Brookings: Experts - Kemal Derviş

Balancing Technocrats with Democratic Politics

Kemal Derviş — Fri, 10 May 2013 10:16:00 -0400

A simplistic (actually, naive) view of markets is that they exist almost in a “state of nature,” and that the best of all worlds is one where they are free to operate without government interference. An equally simplistic view of democracy is that it is a political system in which periodic competitive elections give the winner the right to govern without constraint.

The reality is far more complex, of course. Markets can function only within an institutional and legal framework that includes property rights, enforcement of contracts, quality and information controls, and many other rules to govern transactions.

Similarly, while competitive elections are essential to any democratic system, a “winner-take-all” attitude to electoral outcomes, with the victor concentrating power, is incompatible with democracy in the long term. Well-functioning democracies are embedded in complex constitutional and other laws that separate executive, legislative, and judicial power, and that protect freedom of speech, assembly, and peaceful dissent by those who lose elections.

Regulatory institutions – such as bank supervisory agencies and bodies that oversee the telecommunications, food, and energy industries – play a vital role by maintaining the always-delicate balance between “free” markets and the actions of elected governments and legislatures. The central bank is perhaps the most important of these institutions, for it conducts monetary policy (and sometimes serves as the financial-sector regulator).

The policy and regulatory mistakes that contributed to the subprime mortgage crisis – and thus to the US financial system’s near-meltdown and the eurozone’s travails – have brought the issue of optimal economic regulation and its relation to democracy to the fore once again. In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve! In their view, markets and private initiative require no significant regulation. The role of politics is to elect majorities that can abolish regulations and regulatory bodies.

Others around the world similarly oppose regulatory institutions, but for very different reasons. They argue that politicians can regulate and supervise without intermediate bodies that have some degree of autonomy. In their minds, these bodies merely impede and constrain realization of the people’s will.

If an elected government wants a bank to offer cheap credit to a group of enterprises so that they can hire more people, why should a supervisor be able to obstruct this democratic will? If these enterprises are told to hire the governing party’s supporters as an implicit condition of obtaining subsidized credit, that, too, is the expression of electorally legitimized popular will.

Management of the economy should be entrusted to competent and independent experts, a group of "Platonic Guardians" empowered to act in the state's higher interests, regardless of electoral outcomes or public opinion.

At the other end of the spectrum are technocratic super-defenders of regulatory bodies who believe that politicians and electorates are hopelessly confused, uneducated, and often corrupt. Management of the economy should be entrusted to competent and independent experts, a group of “Platonic Guardians” empowered to act in the state’s higher interests, regardless of electoral outcomes or public opinion.

The International Monetary Fund, the European Commission, and the European Central Bank are often viewed as such technocratic institutions – and as supporting the technocratic element within states and societies around the world. At the height of the eurozone crisis, the IMF, the EC, and the ECB (not to mention financial markets) warmly welcomed the economists Mario Monti and Lucas Papademos as highly respected “technocratic” prime ministers for Italy and Greece, respectively.

Experience in recent decades has shown that a balanced and “moderate” approach is needed on these matters. Electoral cycles (and the accompanying political pressures) are such that monetary policy, banking, and many other areas of policy and economic activity must be overseen by those with professional competence and a much longer time horizon than that of politicians.

Day-to-day politics cannot dominate the regulation that markets need. The single most important institutional reform underlying price stability throughout the world has been the stronger independence of central banks.

But, if independent technocrats are allowed to determine long-term policy and set objectives that cannot be influenced by democratic majorities, democracy itself is in serious jeopardy. I find it undemocratic, for example, that the ECB can set the eurozone-wide inflation target unilaterally. How much inflation a society finds desirable or tolerable (taking into account other important variables, such as employment, GDP growth, or poverty) is an inherently political question that should be debated in parliament. The central bank should be consulted, but its role should be to implement the objective without political interference: independence in terms of policy tools, not goals.

