightly higher rates of account ownership than adults in general, although there is still significant room for growth across all adoption indicators. Given Indonesia’s strong mobile capacity ranking, increasing awareness of mobile money services could drive growth in the digital finance sector. Clarifying existing regulatory frameworks and removing some remaining restrictions regarding agent exclusivity and other agent criteria could further boost financial inclusion.

Philippines: Strong commitment, but geographic barriers have inhibited scale

The Philippines tied with Bangladesh to garner 15^th place for adoption, which contributed to the country’s overall ranking (also 15^th place). In both Bangladesh and the Philippines, about 31 percent of adults had an account with a mobile money provider or formal financial institution as of 2014. According to the 2014 Global Findex, the percentage of women with formal financial accounts was about 7 percentage points higher than the overall percentage of adults with accounts — a rarity among the 21 FDIP countries, which generally exhibit a “gender gap” in which women are less likely to have formal financial accounts than men.

The Philippines’ efforts to foster financial inclusion earned it the second-highest country commitment and regulatory environment rankings among the FDIP Asian countries. The Bangko Sentral ng Pilipinas (BSP), the Philippines’ central bank, has issued a number of circulars providing guidance regarding electronic money and allowing non-bank institutions to become e-money issuers. The BSP also has the distinction of being the first central bank in the world to create an office dedicated to financial inclusion. Most recently, the BSP launched a national financial inclusion strategy in July 2015.

On the mobile side, according to the GSMA Intelligence database, as of the end of the first quarter of 2015 the Philippines had the highest unique mobile subscribership rate among the FDIP Asian countries, as well as the second-highest rate of 3G network coverage by population among these countries.

In terms of mobile money, the Philippines is home to two of the earliest mobile financial services products, Smart’s Smart Money and Globe’s GCash. It also boasts the second-highest rate of mobile money accounts among adults in all the FDIP Asian countries, according to the 2014 Global Findex.

There is still significant room for improvement in adoption of traditional and digital financial services in the Philippines. The country’s geography has posed a challenge with respect to advancing access to financial services among the dispersed population. While the extent of banking infrastructure has improved over time, as of 2013 610 out of 1,634 cities and municipalities did not have a banking office, and financial access points remained concentrated in larger cities. Expanding agent locations and facilitating interoperability could enhance mobile money adoption, mitigating the consequences of these geographic barriers.  

Bangladesh: Rapid growth, but high unregistered use and low adoption overall

While Bangladesh performed strongly on the country commitment and mobile capacity dimensions of the 2015 FDIP Scorecard, it received one of the lowest adoption rankings among the FDIP Asian countries. According to the Global Findex, about 31 percent of adults age 15 and older had an account with a formal financial institution or mobile money provider as of 2014. Indicators pertaining to the country’s rates of formal saving, credit card use, and debit card use all received the lowest score.

Bangladesh has a robust mobile landscape, with fairly strong unique mobile subscription rates — as of the first quarter of 2015, it was tied with Indonesia for the third-highest unique mobile subscribership rates among the FDIP Asian countries, after the Philippines and Turkey. This mobile coverage is combined with a multiplicity of mobile money providers (although a 2014 InterMedia survey noted that nearly 90 percent of active mobile money customers used the bKash mobile money service).

Awareness of mobile money as a service in Bangladesh is very high, although understanding of the concept is less prevalent — in 2014, about 91 percent of respondents in an InterMedia survey were aware of at least one mobile money provider, although only about 36 percent were aware of mobile money as a general concept.

Unregistered use of mobile money accounts is high. While about 37 percent of adults had a mobile money account or bank account or both as of 2014, according to the InterMedia survey, only about 5 percent had registered mobile money accounts, while 4 percent had active, registered mobile money accounts (meaning an account that is registered and has been used in the previous 90 days).Transitioning to registered accounts will help enable individuals to connect with more extensive financial services, such as receipt of government payments.

Overall, adoption of mobile money and the expansion of agent locations have been increasingly rapid in Bangladesh — as of 2014 Bangladesh was one of the fastest growing markets in terms of total accounts globally. Over 60 percent of respondents in a 2013 InterMedia survey stated that they “fully” or “rather” trusted mobile money. Moving forward, increasing financial capability might help individuals feel more at ease registering their accounts and using them independently of an agent.

Pakistan: Public and private sector initiatives advance inclusion

Pakistan ranked 7^th in terms of the percentage of adults with mobile money accounts among the 21 countries, achieving the highest percentage of all of the Asian FDIP countries. Yet there is significant room for growth — as of 2014, only about 6 percent of adults had a mobile money account.

