RSS feeds from globalization research centers

CGD Event: Health-Wealth Trade-offs: Effects of Mineral Mining in Developing Countries

Health-Wealth Trade-offs: Effects of Mineral Mining in Developing Countries 12/18/14

Please join us for a brown-bag lunch event featuring Jan von der Goltz’s presentation of his recent paper with Prabhat Barnwal assessing the health and wealth effects of mines on nearby communities. Their paper is the first extensive analysis to use microdata from communities near about 800 mineral mines in 44 developing countries. The authors find that mining communities enjoy a substantial medium-term rise in asset wealth, but encounter substantial health trade-offs: a ten percentage point increase in anemia among adult women and a five percentage point increase in the prevalence of stunting in young children.

Von der Goltz and Barnwal’s research is consistent with prior evidence linking the health impacts of mines to metal toxicity and, in particular, exposure to high levels of lead. Their assessment finds health impacts only near mines of a type where metal pollution is to be expected, and it finds no systematic evidence of health effects that are not associated with exposure to metal pollution. Both the wealth benefits and health costs are strongly concentrated in the immediate vicinity (≤ 5km) of a mine. To demonstrate that the observed health impacts are due to pollution, they developed three difference-in-difference tests tailored to the known association of certain mine types with heavy metal pollution, and to the pathophysiology of lead toxicity. The results add much needed data to the literature on health impacts near industrial operations in developing countries.

Development blog: Up and Down the SIB Road: How Far Have We Come?

There is no denying that interest in Social Impact Bonds (SIBs) is steadily growing: with investments coming from big banks like Goldman Sachs and Bank of America Merrill Lynch and approximately 26 SIBs implemented in industrialized countries across the globe (see below for a more detailed listing), an evidence base is starting to accumulate on what works and what doesn’t. So far, the evidence on Social Impact Bonds – that they enable innovation and improve service delivery through better use of data – suggests that this approach has huge potential for improving international development programs.

CGD has been exploring through its work on Development Impact Bonds the ways in which the SIB model, first piloted in the UK, could be tested in developing countries and could create a better business model for the way programs operate.  While DIBs are a new concept – so far only one has been launched in June of this year with service provision to begin next year – the SIB market has been gradually growing since the launch of the first SIB in 2010. The evidence gathered over the next few years will determine whether SIBs can catapult to being a standard option for funding programs in the social sectors.

This was part of the discussion at a launch event hosted at Bank of America Merrill Lynch (BAML) in London on the 31st  of October, where BAML and Bridges Ventures presented their joint publication “Choosing Social Impact Bonds – A practitioner’s guide”. The report shares lessons learned during SIB implementation processes over the last four years. Although no SIBs have been completed and fully evaluated yet, clear emerging lessons arise from several pilots that can be applied to future SIBs and DIBs. We have discerned two key takeaways: 

1) SIBs increase the scope for innovation in service delivery

A focus on outcomes and a flexible funding model are proving to trigger an increase in the scope for innovation. The BAML-Bridges Ventures report highlights two examples from the UK in particular: In Greater Manchester, the UK Department for Work and Pensions Innovation Fund has commissioned a SIB with the “Teens and Toddlers” program. Although Teens and Toddlers has already developed a track record for increasing self-esteem and tackling disengagement among youths by pairing teenagers with toddlers, its reach and impact expanded under the SIB, as Social Finance UK, the intermediary in this case, further discuss in this report of the SIB’s first year.

The Teens and Toddlers program initially involved working with teenagers for 18 weeks, through nursery placements and personal development group work to help them acquire a sense of direction, positive relationships and responsibility. For the SIB in particular, a second stage was added which applies skills teenagers have learned to school behavior and academic studies, and tracks teenagers’ progress through to their secondary school exams. In Stage 2, students set learning and behavioral goals and address issues that could impact their academic performance. The SIB provided sufficient room to establish and innovate the program to include specific educational outcomes; in addition, the flexible funding model allowed the provision of a sub-contractor who would tutor students in English and in Maths to guarantee the best outcomes.   

The second example, in Essex, implemented by “Action for Children” together with Social Finance UK and Essex County Council, utilizes the Multi – Systemic Therapy (MST) intervention method. This method is applied to prevent children aged 11-17 in Essex who show anti-social or offending behavior from going into care by providing therapeutic support to them and their families, throughout weekends and overnight where necessary. The intervention focuses on positive behaviors and strengths of the young person and family to encourage long-lasting change. Like “Teens and Toddlers”, MST is an evidence-based program with a good track record and global footprint, but it had not been implemented on a wide scale in the UK. When the SIB was developed, Essex County Council was hesitant to fund a new and intensive program upfront while resources for children’s services were constrained. Under the SIB, investors provided the financing for a five and half year intervention program that aims to work with 380 young people, while Essex County agreed to only paying for successful results. The SIB also includes an “Evolution Fund”, which is a discretionary fund that gives the NGO service provider the flexibility to incorporate new services into the program, if needed, to address individuals’ needs (see this report for more details about how the SIB is working).

The most important aspect of increased innovation under SIBs is therefore that local service providers are implementing changes themselves, but receiving flexible funding in order to be able to do so. This is also true in the case of DIBs. According to Robin Horn, Head of Education at the Children’s Investment Fund Foundation (CIFF), the outcome funder for the first DIB, “the local service provider has the main say and outcomes are not just based on the knowledge of funders.”  

2) Better data collection leads to improving service delivery

SIBs are also showing that better data management systems - implemented to ensure objective validations of outcomes - have led to an improvement in service delivery. David Robinson, chair of the One Service Social Impact Bond Advisory Group for the Peterborough SIB, explained that following the SIB model has planted an incentive structure for an improved dataset service. Typically, service providers or intermediaries who manage service providers develop improved data systems to track performance in a timely and accurate way. For example, during the course of the intervention period of the Peterborough SIB, it became clear that the cohort’s reoffending behavior greatly depended on unresolved mental health issues. This led to the implementation of mental health services, which were not a part of the original package of interventions. Effective use of data - or learning by measuring –proves to be at the heart of things.

Another recent example from the Center for Employment Opportunities (CEO), the service provider of the SIB to reduce recidivism in the State of New York, shows a similar development: data is collected regularly on an individual level and, as a result of weekly calls between CEO and parole officers who identify eligible individuals, a new forum for sharing data materialized and once again services were able to more quickly respond to peoples’ needs. The report highlights interviews with people directly involved who say that these improved systems and improved coordination have been transformative for the government and the service provider.

These key takeaways are a good reminder about why partners from various sectors came together to implement SIBs in the first place. As the BAML guide mentions, the cross-sector partnerships prove to be one of the most encouraging aspects of a SIB: they have created an on-going dialogue about the best way to tackle pressing socio-economic issues, with each partner doing what it does best. 

The DIB market is younger, but lessons are beginning to emerge from early experiences in the development of DIBs too; a range of partners who have been involved will be taking stock at a conference in London on December 10th.