Globalization and the increasing complexity of financial and other markets make it imperative that the domains of private activity, political decision-making, and regulation be clarified. The challenge is even greater because some regulatory agencies must be multilateral, or at least intergovernmental, given the global nature of much economic activity. The difference and the distance between markets and politics must be clear – and, for the sake of both effectiveness and legitimacy, it must be based on rules that are well understood and on popular consent.

Authors

Kemal Derviş

Publication: Project Syndicate

Image Source: © Lisi Niesner / Reuters

Latin America's Macroeconomic Outlook in the Global Context: Bright Future or Déjà Vu all Over Again?

Mon, 29 Apr 2013 09:15:00 -0400

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April 29, 2013
9:15 AM - 10:45 AM EDT

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After displaying eight years of high growth, some Latin American economies are cooling off in spite of a sustained favorable external environment and continued large inflows of foreign capital. In addition, some countries in the region may be exposed to lingering global financial risks. This recent trend has led many economists to question whether Latin America still has the potential to maintain a strong growth performance.

On April 29, the Brookings-CERES Economic and Social Policy in Latin America Initiative hosted a discussion on the macroeconomic policy challenges policymakers should meet head-on to sustain growth and minimize financial risks. Panelists included: José Juan Ruiz Gόmez, chief economist and manager of the research department at the Inter-American Development Bank; Ernesto Talvi, director of the Brookings-CERES Economic and Social Policy in Latin America Initiative; Augusto de la Torre, chief economist for Latin American and the Caribbean at the World; Alejandro Werner, director of the western hemisphere department at the International Monetary Fund. Vice President Kemal Derviş, director of Global Economy and Development at Brookings, moderated the discussion.

The Way Forward for the Eurozone and Europe: A Conversation with European Policymakers

Thu, 18 Apr 2013 16:15:00 -0400

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April 18, 2013
4:15 PM - 6:00 PM EDT

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1775 Massachusetts Avenue NW
Washington, DC 20036

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On April 18, Global Economy and Development at Brookings and the Center for the United States and Europe hosted a discussion on the European economy and the ongoing crisis in the eurozone with a distinguished panel of European policymakers. Panelists included: Olli Rehn, European Commission vice president for economic and monetary affairs and the euro; Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup; Klaus Regling, managing director of the European Stability Mechanism; Werner Hoyer, president of the European Investment Bank; and Jorg Asmussen, executive board member of the European Central Bank. Brookings President Strobe Talbott provided introductory remarks. Vice President Kemal Derviş, director of Global Economy and Development, moderated the discussion.

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Inequality and Inclusive Growth in Africa: A Conversation with South African Finance Minister Pravin Gordhan

Wed, 17 Apr 2013 16:00:00 -0400

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April 17, 2013
4:00 PM - 5:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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Africa is the world’s second-fastest growing region, and South Africa is the continent’s economic leader. The country recently hosted the BRICS Summit and has been working hard to promote growth and encourage investment. Yet inequality has been a persistent challenge. As the economies of South Africa and the African continent continue to expand, governments in the region must ensure that such growth follows a sustainable model that creates wage-paying jobs and lifts citizens out of poverty.

On April 17, the Africa Growth Initiative at Brookings hosted a conversation with the Honorable Pravin Gordhan, minister of finance for the Republic of South Africa, on inequality and inclusive growth in South Africa and the African continent. Minister Gordhan’s remarks were followed by a panel discussion with Brookings Senior Fellow Homi Kharas, deputy director of Global Economy and Development. Brookings Vice President Kemal Derviş, director of Global Economy and Development, moderated the discussion.

You can join the conversation on Twitter using #Africagrowth.

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Economic Policy’s Narrative Imperative

Kemal Derviş — Mon, 15 Apr 2013 10:40:00 -0400

The best advice I received when taking up policymaking responsibilities in Turkey more than a decade ago was to take “a lot of time and care to develop and communicate the ‘narrative’ to support the policy program that you want to succeed.” The more that economic policy is subject to public debate – that is, the more democracy there is – the more important such policy narratives are.

