ABSTRACT

Recent literature has expressed considerable pessimism about the prospects for both productivity and overall economic growth in the U.S. economy, based either on the idea that the pace of innovation has slowed or on concern that innovation today is hurting job creation. While recognizing the problems facing the economy, this paper offers a more optimistic view of both innovation and future growth, a potential return to the innovation and employment-led growth of the 1990s. Technological opportunities remain strong in advanced manufacturing and the energy revolution will spur new investment, not only in energy extraction, but also in the transportation sector and in energy-intensive manufacturing. Education, health care, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities for innovation and change but because of a lack of incentives for change and institutional rigidity.

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• U.S. Productivity Growth: An Optimistic Perspective

November's U.S. Bureau of Labor Statistics (BLS) employment report showed continued improvement in the job market, with employers adding 211,000 workers to their payrolls and hourly pay edging up compared with its level a year ago. The pace of job growth was similar to that over the past year and somewhat slower than the pace in 2014. For the 69^th consecutive month, private-sector payrolls increased. Since the economic recovery began in the third quarter of 2009, all the nation’s employment gains have occurred as a result of expansion in private-sector payrolls. Government employment has shrunk by more than half a million workers, or about 2.5 percent. In the past twelve months, however, public payrolls edged up by 93,000.

The good news on employment gains in November was sweetened by revised estimates of job gains in the previous two months. Revisions added 8,000 to estimated job growth in September and 27,000 to job gains in October. The BLS now estimates that payrolls increased 298,000 in October, a big rebound compared with the more modest gains in August and September, when payrolls grew an average of about 150,000 a month.

Average hourly pay in November was 2.3 percent higher than its level 12 months earlier. This is a slightly faster rate of improvement compared with the gains we saw between 2010 and 2014. A tighter job market may mean that employers are now facing modestly higher pressure to boost employee compensation. The exceptionally low level of consumer price inflation means that the slow rate of nominal wage growth translates into a healthy rate of real wage improvement. The latest BLS numbers show that real weekly and hourly earnings in October were 2.4 percent above their levels one year earlier. Not only have employers added more than 2.6 million workers to their payrolls over the past year, the purchasing power of workers' earnings have been boosted by the slightly faster pace of wage gain and falling prices for oil and other commodities.

The BLS household survey also shows robust job gains last month. Employment rose 244,000 in November, following a jump of 320,000 in October. More than 270,000 adults entered the labor force in November, so the number of unemployed increased slightly, leaving the unemployment rate unchanged at 5.0 percent. In view of the low level of the jobless rate, the median duration of unemployment spells remains surprisingly long, 10.8 weeks. Between 1967 and the onset of the Great Recession, the median duration of unemployment was 10.8 weeks or higher in just seven months. Since the middle of the Great Recession, the median duration of unemployment has been 10.8 weeks or longer for 82 consecutive months. The reason, of course, is that many of the unemployed have been looking for work for a long time. More than one-quarter of the unemployed—slightly more than two million job seekers—have been jobless for at least 6 months.  That number has been dropping for more than five years, but remains high relative to our experience before the Great Recession.

If there is bad news in the latest employment report, it's the sluggish response of labor force participation to a brighter job picture. The participation rate of Americans 16 and older edged up 0.1 point in November but still remains 3.5 percentage points below its level before the Great Recession. About half the decline can be explained by an aging adult population, but a sizeable part of the decline remains unexplained. The participation rate of men and women between 25 and 54 years old is now 80.8 percent, exactly the same level it was a year ago but 2.2 points lower than it was before the Great Recession. Despite the fact that real wages are higher and job finding is now easier than was the case earlier in the recovery, the prime-age labor force participation rate remains stuck well below its level before the recession. How strong must the recovery be before prime-age adults are induced to come back into the work force? Even though the recovery is now 6 and a half years old, we still do not know.

Washington is again paralyzed and pulling back on clean energy economic development. Deficit politics and partisanship are firmly entrenched and the raft of federal financial supports made available through the 2009 stimulus law and elsewhere is starting to expire.

No wonder it’s hard to imagine—especially if you’re sitting in the nation’s capital—how the next phase of American clean energy industry growth will be financed or its next generation of technologies and firms supported.

And yet, one source of action lies hidden in plain sight. With federal clean energy activities largely on hold, a new paper we are releasing today as part of the Brookings-Rockefeller Project on State and Metropolitan Innovation argues that U.S. states hold out tremendous promise for the continued design and implementation of smart clean energy finance solutions and economic development.

Specifically, we contend that the nearly two dozen clean energy funds (CEFs) now running in a variety of mostly northern states stand as one of the most important clean energy forces at work in the nation and offer at least one partial response to the failure of Washington to deliver a sensible clean energy development approach.

To date, over 20 states have created a varied array of these public investment vehicles to invest in clean energy pursuits with revenues often derived from small public-benefit surcharges on electric utility bills. Over the last decade, state CEFs have invested over $2.7 billion in state dollars to support renewable energy markets, counting very conservatively.  Meanwhile, they have leveraged another $9.7 billion in additional federal and private sector investment, with the resulting $12 billion flowing to the deployment of over 72,000 projects in the United States ranging from solar installations on homes and businesses to wind turbines in communities to large wind farms, hydrokinetic projects in rivers, and biomass generation plants on farms. 

In so doing, the funds stand well positioned—along with state economic development and other officials—to build on a pragmatic success and take up the challenge left by the current federal abdication of a role on clean energy economic development.

Yet here is the rub: For all the good the funds have achieved, project-only financing—as needed as it is—will not be sufficient to drive the growth of large and innovative new companies or to create the broader economic development taxpayers demand from public investments.  Also needed will be a greater focus on the deeper-going economic development work that can help spawn whole new industries. 

All of which points to the new brand of fund activity that our paper celebrates and calls for more of. 

In recent years, increasingly ambitious efforts in a number of states have featured engagement on at least three major fronts somewhat different from the initial fund focus: (1) cleantech innovation support through research, development, and demonstration (RD&D) funding; (2) financial support for early-stage cleantech companies and emerging technologies, including working capital for companies; and (3) industry development support through business incubator programs, regional cluster promotion, manufacturing and export promotion, supply chain analysis and enhancement, and workforce training programs.

These new economic development efforts—on display in California, Massachusetts, New York, and elsewhere—show the next era of state clean energy fund leadership coming into focus. States are now poised to jumpstart a new, creative period of expanded clean energy economic development and industry creation, to complement and build upon individualistic project financing. 

Such work could not be more timely at this moment of federal gridlock and market uncertainty.

Along these lines, then, our paper advances several recommendations for moving states more aggressively into this new period of clean energy economic development. We suggest that:

• States should reorient a significant portion (at least 10 percent of the total portfolio) of state CEF money to clean energy-related economic development

• States, as they reorient portions of their CEFS to economic development, should better understand the market dynamics in their metropolitan regions.  They need to lead by making available quality data on the number of jobs in their regions, the fastest-growing companies, the critical industry clusters, gaps in the supply chain for those industries, their export potential, and a whole range of economic development and market indicators

• States also should better link their clean energy funds with economic development entities, community development finance institutions (CDFIs), development finance organizations and other stakeholders who could be ideal partners to develop decentralized funding and effective economic development programs

In addition, we think that Washington needs to recognize the strength and utility of the CEFs and actively partner with them:

• The federal government should consider redirecting a portion of federal funds (for instance, from federal technology support programs administered by the Department of Energy and other programs meant for federal-state cooperation) to provide joint funding of cluster development, export programs, workforce training, and other economic development programs  through matching dollars to state funds that now have active economic development programs, and to provide incentives to states without such programs to create them

• The federal government should create joint technology partnerships with states to advance each state’s targeted clean energy technology industries, by matching federal deployment funding with state funding.