The fact that SIB partners are taking advantage of expanded space for innovation and improved data collection systems is a good reminder that we can improve development programs on these dimensions too, and one reason why we hope to see DIBs quickly implemented.

Authors: Catalina Geib View Profile Rita Perakis View Profile

Development blog: How Germany Copes with REDD+ Dilemmas

One of the most attractive features of the Cash-on-Delivery approach to development assistance is precisely that payments are made (only) for performance against agreed indicators of outcomes.  If desired outcomes are not achieved by the recipient country, the donor country doesn’t pay.  But this very feature could create one of two very different dilemmas for donors: 

  1. What if donors offered a financial reward for performance, and prospective recipient countries were unable to overcome the political and technical obstacles necessary to claim it?
  2. Or what if so many countries came forward to claim the reward, demand exceeded the funding available?

A new CGD Working Paper, “The Politics of German Finance for REDD+” by Dr. Till Pistorius and Laura Kiff of UNIQUE Forestry and Land Use GmbH, lets us eavesdrop on candid conversations with experts in the German aid establishment about these dilemmas in the context of payment for reducing deforestation.

A strong tradition of finance for forests…

To understand German support for forests internationally, you have to go back a few centuries.  Just over 300 years ago in 1713, Hans Carl von Carlowitz invented modern forestry as a way to deal with rapid deforestation and wood shortages caused by the mining industry and urbanization in Saxony. According Pistorius and Kiff, an appreciation of the timber and non-timber benefits that come from sustainable management of forest resources has resulted in “strong emotional ties between Germans and their forests” that prevail until today. 

With domestic deforestation no longer a problem, over the last three decades Germans have extended these ties to tropical forests. In addition to numerous long-standing bilateral assistance programs in forest-rich countries, Germany has been a key participant in multilateral forestry initiatives dating back to the Tropical Forestry Action Plan (TFAP) in 1985, and the Pilot Program to Preserve the Brazilian Rain Forest launched in 1992. 

Indeed, at CGD-sponsored event on climate finance last year, Artur Cardoso de Lacerda of Brazil’s Ministry of Finance singled out German support for capacity building over the long haul as a contributor his country’s extraordinary performance in reducing deforestation:  

To be very honest to Brazil being in the position that we are now in terms of governance and capacity, we have received a lot of external support. Just one example—Germany has been supporting Brazil in terms of improving its management capacity in the forest sector for more than thirty years. So although we have a lot of responsibility for the results we have, we have to acknowledge that this support has been really instrumental to put us in this position nowadays.

Germany has now embraced REDD+ as a promising mechanism to realize a broad range of benefits from sustainable forest management, including conservation of biodiversity and ecosystem services as well as reduction of forest-based climate emissions. According to Pistorius and Kiff, controversy over REDD+ has been virtually nonexistent in the domestic political arena in Germany.  With the exception of a brief NGO-generated debate on forest offsets and safeguards in the run-up to the climate negotiations in Copenhagen in 2009, a broad consensus has supported international forest protection as a climate mitigation strategy.  As a result, debate about REDD+ has been limited to an “experts’ discourse” rather than broader discussions in the Parliament or the press.

…but recognition of limited results creates openness to results-based finance

One of the reasons that REDD+ appeals to German experts is their recognition of the limited effectiveness of traditional models of development assistance in the forestry sector.  With perhaps the important exception of Brazil noted above, those models have not succeeded in helping partner countries slow deforestation.  Performance-based finance offers the promise of a more effective approach.  The following are statements from two experts interviewed for the study:

German cooperation has supported sustainable forest use and development for 30 years, and its success has been limited. Now there is a hope that there is a shifting paradigm with REDD+ because of its performance-based payments. I think this is one of the most attractive elements, as it is a new dimension of international cooperation where the partner country is more responsible. In this sense it’s based on performance and not just development aid without any conditions.

The concept of results-based payments is very attractive. Even in traditional ODA we probably need to head in this direction, so that it will require more ownership and responsibility from the countries.… It may be a painful process for some of countries, but I don’t see many alternatives because with the traditional ODA, what we did for 30 years, the success was limited. I think it would not be wise to go back to the old system.

In order to pilot the feasibility of results-based finance to reduce deforestation—and maintain the confidence of forest-rich countries and subnational jurisdictions while climate negotiations and the establishment of multilateral funding mechanisms drag on— Germany established the REDD+ Early Mover (REM) program.  The REM program’s recent conclusion of an agreement with the state of Acre in Brazil is a welcome addition to the still-small “n” in the universe of REDD+ experiments at scale that will help us all learn the degree to which trees can grow on money.

What if we build it and nobody comes?

Long-standing, deep engagement of German experts in the forestry sectors of developing countries supports an especially nuanced knowledge of the governance challenges that would have to be addressed in order to reduce deforestation.  This history of “hands on” involvement has bred skepticism regarding the degree to which “hands off” performance-based funding will be sufficient to overcome such challenges, especially in countries in sub-Saharan Africa where forest management capacity is low. 

And indeed, the REM program has discovered that the number of “early movers”—countries or subnational jurisdictions positioned to take advantage of finance for verified reductions in forest-based emissions—is fewer than initially anticipated. Further, the process of achieving “readiness” is proving to take longer than expected.  According to one expert:

Just providing a chunk of money will not resolve anything. REDD+ from a financing perspective is new, but all the underlying issues have been linked with the objectives of development assistance and bilateral cooperation … ; yet they still remain important issues, and you need all of these components to put together a workable solution.

What if we’re not in a position to show them the money?

Paradoxically, some German experts also have anxiety about what would happen if too many countries achieved REDD+ readiness (and therefore eligibility for results-based, or “phase III” finance) too soon.  One expert said:

I have an uncomfortable feeling about the availability of funding for phase III, and I foresee already that REDD+ countries may become very impatient and frustrated if they see that the funding we promised a few years ago for phase III is not yet available.

Another expert commented:

In Warsaw we closed REDD+ negotiations on the REDD+ rule book, so the rules are there now, and they can be implemented. Like in Brazil—they did it. However, if more countries follow their example they will put us, the donors, in a very uncomfortable situation. They will say, so we are here now, where is the predictable stable finance you promised for result-based payments?

But maybe the two dilemmas do not constitute a paradox after all.  According to Heru Prasetyo, head of Indonesia’s new REDD+ Management Agency, the prospect of results-based finance may induce countries to move more quickly toward readiness in order to get that “pot of gold at the end of the rainbow.”  This would suggest that Germany’s “both/and” approach makes sense—putting money on the table for results-based finance could complement and improve the effectiveness of traditional capacity-building support.

Having lots of countries successfully reduce deforestation would be a really good problem for REDD+ donors to have, but how will they fulfill their commitments to reward those reductions? Donors could step up their pledges for results-based finance this week at UNFCCC COP 20 in Lima, and in the run-up to COP 21 in Paris next year, to avoid disappointment. If not, we may see forest countries begin to drive the pressures for donors to perform by outpacing pledges currently on the table. 