The crisis faced by the European Union and the eurozone is a telling example of the need for a narrative that explains public policy and generates political support for it. A successful narrative can be neither too complicated nor simplistic. It must capture the imagination, address the public’s anxieties, and generate realistic hope. Voters often sense cheap populism.

European Central Bank President Mario Draghi provided such a narrative to the financial markets last July. He said that the ECB would do everything necessary to prevent the disintegration of the euro, adding simply: “Believe me, it will be enough.”

With that sentence, Draghi eliminated the perceived re-denomination tail risk that was highest in the case of Greece, but that was driving up borrowing costs in Spain, Italy, and Portugal as well. It was not a populist message, because the ECB does indeed have the firepower to buy enough sovereign bonds on the secondary market to put a ceiling on interest rates, at least for many months.

Central bankers, more generally, are typically able to provide short- or medium-term narratives to financial markets.

Central bankers, more generally, are typically able to provide short- or medium-term narratives to financial markets. US Federal Reserve Board Chairman Ben Bernanke provided his own by pledging that US short-term interest rates would remain very low, and the Bank of Japan’s new chairman, Haruhiko Kuroda, has just provided another by saying that he will double the money supply so that inflation reaches 2%.

While central bankers can provide such narratives to financial markets, it is political leaders who must provide the overall socioeconomic messages that encourage long-term real investment, electoral support for reform, and hope for the future. Central bank alchemy, to borrow a term from the US journalist Neil Irwin’s new book, has its limits.

Europe, in particular, needs a narrative of long-term hope that will trigger a real recovery. France is coming closer to the danger zone, and even Germany’s annual GDP growth is falling well below 1% per year. In the meantime, the easing of sovereign interest-rate spreads provides little comfort to the growing army of unemployed in southern Europe, where youth unemployment has reached dramatic heights – close to 60% in Greece and Spain, and almost 40% in Italy.

The narrative should address three essential questions. How can the European model of strong social solidarity and security be reformed, but endure? How can economic growth be revived and sustained throughout the EU? And how can Europe’s institutions function with enhanced legitimacy to accommodate countries that share the euro and others that retain their national currencies?

For starters, a revolution is required in the organization of work, learning, and leisure. Social solidarity, essential to European identity, can and must include longer work lives, but also more work-sharing, adult learning, and shorter average work weeks (particularly close to retirement).

Such flexibility requires the consent of all: employees must adjust to changing requirements; employers must re-organize their enterprises to allow more work-sharing, work from home, and learning intervals; and governments must overhaul taxes, income support, and regulation to promote a “flex-solidarity revolution” that encourages personal choice and responsibility, while remaining committed to social cohesion. This can lead to a better future for all, with citizens gaining better access to adult education, having more free time to pursue personal interests, and remaining productive and occupationally engaged far longer into their healthy lives.

Europe does not need Asia’s rates of economic growth. It can secure decent jobs and prosperity, with a sustained annual growth rate of around 2%.

Europe does not need Asia’s rates of economic growth. It can secure decent jobs and prosperity, with a sustained annual growth rate of around 2%. To achieve that, German voters should be told not that their country’s resources will forever flow to Spain, but that their wages can rise at twice the rate of the recent past without risking inflation or a current-account deficit, because Germany has the world’s largest external surplus.

Service-sector industries throughout the EU must be opened up. The countries with stronger fiscal positions should take the lead in a major pan-European skill-upgrading program. The number of pan-European scholarships should be doubled. School programs everywhere should aim to educate trilingual citizens.

Moreover, a full European banking union with shared resources for resolution should be created without further delay. The European Investment Bank, which received a significant capital increase in 2012, should add a large investment-support program for medium-size enterprises to its current operations, with a subsidy financed from the European budget to encourage first-time job takers for a limited period. Jobs and training for young people must be the centerpiece for the new growth pact, and projects must move ahead in “crisis mode,” rather than according to business as usual.

