What makes the Trans-Pacific Partnership (TPP) consequential?

Since the onset of the 21st century, countries from every corner of the world have vigorously negotiated free trade agreements (FTAs) based on the principle of preferential market access (as opposed to the most-favored nation obligation of the WTO). This has resulted in a veritable avalanche of such trade deals, with close to 400 FTAs notified to the WTO in the past 20 years. If the negotiation of preferential trade agreements is now the dominant trend in the trading regime, and almost no country has escaped contagion from the FTA syndrome, why does one agreement in particular—the TPP—remain the focal point of policy debates on trade?

Chart 1. Multilateral trade regimes and FTA proliferation

The TPP generates most attention because it has spurred the emergence of mega trade agreements (as compared to the mostly small bilateral trade deals that had characterized the FTA wave), and has offered a new platform to advance the trade agenda as negotiations on the Doha Round continue gridlocked. The TPP has come a long way from its humble beginnings as a trade grouping of four small open economies (Brunei, New Zealand, Chile, and Singapore). Today, it comprises 12 nations, covers 26 percent of world trade, and is expected to generate global income gains in the neighborhood of $492 billion by 2030.

Chart 2. From humble beginnings to mega trade deal

But the significance of the TPP is not to be grasped by numbers alone. Consider the following defining traits of this trade agreement:

1. Its high level of ambition for tariff liberalization vowing to disallow sectoral carve-outs. While it is true that sensitive sectors asserted their political weight by deferring or limiting tariff elimination (e.g., autos for the United States and five agricultural commodities for Japan), the commitment of TPP countries to eventually eliminate 99-100 percent of tariff rates is indeed impressive. Japan does stand out for a lower level of committed tariff elimination (95 percent); but again this is the highest level of liberalization that Japan has ever committed to in any trade negotiation.
2. Its comprehensive set of rules to target non-tariff barriers by introducing disciplines on issues such as regulatory coherence, state-owned enterprises, competitiveness, supply chains, etc. With 30 chapters and over 5,000 pages of text, grasping the reach of TPP rules will certainly take time. However, a quick glance does reveal novel, and needed, disciplines in important areas of the economy. For example, the e-commerce chapter establishes a binding obligation for governments to allow free data flows, disallows forced localization of data servers (except for the financial sector), and mandates that all countries must provide a legal framework to protect personal information. Another important innovation is the TPP provision that governments cannot require the transfer of source code from private companies operating in their market.
3. Its expansive vision as an Asia-Pacific platform with aspirations to set global standards. Its open architecture with a docking mechanism to encourage further member expansion and its explicit aim to establish a trans-regional platform that bridges Asia and North and South America are strong selling points for the TPP. It undercuts the oft-mentioned fear of using preferential trade agreements to create closed-off regions, and it gives its rules and standards the opportunity to disseminate far and wide.
4. Last but not least, the TPP has emerged as a central policy priority for both the U.S. and Japan to hone their international economic competitiveness and achieve broader foreign policy goals. In the area of foreign economic policy, the TPP is one of the most compelling frameworks to encourage China to deepen its market reforms and sign on to more ambitious liberalization commitments. The TPP, therefore, has emerged as a central arena for the interaction of the three giants of the world economy.

The United States as a Pacific power

The U.S. expects to reap important economic benefits from the TPP. It is a trade agreement that taps into the areas of competitive strength of the American economy: agricultural exports, trade in services, the digital economy, to name a few. Econometric studies put the expected income gains of the TPP for the U.S. in the order of $131 billion per year, and to the extent that the TPP becomes a global standard, these gains will grow. Indeed, the TPP is the centerpiece of the American trade agenda. Its success is required for continued momentum in the on-going trans-Atlantic trade negotiations, but it could also influence other important trade initiatives. For example, TPP disciplines on services and state-owned enterprises are expected to influence deliberations on the Trade in Services Agreement, a plurilateral trade negotiation carried out under the aegis of the WTO.

From the point of view of global governance, the TPP is a litmus test of the U.S. ability to provide leadership at a time of great complexity in the world economic order: one where supply chains have emerged as a main driver of production and trade, where emerging economies are increasingly vocal in the management of the global economy, and where the test of updating Bretton Woods institutions looms large. Through the TPP, the U.S. can display its convening power to negotiate novel trade rules, to devise new institutional forms that complement and spur on the multilateral regime, and to be proactive and not just reactive to initiatives from rising economic powers.

But the TPP is also a pillar of U.S. Asia policy, one that solidifies the U.S. commitment to remain an engaged Pacific power. This trade agreement increases the appeal of the rebalancing policy by defining it not just as a reorientation of military resources toward a region undergoing a significant power transition; but also as the pursuit of a common endeavor: furthering economic interdependence with rules that match the realities of the 21st century economy, and potentially establishing a bridge toward China with the prospect of TPP membership.

Japan is an essential partner for the U.S. to achieve these important goals. Japan came late to the TPP negotiations (in the summer of 2013), but it transformed the economic and political significance of this deal. Japan’s participation allowed the TPP to qualify as a mega trade agreement. For the U.S. alone, the projected economic gains with Japan on board tripled. This is not surprising given the size of the Japanese market and the fact that the U.S. and Japan do not have a bilateral trade agreement; nor has Japan ever accepted these levels of liberalization. Moreover, prior to Japan joining the TPP there were doubts as to whether this could indeed become an Asia-Pacific platform of economic integration since no major Asian economy was participating. Japan’s entry put those objections to rest.

Japan as a reviving power

For Japan as well, the TPP negotiations have had salutary effects on its trade diplomacy and on the pursuit of central domestic and foreign policy priorities. Prior to joining the TPP, Japan’s trade strategy had achieved modest results: it lagged behind its peer competitors in negotiating an FTA network that covered a substantial share of its trade, it had faced difficulty in persuading Southeast Asian countries to adopt many WTO+ rules, it had received the cold shoulder from the U.S. and Europe as it proposed the negotiation of trade agreements, and remained deadlocked with China over the membership configuration of an East Asian trade grouping. The TPP altered the parameters of Japanese trade policy. It allowed the country to negotiate preferential access to main markets of destination, to disseminate next frontier trade rules, and to undertake concurrent mega trade negotiations. As a reaction to Japan’s courting of TPP membership, China recalibrated its trade policy to speed up the launch of trilateral trade negotiations in Northeast Asia and was now amenable to a 16-member trade grouping upholding the principle of ASEAN centrality (Regional Comprehensive Economic Partnership or RCEP), and the Europeans also came to the negotiation table.

As a full participant in the mega FTA movement, Japan can aim high in order to pursue signature objectives such as:

• Negotiate deep integration FTAs that enhance the international competitiveness of Japanese global supply chains. An assessment of Japan’s core competencies in the 21st century should start with the recognition that a significant share of industrial capacity has been relocated overseas. On-shoring of manufacturing operations is not a viable goal given projected demographic trends. Rather, the aim should be to sustain and strengthen Japan’s role in global supply chains (the leading force of international production and trade today). Japan’s international diplomacy has a role to play here by negotiating deep FTAs that meet the needs of fragmented production chains. Additionally, deep FTA commitments will also help Japan address its own domestic inefficiencies such as the modest liberalization of the services sector.
• Lock-in structural reforms. One of the main benefits of linking the domestic structural reform agenda to international trade commitments is that it will be harder to roll back the reforms if and when political circumstances change (this is indeed a major lesson of the failure to institutionalize Prime Minister Junichiro Koizumi’s reforms). Importantly, the TPP negotiations do not conform to the old-style gaiatsu pattern where a reluctant Japan would deflect U.S. pressure for it to change its ways. This time Japan has eagerly sought to be at the TPP table and has—of its own accord—identified the synergies between the new trade commitments and its own efforts to reform the domestic economy.
• Manage the transition from “regime-taker” to “regime-maker.” With the stagnation of the WTO, we have moved to a system of decentralized competition whereby different clusters of countries seek to define the standards for economic integration. The costs of a passive trade policy are much higher today than in a most favored nation (MFN) world where preferential trade agreements were the exception and not the rule. The expectation of steady liberalization benefits through successive multilateral trade rounds has been sharply revised. Therefore, countries that want to avoid the discriminatory effects of existing preferential trade deals and to improve access to important markets through additional elimination of tariffs and the adoption of rules that address behind-the-border barriers have resorted to an active FTA diplomacy. More broadly, Japan has much to win from displaying leadership in international economic governance, in a manner that resonates with the goals of the Abe administration to play a proactive role in world affairs.

For all the shared interests between the U.S. and Japan in the TPP project, negotiations over long divisive market access terms proved difficult and frustratingly long. Of course, a host of other issues also kept the larger TPP membership apart. Biologics especially was the last topic to close in the final TPP ministerial held in Atlanta in October 2015, and negotiations went to the wire. Despite all these difficulties, the ability to strike a TPP deal last fall represents a big win for the trade regime which has not seen a success of this magnitude in two decades. Since its creation, the WTO has not updated the rules of international trade and investment, and the Doha Round lingers on life support. Many were skeptical that a major trade negotiation tackling front and center the complex and unwieldy behind-the-border agenda could succeed. This is the most powerful message coming from Atlanta: it can be done.

With a TPP deal in hand there is greater hope that we can manage the tectonic changes in international trade governance. The transformation of the trade agenda (increasingly about regulatory matters) and the limitations of the WTO as a negotiation forum, have called into question the pure multilateral ideal—one set of binding rules for 150+ countries. Instead, the center of action is now on what we call “variable geometry” arrangements where subsets of countries negotiate next-frontier rules: the plurilaterals in the WTO and the preferentials through mega trade agreements. The emerging system for trade governance is not risk-free, and much effort will be required to forestall potential dangers: fragmentation (if TPP-like standards do not disseminate widely) and exclusion (if less developed countries are bypassed by the FTA wave).

