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On March 26, the Center for Universal Education at Brookings hosted an expert consultation on the development of the World Bank Group's new Education Strategy. The consultative meeting brought together a small group of experts from diverse fields. The purpose of the discussion was to gather input and suggestions aimed at strengthening the World Bank Group's work in the education sector.

Elizabeth King, Director of Education in the Human Development Network at the World Bank, opened the event by providing an overview of the Bank’s current approach to education, and how it has evolved over the last several decades. She described the Bank’s priorities as reconnecting education to the broader development agenda, supporting more equitable access, ensuring better learning, and strengthening education systems. The Bank’s main operating principals are taking a whole-sector approach, building the evidence base in education, and measuring the results and impact. Beginning with this extensive consultation process, the Bank is demonstrating its willingness to work with others in the development community to build a larger and more robust evidence base from which to draw lessons to improve the quality of limited staff to maximize the impact of Bank activities, to underscore its commitment to partnerships with other organizations and civil society groups, and to move toward improving the measurement of results so as to be able to further improve the Bank’s education programs around the world.

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On Wednesday, June 2, the Center for Universal Education at Brookings hosted a discussion on the need to refocus the international education dialogue from school enrollment to learning achieved in developing countries. Participants, who included education experts from academia, international organizations and government, assessed the current state of systematic efforts at the global level to measure learning outcomes.

Center for Universal Education Co-Director and Senior Fellow Jacques van der Gaag opened the event by charting the landscape of learning, including education outside the primary school classroom, during early childhood development and the importance of acquiring both cognitive and non-cognitive skills for ensuring learning outcomes.

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Editor’s note: In a presentation to the 2011 International Conference on Early Childhood Development in Beijing, China, Jacques van der Gaag makes the economic case for investing in young children. He references the seminal works by several Nobel laureates in economics to demonstrate how development hinges on investments in early childhood, including health, nutrition, and education.

Thank you for inviting me to the 2011 International Conference on Early Childhood Development. I am very grateful to the organizers from the China Development Research Foundation for giving me a chance to make the economic case for investing in young children. While I have been giving these types of presentations for more than two decades in over a dozen countries worldwide, I prefer to have some back-up from a number of serious economists who, over time, have made major contributions to a key finding in development economics: countries prosper if they invest in their people, and the well-being of all people improves in a prosperous country that values equality.

To begin with, I would like to introduce my fellow countryman Jan Tinbergen, who received the first Nobel Prize in Economics, in 1969, for his work on economic development. Being a physicist by training, he pioneered the use of mathematical models to mimic the working of a country’s economy. The equations he used to formulate these models will probably look very foreign to you, but the important point I want to make is that these early models already included people, in the form of labor. People were seen as an input in the production process. Since there was an abundance of people in the developing world, and a shortage of capital, the development process, it was argued, could be sped up by providing more capital to low income countries to invest in infrastructure, factories, and other forms of physical capital. And to invest in human capital -- people. The economy needs all forms of human capital, from unskilled labor to highly skilled labor, and therefore investment in people, through education, was considered an integrated part of the development process.

Another well-known economist (Theodore W. Schulz, Nobel prize 1979) emphasized an important difference between physical capital and human capital: people respond to incentives. Thus, when food prices are being kept artificially low (to allow wages in the cities to stay low), farmers may decide that it is no longer worth their while to produce food, and they may migrate to the cities to work in the new factories. In other words, it is important to invest in human capital to stimulate the economy, but the broad preferences of the (working) population should not be overlooked.
 
Robert W. Fogel (Nobel laureate in 1993) underscored the role of workers in the production process by emphasizing the importance of health and nutrition to enhance productivity. Indeed, he calculated that about half of the speedy growth of the British economy during the Industrial Revolution was the result of better health and nutrition conditions of the working population. In turn, of course, the economic growth made the improvements in sanitation and the increased availability of (better) food possible.

A major breakthrough in the thinking about development (note that I am no longer saying “economic development”) came with the work of Amartya Sen (Nobel prize winner in 1998). His work has led to a re-definition of the development process from one that focuses solely on economic growth to one in which the fruits of economic growth benefits the population in terms of higher literacy rates and education levels, better health and nutrition, higher levels of social cohesion and social skills, and more equality. These four broad dimensions of well-being, together with economic growth, are now the building blocks of the Human Development Index. Indeed, human development, as currently understood, has been further specified in the Millennium Development Goals that drive today’s development discussion and policies in every corner of the world.

Before I finish my very brief (and very selective) history of development economics, allow me to mention the work of one more Nobel laureate in economics: Jim Heckman (2000). Heckman understands, of course, the importance of investing in people to increase a country’s human capital. But he also understands both the economics of early childhood development (ECD) and its scientific underpinnings. In recent work, he has extensively referred to the scientific basis that shows the causal link between deprivations early in life and education, social and health outcomes later in life. His economic work on ECD confirms what others have been saying for decades: The highest economic returns to investments in people come from the investments that occur in the early years of life.  

In sum, with an increased understanding of the basic development process, in which people are both the driving force for development and its main beneficiaries, the importance of investing in very young children is now seen as a key factor in the broad human development process of a country.
Taking care of very young children has long been on the development agenda. Immunization programs have been pushed to improve the health status of young children, nutrition programs have been implemented to prevent malnutrition and hunger, schooling has been emphasized as important for prosperity later in life, and as a possible “equalizer” of society. What the recent literature on brain development, on the interaction of genes and the environment, on the importance of cognitive and non-cognitive skill development (“social skills”), and on the link between early deprivations and a variety of problems later in life (from health problems to increased delinquency) has added to these efforts, is a better understanding of the long-term economic implications of these interventions.
 
Simply stated, economists look at investments in human capital as a means to increase lifelong “productivity”. The easiest way to measure differences in productivity is by comparing differences in wage rates (in well functioning labor markets) among workers with different levels of education (skills). Higher levels of education (more and better skills) lead to higher productivity, and this advantage can be maintained during one’s entire (working) life. Of course, not everyone works for wages, but similar results (more educated workers are more productive) have been found in agriculture and other forms of self-employment. Indeed, even the productivity of people who do not work in the labor market can be improved by education. Case in point: women who finished secondary education are much better equipped to address the health and nutrition needs of their children than illiterate mothers (and they have fewer children and make sure that these children go to school).

When economist do the numbers, solely based on increased productivity in the labor market, the economic returns to ECD are impressive (see slides 21 and 22). Integrated ECD programs reduce infant and child mortality, increase children’s nutritional and health status, increase on-time school enrollment, decrease drop-out and repetition rates, and increase progression to higher levels of education. All this leads to a more productive labor force. The economic returns from these ECD benefits alone are estimated to be in the 7 percent to 12 percent range, with some estimates being much higher. When ECD interventions are properly seen as investments in the human development of a country, the benefits are very large indeed.
 
Chances are that you were a little surprised to get a lecture on the “the history of development economics” at a conference about early childhood development. But the organizers asked me to make the economic case for investing in young children. I decided that I could do this as forcefully as possible by invoking the help of no fewer than five Nobel laureates in economics. Development is now understood as a process by people for people. All the evidence shows that investment in the health, in nutrition, and in cognitive and non-cognitive skill development is crucial for a prosperous and equal society. Of all the investments in people one can make, investments in the very young have the highest economic returns.

I congratulate our organizers from the China Development Research Foundation for their work on ECD to benefit the children of poor minorities in western China, providing them with a chance to benefit from China’s impressive growth record. And I thank you again for the opportunity to address this distinguished audience on such an important topic.

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Editor's Note: This article was originally published in Pediatrics, a subscription-only journal. To obtain a subscription or log in to access the full article, click here.

ABSTRACT

Building a strong foundation for healthy development in the early years of life is a prerequisite for individual well-being, economic productivity, and harmonious societies around the world. Growing scientific evidence also demonstrates that social and physical environments that threaten human development (because of scarcity, stress, or instability) can lead to short-term physiologic and psychological adjustments that are necessary for immediate survival and adaptation, but which may come at a significant cost to long-term outcomes in learning, behavior, health, and longevity. Generally speaking, ministries of health prioritize child survival and physical well-being, ministries of education focus on schooling, ministries of finance promote economic development, and ministries of welfare address breakdowns across multiple domains of function. Advances in the biological and social sciences offer a unifying framework for generating significant societal benefits by catalyzing greater synergy across these policy sectors. This synergy could inform more effective and efficient investments both to increase the survival of children born under adverse circumstances and to improve life outcomes for those who live beyond the early childhood period yet face high risks for diminished life prospects.