Finally, while monetary union obviously requires greater sharing of sovereignty, there should also be a “greater Europe” that includes the United Kingdom and others. This implies two-tier institutions that can accommodate both types of countries: the “euro-ins” and those that prefer to preserve their monetary sovereignty in a larger Europe built around a vibrant single market and common democratic values.

These interconnected visions can and must be realized if Europe is to thrive again. Together, they form a compelling narrative that European leaders must begin to articulate.

Authors

Kemal Derviş

Publication: Project Syndicate

Value-Added Trade and Its Implications for International Trade Policy

Kemal Derviş, Joshua Meltzer and Karim Foda — Tue, 02 Apr 2013 15:20:00 -0400

Reported Trade and Value-Added Trade

In 2012, the U.S. exported $2,196 billion and imported $2,736 billion worth of goods and services, producing a trade deficit of $540 billion. This U.S. trade balance with the world comprises the sum of all the bilateral trade balances the U.S. runs with its trading partners, some of which are in surplus and others that are in deficit. For instance, in 2012, the U.S. had bilateral trade in goods deficits with China ($315 billion), Japan ($76 billion), Mexico ($61 billion) and Germany ($60 billion), and bilateral trade surpluses with Australia ($22 billion), Brazil ($12 billion), Chile ($10 billion) and Panama ($9 billion).

The reported trade balances of the U.S., and all other countries for that matter, are based on the gross commercial value of the goods and services as they depart and enter the country. What these reported trade balances don’t adequately capture is the complex nature of the global economic relationships of international trade today. Quite often goods and services move across multiple national borders in order produce a final product that is then exported. WTO Director-General Pasqual Lamy has described this phenomenon as goods being “made in the world”.

For instance, the U.S., Canada and Mexico are economically very integrated with goods and services often crossing their borders many times in order to produce a final product. According to reported trade data in 2009, [1] the U.S. had a trade deficit with Mexico of $48 billion and a trade deficit with Canada of $22 billion. This would suggest the U.S. simply buys more from Mexico and Canada than it sells to these countries. However, the economic ties between producers, manufacturers, and consumers across borders mean that this is only part of the story. In many cases, U.S. imports from Mexico and Canada are of intermediate goods that are used to produce products which the U.S. then exports back to Mexico and Canada, or the rest of the world.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States. In these cases, Japan is exporting to South Korea but is also exporting to the U.S. via South Korea. However, the way that the U.S.-South Korea trade balance is currently reported does not adequately capture the role of Japanese inputs into Korean exports, which in value-added terms are Japanese exports to the U.S.

Value-added trade data reveals these economic relationships. But to date developing value-added statistics has been difficult to compile for a range of reasons, including obtaining what can be considered commercially sensitive data, the absence of a common statistical framework, and challenges in distinguishing between intermediate and final goods. Recent joint work undertaken by the WTO and the OECD assists with calculations of value-added trade.

For example, under a value-added calculation for 2009, both Mexico’s and Canada’s exports to the U.S. actually decline by around 25 percent each. Additionally, the value-added data reveal that 12 and 8 percent of total exports from Mexico and Canada to the world, respectively, reflects U.S. value-added trade. Moreover, in value-added terms the bilateral U.S. trade deficit with Japan would increase dramatically by 60 percent, from $23 billion to $36 billion.

The following table explains these differences between reported and value-added trade:

The table above explains how a country’s reported exports comprise three elements: domestic value-added that stays overseas; domestic value-added that returns home via imports; and foreign value-added incorporated into its exports. Similarly, reported imports includes the foreign value-added that remains in the country of import, the domestic value-added incorporated in its imports, and the foreign value-added in the imports that are later re-exported. In contrast, a country’s value-added exports capture only the domestic value-added that stays overseas and value-added imports are only the foreign value-added that remains in the country of import.