• The states and the federal government, more generally, should look to “decentralize” financing decisions to local entities with street knowledge of their industries, relying on more “development finance” authorities that have financed traditional infrastructure and now could finance new clean energy projects and programs

In sum, our new paper proposes a much greater focus in U.S. clean energy finance on “bottom up,” decentralized clean initiatives that rely on the states to catalyze regional economic development in regions. Such an approach—which reflects the emergence of an emerging “pragmatic caucus” in U.S. economic life—is currently demanded by federal inaction. However, it might also be the smartest, most durable way to develop the clean energy industries of the future without the partisan rancor and obtuseness that has stymied federal energy policy. State clean energy funds—having funded thousands of individual projects—bring significant knowledge to bear as they focus now on building whole industries. For that reason, the funds’ transition from project development to industry creation should be nurtured and supported.

With Washington adrift and the United Nations climate change panel again calling for action, the search for new clean energy finance solutions continues.  

Against this backdrop, the Metro Program has worked with state- and city-oriented partners to highlight such responses as repurposing portions of states’ clean energy funds and creating state green banks.  Likewise, the Center for American Progress just recently highlighted the potential of securitization and investment yield vehicles, called yield cos. And last week an impressive consortium of financiers, state agencies, and philanthropies announced the creation of the Warehouse for Energy Efficiency Loans (WHEEL) aimed at bringing low-cost capital to loan programs for residential energy efficiency. WHEEL is the country’s first true secondary market for home energy loans—and a very big deal. 

Another big deal is the potential of bond finance as a tool for clean energy investment at the state and local level. That’s the idea advanced in a new paper released this morning that we developed with practitioners at the Clean Energy Group and the Council for Development Finance Authorities.

Over 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large sums for important purposes by selling bonds to Wall Street. Accordingly, the clean energy community—working at the state and regional level—should leverage that expertise. The challenge is for the clean energy and bond finance communities to work collaboratively to create new models for clean energy bond finance in states, and so to establish a new clean energy asset class that can easily be traded in capital markets.

Along these lines, our new brief argues that state and local bonding authorities, clean energy leaders, and other partners should do the following: 

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve availability of data and develop standardized documentation so that the risks  and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

State and local bond finance represents a powerful but underutilized tool for future clean energy investment.

For 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large amounts for important purposes by selling bonds to Wall Street. The challenge is therefore to create new models for clean energy bond finance in states and regions, and so to establish a new clean energy asset class that can easily be traded in capital markets. To that end, this brief argues that state and local bonding authorities and other partners should do the following:

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve the availability of data and develop standardized documentation so that the risks and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

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The financial sector has undergone major changes in response to the Great Recession and post-crisis regulatory reform, as a result of the Dodd-Frank Act and Basel III. These changes have created serious questions about the sector’s role in supporting economic growth and how it affects financial and overall economic stability.

On June 8, the Initiative on Business and Public Policy at Brookings explored the intersection of the financial system and economic growth with the goal of informing the public policy debate. The event featured a keynote address by Richard Berner, director of the Office of Financial Research and other participants with a wide range of views from a variety of backgrounds. Among other issues, the experts considered the changing landscape of the financial sector; growth-promoting allocation and investment decisions; credit availability for low- and moderate-income households; the ideal balance between growth and stability; and the impact of the 2014 midterm elections on regulatory reform.

 Follow the conversation at @BrookingsEcon or #Finance.

Video

• Keynote remarks by Richard Berner
• The financial sector: How has it changed?
• The view from the trenches
• The future of the U.S. financial sector

Audio

• Can the financial sector promote growth and stability?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• Aaron Kleins presentation
• 20150608 BAER slides
• 20150608 MEHTA slides
• 20150608_financial_sector_stability_transcript

Financial advisors offer their clients many advantages, such as setting reasonable savings goals, avoiding fraudulent investments and mistakes like buying high and selling low, and determining the right level of risk for a particular household. However, these same advisors are often incentivized to choose funds that increase their own financial rewards, and the nature and amount of the fees received by advisors may not be transparent to their clients, and small-scale savers may not be able to access affordable advice at all.  What is in the best interest of an individual may not be in the best interest of his or her financial advisor.

To combat this problem, the Department of Labor (DoL) recently proposed a regulation designed to increase consumer protection by treating some investment advisors as fiduciaries under ERISA and the 1986 Internal Revenue Code.  The proposed conflict of interest rule is an important step in the right direction to increasing consumer protections.  It addresses evidence from a February 2015 report by the Council of Economic Advisers suggesting that consumers often receive poor recommendations from their financial advisors and that as a result their investment returns on IRAs are about 1 percentage point lower each year.   Naturally, the proposal is not without its controversies and it has already attracted at least 775 public comments, including one from us .

For us, the DoL’s proposed rule is a significant step in the right direction towards increased consumer protection and retirement security.  It is important to make sure that retirement advisors face the right incentives and place customer interests first.  It is also important make sure savers can access good advice so they can make sound decisions and avoid costly mistakes.  However, some thoughtful revisions are needed to ensure the rule offers a net benefit. 

If the rule causes advisors’ compliance costs to rise, they may abandon clients with small-scale savings, since these clients will no longer be profitable for them.  If these small-scale savers are crowded out of the financial advice market, we might see the retirement savings gap widen.  Therefore we encourage the DoL to consider ways to minimize or manage these costs, perhaps by incentivizing advisors to continue guiding these types of clients.  We also worry that the proposed rule does not adequately clarify the difference between education and advice, and encourage the DoL to close any potential loopholes by standardizing the general educational information that advisors can share without triggering fiduciary responsibility (which DoL is trying to do).  Finally, the proposed rule could encourage some advisors to become excessively risk averse in an overzealous attempt to avoid litigation or other negative consequences.  Extreme risk aversion could decrease market returns for investors and the ‘value-add’ of professional advisors, so we suggest the DoL think carefully about discouraging conflicted advice without also discouraging healthy risk.

The proposed rule addresses an important problem, but in its current form it may open the door to some undesirable or problematic outcomes.  We explore these issues in further detail in our recent paper.

Introduction

I would like to thank the Department for giving me the opportunity to testify on this important issue. The document I submitted to you is more general than most of the comments you have received, talking about the issues facing retirement savers and policymakers, rather than engaging in a point-by-point discussion of the detailed DOL proposal¹.

Issues around Retirement Saving

1. Most workers in the bottom third of the income distribution will rely on Social Security to support them in retirement and will save little. Hence it is vital that we support Social Security in roughly its present form and make sure it remains funded, either by raising revenues or by scaling back benefits for higher income retirees, or both.

2. Those in the middle and upper middle income levels must now rely on 401k and IRA funds to provide income support in retirement. Many and perhaps most households lack a good understanding of the amount they need to save and how to allocate their savings. This is true even of many savers with high levels of education and capabilities.

3. The most important mistakes made are: not saving enough; withdrawing savings prior to retirement; taking Social Security benefits too early² ; not managing tax liabilities effectively; and failing to adequately manage risk in investment choices. This last category includes those who are too risk averse and choose low-return investments as well as those that overestimate their own ability to pick stocks and time market movements. These points are discussed in the paper I submitted to DoL in July. They indicate that retirement savers can benefit substantially from good advice.