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The Chinese government has recently made early childhood development a national priority, recognizing the social and economic dividends that quality early learning opportunities reap for its human capital in the long term. As the country with the largest population in the world, 100 million children under the age of six in China stand to benefit from increased access to high quality early childhood education.

The quality of education in a country is indicative of its overall development prospects. Over the past two decades – building on the momentum generated by the Education for All and Millennium Development Goals – there have been significant increases in the number of children enrolled in school. Now, with discussions heating up around what the next set of development goals will look like in 2015, it is critical that learning across the education spectrum – from early childhood through adolescence and beyond – is included as a global priority. Starting early helps children enter primary school prepared to learn. High-quality early childhood development opportunities can have long-term impacts on a child’s later success in school.

Last month, the Chinese Ministry of Education, in partnership with the United Nations Children’s Fund, launched its first national early childhood advocacy month to promote early learning for all children. The campaign, which includes national television public service announcements on the benefits of investing early in education, builds on a commitment made by the government in 2010 to increase funding for early childhood education over the next decade. The Chinese government pledged to build new preschool facilities, enhance and scale up teacher training, provide subsidies for rural families for access to early learning opportunities, and increase support for private early childhood education centers.

A new policy guide by the Center for Universal Education outlines recommendations that education stakeholders, including national governments, can take to ensure that all children are in school and learning. These steps include establishing equity-based learning targets for all children, systematically collecting data for tracking progress against these targets, and allocating sufficient resources to education beginning in early childhood. The policy guide, based on a report calling for a Global Compact on Learning, is available in Mandarin, as well as Spanish, Portuguese, French and, soon, Arabic.

The success of China’s productivity and growth over the last few decades is attributable in part to its commitment to building a robust education system. As international attention mounts around the post-2015 education and development agendas, the priorities of national governments must be a central organizing principle. When national governments take bold steps to prioritize early childhood development, the global community should take its cue and integrate early childhood development into the broader push toward access plus learning. There is an opportunity for the global education community to push toward reaching the Education for All and Millennium Development Goals while ensuring that the post-2015 agendas include a focus on the quality of education, learning and skills development, beginning with the youngest citizens.

       

INTRODUCTION

In an earlier policy brief, Where is the Learning? Measuring Schooling Efforts in Developing Countries, we drew attention to what was labeled “the global learning crisis.” While tremendous progress has been made over the past couple of decades to get tens of millions of additional children to enroll in school, progress in improving learning outcomes has been considerably less impressive. Although, shockingly, comprehensive learning outcome data are not available for most of the developing world, the many small scale, local or, in some cases, national studies that have been done show a dismal picture. For instance, Uwezo, an East African initiative, found that in Tanzania, only 44 percent of students in Grade 4 were able to read a basic story from Grade 2. Similarly, the Annual Status of Education Report (ASER) facilitated by Pratham found that in rural India, less than half of Grade 4 students were able to do basic subtraction. These examples demonstrate the gravity of “the global learning crisis” as students fail to master competencies appropriate for their grade level, hindering the development of life skills and success in further schooling, as well as performance in the labor market.

With about 61 million children in the developing world still not yet in school, it is too early to declare victory on the “enrollment agenda”. But we would do a disservice to the 250 million children around the world who fail to reach Grade 4 or attain minimum learning standards, if we don’t step up efforts to improve learning outcomes.

This policy brief is part of a larger effort to link resources in the education sector with outcome measures. As we have documented elsewhere, few countries systematically collect comprehensive financial data on education, although fortunately an increasing number of initiatives is trying to address this issue by producing, for instance, National Education Accounts (NEAs). When the focus of the sector changes from enrollment to enrollment plus learning, efforts to better grasp the size and use of financial resources should evolve accordingly. For instance, much learning takes place outside of the classroom, especially in the early years. For NEAs to be a useful tool for adjusting the allocation of scarce resources, the “learning” sector should be defined more broadly than the education or “schooling” sector. We will address this and related issues in a subsequent policy brief.

Once our focus becomes enrollment plus learning, we have to broaden our view and look at the entire environment in which a child develops skills, starting with the households in which children are born. It has beenknown for many decades and throughout the world, that among the best predictors of future school performance are some basic household characteristics, such as income and mother’s education level.

Data from international assessments also show a relationship between income and educational performance, exemplified by intra and intercountry results. In Colombia, average Trends in International Mathematics and Science Study (TIMSS) math scores at Grade 8 for the richest quintile of students were close to 100 points higher than those from the poorest quintile. On the other hand, the difference in average scores between the poorest quintile in the United States and the richest quintile in Colombia was about 50 points. Income is not the only predictor of success, as exemplified in Peru, where children whose mothers have completed primary school and whose maternal language is Spanish rather than an indigenous language, have a greater probability of reaching the appropriate school grade for their age. In Kenya, Uwezo found that the higher their father’s educational attainment, the more likely children were able to read a story at Grade 3 or attend extra tutoring sessions.

In addition, the larger environment (such as the village or the urban neighborhood) in which the young child grows up also has a major and lasting impact. In Tanzania, urban students in Grade 3 are three times more likely than their rural counterparts to meet standards in literacy and numeracy. Related to the impact of the larger environment, data from Nigeria suggest that girls are more disadvantaged in school attendance, as parents may be reluctant to send girls to school because of perceived fears for their safety while traveling and concerns about the physical strength required for walking the distance.

Clearly, especially in the early years, most learning takes place outside of the classroom. Consequently, children who grow up in deprived circumstances will start life with a disadvantage leading to a lack of learning in the early grades, which will have lifetime effects.

In the next section, we will summarize the evidence that the early years (ages 0 to 5) are crucial for subsequent learning achievements. From this evidence we conclude that many of the problems with learning outcomes in the developing world (and in many developed countries) need to be addressed well before school age. Before delving into what happens in schools, we explore the relationship between enrollment, learning and dropout. As the crux of this brief is to lay out the evidence on what contributes to learning, we must acknowledge the factors leading to low enrollment and dropout. Next, we turn our attention to what happens in schools and what can be done to improve these activities, as well as try to summarize the evidence about the relationship between specific school-based inputs and learning outcomes. As it turns out, this evidence is, in many cases, rather feeble. Therefore, we will first focus on school-level inputs that are necessary for a good learning environment, i.e. without which we cannot expect any learning to take place. Most of these inputs are rather obvious, but they are worth mentioning. Subsequently, we will discuss additional inputs that have proven to contribute to learning outcomes in some cases, but not in others. Clearly how these inputs are applied matters.

Next, we address factors that contribute to learning outside of a formal environment, after which we review issues in health and nutrition that are closely linked to learning outcomes. We then review the need for the collection and dissemination of learning assessments in order to impact further improvements in these areas and we try to answer the question: what are the building blocks for an education sector that promote learning? Finally we explore needs for future research in learning.

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In the developing world, more than 200 million children under the age of five years are at risk of not reaching their full development potential because they suffer from the negative consequences of poverty, nutritional deficiencies and inadequate learning opportunities. Overall, 165 million children (one in four) are stunted, and 90 percent of these children live in Africa and Asia. And though some progress has been made globally, child malnutrition remains a serious public health problem with enormous human and economic costs. Worldwide, only about 50 percent of children are enrolled in preprimary education, and in low-income countries a mere 17 percent. And though more and more children are going to school, millions have little to show for it. By some accounts, 250 million children of primary school age cannot read even part of a sentence. Some of these children have never been to school (58 million); but more often, they perform poorly despite having spent several years in school, which reflects not only the poor quality of many schools but also the multiple disadvantages that characterize their early life.

Ensuring that all children—regardless of their place of birth and parental income or education level—have access to opportunities that will allow them to reach their full potential requires investing early in their development. To develop their cognitive, linguistic, socioemotional and physical skills and abilities, children need good nutrition and health, opportunities for play, nurture and learning with caregivers, early stimulation and protection from violence and neglect.