This table also explains why a country’s overall trade balance will be the same in reported and value-added terms, as the over and under accounting of exports and imports that arises from the inclusion of domestic and foreign value-added goods are themselves imports and exports that cancel each other out over a country’s total trade. This is to be expected as the current account balance, which equals the trade balance and net factor income, the latter unaffected by the conversion to value-added, is a function of the gap between domestic savings and investment and does not depend on whether trade is calculated in reported or value-added terms.

While a country’s trade with the world is the same in reported and value-added terms, bilateral trade balances can diverge greatly under value-added and reported data. But as the sum of a country’s reported and value-added bilateral trade balances sum to the same overall trade balance, a reduced bilateral trade deficit using value-added data with one country must be offset with changes in other value-added bilateral trade relationships. For instance, both reported and value-added trade data will still see the U.S. running the same overall trade deficit and China the same overall trade surplus, even when the value-added data shows a reduced U.S.-China bilateral trade deficit.

Trade Policy Implications for U.S.-China Trade

Differences between reported and value-added bilateral trade relationships have important implications for trade policy. As noted, value-added trade data captures the value traded and thereby reveals the income generated by trade in multiple countries and industries.

There is no bilateral trade relationship of greater economic and political significance for the U.S. than with China. For example, in 2012, U.S.-China trade in goods deficit was $315 billion, the largest bilateral deficit the United States has ever had. And it is the size of the trade deficit that feeds all manner of concerns in the U.S. about declining competitiveness, job losses, and unfair trade practices by Chinese companies. China is also the world’s largest exporter and a global center for the manufacturing and assembling of goods for export. In addition, manufactured exports tend to have higher levels of foreign value-added due to the role of imported intermediate goods and services in their production.

As a result, calculating the U.S.-China trade deficit using value-added data reduces the deficit by 25 percent. However, as China’s overall trade balance remains the same under reported and value-added trade data, a reduced bilateral trade deficit with the United States also means that China has greater bilateral trade surpluses (or reduced deficits) with other countries. This suggests that while China is exporting less domestic value to the U.S., it is adding more value to its exports to other countries.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods. In addition, U.S. manufacturers would end up paying more for intermediate goods, which would reduce the competitiveness of their final goods in the U.S. and in export markets overseas. Furthermore, to the extent that U.S. trade barriers reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into China’s exports.

Value-added trade also reveals why it is also in China’s interest to reduce its trade barriers. Given the significant trade in intermediate goods and services used in China, reducing its trade barriers would make Chinese products even more competitive domestically and overseas.

This is only one example of how value-added data can change the way we understand how the international economy works, the role of trade and with important implications for trade policy. Reported data gives the impression that each country is wholly responsible for the production of its exports and this is now significantly out of a step with an international economy that increasingly relies on disaggregated supply chains spread across many countries where goods and services are trade across borders multiple times. In contrast, value-added data calculates these economic linkages and reveals the contribution that countries make to global processes. Economists since David Ricardo in the 19th century have demonstrated the economic gains to countries from trade. Value-added trade data reaffirms these insights and reveals how in today’s economically-integrated world trade barriers are also often barriers against goods and services that domestic industry had a role in creating.

These realities may also help explain why protectionist pressures have been relatively subdued during the difficult economic period after the 2008 global crisis. Does this mean that international trade comes with no problems? Not at all. Whether in value-added or traditional final products form, trade supports a process of “creative destruction” where national wealth increases but some firms and households lose out to others. There are, therefore, strong ethical and political arguments for assisting the “losers” in their needs to adjust and providing a social safety net to those who are not in a position to adjust. The increasing importance of international value chains raises tax avoidance issues for multinationals. This is a big topic but suffice it to say here that international cooperation to avoid excessive tax avoidance is reasonable. Finally, while international value chains make it easier for some poorer countries to “break-into” the world economy, it may also make it more difficult for them to develop national economic strategies aimed at reaping the benefits of agglomeration of economic activities and deepening their industrial production.