Authors: Frances Seymour View Profile

CGD Publication: The Politics of German Finance for REDD+ - Working Paper 390

The Politics of German Finance for REDD+ - Working Paper 39012/4/14

The concept of Reducing Emissions from Deforestation and Forest Degradation (REDD+) and its framing of forest protection as a climate mitigation approach mark a clear paradigm shift – after decades of up-front financing of traditional ODA projects REDD+ follows the logic of ex-post payments for measured and verified performance within much larger jurisdictions. 


Development blog: Norway’s “Rainforest Billions”: How Did the Stars Align?

Seven years ago at the 2007 climate talks in Bali, then Norwegian Prime Minister Jens Stoltenberg shocked the world by pledging $2.5 billion over the next five years to reduce tropical deforestation. Since then, as described in a recent CGD Working Paper, “The State of REDD+ Finance,” Norway has remained the 10 billion kroner gorilla when it comes to putting money on the table for REDD+. As illustrated in the figure below, Norway’s pledges surpass those of the next five countries combined.

The 10 billion kroner gorilla: Norway pledges more for REDD+ than next five countries combined
Pledges for REDD+ 2006 – March 2014

Last month, we released a paper and accompanying blog detailing the challenges of climate politics, budget austerity, and aid rules that constrain REDD+ finance from the United States. How has Norway avoided such constraints? We also released a paper and blog reviewing the political opposition generated by a proposal to include international forests offsets in California’s cap-and-trade program. By contrast, why has Norway’s finance of REDD+ provoked so little controversy in the domestic political arena?

A new CGD Working Paper, “Climate Policy Constraints and NGO Entrepreneurship: The Story of Norway’s Leadership in REDD+ Financing,” by Erlend A. T. Hermansen of the CICERO Center for International Climate and Environmental Research–Oslo and Sjur Kasa of Hedmark University College, answers these questions and many more.

Lack of political, financial, and bureaucratic constraints

Hermansen and Kasa illuminate how the stars aligned to support Norway’s initial “rainforest billions” commitment, and to maintain that support over the last seven years, through a change in government last year. In short:

  • There was (and is) overall consensus across the political spectrum on the importance of taking action on climate change.
  • The limited options for low-cost domestic emission reductions made investment in reducing emissions from tropical deforestation attractive to a range of constituencies.
  • A growing economy, combined with a target of 1 percent of Gross National Income (GNI) for overseas development assistance (ODA), allowed the new rainforest commitment to be incorporated into the aid budget, thus circumventing the fiscal conservatism of the largest political party and the Ministry of Finance. Framing the commitment as performance-based finance also increased its palatability across the political spectrum.
  • The initiative was championed by Erik Solheim, who from 2007 was simultaneously playing the roles of Minister of Environment and Minister of International Development. By creating a new Climate and Forests Secretariat under the Ministry of Environment, the Norwegian International Forests and Climate Initiative (NICFI) was able to bypass the “cautiousness”(and many of the norms) of the Norwegian Agency for Development Cooperation (Norad).
NGOs as policy entrepreneurs

But the stars did not align all by themselves. As tipped in the title of their paper, Hermansen and Kasa emphasize the role of NGOs as policy entrepreneurs in generating and sustaining the rainforest billions commitment.

In 2007, the leadership of Friends of the Earth–Norway and the Rainforest Foundation Norway saw a window of opportunity as climate change rose on the domestic and international political agendas. Friends of the Earth–Norway proposed a crosspolitical “climate settlement,” leveraging the desires of the ruling parties and the opposition to show leadership on the climate issue.

The NGOs also linked their proposal to international developments, mobilizing support from the Brazilian Minister of Environment Marina Silva and civil society leaders from Brazil for prospective Norwegian funding for reduced deforestation. (For more on parallel developments in Brazil during this period and the country’s remarkable success in reducing deforestation, see the background paper by Sergio Abranches and associated blog.)

And by providing legitimacy, NGO support for the initiative might also help explain the relative absence of domestic controversy over NICFI, even in the face of concerns about corruption and safeguards in the context of REDD+ implementation described in the paper. The authors speculate that NICFI’s “very generous funding for civil society projects” channeled through Norad—from which CGD as well as Norwegian NGOs have benefited—might also have dampened criticism.

Looking ahead

Hermansen and Kasa conclude that domestic political support is sufficiently robust that NICFI is likely to be a “centerpiece” of Norwegian climate policy for the foreseeable future. Ironically (and appropriately), the continuation of NICFI will be more dependent on political developments in partner countries than at home in Norway. Setbacks in the fight against deforestation in Brazil and Indonesia in particular could “undermine NICFI, and certainly make the planned future spending of Norway’s rainforest initiative difficult to achieve.”

Let’s hope that the stars remain aligned in the heavens above Norway as well as across the skies of forest-rich countries in the tropics for effective partnerships to reduce deforestation.

Authors: Frances Seymour View Profile

Development blog: The ADB Says Poverty Is Rising in Asia: I Have My Doubts

Would you believe that half of Asia lives in poverty and the absolute number is rising? That’s what the new Key Indicators report by the Asian Development Bank (ADB) would have you believe—49.5 percent in 2010, to be precise, with a poverty count of 1.8 billion, up from 1.6 billion in 2005.

This is surprising. Indeed, it runs counter to every other assessment I have seen.  Absolute approaches to measuring poverty over a very wide range of poverty lines (including $1.25 a day) have shown a decline in Asia’s poverty measures. And (weakly) relative poverty measures also show declining poverty rates, as is shown here. It takes a marked upward revision in the real value of the poverty line over time to deliver rising poverty in Asia. This calls for a closer inspection.

At the heart of the ADB’s new poverty counts is a set of three “adjustments” they make to the international line of $1.25 a day in 2005 prices. Taken separately, none of the three is enough to give rising poverty in Asia, but together they manage it. However, when I look more closely at the three adjustments, I have concerns about two of them.

The first adjustment is to switch to a regional line of $1.51 a day. To get this, the ADB has applied essentially the same method used to set the global $1.25 a day line, but solely on data for Asia. (The $1.25 line is the mean of the national lines found in the poorest 20 or so countries in the world; the ADB did roughly the same for the poorest countries in Asia.)  The $1.25 line was never meant to be the only line, and higher lines are defensible. Switching to $1.51 adds 10 percentage points to the poverty rate for Asia in 2010.

The second adjustment is to use the rate of food price inflation for adjusting over time whenever this is greater than the overall rate of inflation. This is odd. The authors acknowledge that people living around the median do not just consume food. In Asia, close to half of their expenditures go to nonfood goods. It can be granted that the official Consumer Price Indices for some countries put too low a weight on food for the purposes of poverty measurement. But the standard corrective is to reweight the index appropriately, not to simply switch to the food CPI when it rises more than the ordinary CPI.  This second adjustment adds 4 percentage points to the poverty rate for Asia.   