Moreover, the TPP deal opens a new and promising chapter in U.S.-Japan relations. It is certainly more than a U.S.-Japan trade agreement—it represents the ability of 12 countries at varying levels of development and with very different regulatory regimes to agree on the most substantive trade liberalization to date. But it is also true that at the core of the TPP, the U.S. and Japan as the largest and most developed economies have acted as an engine of negotiations. The TPP marks a milestone in U.S.-Japan relations, as an effective instance of cooperation to upgrade the international economic architecture. In the TPP, the U.S. and Japan are on close alignment on the rules area of the talks and were able to reach an agreement on market access issues that in the past had proven intractable.

Ratification, reform, and reach

None of these effects will be long lasting nor will they reach their full potential, if TPP countries (and the U.S. and Japan in particular) do not double down on the next crucial steps. For simplicity sake, these can be dubbed the three “Rs” of ratification, reform, and reach.

Ratification

Ratification rules in the TPP require that six countries representing 85 percent of combined GDP approve the agreement before it enters into force. Therefore, to meet this numerical requirement both the U.S. and Japan must ratify. However, for the U.S., TPP ratification will represent a steep political battle in the midst of an American presidential election year. Despite public opinion polls showing that most Americans see in international trade an opportunity, the politics of trade agreements are fractious. Long-standing opposition by environmental groups and unions to trade agreements has resulted in their active mobilization against the TPP. And the debate on the merits of trade agreements has only become more heated as critics suggest that trade globalization is to be blamed for growing income inequality and the erosion of state regulatory powers.

For both national parties, the TPP is a divisive issue. While President Barack Obama has made TPP negotiation and ratification a central priority of his administration, Democrats in Congress have not backed his trade initiative in large numbers, in part due to the opposition of the party’s traditional base, labor unions. The internal dynamics of the Republican Party have shifted dramatically, complicating the odds for the TPP. The Republican Party has become less cohesive with the emergence of the Tea Party wing determined to deny Obama a legacy-making trade agreement. The support of key Republican figures in the Senate has also waned due to dissatisfaction over the tobacco carve-out from investor-state dispute settlement and the exclusivity period for biologics. And the business community has also criticized these provisions, offering only qualified support for the TPP deal.

The U.S. has yet to fail in ratifying a negotiated trade agreement. And a vote down on the TPP would be singularly costly for the credibility of U.S. foreign policy and the evolution of the international trade regime.

Reform

One of the most powerful benefits of trade agreements is the ability of governments to use them as commitment devices to implement needed economic changes. Reform is in fact the crucial issue for Japan as it tries to leave behind stagnant growth. Economic revitalization certainly goes beyond agricultural reform, to encompass the host of productivity-enhancing measures across all areas of the economy, the internationalization of services, the promotion of inward direct investment, and the further upgrading of regional and trans-regional production networks.

Yet, farming countermeasures adopted in the wake of the TPP deal have raised doubts about the government’s resolve to transform its agricultural sector. Japan’s TPP market access commitments do include a 56,000-ton import rice quota (to grow eventually to 78,400 tons). But the government promptly announced an increase in stockpiling purchases to match the TPP quota, effectively preventing a drop in the price of rice and market adjustment. This artificial support preempts the modernization of the agricultural sector since it enables part-time farmers to continue operating in tiny plots, hindering the emergence of commercial farming. The government also submitted a generous 2016 supplementary budget with 312 billion yen earmarked for agricultural TPP countermeasures. But informed experts question its impact in boosting farming competitiveness since public works allocations still loom large (30 percent of outlays will go to land reclamation projects).

Just as the electoral cycle has not facilitated TPP ratification in the U.S., the looming Japanese Upper House election in July is not conducive to moving past prior trade compensation practices.

Reach

The release of the TPP text has clarified a very important point: membership can be extended not only to APEC economies but also to other countries that are willing to meet TPP disciplines. Enlargement will be critical to avoid the above-mentioned risks of fragmentation and exclusion by helping disseminate TPP standards. In the short and medium term, the conclusion of the TPP talks is expected to have two main effects: increase the list of potential applicants, and encourage a higher level of ambition among on-going trade negotiations.

The number of economies expressing an interest in joining the TPP has grown to include South Korea, Taiwan, Indonesia, Thailand, the Philippines, Colombia, and Costa Rica, among others. Regarding the second wave of accession the key issue will be readiness to undertake the ambitious liberalization commitments of the TPP, and the list of prospective applicants shows wide variation on this score. The conclusion of TPP talks also creates an incentive for the updating of existing FTAs and/or scaling up the level of ambition in ongoing trade negotiations, as countries outside the TPP want to secure export markets, attract foreign direct investment, and embed their companies in global supply chains.

In the long run, the key challenge will be to devise an effective strategy to engage emerging economies, such as China, India, and Brazil. This is still the gaping hole in the U.S. plans to develop trans-Pacific and trans-Atlantic trade groupings. Certainly, putting in place the TPP and the Transatlantic Trade and Investment Partnership is the first step in such strategy since it changes the incentive structure for these countries to entertain further market liberalization. But at the end of the day, these emerging economies must reach the determination that it is in their national interest to abide by these economic standards, and find the political will to tackle vested interests. This is a tall order indeed.

The most pressing question may well be how China will position itself vis-à-vis the TPP. Can we expect it to act on past precedent and seek TPP accession just as in the past it used WTO membership to advance economic reforms? Or will it choose instead to champion the negotiation of a Free Trade Area of the Asia-Pacific (FTAAP) after both the TPP and RCEP materialize, in order to play a more proactive role in the international economic architecture—more in conformance with the recent launch of the Asian Infrastructure Investment Bank?

The recently struck TPP agreement underscores the potential of furthering U.S.-Japan cooperation to supply needed international economic governance. However, the overview of remaining challenges also shows that clinching a TPP deal is just the first step.

This article originally appeared in the March/April 2016 issue of Economy, Culture & History Japan SPOTLIGHT Bimonthly.

Downloads

• The high stakes of TPP ratification: Implications for Asia-Pacific and beyond

Editor’s Note: This blog post is one in a series of posts in which guest bloggers respond to the Brookings paper, “The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide.”

Social impact bonds (SIBs) are one of a number of new “Payment by Results” financing mechanisms available for social services. In a SIB, private investors provide upfront capital for a social service, and government pays investors based on the outcomes of the service. If the intervention does not achieve outcomes, the government does not pay investors at all. The provision of upfront capital differentiates SIBs from other Payment by Results contracts.

Development Impact Bonds (DIBs) are a variation of SIBs, where the outcome funder is a third party, such as a foundation or development assistance agency, rather than the government. To date, 47 SIBs and one DIB have been implemented in the sectors of social welfare (21), employment (17), criminal recidivism (4), education (4), and health (2).

In a recent Brookings study, drawing from interviews with stakeholders in each of the 38 SIBs contracted as of March 1, 2015, we evaluate 10 common claims of the impact bond literature to date, so far made up of published thought-pieces and interview-based reports.

Figure 1. Common claims about Social Impact Bonds

Source:  The Potential and Limitations of Impact Bonds: Lessons Learned from the First Five Years of Experience Worldwide, Brookings Institution, 2015.

Of the 10 common claims about impact bonds, we found five areas where the SIB mechanism had a demonstrable positive effect on service provision:

1. Focus on outcomes. We found a significant shift in the focus of both government and service providers when it came to contracting and providing social services. Outcomes became the primary consideration in these contracts in which the repayment of the investment depended on achievement of those outcomes. Given that outcomes are the pivotal and defining piece of a SIB contract, it is unsurprising that many of those interviewed in the course of our research emphasized their importance, though we did find that this represented a more significant transformation in culture than expected.
2. Build a culture of monitoring and evaluation. The outcome-based contract necessitates the collection of data on outcomes, which helps build a culture of monitoring and evaluation in provider organizations and government. We found that the SIB is beginning to help solve longstanding problems in systemic data collection in multiple instances. In turn, government evaluation of outcomes and obligation to pay only for successful outcomes provides transparency and value for taxpayers. However, it is too soon to tell whether the monitoring and evaluation systems will remain in place after the SIB contracts conclude.
3. Drive performance management. The involvement of the investors and intermediaries in management of the service performance is a key component of SIBs. These private sector organizations often have stronger background in performance management and bring a valuable perspective to the social service sector. However, on average we find limited evidence that the service providers in SIBs to date have been able to significantly adjust their programs mid-contract in the case of poor outcomes, despite SIB proponents claiming this is one of the mechanism’s greatest merits.
4. Foster collaboration. In addition to collaboration between the for-profit, nonprofit, and government sectors, we also find evidence of gridlock-breaking collaboration across government agencies, levels of government, and political parties due to SIB contracts. This was noted to be one of the most important aspects of SIBs but also one of the most challenging.
5. Invest in prevention. External, upfront capital for services allows government to invest in preventive programs that greatly reduce spending in the future, such as early childhood development programs that reduce remedial education, crime, and unemployment. We found that all but one of the 38 SIBs were issued for preventive programs. Going forward, SIBs will not necessarily need to be tied to cash savings for government, but could simply be used as a method to finance programs that achieve desired social outcomes. 

Where do SIBs currently fall short?

For the five remaining claims about SIBs, we found less evidence of impact.