Footnote

[1] The most recent value-added trade data is from 2009

References

Benedetto, John. July 2012. “Implications and Interpretations of Value-Added Trade Balances,” Journal of International Commerce & Economics, Vol. 4, No. 2. U.S. International Trade Commission.

Authors

Image Source: © Paulo Whitaker / Reuters

Why Rising Financial Markets are at Odds with Political Events and Real Economic Indicators

Kemal Derviş — Wed, 13 Mar 2013 11:48:00 -0400

Since the second half of 2012, financial markets have recovered strongly worldwide. Indeed, in the United States, the Dow Jones industrial average reached an all-time high in early March, having risen by close to 9% since September. In Europe, European Central Bank President Mario Draghi’s “guns of August” turned out to be remarkably effective. Draghi reversed the euro’s slide into oblivion by promising potentially unlimited purchases of member governments’ bonds. Between September 1 and February 22, the FTSEurofirst index rose by almost 7%. In Asia, too, financial markets are up since September, most dramatically in Japan.

Even the Italian elections in late February seem not to have upset markets too much (at least so far). Although interest-rate spreads for Italian and Spanish ten-year bonds relative to German bonds briefly jumped 30-50 basis points after the results were announced, they then eased to 300-350 basis points, compared to 500-600 basis points before the ECB’s decision to establish its “outright monetary transactions” program.

But this financial market buoyancy is at odds with political events and real economic indicators. In the US, economic performance improved only marginally in 2012, with annual GDP rising by 2.3%, up from 1.8% in 2011. Unemployment remained high, at 7.8% at the end of 2012, and there has been almost no real wage growth over the last few years. Median household income in the US is still below its 2007 level – indeed, close to its level two decades ago – and roughly 90% of all US income gains in the post-crisis period have accrued to the top 1% of households.

Indicators for the eurozone are even worse. The economy contracted in 2012, and wages declined, despite increases in Germany and some northern countries. Reliable statistics are not yet available, but poverty in Europe’s south is increasing for the first time in decades.

On the political front, the US faces a near-complete legislative stalemate, with no sign of a compromise that could lead to the optimal policy mix: short-term support to boost effective demand and long-term structural reforms and fiscal consolidation. In Europe, Greece has been able – so far – to maintain a parliamentary majority in support of the coalition government, but there, and elsewhere, hyper-populist parties are gaining ground.

The Italian election results could be a bellwether for Europe. Beppe Grillo’s populist Five Star Movement emerged with 25% of the popular vote – the highest support for any single party. Former Prime Minister Silvio Berlusconi, confounding those who had forecast his political demise, re-emerged at the head of a populist-rightist coalition that ended up only 0.3 percentage points away from winning.

In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being. In the US and many other places, corporate profits as a share of national income are at a decades-long high, in part owing to labor-saving technology in a multitude of sectors. Moreover, large corporations are able to take full advantage of globalization (for example, by arbitraging tax regimes to minimize their payments).

As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth. Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups.

All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward.

And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged. The opposition to the dominant mainstream in Europe is split between what is still too often an “old” left that has trouble adjusting to twenty-first-century realities, and populist, anti-foreigner, and sometimes outright fascist parties on the right.

In the US, the far right shares many of the characteristics of its populist European counterparts. But it is a tribute to the American two-party system’s capacity for political integration that extremist forces remain marginalized, despite the rhetoric of the Tea Party. President Barack Obama, in particular, has been able to attract support as a liberal-left idealist and as a centrist-realist at the same time, which enabled him to win re-election in the face of a weak economy and an even weaker labor market.

Nonetheless, without deep socio-economic reforms, America’s GDP growth is likely to be slow at best, while its political system seems paralyzed. Nowhere is there a credible plan to limit the concentration of wealth and power, broaden economic gains through strong real-income growth for the poor, and maintain macroeconomic stability.