4. The market for investment advice is one where there is asymmetric information and such markets are prone to inefficiency. It is very hard to get incentives correctly aligned. Professional standards are often used as a way of dealing with such markets but these are only partially successful. Advisers may be compensated through fees paid by the investment funds they recommend, either a load fee or a wrap fee. This arrangement can create an incentive for advisers to recommend high fee plans.

5. At the same time, advisers who encourage increased saving, help savers select products with good returns and adequate diversification, and follow a strategy of holding assets until retirement provide benefits to their clients.

Implications for the DoL’s proposed conflicted interest rule

1. Disclosure. There should be a standardized and simple disclosure form provided to all households receiving investment advice, detailing the fees they will be paying based on the choices they make. Different investment choices offered to clients should be accompanied by a statement describing how the fees received by the adviser would be impacted by the alternative recommendations made to the client.

2. Implications for small-scale savers. The proposed rule will bring with it increased compliance costs. These costs, combined with a reluctance to assume more risk and a fear of litigation, may make some advisers less likely to offer retirement advice to households with modest savings. These households are the ones most in need of direction and education, but because their accounts will not turn profits for advisors, they may be abandoned. According to the Employee Benefits Security Administration (EBSA), the proposed rule will save families with IRAs more than $40 billion over the next decade. However, this benefit must be weighed against the attendant costs of implementing the rule. It is possible that the rule will leave low- and medium-income households without professional guidance, further widening the retirement savings gap. The DoL should consider ways to minimize or manage these costs. Options include incentivizing advisors to continue guiding small-scale savers, perhaps through the tax code, and promoting increased financial literacy training for households with modest savings. Streamlining and simplifying the rules would also help.

3. Need for Research on Online Solutions. The Administration has argued that online advice may be the solution for these savers, and for some fraction of this group that may be a good alternative. Relying on online sites to solve the problem seems a stretch, however. Maybe at some time in the future that will be a viable option but at present there are many people, especially in the older generation, who lack sufficient knowledge and experience to rely on web solutions. The web offers dangers as well as solutions, with the potential for sub-optimal or fraudulent advice. I urge the DoL to commission independent research to determine how well a typical saver does when looking for investment advice online. Do they receive good advice? Do they act on that advice? What classes of savers do well or badly with online advice? Can web advice be made safer? To what extent do persons receiving online advice avoid the mistakes described earlier?

4. Pitfalls of MyRA. Another suggestion by the Administration is that small savers use MyRA as a guide to their decisions and this option is low cost and safe, but the returns are very low and will not provide much of a cushion in retirement unless households set aside a much larger share of their income than has been the case historically.

5. Clarifications about education versus advice. The proposed rule distinguished education from advisement. An advisor can share general information on best practices in retirement planning, including making age-appropriate asset allocations and determining the ideal age at which to retire, without triggering fiduciary responsibility. This is certainly a useful distinction. However, some advisors could frame this general information in a way that encourages clients to make decisions that are not in their own best interest. The DoL ought to think carefully about the line between education and advice, and how to discourage advisors from sharing information in a way that leads to future conflicts of interest. One option may be standardizing the general information that may be provided without triggering fiduciary responsibility.

6. Implications for risk management. Under the proposed rule advisors may be reluctant to assume additional risk and worry about litigation. In addition to pushing small-scale savers out of the market, the rule may encourage excessive risk aversion in some advisors. General wisdom suggests that young savers should have relatively high-risk portfolios, de-risking as they age, and ending with a relatively low-risk portfolio at the end of the accumulation period. The proposed rule could cause advisors to discourage clients from taking on risk, even when the risk is generally appropriate and the investor has healthy expectations. Extreme risk aversion could decrease both market returns for investors and the “value-add” of professional advisors. The DoL should think carefully about how it can discourage conflicted advice without encouraging overzealous risk reductions.

The proposed rule is an important effort to increase consumer protection and retirement security. However, in its current form, it may open the door to some undesirable or problematic outcomes. With some thoughtful revisions, I believe the rule can provide a net benefit to the country.

^{1. Baily’s work has been assisted by Sarah E. Holmes. He is a Senior Fellow at the Brookings Institution and a Director of The Phoenix Companies, but the views expressed are his alone.}

^{2. As you know, postponing Social Security benefits yields an 8 percent real rate of return, far higher than most people earn on their investments. For most of those that can manage to do so, postponing the receipt of benefits is the best decision.}

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Can this sector be saved? We often hear sentiments like: "Does America still produce anything?" and "The good jobs in manufacturing have all gone." There is nostalgia for the good old days when there were plentiful well-paid jobs in manufacturing. And there is anger that successive U.S. administrations of both parties have negotiated trade deals, notably NAFTA and the admission of China into the World Trade Organization, that have undercut America's manufacturing base.

Those on the right suggest that if burdensome regulations were lifted, this would fire up a new era of manufacturing prowess. On the left, it is claimed that trade agreements are to blame and, at the very least, we should not sign any more of them. Expanding union power and recruiting are another favorite solution. Despite his position on the right, Donald Trump has joined those on the left blaming China for manufacturing’s problems.

What is the real story and what needs to be done to save this sector? The biggest factor transforming manufacturing has been technology; and technology will largely determine its future.

Disappearing jobs

Employment in the manufacturing sector declined slowly through the 1980s and 1990s, but since 2000, the decline has been much faster falling by over 6 million workers between 2000 and 2010. There were hopes that manufacturing jobs would regain much of their lost ground once the recession ended, but the number of jobs has climbed by less than a million in the recovery so far and employment has been essentially flat since the first quarter of 2015. Manufacturing used to be a road to the middle class for millions of workers with just a high school education, but that road is much narrower today—more like a footpath. In manufacturing’s prime, although not all jobs were good jobs, many were well paid and offered excellent fringe benefits. Now there are many fewer of these.

Sustained but slow output growth

The real output of the manufacturing sector from 2000 to the present gives a somewhat more optimistic view of the sector, with output showing a positive trend growth, with sharp cyclical downturns. There was a peak of manufacturing production in 2000 with the boom in technology goods, most of which were still being produced in the U.S. But despite the technology bust and the shift of much of high-tech manufacturing overseas, real output in the sector in 2007 was still nearly 11 percent higher than its peak in 2000.

Production fell in the Great Recession at a breathtaking pace, dropping by 24 percent starting in Q3 2008. Manufacturing companies were hit by a bomb that wiped out a quarter of their output. Consumers were scared and postponed the purchase of anything they did not need right away. The production of durable goods, like cars and appliances, fell even more than the total. Unlike employment in the sector, output has reclaimed it previous peak and, by the third quarter of 2015, was 3 percent above that peak. The auto industry has recovered particularly strongly. While manufacturing output growth is not breaking any speed records, it is positive.

Understanding the pattern

The explanation for the jobs picture is not simple, but the Cliff Notes version is as follows: manufacturing employment has been declining as a share of total economy-wide employment for 50 years or more—a pattern that holds for all advanced economies, even Germany, a country known for its manufacturing strength. The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector. This conclusion probably comes as a surprise to most Americans who believe that international trade, and trade with China in particular, is the key reason for the loss of jobs. In reality, trade is a factor in manufacturing weakness, but not the most important one.

The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector.

The existence of our large manufacturing trade deficit with Asia means output and employment in the sector are smaller than they would be with balanced trade. Germany, as noted, has seen manufacturing employment declines also, but the size of their manufacturing sector is larger than ours, running huge trade surplus. In addition, right now that there is global economic weakness that has caused a shift of financial capital into the U. S. looking for safety, raising the value of the dollar and thus hurting our exports. In the next few years, it is unlikely that the U.S. trade deficit will improve—and it may well worsen.