The third adjustment is for “vulnerability.” The aim here is to find the increment to the poverty line in a risky world that gives the same level of welfare as a risk-free line. This third adjustment adds 12 percentage points to the 2010 poverty rate.

There are a number of issues here. While this type of “welfare-consistency” is conceptually appealing for setting poverty lines, the report is not internally consistent. It argues for welfare consistency in dealing with risk, but implicitly rejects that principle for relative poverty lines, at different levels of development. Welfare consistency almost certainly requires setting a higher line in richer countries to compensate for the welfare loss from relative deprivation and the higher costs of social inclusion (as argued here).

It’s also not clear why the base poverty line ($1.25 or $1.51) should be treated as risk free; the underlying national lines were clearly not developed in a riskless world. As the report acknowledges, national poverty lines reflect the prevailing view of what it means to be “poor” in a given country. Such assessments are unlikely to ignore country-specific risk.  

I have other concerns about the report’s assumptions, and the problems will not be evident to many readers. Using some math, and numerous assumptions buried in quite technical boxes, the report derives a formula for the risk-adjusted poverty line corresponding to any given risk-free absolute line. Let me try to explain what all those equations in the report’s boxes mean.

“Risk” is assumed to take a rather special form, namely that it rescales personal income levels (it is “multiplicative”) and in a way that it is uncorrelated with the long-run income levels. The latter appear to be measured by overall regional averages. A single parameter reflecting relative risk aversion is assumed.

Are the assumptions plausible? Some observers will think that the ADB’s assumed parameter for the extent of risk aversion is on the high side. But for me the more worrying feature is that any rise over time in the overall interpersonal variance of incomes is taken to reflect an increase in their riskiness. Rising variance is passed onto their risk-adjusted lines. 

That is hard to accept. Plainly the rising income dispersion that we see in Asia and elsewhere stems in no small measure from rising inequality of wealth. Rising risk is no doubt a contributing factor, but it is not the whole story. To put it another way, the risk-free long-run interpersonal variance of incomes in Asia is almost certainly rising. Thus the ADB’s upward revisions to poverty lines overcompensate for rising vulnerability.

The ADB’s researchers have made a valiant, even heroic, effort to deal with what they see as the shortcomings of standard absolute poverty lines. In the end, however, I am not convinced by their calculations, or their implication that poverty is rising in Asia. 


Authors: Martin Ravallion View Profile

CGD Publication: Climate Policy Constraints and NGO Entrepreneurship: The Story of Norway’s Leadership in REDD+ Financing - Working Paper 389

Climate Policy Constraints and NGO Entrepreneurship: The Story of Norway’s Leadership in REDD+ Financing - Working Paper 38912/3/14

Norway – a small northern country with only 5 million inhabitants – is at present a global leader in REDD+ financing. In this paper, we explain why and how this happened by telling the story about the emergence of Norway’s International Climate and Forest Initiative (NICFI) in 2007 and its institutionalization in the following years. 


Development blog: Why Aren’t Forests More Prominent on the Agenda for COP20 Climate Talks in Lima?

Conserving the world’s tropical forests is a critical element of any global strategy to protect against climate change—and promote development, for that matter—but we haven’t heard much about it being on the agenda for the COP20  climate talks in Lima starting this week. One reason for that: negotiations on forests were largely completed at COP19 with agreement on the Warsaw Framework on REDD+, and a new CGD Working Paper explains how.

But the stakes for forests in Lima remain high – see below for more on why.  First, let’s understand how the forest-related negotiations got out in front of the others.

Why were negotiators able to reach agreement on forests more quickly?

Why Forests, Why Now?

In “Two Global Challenges, One solution: International Cooperation to Combat Climate Change and Tropical Deforestation,” Antonio G.M. La Viña and Alaya de Leon of the Ateneo School of Government in Manila explain that the achievement of agreement on REDD+ was the culmination of an unusually constructive strand of negotiations.  The authors are particularly well-placed to tell the story, having both played key roles in REDD+ negotiations as members of the delegation from the Philippines.

La Viña and de Leon start by summarizing the history of previous attempts to reach international agreements on conserving tropical forests, including the failure to conclude a convention on forests among the outcomes of the Rio Earth Summit in 1992.  In the context of the resulting policy vacuum, the linkage of forests to climate change provided a timely opportunity to address two global challenges with one solution: REDD+.

La Viña and de Leon analyze how the politics of REDD+ were unique, with the national interests of various countries not splitting along the usual North-South divide.  Indeed, the relative absence of the G-77 and China as leading protagonists in REDD+ negotiations is notable.  Overall, the interests of industrialized countries in low-cost mitigation options lined up with the interests of forest-rich countries in generating a new source of development finance, although the positions of individual countries evolved over time.

A model for other areas of negotiation?

Despite an alignment of interests in reaching agreement on forests, doing so was not easy.  Negotiators had to address a long list of technical issues, such as guidance on setting reference emission levels (RELs) and rules for the measurement, reporting, and verification (MRV) of forest-based emission reductions.  Technological advances in remote sensing over the previous decade facilitated agreement on the inclusion of emission reductions from “avoided deforestation” that were not possible at the time of the Kyoto Protocol.  

Two particularly contentious issues had to do with finance and safeguards. Brazil, Bolivia, and many nongovernment stakeholders opposed finance of REDD+ through carbon markets, out of concern that offsets would enable industrialized countries to avoid reducing their own emissions.  Many countries and other stakeholders were also worried that market-driven finance would create perverse incentives to harm vulnerable communities and ecosystems, for example, through displacement of indigenous peoples or conversion of natural forests to plantations. Ultimately, “appropriate market-based approaches” were accepted as a financing option linked to compliance with a set of safeguards agreed at COP16 in Cancun in 2010.  Those safeguards would also of course apply to non-market-based sources of finance.

La Viña and de Leon describe how these challenges were addressed through an approach to negotiations that combined a number of features designed to nurture and build on incremental progress.  Technical issues were resolved before tackling political issues, and nongovernment stakeholders were giving an unusual degree of access to the discussions in order to secure their support for negotiated outcomes.  La Viña and de Leon see lessons learned from this approach as applicable to other areas of negotiation. 

What are the stakes for forests in Lima?

This week’s negotiations are a critical milestone on the road to COP21 in Paris next year, where a new global climate agreement is expected to be reached.

First, many observers are hopeful that the momentum created by forest-related commitments announced at the UN Secretary General’s Climate Summit in September via the New York Declaration on Forests will carry through to Lima, influencing the size and composition of national commitments being formulated for inclusion in the Paris agreement.  Indeed, the host of COP20, the Government of Peru, announced a REDD+ partnership with Norway and Germany in New York, so its own efforts to reduce emissions from deforestation will be in the spotlight.

Second, a few issues related to REDD+ are still on the negotiating table for methodological guidance, as La Viña and de Leon describe in their working paper, including non-carbon benefits, non-market-based approaches, and safeguard information systems.  An issue that could prove tricky is how to craft a comprehensive approach to account for land-based emissions, linking REDD+ to reductions in agricultural and other terrestrial sources of emissions.  While everyone agrees that such linkage is in principle desirable, doing so without unraveling the painstakingly achieved agreements specific to REDD+ would be a challenge.