The State Bank of Pakistan (SBP) has clearly expressed its commitment to advancing financial inclusion, which earned the country a commitment score of 100 percent. The SBP developed Branchless Banking regulations in 2008, with revisions in 2011. These regulations were explicitly intended to promote financial inclusion. More recently, the country’s National Financial Inclusion Strategy was launched in May 2015. In terms of quantitative assessments of financial inclusion, the SBP tracks supply-side information on branchless banking in its quarterly newsletters.

Recent public and private sector initiatives may help advance mobile money adoption. For example, a re-verification initiative for SIM cards was mandated by the government and initiated earlier in 2015. Mobile network operators have been promoting registration of mobile money accounts since the biometric re-verification process is more intensive than the identification requirements needed to register a mobile money account.

Earlier, in September 2014, the EasyPaisa mobile money service decided to eliminate fees related to money transfers between Easypaisa account customers and cash-out transactions for a set period. As of April 2015, the number of person-to-person money transfers had increased by about 2500 percent.

Still, barriers to financial inclusion remain. A 2014 InterMedia survey noted that while distance was less of a barrier to registration than previously, distance did affect the frequency with which users engaged with mobile money services. Therefore, expanding access points could further facilitate use of mobile money. Increasing the number of registered accounts could also provide individuals with more opportunities to engage with financial services beyond basic transfers — the InterMedia survey found that as of 2014, about 8 percent of adults were over-the-counter mobile money users, while 0.3 percent were registered users.

Afghanistan: Commitment to improving infrastructure and adoption

Instability and systemic corruption in Afghanistan over the past several decades have damaged trust in formal financial services and limited the development of traditional banking infrastructure. In addition to having one of the lowest levels of GDP among the 21 FDIP countries, as of 2013 the Financial Access Survey found Afghanistan had the lowest reported density of commercial banks per 100,000 adults. Even among individuals who can access banks, adoption of formal accounts is constrained by a lack of trust in formal financial services.

On the mobile side, Afghanistan has fairly widespread 3G network coverage (over 80 percent of the population, according to the GSMA Intelligence database), which helped boost its mobile capacity ranking to 2^nd place. However, Afghanistan received the lowest score possible for each of the 15 adoption indicators. According to the 2014 Global Findex, financial account ownership as of 2014 was at about 10 percent of adults, and financial account ownership among women was at only 4 percent. Tracking gender-disaggregated data at the national level could help the government better identify underserved populations and target financial solutions toward their needs.

The government has made an effort to promote financial inclusion and digital financial services. For example, Da Afghanistan Bank committed to the Alliance for Financial Inclusion in 2009, and the Republic of Afghanistan is a member of the Better Than Cash Alliance. In 2008, the Money Service Providers Regulation was issued, with amendments instituted a few years later pertaining to e-money. The Afghanistan Payments Systems, which is still being fully operationalized, aims to allow payment service providers such as mobile network operators to connect their mobile money systems.

While several mobile money options are available, adoption of these services is low. According to the 2014 Global Findex, about 0.3 percent of adults had a mobile money account. Implementing interoperability across platforms might help increase the utility of mobile money services for consumers, and as in Turkey, developing specific agent banking regulations could provide clarity to the sector and drive innovation.

By expanding financial access points, educating consumers about traditional and digital financial services, and monitoring providers to ensure consumer protection, Afghanistan’s regulatory entities and financial service providers may be able to better reach underserved populations and inculcate trust in formal financial services.

       

How can countries support innovative approaches to facilitating access to and usage of formal financial services among low-income and other marginalized groups while mitigating the risk of misuse within the financial sector?

As part of the Brookings Financial and Digital Inclusion Project (FDIP), the FDIP team recently hosted a roundtable to examine this central question. The objective of the roundtable was to identify and discuss salient challenges and opportunities for financial services providers, government entities, and consumers with respect to balancing anti-money laundering/countering the financing of terrorism (AML/CFT) compliance — a critical component of financial integrity and stability — with inclusive financial access and growth.

We explore several key questions and themes that emerged from the roundtable below.

Do areas of synergy exist between financial inclusion and AML/CFT efforts?