Even though it will not spark a jobs revival, manufacturing is still crucial for the future of the U.S. economy, remaining a center for innovation and productivity growth and if the U.S. trade deficit is to be substantially reduced, then manufacturing must become more competitive. The services sector runs a small trade surplus and new technologies are eliminating our energy trade deficit. Nevertheless a substantial expansion of manufactured exports is needed if there is to be overall trade balance.

Disruptive innovation in manufacturing

The manufacturing sector is still very much alive and reports of its demise are not just premature but wrong. If we want to encourage the development of a robust competitive manufacturing sector, industry leaders and policymakers must embrace new technologies. The sector will be revived not by blocking new technologies with restrictive labor practices or over-regulation but by installing them—even if that means putting robots in place instead of workers. To speed the technology revolution, however, help must be provided to those whose jobs are displaced. If they end up as long-term unemployed, or in dead-end or low-wage jobs, then not only do these workers lose out but also the benefits to society of the technology investment and the productivity increase are lost.

The manufacturing sector performs 69 percent of all the business R&D in the U.S. which is powering a revolution that will drive growth not only in manufacturing but also in the broader economy as well. The manufacturing revolution can be described by three key developments:

1. In the internet of things, sensors are embedded in machines, transmitting information that allows them to work together and report impending maintenance problems before there is a breakdown.
2. Advanced manufacturing includes 3-D printing, new materials and the “digital thread” which connects suppliers to the factory and the factory to customers; it breaks down economies of scale allowing new competitors to enter; and it enhances speed and flexibility.
3. Distributed innovation allows crowdsourcing is used to find radical solutions to technical challenges much more quickly and cheaply than with traditional R&D.

In a June 2015 Fortune 500 survey, 72 percent of CEOs reported their biggest challenge is that technology is changing fast, naming it as their number one challenge. That new technology churn is especially acute in manufacturing. The revolution is placing heavy demands on managers who must adapt their businesses to become software companies, big data companies, and even media companies (as they develop a web presence). Value and profit in manufacturing is shifting to digital assets. The gap between current practice and what it takes to be good at these skills is wide for many manufacturers, particularly in their ability to find the talent they need to transform their organizations.

Recent OECD analysis highlighted the large gap between best-practice companies and average companies. Although the gap is smaller in manufacturing than in services because of the heightened level of global competition in manufacturing, it is a sign that manufacturers must learn how to take advantage of new technologies quickly or be driven out of business.

Closing the trade deficit

A glaring weakness of U.S. manufacturing is its international trade performance. Chronic trade deficits have contributed to the sector’s job losses and have required large-scale foreign borrowing that has made us a net debtor to the rest of the world -- to the tune of nearly $7 trillion by the end of 2014. Running up endless foreign debts is a disservice to our children and was one source of the instability that led to the financial crisis. America should try to regain its balance as a global competitor and that means, at the least, reducing the manufacturing trade deficit. Achieving a significant reduction in the trade deficit will be a major task, including new investment and an adjustment of today’s overvalued dollar.

The technology revolution provides an opportunity, making it profitable to manufacture in the U.S. using highly automated methods. Production can be brought home, but it won’t bring back a lot of the lost jobs. Although the revolution in manufacturing is underway and its fate is largely in the hands of the private sector, the policy environment can help speed it up and make sure the broad economy benefits.

First, policymakers must accept that trying to bring back the old days and old jobs is a mistake. Continuing to chase yesterday’s goals isn’t productive, and at this point it only puts off the inevitable. Prioritizing competitiveness, innovativeness, and the U.S. trade position over jobs could be politically difficult, however, so policymakers should look for ways to help workers who lose jobs and communities that are hard hit. Government training programs have a weak track record, but if companies do the training or partner with community colleges, then the outcomes are better. Training vouchers and wage insurance for displaced workers can help them start new careers that will mostly be in the service sector where workers with the right skills can find good jobs, not just dead-end ones.

Second, a vital part of the new manufacturing is the ecosystem around large companies. There were 50,000 fewer manufacturing firms in 2010 than in 2000, with most of the decline among smaller firms. Some of that was inevitable as the sector downsized, but it creates a problem because as large firms transition to the new manufacturing, they rely on small local firms to provide the skills and even the technologies they do not have in-house. The private sector has the biggest stake in developing the ecosystems it needs, but government can and has helped, particularly at the state and local level. Sometimes infrastructure investment is needed, land can be set aside, mentoring programs can be established for young firms, help can be given in finding funding, and simplified and expedited permitting processes instituted.

It is hard to let go of old ways of thinking. Policymakers have been trying for years to restore the number of manufacturing jobs, but that is not an achievable goal. Yes manufacturing matters; it is a powerhouse of innovation for our economy and a vital source of competitiveness. There will still be good jobs in manufacturing but it is no longer a conveyor belt to the middle class. Policymakers need to focus on speeding up the manufacturing revolution, funding basic science and engineering, and ensuring that tech talent and best-practice companies want to locate in the United States.

Productivity, which is the output produced by each hour of work in the non-farm business sector, grew at a paltry 1.2 percent a year in the 10 years through the third quarter of this year. In the prior decade, the growth rate was more than double, at around 3 percent a year. The question is what it means.

High-wage workers have done better than the average Joe; and profits have grown faster than wages, but productivity growth is even more important — it is the rising tide that lifts most boats. Average wages grew at more than 2 percent a year during the years of strong productivity growth and are growing at under 1 percent a year now.

The pace of the productivity increase is also vital to the nation’s finances. The last balanced federal budgets came after the fast-growth 1990s, which drove up incomes, profits and tax revenues. Today there are scary forecasts of the size of future budget deficits, and those forecasts are set to become much scarier unless productivity improves.

Slow productivity growth does not have the drama of Janet Yellen arguing with angry senators. It is a problem like termites in the attic where you don’t realize it exists until the roof collapses. And, even worse, it is a problem where there is no generally recognized explanation, nor are there obvious solutions.

One possible explanation, put forward by leading economist Robert Gordon, is that all the best innovations have been used up. He looks at the broad sweep of history, describing the age of steam, the age of electricity, and so on. The last wave, he argues, is the one fueled by the technology bubble, and it ran its course 10 years ago.

Gordon’s diagnosis is hard to swallow, however, as technology is changing all around us. A June 2015 survey of the Fortune 500 companies asked CEOs to list the biggest challenges they face, and their number-one answer by far was the challenge of rapid technological change. Any visitor to Silicon Valley or Cambridge, Massachusetts, is impressed by the pace of change.

There seems to be a major gap occurring between the cup and the lip. Technology changes apace, but the changes are apparently not translating into more efficient factories and offices.

One reason for this could be a lack of investment in business and human capital —the skills of the workforce. The Great Recession certainly put a damper on all forms of investment and the recovery has been sluggish. Regardless of what caused the slowdown, a boost to investment would help productivity.

Another possibility is that economic data are not capturing the fruits of innovations. Improved surgical procedures, new drugs and better treatment protocols allow hospitals to become more productive, but this large sector of the economy shows almost no measured productivity growth. Silicon Valley is turning out new apps to make our lives easier, but very little of this activity shows up in our productivity statistics.

Another clue to the productivity problem is that, for some reason, the dynamism of the U.S. economy seems to have faded. The number of startups is down, especially the so-called gazelles that grow fast and become much more productive.

Traditionally, a source of productivity growth has been the expansion of the most productive firms and the contraction of the less productive, and this dynamic has also slowed, perhaps due to diminished access to funding, or maybe regulation has become more burdensome.