1.  Achieve scale. Of the 38 impact bonds contracted as of March 1, 2015, 25 served less than 1,000 beneficiaries. The largest impact bond, the SIB to reduce criminal recidivism at Rikers Island Prison in New York City, aimed to reach up to 10,000 individuals, but was terminated a year early this July because it did not meet target outcomes. The smallest SIB supports 22 homeless children and their mothers in the city of Saskatoon in Canada. These numbers are nowhere near the scale of the toughest problems facing the globe, where, for example, 59 million children are out of school. However, since March of 2015, two larger SIBs have been contracted, which may be an indication of increasing confidence in the mechanism. The Ways to Wellness SIB in the U.K. aims to improve long-term health conditions of over 11,000 beneficiaries and the first DIB launched plans to improve enrollment and learning outcomes of nearly 20,000 schoolchildren in Rajasthan, India. Further, the impact bond fund model used in the U.K. for 21 SIBs—where teams of service providers, intermediaries, and investors bid for SIB contracts based on a rate card of maximum payments per outcome government is willing to make—could be used to reach greater scale by contracting multiple SIBs at once. The largest of the impact bond funds, the Innovation Fund, reaches over 16,000 beneficiaries across 10 SIBs.
2. Foster innovation in delivery, and 
3. Reduce risk for government. SIBs vary in the degree of innovation and risk to investors—SIBs based on more innovative programs pose a greater risk to investors and may have higher investment protection or greater potential returns to balance the risk. In our study we found that very few of the programs financed by SIBs were truly innovative in that they had never been tested before, but that many were innovative in that they applied interventions in new settings or in new combinations. The literature claims that SIBs reduce the risk to government of funding an innovative service (government pays nothing if outcomes aren’t achieved), but as of March of this year it did not seem that the programs were particularly risky. The SIB in Rikers Island Prison was one of the most innovative and risky, and the early termination of the deal was an important demonstration of the reduction in risk for government. The New York City Department of Correction did not pay anything in this case; instead the investor and foundation backing the investment paid for the program.
4. Crowd-in private funding. Our research also shows mixed evidence on the power of impact bonds to crowd-in private funding, the fourth claim with unclear results. The literature up until now has claimed that impact bonds crowd-in private funding for social services by increasing the amount of money from traditional funding sources and bringing in new money from nontraditional sources. There is some evidence that traditional service funders, such as foundations, are increasing their contributions because of the opportunity to earn back what would otherwise have been a donation. Many of the current investors in impact bonds, Goldman Sachs for example, are indeed new actors in the space and their increased awareness of social service provision may be a benefit in and of itself. However, if a program is successful, government ultimately pays for the program. In this case, investors are solving a liquidity problem for government by providing upfront capital and not actually providing new money. Nonetheless, there is some evidence that paying only for proven outcomes has motivated the public sector to spend more on social services and that the external upfront capital has allowed government to shift spending from curative to preventive programs. Further, most programs thus far have been designed such that savings to the public sector are greater than payments to investors, resulting in a net increase in available public sector funds.
5. Sustain impact. Finally, five years since the first impact bond, we have yet to see whether impact bonds will lead to sustained impact on the lives of beneficiaries beyond the impact bond contract duration. The existing literature states that impact bonds could lead to sustained impact by demonstrating to government that a sector or intervention type is worth funding or by improving the quality of programs by instilling a culture of outcome achievement, monitoring, and evaluation. However, the success of impact bonds depends on whether new efforts to streamline the contract development stage come to fruition and whether incentives for all parties are closely scrutinized.

The optimal financing mechanism for a social service will differ across issue area and local context, and we look forward to conducting more research in the field on the suitable characteristics for each tool.

Downloads

• Download the policy recommendations
• The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide (PDF)

Editor’s Note: This blog post is one in a series of posts in which guest bloggers respond to the Brookings paper, “The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide."

In 2014, clause 5 (1) of the County Early Childhood Education Bill 2014 declared free and compulsory early childhood education a right for all children in Kenya. Early childhood education (ECE) in Kenya has historically been located outside of the realm of government and placed under the purview of the community, religious institutions, and the private sector. The disparate and unstructured nature of ECE in the country has led to a proliferation of unregistered informal schools particularly in underprivileged communities. Most of these schools still charge relatively high fees and ancillary costs yet largely offer poor quality of education. Children from these preschools have poor cognitive development and inadequate school readiness upon entry into primary school.

The Kenyan constitution places the responsibility and mandate of providing free, compulsory, and quality ECE on the county governments. It is an onerous challenge for these sub-national governments in taking on a large-scale critical function that has until now principally existed outside of government.

In Nairobi City County, out of over 250,000 ECE eligible children, only about 12,000 attend public preschools. Except for one or two notable public preschools, most have a poor reputation with parents. Due to limited access and demand for quality, the majority of Nairobi’s preschool eligible children are enrolled in private and informal schools. A recent study of the Mukuru slum of Nairobi shows that over 80 percent of 4- and 5-year-olds in this large slum area are enrolled in preschool, with 94 percent of them attending informal private schools.

In early 2015, the Governor of Nairobi City County, Dr. Evans Kidero, commissioned a taskforce to look into factors affecting access, equity, and quality of education in the county. The taskforce identified significant constraints including human capital and capacity gaps, material and infrastructure deficiencies, management and systemic inefficiencies that have led to a steady deterioration of education in the city to a point where the county consistently underperforms relative to other less resourced counties. 

Nairobi City County now faces the challenge of designing and implementing a scalable model that will ensure access to quality early childhood education for all eligible children in the city by 2030. The sub-national government’s resources and implementation capacity are woefully inadequate to attain universal access in the near term, nor by the Sustainable Development Goal (SDG) deadline of 2030. However, there are potential opportunities to leverage emerging mechanisms for development financing to provide requisite resource additionality, private sector rigor, and performance management that will enable Nairobi to significantly advance the objective of ensuring ECE is available to all children in the county.

Social impact bonds (SIBs) are one form of innovative financing mechanism that have been used in developed countries to tap external resources to facilitate early childhood initiatives. This mechanism seeks to harness private finance to enable and support the implementation of social services. Government repays the investor contingent on the attainment of targeted outcomes. Where a donor agency is the outcomes funder instead of government, the mechanism is referred to as a development impact bond (DIB).

The recent Brookings study highlights some of the potential and limitations of impact bonds by researching in-depth the 38 impact bonds that had been contracted globally as of March, 2015. On the upside, the study shows that impact bonds have been successful in achieving a shift of government and service providers to outcomes. In addition, impact bonds have been able to foster collaboration among stakeholders including across levels of government, government agencies, and between the public and private sector. Another strength of impact bonds is their ability to build systems of monitoring and evaluation and establish processes of adaptive learning, both critical to achieving desirable ECD outcomes. On the downside, the report highlights some particular challenges and limitations of the impact bonds to date. These include the cost and complexity of putting the deals together, the need for appropriate legal and political environments and impact bonds’ inability thus far to demonstrate a large dent in the ever present challenge of achieving scale.

In the Kenyan context, especially at the sub-national level, there are two key challenges in implementing impact bonds.

To begin with, in the Kenyan context, the use of a SIB would invoke public-private partnership legislation, which prescribes highly stringent measures and extensive pre-qualification processes that are administered by the National Treasury and not at the county level. The complexity arises from the fact that SIBs constitute an inherent contingent liability to government as they expose it to fiscal risk resulting from a potential future public payment obligation to the private party in the project.

Another key challenge in a SIB is the fact that Government must pay for outcomes achieved and for often significant transaction costs, yet the SIB does not explicitly encompass financial additionality. Since government pays for outcomes in the end, the transaction costs and obligation to pay for outcomes could reduce interest from key decision-makers in government.

The above challenges notwithstanding, a combined approach of results-based financing and impact investing has high potential to mobilize both requisite resources and efficient capacity to deliver quality ECE in Nairobi City County. To establish an enabling foundation for the future inclusion of impact investing whilst beginning to address the immediate ECE challenge, Nairobi City County has designed and is in the process of rolling out a modified DIB. In this model, a pool of donor funds for education will be leveraged through the new Nairobi City County Education Trust (NCCET).

The model seeks to apply the basic principles of results-based financing, but in a structure adjusted to address aforementioned constraints. Whereas in the classical SIB and DIB mechanisms investors provide upfront capital and government and donors respectively repay the investment with a return for attained outcomes, the modified structure will incorporate only grant funding with no possibility for return of principal. Private service providers will be engaged to operate ECE centers, financed by the donor-funded NCCET. The operators will receive pre-set funding from the NCCET, but the county government will progressively absorb their costs as they achieve targeted outcomes, including salaries for top-performing teachers. As a result, high-performing providers will be able to make a small profit. The system is designed to incentivize teachers and progressively provide greater income for effective school operators, while enabling an ordered handover of funding responsibilities to government, thus providing for program sustainability.

Nairobi City County plans to build 97 new ECE centers, all of which are to be located in the slum areas. NCCET will complement this undertaking by structuring and implementing the new funding model to operationalize the schools. The structure aims to coordinate the actors involved in the program—donors, service providers, evaluators—whilst sensitizing and preparing government to engage the private sector in the provision of social services and the payment of outcomes thereof.

The confluence of the agreement on 17 Sustainable Development Goals (SDGs, or Global Goals) in 2015, and the increased attention being paid to the role of non-traditional actors in contributing to shared prosperity, provide a unique opportunity to focus attention on attempts to identify promising new solutions to the barriers that impede the full development of the world’s youngest citizens. Current estimates indicate that 200 million children globally under the age of 5 are at risk of not reaching their development potential. With these goals, the global community has a tremendous opportunity to change the course of history. There is evidence that certain early childhood development (ECD) interventions—spanning the nutrition, health, water and sanitation, education, social protection, and governance sectors from conception to age 5—have high potential to help to achieve the SDGs related to child development. Furthermore, early childhood interventions have been found to improve adult health and education levels, reduce crime, and raise employment rates, which will be paramount to achieving global economic, climate, and physical security.