The Case for Early Interventions 

The arguments for investing in children early are simple and convincing. Early investment makes sense scientifically. The brain is almost fully developed by age three, providing a prime opportunity to achieve high gains. We know that the rapid rate of development of the brain’s neural pathways is responsible for an individual’s cognitive, social and emotional development, and there is solid evidence that nutrition and stimulation during the first 1,000 days of life are linked to brain development. 

Early investment makes sense in terms of equity. The playing field has the highest chances of being leveled early on, and we know that programs have a higher impact for young children from poorer families. In the United States, for example, increasing preschool enrollment to 100 percent for low-income children would reduce disparities in school readiness by 24 percent between black and white children and by 35 percent between Hispanic and white children. We also know that equalizing initial endowments through early childhood development (ECD) programs is far more cost-effective than compensating for differences in outcomes later in life. 

Early investment makes sense economically. Investing early prevents higher costs down the road, and interventions yield a high return on investment. There is evidence of the benefits for the individual and for society more broadly. For instance, at the level of the individual, in Jamaica children participating in an early childhood stimulation program were found to have 25 percent higher earnings 20 years later compared with children who did not participate. At the economy-wide level, eliminating malnutrition is estimated to increase gross domestic product by 1 to 2 percentage points annually, while countries with school systems that have a 10-percentage-point advantage in the proportion of students

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In the developing world, more than 200 million children under the age of five years are at risk of not reaching their full human potential because they suffer from the negative consequences of poverty, nutritional deficiencies and inadequate learning opportunities. Given these risks, there is a strong case for early childhood development (ECD) interventions in nutrition, health, education and social protection, which can produce long-lasting benefits throughout the life cycle. The results from the 2012 round of the Program for International Student Assessment (PISA)—an international, large-scale assessment that measures 15-year-olds’ performance in mathematics, reading and science literacy—demonstrate the benefits of ECD: Students in the countries that belong to the Organization for Economic Cooperation and Development (OECD) who had the benefit of being enrolled for more than one year in preprimary school scored 53 points higher in mathematics (the equivalent of more than one year of schooling), compared with students who had not attended preprimary school. Although there is much evidence that ECD programs have a great impact and are less costly than educational interventions later in life, very few ECD initiatives are being scaled up in developing countries. For example, in 2010, only 15 percent of children in low-income countries—compared with 48 percent worldwide—were enrolled in preprimary education programs. Furthermore, even though the literature points to larger beneficial effects of ECD for poorer children, within developing countries, disadvantaged families are even less likely to be among those enrolled in ECD programs. For instance, in Ghana, children from wealthy families are four times more likely than children from poor households to be enrolled in preschool programs.

One of the major barriers to scaling up ECD interventions is financing. In order to address financing issues, both policymakers and practitioners need a better understanding of what is currently being spent on ECD interventions, what high-quality interventions cost, and what outcomes these interventions can produce. If stakeholder groups are made more aware of the costs of ECD interventions, they may be able to support decisionmaking on investments in ECD, to better estimate gaps in financing, and to work toward securing stable funding for scaling up service provision and for quality enhancement. One of the weakest areas of ECD policy planning is in the realm of financial planning.6 Good data are scarce on ECD spending and the costs of ECD interventions that are useful for program budgeting and planning; but these data are valuable for a number of reasons, including the fact that they support analyses of what different inputs cost and thus can facilitate considering various alternative modalities for service delivery. In this paper, we focus on what data are available to gain a clearer picture of what is being spent on ECD and what it costs to deliver basic ECD interventions in developing countries.

ECD interventions come in many varieties, and therefore we first define the package of ECD interventions that have been deemed essential. Then we outline a framework for better understanding ECD financing, which combines a top-down approach analyzing expenditures and a bottom-up approach analyzing the costs of delivering individual interventions. We comment on the general methodological issues stemming from these approaches and the limitations of the data that have been produced. Next, we delve into the available data and discuss the different funding sources and financing mechanisms that countries utilize to deliver ECD services and what patterns exist in spending. We provide a brief overview of how many public and private resources in both developed and developing countries are invested in young children, and in which specific subsectors. Although these data on spending illustrate the flows and help us understand how much is being allocated and by whom, the data are limited, and this top-down approach still leaves us with many unanswered questions. Therefore, we turn our attention to the actual costs of individual ECD interventions, which help us further understand what ECD spending can “buy” in different countries. We identify some trends in the actual costs of delivering these services, although there are a number of methodological issues vis-à-vis costing and the services delivered, which lead to wide variations between and within countries and make it difficult to compare programs over time.

Finally, we look at a number of initiatives that are currently under way to collect better data on ECD costs and expenditures, which will be useful for countries in planning programs and identifying funding sources. These initiatives are sponsored by organizations such as UNICEF, Save the Children, the World Bank and the Inter-American Development Bank. Given the gaps in the available data that we identify and the interventions currently under way, we conclude with recommendations for increasing the knowledge base in this area for use in policymaking and planning.

       

       

       

       

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2016 Richard C. Holbrooke Forum

On February 5, the Foreign Policy program at Brookings hosted the American Academy in Berlin for the 2016 Richard C. Holbrooke Forum for a two-part public event focusing on the global refugee crisis. Brookings Isaiah Berlin Senior Fellow in Culture and Policy Leon Wieseltier delivered featured remarks on the moral dimensions of the refugee crisis. Wieseltier is currently completing an essay on certain moral, historical, and philosophical dimensions of the refugee crisis. Michael Ignatieff, Edward R. Murrow professor of practice at the Harvard Kennedy School, moderated a question and answer session following Wieseltier’s remarks.

The second panel featured experts addressing the first-step policies needed to ameliorate the crisis. Bruce Katz, Brookings centennial scholar, Tamara Wittes, director of Brookings’s Center for Middle East Policy, Elizabeth Ferris, research professor at Georgetown University and Brookings nonresident senior fellow, spoke to the multiple aspects of the refugee crisis. Brookings Executive Vice President Martin Indyk moderated the panel discussion.

Bruce Jones, vice president and director for the Foreign Policy program, provided introductory remarks.

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“When I go to meetings today, I see more women, and I see many more younger women coming into the field.  But what’s really struck me, as I’ve been thinking about this issue of women in foreign policy in the last couple years, is the difference between presence and voice.  There are many more women working in foreign policy today, but you don’t see the same proportion of women prominent in foreign policy speaking in the media, in senior positions, or even when you’re all in the room together sitting at the table and speaking as the lead speaker at a conference.  It’s that distinction between presence and voice and what accounts for that gap.  That’s what I find both fascinating and frustrating.”—Tamara Wittes

“I think it is getting better. I think women are starting to see examples of other women who are  at the table, who are speaking up, who are volunteering, who are being more confident and starting to learn that just because you might not think you are the greatest expert on something, doesn’t mean you don’t have the right to give your opinion and start speaking up.”—Sarah Yerkes

In this week’s episode of “Intersections,” Tamara Wittes, senior fellow and the director of the Center for Middle East Policy, and Sarah Yerkes, a visiting fellow in the Center for Middle East Policy, discuss their experiences as women working in foreign policy, both in and out of government. They also shed light on progress regarding the active participation of women in foreign policy, while looking forward to potential improvements in order to promote more equality for women’s representation in government.

Show Notes

The Absence of Women from Middle East Policy Debates: An Update

Women still overlooked in vital peacekeeping process, study finds

An All-Women Symposium: The Missing XX-Factor

Foreign Policy Interrupted

Women Are Underrepresented In Cable News Segments On Foreign Affairs, National Security 

With thanks to audio engineer and producer Zack Kulzer, Mark Hoelscher, Carisa Nietsche, Sara Abdel-Rahim,  Eric Abalahin, Fred Dews and Richard Fawal.

Subscribe to the Intersections on iTunes, and send feedback email to intersections@brookings.edu.

       

       

       

       

       

       

       

       

       

       

Editor's Note: This article was the first published in the June 2008 World Cities Summit edition of ETHOS.

At the dawn of a new century, broad demographic, economic and environmental forces are giving American cities their best chance in decades to thrive and prosper. The renewed relevance of cities derives in part from the very physical characteristics that distinguish cities from other forms of human settlement: density, diversity of uses and functions, and distinctive design.