While the cause of the problem and the nature of the solution remain uncertain, there is a lot of exciting research going on to understand productivity better and formulate policies to enhance it. If misery loves company, the United States should feel better because weak productivity is a problem for all advanced economies.

Moreover, understanding slow growth is not just a challenge for “experts.” Many of the latest best ideas are coming from the global community. Perhaps a new explanation for and solution to the productivity problem will bubble up from the new interconnected world.

Editor's Note: this piece first appeared in Inside Sources. 

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The financial crisis is now eight years behind us, but its legacy lingers on. Many Americans are concerned about their financial security and are particularly worried about whether they will have enough for retirement. Guaranteed benefit pensions are gradually disappearing, leaving households to save and invest for themselves. What role could equities play for retail investors?

Another concern about the lingering impact of the crisis is that business investment and overall economic growth remains weak compared to expectations. Large companies are able to borrow at low interest rates, yet many of them have large cash holdings. However, many small and medium sized enterprises face difficulty funding their growth, paying high risk premiums on their borrowing and, in some cases, being unable to fund investments they would like to make. Equity funding can be an important source of growth financing.

On Friday, April 15, the Initiative on Business and Public Policy at Brookings examined what role equity markets can play for individual retirement security, small business investment and whether they can help jumpstart American innovation culture by fostering the transition from startups to billion dollar companies.

You can join the conversation and tweet questions for the panelists at #EquityMarkets.

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• Keynote address by Richard G. Ketchum
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• Keynote address by Roger Ferguson

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• Not just for the professionals? Understanding equity markets for retail and small business investors

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• Uncorrected Transcript (.pdf)

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• Equity Markets Retirement Security 2016 Apr 15 (2)
• 20160415_equity_markets_transcript

Abstract

An individual-based computational model of smallpox epidemics in a two-town county is presented and used to develop strategies for bioterror containment. A powerful and feasible combination of preemptive and reactive vaccination and isolation strategies is developed which achieves epidemic quenching while minimizing risks of adverse side effects. Calibration of the model to historical data is described. Various model extensions and applications to other public health problems are noted.

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On November 7, millions of Americans will exercise their civic duty to vote. At stake will be control of the House and Senate, not to mention the success of individual candidates running for office. President Bush's "stay the course" agenda will either be enabled over the next two years by a Republican Congress or knocked off kilter by a Democratic one.

With so much at stake, it is not surprising that the Pew Research Center found that 51 percent of registered voters have given a lot of thought to this November's election. This is higher than any other recent midterm election, including 44 percent in 1994, the year Republicans took control of the House. If so, turnout should better the 1994 turnout rate among eligible voters of 41 percent.

There is good reason to suspect that despite the high interest, turnout will not exceed 1994. The problem is that a national poll is, well, a national poll, and does not measure attitudes of voters within states and districts.

People vote when there is a reason to do so. Republican and Democratic agendas are in stark contrast on important issues, but voters also need to believe that their vote will matter in deciding who will represent them. It is here that the American electoral system is broken for many voters.

Voters have little choice in most elections. In 1994, Congressional Quarterly called 98 House elections as competitive. Today, they list 51. To put it another way, we are already fairly confident of the winner in nearly 90 percent of House races. Although there is no similar tracking for state legislative offices, we know that the number of elections won by less than 60 percent of the vote has fallen since 1994.

The real damage to the national turnout rate is in the large states of California and New York, which together account for 17 percent of the country's eligible voters. Neither state has a competitive Senate or Governor's election, and few competitive House or state legislative races. Compare to 1994, when Californians participated in competitive Senate and governor races the state's turnout was 5 percentage points above the national rate. The same year New York's competitive governor's race helped boost turnout a point above the national rate.

Lacking stimulation from two of the largest states, turnout boosts will have to come from elsewhere. Texas has an interesting four-way governor's race that might draw from infrequent voters to the polls. Ohio's competitive Senate race and some House races might also draw voters. However, in other large states like Florida, Illinois, Michigan and Pennsylvania, turnout will suffer from largely uncompetitive statewide races.

The national turnout rate will likely be less than 1994 and fall shy of 40 percent. This is not to say that turnout will be poor everywhere. Energized voters in Connecticut get to vote in an interesting Senate race and three of five Connecticut House seats are up for grabs. The problem is that turnout will be localized in these few areas of competition.

The fault is not on the voters; people's lives are busy, and a rational person will abstain when their vote does not matter to the election outcome. The political parties also are sensitive to competition and focus their limited resources where elections are competitive. Television advertising and other mobilizing efforts by campaigns will only be found in competitive races.

The old adage of "build it and they will come" is relevant. All but hardcore sports fans tune out a blowout. Building competitive elections -- and giving voters real choices -- will do much to increase voter turnout in American politics. There are a number of reforms on the table: redistricting to create competitive districts, campaign financing to give candidates equal resources, and even altering the electoral system to fundamentally change how a vote elects representatives. If voters want choice and a government more responsive to their needs, they should consider how these seemingly arcane election procedures have real consequences on motivating them to do the most fundamental democratic action: vote.

Now that the 2010 Census is concluded, states will begin the process of reapportionment—re-drawing voting district lines to account for population shifts. Nonresident Senior Fellow Michael McDonald says redistricting has been fraught with controversy and corruption since the nation’s early days, when the first “gerrymandered” district was drawn. Two states—Arizona and California—have instituted redistricting commissions intended to insulate the process from political shenanigans, but politicians everywhere will continue to work the system to gain electoral advantage and the best chance of re-election for themselves and their parties.

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Analysis of dozens of publicly created redistricting plans shows that map-making technology can improve political representation and detect a gerrymander.  In 2012, President Obama won the vote in Ohio by three percentage points, while Republicans held a 13-to-5 majority in Ohio’s delegation to the U.S. House. After redistricting in 2013, Republicans held 12 of Ohio’s House seats while Democrats held four. As is typical in these races, few were competitive; the average margin of victory was 32 points. Is this simply a result of demography, the need to create a majority-minority district, and the constraints traditional redistricting principles impose on election lines—or did the legislature intend to create a gerrymander?

Crowd-Sourced Redistricting Maps

In the Ohio elections, we have a new source of information that opens a window into the legislature’s choice: Large numbers of publicly created redistricting plans.

During the last round of redistricting, across the country thousands of people in over a dozen states created hundreds of legal redistricting plans. Advances in information technology and the engagement of grassroots reform groups made these changes possible. To promote these efforts we created the DistrictBuilder open redistricting platform and many of these groups used this tool to create their plans.

Over the last several years, we have used the trove of information produced by public redistricting to gain insight into the politics of representation. In previous work that analyzed public redistricting in Virginia^[1], and in Florida^[2], we discovered that members of the public are capable of creating legal redistricting plans that outperform those maps created by legislatures in a number of ways.

Public redistricting in Ohio shows something new—the likely motives of the legislature. This can be seen through using information visualization methods to show the ways in which redistricting goals can be balanced (or traded-off) in Ohio , revealing the particular trade-offs made by the legislature.

The figure below, from our new research paper^[3], shows 21 plots—each of which compares legislative and publicly-created plans using a pair of scores—altogether covering seven different traditional and representational criteria. A tiny ‘A’ shows the adopted plan. The top-right corner of each mini-plot shows the best theoretically possible score. When examined by itself, the legislative plan meets a few criteria: it minimizes population deviation, creates an expected majority-minority seat, and creates a substantial majority of districts that would theoretically be competitive in an open-seat race in which the statewide vote was evenly split.