The absence of such a plan in the US (and in Europe) has contributed to the decoupling of financial markets from inclusive economic progress, because it suggests that current trends are politically sustainable. But, while this disconnect could continue for some time if no alternative program emerges, the huge gap between financial markets’ performance and most people’s well-being is unlikely to persist in the longer term. When asset prices overshoot reality, eventually they have nowhere to go but down.

Authors

Kemal Derviş

Publication: Project Syndicate

Clicks into Bricks, Technology into Transformation, and the Fight Against Poverty

Laurence Chandy, Kemal Derviş and Steven Rocker — Tue, 12 Feb 2013 09:42:00 -0500

The last century has witnessed dramatic global improvements in the quality of life. Many of these improvements can be attributed to the discovery and spread of new technologies and ideas, ranging from vaccines and antibiotics, to improved hygiene, to the agricultural reforms of the Green Revolution. Today there is growing excitement about a new set of technologies that could further improve the lives of poor people around the world. Mobile technology is giving poor people the capacity to use their cell phones to send, receive and store money. Connection technologies such as open source software have allowed people in Haiti and Pakistan to collect and analyze information about, and then respond to, violence, corruption and natural disasters. “Green growth” innovations are expanding access to electricity and increasing agricultural yields around the globe while also reducing harmful emissions.

The 2012 Brookings Blum Roundtable was convened to discuss how the role of technology and innovation in global development can be promoted. Development practitioners and thought leaders from the public, private and non-profit sectors came together to examine the constraints that prevent the take up of creative technologies and how these constraints can be lifted. A critical question for the roundtable was what role the U.S. government should play in this agenda and how it can crowd in greater private sector activity.

This report highlights 10 issues raised at the roundtable where either particular proposals were advanced and debated, or new perspectives and analyses were shared. In each case, we summarize the roundtable discussion or explore the issues raised.

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The video below chronicles M-Pesa, the leading mobile money service in Kenya, and delves into the question of why its success has not been easily replicated elsewhere. For more information on M-Pesa, read Chapter 2 of this report.

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Image Source: © Reuters Staff / Reuters

David Cameron's European Spaghetti Bowl

Kemal Derviş — Mon, 04 Feb 2013 17:18:00 -0500

British Prime Minister David Cameron’s “Europe” speech, delivered on January 23, was powerful, polished, contained a bold vision, and offered good arguments. In particular, he got three things right. But translating those arguments into institutional reality will be a nearly impossible challenge.

First, Cameron is correct to emphasize the urgent need for a renewal of popular support for the European Union. The percentage of Europeans who believe that the EU is “a good thing” is dropping steadily.

Democracies require real debate. Yet too many decisions about the future of Europe and the eurozone are made in highly technocratic settings, with most citizens not really understanding what is going on, let alone feeling that policymakers care. One can debate whether a referendum is the most appropriate vehicle for asking for their consent, but ask one must.

As Cameron put it: “There is a gap between the EU and its citizens which has grown dramatically in recent years and which represents a lack of democratic accountability and consent that is – yes – felt particularly acutely in Britain.” Addressing the political challenge head on is much better than trying to evade the debate.

Second, Cameron was right to say that “the European Union that emerges from the eurozone crisis … will be transformed beyond recognition by the measures needed to save the eurozone.” He did not disagree that the eurozone needs more integration, but correctly noted that the required degree of political integration is beyond the comfort zone of British citizens and of others in the EU.

Finally, Cameron argues that the EU is not an end in itself. Rather, it must deliver better economic performance for its citizens by emphasizing the challenge of competitiveness, particularly with respect to the new emerging countries. His speech stressed the economic weakness of many EU members (though some – such as Germany and the Nordic countries – are actually doing reasonably well in the global marketplace).

As a conservative, Cameron lays the blame for economic weakness on the size of the state and a high degree of market regulation, though some Nordic countries with large government spending and strong financial and environmental regulations are in better shape than the UK, which has had less of both. But he is right that a debate on economic performance is needed, and that it will be crucial to reform Europe in a way that maximizes its prospects in global competition.