Across the United States (U.S.), a broad cross section of urban practitioners—private investors and developers, government officials, community and civic leaders—are taking ambitious steps to leverage the distinctive physical assets of cities and maximise their economic, fiscal, environmental and social potential.

A special class of urban interventions—what we call “transformative investments”—is emerging from the millions of transactions that occur in cities every year. The hallmark of transformative investments is their catalytic nature and seismic impact on markets, on people, on the city landscape and urban possibilities—far beyond the geographic confines of the project itself.

Recognising and replicating the magic of transformative investments, and making the exception become the norm is important if U.S. cities are to realise their full potential.

THE URBAN MOMENT
The U.S. is undergoing a period of dynamic change, comparable in scale and complexity to the latter part of the nineteenth century. Against this backdrop, there is a resurgence in the importance of cities due to their fundamental and distinctive physical attributes.

Cities offer a broad range of physical choices—in neighbourhoods, housing stock, shopping venues, green spaces and transportation. These choices suit the disparate preferences of a growing population that is diverse by race, ethnicity and age.

Cities are also rich with physical amenities—mixed-use downtowns, historic buildings, campuses of higher learning, entertainment districts, pedestrian-friendly neighbourhoods, adjoining rivers and lakes—that are uniquely aligned with preferences in a knowledge-oriented, post-industrial economy. A knowledge economy places the highest premium on attracting and retaining educated workers, and an increasing proportion of these workers, particularly young workers, value urban quality of life when making their residential and employment decisions.

Finally, cities, particularly those built in the nineteenth and early twentieth centuries, are compactly constructed and laid out along dense lines and grids, enhancing the potential for the dynamic, random, face-to-face human exchange prized by an economy fuelled by ideas and innovation. Such density also makes cities perfect agents for the efficient delivery of public services as well as the stewardship of the natural environment.

Each of these elements—diversity, amenities and density—distinguishes cities from other forms of human settlement. In prior generations, these attributes were devalued in a nation characterised by the single family house, the factory plant, cheap gas, and environmental profligacy. In recent history, many U.S. cities responded by making the wrong physical bets or by replicating low-density, suburban development—further eroding the very strengths that make cities distinctly urban and competitive.

Yet, the U.S., a nation in demographic and economic transition, is revaluing the quality of life uniquely offered by cities and urban places, potentially altering the calculus by which millions of American families and businesses make location decisions every year.

DELIVERING "CITYNESS": THE RISE OF TRANSFORMATIVE INVESTMENTS
Across the U.S., a practice of city building is emerging that builds on the re-found value and purpose of the urban physical landscape, and recognises that cities thrive when they fully embrace what Saskia Sassen calls “cityness”.¹

The move to recapture the American city can be found in all kinds of American cities: global cities like New York, Los Angeles and Chicago that lie at the heart of international trade and finance; innovative cities like Seattle, Austin and San Francisco that are leading the global economic revolution in technology; older industrial cities like Cleveland, Pittsburgh and Rochester that are transitioning to new economies; fast-growing cities like Charlotte, Phoenix and Dallas that are regional hubs and magnets for domestic and international migration.

The new urban practice can also be found in all aspects or “building blocks” of cities: in the remaking of downtowns as living, mixed-use communities; in the creation of neighbourhoods of choice that are attractive to households with a range of incomes; in the conversion of transportation corridors into destinations in their own right; in the reclaiming of parks and green spaces as valued places; and in the revitalisation of waterfronts as regional destinations, new residential quarters and recreational hubs.

Yet, as the new city building practice evolves, it is clear that a subset of urban investments are emerging as truly “transformative” in that they have a catalytic, place-defining impact, creating an entirely new logic for portions of the city and a new set of possibilities for economic and social activity.

We define these transformative investments as “discrete public or private development projects that trigger a profound, ripple effect of positive, multi-dimensional change in ways that fundamentally remake the value and/or function of one or more of a city’s physical building blocks”.

This subset of urban investments share important characteristics:

• On the economic front, transformative investments uncover the hidden value in a part of the city, creating markets in places where markets either did not exist or were only partially realised.
• On the fiscal front, transformative investments dramatically enhance the fiscal capacity of local governments, generating revenues through the rise in property values, the growth in city populations, and the expansion of economic activity.
• On the cognitive front, transformative investments redefine the identity and image of the city. They effectively “re-map” previously forgotten or ignored places by residents, visitors and workers. They create nodes of new activities and new places for people to congregate.
• On the environmental front, transformative investments enable cities to achieve their “green” potential by cleaning up the environmental residue from prior industrial uses or urban renewal efforts, by enabling repopulation at greater densities to occur and by providing residents, workers and visitors with transportation alternatives.
• On the social front, transformative investments have the potential, while not always realised, to alter the opportunity structure for low-income residents. When carefully designed, staged and leveraged, they can expand the housing, employment and educational opportunities available to low-income residents and overcome the racial, ethnic and economic disparities that have inhibited city performance for decades.

DISSECTING SUCCESS: HOW AND WHERE TRANSFORMATIVE INVESTMENTS TAKE PLACE
The best way to identify and assess transformative investments is by examining exemplary interventions in the discrete physical building blocks of cities: downtowns, neighbourhoods, corridors, parks and green spaces, and waterfronts.

Downtowns
If cities are going to realise their true potential, downtowns are compelling places to start. Physically, downtowns are equipped to take on an emerging set of uses, activities and functions and have the capacity to absorb real increases in population. Yet, as a consequence to America’s sprawling appetite, urban downtowns have lost their appeal. Economic interests, once the stronghold in downtowns, have moved to suburban town centres and office parks, depressing urban markets and urban value.

Across the US, downtowns are remaking themselves as residential, cultural, business and retail centres. Cities such as Chattanooga, Washington, DC and Denver have demonstrated how even one smart investment can inject new energy and jumpstart new markets. The strategic location of a new sports arena in a distressed area of downtown Washington, DC fits our definition of a transformative investment. Leveraging the proximity of a transit stop, the MCI Arena was nestled within the existing urban fabric on a city-owned urban renewal site. The arena’s pedestrian-oriented design strengthened, rather than interrupted, the continuity of the 7th Street retail corridor.² Today, the area has been profoundly transformed as scores of new restaurants, retail and bars dot the arena’s surroundings. Residents and visitors rely heavily on the nearby transit to come to this destination.

Neighbourhoods
Ever since the physical, economic and social agglomeration of “city” was established, the function of neighbourhoods has remained relatively untouched. While real estate values of neighbourhoods have shifted over time in response to micro- and macro-economic trends, a subset of inner city communities have remained enclaves of poverty. Victims of earlier urban renewal and public housing efforts, millions of people are consigned to living in neighbourhoods isolated from the economic and social mainstream.

Cities such as St. Louis, Louisville and Atlanta have been at the forefront of public housing (and hence neighbourhood) transformation, supported by smart federal investments in the 1990s. For example, the demolition of the infamous high-rise Vaughn public housing project in St. Louis enabled the construction of a new human scale, mixed-income housing development in one of the poorest, most crime-ridden sections of the city. This redevelopment cured the mistakes made by failed public housing projects, by restoring street grids, providing quality design, and injecting a sense of social and physical connection. Constructing a mix of townhouses, garden apartments and single family homes helped catalyse other public and private sector investments.

What made this investment transformative was that it included the reconstitution of Jefferson Elementary, a nearby public school. Working closely with residents, and with the financial support of corporate and philanthropic interests, the developer helped modernise the school, making it one of the most technologically advanced educational facilities in the region. A new principal, new curriculum, and new school programmes helped it become one of the highest performing inner city schools in the state of Missouri.

Corridors
City corridors are the physical tissue that knit disparate parts of a city together. In the best of conditions, corridors are multi-dimensional in purpose, where they are destinations as much as facilitators of movement. In many cities, however, corridors are simply shuttling traffic past blocks of desolated retail and residential areas or they have become yet another cookie cutter image of suburbia—parking lots abutting the main street, standardised buildings and design, and oversized and cluttered signage.

Cities like Portland, Oregon and urban counties like Arlington, Virginia have used mass transit investments and land use reforms to create physically, economically and socially healthy corridors that give new residents reasons to choose to live nearby and existing residents reasons to stay.