Impact bonds have the potential to address some of the main financing and delivery constraints faced in ECD. By providing upfront private capital, impact bonds could help to address service provider liquidity constraints and leverage public capital by allowing the government to connect preventive programs with future benefits to individuals, society, and the economy. Impact bonds also have the potential to drive performance management, support monitoring and evaluation, and create accountability, which all help to address quality and capacity constraints. By fostering innovation, experimentation and adaptive learning in service delivery, cost-effective solutions could be identified through impact bonds. By producing evidence of outcome achievement, impact bonds could shift the focus toward effective ECD programs. Finally, collaboration across stakeholders—a necessary component of impact bonds—has the potential to allow for alignment of interests and a win-win situation for investors, outcome funders, and program beneficiaries alike.

The high participation of non-state actors and potentially significant returns in ECD make it a promising sector for impact bonds. Unlike other services that may have entrenched interests, the multitude of agencies and non-state entities financing and providing ECD services potentially allows for more experimentation. The preventive nature of ECD programs also fits well with the core feature of SIBs, which is that preventive investments will result in valuable short- and potentially long-term outcomes. There is evidence that ECD interventions can have immense effects on later-life outcomes. For example, a longitudinal study of a program in Jamaica, in which participants received weekly visits from community health workers over a 2-year period, was found to increase the earnings of participants by 25 percent, 20 years later.

There may, however, be some particular challenges associated with applying impact bonds in the ECD sector. Impact bonds (and other Payment by Results mechanisms tied to outcomes) require meaningful outcomes that are measureable within a timeframe that is reasonable to the outcome funder (and investors in the case of an impact bond). Meaningful outcomes are outcomes that are intrinsically or extrinsically valuable. Intrinsically valuable outcomes that are measureable within a reasonable timeframe could be extrinsically valuable if they are proxies for long-term benefits to individuals, society, or the economy. The delay between ECD interventions and later-life results may prove an impediment in some cases. By identifying appropriate interim measures such as language development, socioemotional development, and schooling outcomes that may proxy for desirable longer-term outcomes, the issue of delay could be mitigated. For example, there is evidence that early stimulation and health programs can have statistically significant effects on schooling outcomes in the short-run. An increase in focus on the intrinsic value of short-term outcomes that result from ECD interventions, such as child survival, is also important.

As the global community moves beyond the Millennium Development Goals to a set of Global Goals and associated targets linked to measurable outcomes, there is an opportunity to demonstrate a commitment to invest in future generations. Leveraging upfront funding, focusing on outcomes through adaptive learning and testing new ways to deliver early childhood interventions more effectively are all means of achieving the ECD-related goals. Despite the hype around all of the new financing mechanisms, the keys to creating high-quality, locally appropriate programs remains simple—real-time collection of outcome data, the freedom to fail, and the flexibility to course-adjust. In some circumstances social service provision based on outcomes and adaptive learning may require mechanisms like impact bonds or other Payment by Results mechanisms. In other circumstances it may not. As this very nascent field continues to grow, more research will be needed to capture lessons learned, contextualize them within the larger landscape of ECD financing and service provision, and apply them to real-world social challenges with the world’s youngest and most disadvantaged populations at the forefront of the conversation. 

Read the previous report on the landscape of impact bonds across sectors and geography »

Downloads

• Download the full report
• Download the policy brief

Event Information

Webcast archive:

View speaker presentations here:
1. Impact Bonds Worldwide
2. Impact Bonds for ECD

Impact bonds, also known as Pay for Success contracts in the United States, have leveraged over $200 million in upfront private capital for social services worldwide over the last six years, and by 2020 the market is expected to triple. Brookings experts have published two reports analyzing the market, the first of which is a comprehensive review of the global impact bond market and the second of which examines applications to Early Childhood Development programs.

On February 29, the Global Economy and Development program at Brookings hosted a discussion on the scope for social and development impact bonds to address social challenges globally. Sessions reflected on the types of challenges for which these new financing modalities are best suited, and the factors critical for their success. Sir Ronald Cohen, chairman of the Global Social Impact Investment Steering Group, provided keynote remarks, followed by presentations from Emily Gustafsson-Wright, fellow at the Center for Universal Education at Brookings and lead author of both reports on impact bonds.  The event included two panel discussions and a networking lunch.  

 Join the conversation on Twitter using hashtag #ImpactBonds.

Audio

• The global potential and limitations of impact bonds

Transcript

• Transcript (.pdf)

Event Materials

• 20160229_social_impact_bonds_transcript

“For a not-for-profit it’s the equivalent of venture capital,” said Sir Ronald Cohen, chairman of the Global Social Impact Investing Steering Group, about impact bonds in his keynote address at a recent event at the Brookings Institution. Impact bonds combine results-based financing and impact investing, where investors provide upfront capital for a social service and government agencies, or donors, agree to pay investors back based on the outcomes of the service. At their best, they could allow for innovation, encourage performance management and adaptability, promote learning through evaluation, and create a clear case for investing in what works. However, impact bonds thus far have had immense transaction costs and there are risks that poor execution of the impact bond mechanism could have negative consequences for beneficiaries.

It has been six years since the first impact bond was implemented in March of 2010, and the field is beginning to move from an exploratory stage to looking at systemic change, as Tracy Palandjian, CEO and co-founder of Social Finance U.S. described. The event, “The Global Potential and Limitation of Impact Bonds,” served as a point of reflection for stakeholders at this pivotal stage of the field, bringing together over 500 individuals in the room and on the webcast, including practitioners developing impact bonds around the world. While context matters, there were notable similarities in the motivations and challenges across regions.

In our presentations of our research and subsequent panels, we focused on the potential value and challenges of combining results-based financing and impact investing through an impact bond. Shri Naveen Jain, mission director of the National Health Mission of Rajasthan, India, who is working to develop an impact bond for maternal and child health services across his entire state, pointed out that the value of a results-based financing contract to him was in the added transparency it provides—the government is able to see what they are paying for, keep service providers accountable, and incentivize providers to achieve better outcomes. Louise Savell, a director at Social Finance U.K., the entity that first put impact bonds on the map, explained that results-based financing contracts are often arranged such that only one portion of the contract is based on results. This, she explained prescribes a model and does not allow for flexibility; furthermore, it forces service providers to bear a significant risk. Impact bonds allow for the entirety of payments to be based on results, which gives the provider full flexibility (at least in theory), but puts the risk of service performance on the investor. The shift of risk to investors could be particularly useful for service delivery in conflict affected areas, where donors are often highly concerned about how money will be used, mentioned Francois de Borchgrave, co-founder and managing director of Kois Invest, who is working on an impact bond with the International Rescue Committee of the Red Cross. The panelists also emphasized that impact bonds are more powerful than results-based financing contracts alone because, if successful, they pay real financial returns to investors. This draws a great deal of attention from policymakers and the public, and the added scrutiny helps in making the investment case for preventive interventions highly explicit. Mayor Ben McAdams of Salt Lake County, Utah said that “data and evidence is bridging a partisan divide” in his state—when the case for investment is clear, policymakers from both sides of the aisle are willing to invest. Impact bonds do not necessarily add value by increasing the total amount of funding available for social services, because investors are repaid if outcomes are achieved. Rather, impact bonds could help increase the outcomes achieved with given funding.

Overall there was agreement that impact bonds have enormous potential to lead to more outcome-focused financing that focuses on preventive interventions and incentivizes collaboration. However two critical considerations for the use of impact bonds arose throughout the day.

The first consideration discussed was whether or not impact bonds can support innovation or scale. As found in our first report, impact bonds have been relatively small in scale in terms of capital and beneficiaries. The average upfront investment in impact bonds to date is $3.7 million, reaching an average of 1,900 beneficiaries. They also have not, on average, focused on particularly innovative interventions—in fact they have almost all had a relatively strong base of evidence behind them. Views on the panel differed on whether the uses of impact bonds could be expanded—if they could be used for highly innovative pilot programs or proven large scale programs. One perspective was that impact bonds could indeed provide seed capital to test new ideas for service delivery. This would require investors who are willing to test not only the innovation but also this relatively new financing mechanism. Given the high transaction costs that impact bonds entail, however, this may not be the most efficient use of resources. Impact bonds could also reach more beneficiaries per transaction (greater scale) with changes in public procurement and the creation of markets for tradeable impact bond assets. Government can play a role in facilitating larger impact bonds by creating central government outcome payment funds, providing tax breaks for investment in impact bonds, and enabling the development of investment vehicles, all of which are being implemented in the U.K. Impact bonds could also help effective social services reach scale by encouraging government to fund programs at scale after the impact bond is over or by improving data use and performance management in government-funded services broadly.

A second, and related, discussion happened around evaluation methodology—which may differ depending on whether the impact bond is intended to test an innovative intervention or scale an intervention already backed by significant evidence. The “gold standard” randomized controlled trial (RCT) is the only methodology that eliminates the possibility that impact could be attributed to something other than the intervention, though the majority of impact bonds thus far use evaluation methodologies that are less rigorous. The panelists explained that it is important, however, to consider the status quo—currently, less than 1 percent of U.S. federal spending on social services has been shown to be effective. The same is true in low- and middle-income countries, where there are relatively few impact evaluations given the number of interventions. At the end of the day, the government agency acting as the outcome funder must decide on the importance of attribution to trigger payment through the impact bond in view of the already available evidence of program effectiveness and weigh the criticism that might ensue in the absence of a valid counterfactual.

