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

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

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

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

Editor’s note: This post is part of a series on the Brookings Financial and Digital Inclusion Project, which aims to measure access to and usage of financial services among individuals who have historically been disproportionately excluded from the formal financial system. To read the first annual FDIP report, learn more about the methodology, and watch the 2015 launch event, visit the 2015 Report and Scorecard webpage.

Convenient access to banking infrastructure is something many people around the world take for granted. Yet while the number of people outside the formal financial system has substantially decreased in recent years, 2 billion adults still do not have an account with a formal financial institution or mobile money provider.¹

This means that significant opportunities remain to provide access to and promote use of affordable financial services that can help people manage their financial lives more safely and efficiently.

To learn more about how countries can facilitate greater financial inclusion among underserved groups, the Brookings Financial and Digital Inclusion Project (FDIP) sought to answer the following questions: (1) Do country commitments make a difference in progress toward financial inclusion?; (2) To what extent do mobile and other digital technologies advance financial inclusion; and (3) What legal, policy, and regulatory approaches promote financial inclusion?

To address these questions, the FDIP team assessed 33 indicators of financial inclusion across 21 economically, geographically, and politically diverse countries that have all made recent commitments to advancing financial inclusion. Indicators fell within four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory commitment, and adoption of selected traditional and digital financial services.

In an effort to obtain the most accurate and up-to-date understanding of the financial inclusion landscape possible, the FDIP team engaged with a wide range of experts — including financial inclusion authorities in the FDIP focus countries — and also consulted international non-governmental organization publications, government documents, news sources, and supply and demand-side data sets.

Our research led to 5 overarching findings.

1. Country commitments matter.

   Not only did our 21 focus countries make commitments toward financial inclusion, but countries generally took these commitments seriously and made progress toward their goals. For example, the top five countries within the scorecard each completed at least one of their national-level financial inclusion targets. While correlation does not necessarily equal causation, our research supports findings by other financial inclusion experts that national-level country commitments are associated with greater financial inclusion progress. For example, the World Bank has noted that countries with national financial inclusion strategies have twice the average increase in the number of account holders as countries that do not have these strategies in place.

2. The movement toward digital financial services will accelerate financial inclusion.

   Digital financial services can provide customers with greater security, privacy, and convenience than transacting via traditional “brick-and-mortar” banks. We predict that digital financial services such as mobile money will become increasingly prevalent across demographics, particularly as user-friendly smartphones become cheaper² and more widespread.³

   Mobile money has already driven financial inclusion, particularly in countries where traditional banking infrastructure is limited. For example, mobile money offerings in Kenya (particularly the widely popular M-Pesa service) are credited with advancing financial inclusion: The Global Financial Inclusion (Global Findex) database found that the percentage of adults with a formal account in Kenya increased from about 42 percent in 2011 to about 75 percent in 2014, with around 58 percent of adults in Kenya having used mobile money within the preceding 12 months as of 2014.

3. Geography generally matters less than policy, legal, and regulatory changes, although some regional trends in terms of financial services provision are evident.

   Regional trends include the widespread use of banking agents (sometimes known as correspondents)⁴ in Latin America, in which retail outlets and other third parties are able to offer some financial services on behalf of banks,⁵ and the prevalence of mobile money in sub-Saharan Africa. However, these regional trends aren’t absolute: For example, post office branches have served as popular financial access points in South Africa,⁶ and the GSMA’s “2014 State of the Industry” report found that the highest growth in the number of mobile money accounts between December 2013 and December 2014 was in Latin America. Overall, we found high-performing countries across multiple regions and using multiple approaches, demonstrating that there are diverse pathways to achieving greater financial inclusion.

4. Central banks, ministries of finance, ministries of communications, banks, non-bank financial providers, and mobile network operators have major roles in achieving greater financial inclusion. These entities should closely coordinate with respect to policy, regulatory, and technological advances.

   With the roles of public and private sector entities within the financial sector becoming increasingly intertwined, coordination across sectors is critical to developing coherent and effective policies. Countries that performed strongly on the country commitment and regulatory environment components of the FDIP Scorecard generally demonstrated close coordination among public and private sector entities that informed the emergence of an enabling regulatory framework. For example, Tanzania’s National Financial Inclusion Framework⁷ promotes competition and innovation within the financial services sector by reflecting both public and private sector voices.⁸

5. Full financial inclusion cannot be achieved without addressing the financial inclusion gender gap and accounting for diverse cultural contexts with respect to financial services.

   Persistent gender disparities in terms of access to and usage of formal financial services must be addressed in order to achieve financial inclusion. For example, Middle Eastern countries such as Afghanistan and Pakistan have demonstrated a significant gap in formal account ownership between men and women. Guardianship and inheritance laws concerning account opening and property ownership present cultural and legal barriers that contribute to this gender gap.⁹

   Understanding diverse cultural contexts is also critical to advancing financial inclusion sustainably. In the Philippines, non-bank financial service providers such as pawn shops are popular venues for accessing financial services.¹⁰ Leveraging these providers as agents can therefore be a useful way to harness trust in these systems to increase financial inclusion.

To dive deeper into the report’s findings and compare country rankings, visit the FDIP interactive. We also welcome feedback about the 2015 Report and Scorecard at FDIPComments@brookings.edu.

¹ Asli Demirguc-Kunt, Leora Klapper, Dorothe Singer, and Peter Van Oudheusden, “The Global Findex Database 2014: Measuring Financial Inclusion around the World,” World Bank Policy Research Working Paper 7255, April 2015, VI, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/04/15/090224b082dca3aa/1_0/Rendered/PDF/The0Global0Fin0ion0around0the0world.pdf#page=3.

² Claire Scharwatt, Arunjay Katakam, Jennifer Frydrych, Alix Murphy, and Nika Naghavi, “2014 State of the Industry: Mobile Financial Services for the Unbanked,” GSMA, 2015, p. 24, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/03/SOTIR_2014.pdf.

³ GSMA Intelligence, “The Mobile Economy 2015,” 2015, pgs. 13-14, http://www.gsmamobileeconomy.com/GSMA_Global_Mobile_Economy_Report_2015.pdf.

⁴ Caitlin Sanford, “Do agents improve financial inclusion? Evidence from a national survey in Brazil,” Bankable Frontier Associates, November 2013, pg. 1, http://bankablefrontier.com/wp-content/uploads/documents/BFA-Focus-Note-Do-agents-improve-financial-inclusion-Brazil.pdf.

⁵ Alliance for Financial Inclusion, “Discussion paper: Agent banking in Latin America,” 2012, pg. 3, http://www.afi-global.org/sites/default/files/discussion_paper_-_agent_banking_latin_america.pdf.

⁶ The National Treasury, South Africa and the AFI Financial Inclusion Data Working Group, “The Use of Financial Inclusion Data Country Case Study: South Africa – The Mzansi Story and Beyond,” January 2014, http://www.afi-global.org/sites/default/files/publications/the_use_of_financial_inclusion_data_country_case_study_south_africa.pdf.

⁷ Tanzania National Council for Financial Inclusion, “National Financial Inclusion Framework: A Public-Private Stakeholders’ Initiative (2014-2016),” 2013, pgs. 19-22, http://www.afi-global.org/sites/default/files/publications/tanzania-national-financial-inclusion-framework-2014-2016.pdf.

⁸ Simone di Castri and Lara Gidvani, “Enabling Mobile Money Policies in Tanzania,” GSMA, February 2014, http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2014/03/Tanzania-Enabling-Mobile-Money-Policies.pdf.

⁹ Mayada El-Zoghbi, “Mind the Gap: women and Access to Finance,” Consultative Group to Assist the Poor, 13 May 2015, http://www.cgap.org/blog/mind-gap-women-and-access-finance.

¹⁰ Xavier Martin and Amarnath Samarapally, “The Philippines: Marshalling Data, Policy, and a Diverse Industry for Financial Inclusion,” FINclusion Lab by MIX, June 2014, http://finclusionlab.org/blog/philippines-marshalling-data-policy-and-diverse-industry-financial-inclusion.

Editor’s Note: The Center for Technology Innovation released the 2015 Financial and Digital Inclusion Project (FDIP) Report on August 26^th. TechTank has previously covered the FDIP launch event and outlined the report’s overall findings. Over the next two months, TechTank will take a closer look at the report’s findings by country and by region, beginning with today’s post on India. 

With about 21 percent of the world’s entire unbanked adult population residing in India as of 2014, the country has tremendous opportunities for growth in terms of advancing access to and use of formal financial services.

In the 2015 Financial and Digital Inclusion Project (FDIP) Report and Scorecard, we detail the progress achieved and possibilities remaining for India’s financial services ecosystem as it moves from a heavy reliance on cash to an array of traditional and digital financial services offered by diverse financial providers.

As noted in the 2015 FDIP Report, government-led initiatives to promote financial inclusion have advanced access to financial services in India. Ownership of formal financial institution and mobile money accounts among adults in India increased about 18 percentage points between 2011 and 2014. Recent regulatory changes and public and private sector initiatives are expected to further promote use of these services.

In this post, we unpack the four components of the 2015 FDIP Scorecard — country commitment, mobile capacity, regulatory environment, and adoption of traditional and digital financial services — to highlight India’s achievements and possible next steps toward greater financial inclusion.

Country commitment: An unprecedented year with no sign of slowing

India’s national-level commitment to promoting financial inclusion earned it a “country commitment” score of 100 percent. A historic government initiative helped India garner a top score: In August 2014, Prime Minister Narendra Modi launched the “Pradhan Mantri Jan-Dhan Yojana,” the Prime Minister’s People’s Wealth Scheme (PMJDY). This effort — arguably the largest financial inclusion initiative in the world — “envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension facility,” in addition to providing beneficiaries with an RuPay debit card.