Portland conceived a streetcar to spur high density housing in close-in neighbourhoods that were slowly shedding old industrial uses. The streetcars traverse a three-mile route through residential areas, the water front, to the university. Since its construction, the streetcar has not only expanded transportation choices, it has helped galvanise new destinations along its route—including new neighbourhoods, retail clusters, and economic districts.

Parks and Open Space
City green spaces (such as parks, nature trails, bike paths) were initially designed to provide the lungs of the city and an outlet for recreation, entertainment and social cohesion. As general conditions declined in many cities, the quality of urban parks also declined, to the great consternation of local residents. Green spaces were turned into under-used, if not forgotten, areas of the city; or worse still, hot spots of crime and illegal activity. Such blight discouraged cities to transform outmoded uses (such as manufacturing areas) into more green space. In cities with booming development markets, parks failed to be designed and incorporated into the new urban fabric.

Across the US, cities are pursuing a variety of strategies to reclaim or augment urban green spaces. Cities like Atlanta, for example, have created transformative parks from outmoded economic uses, such as manufacturing land along urban waterfronts or by converting old railway lines into urban trail-ways.

Cities like Scranton have reclaimed existing urban parks consumed by crime and vandalism. This has required creative physical and programmatic investments, including: redesigning parks (removing physical and visibility barriers such as walls, thinning vegetation, and eliminating “dark corners”); increasing the presence of uniformed personnel; increasing the park amenities (such as evening movies and other events to increase patronage);³ and providing regular maintenance of the park and recreational facilities.⁴

Waterfronts
Many American cities owe their location and initial function to the proximity to water: rivers, lakes and oceans. Waterfronts enabled cities to manufacture, warehouse and ship goods and products. Infrastructure was built and zoning was aligned to carry out these purposes. In a knowledge-intensive economy, however, the function of waterfronts has dramatically changed, reflecting the pent-up demand for new places of enjoyment, activities and uses.

As with the other building blocks, cities are pursing a range of strategies to reclaim their waterfronts, often by addressing head-on the vestiges of an earlier era.

New York has overhauled the outdated zoning guidelines for development along the Brooklyn side of the East River, enabling the construction of mixed-income housing rather than prescribing manufacturing and light industry uses.

Pittsburgh and many of its surrounding municipalities have embarked on major efforts to re-mediate the environmental contamination found in former industrial sites, paving the way for new research centres, office parks and retail facilities.

Milwaukee, Providence and Portland have demolished the freeways that separated (or hid) the waterfront from the rest of the downtown and city, and unleashed a new wave of private investment and public activities.

WHAT IS THE RECIPE FOR SUCCESS?
The following are underlying principles that set these diverse investments apart from other transactions:

Transformative Investments advance “cityness”: Investments embrace the characteristics, attributes, and dynamics that embody “city”—its complexity, its intersection of activities, its diversity of populations and cultures, its distinctively varied designs, and its convergence of the physical environment at multiple scales. Project by project, transformative investments are reclaiming the true urban identity by strengthening aspects of the ‘physical’ that are intrinsically urban—be it density, rehabilitation of a unique building or historic row, or the incorporation of compelling, if not iconic, design.

Transformative Investments require a fundamental rethinking of land use and zoning conventions: In the midst of massive economic global change, 21st century American cities still bear the indelible markings of the 20th century. In the early 20th century, for example, government bodies enacted zoning to establish new rules for urban development. While originally intended to protect “light and air” from immense overbuilding, later versions of zoning added the segregation of uses—isolating housing, office, commercial and manufacturing activities from each other. Thus, transformative investments require, at a minimum, variances from the rigid, antiquated rules that still define the urban landscape. In many cases, examples of successful transformative investments have become the tool to overhaul outdated and outmoded frameworks and transform exceptions into new guidelines.

Transformative Investments require innovative, often customised financing approaches: Cities have distinctive physical forms (e.g., historic buildings) and distinctive physical visions (e.g., distinct districts). Yet private and even public financing of the American physical landscape, for the most part, is standardised and routinised, enabling the production of similar products (e.g., single family homes, commercial strips) at high volume, low cost and low quality. Transformative investments, however, require the marrying of multiple sources of financing (e.g., conventional debt, traditional equity, tax-driven equity investments, innovative financing arrangements, public subsidy, patient philanthropic capital), placing stress on project design and implementation. In addition, achieving social objectives often require building innovative tax and shared equity approaches into particular transactions, so that appreciations in property value can serve higher community purposes (e.g., creating affordable housing trust funds). As with regulatory frames, the evolution from exceptional transactions to routinised forms of investments is required to ensure that transformative investments become more the rule rather than the exception.

Transformative Investments often involve an empirically-grounded vision at the building block level: While a vision is not a necessary pre-requisite for realising transformative investments, cities that proceed without one have a higher probability of making the wrong physical bets, siting them in the wrong places, or ultimately creating a physical landscape that fails to cumulatively add up to “ cityness”. It is easy to find such examples around the country, such as isolated mega-projects (a new stadium or convention centre) or waterfront revitalisation efforts that constructed the wrong projects, having misunderstood the market and the diversifying demographic.

Telescoping the possibilities and developing a bold vision must be done through an empirically-grounded process. A visioning exercise should therefore include: an economic and market diagnostic of the building block; a physical diagnostic; an evaluation of existing projects; and the development of a vision to transform the landscape. From here, disparate actors (public, private, civic, not-for-profit) will have the best instruments to assess whether a physical project could meet specific market, demographic and physical needs—increasing its chances of becoming truly transformative.

Transformative Investments require integrative thinking and action: Transformative investments are often an act in “connecting the dots” between the urban experiences (e.g., transportation, housing, economic activity, education and recreation), which are inextricably linked in reality but separated in action. This requires a significant change in how cities are both planned and managed.

On the public side, it means that transportation agencies must re-channel scarce infrastructure investments to leverage other city building goals beyond facilitating traffic. It means that agencies driving a social agenda, such as schools and libraries, have to re-imagine their existing and new facilities to integrate strong design and move away from isolated projects.

In the private sector, it means understanding the broader vision of the city and carefully siting and designing investments to increase successful city-building and not just project-building. It means increasing their own standards by using exemplary design and construction materials. It means finding financially beneficial approaches to mixed income housing projects and mixed use projects instead of just single uses. In all cases, it requires holistic thinking that cuts across the silos and stovepipes of specialised professions and fragmented bureaucracies.

BUILDING GREAT CITIES
For the first time in decades, American cities have a chance to experience a measurable revival. While broader macro forces have handed cities this chance, city builders are also learning from past mistakes. After investing billions of dollars into city revitalisation efforts, the principles underpinning particularly successful and catalytic projects—transformative investments—are beginning to be clarified. The most important lesson for cities, however, is to embrace “cityness”, to maximise what makes them physically and socially unique and distinctive. Only in this way will American cities reach their true greatness.

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• ¹Saskia Sassen defined the term “cityness” to be the concept of embracing the characteristics, attributes, and dynamics that embody “city”: complexity, the convergence of the physical environment at multiple scales, the intersection of differences, the diversity of populations and culture, the distinctively varied designs and the layering of the old and the new. Sassen, S., “Cityness in the Urban Age”, Urban Age Bulletin 2 (Autumn 2005).
• ²Strauss, Valerie, “Pollin Says He’ll Pay for Sports Complex District, Awaits Economic Boost, Upgraded Image”, Washington Post, Thursday, 29 December 1994.
• ³Personal communication from Peter Harnik, Director, Center for City Park Excellence, Trust for Public Land, 6 June 2005.
• ⁴Harnik, Peter, “The Excellent City Park System: What Makes it Great and How to Get There”. San Francisco, CA: The Trust for Public Land, 2003. Available online at http://www.tpl.org/tier3_cd.cfm?content_item_id=11428&folder_id=175

      

Event Information

On February 2 and 3, 2010, the Brookings Institution Metropolitan Policy Program and Lazard convened leaders from the public sector, energy, infrastructure, finance and venture capital communities for an in-depth conversation focused on innovative policy and business practices that will help build the next American economy.