Though impact bonds are a potentially useful tool in the toolbox of many financing mechanisms, there are some significant constraints to their implementation. The biggest barrier to impact bonds and other results-based contracts is the administrative hurdle of contracting for outcomes. Peter Vanderwal, innovative financing lead at the Palladium Group, and Caroline Whistler, co-president and co-founder of Third Sector Capital Partners, both stated that governments often are unable or do not know how to contract for outcomes, and there is a need to invest in their capacity to do so. Appropriation schedules are part of this challenge, governments are often not allowed to appropriate for future years. When an audience member asked how we go about changing the culture in government to one of contracting for outcomes, Mayor McAdams answered that impact bonds may have a contagious effect—contracting for outcomes will be the expectation in the future. Additionally, the transaction costs of establishing the partnership are large relative to other mechanisms, though they may be worthwhile. Jim Sorenson, of the Sorenson Impact Center, pointed out that service provider capacity and data collection systems could be barriers to the development of future impact bonds. There is also still a long way to go in developing outcome measures and in particular in calibrating those outcome measures to low- and middle-income countries.

The influence that impact bonds have on the provision of quality services globally depends on the quality of implementation. With a rapidly growing market, there will inevitably be “bad” impact bonds in the future. To ensure that impact bonds are used as effectively as possible, governments and the research community have a pivotal role to play in asking the right questions: Will a results-based contract help improve outcomes in this particular case? What should the outcomes be to avoid perverse incentives or potentially negative externalities? And would an impact bond structure add value? 

March 18 was an historic day for early childhood development (ECD) financing—the Departments of Social Development and Health of the Western Cape province of South Africa committed 25 million rand ($1.62 million) in outcome funding for three social impact bonds (SIBs) for maternal and early childhood outcomes. This is the first ever funding committed by a middle-income government for a SIB—to date no low-income country governments have participated in a SIB either—making South Africa’s choice to pioneer this new path especially exciting.

A SIB is a financing mechanism for social outcomes where investors provide upfront capital for services and a government agency repays investors contingent on outcome achievement. There are currently two active development impact bonds or DIBs (where a donor provides outcome funding rather than a government agency) in middle-income countries, one for coffee production in Peru and one for girls’ education in India. The South African SIBs, whose implementation was facilitated by the Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town and Social Finance U.K. as well as other organizations, will be the first impact bonds in Africa.

We have been following closely the development of these SIBs over the last two years through our research on the potential applications of impact bonds for ECD outcomes, and recently hosted a discussion on the topic at Brookings. There are currently nine other impact bonds worldwide that include outcomes for children ages 0 to 5, including two recently announced impact bonds in the U.S. for nurse home-visiting in South Carolina and support for families struggling with substance abuse in Connecticut.

Impact bonds are well suited to fund interventions that have high potential returns to society; that require learning, adaptability, and combinations of services to achieve those returns; and that are not core government-funded services (often resulting in a relative proliferation of non-state providers). In our recent report, we find that a majority of evaluations show ECD can have unparalleled returns, but there are also a number of evaluations that show no significant impact or where impact fades out. Overall however, there are few evaluations relative to the number of service providers and interventions, an indication of how little we know about the effectiveness of the majority of service providers. For example, there are only 15 studies examining the effects of ECD interventions in low- and middle-income countries on later-life socioemotional development, which has been shown to be a critical determinant of success in school and life.

The case for government investment is strong, but continuous learning and adaptation is needed to ensure the high potential impacts are achieved. Tying payments to outcomes could help the ECD sector in three ways: it could encourage new government investment in ECD, it could encourage performance management and adaptability, and, crucially, it could help develop the knowledge base of what works in ECD. Unlike some other sectors where providers are able to finance their own operations to participate in a results-based (performance-based) contract through fees or other cash flows, ECD providers will almost always require upfront capital in order to reach the most vulnerable. Consequently, we find that, despite some significant challenges, ECD interventions are particularly well suited to impact bonds.

For this reason, there are three things we find particularly exciting about these new SIBs for early childhood development in South Africa:

1. Collaboration of two departments to ensure a continuity of outcome measurement and, hopefully, achievement. Given their different mandates, the Department of Health will fund outcomes for pregnant mothers and children in their first 1,000 days and the Department of Social Development will fund outcomes for children ages 2 to 5. The Bertha Centre writes that “the funding will be made available to three community based organizations working with pregnant women and children up to five years of age with outcomes including improved antenatal care, prevention of mother to child transmission of HIV, exclusive breastfeeding, a reduction in growth stunting, and improved cognitive, language and motor development.” 

The continuity of quality services is essential to sustaining the impacts of early childhood services, and this is the first set of impact bonds to address outcomes across the development spectrum from age 0 to 5. Selecting outcomes however, particularly for more complex learning outcomes for children ages 3 to 5, can be one of the greatest challenges for impact bonds in the ECD sector.

A full list of recommended outcome metrics for ECD impact bonds is available in our report.

2. Outcome fund structure. The SIBs in South Africa have been designed as impact bond funds, where the outcome funder issues a rate card of prices it is willing to pay for certain outcomes and multiple service providers are awarded contracts to provide those outcomes. This structure, which has been implemented in four instances in the U.K., could help facilitate impact bonds at greater scale than what we have seen thus far.

At the Brookings event on impact bonds, Louise Savell of Social Finance U.K., explained that scale was critical in the South African case because there are few providers that work across the entire province. While the discussion around pricing outcomes in the U.K. was more focused on future value to the economy, the discussion in South Africa had to be more attuned to the price of providing services. These delivery prices differ greatly by township, which may result in different outcome payment prices by township. The impact bond designers also had to ensure the outcome price allowed for providers to serve the hardest to reach.

3. Matching of private-sector outcome funds. This is the first impact bond to date where private-sector actors will augment outcome funds, in addition to serving as investors. Impact bonds take a great deal of work for a government agency to establish—though it will likely drop over time—and additional or matching of outcome funds will be critical to making this effort worthwhile for low- and middle-income country governments.

Looking forward, it will be interesting to compare and contrast the structure and design of these SIBs with the impact bonds for ECD outcomes in Cameroon, India, and potentially other countries as they launch in the coming years. Each impact bond must be designed taking into consideration the particular issues and challenges in a given context. However, sharing learnings from one impact bond to the next will likely improve both efficiency and quality of the impact bond implementation. 

Announcements of new federal regulations on the use of program-related investments (PRIs) and the launch of a groundbreaking fund in Chicago are the latest signals that impact investing, once a marginal philanthropic and policy tool, is moving into the mainstream. They are also illustrative of two important and complementary paths to institutional change: fast-moving, collaborative local leadership creating innovative new instruments to meet funding demands; federal regulators updating policy to pave the way for change at scale.

Impact investing, referring to “investment strategies that generate financial returns while intentionally improving social and environmental conditions,” provides an important tier of higher-risk capital to fund socially beneficial projects with revenue-generating potential: affordable housing, early childhood and workforce development programs, and social enterprises. It is estimated that there are over $60 billion of impact investments globally and interest is growing—an annual JP Morgan study of impact investors from 2015 reports that the number of impact investing deals increased 13 percent between 2013 and 2014 following a 20 percent increase in the previous year.

Traditionally, foundations have split their impact investments into two pots, one for mission-related investments, designed to generate market-rate returns and maintain and grow the value of the endowment, and the other for program-related investments. PRIs can include loans, guarantees, or equity investments that advance a charitable purpose without expectation of market returns. PRIs are an attractive use of a foundation’s endowment as they allow foundations to recycle their limited grant funds and they count towards a foundation’s charitable distribution requirement of 5 percent of assets. However they have been underutilized to date due to perceived hurdles around their use–in fact among the thousands of foundations in the United States, currently only a few hundred make PRIs.

But this is changing, spurred on by both entrepreneurial local action and federal leadership. On April 21, the White House announced that the U.S. Department of the Treasury and Internal Revenue Service had finalized regulations that are expected to make it easier for private foundations to put their assets to work in innovative ways. While there is still room for improvement, by clarifying rules and signaling mainstream acceptance of impact investing practices these changes should lower the barriers to entry for some institutional investors.

This federal leadership is welcome, but is not by itself enough to meet the growing demand for capital investment in the civic sector. Local innovation, spurred by new philanthropic collaborations, can be transformative. On April 25 in Chicago, the Chicago Community Trust, the Calvert Foundation, and the John D. and Catherine T. MacArthur Foundation launched Benefit Chicago, a $100 million impact investment fund that aims to catalyze a new market by making it easier for individuals and institutions to put their dollars to work locally and help meet the estimated $100-400 million capital needs of the civic sector over the next five years.

A Next Street report found that the potential supply of patient capital from foundations and investors in the Chicago region was more than enough to meet the demand – if there were ways to more easily connect the two. Benefit Chicago addresses this market gap by making it possible for individuals to invest directly through a brokerage or a donor-advised fund and for the many foundations without dedicated impact investing programs to put their endowments to work at scale. All of the transactional details of deal flow, underwriting, and evaluation of results are handled by the intermediary, which should lead to greater efficiency and a significant increase in the size of the impact investing market in Chicago.