As part of this effort, the program aimed to provide 75 million unbanked adults in India with accounts by late January 2015. As of September 2015, about 180 million accounts had been opened; about 44 percent of these accounts did not carry a balance, down from about 76 percent in September 2014.

The PMJDY initiative is a component of the JAM Trinity, or “Jan-Dhan, Aadhaar and Mobile.” Under this approach, government transfers (also known as Direct Benefit Transfers, or DBT) will be channeled through bank accounts provided under Jan-Dhan, Aadhaar identification numbers or biometric IDs, and mobile phone numbers.

The Pratyaksh Hanstantrit Labh (PaHaL) program is a major DBT initiative in which subsidies for liquefied petroleum gas can be linked to an Aadhaar number that is connected to a bank account or the consumer’s bank details. As of July 2015, about $2 billion had been channeled to beneficiaries in 130 million households across the country.

Mobile capacity: Ample opportunity for digital services, but limited awareness and use

India received 16^th place (out of the 21 countries considered) in the 2015 FDIP Report and Scorecard’s mobile capacity ranking. India’s mobile money landscape features an extensive array of services, and the licensing of new payments banks (discussed below) may drive the entry of new players and products that can improve low levels of awareness and adoption of digital financial services.

An InterMedia survey conducted from September to December 2014 found that while 86 percent of adults owned or could borrow a mobile phone, only about 13 percent of adults were aware of mobile money. Awareness of mobile money is increasing — the 13 percent figure is double that of the first wave of the survey, which concluded in January 2014 — but uptake remains low. The Global Financial Inclusion (Global Findex) database found only 2 percent of adults in India had a mobile money account in 2014.

Implementing interoperability across mobile money offerings, increasing 3G network coverage by population, and enhancing unique mobile subscribership could boost India’s mobile capacity score in future editions of the FDIP report.

Regulatory environment: Opening up the playing field to non-bank entities

India tied for 7^th place on the regulatory environment component of the 2015 Scorecard. The country’s recent shift to a more open financial landscape contributed to its strong score, although more time is needed to see how recent regulations will be operationalized.

India has traditionally maintained tight restrictions with respect to which entities are involved in financial service provision. Non-banks could manage an agent network on behalf of a bank as business correspondents or issue “semi-closed” wallets that did not permit customers to withdraw funds without transferring them to a full-service bank account. These restrictions likely contributed to the country’s slow and limited adoption of mobile money services.

However, 2014 brought significant changes to India’s regulatory landscape. The Reserve Bank of India’s November 2014 Payments Banks guidelines were heralded as a major step forward for increasing diversity in the financial services ecosystem. These guidelines marked a significant shift from India’s “bank-led” approach by providing opportunities for non-banks such as mobile network operators to leverage their distribution expertise to advance financial access and use among underserved groups.

While these institutions cannot offer credit, they can distribute credit on behalf of a financial services provider. They may also distribute insurance and pension products, in addition to offering interest-bearing deposit accounts.

We noted in the 2015 FDIP Report that timely approval of license applications for prospective payments banks, particularly mobile network operators, would be a valuable next step for India’s financial inclusion path. In August 2015, the Reserve Bank of India approved 11 applicants, including five mobile network operators, to launch payments banks within the next 18 months. As noted in Quartz India, the “underlying objective is to use these new banks to push for greater financial inclusion.” India has also made strides in terms of establishing proportionate “know-your-customer” requirements for financial entities, including payments banks.

While India has made significant progress in terms of promoting a more enabling regulatory environment, room for improvement remains. For example, concerns have been raised regarding the low commission rate for banks distributing DBT, with many experts noting that a higher commission would enhance the ability of these banks to operate sustainably.

Adoption: Access is improving, but promoting use is key

India ranked 9^th for the adoption component of the 2015 Scorecard. Recent studies have demonstrated that adoption of formal financial services among traditionally underserved groups is improving. For example, InterMedia surveys conducted in October 2013 to January 2014 and September to December 2014 found that the most significant increase in bank account ownership was among women, particularly women living below the poverty line. Still, further work is needed to close the gender gap in account ownership.

As noted above, adoption of digital financial services such as mobile money is minimal compared with traditional bank accounts (0.3 percent compared with 55 percent, according to the September to December 2014 InterMedia survey); nonetheless, we believe that the introduction of payments banks, combined with government efforts to digitize transfers, will facilitate greater adoption of digital financial services.

While PMJDY has successfully promoted ownership of bank accounts, incentivizing use of these services is critical for achieving true financial inclusion. Dormancy rates in India are high — about 43 percent of accounts had not been deposited into or withdrawn from in the previous 12 months, according to the 2014 Global Findex.

More time may be needed for individuals to understand how their new accounts function and, equally importantly, how their new accounts are relevant to their daily lives. A February 2015 survey designed by India’s Ministry of Finance, MicroSave, and the Bill & Melinda Gates Foundation found about 86 percent of PMJDY account holders reported the account was their first bank account. While this survey is not nationally representative, it provides some context as to why efforts to promote trust in and understanding of these new accounts will be key to the success of the program.

An opportunity for promoting adoption of digital financial services was highlighted during the public launch of the 2015 Report and Scorecard: As of June 2015, it was estimated that fewer than 6 percent of merchants in India accepted digital payments. The U.S. government is partnering with the government of India to promote the shift to digitizing transactions, including at merchants.

The next annual FDIP Report will examine the outcomes of such initiatives as we assess India’s progress toward greater financial inclusion. Suggestions and other comments regarding the FDIP Report and Scorecard are welcomed at FDIPComments@brookings.edu.

Editor’s Note: This post is part of a series on the 2015 Brookings Financial and Digital Inclusion Project (FDIP) Report and Scorecard, which were launched at a Brookings public event in August. Previous posts have highlighted regional findings from Southeast and Central Asia, the Middle East, and Africa, as well as selected financial inclusion milestones from FDIP countries. This post focuses on key financial inclusion achievements and challenges regarding the five Latin American FDIP countries: Brazil, Chile, Colombia, Mexico, and Peru.

Financial inclusion growth and opportunities in Latin America

With its well-developed banking infrastructure and growing mobile ecosystem, Latin America presents a unique set of opportunities and obstacles with respect to promoting greater financial inclusion. From 2011 to 2014, there was a 12 percentage point increase in the number of adults in Latin America and the Caribbean with formal financial accounts, according to the World Bank’s Global Financial Inclusion (Global Findex) database. As noted in the 2015 GSMA report “Mobile financial services in Latin America & the Caribbean,” in 2014 Latin America and the Caribbean saw the fastest growth of any region in terms of new registered mobile money accounts.

Moreover, these accounts are often used for more advanced transactions that go beyond simple transfers: As stated in a 2015 post published by the GSMA, “ecosystem transactions (transactions that involve third parties, e.g. bill payment, merchant payment or bulk payment) already make up 27% of transaction volumes in Latin America & the Caribbean.” In contrast, only 6 percent of transaction volumes over the same period were considered ecosystem transactions in East Africa, where mobile money has been most widely adopted and used.

Moving forward, facilitating greater adoption of a suite of digital financial services (e.g., savings) will be a vital component of promoting sustainable financial inclusion in the region. Recent regulatory changes in several Latin American countries designed to promote a greater diversity of service providers should propel financial inclusion growth, although a need for regulatory clarity persists in some places. Financial inclusion strengths and challenges germane to our five Latin American FDIP countries are explored below.

Brazil: Branchless banking leadership combined with dynamic mobile market

Brazil achieved the highest ranking of any Latin American country on the Brookings 2015 FDIP Scorecard, ranking 3^rd overall with a score of 78 percent. Brazil’s economy is the largest in Latin America, with a GDP (in current US dollars) of about $2.3 trillion as of 2014; for comparison, Mexico, the Latin American country with the second largest economy, had a GDP of about $1.3 trillion within that same period.

Brazil received strong country commitment and mobile capacity scores (89 and 83 percent, respectively) in the 2015 FDIP Scorecard and earned the highest regulatory environment score among the Latin American FDIP countries, which also included Chile, Colombia, Mexico, and Peru. As noted in the 2015 FDIP Report, Brazil launched a National Partnership for Financial Inclusion in November 2011, which has supported the development of a number of enabling financial inclusion initiatives. In 2013, Law 12865 and associated regulations permitted non-banks to issue e-money as payments institutions. Brazil boasted the largest mobile market in Latin America as of 2014, with a unique subscribership rate of about 57 percent in 2015 (a lower unique subscribership rate than Chile’s by about 7 percentage points, but otherwise higher than that of any of the other Latin American FDIP countries).

Brazil received 4^th place on the 2015 FDIP Scorecard for adoption of selected traditional and digital financial services. As with many other countries in Latin America, branchless banking (i.e., access to formal financial services beyond a traditional brick-and-mortar bank) through “agents” is popular in Brazil — as of 2014, Brazilian banks’ agent networks had a presence in all of the country’s approximately 6,000 municipalities, contributing to formal account growth. Chile was the only Latin American country that received a higher ranking for the adoption dimension, placing 2^nd. In terms of account usage, government-to-person payments comprise a significant source of activity for formal accounts: The 2014 Global Findex report noted that among recipients of government payments in Brazil, 88 percent received their transfers directly into an account.