Figure 1: Pairwise Congressional Score Comparisons (Scatterplots) - Standardized Scores

In previous rounds of redistricting, empirical analysis would stop here—unless experts were called in to draw alternative plans in litigation. However, the large number of public plans now available allows us to see other options, plans the legislature could readily have created had it desired to do so. Comparison of the adopted plans and public plans reveal the weakness of the legislature’s choice. Members of the public were able to find plans that soundly beat the legislative plan on almost every pair of criteria, including competitive districts.

So why was the adopted plan chosen? Information visualization can help here, as well, but we need to add another criterion—partisan advantage:

Pareto Frontier: Standard Criteria vs. Democratic Surplus

When we visualize the number of expected Democratic seats that was likely to result from each plan, and compare this to the other score, we can see that the adopted plan is the best at something— producing Republican seats.

Was Ohio gerrymandered? Applying our proposed gerrymandering detection method, the adopted plans stands in high contrast to the public sample of plans, even if the overall competition scoring formula is slightly biased towards the Democrats, as strongly biased towards the Republicans on any measure of partisan fairness. Moreover analyzing the tradeoffs among redistricting criteria illuminate empirically demonstrates what is often suspected, but is typically impossible to demonstrate—that had the legislature desired to improve any good-government criterion—it could have done so, simply by sacrificing some partisan advantage. In light of this new body of evidence, the political intent of the legislature is clearly displayed.

However, when politics and technology mix, beware of Kranzberg’s first law: “Technology is neither good nor bad; nor is it neutral.”^[4] Indeed there is an unexpected and hopeful lesson on reform revealed by the public participation that was enabled by new technology. The public plans show that, in Ohio, it is possible to improve the expected competitiveness, and to improve compliance with traditional districting principles such as county integrity, without threatening majority-minority districts simply by reducing partisan advantage—this is a tradeoff we should gladly accept.

The promise of geoengineering is placing average global temperature under human control, and is thus considered a powerful instrument for the international community to deal with global warming. While great energy has been devoted to learning more about the natural systems that it would affect, questions of political nature have received far less consideration. Taking as a given that regional effects will be asymmetric, the nations of the world will only give their consent to deploying this technology if they can be given assurances of a fair compensation mechanism, something like an insurance policy. The question of compensation reveals that the politics of geoengineering are far more difficult than the technical aspects.

What is Geoengineering?

In June 1991, Mount Pinatubo exploded, throwing a massive amount of volcanic sulfate aerosols into the high skies. The resulting cloud dispersed over weeks throughout the planet and cooled its temperature on average 0.5° Celsius over the next two years. If this kind of natural phenomenon could be replicated and controlled, the possibility of engineering the Earth’s climate is then within reach.

Spraying aerosols in the stratosphere is one method of solar radiation management (SRM), a class of climate engineering that focuses on increasing the albedo, i.e. reflectivity, of the planet’s atmosphere. Other SRM methods include brightening clouds by increasing their content of sea salt. A second class of geo-engineering efforts focuses on carbon removal from the atmosphere and includes carbon sequestration (burying it deep underground) and increasing land or marine vegetation. Of all these methods, SRM is appealing for its effectiveness and low costs; a recent study put the cost at about $5 to $8 billion per year.¹

Not only is SRM relatively inexpensive, but we already have the technological pieces that assembled properly would inject the skies with particles that reflect sunlight back into space. For instance, a fleet of modified Boeing 747s could deliver the necessary payload. Advocates of geoengineering are not too concerned about developing the technology to effect SRM, but about its likely consequences, not only in terms of slowing global warming but the effects on regional weather. And there lies the difficult question for geoengineering: the effects of SRM are likely to be unequally distributed across nations.

Here is one example of these asymmetries: Julia Pongratz and colleagues at the department of Global Ecology of the Carnegie Institution for Science estimated a net increase in yields of wheat, corn, and rice from SRM modified weather. However, the study also found a redistributive effect with equatorial countries experiencing lower yields.² We can then expect that equatorial countries will demand fair compensation to sign on the deployment of SRM, which leads to two problems: how to calculate compensation, and how to agree on a compensation mechanism.

The calculus of compensation

What should be the basis for fair compensation? One view of fairness could be that, every year, all economic gains derived from SRM are pooled together and distributed evenly among the regions or countries that experience economic losses.

If the system pools gains from SRM and distributes them in proportion to losses, questions about the balance will only be asked in years in which gains and losses are about the same. But if losses are far greater than the gains; then this would be a form of insurance that cannot underwrite some of the incidents it intends to cover. People will not buy such an insurance policy; which is to say, some countries will not authorize SRM deployment. In the reverse, if the pool has a large balance left after paying out compensations, then winners of SRM will demand lower compensation taxes.

Further complicating the problem is the question of how to separate gains or losses that can be attributed to SRM from regional weather fluctuations. Separating the SRM effect could easily become an intractable problem because regional weather patterns are themselves affected by SRM.  For instance, any year that El Niño is particularly strong, the uncertainty about the net effect of SRM will increase exponentially because it could affect the severity of the oceanic oscillation itself. Science can reduce uncertainty but only to a certain degree, because the better we understand nature, the more we understand the contingency of natural systems. We can expect better explanations of natural phenomena from science, but it would be unfair to ask science to reduce greater understanding to a hard figure that we can plug into our compensation equation.

Still, greater complexity arises when separating SRM effects from policy effects at the local and regional level. Some countries will surely organize better than others to manage this change, and preparation will be a factor in determining the magnitude of gains or losses. Inherent to the problem of estimating gains and losses from SRM is the inescapable subjective element of assessing preparation. 

The politics of compensation

Advocates of geoengineering tell us that their advocacy is not about deploying SRM; rather, it is about better understanding the scientific facts before we even consider deployment. It’s tempting to believe that the accumulating science on SRM effects would be helpful. But when we consider the factors I just described above, it is quite possible that more science will also crystalize the uncertainty about exact amounts of compensation. The calculus of gain or loss, or the difference between the reality and a counterfactual of what regions and countries will experience requires certainty, but science only yields irreducible uncertainty about nature.

The epistemic problems with estimating compensation are only to be compounded by the political contestation of those numbers. Even within the scientific community, different climate models will yield different results, and since economic compensation is derived from those models’ output, we can expect a serious contestation of the objectivity of the science of SRM impact estimation. Who should formulate the equation? Who should feed the numbers into it? A sure way to alienate scientists from the peoples of the world is to ask them to assert their cognitive authority over this calculus. 

What’s more, other parts of the compensation equation related to regional efforts to deal with SRM effect are inherently subjective. We should not forget the politics of asserting compensation commensurate to preparation effort; countries that experience low losses may also want compensation for their efforts preparing and coping with natural disasters.

Not only would a compensation equation be a sham, it would be unmanageable. Its legitimacy would always be in question. The calculus of compensation may seem a way to circumvent the impasses of politics and define fairness mathematically. Ironically, it is shot through with subjectivity; is truly a political exercise.

Can we do without compensation?

Technological innovations are similar to legislative acts, observed Langdon Winner.³ Technical choices of the earliest stage in technical design quickly “become strongly fixed in material equipment, economic investment, and social habit, [and] the original flexibility vanishes for all practical purposes once the initial commitments are made.” For that reason, he insisted, "the same careful attention one would give to the rules, roles, and relationships of politics must also be given to such things as the building of highways, the creation of television networks, and the tailoring of seeming insignificant features on new machines."