California Governor Arnold Schwarzenegger and Pennsylvania Governor Edward G. Rendell provided the keynote remarks. Both stressed the need for strategic investments in innovative infrastructure and energy practices going forward.

Framing the conference was the notion that the next American economy must be export-oriented, low carbon, innovation-fueled and opportunity rich—an idea which has been proposed by leading economists such as Director of the National Economic Council Larry Summers. It is with this mindset that Brookings and Lazard put together high-level, dynamic panels that centered around the private sector needs for building out the next American economy—and the policy implications. Specifically, they focused on how the traditional industry leaders (e.g., utility companies), the new industry leaders (e.g., venture capital investors), and public sector leaders can work together to move our country forward, especially within the metro areas where the resources and networks that drive innovation are rooted.

For media coverage of the event, please visit the following:

Time Is Running Out: The New York Times – Bob Herbert

Watching China Run: The New York Times – Bob Herbert

High Hopes for Clean-Energy Jobs: The Wall Street Journal - Rebecca Smith

Campaign for 'Next American Economy' Begins: San Francisco Chronicle - Andrew Ross

Bruce Katz, Vice President and Director, Metropolitan Policy Program, Brookings Institution		Vernon Jordan, Senior Managing Director, Lazard and California Governor Arnold Schwarzenegger
Wall Street Journal reporter Rebecca Smith leads a conversation with business leaders		Pennsylvania Governor Edward Rendell
Conference participants Jim Robinson of RRE Ventures and Michael Ahearn of First Solar		From left: Bob Herbert (New York Times), Mallory Walker (Walker and Dunlop) and George Bilicic (Lazard)

Video

• The Keys to American Competitiveness

Audio

• The Next American Economy: Transforming Energy and Infrastructure Investment

Transcript

• Transcript (.pdf)
• Bruce Katz's delivered remarks (.pdf)

Event Materials

• 0203_transcript
• 0203_nextecon_katz
• 0203_overview
• 0203_agenda
• 0203_nextecon_pres

      

       

Critics of the nation's retirement system regularly complain that the system is in crisis. Too many private companies fail to offer their employees a retirement plan. Many employees who are covered by a plan fail to make contributions to it. Those who do make contributions may contribute too little or invest their savings unwisely. The end result: Many of us will reach retirement age with miniscule pensions or too little savings to enjoy a comfortable old age.

The argument that our retirement system has gaping holes is well founded. The notion that it faces an imminent "crisis" is nonsense. If the system currently faces a crisis, it has faced the same one for the past 40 years. While elderly Americans have seen their incomes and living standards improve in recent decades, the median working-age family has experienced little improvement in its real income. Nonelderly families that depend solely on the earnings of breadwinners who have below-average schooling saw a drop in their incomes.

In recent research with Brookings colleagues, I tracked the real incomes of families headed by aged and nonaged Americans. In the 34 years ending in 2012, the median real income of working-age families climbed a little more than 2 percent (in other words, by less than one-tenth of a percentage point per year). The median real income of families headed by someone past 62 increased a little more than 40 percent. The numbers suggest our retirement system is doing a decent job improving the living standards of the aged. Unfortunately, the labor market is doing a much worse job boosting the living standards of middle-class wage earners.

Critics of the retirement system might worry that it succeeds in protecting the incomes of the middle class elderly but fails to protect the incomes of the poor -- a concern not supported by the evidence. Income inequality has gone up among the elderly as it has among the nonelderly. But older low-income Americans have fared much better than low-income working-age adults. In the late 1950s, by far the highest poverty rate of any age group was that for people over 65. Even in the late 1980s, the elderly had a higher poverty rate than adults between 18-64. Since the middle of the last decade, however, the elderly have had the lowest poverty rate of any age group.

People who warn us of a retirement "crisis" are nonetheless correct in pointing to sizeable holes in the current system. Too few companies, especially small ones, offer their workers a retirement plan. According to recent government estimates, only about half of workers in companies with fewer than 100 employees are offered a retirement plan. Offer rates are higher in bigger companies and in government agencies, but about 30 percent of all employees are not offered any pension or retirement savings plan where they work. When retirement plans are offered, however, workers are very likely to participate in them -- even if they must make a voluntary contribution out of their pretax wages.

What is crucial for a retirement savings plan's success is automatic payroll withholding. Dollars that are withheld from workers' paychecks are harder for workers to spend on something other than retirement savings. A crucial improvement in our current system would be to require all employers to establish automatic payroll withholding for voluntary retirement savings in an IRA (individual retirement account). Companies that already offer a qualified pension or retirement savings plan should be exempt from any extra obligation.

The harshest critics of the current retirement system would go much further than this. Many want to bring back traditional retirement plans that guaranteed workers a specific monthly pension linked to their job tenure, final pay, and age at retirement. The advantages of such a plan for workers are that their employer is typically responsible for funding the plan and for ensuring that pensions are paid, regardless of the ups and downs of financial markets. A big disadvantage is that the promised benefits are not worth much if the worker's career with a company is cut short, either because of a layoff or quitting.

People who are nostalgic for old-fashioned pensions may be right that workers would prefer to be covered by such a plan, despite their disadvantages for short-tenure workers. I'm less persuaded that traditional pensions offer better protection to typical workers than modern 401(k)-type plans. Regardless of the pros and cons of the two kinds of plan, it is wildly unrealistic to think small employers or new employers will want to take on the risks and administrative burdens connected with an old-fashioned pension plan.

All U.S. workers are covered by a traditional, defined-benefit pension: it's called Social Security. It has worked well over the past four decades in protecting and even lifting the incomes of the retired elderly. It may not work as well in the future if benefits are cut substantially to keep the program solvent. Boosting workplace retirement savings is a sensible way to insure future retirees will have adequate incomes, even if Social Security benefits have to be trimmed. An essential first step to boosting savings is to require companies to put a retirement savings plan in every workplace.

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Editor's note: This piece originally appeared in Real Clear Markets.

       

No. We should exempt workers earning the lowest wages.

Social Security faces a serious funding problem. The program takes in too little money to pay all that has been promised to future beneficiaries. Government forecasters predict Social Security’s reserve fund will be depleted between 2030 and 2034. There are two basic ways we can eliminate the funding gap: cut benefits or increase contributions. A common proposal is to increase the age at which workers can claim full retirement benefits. For people nearing retirement today, the full retirement age is 66. As a result of a 1983 law, that age will rise to 67 for workers born after 1959.

When policymakers urge us to raise the retirement age, they are proposing to increase the full retirement age beyond 67, possibly to 70, for workers now in their 30s or 40s. This saves money, but it also cuts monthly retirement benefits by the same percentage for every worker, unless workers delay claiming benefits. The policy might seem fair if workers in future generations could all expect to share in gains in life expectancy. However, new research shows that gains in life expectancy have been very unequal, with the biggest improvements among workers who earn top incomes. Life expectancy gains for workers with the lowest incomes have been small or negligible.

If the full retirement age were raised, future retirees with high lifetime earnings can expect to receive some compensation when their monthly benefits are cut. Because they can expect to live longer than today’s retirees, they will receive benefits for a longer span of years after 65. For low-wage workers, there is no compensation. Since they are not living longer, their lifetime benefits will fall by the same proportion as their monthly benefits. Thus, “raising the retirement age” is a policy that cuts the lifetime benefits of future low-wage workers by a bigger percentage than it does of future high-wage workers.

The fact that low-wage workers have seen small or negligible gains in life expectancy signals that their health when they are past 60 is no better than that of low-wage workers born 20 or 30 years ago. This suggests their capacity to work past 60 is no better than it was for past generations. A sensible policy for cutting future benefits should therefore preserve current benefit levels for workers who have contributed to Social Security for many years but have earned low wages.

Editor's note: This piece originally appeared in CQ Researcher.

       

Voters and policy makers bemoan our crumbling roads, airports, and public transit systems, but few jurisdictions do much about it. The odd thing is that historically low interest rates now make it cheap to fix or improve our public facilities. The mystery is why decision makers have passed on this opportunity.