Yet according to the Global Findex, about 32 percent of Brazilian adults age 15 and older still do not have accounts with a formal financial institution or mobile money provider. As with the other Latin American countries in the FDIP sample, mobile money adoption in Brazil has remained low: Brazil received the lowest score (one out of three possible points) for all six mobile money indicators included in the 2015 FDIP Scorecard. However, given that as of 2014 Brazil had the fifth-largest global smartphone market in the world in terms of subscribers, a combination of growing smartphone penetration and an increasingly enabling regulatory environment should drive greater adoption of digital financial services in the future.

Chile: Opportunities for enhanced e-money regulatory clarity

Chile tied with Colombia and Turkey for 6^th place on the overall 2015 FDIP Scorecard. Chile’s financial inclusion environment is characterized by a firm national commitment to financial inclusion (earning a country commitment score of 89 percent) but a less developed mobile money environment than the other Latin American FDIP countries. While Chile’s unique mobile subscribership rate and 3G network coverage rate by population are higher than and on par with other countries in the region, respectively, Chile’s mobile money offerings are limited. The lack of a robust mobile money market contributed to Chile’s mobile capacity score of 72 percent, the lowest score among the FDIP Latin American countries.

Chile’s regulatory environment score (67 percent) was also the lowest of the Latin American FDIP countries, primarily due to a lack of regulatory clarity surrounding digital financial services. Developing or clarifying regulations pertaining to electronic money in particular could potentially drive more engagement with the sector and advance the diversity of mobile money providers and offerings. Further, supporting the interoperability of digital and traditional financial services could enhance the utility of these products for customers.

Given that 37 percent of adults in Chile did not have an account with a formal financial provider as of 2014, there is also room for growth in terms of expanding financial inclusion. However, it should be noted that Chile earned the highest adoption ranking of any Latin American country featured in the 2015 FDIP Scorecard. While Chile’s adoption levels with respect to mobile money services were limited, adoption rates of other formal financial services were among the highest of the FDIP countries. Chile received three out of three possible points for all but one indicator (savings at a formal financial institution) related to traditional financial services. Chile’s performance on the adoption dimension of the scorecard contributed to its 6^th place ranking overall.

While Chile’s mobile money adoption rates are low, use of other digital financial services is increasingly popular. For example, as noted in the “2015 Maya Declaration Progress Report,” since 2012 the number of CuentaRUT accounts (accounts that feature debit cards associated with a savings account provided by Chile’s BancoEstado) has increased by about 47 percent. As of 2014, there were over 7 million active CuentaRUT cards in Chile.

Colombia: Regulatory advancements coupled with sustained country commitment

As noted above, Colombia tied with Chile for 6^th place on the overall 2015 FDIP Scorecard. Colombia has demonstrated strong commitment to financial inclusion, including through involvement in multinational organizations such as the Alliance for Financial Inclusion (AFI). An example of Colombia’s national-level financial inclusion commitment is the 2006 establishment of Banca de las Oportunidades, an entity charged with fostering regulatory reforms conducive to financial inclusion. Another key player in the financial inclusion space is the Intersectoral Economic and Financial Education Committee, created in February 2014 under Decree 457.

In terms of the country’s regulatory environment, Law 1735 of 2014 permitted new institutions, called Sociedades Especializadas en Depósitos y Pagos Electrónicos, to offer mobile financial services. As part of the law, proportionate “know-your-customer” (KYC) requirements were also instituted for under-resourced customers in order to facilitate greater access to financial services among low-risk populations. In July 2015, Decree 1491 implemented Colombia’s financial inclusion law and highlighted the regulatory regime for the mobile money market. Colombia’s regulatory environment earned a score of 89 percent, ranking it 2^nd among the Latin American FDIP countries in this dimension.

On the supply side, banking correspondents (also known as agents) have been utilized to extend financial access to underserved populations.  As of 2015, all of Colombia’s 1,102 municipalities had at least one financial access point, defined as bank branches, banking correspondents, and ATMs. Another innovative approach to branchless banking in Colombia is bank Davivienda’s initiative to use DaviPlata mobile wallet accounts to distribute government transfers to more than 900,000 recipients of welfare program “Familias en Accion.”

With respect to demand side figures, Colombia tied with Mexico for 7^th place on the adoption dimension. As of 2014, about 38 percent of adults in Colombia had an account with a formal financial institution, and about 2 percent of adults were mobile money account holders. In terms of advancing future mobile money use, Colombia received the highest score of the Latin American countries on the mobile capacity dimension; thus, Colombia is well-positioned to advance access to and use of mobile money services in the future. Promoting usage of appropriate, quality financial services is critical, as dormancy rates have been identified as an obstacle to financial inclusion; about half of accounts in Colombia (including savings accounts, simplified accounts, and electronic deposits) were identified as dormant in 2014.

Mexico: Recent reforms may enhance competition and drive digital takeup

Mexico ranked 9^th on the overall 2015 FDIP Scorecard, with adoption of traditional and digital financial services as its highest-ranked dimension. Among the Latin American FDIP countries, Mexico features the greatest parity in terms of formal financial account ownership rates among men and women, at about 39 percent each.  In terms of national-level commitment to financial inclusion, Mexico tied with Peru for the highest ranking among the Latin American countries. AFI’s Maya Declaration was signed at the 2011 Global Policy Forum held in Riviera Maya, Mexico, signaling Mexico’s public commitment to financial inclusion.

With respect to mobile capacity, as of the first quarter of 2015 Mexico’s unique subscribership rates were the lowest of the Latin American countries. Mexico tied with Chile and Brazil for 3G network coverage by population. In terms of mobile money, Mexico’s market is still developing; several providers were available as of May 2015, but the extent of offerings was somewhat limited. As noted in the GSMA’s “Mobile Economy: Latin America 2014” report, new telecommunications reforms recently passed in Mexico are expected to affect the mobile market and potentially increase competition among the telecommunications sector. This increased competition could in turn drive the development of a greater array of innovative, affordable mobile money products.

Regarding Mexico’s regulatory environment, the country has been lauded for its risk-based KYC requirements that enable underserved individuals to access low-value accounts without fulfilling the full array of traditional identification processes, which can sometimes be burdensome for under-resourced groups. Under Mexico’s four-tiered KYC system (introduced in 2011), “level one” (very low-risk) accounts feature monthly deposit limits and a maximum balance limit of about 400 dollars; accounts can be opened at a bank branch, banking agent, over the internet, or by telephone. Higher-tier accounts have more stringent KYC requirements. A 2015 AFI article noted that Mexico's banking and securities regulator, the Comisión Nacional Bancaria y de Valores, indicated about 7.5 million new accounts were opened between August 2011 and September 2012, including over 4 million “level one” accounts.

Mexico tied with Colombia for 7^th place on the adoption dimension of the 2015 FDIP Scorecard. About 39 percent of adults in Mexico held accounts with a formal financial institution as of 2014, while about 3 percent of adults held mobile money accounts. As with other countries in Latin America, debit card and credit card use were much higher than mobile money use as of 2014, although usage of both kinds of cards was lower in Mexico than in several other Latin American FDIP countries such as Brazil and Chile. Initiatives such as the Saldazo debit card, which enables customers to use a debit card associated with a savings account and does not require a minimum balance, have helped drive adoption of digital financial services in Mexico.

Peru: Enabling regulatory environment, but constrained adoption of financial services

Peru presents perhaps one of the most interesting paradoxes among the FDIP countries. While Peru’s regulatory environment has been consistently recognized as among the best in the world for enabling financial inclusion, adoption of formal financial services remains quite low. Peru received 17^th place overall on the 2015 FDIP Scorecard, which can primarily be attributed to its low adoption score: Peru received a 15^th place ranking on the adoption dimension, the lowest score among the Latin American FDIP countries. However, we anticipate that recent regulatory changes in Peru, coupled with increasing smartphone penetration rates (Peru’s 2014 adoption rates were about 12 percentage points below the Latin American average), will facilitate adoption of digital financial services and drive greater financial inclusion in the future.

With respect to the supply side aspect of financial inclusion, as of 2014 about 92 percent of Peru’s population lived in a district with access to financial services, according to the Superintendencia de Banca, Seguros y AFP (SBS) del Peru. Nonetheless, demand side figures lag behind: The Global Findex found that only about 29 percent of adults had an account with a formal financial provider as of 2014. Peru received a “1” for two-thirds of the non-mobile money indicators on the adoption dimension of the 2015 FDIP Scorecard, and mobile money adoption was negligible. Moreover, as of 2014 there was a 14 percentage point disparity in financial account ownership between men and women, the highest financial inclusion “gender gap” among the Latin American FDIP countries.

However, given Peru’s strong national commitment to financial inclusion (reflected in Peru’s country commitment score of 94 percent) and legislative initiatives designed to promote an enabling regulatory environment, we fully anticipate that financial inclusion growth will accelerate in the future. For example, Peru recently finalized its national financial inclusion strategy, as discussed in our earlier post. Moreover, Peru has adopted laws and regulations that permit a greater diversity of players to enter the financial services market. Law 2998 of January 2013 allowed both banks and non-banks to issue e-money, and October 2013 regulations issued by the SBS enabled e-money issuers to follow a simplified account opening process. These initiatives should facilitate greater access to and usage of formal financial accounts in the future.

In terms of electronic payments specifically, diversifying the mobile money market and increasing unique subscribership could help facilitate greater adoption of mobile money services. Demand side factors, such as ensuring that services are a good fit for customers, are also critical — as evidenced by the fact that Mexico, which had comparable smartphone adoption rates to Peru and lower unique subscribership rates as of 2014, features significantly higher rates of mobile money adoption across all demographics than Peru. Peru is making a concerted effort to develop innovative electronic platforms — for example, the Peruvian Association of Banks (ASBANC) is working on the creation of an electronic money platform accessible by both financial institutions and telecommunications companies. Implementation of this interoperable platform is expected to promote further adoption of digital financial services.