In the last few years, a new form of impact investing has made measurement of social return to investments even more concrete. Social impact bonds (SIBs), also known as pay for success (PFS) financing, are a way for private investors (including foundations) to provide capital to support social services with the promise of a return on their investment from a government agency if some agreed-upon social outcomes are achieved. These PFS transactions range from funding to support high-quality early childhood education programs in Chicago to reduction in chronic individual homelessness in the state of Massachusetts. Both the IRS and the Chicago announcements are bound to contribute to the growth of the impact bond market which to date represents a small segment of the impact investing market.

These examples illustrate a rare and wonderful convergence of leadership at the federal and local levels around an idea that makes sense. Beyond simply broadening the number of ways that foundations can deploy funds, growing the pool of impact investments can have a powerful market-making effect. Impact investments unlock other tiers of capital, reducing risk for private investors and making possible new types of deals with longer time horizons and lower expected market return.

In the near future, these federal and local moves together might radically change the philanthropic landscape. If every major city had a fund like Benefit Chicago, and all local investors had a simple on-ramp to impact investing, the pool of capital to help local organizations meet local needs could grow exponentially. This in turn could considerably improve funding for programs—like access to quality social services and affordable housing—that show impact over the long term.

Impact investing can be a bright spot in an otherwise somber fiscal environment if localities keep innovating and higher levels of government evolve to support, incentivize, and smooth its growth. These announcements from Washington and Chicago are examples of the multilevel leadership and creative institutional change we need to ensure that we tap every source of philanthropic capital, to feel some abundance in an era where scarcity is the dominant narrative.

Editor's Note: Alaina Harkness is a fellow at Brookings while on leave from the John D. and Catherine T. MacArthur Foundation, which is a donor to the Brookings Institution. The findings, interpretations and conclusions posted in this piece are solely those of the authors and not determined by any donation.

This week the Dutch Ministry of Security and Justice announced that it will pay for the successful achievement of employment and prison recidivism outcomes among short-term adult prisoners as part of the new “Work After Prison” social impact bond (SIB)—the fifth such transaction in the Netherlands and one of about 60 in the world. In a SIB—which is a mix of results-based financing, a public-private partnership, and impact investing—private investors provide upfront capital for preventive social services, and in turn an outcome funder (usually government) pays them back plus a return contingent upon the achievement of agreed-upon outcomes. Where consistent social outcomes achievement poses challenges, this model has considerable potential to create a path forward.

What is the social challenge?

Each year in the Netherlands, around 40,000 adults are incarcerated and about 30,000 are released. What’s troubling is that the rate of recidivism two years after release from prison is nearly 50 percent. And the costs of successful reintegration and reduced recidivism rates are high and include enormous amounts of social benefits paid out to previously incarcerated individuals. Multi-pronged approaches are often necessary including programs that address housing needs, employment, mental health and substance abuse issues, and debt settlement. Addressing all of these challenges simultaneously is difficult and often the right incentives are not in place for the outcomes of importance to be at the forefront of decision-making. But SIBs may offer a promising way to meet these hurdles.

Who are the players in the SIB?

In a typical SIB, the players at the table include an outcome funder (government), investors (usually impact investors including foundations), a service provider or providers (usually a non-governmental entity but it can also be public), and the beneficiary population. In addition, there can be external evaluators who assess whether or not the agreed-upon outcome has been achieved; and, in many SIBs, there is also an intermediary party that brings the stakeholders to the table, structures the deal, manage the deal, or conducts performance management for the service provider.

The Dutch SIB for prison recidivism has a total of 10 players not including the beneficiary population. Most interestingly, this deal differs from all four previous SIBs in the Netherlands in that the outcome funder, the Ministry of Security and Justice, is at the national level rather than subnational level—the previous outcome funders were all municipal governments. Notably, less than half of the SIBs in the world have a national-level outcome funder. The Dutch bank ABN Amro, the Start Foundation, and Oranje Fonds are equal investors (and have all invested in previous Dutch SIBs). Three organizations that are part of the Work-Wise Direct Consortium—Exodus Foundation, Restart, and Foundation 180—will provide services to the population in need. Society Impact, an organization supporting social entrepreneurship and innovative financing in the Netherlands, acted as a matchmaker in the transaction by helping to bring all parties to the table. An evaluation arm of the Ministry of Security and Justice and a research entity, Panteia will evaluate whether or not outcomes are achieved.

The beneficiary population includes 150 adults who have been in prison between three and 12 months. There is no targeting based on type of crime, age, or gender and consent must be provided by the participant and the municipality.

What’s at stake?

There are two outcome metrics established in this SIB. In a period of two and half years, the outcome funder will repay investors the principal investment of 1.2 million euros plus a maximum return of 10 percent of the investment (but expected return is around 5 percent) contingent upon: 1) a 25 to 30 percent decrease in the social benefits issued to the previously incarcerated participants (which is estimated to require a 882-month increase in labor force participation by the entire group); and 2) a 10 percent reduction in recidivism among the participants.

Who will benefit?

The beneficiary population

In theory, with all eyes on the target (outcomes), beneficiary populations have a greater chance of success with this results-based financing mechanism compared to traditional input-based financing contracts. The potential for greater collaboration among stakeholders, performance management, and adaptive learning should all bode well for the delivery of the set goals. This could allow for improvements even beyond the targets within the impact bond structure such as improved family life, higher earnings, and increased civic participation.

The outcome funder (and taxpayers)

For the Ministry of Security and Justice, the SIB provides an opportunity to shift to private investors the implementation and financial risk of funding social service programs. If outcomes are achieved, then the ministry repays the investors an amount that represents the value they place on outcome achievement, and if outcomes are not achieved, then they do not pay. What’s more, the ministry could benefit from reduced costs as a result of shifting from remedial to preventive services. Additional cost savings, in particular the reduction in social welfare benefits, and other inherent benefits will be accrued to other government entities as well as society as a whole.

The service providers

There can be multiple benefits for services providers. First, the availability of upfront capital allows them to do their job better. Second, the longer-term (multi-year) contract reduces time spent on grant proposals and allows for more steady funding flows. Third, the SIB can provide an opportunity to strengthen the providers’ systems of data collection. Fourth, it allows the service providers to conduct a rigorous evaluation of their program. Further, SIBs can allow for flexibility and learning-by-doing in the delivery of the social services.

The investors

The three investors in this SIB have an opportunity to earn a financial return of maximum 10 percent if outcomes are successfully achieved. In addition, they benefit from having contributed to the improvement of the lives of the target population and their families. Furthermore, they could generate an impact that goes way beyond the SIB itself. They have the potential to create larger systemic change in the provision of social services by shifting government’s focus away from how services are delivered to which outcomes they want to achieve and by helping to build systems of monitoring and evaluation that allow for systematic assessment of those outcomes.

A way forward

Six years after the implementation of the first SIB for prison recidivism in the United Kingdom, this creative idea has spread to at least 12 other countries with the aim of tackling some of the world’s most intractable social problems. The Netherlands, known globally as a leader on many social and environmental issues, is taking a leading role in the adoption of this mechanism. Moving forward, the rest of the world will be watching to see what lessons can be gleaned from these early experiments as the burden of tough societal issues and potential solutions become increasingly global in nature.

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

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

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

Current SIBs for education globally

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

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

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

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

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

SIBs for education in low- and middle-income countries

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

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

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

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

Event Information

On July 5, the Center for Universal Education at Brookings and the partners of the world’s first development impact bond for education held an online a discussion of the first year’s enrollment and learning results. The impact bond provides financing for Educate Girls, a non-profit that aims to increase enrollment for out-of-school girls and improve learning outcomes for girls and boys in Rajasthan, India. The UBS Optimus Foundation has provided upfront risk capital to Educate Girls and, contingent on program targets being met, will be paid back their principal plus a return by the Children's Investment Fund Foundation. Instiglio, a non-profit organization specializing in results-based financing mechanisms, serves as the program intermediary.

The webinar explored the experiences so far, the factors affecting the initial results, the key learnings, and ways these will inform the development of the programs it moves forward. The partners shared both positive and negative learnings to start a transparent discussion of the model and where, and how, it can be most effective.

Chaired by Emily Gustafsson-Wright, a fellow at the Center for Universal Education, the discussion featured Safeena Husain of Educate Girls, Phyllis Costanza of UBS Optimus Foundation, and Avnish Gungadurdoss of Instiglio. For further background on impact bonds as a financing mechanism for education and early childhood development in low- and middle-income countries, please see the Center for Universal Education’s report.

Further information on the outcome metrics and evaluation design in the Educate Girls Development Impact Bond » (PDF)

Watch a recording of the webinar via WebEx »

Impact bonds, and other RBF mechanisms, require the measurement of outcomes and create an incentive for the service provider to deliver results. Both aspects encourage the service provider to improve performance management and, ultimately, the quality of the service. Because governments or donors only pay if results are achieved, funding is not wasted on unsuccessful programs. Furthermore, the guarantee of value can encourage governments or donors to explore new, potentially high-impact interventions, instead of continuing to fund low-impact programs.

Impact bonds may also have other positive spillover effects on development. For example, the involvement of private intermediaries and investors may also help grease the wheels of new government contracting systems or provide a way for the business sector to engage in a social issue.

However, despite the enormous potential of impact bonds, there are also some considerable limitations and challenges associated with their implementation. Three criteria are necessary to even consider the use of an impact bond:

1. The ability of the funder to pay for outcomes rather than inputs
2. Sufficient evidence that a given intervention and service provider will be able to deliver a stated outcome for an investor to take the risk of engaging
3. Meaningful outcomes (i.e., related to the SDG indicators) that can be measured within a time frame suitable to both investors and outcome funders

In addition to these three critical criteria, the ability for the key stakeholders to collaborate with one another has enormous implications for getting an impact bond off the ground. These factors contribute to the complexity and high transaction costs associated with impact bonds (relative to traditional input-based financing). Given these constraints, impact bonds are suited to areas where service providers need flexibility and where risk factors discourage direct funding but are minor enough to attract impact investors.