Third, and most important, countries participating in REDD+ will be looking for signals in Lima that the international community is serious about providing finance commensurate with the task of reducing forest-based emissions.  With the REDD+ rulebook essentially complete, implementation is now effectively held hostage by the lack of broader agreement on a global emissions reduction strategy that would liberate large-scale finance for forests.  Recent (Brazil) and prospective (Indonesia) submissions of Reference Emissions Levels on the part of the two largest REDD+ countries increase the pressure on industrialized countries to be prepared to reward performance in reducing deforestation with results-based funding.

As detailed in a previous CGD Working Paper and associated blog, REDD+ finance so far has been too small, too slow, too public-sector dependent, too concentrated, and not sufficiently performance-based.  Recently announced contributions to the Green Climate Fund are promising, but there’s still a long way to go before reaching the $100 billion of climate finance per year by 2020 envisioned at COP15 in Copenhagen.  

La Viña and de Leon conclude from the experience of REDD+ negotiations that “international cooperation [on climate change] is not certain but it is certainly possible.”  Here’s hoping that negotiators reach the cooperation possibility frontier in Lima!

Authors: Frances Seymour View Profile

CGD Publication: Two Global Challenges, One Solution: International Cooperation to Combat Climate Change and Tropical Deforestation - Working Paper 388

Two Global Challenges, One Solution: International Cooperation to Combat Climate Change and Tropical Deforestation - Working Paper 38812/2/14

This paper provides an analysis of the international political dynamics around the reduction of tropical deforestation and forest degradation as a climate mitigation strategy, emphasizing the necessity of an enabling environment and sustainable financing to support the scaling up of these efforts globally.


CGD Event: Why Forests? Why Now? Events at the 20th UNFCCC Conference of Parties

Why Forests? Why Now? Events at the 20th UNFCCC Conference of Parties12/8/14

The Center for Global Development will host a reception on Monday, December 8 at the 20th UNFCCC Conference of Parties in Lima, Peru for a discussion and celebration of CGD’s forthcoming book Why Forests? Why Now? and the research of our Working Group on Performance-Based Payments to Reduce Tropical Deforestation.

Why Forests? Why Now? draws on scientific, economic, and political evidence to show that tropical forests are essential for both climate stability and sustainable development, that now is the time for action on tropical forests, and that payment-for-performance finance for reducing emissions from deforestation and forest degradation (REDD+) is a course of action with great potential for success.

The working group aims to understand the political, financial, and practical obstacles that are holding back what should be large flows of funds to forest-rich countries to reward them for measured reductions in deforestation. We seek to identify practical ways to accelerate performance-based finance for tropical forests in the lead-up to COP 21 in Paris.

The reception will take place on Monday, December 8, 2014 at 8:00 p.m. at the Casa Andina Miraflores (Av. La Paz 463, Miraflores). Frances Seymour and Jonah Busch will present a brief overview of the book and will join fellow CGD expert Michele de Nevers to give remarks on the working group. The discussion will be followed by a cocktail reception to conclude around 10:00 p.m.

CGD Publication: Predicting Partnerships: Which Countries Will MCC Select for FY2015 Eligibility?

Predicting Partnerships: Which Countries Will MCC Select for FY2015 Eligibility?12/1/14

The Millennium Challenge Corporation’s (MCC) board of directors is scheduled to meet on December 10. As usual, they will use this end-of-year meeting to vote on which countries will be eligible for MCC assistance for FY2015.


Global Health blog: Major Progress at the Global Fund: A One-Year ‘More Health for the Money’ Update for World AIDS Day

Last September, we released a report on how the Global Fund could get more health for its money. In it, we offered concrete suggestions for improvements in several different value-for-money domains, all with an eye toward maximizing the health impact of every dollar spent.

A lot can change in a year. And during a recent reread of our own report, I was pleasantly surprised by how much the Global Fund has changed for the better, particularly in how it does business. So what’s been done, and what challenges remain? 

More Data-Driven Allocation

Under its old system, the Global Fund allocated its funding through a series of proposal rounds. During each round, countries could submit their requests for funding; good proposals would be approved and bad proposals rejected by an expert technical review panel  until all available funds were committed. 

While well-intentioned, this system was rife with problems. As we wrote in our report, “by failing to provide countries with a clear budget constraint, predictable funding windows, or rewards for efficiency, the Global Fund created strong incentives for countries to maximize their funding requests—often without considering actual need and other funding sources, or assessing their most pressing priorities given scarce resources.” Funding went to countries with the best proposals—not necessarily the countries that had the greatest need or capacity to deliver results. As a result, major differences (up to 5,000-fold!) were seen in per-case spending on HIV across countries, with no obvious justification for the discrepancies.

Fast-forward to today and the Global Fund now deploys an explicit, data-driven allocation formula to split scarce funds across countries on the basis of their disease burdens and ability to fund their own disease programs (the board originally voted to enact a formula-driven allocation approach in 2012; exact allocations for the 2014–2016 window were announced in March). As a result, funding is better aligned with countries’ respective disease burdens, and more predictable funding empowers countries to plan ahead with a clear understanding of the available resource envelope. In a new paper with Victoria Fan and Amanda Glassman, we conclude that this new “methodology is expected, but not guaranteed, to improve the efficiency of Global Fund allocations in comparison to historical practice.”

Still, the fund has experienced some growing pains during its ongoing transition to the new approach. The split of funding across the Global Fund’s three target diseases is based on historical practice rather than objective criteria, and the relatively low allocations for malaria and tuberculosis (32 percent and 18 percent, respectively) remain controversial. Within each disease area, the sources to inform cross-country allocation are inconsistent. In particular, the use of malaria data from 2000 was intended to protect countries where continued funding is required to sustain recent gains; in practice, the fund’s own technical review panel  worries that “allocation amounts … may no longer reflect the most strategic investment of resources.” Finally, during the first wave of New Funding Model proposals, confusion about the role of “incentive funding” and competition for its allocation proved a major distraction. But the Global Fund has absolutely taken a step forward toward a strategic, evidence-based approach, and we look forward to watching further refinements over the next few years.

More Results-Based Contracts

In our report and a related paper, we recommended that the Global Fund restructure its contracts to incentivize better results. One year later, we’re pleased to see the fund embrace piloting of results-based contracting mechanisms with open arms, and we’re even more excited to be part of the action.

Here are some highlights: In Rwanda, the Global Fund has signed on to a pilot project where payments are tied to performance against specific HIV outcome indicators. In Mesoamerica (countries of Central America and southern states of Mexico), the fund is supporting a Cash-on-Delivery model to reward countries for progress toward malaria elimination. In Benin, the Global Fund is partnering with the World Bank’s Health Results Innovation Trust Fund to support results-based financing for providers at local health facilities. And many more projects are currently under discussion as the Global Fund explores how results-based financing can become a core component of its overall business model. 