Editor’s Note: Brookings will hold an event and live webcast on Thursday, August 4 to discuss the findings of the forthcoming 2016 Financial and Digital Inclusion Project (FDIP) Report. Follow the conversation on Twitter using #FinancialInclusion.

The 2016 Brookings Financial and Digital Inclusion Project (FDIP) Report, the second annual report produced by the FDIP team, assesses national commitment to and progress toward financial inclusion through traditional and digital mechanisms in 26 countries.  

As in the 2015 report, the FDIP team analyzed four key dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of formal financial services. The 2016 report amplifies the geographic diversity of the FDIP country sample by adding five new countries and features descriptions of the financial inclusion landscape in all 26 countries.

The 2016 FDIP Report finds that significant progress has been made toward advancing financial inclusion in many countries, and robust commitment to strengthening the digital financial services ecosystem is evident across diverse geographic, political, and economic contexts.

On August 4, the Center for Technology Innovation will discuss the key findings of the 2016 FDIP Report and host a conversation with public sector representatives about key trends, opportunities, and obstacles regarding financial inclusion in their respective countries and around the world.

Below we provide some context regarding the role of financial inclusion within the global drive for sustainable development.

What is financial inclusion?

The common themes that emerge from many definitions of financial inclusion are the ability to access formal financial services and to utilize those services in a way that promotes financial health.

For example, the Center for Financial Inclusion at Accion defines financial inclusion as a “state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.”

In short, financial inclusion in itself is not the end goal, but instead serves as a key mechanism for advancing the well-being of individuals, families, and communities. At the macroeconomic level, financial inclusion provides opportunities to advance economic growth, reduce income inequality, and combat poverty.

For the purposes of FDIP, we primarily focus on individuals’ access to and usage of affordable, secure, basic financial services and products, such as person-to-person payments and savings accounts. However, we also recognize the important role that more extensive financial services (e.g., microinsurance and microcredit) can play in enabling individuals to plan for the future and absorb financial shocks. Where possible, we highlight examples of a broad suite of financial services within the country profiles of the 2016 report.

To learn more about the 2016 FDIP Report, please register to attend the launch event in-person or watch the live webcast.

Businesses, citizens, and law enforcement officials are discovering innovative new uses for drones every day. Drones have a distinctively menacing reputation because TV footage typically depicts them flying over a faraway battlefield launching missiles. In the popular imagination, drones have replaced the black helicopters of the 1990s and the satellite images of the 2000s as the primary surveillance tool. For this reason many perceive the drone as a threat to civil rights and safety in the United States. Privacy advocates have called upon lawmakers to pass legislation that keeps drones out of American skies. Others see a potentially beneficial role from drones if effective regulations are developed. In a recent paper titled Drones and Aerial Surveillance: Considerations For Legislators, Gregory McNeal proposes a model for how Congress should regulate drones.

Editor's Note: This piece originally appeared in Foreign Policy.

The killing of Nasir al-Wuhayshi, reportedly via U.S. drone strike, is not just another notch in the belt of America’s long campaign against al-Qaida and its allies. Wuhayshi was one of al-Qaida’s top remaining leaders, and he is the highest-level death the organization has suffered since Osama bin Laden was killed in 2011. Wuhayshi headed al-Qaida’s most active affiliate, the Yemen-based al-Qaida in the Arabian Peninsula (AQAP), and was the designated successor of al-Qaida leader Ayman al-Zawahiri. His killing adds one more element of uncertainty to the turbulence in Yemen and may set AQAP on a new path. Which path, however, remains an open question.

Wuhayshi helped transform AQAP from a fractious organization on the edge of defeat to one that menaces both Yemen and the United States. A decade ago, Yemen’s jihadi movement seemed near defeat. In the aftermath of 9/11, the Yemeni government rounded up jihadis and imprisoned Wuhayshi, and it was Saudi Arabia, not Yemen, that was the focus of jihadis in the Arabian Peninsula. In 2003, al-Qaida sponsored the original AQAP’s uprising against the Saudi government. Several years later, most of AQAP’s Saudi members were dead or in jail, and its remnants had fled to Yemen. There, they mixed with Yemeni jihadis, including important figures like Wuhayshi, who had escaped from Yemen’s jails in 2006. In 2009, two regional Islamist groups merged and formally anointed themselves AQAP, basing their operations in Yemen and trying to unseat the government. As Osama bin Laden’s former secretary, Wuhayshi became the group’s leader and embraced al-Qaida’s emphasis on attacking Western targets.

The group made fitful progress, at times taking territory but often losing it quickly after alienating locals and proving vulnerable to government counterattacks. But when the government of Yemeni President Ali Abdullah Saleh fell in 2012 during the Arab Spring, AQAP tried to step into the void. Saleh’s successor, Abed Rabbo Mansour Hadi, pursued AQAP vigorously, but his weak government was unable to score any lasting successes.

In addition to its prowess in Yemen, AQAP has long been al-Qaida’s most active affiliate when it comes to taking on the West. The organization was behind the 2009 Christmas Day attempt to down a U.S. airliner over Detroit, a near-miss only foiled by the bomber’s incompetence and the quick thinking of the plane’s passengers. AQAP tried again in 2010, this time attempting to down U.S. cargo planes. The organization also attacked Western targets in Yemen, and puts out Inspire, a stylish English-language online publication that is one of al-Qaida’s more effective attempts to influence Western jihadis.

These AQAP efforts to attack the United States and the West, in general, led to a greater U.S. focus on Yemen and more drone attacks there. In 2011, the United States killed Anwar al-Awlaki, a U.S. citizen and AQAP member who helped lead the terrorist group’s campaign against targets in the United States and Europe. Awlaki has continued to inspire terrorists after his death, with Boston Marathon plotters downloading his sermons before their attack. Awlaki also inspired the Fort Hood shooter in 2009 and the attacks on the Charlie Hebdo office in 2015.

Wuhayshi’s death, however, comes as Yemen is falling apart. Earlier this year, Hadi’s government fell to the Houthi rebels, Yemeni Shiites who oppose both Yemen’s traditional order and the Sunni fanatics of AQAP who see Shiites as apostates. Alarmed by Houthi ties to Iran, Saudi Arabia has led an intervention in Yemen on Hadi’s behalf, bombing the Houthis and trying to reverse their gains. AQAP seems to be flourishing amid the chaos, as its enemies turn on one another.

But with Wuhayshi’s death, AQAP may find it difficult to further exploit the Yemeni civil war. Personal connections, reputation, and charisma play a bigger role in leadership in the jihadi cause than do formal rank, and it is not clear if Qasim al-Raimi, the designated new leader, can retain the support of the AQAP rank and file. There is always a chance, of course, that Raimi proves an even more effective leader than Wuhayshi, and some observers see him as “more dangerous and aggressive.” (Lest we forget: In 1992, the Israelis killed Hezbollah’s Secretary-General Abbas al-Musawi, one of the group’s most competent leaders. Musawi was replaced by Hassan Nasrallah, who has proven one of the most effective terrorist and guerrilla leaders in modern times.)

The bad news is that Raimi and AQAP may seek revenge, both out of genuine anger and to score points within the jihadi community. Al-Qaida’s chief bomb-maker, Ibrahim al-Asiri, may still be out there and has likely passed his sophisticated techniques on to others in Yemen.

The bad news is that Raimi and AQAP may seek revenge, both out of genuine anger and to score points within the jihadi community.

Over time, however, Wuhayshi’s death may push AQAP to focus even more on Yemen and less on the West. His close, personal ties to the al-Qaidacore may have been part of why AQAP was a steadfast ally of Zawahiri in his power struggle with the Islamic State. The opportunities and risks in the civil war are both tempting and frightening for AQAP. On the one hand, by taking up arms against the hated Shiites, AQAP can position itself as the defender of Yemen’s Sunnis, a strategy that has worked well for the Islamic State in Iraq and Syria. AQAP might gain more recruits and local support, while drawing foreign fighters and money from Sunnis eager to find yet another Shiite-Iran axis to oppose. Not surprisingly, AQAP has stepped up its operations against the Houthis in recent months.

AQAP also has an opportunity to govern. And the bad news for the West is that it has learned from its own many mistakes on this front. In the past when AQAP made gains, it tried to impose a strict version of Islamic law that alienated local communities. Now when its fighters seize territory, theywork with local tribal figures and other elites, avoiding the most controversial measures and trying to portray themselves as guardians, not overlords.

Wuhayshi’s death also comes at a time when the broader jihadi movement is split between backers of al-Qaida and supporters of the Islamic State, a struggle in which AQAP has long played an important role. As al-Qaida’s most active anti-Western affiliate, AQAP was important to Zawahiri’s claim that he was leading the struggle against the United States. Its strength in Yemen, moreover, also expanded al-Qaida’s presence and prestige to an important part of the Arab world. Islamic State supporters have already conducted attacks in Yemen, and the death of Wuhayshi offers them a chance to expand their influence there. The core leadership of AQAP is not likely to join the Islamic State, but some of its cells and supporters could break off if Raimi proves a weak leader.

For now, Wuhayshi’s death means the United States has another point in the struggle against the jihadi movement. In the long term, successful disruption is more likely if the United States and its allies can keep the pressure on AQAP, forcing its leaders to go on the run and hindering their ability to communicate — particularly difficult challenges for a group in transition under new leadership. Wuhayshi’s death also comes on the heels of the deaths of several other AQAP members, including its top ideologue and spokesman. Having to hide also makes it difficult for the group to govern, as its exposed leaders run the risk of being killed. But AQAP has lost many leaders before, yet remains a force to be reckoned with. So at best, this should be seen as winning a battle, not the war.