The sorry state of the nation’s roads, bridges, and public infrastructure has been widely reported. Every few years the American Society of Civil Engineers draws up a report card on U.S. infrastructure, highlighting its strengths and shortcomings in a variety of areas—drinking water systems, wastewater, dams, roads, bridges, inland waterways, ports. The report card spotlights areas where spending on maintenance falls short of the amount needed to keep our infrastructure functioning efficiently. For many kinds of infrastructure, a bigger population and heavier utilization require us to invest in brand new facilities. In its latest report card, the ASCE awards our public infrastructure a grade of D+.

It’s hard to think of a time more attractive for public investment than years when total demand for goods and services is depressed. The Treasury’s borrowing cost for investment funds is near historical lows. Since 2011, the interest rate on 10-year government bonds has averaged 2.3 percent. Savers buying inflation-protected bonds have been willing to lend funds to the federal government at a real interest rate of just 0.22 percent.

So long as there is excess unemployment, especially in the building trades, the labor resources needed to fix or improve public facilities should be abundant and relatively inexpensive. Employment in the construction industry has rebounded as home building and business investment have improved. Nonetheless, construction employment has recovered only half the loss it experienced between its pre-recession peak in 2006 and its post-recession low in 2011. Skilled labor is not nearly as abundant as it was in 2011, but the trend in wage inflation does not suggest employers are bidding up worker salaries.

The federal government’s failure to use fiscal policy and, in particular, public investment policy to bring the nation closer to full employment represents a notable lapse in policymaking, perhaps the most grievous lapse since the crisis began. It unnecessarily prolonged the suffering of the nation’s long-term unemployed and it wasted a rare opportunity to rebuild the nation’s public infrastructure at relatively low cost.

Why did this failure occur? One reason is that policy makers were too optimistic when the financial crisis took place back in 2008. Most public and private forecasts at the time understated the severity of the economic fallout from the bank meltdown. Decision makers in Congress and the Administration may have believed infrastructure investment would be unhelpful in the recovery. Well-conceived infrastructure projects take many months to design and many years to complete. Policy makers may have believed the economic crisis would be over by the time federally infrastructure spending reached its peak.

When forecasters and Democratic policy makers recognized their error, voters had elected a Congress that supported only one kind of fiscal policy to deal with the crisis—big tax cuts focused on high-income tax payers. Whether or not such a policy could have been effective, it would not make additional funds available for infrastructure projects.

Harvard’s Lawrence Summers and Rachel Lipset recently pointed to another reason voters have failed to back a big program to boost infrastructure investment—government ineptitude. In the Boston Globe they documented the painfully slow progress of the Massachusetts Department of Transportation in overhauling a bridge across the Charles River. The bridge, which was built over 11 months back in 1912, has so far required four years for its reconstruction. No end date is in sight. In addition to the over-budget cost of the project, the overhaul has also caused massive and highly visible inconvenience for drivers, cyclists, and pedestrians trying to move between Boston and Cambridge.

Few readers can be under the illusion Boston’s experience is exceptional. Many of us pass near or use public facilities that are being rebuilt or repaired. We often see bafflingly little progress over a span of months or even years. As Summers and Lipset note, the conspicuous failure of public managers to complete capital projects speedily and on budget undermines voters’ confidence that infrastructure projects can be worthwhile.

Despite wide agreement the nation’s infrastructure needs to be modernized, we have made little progress toward that goal. On the contrary, government capital spending has shrunk significantly as a share of the economy. In 2014, net government investment spending on items other than defense dipped to a 60-year low when spending is measured as a percent of GDP. Using this indicator, net government investment has shrunk almost half compared with its level in the first decade of the century. For many reasons this is a good time to fix our public infrastructure. It is also an excellent time to overhaul public management of government capital projects.

Editor's note: This piece originally appeared in Inside Sources.

       

       

       

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.

       

State clean energy funds (CEFs) have emerged as effective tools that states can use to accelerate the development of energy efficiency and renewable energy projects. These clean energy funds, which exist in over 20 states, generate about $500 million per year in dedicated support from utility surcharges and other sources, making them significant public investors in thousands of clean energy projects.

However, state clean energy funds’ emphasis on a project finance model—which directly promotes clean energy project installation by providing production incentives and grants/rebates—is by itself not enough to build a statewide clean energy industry. State clean energy funds also need to pay attention to other critical aspects of building a robust clean energy industry, including cleantech innovation support through research and development funding, financial support for early-stage cleantech companies and emerging technologies, and various other industry development efforts.

As it happens, some of these state clean energy funds are already supporting a broader range of clean energy-related economic development activities within their states. As more and more states reorient their clean energy funds from a project finance-only model in order to encompass broader economic development activities, clean energy funds can collectively become an important national driver for economic growth.

To become true economic development engines in clean energy state clean energy funds should:

• Reorient a significant portion of their funding toward clean energy-related economic development
• Develop detailed state-specific clean energy market data
• Link clean energy funds with economic development entitites and other stakeholders in the emerging industry
• Collaborate with other state, regional, and federal efforts to best leverage public and private dollars and learn from each other's experiences

Downloads

• Download the Full Paper

       

       

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.

      

Americans are enjoying longer lifespans than ever before. Living longer affords individuals the opportunity to make more contributions to the world, to spend more time with their loved ones, and to devote more years to their favorite activities – but a longer life, and particularly a longer retirement, is also expensive. The retirement security landscape is evolving as workers, employers, retirees, and financial services companies find their needs shifting. Once, many workers planned to stay with a single employer for most or all of their careers, building up a sizeable pension and looking forward to a comfortable retirement. Today, workers more and more workers will be employed by many different employers.  Additionally, generous defined benefit (DB) retirement plans are less popular than they once were – though they were never truly commonplace – and defined contribution (DC) plans are becoming ever more prevalent.  

Figure 1, below, shows the change from DB to DC that has occurred over the past three decades.

In the past many retirees struggled financially towards the end of their lives, just as they do now, but even so, the changes to the retirement security landscape have been real and marked, and have had a serious impact on workers and retirees alike. DB plans are dwindling, DC plans are on the rise, and as a result individuals must now take a more active role in managing their retirement savings. DC plans incorporate contributions from employees and employers alike, and workers much choose how to invest their nest egg.  When a worker leaves a job for retirement or for a different job he or she will often roll over the money from a 401(k) plan into an Individual Retirement Account (IRA). While having more control over one’s retirement funds might seem on its face to be a net improvement, the reality is that the average American lacks the financial literacy to make sound decisions (SEC 2012).

The Council of Economic Advisers (CEA) expressed concern earlier this year that savers with IRA accounts may receive poor investment advice, particularly in cases where their financial advisors are compensated through fees and commissions. “[The] best recommendation for the saver may not be the best recommendation for the adviser’s bottom line” (CEA 2015). President Obama echoed these concerns in a speech at AARP in February, asking the Department of Labor (DoL) to update its rules for financial advisors to follow when handling IRA accounts (White House 2015). The DoL receives its authority to craft such rules and requirements from the 1974 Employee Retirement Income Security Act (ERISA) (DoL 2015a).

The 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 (DoL 2015b). The proposed rule has generated heated debate, and some financial advisors have responded with great concern, arguing that it will be difficult or impossible to comply with the rule without raising costs to consumers and/or abandoning smaller accounts that generate little or no profit. Advisors who have traditionally offered only the proprietary products of a single company worry that the business model they have used for many years will no longer be considered to be serving the best interests of clients.

Rather than offering detailed comments on the DoL proposals, this paper will look more broadly at the problem of saving for retirement and the role for professional advice. This is, of course, a well-travelled road with a large literature by academics, institutions and policy-makers, however, it is worthwhile to think about market failures, lack of information and individual incentives and what they imply for the investment advice market.

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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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Australia's economic performance has been the standout among advanced economies for several decades. With economic growth at nearly twice the pace of US or Germany over the past decade, a remarkable 25 years without a recession and a large, highly competitive mining sector despite the end of the resources boom, Australia remains a strong economic participant in a region of the world where future global growth is likely to be generated.

But with drivers of growth over the past 25 years unlikely to be the engines of growth in coming decades, now is not a time for complacency. And if there's one lesson from Britain's decision to leave the EU, it's that that disruptive forces are sweeping through the global economy. Australia, with its cohesive politics and economic success, has been able to avoid the worst of these problems, but the dangers are present if the economic challenges are not met.