Looking Ahead

One more exciting development: this month, with support from the Bill and Melinda Gates Foundation, and in partnership with both the Global Fund and the Clinton Health Access Initiative, we’re launching a new working group to explore how the Global Fund can best put innovative contracting designs to work across its portfolio—all while striving to maximize the health impact of each dollar and mitigating the attendant risks. The working group will be co-chaired by a high-ranking member of the Global Fund’s secretariat, and we expect that the output will help inform the Fund’s strategy for the next replenishment cycle.

Though the finish line is still far away, the Global Fund deserves kudos for what’s already been done. We’ll continue to check in on movement – but for now we’re happy to see momentum in the right direction.

Authors: Rachel Silverman View Profile

Development blog: Alex Cobham’s Off to the Tax Justice Network

It is with bitter-sweet excitement that we share our news that Alex Cobham is taking up a new post from the beginning of next year as Director of Research at the Tax Justice Network.

This feels like a coming of age. Since we began CGD in Europe in 2011, we’ve focused on three main priorities: development impact bonds, Europe Beyond Aid and Alex’s area: illicit financial flows (IFF). In our work on illicit flows, we’ve been lucky enough to have had a little input to the 2013 G8 process; to have written the zero draft for the Mbeki panel on IFF out of Africa which will report in January 2015; the background paper for the 2014 Tana High Level Forum on Peace and Security in Africa; and a study published by the Copenhagen Consensus on the potential costs and benefits of our proposed new IFF targets for post-2015.  Along the way, Alex Cobham and Andy Sumner proposed a new inequality measure, the Palma; and their current work combines these areas, looking at the possibility of adjusting global income distributions for undeclared (illicit) incomes. And the first major academic paper on the Financial Secrecy Index is forthcoming.

Now Alex is off to take the research and policy agenda forward with the Tax Justice Network, who began, a little over ten years ago, to produce the dangerous ideas that have risen from nowhere to the top of the G8, G20 and OECD agenda; and CGD is bringing together a new team to take the work forward here, with Vijaya Ramachandran and Matt Collin in London, and Washington visiting fellow Peter Reuter.

We’re looking forward to continuing to work together, confident that the net effect will be an expansion of policy-focused research into this important set of issues. And we are seriously considering getting a fußball machine for our new office in the hope that this will entice Alex to fulfil his promise to be a regular visitor.

Authors: Owen Barder View Profile Alex Cobham View Profile

Global Health blog: Realizing the Vision of Swasth Bharat through Fiscal Federalism in India

Related Research

In his early days as India’s new prime minister, Narendra Modi has shown remarkable leadership in all sectors, including health, for which he’s articulated his vision to create a Swasth Bharat, a Healthy India. Combined with two major policy windows—the proposed restructuring of the Planning Commission and the report of the 14th Finance Commission expected by the end of the year—the policy reforms under the ruling National Democratic Alliance (NDA)’s mandate of “Universal Health Assurance for All” have the potential to be a game-changer for India’s neglected public health system.

India’s health system has many problems but perhaps the most obvious is its persistently low levels of public financing for health, with often limited health outcomes. With only 1.7 percent of its GDP being spent on health expenditures (including sanitation and nutrition), India spends roughly $15 per person for health each year. As a result, up to 75 percent of health care expenses are borne out of pocket by patients. And given the lack of any mechanism to insure against health risks, much of India’s low-income population has to forego necessary healthcare or is forced into bankruptcy because of the inability to pay when confronted with a severe medical condition.

One critical policy lever that could have an impact on Indian public health expenditure and its effects on health outcomes is the financial flows and incentives from central government to states. India’s center-to-state fiscal transfers have occurred through three channels—Finance Commission; Planning Commission; and Centrally Sponsored Schemes—with at least three crucial characteristics (see figure 1):

  1. Are the allocations based on a formula and objective criteria or not?
  2. Are there conditionalities associated with those transfers?
  3. Who does the money go to?

While health is a ‘state’ subject, the central government has exerted significant influence on health financing through the flagship scheme known as the National Rural Health Mission (NRHM) from 2006–07 onwards. NRHM has now been extended to cover urban areas under the National Health Mission (NHM) umbrella. However, a systematic assessment of the impact of the three channels of transfers at the state level has not been attempted until now.

Over the past year, the Center for Global Development and the Center for Policy Research’s Accountability Initiative (in Delhi) have conducted research on intergovernmental fiscal transfers to improve health in India. As an early step we commissioned a background paper that describes and analyzes the myriad of channels and mechanisms of center-to-state fiscal transfers that could affect health outcomes. See a draft of the background paper here.

Source: Budget Documents, Government of India, 2014–15

Building on this background paper, Accountability Initiative and CGD have jointly pursued several areas of research to better assess the consequences and effectiveness of these different channels of funding—between Planning Commission and Finance Commission, within the Finance Commission, and the ‘Centrally Sponsored Schemes’ for health. In December, we are convening a working group to discuss some of our early findings and policy recommendations.

Authors: Victoria Fan View Profile Anit Mukherjee View Profile Rifaiyat Mahbub View Profile

Development blog: Should Sovereign Wealth Funds Finance Domestic Investment?

Countries have traditionally invested their sovereign wealth in securities of major markets able to provide dependable returns and macroeconomic stability, but some are now investing more sovereign wealth domestically because of diminished returns in major markets and new investment opportunities at home. This opens up some potential opportunities but also a number of serious risks, including undermining hard-earned efforts to sustain macroeconomic stability and providing a vehicle for politically driven “investments” that fail to add to national wealth.  Resource-rich countries are prone to this; the quality of their public investment management is substantially lower than that of non-resource countries.

Related Research

In a policy paper, my co-authors (Silvana Tordo, Havard Halland, Noora Arfaa, and Gregory Smith) and I propose a set of checks and balances to mitigate the risks of putting sovereign wealth into domestic investments.  Here I present a summary of that work.

Why the Trend toward Domestic Investments?

Sovereign wealth funds amount to more than $6 trillion in assets, and about half of that belongs to resource-exporting countries.  Several resource-rich developing countries have established or are establishing sovereign wealth finds with an expanded role as a national investor, including in “strategic” projects. Angola, Nigeria, Papua New Guinea, and Mongolia are among the most recent examples. More are in the making, including Colombia, Morocco, Tanzania, Uganda, Mozambique, and Sierra Leone.

With needs in such countries high, popular sentiment may push governments to spend part of their accumulated financial wealth at home. And given constrained access to finance since the global financial crisis and the significant management and governance challenges facing public investment in resource-rich countries, governments may see the sovereign wealth fund as a means to improve the quality of public spending and attract private investors to strengthen investment discipline.  