The increasing diversification of news media—from online versions of major newspapers to political bloggers, to 24-hour cable news to social media—plus the profession’s changing economics have caused the balance of power between political reporters and presidential candidates to change. Stephen Hess, senior fellow emeritus, says our very good, well-trained reporters are “almost dangerous” to presidential candidates who are trying to stay on message. Thus, says Hess, the way the press covers campaigns has changed as well, and not for the better.

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• Stephen Hess: The Changing Balance of Power in Presidential Campaign Reporting

Editor's Note: With the latest coup attempt in Turkey, Turkish democracy survived a major test, and the country turned from the edge of a precipice. writes Kemal Kirisci. But Turkey’s democracy has also taken a severe blow. This article was originally published in The National Interest.

The history of Turkish politics is littered with coups and coup attempts that have occurred in roughly ten-year intervals. It is almost a genetic defect.

• The nascent Turkish democracy experienced its first coup in 1960 when it was barely into its tenth year—led by a group of left-wing “young officers,” who had also forced the General Staff into its ranks. Administrative authority was returned to civilians in October 1961, after having cost the lives of the then-Prime Minister, Adnan Menderes, the Minister of Foreign Affairs, Fatin Rüştü Zorlu, and the Minister of Finance, Hasan Polatkan.
• The second military intervention took place in 1971 against the government of Süleyman Demirel—this time around, though, through a “coup by memorandum.” The military issued to the prime minister an ultimatum—to step aside and be replaced by a technocratic cabinet.
• Less than ten years later, in the midst of endemic violence between left- and right-wing radical groups, the military's top brass carried out another intervention. This was bloodier than the previous two interventions, costing hundreds of lives and leading to massive human-rights violations. After rubberstamping a suffocating constitution on the country, the military handed the government over to a semblance of a democratically-elected government in 1983.
• Surprisingly, Turkey broke this pattern of ten-yearly military interventions, and civilian authority continued until 1997, when there was what was termed a “post-modern coup.” The army rolled out a convoy of tanks into the streets of Ankara, and in a repeat of the coup of 1971, demanded the resignation of the coalition government led by Necmettin Erbakan.
• The next coup occurred a decade later (almost to the day) in April 2007, when the Chief of Staff staged an “e-coup” by posting a set of demands on its website. The coup was a reaction against a long list of democratic reforms that were introduced as a part of the leadership’s pro-EU agenda and were seen as a departure from the staunchly secularist, restrictive mode of governance. Bolstered by the public support for these reforms, however, the incumbent Justice and Development Party (AKP) led by Recep Tayyip Erdoğan, now the current president of Turkey, successfully withstood the “e-coup,” and for the first time, pushed the military back “into the barracks”.

The latest coup attempt—which took place on Friday, July 15—has widely been attributed to a large Gülenist faction within the military and the judiciary that circumvented the established chain of command and held the high command hostage. Gülenists are the followers of the Islamic scholar Fethullah Gülen, who leads a worldwide movement that claims to advocate a moderate form of Sunni Islam with an emphasis on tolerance and interfaith dialogue. Formerly allies with Erdoğan, the Gülenists were blamed for spearheading the corruption scandal in December 2013 that engulfed several government officials, ministers and people in Erdoğan’s intimate circle. Since then, Gülen and Erdoğan have been locked in a power struggle.

Back from the brink

Turkish democracy survived a major test, and Turkey turned from the edge of a precipice. The credit for the coup’s defeat goes to the Turkish people, who heeded Erdoğan’s call to resist this intervention “by any means possible and necessary" and filled the squares. TV reports were filled with eye-to-eye, tense, agitated confrontations between civilians and armed soldiers on the two bridges that connect the Asian and European sides of Istanbul. Public restraint and sobriety helped to prevent escalation of violence. There were nevertheless senseless causalities resulting from fire opened by the mutineers and especially attacks mounted on the parliament building as well as the Headquarters of the General Staff. It could have been a lot worse.

Erdoğan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt.

Clearly, Turkey’s democracy has taken a severe blow—cushioned only by the unequivocal stance of the opposition leaders and the media against the coup. Once again, the nation managed to break this pattern of ten-year coups. This offers the country a matchless opportunity for reconciliation. Granted, Erdoğan has had an exceptionally rough weekend and his frustration with those responsible for or implicated in the coup is understandable. He is correct in calling “for their punishment under the full force of the law of the land.” It will, however, now be critical that he ensure that the rule of law is upheld and rises to the challenge of winning the hearts and minds across a deeply polarized nation. He has the tools for it in his repertoire and had successfully wielded them in the past—especially between 2003 and 2011, when he served as prime minister. In hindsight, this period is often referred to as AKP’s “golden age,” when the economy boomed, democracy excelled, and Turkey was touted as a model for those Muslim-majority countries aspiring to transform themselves into liberal democracies.

As he steers the country from the brink of civil war, Erdoğan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt. This is the least that the Turkish public deserves. This would also be a move in the right direction for Turkey’s neighborhood, which desperately needs a respite from the turmoil resulting from the war in Syria, the instability in Iraq, Russia’s territorial ambitions and now Brexit. This is the moment when a stable, democratic, transparent, accountable and prosperous Turkey needs to come to the fore on the world-stage. The United States needs it too. As much as the White House declared its faith in the strength of Turkey’s democracy and its support for the elected leadership, there is a clear chance for forging closer cooperation between the two countries. The first step in cooperation should be in bringing to justice the perpetrators of this coup, followed by measures to enhance Turkey’s capacity to address and manage the many challenges facing Turkey and its neighborhood.

Leaders from the world’s largest economies are gathering in Cannes, France for the second round of G-20 talks this year. The most pressing issue on the agenda is the ongoing sovereign debt crisis that is still looming despite a plan to help stabilize the fiscal free fall in Greece. The call from all quarters is for leaders to hammer out an action plan that spurs global growth, promotes investment and facilitates trade. Nonresident Senior Fellow Colin Bradford says dealing with the eurozone debt crisis presents an opportunity for leaders to make a serious commitment to a serious problem.

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• 01 bradford g20

Event Information

The year 2015 will be a milestone year, with the adoption of the Sustainable Development Goals (SDGs) and the post-2015 development agenda by world leaders in September; the Addis Ababa Accord on financing for development in July; and the conclusion of climate negotiations at COP21 in Paris in December. The draft Addis Ababa Accord, which focuses on the actions needed to attain the SDGs, highlights the key role envisaged for the multilateral development banks (MDBs) in the post-2015 agenda. Paragraph 65 of the draft accord notes: “We call on the international finance institutions to establish a process to examine the role, scale, and functioning of the multilateral and regional development finance institutions to make them more responsive to the sustainable development agenda.”          

Against this backdrop, on April 18, 2015, the Global Economy and Development program at Brookings held a private roundtable with the leaders of the MDBs and other key stakeholders to discuss the role of the MDBs in supporting the post-2015 development agenda.

The meeting focused on four questions:

1. What does the post-2015 development agenda and the ambitions of the Addis and Paris conferences imply for the MDBs?


Given the ability of the MDBs to leverage shareholder resources, they can be efficient and effective mechanisms for scaling up development cooperation, particularly with respect to the agenda on investing in people and to the financing of sustainable infrastructure. New roles, instruments and partnerships might be needed.

2. How can MDBs best take advantage of the political attention that is being paid to the various conferences in 2015?   


The World Bank and selected regional development banks have launched a series of initiatives to optimize their balance sheets, address other constraints and enhance their catalytic role in crowding in private finance. And new institutions and mechanisms are coming to the fore. But the responses are not coordinated to best take advantage of each MDB’s comparative advantage.

3. What are the key impediments to scaling up the role and engagement of the MDBs?


Views on constraints are likely to differ but discussions should cover policy dialogue, capacity building, capital, leverage, shareholder backing on volume, instruments on leverage and risk mitigation, safeguards, and governance. 

4. How should the MDBs respond to the proposal to establish a process to examine the role, scale and functioning of the multilateral and regional development finance institutions to make them more responsive to the sustainable development agenda?   


A proactive response and engagement on the part of the MDBs would facilitate a better understanding of the contribution that the MDBs can make and greater support among shareholders for a coherent and stepped-up role.

Event Materials

• Participant List
• MDB PostEvent Summary

A clamor is rising against "short termism"—judging a company by its performance over the past quarter, rather than the past few years. BlackRock CEO Laurence Fink and Delaware Supreme Court Chief Justice Leo Strine, for example, recently joined the Business Roundtable and others in decrying the strong pressures for short-term results exerted by daily stock traders and activist hedge funds. Critics claim that these pressures prevent executives from making long-term investments needed for sustainable corporate growth.

There are pressures on and incentives for corporate leaders to put the short term ahead of the long term, but not necessarily from activist hedge funds or stock trading. And some proposed remedies for short-termism would undermine the economic interests of shareholders.

The current attack on short termism is premised on the sharp increase in the average daily trading volume of stocks over the past few decades. The primary cause has been a relatively small group of day traders, including the notorious high-frequency traders who buy millions of shares and sell them a millisecond later. These traders care not a whit about corporate fundamentals or business plans; they are trying to exploit slight pricing anomalies that arise because of technical differences in securities markets. Thus corporate executives should not be pressured by higher daily trading volumes to avoid good long-term investment spending.

Critics of short-termism are even more alarmed about activist hedge funds that may lobby corporations to pay higher dividends, for example, or sell unprofitable divisions. They claim these funds push for a quick boost in corporate earnings in order to sell their shares for a quick profit.