• AML/CFT requirements and financial inclusion have sometimes been perceived as being in tension with one another — for example, stringent “know your customer” (KYC) requirements associated with AML processes can restrict formal financial access among marginalized groups who are unable to fulfill the KYC documentation requirements. However, the objectives of AML/CFT (ensuring stability and integrity within the financial sector) and financial inclusion (providing access to and promoting usage of a broad range of appropriate, affordable financial services) can be mutually reinforcing.
• By moving individuals from the shadow economy into the formal financial system, greater opportunities emerge for introducing underserved populations to a broad suite of formal financial services, and ensuring those services are accompanied by suitable consumer protections. Thus, financial inclusion, financial integrity, and financial stability can act as complementary objectives.
• The 2012 Declaration of the Ministers and Representatives of the Financial Action Task Force (FATF) recognized financial exclusion as a money laundering and terrorist financing risk in approving FATF’s 2012-2020 Mandate. This mandate affirmed FATF’s 2011 guidance on AML and terrorist financing measures and financial inclusion, which stated that “[i]t is acknowledged at the same time that financial exclusion works against effective AML/CFT policies. Indeed the prevalence of a large informal, unregulated and undocumented economy negatively affects AML/CFT efforts and the integrity of the financial system. Informal, unregulated and undocumented financial services and a pervasive cash economy can generate significant money laundering and terrorist financing risks and negatively affect AML/CFT preventive, detection and investigation/prosecution efforts.”

What are key challenges and concerns with respect to balancing financial inclusion with financial integrity?

• Awareness of financial inclusion issues is not universal among individuals who work in the regulatory, compliance, and law enforcement spheres of the financial ecosystem. Engagement among these groups is critical for promoting knowledge-sharing with respect to financial integrity and inclusion.
• Although FATF and other standard-setting bodies (SSBs) have increasingly adopted recommendations favoring proportionate, risk-based approaches to AML/CFT (as evidenced by the 2013 FATF Guidance on Financial Inclusion), regulators often pursue more conservative approaches than SSB guidelines recommend. These conservative approaches may constrain access to and usage of formal financial services among marginalized groups.
• Combating the potential use of low-value transfers within countries and across borders for terrorist financing purposes is a salient concern for the law enforcement community when considering proportionate AML/CFT approaches.

How does the digital component fit into these issues?

• As its name suggests, FDIP is interested in exploring the evolving role of digital technology within the financial services ecosystem. As discussed in the 2015 FDIP Report, digitization of financial services can be more cost-effective for public and private sector providers to manage and safer for consumers than carrying or storing cash.
• For example, a 2013 report found that the Mexican government saved about $1.3 billion annually by centralizing and digitizing payments for wages, pensions, and social transfers. A 2014 report by the World Bank Development Research Group, the Better Than Cash Alliance, and the Bill & Melinda Gates Foundation highlighted several countries, including South Africa, where disbursing social transfers electronically cost significantly less than manual cash disbursement.
• Digital financial services can also promote women’s economic empowerment, as these services are often more private and convenient to access than traveling to a “brick and mortar” financial service provider. Given that as of 2014 there was a 9 percentage point gap between the number of men and women with accounts in developing economies (with women disproportionately excluded from account ownership), facilitating access to formal financial services among the 42 percent of women globally who do not have an account will be a major factor in advancing financial inclusion.
• With respect to financial integrity in particular, digital identification mechanisms such as biometric IDs can help lower access barriers to financial services while ensuring that providers have the information they need to promote security and stability in the financial ecosystem. In its June 2011 guidance, FATF recognized the use of non-documentary methods of identification verification — for example, a signed declaration from a community leader coupled with a photo taken by a mobile phone — for advancing access to formal financial services among underserved groups.
• The Aadhaar initiative in India, which the FDIP team referenced in a previous post, is currently the largest biometric identification program in the world. The unique 12-digit ID enables individuals to meet KYC requirements and has been used as a financial account among those who do not have an account with a financial institution. Another innovative digital initiative is underway in Tanzania, where the government is working in concert with mobile carrier Tigo and UNICEF to provide birth certificates via mobile phones.

What are critical questions and areas of opportunity for fostering financial inclusion and integrity moving forward?

• How can regulators and providers ensure sufficient privacy protections are in place for customers when advancing financial inclusion efforts, particularly through digital channels?
• Through what mechanisms can government entities and non-government financial services providers best mitigate the risks of centralizing sensitive customer data?
• Could an industry utility that facilitates a common solution to AML systems serve as a feasible solution for harmonizing standards?
• What is the proper role of private solutions in the AML/CFT and financial inclusion spaces?
• Could identification verification applications be developed using blockchain technology?
• In what ways can social networks be leveraged with respect to digital identity initiatives and financial inclusion?