If technological change can be thought of as legislative change, we must consider how such a momentous technology as SRM can be deployed in a manner consonant with our democratic values. Engineering the planet’s weather is nothing short of passing an amendment to Planet Earth’s Constitution. One pesky clause in that constitutional amendment is a fair compensation scheme. It seems so small a clause in comparison to the extent of the intervention, the governance of deployment and consequences, and the international commitments to be made as a condition for deployment (such as emissions mitigation and adaptation to climate change). But in the short consideration afforded here, we get a glimpse of the intractable political problem of setting up a compensation scheme. And yet, if the clause were not approved by a majority of nations, a fair compensation scheme has little hope to be consonant with democratic aspirations.

¹McClellan, Justin, David W Keith, Jay Apt. 2012. Cost analysis of stratospheric albedo modification delivery systems. Environmental Research Letters 7(3): 1-8.

²Pongratz, Julia, D. B. Lobell, L. Cao, K. Caldeira. 2012. Nature Climate Change 2, 101–105.

³Winner, Langdon. 1980. Do artifacts have politics? Daedalus (109) 1: 121-136.

A key objective of the United Nations Development Programme (UNDP) is to assist its member countries in meeting the Millennium Development Goals (MDGs). UNDP pursues this objective in various ways, including through analysis and advice to governments on the progress towards the MDGs (such as support for the preparation and monitoring Poverty Reduction Strategies, or PRSs, in poor countries), assistance for capacity building, and financial and technical support for the preparation and implementation of development programs.

The challenge of achieving the MDGs remains daunting in many countries, including Tajikistan. To do so will require that all development partners, i.e., the government, civil society, private business and donors, make every effort to scale up successful development interventions. Scaling up refers to “expanding, adapting and sustaining successful policies, programs and projects on different places and over time to reach a greater number of people.” Interventions that are successful as pilots but are not scaled up will create localized benefits for a small number of beneficiaries, but they will fail to contribute significantly to close the MDG gap.

This paper aims to assess whether and how well UNDP is supporting scaling up in its development programs in Tajikistan. While the principal purpose of this assessment was to assist the UNDP country program director and his team in Tajikistan in their scaling up efforts, it also contributes to the overall growing body of evidence on the scaling up of development interventions worldwide.

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The challenge of rural poverty and food insecurity in the developing world remains daunting. Recent estimates show that “there are still about 1.2 billion extremely poor people in the world. In addition, about 870 million people are undernourished, and about 2 billion people suffer from micronutrient deficiency. About 70 percent of the world’s poor live in rural areas, and many have some dependency on agriculture,” (Cleaver 2012). Addressing this challenge by assisting rural small-holder farmers in developing countries is the mandate of the International Fund for Agricultural Development (IFAD), an international financial institution based in Rome.

The International Fund for Agricultural Development is a relatively small donor in the global aid architecture, accounting for approximately one-half of 1 percent of all aid paid directly to developing countries in 2010. Although more significant in its core area of agricultural and rural development, IFAD still accounts for less than 5 percent of total official development assistance in that sector.1 Confronted with the gap between its small size and the large scale of the problem it has been mandated to address, IFAD seeks ways to increase its impact for every dollar it invests in agriculture and rural development on behalf of its member states. One indicator of this intention to scale up is that it has set a goal to reach 90 million rural poor between 2012 and 2015 and lift 80 million out of poverty during that time. These numbers are roughly three times the number of poor IFAD has reached previously during a similar time span. More generally, IFAD has declared that scaling up is “mission critical,” and this scaling-up objective is now firmly embedded in its corporate strategy and planning statements. Also, increasingly, IFAD’s operational practices are geared towards helping its clients achieve scaling up on the ground with the support of its loans and grants.

This was not always the case. For many years, IFAD stressed innovation as the key to success, giving little attention to systematically replicating and building on successful innovations. In this regard, IFAD was not alone. In fact, few aid agencies have systematically pursued the scaling up of successful projects. However, in 2009, IFAD management decided to explore how it could increase its focus on scaling up. It gave a grant to the Brookings Institution to review IFAD’s experience with scaling up and to assess its operational strategies, policies and processes with a view to strengthening its approach to scaling up. Based on an extensive review of IFAD documentation, two country case studies and intensive interactions with IFAD staff and managers, the Brookings team prepared a report that it submitted to IFAD management in June 2010 and published as a Brookings Global Working Paper in early 2011 (Linn et al. 2011).

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The replenishment process for concessional resources of the multilateral development banks is broken. We have come to this conclusion after a review of the experience with recent replenishments of multilateral development funds. We also base it on first-hand observation, since one of us was responsible for the World Bank’s International Development Association (IDA) replenishment consultations 20 years ago and recently served as the external chair for the last two replenishment consultations of the International Fund for Agricultural Development (IFAD), which closely follow the common multilateral development bank (MDB) practice. As many of the banks and their donors are preparing for midterm reviews as a first step toward the next round of replenishment consultations, this is a good time to take stock and consider what needs to be done to fix the replenishment process.

So what’s the problem?

Most of all, the replenishment process does not serve its key intended function of setting overall operational strategy for the development funds and holding the institutions accountable for effectively implementing the strategy. Instead, the replenishment consultations have turned into a time-consuming and costly process in which donor representatives from their capitals get bogged down in the minutiae of institutional management that are better left to the boards of directors and the managements of the MDBs. There are other problems, including lack of adequate engagement of recipient countries in donors’ deliberations, the lack of full participation of the donors’ representatives on the boards of the institutions in the process, and inflexible governance structures that serve as a disincentive for non-traditional donors (from emerging countries and from private foundations) to contribute.

But let’s focus on the consultation process. What does it look like? Typically, donor representatives from capitals assemble every three years (or four, in the case of the Asian Development Bank) for a year-long consultation round, consisting of four two-day meetings (including the meeting devoted to the midterm review of the ongoing replenishment and to setting the agenda for the next consultation process). For these meetings, MDB staff prepare, per consultation round, some 20 substantive documents that are intended to delve into operational and institutional performance in great detail. Each consultation round produces a long list of specific commitments (around 40 commitments is not uncommon), which management is required to implement and monitor, and report on in the midterm review. In effect, however, this review covers only half the replenishment cycle, which leads to the reporting, monitoring, and accountability being limited to the delivery of committed outputs (e.g., a specific sector strategy) with little attention paid to implementation, let alone outcomes.

The process is eerily reminiscent of the much maligned “Christmas tree” approach of the World Bank’s structural adjustment loans in the 1980s and 1990s, with their detailed matrixes of conditionality; lack of strategic selectivity and country ownership; focus on inputs rather than outcomes; and lack of consideration of the borrowers’ capacity and costs of implementing the Bank-imposed measures. Ironically, the donors successfully pushed the MDBs to give up on such conditionality (without ownership of the recipient countries) in their loans, but they impose the same kind of conditionality (without full ownership of the recipient countries and institutions) on the MDBs themselves—replenishment after replenishment.

Aside from lack of selectivity, strategic focus, and ownership of the commitments, the consultation process is also burdensome and costly in terms of the MDBs’ senior management and staff time as well as time spent by ministerial staff in donor capitals, with literally thousands of management and staff hours spent on producing and reviewing documentation. And the recent innovation of having donor representatives meet between consultation rounds as working groups dealing with long-term strategic issues, while welcome in principle, has imposed further costs on the MDBs and capitals in terms of preparing documentation and meetings.

It doesn’t have to be that way. Twenty years ago the process was much simpler and less costly. Even today, recent MDB capital increases, which mobilized resources for the non-concessional windows of the MDBs, were achieved with much simpler processes, and the replenishment consultations for special purpose funds, such as the Global Fund for HIV/AIDS, tuberculosis, and malaria and for the GAVI Alliance, are more streamlined than those of the MDBs.