The data do not support this uniformly negative view. Activist hedge funds display a broad array of strategies and time horizons. On average, they hold a company's stock for one or two years, according to various empirical studies. Yet according to a recent McKinsey study of 400 activist campaigns over the past decade, the median campaign was launched when the company was on the decline and led to higher shareholder returns relative to peers for at least three years.

To win proxy contests, activist hedge funds must persuade other shareholders to support the changes they advocate. The funds usually hold a relatively small percentage of a company's shares; the overwhelming majority are owned by institutional investors such as mutual funds and pension plans.

Activist hedge funds have won roughly half of the proxy contests they've entered, as institutional investors have carefully distinguished among long-term plans depending on a company's specific circumstances. These institutions backed activist campaigns to increase dividends at companies like Apple with huge hoards of cash. But they've also supported multi-year research programs of biotech firms like Amgen that have shown they can deliver.

To thwart the perceived threats of short-termism, critics have proposed measures that would reduce the legal rights and economic interests of all shareholders. Martin Lipton, a prominent opponent of activist hedge funds, has recommended that U.S. corporate law adopt a new norm—that corporate directors be elected to five-year terms, rather than the usual one-year term. Such long tenure, combined with existing anti-takeover defenses, would effectively insulate the leadership of chronically under-performing companies.

There is a better approach: Boards should measure and reward the efforts of corporate executives and portfolio managers by looking at the organization's performance over the past three years. At present, most firms distribute cash bonuses and stock grants on the basis of the prior year's results. This approach does encourage top executives to favor short-term results over long-term growth.

At the same time, the top executives at both public companies and asset managers should be required to retain for three to five years half of the shares they receive through stock grants and options. At present, these people can usually sell all their shares as soon as they vest or the options are exercised. This is an inducement for top executives and managers to push up the company's stock price for a few months so they can sell at a temporary high.

While there are reasonable concerns about corporate short-termism, their remedies should be narrowly tailored. Most of these concerns can be addressed by adopting longer periods for executive compensation. But we should not overreact to day traders or hedge funds by dramatically reducing the legitimate rights and financial interests of all shareholders.

By 2020, Millennials will comprise more than one of three adult Americans. It is estimated that by 2025 they will make up as much as 75 percent of the workforce.  Millennials’ desire for pragmatic action that drives results will overtake today’s emphasis on ideology and polarization as Boomers finally fade from the scene. Thus, understanding the generation’s values offers a window into the future of corporate America.

Morley Winograd and Michael Hais outline the cultural force of the Millennial generation on the economy as Millennials increasingly dominate the nation’s workplaces and permeate its corporate culture. Winograd and Hais argue that the current culture on Wall Street is becoming increasingly isolated from the beliefs and values of America’s largest adult generation. The authors also include data on Millennials’ ideal employers, their financial behaviors, and their levels of institutional trust in order to provide further insight into this important demographic.

Key Millennial values shaping the future of the American economy include:

• Interest in daily work being a reflection of and part of larger societal concerns.
• Emphasis on corporate social responsibility, ethical causes, and stronger brand loyalty for companies offering solutions to specific social problems.
• A greater reverence for the environment, even in the absence of major environmental disaster.
• Higher worth placed on experiences over acquisition of material things.
• Ability to build communities around shared interests rather than geographical proximity, bridging otherwise disparate groups.

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• Download the paper

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

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

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

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

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

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

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

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

In our latest 21st Century Capitalism initiative paper, "What must corporate directors do? Maximizing shareholder value versus creating value through team production," author Margaret M. Blair explores how the share value maximization norm (or the “short-termism” malady) came to dominate, why it is wrong, and why the “team production” approach provides a better basis for governing corporations over the long term.

Blair reviews the legal and economic theories behind the share-value maximization norm, and then lays out a theory of corporate law building on the economics of team production. Blair demonstrates how the team production theory recognizes that creating wealth for society as a whole requires recognizing the importance of all of the participants in a corporate enterprise, and making sure that all share in the expanding pie so that they continue to collaborate to create wealth.

Arguing that the corporate form itself helps solve the team production problem, Blair details five features which distinguish corporations from other organizational forms:

1. Legal personality
2. Limited liability
3. Transferable shares
4. Management under a Board of Directors
5. Indefinite existence

Blair concludes that these five characteristics are all problematic from a principal-agent point of view where shareholders are principals. However, the team production theory makes sense out of these arrangements. This theory provides a rationale for the role of corporate directors consistent with the role that boards of directors historically understood themselves to play: balancing competing interests so the whole organization stays productive.

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• Download the paper

Last June, Brookings senior fellow Elaine Kamarck and I published a paper laying out the rise of short-term thinking in U.S. corporations. We argued that this trend was bad for the economy, and we suggested policies that would at least slow it down and diminish its effects.

Since then, additional research on short-termism has emerged, and an increasing number of corporate leaders are expressing concern about the trajectory of U.S. firms. Last November, for example, the Boston Consulting Group documented a worrisome decline in the corporate activities and investments designed to discover and nurture future growth opportunities. This turn away from exploratory activities may not immediately affect investors, said the BCG report: in the short term, companies can maintain earnings and shareholder returns by “cutting costs, increasing dividends, and pursuing share buybacks.” (As Kamarck and I showed, this is what is happening across our economy.) But in the long run, BCG researchers found, firms that invest in exploration boost revenues and total returns far faster than do those who are content to exploit their existing lines of business and return most of their earnings to shareholders in the form of dividends and buybacks.

A few days ago, Laurence Fink, the chief executive of the world’s largest investment fund and a long-time foe of short-termism, sent a letter to the heads of S & P 500 companies and large European corporations. He noted that in the twelve months ending September 30 2015, buybacks had risen by 27 percent over the previous year, when buybacks already stood at record levels. “Today’s culture of quarterly earning hysteria,” he declared, is “totally contrary to the long-term approach we need.” And he warned corporate executives that in the absence of well-considered long-term plans for investment and growth, they would expose their firms “to the pressures on investors focused on maximizing near-term profit at the expense of long-term value.”

Many influential investors agree with Fink, and they are joining forces. On February 1, the Financial Times reported that since last summer, the world’s largest asset managers—Warren Buffett, Jamie Dimon, the chief executive of JPMorgan Chase, and the heads of BlackRock, Fidelity, Vanguard, and Capital Group, among others—have been holding secret meetings to frame proposals that would encourage longer-term investments while reducing friction with shareholders. These proposals, which are reportedly some months away from final agreement and publication, may well involve changes in boards of directors, executive compensation, and shareholder rights.

The summit participants plan to support these changes for the companies in which they invest. Given the pools of funds they control, which amount to many trillions of dollars, their coordinated action may well represent a turning-point in the struggle to reorient corporate strategy toward the long term.

In 2005, billionaire hedge fund manager Eddie Lampert acquired a large portion of Sears Holdings, the parent company of Sears and Kmart, among other brands. In 2008, Lampert reorganized the company into 30 autonomous business units that would operate like independent businesses, with their own IT contracts, marketing officers, and most importantly, annual financial statements. The idea was that having each unit compete for resources would drive better decision-making and boost profits overall. The exact opposite happened. The divisions turned against one another, making decisions that benefited their divisions at the expense of others. In the year after Lampert’s acquisition of Sears, the company thrived, but two years later, profits tanked, the share price plummeted, and hundreds of stores were closed. As Jillian Popadak explains in a new paper about corporate culture and firm value, erosion of corporate culture may be to blame.

It’s not the case that decentralization is always bad—some large technology companies take this approach—but in Sears’s case, the reorganization changed the norms and culture for employees, dis-incentivizing collaboration at the expense of the overall firm. Popadak notes that former Sears employees speak to this: they said the change created a “warring-tribes culture” that lacked cooperation, and “the result was confusing to the customer.” Media accounts tell a similar story. Accounts detail managers cutting floor staff to save money, intense rivalries over the space in the weekly circular, resulting in nonsense product combinations, and a paltry one percent investment in capital expenditures. Popadak argues this is an example of how important implicit norms can be when they are working to create value at the company. When the explicit emphasis on performance was introduced, it “overpowered the implicit values to collaborate, satisfy the customer, and not act selfishly.”

How can you tell if a firm’s culture creates long-term value, or even measure something so seemingly unquantifiable? Popadak argues that while corporate governance measures are designed to change the explicit rules at a company, the culture is a set of implicit rules that govern employee behavior: the expectations employees have about what it takes to be successful at the firm. In her paper, Popadak collected millions of reviews from job sites like Glassdoor.com, Payscale.com, and CareerBliss.com by year and firm, and then used the text of the reviews to create measures of firm culture based on six categories: adaptability, collaboration, customer-orientation, detail-orientation, results-orientation, and integrity. She then assessed how these measures changed when a firm underwent a governance change.

Popadak writes of this graphic, “The figure shows that firms with stronger shareholder governance exhibited statistically significant increases in results-orientation but decreases in customer-orientation, integrity, and collaboration in the year following the governance change.” In the short term, a move to results-orientation boosts sales growth and payout in the short term, but in the long term, there are “significant declines in intangible value, customer satisfaction and brand value.” Ultimately, Popadak concludes that sacrificing corporate culture for short-term payoff may not be worth it.

Major changes in geopolitics, political economy, and energy markets are altering the global energy landscape. A potential nuclear deal with Iran has raised the possibility of new supplies coming online, and ongoing political gridlock in Iraq has hampered the country’s ability to expand supply. The U.S. energy boom is increasingly viewed as a long-term phenomenon, while a prolonged crisis in Ukraine threatens to impact Russian gas supplies to Europe.