Thus far, these criteria have limited impact bonds to particular subsectors, regions, and investor types and have restricted their scale (both monetarily and in terms of beneficiary numbers). Impact bonds have been developed in fields with complex service inputs and simple outcomes, and for services that cater to particularly underserved or marginalized populations. The scale of impact bonds has been limited—the majority serve fewer than 2,000 individuals, and the largest reaches less than 16,000. Investors have been limited to philanthropic or impact investors rather than commercial investors. However, all impact bonds thus far have supported interventions that have at least some evidence of effectiveness.

Given trends in the global impact bond market, what role do impact bonds have in fulfilling the financing needs to achieving the SDGs, in particular in developing countries?

Impact bonds are likely to be improve effectiveness of financing rather than increasing volume. They also serve an important role in financing mid-scale interventions with some evidence of effectiveness. While they may not be best suited to large-scale financing of social services, they have the potential to affect large-scale systemic shifts in how governments and service providers think about service provision because they build cultures of monitoring and evaluation, encourage investments in prevention, and incentivize collaboration, all of which are essential to achieving the SDGs.

On July 5, the results from the first year of the world’s first development impact bond (DIB) for education in Rajasthan, India, were announced. The Center for Universal Education hosted a webinar in which three stakeholders in the DIB shared their perspective on the performance of the intervention, their learnings about the DIB process, and their thoughts for the future of DIBs and other results-based financing mechanisms.

Approximately 3 million girls ages 6 to 13 were out of school in India according to most recent data, 350,000 of which are in the state of Rajasthan. Child marriage is also a large issue in the state; no state-specific data exists, but nationwide 47 percent of girls ages 20 to 24 are married before age 18. According to Educate Girls, a non-governmental organization based in Rajasthan, girls’ exclusion is primarily a result of paternalistic societal mindsets and traditions. Given the evidence linking education and future life outcomes for girls, this data is greatly concerning.

The DIB finances a portion of the services provided by Educate Girls, which has been working to improve enrollment, retention, and learning outcomes for girls (and boys) in Rajasthan since 2007. The organization trains a team of community volunteers ages 18 to 30 to make door-to-door visits encouraging families to enroll their girls in school and to deliver curriculum enhancement in public school classrooms. Their volunteers are present in over 8,000 villages and 12,500 schools in Rajasthan. The DIB was launched in March of 2015 to finance services in 166 schools, which represents 5 percent of Educate Girls’ annual budget. The DIB is intended to be a “proof of concept” of the mechanism using this relatively small selection of beneficiaries.

The investor in the DIB is UBS Optimus Foundation, who has provided $238,000 in working capital to fund the service delivery. ID Insight, a non-profit evaluation firm, will evaluate the improvement in learning of girls and boys in the treatment schools in comparison to a control group and will validate the number of out of school girls enrolled. The Children’s Investment Fund Foundation serves as the outcome funder, and has agreed to pay UBS Optimus Foundation 43.16 Swiss francs ($44.37) for each unit of improved learning and 910.14 francs ($935.64) for every percentage point increase in the enrollment of girls out of school. Instiglio, a non-profit impact bond and results-based financing intermediary organization, provided technical assistance to all parties during the design of the DIB and currently provides performance management assistance to Educate Girls on behalf of UBS Optimus Foundation. 

The outcomes will be calculated in 2018, at the end of three years; however, preliminary results for the year since the launch of the DIB (representing multiple months of door-to-door visits and seven weeks of interventions in the classroom) were released last week. The payments for the DIB were structured such that the investor, UBS Optimus Foundation, would earn a 10 percent internal rate of return (IRR) on their investment at target outcome levels, which were based on Educate Girls’ past performance data. The table below presents the metrics, target outcome level, year-one result, and the progress toward the target. 

Table 1: Educate Girls DIB Results from first year of services

The DIB was challenging to implement and required DIB stakeholders to be resourceful.

First, the reliability of government data was a challenge, which necessitated flexibility in the identification of the target population and metrics. Second, given the number of stakeholders engaged and the novelty of this approach, the transaction costs were higher than they would have been for a traditional grant. This meant that strong and regular communication was crucial to the survival of the project.

The role of the outcome funder and investor were significantly different versus a grant.

The outcome funder spent more resources on defining outcomes, but spent fewer resources on managing grant activities. The investor utilized risk management and monitoring strategies informed by the activities in their commercial banking branch, which they have not used for other grants.

The DIB has changed the way the service provider operates.

In the video below, Safeena Husain from Educate Girls’ highlights the ways in which financing a portion of their program through a DIB differs from financing the program through grants. Safeena describes that in a grant, performance data is reported up to donors, but rarely makes it back down to frontline workers. The DIB has helped them to develop mobile dashboards that ensure performance data is reaching the front line and helping to identify barriers to outcomes as early as possible.

Based on the learnings from the implementation of the first DIB for education, this tool can be used to improve the value for money for the outcome funder and strengthen the performance management of a service provider. As the panelists discussed in the webinar, DIBs and other outcome-based financing mechanisms can help differentiate between organizations that are adept at fundraising and those that excel at delivering outcomes. However, service providers must be sufficiently prepared for rigorous outcome measurement if they plan to participate in a DIB; otherwise the high-stakes environment might backfire. In our research, we have closely examined the design constraints for impact bonds in the early childhood sector.

There are countless lessons to be learned from the stakeholder’s experience in the first DIB for education. We applaud the stakeholders for being transparent about the outcomes and true challenges associated with this mechanism. This transparency will be absolutely critical to ensure that DIBs are implemented and utilized appropriately moving forward.

High unemployment, the Gulf oil spill, and mounting fiscal worries clouded our July 4th celebrations. Yet, one patriotic highlight in President Obama's first year was bipartisan support of the Serve America Act, which expanded opportunities for Americans of all ages to meet urgent domestic challenges through community and national service. In the process, Americans who otherwise would have been unemployed are engaging in productive work, at low cost to taxpayers, to meet problems like the high school dropout epidemic. Similar efforts can expand volunteer service abroad.

As President Obama made clear in his first major policy speech to the international community in Cairo, Egypt, the world must unleash its collective imagination through social innovators, entrepreneurs and citizen diplomats to contribute to global development, respond to natural disasters, and initiate interfaith action to tackle preventable diseases like malaria. The moment is now.

Fifty years after John F. Kennedy's call for a Peace Corps, we might reconsider our obligations to meet needs around the world. President Kennedy said that the Peace Corps would be serious when 100,000 Americans were serving abroad each year. Although the Peace Corps is America's flagship international service program, today less than 8,000 volunteers are spread across 77 countries. Since 1961, America has sent and returned nearly 200,000 volunteers, a number significantly less than the millions Kennedy envisioned by his Peace Corps' 50th year. Had the Peace Corps grown at the rate Kennedy envisioned, the course of our country's foreign policy, diplomatic strategy and global awareness over the past 50 years would be very different.

Last week, ServiceWorld, an international service coalition of more than 300 non-profits, colleges, corporations and faith-based institutions, released a bold plan to meet President Kennedy's goal of mobilizing 100,000 Americans every year - and one million over a decade - to serve abroad. The proposed Sargent Shriver International Service Act calls for doubling Peace Corps to 15,000 by 2015, lowering costs per volunteer, and forging partnerships with the hundreds of non-profits that have emerged since its creation. Doubling of the Peace Corps is a goal that both Presidents George W. Bush and Barack Obama have embraced.

Volunteers for Prosperity will tap 75,000 skilled Americans for flexible term assignments to work on international challenges Congress and many Presidents have made priorities, such as HIV/AIDS, malaria, and clean water. Global Service Fellows will enable Members of Congress to nominate top talent from their districts and states, as they do for the military academies today, to serve for up to one year abroad. Together with the Peace Corps, these efforts will meet John Kennedy's goal of mobilizing 100,000 Americans to serve abroad each year.

The Service World plan focuses on multi-lateral partnerships and exchanges so Americans serve side-by-side with people from other countries, including in the United States. Under the plan, both skilled and non-skilled volunteers of all classes and ages will serve abroad for both long- and short-term assignments and veterans have specific opportunities to utilize their many skills in a civilian capacity. We believe an inclusive and mobile model of volunteering will contribute to the development of a new generation of global leaders, provide skills for U.S. citizens to compete in a global economy, increase international awareness, strengthen development, and improve the image of America abroad.

Volunteer service by people of all nations should become a common strategy in meeting pressing challenges in education, health, the environment, agriculture and more. By having national policies that engage more Americans in international service at every stage of life, we will be sharing our most valuable assets - the skills, talents and perspectives of our people - to make a significant difference in communities and nations throughout the world.

INTRODUCTION

Over the past decade, the focused attention of African nations, the United States, U.N. agencies and other multilateral partners has brought significant progress toward achievement of the Millennium Development Goals (MDGs) in health and malaria control and elimination. The potential contribution of these strategies to long-term peace-building objectives and overall regional prosperity is of paramount significance in sub-regions such as the Horn of Africa and Western Africa that are facing the challenges of malaria and other health crises compounded by identity-based conflicts.

National campaigns to address health Millennium Development Goals through cross-ethnic campaigns tackling basic hygiene and malaria have proven effective in reducing child infant mortality while also contributing to comprehensive efforts to overcome health disparities and achieve higher levels of societal well-being.