A Risky Proposition

If a sovereign wealth fund has, or engages, the necessary expertise it could act as a specialized investor, helping to attract private investors through well-designed private-public partnerships, but opening the door to domestic investment introduces very serious risks. With domestic investments, the investor—the government, on behalf of the nation—is also the promoter of the investments. The quality of the fund’s portfolio can then be undermined by politically driven decisions, with “investments” contributing neither to growth nor to increasing the wealth of the nation. Since the fund could be used to bypass parliamentary scrutiny of spending, the result could be even more inefficient and fragmented public investment programs. Sovereign wealth funds are particularly vulnerable to these risks because, unlike pension funds or development banks, they have no creditors able to exert due diligence in an independent manner.

How to Mitigate the Risks?

The basic conflict of interest posed by state ownership cannot be eliminated, but it can be mitigated by good policies. 

Coordinate strategic investments. Domestic investments by sovereign wealth funds need to be considered part of a public investment program and the implementation of macroeconomic policy.  As such, especially if large they should be considered in the context of overall investment levels to avoid damaging “boom-bust” cycles. 

Finance the right investments.  An infrastructure project, for example, may provide indirect benefits such as the stimulation of private investments and jobs that are not fully captured by its financial return. While such social and economic returns should be high, wealth fund investments must also yield “acceptable” financial returns.

Invest for competitive returns. Allocations to domestic investment should not be in the form of a mandated share but determined on the basis of competition with the returns on foreign assets.  When domestic returns are low or there are indications of asset bubbles, investment should be channeled abroad. 

Pool investments.   Investing with private investors, pooling with other funds, and co-financing with the regional development banks could help sovereign wealth funds reduce risk, bring in additional expertise, and enhance the credibility of the investment decision. Some funds, such as Nigeria’s, have signed cooperation agreements with major international investors. Limiting investments to minority shares would serve to reduce risks of politically motivated allocations.

Strengthen corporate governance.   There is a large body of knowledge on effective external governance (between the state and sovereign wealth funds) and internal governance (the composition and functioning of the board of directors or trustees and the management processes of the fund). It is especially important that sovereign wealth funds mandated to invest domestically have independent boards, professional staffing, independent auditing, and transparent reporting, especially on strategic investments. 

What Lies Ahead?

Sovereign wealth funds as strategic domestic investors can inject a degree of discipline into the use of natural resource revenue and help countries avoid the “resource curse.”  However, they also have the potential to exacerbate the mismanagement of resources that has plagued so many oil and mineral-exporting countries.  Although domestic investment by sovereign wealth funds is a new issue, some funds such as Temasek (Singapore) have been active investors in large projects, including in developing countries.  We see no sign that the trend will go away, except possibly in the event that a commodity price collapse creates a financing crisis in the resource countries that causes the funds to be tapped to provide massive assistance to budgets.  A second stage of this research is looking in more detail at the practices of a number of funds that could provide useful lessons.   

Authors: Alan Gelb View Profile

Global Health blog: World AIDS Day 2014: UNAIDS Shifts Its Emphasis toward Reducing New Infections

On World AIDS Day in 2003, WHO and UNAIDS launched a campaign called the “3 by 5 initiative,” with the objective to “treat three million people with HIV by 2005.” At that time, AIDS treatment was still prohibitively expensive for poor countries, where only a few thousand people had access to treatment. Thanks to President Bush’s creation of the President's Emergency Plan for AIDS Relief (PEPFAR) program that same year, the number of people on antiretroviral therapy (ART) began to rise dramatically. While the total number of people on ART reached only one million in 2005, the objective to reach three million people was attained in 2007, and the numbers have continued to climb. The numbers have now surpassed 11 million in low- and middle-income countries and 13 million worldwide. (See bottom trend line in figure 1.)

Figure 1. Impressive growth in the number of people on antiretroviral treatment has not yet led to a decrease in the total number of people living with HIV/AIDS

Because treatment extends lives and new infections have persistently outpaced AIDS-related deaths, the number of people living with HIV/AIDS has consequently continued to grow (top line in figure 1). I argued in my 2011 book, Achieving an AIDS Transition, that a unique focus on expanding access to treatment would make recipient countries increasingly dependent on rich ones and would generate unsustainably growing demands for donor resources. The alternative, I proposed, was to focus even more attention and effort on reducing the rate of new infections to below the mortality rate so that the number of people living with AIDS, and eventually the number needing treatment, would begin to decline.

This year, in their annual World AIDS Day plea for more resources, UNAIDS is for the first time focusing more on the need to reduce new infections than on treatment expansion. In figure 2 below, we have assembled into one chart the projections UNAIDS shows in figures 6a and 6b of their new “Fast Track” report. Under their “constant coverage” scenario, new HIV infections will exceed AIDS-related deaths by about half a million persons a year through 2030, causing the number of people living with HIV/AIDS to increase by about 8 million, or to a total of about 43 million (not shown; imagine the top line in figure 1 continuing to climb).

This scenario is a dismal one for the AIDS epidemic. With the need for treatment continually climbing and donor commitments for AIDS remaining flat or declining since 2008, AIDS advocates are concerned that the days of unlimited budgets are over.

But UNAIDS is urging the world to make one last push. Instead of hoping only for constant coverage, or perhaps failing to sustain even that modest goal, UNAIDS is proposing instead that the world adopt “ambitious targets” by aiming for “zero,” which they define as reducing new HIV infections and AIDS deaths by at least 90 percent by 2030. As figure 2 shows, the ambitious targets would bend both the new infections and the annual deaths dramatically downwards. The “AIDS transition,” a key milestone defined in my book, is passed in 2019 when new infections will for the first time be fewer than deaths and the total number of persons living with HIV/AIDS will begin to decline.

Figure 2. With UNAIDS ambitious targets, the world will reach an AIDS transition after 2019

Source: UNAIDS, Fast-Track, November, 2014

Of course, it’s one thing to find a set of assumptions that predict new infections and deaths to go down instead of up (the Futures Institute helped UNAIDS with this meticulous and heroic task). It’s another thing to achieve these ambitious targets. UNAIDS is depending on increased funding of existing interventions to get us to the AIDS transition and beyond. Suppressing mortality to this degree requires greatly expanding treatment to 81% of all infected people, and suppressing new infections requires that 90 percent of people on treatment have suppressed viral load.  So increased funding will certainly be necessary to reach the AIDS transition. However, as I argue in my book, countries that have been receiving aid to finance their AIDS epidemic will also have to dramatically change their attitudes towards HIV prevention. In addition to deploying the array of available preventive medical technology, including treatment-as-prevention, male circumcision, and needle sharing, affected countries must find new ways to incentivize their citizens to assiduously adhere to AIDS treatment guidelines and to adopt safer sexual practices. Cash transfers to schoolgirls and their families show promise but have not yet been widely adopted. More important might be regional and district-level cash-on-delivery rewards for verified evidence of reductions in new HIV infections.

Bravo to UNAIDS for setting a course towards a future when it will no longer be needed—a future without AIDS. Now it must convince donors and recipient countries that this future is realistic and attainable. And that allocating resources towards achieving the AIDS transition is consistent with other sustainable development goals, like universal health coverage and protection from Ebola and other disease outbreaks. The hard work is still ahead.