How will the political developments in Iraq and Iran affect oil supply? What will be the impact of the Ukraine crisis on Europe, Russia, and China? How will these shifts help shape the energy markets of tomorrow?

Read the paper online: Brookings Doha Energy Report 2014

The 2014 Doha Energy Forum convened prominent industry experts and policymakers from Asia, the Middle East, Europe, and the United States for an in-depth dialogue on the rapidly changing global energy landscape. Based on the Forum’s plenary and roundtable sessions, this paper from the Brookings’ Doha Center and Energy Security Initiative reflects much of the discussion and debate around these changes. It also outlines the complexity of today’s energy markets and the geopolitical factors that set them in motion.

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From the rapid fall in oil prices to the conflicts that have threatened key energy sources and transit routes in the Middle East and North Africa, the global energy landscape has shifted dramatically over the past year. The change of a single number – the price of a barrel of crude oil – can carry profound implications for government policies and company decisions around the world, from efforts at subsidy reform to shale oil extraction. Understanding the interplay between key geopolitical events and energy markets remains crucial.

Has Asian consumers’ growing dependence on Middle Eastern energy supplies prompted greater interest in providing for the region’s security? How will new sources and new transit routes reshape the global LNG and natural gas landscape? What has been the impact of falling energy prices on unconventional production and investment in renewable energy resources?

At the fourth annual Brookings Doha Energy Forum, experts and policymakers from around the globe met to discuss the key global energy trends. In broad plenary sessions and focused roundtable discussions, industry leaders from the Middle East, Europe, Asia, and the United States wrestled with these and other questions. The findings of these many conversations are reflected in this report, jointly prepared by the Brookings Doha Center and the Energy Security and Climate Initiative.

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In recent weeks, the Obama Administration has taken the two most important steps in nearly a decade to increase access to retirement savings for more than 55 million Americans who currently do not participate in a retirement saving plan.

The Treasury Department's myRA program, launched this month, will help new savers and the self-employed start accounts without risk or fees. And earlier this week, the Department of Labor clarified rules that will make it easier for states to create retirement savings plans for small business employees.

myRA

The new myRAs provide another way for new savers to build small nest eggs. They will also help consultants, contract employees, and part-time workers save for retirement or for emergencies. 

For employees, myRAs are payroll deduction savings accounts designed to meet the needs of new savers and lower income workers.  They have no fees, cost nothing to open, and allow savers to regularly contribute any amount.  Savings are invested in US Treasury bonds, so savers can’t lose principal, an important feature for low-income workers who might otherwise abandon plans if they face early losses.  Those who are not formal employees and thus lack access to an employer-sponsored plan can participate in myRA through direct withdrawals from a checking or other bank account. 

As the growing “gig economy” creates more independent workers, the myRA will be a valuable entry to the private retirement system.  These workers might otherwise retire on little more than Social Security. All workers can build myRA balances by redirecting income tax refunds into their accounts. Because a myRA is a Roth IRA (that is, contributions are made from after-tax income), savers can withdraw their own contributions at any time without penalties or tax liability.  

When a myRA reaches $15,000, it must be rolled into another account, and Treasury may make it possible for workers to transfer these savings into funds managed by one of several pre-approved private providers.  MyRAs won’t replace either state-sponsored plans or employer-related pension or retirement savings plans.  However, they will make it possible for new and lower-income savers as well as the self-employed to build financial security without risk or fees.  

State-Sponsored Retirement Savings Plans

The DOL announcement gave the green light to several state models, including Automatic IRAs, marketplace models, and Multiple Employer Plans.  About two dozen states are considering these plans and, so far, Illinois and Oregon have passed “Secure Choice” plans based on the Automatic IRA, while Washington State has passed a marketplace plan.

DOL’s proposed Automatic IRA rules (open for a 60 day comment period) would let states administer automatic enrollment payroll deduction IRAs provided that the plans meet certain conditions for selecting or managing the investments and consumer protections.  States would also have to require businesses to offer such a plan if they don’t already offer their employees a pension or other retirement savings plan. Companies that are not required to offer an Automatic IRA or other plan, but decide to join the state plan voluntarily could still be subject to ERISA. The Retirement Security Project at the Brookings Institution first designed the Automatic IRA, which was proposed by the Administration before being adopted by some states.

In a separate interpretation, DOL allowed states to offer marketplace plans without being subject to the Employee Retirement Income Security Act (ERISA).  These plans are essentially websites where small businesses may select pre-screened plans that meet certain fee or other criteria.  Under the DOL guidance, these marketplaces may include ERISA plans, but states cannot require employers to offer them.   However, if states sponsor a marketplace model, they could also require employers without other plans to offer Automatic IRAs.

Finally, DOL’s rules let states administer Multiple Employer Plans (MEPs), where individual employers all use the same ERISA-covered model plan.  MEPs are usually simplified 401(k)-type plans. Because the state would be acting on behalf of participating employers, it could assume some functions that would otherwise be the responsibility of the employer. These include handling ERISA compliance, selecting investments, and managing the plan.

The Retirement Security Project has issued a paper and held an event discussing ways states could create small business retirement savings plans. The paper is available here and the event is available here.

Together, the two initiatives—the new MyRA and the state-sponsored plans-- could greatly increase the number of American workers who’ll be able to supplement their Social Security benefits with personal savings.

The Horatio Alger ideal of upward mobility has a strong grip on the American imagination (Reeves 2014). But recent years have seen growing concern about the distance between the rhetoric of opportunity and the reality of intergenerational mobility trends and patterns.

The related issues of equal opportunity, intergenerational mobility, and inequality have all risen up the agenda, for both scholars and policymakers. A growing literature suggests that the United States has fairly low rates of relative income mobility, by comparison to other countries, but also wide variation within the country. President Barack Obama has described the lack of upward mobility, along with income inequality, as “the defining challenge of our time.” Speaker Paul Ryan believes that “the engines of upward mobility have stalled.”

But political debates about equality of opportunity and social and economic mobility often provide as much heat as light. Vitally important questions of definition and motivation are often left unanswered. To what extent can “equality of opportunity” be read across from patterns of intergenerational mobility, which measure only outcomes? Is the main concern with absolute mobility (how people fare compared to their parents)—or with relative mobility (how people fare with regard to their peers)? Should the metric for mobility be earnings, income, education, well-being, or some other yardstick? Is the primary concern with upward mobility from the bottom, or with mobility across the spectrum?

In this paper, we discuss the normative and definitional questions that guide the selection of measures intended to capture “equality of opportunity”; briefly summarize the state of knowledge on intergenerational mobility in the United States; describe a new microsimulation model designed to examine the process of mobility—the Social Genome Model (SGM); and how it can be used to frame and measure the process, as well as some preliminary estimates of the simulated impact of policy interventions across different life stages on rates of mobility.

The three steps being taken in mobility research can be described as the what, the why, and the how. First, it is important to establish what the existing patterns and trends in mobility are. Second, to understand why they exist—in other words, to uncover and describe the “transmission mechanisms” between the outcomes of one generation and the next. Third, to consider how to weaken those mechanisms—or, put differently, how to break the cycles of advantage and disadvantage.

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Unprecedented armed conflicts and natural disasters are now driving a global displacement crisis. According to the United Nations High Commission for Refugees, more than 60 million people are displaced worldwide, and half of them are children. These displaced children are hindered from developing cognitive and social-emotional skills—such as perseverance, emotional regulation, and conflict resolution—which are essential for school readiness and serve as the foundation for a more peaceful and stable future. However, through the development and testing of innovative educational strategies, we can build effective practices for improving young children’s learning and developmental outcomes in crisis contexts.

On June 8, the Center for Universal Education at Brookings and Sesame Workshop co-hosted a panel discussion to explore innovative strategies to meet the needs of young children in humanitarian crises. 

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“This is about governments using data for performance rather than compliance” was a resounding message coming out of the U.S. Department of Education’s conference on June 10 on the use of Pay for Success contracts in education. These contracts, known globally as social impact bonds, continue to be at the forefront of global conversations about results-based financing mechanisms, and have garnered significant momentum this week with passage of the Social Impact Partnerships for Pay for Results Act in the U.S. While limitations certainly exist, their potential to revolutionize the way we fund social projects is tremendous.

A social impact bond (SIB) is a set of contracts where a government agency agrees to pay for service outputs or outcomes, rather than funding defined service inputs, and an investor provides upfront risk capital to the service provider. The investor is potentially repaid principal and interest contingent on the achievement of the predetermined outputs or outcomes.

In our research on impact bonds at the Center for Universal Education, we have analyzed the use of SIBs for education in the U.S., other high-income countries, and low- and middle-income countries. Practitioners in each of these contexts are having far more similar conversations than they may realize—all are united in their emphasis on using SIBs to build data systems for performance. There is tremendous potential for lessons learned across these experiences and across the broader discussions of results-based financing mechanisms for education globally.

Current SIBs for education globally

There are currently five SIBs for education worldwide: two in the U.S. for preschool education, one in Portugal for computer science classes in primary school, and one each in Canada and Israel for higher education. In addition, a number of countries have used the SIB model to finance interventions to promote both education and employment outcomes for teens—there are 21 such SIBs in the U.K., three in the Netherlands, and one in Germany. There is also a Development Impact Bond (DIB), where a donor rather than government agency serves as the outcome funder, for girls’ education in India. The Center for Universal Education will host a webinar to present the enrollment and learning outcomes of the first year of the DIB on July 5 (register to join here).