There is also growing if nascent research to suggest that health and other humanitarian interventions can result in additional benefits to both recipients and donors alike.

The social, economic and political fault lines of conflicts, according to a new study, are most pronounced in Africa within nations (as opposed to international conflicts). Addressing issues of disparate resource allocations in areas such as health could be a primary factor in mitigating such intra-national conflicts. However, to date there has been insufficient research on and policy attention to the potential for wedding proven life-saving health solutions such as malaria intervention to conflict mitigation or other non-health benefits.

Downloads

• malaria africa caprara

BPEA co-editor Justin Wolfers describes new research that found: people dropped out of the labor force before the recession started; there are better ways to forecast unemployment; homebuyer expectations helped inflate the bubble; the U.S. is not actually as politically polarized as most people think; central banks’ recent experiments with capital controls haven’t delivered results; and the U.S. is making inroads fighting poverty.

Video

• U.S. Not Actually as Politically Polarized as Most Think
• Poverty Has Fallen Much More than Previously Thought
• New Unemployment Model Can Outperform Forecasters
• Perceptions Matter: Homebuyer Expectations Helped Inflate Bubble
• Central Banks’ Recent Experiments with Capital Controls Haven’t Delivered Results

Editor's Note: A new academic study by David Rothschild and Justin Wolfers concludes that poll questions about expectations—which ask people whom they think will win—have historically been better guides to the outcome of presidential elections than traditional questions about people’s preferences. David Leonhardt of The New York Times conducted an interview with Wolfers by e-mail, focusing on the implications of the study for current presidential polls.

David Leonhardt:In the article, I discussed only briefly the expectations polls about the 2012 race, and some of the Twitter feedback was eager for more. By my count, there have been five recent major polls asking people whom they expect to win — by ABC/Washington Post, Gallup, Politico/George Washington University, New York Times/CBS News, and the University of Connecticut. There is also sixth from Rand asking people the percentage chances they place on each candidate winning. How consistent are the polls?

Justin Wolfers: There’s a striking consistency in how people are responding to these polls. The most recent data are from the Gallup poll conducted Oct. 27-28, and they found 54 percent of adults expect Obama to win, versus 34 percent for Romney. Around the same time (Oct. 25-28), there was a comparable New York Times/CBS poll in which 51 percent of likely voters expect Obama to win, versus 34 percent for Romney.

But these results aren’t just stable across pollsters, they’ve also been quite stable over the past few weeks, even as the race appeared to tighten for a while. Politico and George Washington University ran a poll of likely voters on Oct. 22-25, finding 54 percent expect Obama to win, versus 36 percent for Romney. The University of Connecticut/Hartford Courant poll of likely voters got a somewhat higher share not venturing an answer, with 47 percent expecting Obama to win versus 33 percent for Romney. Finally, the ABC/Washington Post poll of registered voters run Oct. 10-13 found 56 percent expect Obama to win, compared to 35 percent for Romney.

I’m rather surprised by the similarities here – across time, across pollsters, across how they word the question, and across different survey populations (likely voters, registered voters, or adults) – but I suspect that is part of the nature of the question. You just don’t see the noise here that you see in the barrage of polls of voter intentions, which are extremely sensitive to all of these factors.

I always throw out the folks who don’t have an opinion, and count the proportions as a share of only those who have an opinion. By this measure, the proportion who expect Obama to win is: 61 percent (Gallup), 60 percent (The New York Times), 60 percent (Politico), 59 percent (Hartford Courant), 62 percent (ABC). The corresponding proportions who expect Romney to win are: 39 percent, 40 percent, 40 percent, 41 percent and 38 percent. Taking an average across all these polls: 60.3 percent expect Obama to win. Or if you prefer that I focus only on the freshest two polls, 60.7 percent expect him to win.

DL: The results do seem have tightened somewhat since the first debate, which Romney was widely seen to have won, right? Do the patterns — or lack of patterns — in the numbers help solve the issue of what most people are thinking of when they answer the expectation question: Private information (their friends’ voting plans, yard signs in their neighborhood, etc.) or public information (media coverage, speeches, etc.)?

JW: The results of the polls of voter intentions seem to have tightened a bit since the first debate. There’s an interesting school of thought in political science that basically says: voters are pretty predictable. But they don’t think too hard about how they’re going to vote until right before the election. So what happens is that public opinion through time just converges to where it “should” be. And viewed through this lens, the first debate was just an opportunity for people who really should always have been in Romney’s camp to figure out that they’re in Romney’s camp.

So why did the expectations polls move less sharply than intentions polls? One possibility is that your expectations are explicitly forward-looking, and perhaps people saw the race tightening as they saw that some of the support for Obama was a bit soft. Let me put this another way: There are two problems with how we usually ask folks how they plan to vote. First, the question captures the state of public opinion today, while the expectations question effectively asks you where you think public opinion is going. And second, polls typically demand a yes or no answer, when the reality may be that we know that our support is pretty weak, and it may change, or we aren’t even sure whether we’ll turn up to the polls. The virtue of asking about expectations is that you can think about each of your friends, and think not just about who they’re supporting today, but also whether they may change their minds in the future.

I worry that it sounds a bit like I haven’t answered your question, but that’s because I don’t have a super-sharp answer. If I had to summarize, it would be: expectations questions allow you to think about how the dynamics of the race may change, and so they are less sensitive to that change when it happens.

DL: Based on your research and the current polls, what does the expectations question suggest is the most likely outcome on Tuesday?

JW: If a majority expects Obama to win, then right there, it says that I’m forecasting an Obama victory.

But by how much? Here’s where it gets tricky. The fact that 60 percent of people think that Obama is going to win doesn’t mean that he’s going to win 60 percent of the votes. And it doesn’t mean that he’s a 60 percent chance to win. Rather, it simply says that given the information they have, 60 percent of people believe that Obama is going to win. Can we use this to say anything about his likely winning margin?

Yes. I’ll spare you the details of the calculation, but it says that if 60.3 percent of people expect Obama to beat Romney, then we can forecast that he’ll win about 52.5 percent of the two-party vote. That would be a solid win, though not as impressive as his seven-point win in 2008.

The proportion who expect Obama to win right now looks awfully similar to the proportion who expected George W. Bush to win in a Gallup Poll at a similar point in 2004. Ultimately Bush won 51.2 percent of the two-party vote.

Right now, Nate Silver is predicting that Obama will win 50.5 percent of the popular vote, and Romney 48.6 percent. As a share of the two-party vote, this says he’s forecasting Obama to win 51 percent of the vote. Now Silver’s approach aggregates responses from hundreds of thousands of survey respondents, while I have far fewer, so his estimate still deserves a lot of respect. I don’t want to overstate the confidence with which I’m stating my forecast. So let me put it this way: My approach says that it’s likely that Obama will outperform the forecasts of poll-based analysts like Silver.

DL: We’ll find out soon enough. Thanks.

The headlines seem pretty good. Unemployment fell a tick to 7.3 percent. And jobs growth continued, with payrolls expanding by 169,000 in August, which is just shy of the 175,000 new jobs that analysts were expecting.

But beneath the headline: blech!

The most important news was the revisions to what we had previously thought was a healthy and perhaps self-sustaining recovery. Instead, jobs growth in July was revised from 162,000, to a weak 104,000, and June was also revised downward. Taken together, this month's revisions means we've created 74,000 fewer jobs than previously believed. And the previous jobs report subtracted another 26,000 jobs through revisions. Moreover, for reasons that remain a mystery, revisions have tended to be pro-cyclical, meaning that the healthy recovery we thought we were having might have been expected to yield further upward revisions. All this means that analysts are hastily revising their views.

The other bad news comes from the household survey, where employment fell 115,000, leading the employment-to-population ratio to decline by 0.1 percentage points. So the decline in the unemployment rate isn't due to folks getting jobs; instead, it's due to people dropping out of the labor force.

I have two simple metrics I use to measure the "underlying" pace of jobs growth. The first puts 80% weight on the (more accurate) payrolls survey, and 20% weight on the noisier household survey. That measure suggests employment grew by only 112,000 in August. The alternative is to focus on the 3-month average of payrolls growth, which suggests we're creating slightly around 148,000 jobs per month.

Bottom line: This report says that we're barely creating enough jobs to keep the unemployment rate falling from its current high levels. Policymakers have been looking for a signal that the recovery has become self-sustaining. This report doesn't provide it. And until we're confident that the recovery will keep rolling on, we should delay either any monetary tightening, further fiscal cuts, and definitely postpone the legislative shenanigans that Congress is threatening.

ABSTRACT

The AIDS pandemic in sub-Saharan Africa puts increasing pressure on the buffer capacity of low- and middle-income households without access to health insurance. This paper examines the relationship between health shocks, insurance status and health-seeking behaviour. It also investigates the possible mitigating effects of insurance on income loss and out-of-pocket health expenditure. The study uses a unique dataset based on a random sample of 1769 households and 7343 individuals living in the Greater Windhoek area in Namibia. The survey includes medical testing for HIV infection which allows for the explicit analysis of HIV-related health shocks. We find that the economic consequences of health shocks can be severe for uninsured households even in a country with a relatively well-developed public health care system such as Namibia. The uninsured resort to a variety of coping strategies to deal with the high medical expenses and reductions in income, such as selling assets, taking up credit or receiving financial support from relatives and friends. As HIV-infected individuals increasingly develop AIDS, this will put substantial pressure on the public health care system as well as social support networks. Evidence suggests that private insurance, currently unaffordable to the poor, protects households from the most severe consequences of health shocks.

Read the full article on Oxford Journals »