Authors: Mead Over View Profile

CGD Event: Winners and Losers of Globalization: Political Implications of Inequality

Winners and Losers of Globalization: Political Implications of Inequality12/9/14

The last quarter century of globalization has witnessed the largest reshuffle of global incomes since the Industrial Revolution. Branko Milanovic finds that the main factor behind the reshuffle was the rise of China and, to a slightly lesser extent, all of Asia. By tracking the evolution of individual country-deciles through a new panel database of 100 country-deciles and deriving the global Growth Incidence Curve, Milanovic and co-authors are able to show the underlying elements that drove the changes.

They find that three changes stand out, and those changes open up discussion on the following political issues: how to manage rising expectations of political participations in emerging countries like China, how to “placate” rich countries’ globalization losers so that they do not begin supporting populist anti-immigrant policies, and how to constrain the rising economic and political power of the global top 1 percent.

*The CIRF series is an academic research seminar that brings some of the world's leading development scholars to discuss their new research and ideas. The presentations are at times technical, but retain a focus on a mixed audience of researchers and policymakers. There’s more about the series here.

Development blog: All Technology Leapfrogging Is Not the Same (Why Phones ≠ Energy)

In the debates over how best to bring electricity to the billion-plus poor people who live every day without it, a common refrain is that we can replicate the telecommunications leapfrog with energy too. It’s an attractive notion. Instead of building telephone landlines, billions of poor people jumped right to mobile phones. Why not just do the same with electricity and, instead of building a grid and big dirty power plants, just go right to off-grid solar? 

Yet “the supposed analogy between cell phones and distributed solar is misplaced” argues UC Berkeley’s Catherine Wolfram because of (1) cost, (2) benefits of centralized networks, (3) actual development goals, and (4) quality. She concludes:

I worry that the idea of energy leapfrogging lulls us into ignoring the difficult development versus environment tradeoffs involved with bringing electricity and other improved energy services, like motorized vehicles, to people who do not currently have them... .

Modern energy can transform people’s lives, so it’s unfair to insist that households who do not currently have electricity use the high cost, zero-carbon alternative...let’s stop talking about energy leapfrogging and keep our eyes on the goal of achieving cost-effective, low-carbon solutions.

Read the full post here

Authors: Todd Moss View Profile

Development blog: ‘Taxing across Borders’: An Academic Milestone

Originally posted on Richard Murphy's Tax Research blog on November 21st. 

A new paper from Gabriel Zucman (of London School of Economics, and erstwhile co-author of Thomas Piketty) in the (free-to-view) Journal of Economic Perspectives represents a milestone in the academic economics literature. As far as I’m aware, it is the first major journal paper that aims to put a specific scale to both corporate tax distortions via ‘tax havens’, and the evasion of individual income and wealth taxes through offshore ownership. This post sets out the main findings of the paper and briefly discusses its policy proposals.

Cross-border corporate tax avoidance

The bulk of the paper deals with corporate tax avoidance, and contains substantial new analysis of profit-shifting by US-headquartered multinationals. The story is built up in five figures. First, Zucman shows that the share of all US corporate profits declared as earned outside the US has risen steadily in the post-war period.

Second, Zucman shows that the share of those foreign-earned profits declared as earned in a group of jurisdictions he labels ‘tax havens’ has grown especially sharply – to over half by 2013 (or from around 2% of all US corporate profits in the mid-1980s, to over 20% at its 2008 peak).

The share of US MNE profits retained in’ ‘tax havens’ has also risen: nearly four-fold since the 1980s, towards 40%.

Zucman then shows that the effective tax rates on US corporate profits has fallen consistently in the post-war period, but with an important change.

From the 1960s to the 1990s, the nominal tax rate was also falling – so a falling effective rate may be broadly consistent with the policy intention. From the 1990s onwards the nominal rate has been stable, but the effective rate paid has continued to drop steadily – so this is less obviously a deliberate policy choice.

Offshore tax evasion

The other element of the analysis deals with tax evasion through offshore wealth holdings, and draws on earlier work. There are two main points here. First, Zucman shows that the share of US equities held by individuals or through firms based in a group of ‘tax haven’ jurisdictions has risen from 2% or less in the 1980s, to exceed 8% now (with no discernible change due to the financial crisis).

The second part of the analysis is a global estimate of the total offshore holding of wealth (in this case, not in a particular group of ‘tax havens’, but in all jurisdictions other than the home country). [Of course, holding assets ‘onshore’ also allows in many cases – not least the US – for great opacity and tax manipulation too. See e.g. this new paper from Jason Sharman and co-authors that continues his great work of showing the extent to which OECD economies lag the ‘usual suspect’ havens in, for example, the risk attitude of company formation agents when unknown parties seek to breach beneficial ownership identity requirements.]

The identified offshore wealth holdings are estimated at $7.6 trillion. Data from the Swiss authorities, as presented in earlier work by Zucman and Niels Johannesen (see Fig.7 here), is then used as the basis for an assumption that 80% of offshore assets are undeclared, which in turn gives rise to an estimated tax loss of c.$190bn.

Policy proposals

Zucman makes two main policy proposals: corporate tax reform, and a world financial register. On the former, he considers and dismisses OECD BEPS attempts to fix current system, along with formulary apportionment options. Instead, Zucman argues for (re)integration of corporate and individual income taxation, within the more complex reality of globalisation – even although attempts at integration were largely dropped over time as this complexity developed.

The way that Zucman proposes to make this work is through a major shift in information provision and use, through the creation of a world financial register – Piketty’s major proposal in Capital (which I’ve enthused about before, for its spirit of democratic and financial transparency). Zucman here calls it “a transparent way to enforce a fair distribution of corporate tax revenue globally and thus make an imputation system work in a globalized world.” He then considers and dismisses counter-arguments around cost, complexity and obstructive financial secrecy. (On cost, by the way, my limited cost-benefit analysis of national registers established globally may be of interest.)

Each of these proposals deserve – and I hope, will receive – substantial attention.

Last word, not the last word

The paper itself is a great contribution, pulling together elements of Zucman’s work into a single, powerful argument. In doing so, it also confirms the difficulties of attributing anything more than approximate scale on the basis of current data. By that I mean that the approaches taken are either somewhat partial (what of other jurisdictions’ multinationals?), and/or rely necessarily on extrapolations (for example from Swiss data on asset declarations to the global level); and in addition, inevitably, on assumptions about returns and implicitly about counterfactuals. To be clear, these points are not meant as criticisms; rather, they are additional confirmation that this kind of work requires such steps – as various recent pieces have argued. Researchers simply need to be clear, and open to criticism (as Zucman is), about the steps being taken.

So while it certainly isn’t the last word about the scale of either corporate tax avoidance or offshore tax evasion (and I may write a more critical review of some technical points later), Zucman’s paper marks an important milestone in the development of rigorous academic research in these areas.

Authors: Alex Cobham View Profile
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