U.S. activities to facilitate the use of SIBs for education

At the June 10 conference at the Department of Education, the secretary of education and the deputy assistant to the president for education said that they saw the greatest potential contribution of SIBs in helping to scale what works to promote education outcomes and in broadening the array of partners involved in improving the education system. Others pointed out the value of the mechanism to coordinate services based on the needs of each student, rather than a multitude of separately funded services engaging the student individually. In addition to using data to coordinate services for an individual, participants emphasized that SIBs can facilitate a shift away from using data to measure compliance, to using data to provide performance feedback loops.

The interest in data for performance rather than compliance is part of a larger shift across the U.S. education sector, represented by the replacement of the strict compliance standards in the No Child Left Behind Act of 2002 with the new federal education funding law, the Every Student Succeeds Act, signed into law in December of 2015. The law allows for federal outcome funding for SIBs in education for the first time, specifically for student support and academic enrichment programs. The recently passed Social Impact Partnerships for Pay for Results Act also allows for outcome funding for education outcomes. The Department of Education conference explored potential applications of SIBs across the education sector, including for early home visiting programs, programs to encourage completion of higher education programs, and career and technical education. The conference also analyzed the potential to use SIBs for programs that support specific disadvantaged populations, such as dual language learners in early education, children of incarcerated individuals, children involved in both the child protection and criminal justice systems, and Native American youth. Overall, there was a focus on areas where the U.S. is spending a great deal on remediation (such as early emergency room visits) and on particular levers to overcome persistent obstacles to student success (such as parent engagement).

To help move the sector forward, the Department of Education announced three new competitions for feasibility study funding for early learning broadly, dual language learners in early education, and technical education. The department is also facilitating connections between existing evaluation and data system development efforts and teams designing SIBs. The focus on early childhood development by the Department of Education is reflective of the national field as a whole: Programming in the early years is becoming a particularly fast-growing sector for SIBs in the U.S. with over 40 SIBs feasibility and design stages.

SIBs for education in low- and middle-income countries

There is only one DIB for education in low- and middle-income countries; however, there are a number of SIBs and DIBs for education in design and prelaunch phases. In particular, the Western Cape Province of South Africa has committed outcome funding for three SIBs across a range of health and development outcomes for children ages 0 to 5.

Though the number of impact bonds may be relatively small, a significant amount of work has been done in the last 15 years in results-based financing for education. The U.K. Department for International Development (DfID), the Dutch Ministry of Foreign Affairs, the Asian Development Bank, the World Bank, the Global Partnership for Output-Based Aid, and Cordaid had together funded 24 results-based financing initiatives for education as of 2015. Of particular interest, DfID is funding results-based financing projects through a Girls Education Challenge and the World Bank launched a new trust fund for results-based financing in education in 2015. As with impact bonds in the U.S., a primary aim of results-based financing for education in low- and middle-income countries is to strengthen data and performance systems. Early childhood development programs and technical and vocational and training programs have also been identified as sub-sectors of high potential. Here are a few final takeaways for those working on results-based financing for education in low- and middle-income countries from the U.S. Department of Education conference:

1. The differences between the No Child Left Behind Act and the Every Student Succeeds Act should be analyzed carefully to ensure other data-driven education performance management systems promote both accountability and flexibility.
2. In building data systems through results-based financing, ensure services can be coordinated around the individual, feedback loops are available for providers, and data on early education, child welfare, parent engagement, and criminal justice involvement are also incorporated.
3. There are potential lessons to be learned from the U.S. Department of Education’s effort to conduct more low-cost randomized control trials in education and the U.S. Census Bureau’s data integration efforts.
4. SIBs provide an opportunity to work across agencies or levels of government in education, which could be particularly fruitful in both low- and middle-income countries and the U.S.

As the global appetite for results-based financing continues to grow and new social and development impact bonds are implemented throughout the world, we’ll have an opportunity to learn the true potential of such financing models.

It was fifty years ago that President Kennedy famously launched the Peace Corps, bringing international volunteerism to its true prominence in this country. Today, a diverse set of international volunteer efforts are supported by federal, state and local governments and through partnerships with NGOs. These efforts have been particularly effective at engaging two segments of our population: students or recent graduates; and retirees or those pursuing second careers.

But the segment that holds perhaps the greatest promise for global development has – for the most part – been underserved. We’re referring to mid-career employees at corporations: particularly large, globally-integrated enterprises. These corporate employees have what is most required for a successful international service engagement: cutting edge skills, deep expertise and relevant strategic knowhow.

Why has this resource largely gone untapped? Because a clear connection to business strategy and return on investment has been made in only a few cases.

There exists a triple benefit from corporate-sponsored international volunteerism. Local communities receive premier business and consulting services. Employees enrich their skill sets by working in international markets and leadership experience from working with diverse teams of colleagues and local partners. And corporations gain experienced leaders, insights into new markets, and brand and reputation enhancement that can ultimately create new global business opportunities.

IBM’s Corporate Service Corps (CSC) was developed with those benefits in mind. Often referred to as a “corporate peace corps,” CSC provides IBM employees with unique opportunities to develop and explore their roles as global citizens. Through one month deployments, IBM’s top talent works in teams of roughly 12 to provide in-depth business and IT consulting support to local entrepreneurs and small businesses, nonprofit organizations, educational institutions and governmental agencies. Already in its third year, Corporate Service Corps has deployed 700 IBM employees from 47 countries on 70 teams to 14 countries including China, Nigeria, Romania, Poland and Vietnam. The result is a leadership development program that has made strides in answering the economic, social and environmental sustainability challenges faced by many emerging markets.

We’re pleased to see that other organizations are adopting similar programs. In fact, the U.S. Agency for International Development (USAID) has announced a partnership with IBM to accelerate international volunteerism by leveraging the Corporate Service Corps model. USAID and IBM are creating an Alliance for International Corporate Volunteerism Program to help smaller companies and organizations eager to implement their own corporate peace corps, but lacking the resources and scale to do so.

As we look to help expand international service opportunities, there are several best practices to share based on IBM’s experience.

• In the case of executives, keep the duration of the projects relatively short. This allows for better access to a company’s top talent because rather than interrupting a career, you are asking someone to make service an integral part of it.
• Continue the relationship. While the duration of an individual’s participation may be short, your involvement with the region should be long-term and sustainable. It is not a vendor relationship; it is a partnership.
• Identify the right projects. The most successful development efforts take time and effort to scope out and plan. Partner with NGOs early and often to find the best local opportunities for growth and impact.
• Carefully mix and match skills when forming a team of service participants. This allows them to deliver results quickly and build capacity on the local level.
• Take advantage of technology. Technology can be a powerful tool to help train and prepare service participants. Technology like social networking can also help build a community of service participants and allow them to share their experiences.

The world has changed significantly over the last 50 years. Corporate-sponsored international volunteerism is now building upon the government’s original architecture of the Peace Corps. The same conditions and capabilities that have made the world “flat”, allowing its systems to become smarter, are also opening up new paths for citizen diplomacy. Those seeking out international volunteer service opportunities are no longer limited to government guidance and other official avenues into long-term engagements.

In an interconnected world, citizens have the choice of participating more directly in service through short-term assignments that will not disrupt their careers but enrich them. And it is these mid-career volunteers who possess the skills to make such assignments successful. Forward-thinking corporations with a clear understanding of the benefits of international volunteer programs can empower meaningful citizen diplomacy, contributing to sustainable development practices and building partnerships in a globalized world.

My first response to the GDP report was “holy cow!”-- it’s not often that the U.S. economy contracts, and the headline says that this just happened in the final quarter of 2012. Many had expected weak growth; none had seen a contraction coming. But once you take a deep breath, read past the headline, and delve into the numbers, you’ll see that this is actually a pretty good (though not great) report. The internals are much better than the top-line belies. Under the hood, we see solid growth in both consumption and investment and as a result, private spending was humming along. Last quarter’s decline in U.S. GDP was all about inventories (which subtracted 1.3 percentage points from growth), as well as sharp cuts in defense spending. Neither of these are expected to persist.

And let’s not forget that this is the "advance" GDP estimate, which is only an early (an often inaccurate) guess as to what was happening. Typically, this estimate misses the mark by a full 1.3 percentage points.

I'm sure we will start seeing the use of the dreaded "R" word (recession). That's premature, and almost certainly wrong. The U.S. economy is growing, although probably slower than potential. Don’t let me overstate my sunny optimism though—the recovery is still precarious, and Congress could still blow it up.

Overall, there's nothing in today's GDP report to change my view: The U.S. economy was doing OK -- maybe even pretty well -- but definitely not great in the final quarter of 2012. While this morning's negative growth number is an attention grabber, realize it's for last quarter, it's an early guess, and it's contradicted by most other data which point to an economy that is still growing, although perhaps not fast enough.

And finally, a trivia question: When is the last time that the first big hint of bad economic news came from an advance GDP report? Answer: Never.

This morning's gross domestic product (GDP) report showed that the economic recovery continued through the first quarter of this year, growing at 2.5%. That's a reasonable (though not great) rate of growth, although a bit below expectations, which were for something closer to 3%.

There's good news and bad news buried in the detail. The good is that consumers seem interested in spending again. We'll see whether that holds up over coming months. The bad is that firms aren't so optimistic, and investment was lackluster.

Government spending continues to detract from economic growth, as it has for 10 of the past 11 quarters.

This report also provides the latest reading on the core PCE deflator, which is the rate of inflation targeted by the Fed. This measure shows inflation running at 1.2%, well below the Fed's target.

Let's not get lost in the detail. This GDP report provides a soon-to-be-revised and noisy indicator of what happened in the economy a few months back.

The bigger picture is that we have a fledgling recovery which needs help, but isn't getting it: Fiscal policy is set as a drag on growth, and monetary policy delivering below-target inflation.