To start with, the impacts of the reforms of the 1980s and 1990s are fading. The investment boom in mining is over, and the prices for mining and agricultural exports will probably remain subdued with slower growth in China. While Australia's incomes were boosted by the improved terms of trade, this has partially reversed. The housing boom will inevitably eventually slow.

As evidenced by the results of the Brexit referendum, there is a distrust of the political and economic elites that have led the world's biggest economies. Disruptive, rapid changes in technology have not led to broad-based productivity growth. Workers in many countries have been left with stagnant incomes and governments with rising public debt.

Industry policy has a bad name among American economists who see it as a manifestation of "capture" where special interests are able to obtain subsidies from taxpayers or special protections that are not in the national interest. The modern theory of industry policy, however, recognises that a well-designed policy can actually help markets work better, therefore helping an economy like Australia's make the transition to a new growth path when faced with changing economic conditions. Productivity is the key to high growth and rising incomes – and well-designed industry policy can help.

Structure of trade competitiveness

Take, for example, Australia's manufacturing sector. Mostly because of comparative advantage, it is the smallest among all advanced economies relative to the size of its economy. In 2010, Germany had 21.2 per cent of its workforce in manufacturing while Australia's was 8.9 per cent. While it's not surprising that Australia's structure of trade competitiveness differs from Germany's because of its enormous export strength of mining and agriculture, it will benefit by taking advantage of its highly skilled workforce and the potential to develop industries based on this human capital – including advanced manufacturing industries.

One of the traditional strengths of the American economy is the close link that exists between leading universities and businesses – an area Australian policymakers are seeking to improve upon. At MIT and Stanford, professors of engineering, biology, finance or economics finish their lectures and head off to the companies they run or advise. They often enlist graduate or undergraduate students to help them with their commercial projects and these collaborations often result in jobs as well as experience. There is a danger in this model if pure research loses out to business interests, but the interaction between academia and the practical needs of companies can largely improve both research and business profitability. It's worth recalling that even the giants of science in the 18th century were motivated by the need to improve navigation or build new machines or design buildings. Funding for research should support greater industry-university cooperation as highlighted by the Watt Review.

Another important element in Australia's continued economic success is the growth of its service industries. With most jobs in these industries, the performance and productivity of services will be the largest determinant of Australia's living standards. Productivity comparisons between Australia and the United States show that Australian productivity lagged behind the US as recently as the mid-1990s, but there has since been substantial catch-up taking place. Smart regulation that promotes competition and rewards innovation are necessary to bring up the laggards. While there is a continuing debate about the possible end of productivity growth in advanced economies, Australia can still do much to catch up to global best practice.

The winners of this weekend's election will be charged with answering an important question: what is the role of government in a modern economy? How they answer that will determine future prosperity for all Australians.

High taxes, large government, poorly regulated markets (particularly labour markets), excessive debt and poor infrastructure undermine the drivers of growth. The realities of a fragile global economy and the need to build a solid foundation to generate productivity growth in Australia must be at the core of the policies that follow this election campaign.

Martin Baily is a senior fellow at the Brookings Institution in Washington and a former chair of the US President's Council of Economic Advisers. He has been invited by the Australian Ministry of Industry Innovation and Science to report on lessons from the US for policies to enhance economic growth, innovation and competitiveness.

Warwick McKibbin AO, is the director of the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy and is a non-resident senior fellow at the Brookings Institution.

Editor's note: this opinion first appeared in Australian Financial Review.

       

       

       

       

       

       

       

       

       

       

       

       

The issue of Armenia enters the Turkish foreign policy agenda almost exclusively in the context of Western attempts at legislating genocide resolutions. The result is often a reactive nationalist defense.

In less than two years, by 2015, Turkey will find itself in a similar dilemma. Once again, it will be external dynamics that will drive the domestic and foreign policy debate, and quite predictably Turkey will react with anger and resentment to Western attempts at commemorating the centennial of the Armenian genocide. In order to avoid such an ordeal, Ankara needs to think about Armenian-Turkish relations now, before Western pressure builds up. The fact that Foreign Minister Ahmet Davutoğlu visited Yerevan last week is a step in the right direction and needs to be congratulated. Instead of panicking shortly before 2015, the Turkish government needs to pursue a multidimensional strategy, starting now. The first dimension of the strategy should be the opening of the border and the establishment of diplomatic relations between the two countries.

As it is well known, shortly after the signature of the two protocols aiming at achieving these two goals in 2009, Ankara decided to index the ratifications of the protocols to the resolution of the Nagorno-Karabakh conflict. Linking the normalization of relations to a “frozen conflict” had the impact of freezing the protocols as well. It also showed that Turkey had no empathy for the Armenian political leadership, which took a lot of heat from the diaspora for dropping genocide recognition as a precondition for the normalization of relations with Ankara.

In retrospect, the Turkish decision to establish a precondition for normalization with Armenia was shortsighted because it practically gave Azerbaijan de facto veto power over Turkish-Armenian normalization. Instead, what Turkey should have done was to establish diplomatic and economic relations with Armenia with the hope that such a policy of engagement would in time create positive momentum and leverage in favor of a resolution in Nagorno-Karabakh. It remains unclear whether a breakthrough in this frozen conflict can be achieved in the absence of Turkey gaining more leverage in relations with Armenia. It looks like sequencing is the main problem here. The Turkish side is reportedly ready to open the border, establish diplomatic relations and even provide financial support to Armenia in return for an Armenian withdrawal from two of the seven occupied regions surrounding Nagorno-Karabakh. This proposal looks like the same one Prime Minister Recep Tayyip Erdoğan made a few years ago to his Armenian counterpart at the time, Robert Kocharyan. Kocharyan had refused the Turkish demand on the grounds that there should be no linkage between Nagorno-Karabakh and normalization with Turkey. It is hard to see why today the Armenian reaction to a very similar Turkish proposal would be any different.

Therefore, this most recent Turkish attempt at rapprochement with Armenia is also likely to fail in the absence of a unilateral Turkish gesture such as the opening of the border without preconditions. On the other hand, since Turkey is always in some kind of election season, it is almost impossible to see the Justice and Development Party (AKP) invest serious political capital in rapprochement by taking such a courageous step. Under such circumstances, it is not surprising that the Armenian media saw Davutoğlu's Yerevan visit as nothing more than a public relations campaign. If Turkey is really serious about normalizing relations with Armenia, it will have to take some risks in relations with Azerbaijan. The key will be to convince Baku that only the normalization of Turkish-Armenian relations will create positive momentum in solving the Nagorno-Karabakh dispute. Turkey needs to open the border first and expect its diplomatic and economic engagement policy with Armenia to pay off in the long run. The alternative is to continue with the current policy. The current Turkish policy has produced no change in Nagorno-Karabakh in the last 20 years. It is time to think more creatively.

      

Introduction

Ninety years after the foundation of the Turkish Republic, Ankara appears to be on the verge of a paradigmatic change in its approach to the Kurdish question. It is too early to tell whether the current negotiations between Ankara and the Kurdish Workers’ Party (PKK) will manage to accommodate Kurdish cultural and political demands. Yet, for perhaps the first time in its history, the Turkish Republic seems willing to incorporate Kurds into the political system rather than militarily confront them. For decades, Turkey sought to assimilate its sizable Kurdish minority, about 15 million people, or around 20 percent of its total population. From the mid-1920s until the end of the Cold War, Ankara denied the ethnic existence of Kurds and their cultural rights. It took a three-decade-long PKK-led insurgency – which started in 1984 and caused a death toll of 40,000 – for the republic to start accepting the “Kurdish reality” and introduce cultural reforms. This perhaps explains why the PKK’s jailed leader Abdullah Öcalan is a national hero in the eyes of significant segments of Kurdish society.

Of the approximately 30 million Kurds in the Middle East, about half live in Turkey. Kurds also constitute a significant minority in neighboring Iraq, Iran and Syria. The Palestinians are often referred to as the most famous case of a “nation without a state” in the Middle East. But the Kurds, who outnumber the Palestinians by a factor of five, are by far the largest ethnic community in the region seeking national self-determination. The future of Turkey - and the Middle East - is therefore intimately linked to the question of Kurdish nationalism.

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