So what’s to be done?

We recommend the following measures to fix the replenishment consultation process:

1. Focus on a few strategic issues and reduce the number of commitments with an explicit consideration of the costs and capacity requirements they imply. Shift the balance of monitoring and accountability from delivery of outputs to implementation and outcomes.
2. Prepare no more than five documents for the consultation process: (i) a midterm review on the implementation of the previous replenishment and key issues for the future; (ii) a corporate strategy or strategy update; (iii) the substantive report on how the replenishment resources will contribute to achieve the strategy; (iv) a financial outlook and strategy document; and (v) the legal document of the replenishment resolution.
3. Reduce the number of meetings for each replenishment round to no more than three and lengthen the replenishment period from three to four years or more.
4. Use the newly established working group meetings between replenishment consultation rounds to focus on one or two long-term, strategic issues, including how to fix the replenishment process.

The initiative for such changes lies with the donor representatives in the capitals, and from our interviews with donor representatives we understand that many of them broadly share our concerns. So this is a good time—indeed it is high time!—for them to act.

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In 2015, 193 countries adopted the Sustainable Development Goals (SDGs), a new global agenda that is more ambitious than the preceding Millennium Development Goals and aims to make progress on some of the most pressing issues of our time. Goal 4, "To ensure inclusive and quality education for all, with relevant and effective learning outcomes," challenges the international education community to meet universal access plus learning by 2030. We know that access to primary schooling has scaled up rapidly over previous decades, but what can be learned from places where transformational changes in learning have occurred? What can governments, civil society, and the private sector do to more actively scale up quality learning?

On April 18-19, the Center for Universal Education (CUE) at Brookings launched "Millions Learning: Scaling Up Quality Education in Developing Countries," a comprehensive study that examines where learning has improved around the world and what factors have contributed to that process. This two-day event included two sessions. Monday, April 18 focused on the role of global actors in accelerating progress to meeting the SDGs. The second session on Tuesday, April 19 included a presentation of the Millions Learning report followed by panel discussions on the role of financing and technology in scaling education in developing countries.

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• Getting millions to learn: What will it take to accelerate progress on meeting the Sustainable Development Goals?
• Scaling quality education: The launch of the Millions Learning report
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To achieve the desired outcomes of the Sustainable Development Goals as well as the global targets from the Paris COP21 Climate Summit by 2030, governments will have to find ways to meet the top-down objectives with bottom-up approaches. A systematic focus on scaling up successful development interventions could serve to bridge this gap, or what’s been called the “missing middle.” However, the question remains how to actually address the challenge of scaling up.

When Arna Hartmann, adjunct professor of international development, and I first looked at the scaling up agenda in development work in the mid-2000s, we concluded that development agencies were insufficiently focused on supporting the scaling up of successful development interventions. The pervasive focus on one-off projects all too often resulted in what I’ve come to refer to as “pilots to nowhere.” As a first step to fix this, we recommended that each aid organization carry out a review to be sure to focus effectively on scaling up. 

The institutional dimension is critical, given their role in developing and implementing scaling up pathways. Of course, individuals serve as champions, designers, and implementers, but experience illustrates that if individuals lack a strong link to a supportive institution, scaling up is most likely to be short-lived and unsustainable. “Institutions” include many different types of organizations, such as government ministries and departments, private firms and social enterprises, civil society organizations, and both public and private external donors and financiers.

The Brookings book “Getting to Scale: How to Bring Development Solutions to Millions of Poor People” explores the opportunities and challenges that such organizations face, on their own or, better yet, partnering with each other, in scaling up the development impact of their successful interventions.

Over the past decade I have worked with 10 foreign aid institutions—multilateral and bilateral agencies, as well as big global non-governmental organizations—helping them to focus systematically on scaling up operational work and developing approaches to do so. There are common lessons that apply across the board to these agencies, with one salutary example being the International Fund for Agricultural Development (IFAD) which has tackled the scaling up agenda systematically and persistently.

Following are eight takeaway lessons I gleaned from my work with IFAD:

1. Look into the “black box” of institutions. It is not enough to decide that an institution should focus on and support scaling up of successful development interventions. You actually need to look at how institutions function in terms of their mission statement and corporate strategy, their policies and processes, their operational instruments, their budgets, management and staff incentives, and their monitoring and evaluation practices. Check out the Brookings working paper that summarizes the results of a scaling up review of the IFAD.
2. Scaling needs to be pursued institution-wide. Tasking one unit in an organization with innovation and scaling up, or creating special outside entities (like the Global Innovation Fund set up jointly by a number of donor agencies) is a good first step. But ultimately, a comprehensive approach must be mainstreamed so that all operational activities are geared toward scaling up.
3. Scaling up must be championed from the top. The governing boards and leadership of the institutions need to commit to scaling up and persistently stay on message, since, like any fundamental institutional change, effectively scaling up takes time, perhaps a decade or more as with IFAD.
4. The scaling up process must be grown within the institution. External analysis and advice from consultants can play an important role in institutional reviews. But for lasting institutional change, the leadership must come from within and involve broad participation from managers and staff in developing operational policies and processes that are tailored to an institution’s specific culture, tasks, and organizational structure.
5. A well-articulated operational approach for scaling up needs to be put in place. For more on this, take a look at a recent paper by Larry Cooley and I that reviews two helpful operational approaches, which are also covered in Cooley’s blog. For the education sector, the Center for Universal Education at Brookings just published its report “Millions Learning,” which provides a useful scaling up approach specifically tailored to the education sector.
6. Operational staffs need to receive practical guidance and training. It is not enough to tell staff that they have to focus on scaling up and then give them a general framework. They also need practical guidance and training, ideally tailored to the specific business lines they are engaged in. IFAD, for example, developed overall operational guidelines for scaling up, as well as guidance notes for specific area of engagement, including livestock development, agricultural value chains, land tenure security, etc.  This guidance and training ideally should also be extended to consultants working with the agency on project preparation, implementation, and evaluation, as well as to the agency’s local counterpart organizations.
7. New approaches to monitoring and evaluation (M&E) have to be crafted. Typically the M&E for development projects is backward looking and focused on accountability, narrow issues of implementation, and short-term results. Scaling up requires continuous learning, structured experimentation, and innovation based on evidence, including whether the enabling conditions for scaling up are being established. And it is important to monitor and evaluate the institutional mainstreaming process of scaling up to ensure that it is effectively pursued. I’d recommend looking at how the German Agency for International Development (GIZ) carried out a corporate-wide evaluation of its scaling up experience.
8. Scaling up helps aid organizations mobilize financial resources. Scaling up leverages limited institutional resources in two ways: First, an organization can multiply the impact of its own financial capacity by linking up with public and private agencies and building multi-stakeholder coalitions in support of scaling up. Second, when an organization demonstrates that it is pursuing not only one-off results but also scaled up impact, funders or shareholders of the organization tend to be more motivated to support the organization. This certainly was one of the drivers of IFAD’s successful financial replenishment consultation rounds over the last decade.

By adopting these lessons, development organizations can actually begin to scale up to the level necessary to bridge the missing middle. The key will be to assure that a focus on scaling up is not the exception but instead becomes ingrained in the institutional DNA. Simply put, in designing and implementing development programs and projects, the question needs to be answered, “What’s next, if this intervention works?”

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

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

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

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

Figure 1. Role of SE sector in public service provision

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

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

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

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

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

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