It is normal for conservatives to argue for less government and to place greater trust in free markets, and for social democrats and greens to argue for public policies that deliver less income inequality, more public goods (such as a clean environment and public transport), and more regulation to help markets function with greater stability and distribute benefits more evenly. The competitiveness debate should indeed be part of the debate about Europe’s renewal.

But Cameron’s vision for Europe’s institutional future is difficult to translate into workable specifics. He argues for a Europe “à la carte,” at least for those outside the eurozone. He entertains the possibility that the UK and other EU countries that have opted out of the eurozone could each negotiate a specific and special “deal” with the EU, picking and choosing among its various dimensions those that suit them best and cost them the least.

Thinking about the consequences that such a Europe would have on EU institutions, one must ask how the European Commission, the European Parliament, and the Council of Ministers would function. Would there be one set of sub-institutions for every country that has made a special deal with the Union – say, a Commission for the eurozone and Sweden, and another for the eurozone and the UK?

And would the European Parliament become fragmented in similar fashion? Would the European Council have a diverse set of memberships? How many temporary or permanent opt-outs can there be? How will Europe’s citizens, who already have enough trouble with the complexities of European governance, be able to comprehend such a “spaghetti bowl” structure?

And yet Cameron is right to believe that not all EU members will want or be able to be part of a more integrated eurozone. There will have to be some flexibility if the EU is not to shrink, becoming a smaller eurozone. British membership is important to many in Europe.

One way to overcome the dilemma might be to articulate an institutional future in which there would be essentially just two types of countries within the EU and the single market: those in the eurozone and those with national currencies. There would have to be two sets of EU institutions, one for the eurozone and another for non-eurozone countries, although they would overlap.

This is already the case in some areas: consider the EU-wide Ecofin and the eurozone-only Eurogroup of Finance Ministers. Something similar could be created for the European Parliament, and so on. It would be complex, but it could be made manageable; we should discuss how.

A new European treaty would not allow cherry-picking, but would give each member state a chance to join, or commit to, either the politically more integrated eurozone or the less integrated second group. There would be clear rules and decision-making mechanisms for both sets of countries, subject to democratic votes by a two-tier European Parliament.

Many details would have to be worked out. But this may be a vision that gives Europe a chance to remain big and inclusive, while retaining the politically integrated core that the eurozone needs.

Authors

Kemal Derviş

Publication: Project Syndicate

Image Source: © Luke MacGregor / Reuters

Arab Spring Countries: Beyond Political Upheaval and toward Inclusive Growth

Thu, 31 Jan 2013 14:00:00 -0500

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January 31, 2013
2:00 PM - 3:30 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Two years after the revolutions that changed the political landscape of the Arab world, countries in the region are still struggling to address the core political and socioeconomic issues behind the protests. Political unrest and an unfavorable international environment have led to economic stagnation and heightened short-term macro-economic risks. Little progress has been made toward achieving the revolutions’ objectives of better lives and social justice. In a series of papers, scholars from Brookings and the Japan International Cooperation Agency (JICA) address how these countries can move beyond the political upheaval and support economic and social development.

On January 31, Global Economy and Development at Brookings hosted a discussion on how post-Arab Spring countries can move toward more inclusive growth. Brookings Senior Fellow Hafez Ghanem presented the overall recommendations from the papers and a group of experts discussed their thoughts on the papers and the broader issues. Panelists included: Inger Andersen, vice president of the Middle East and North Africa region at the World Bank; Andrew Baukol, deputy assistant secretary for Middle East and Africa at the U.S. Treasury; Heidi Crebo-Rediker, chief economist at the U.S. State Department; and Akihiko Koenuma, director-general of the Middle East and Europe Department at JICA. Vice President Kemal Derviş, director of Global Economy and Development, moderated the discussion.

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The Centrists Cannot Hold

Kemal Derviş — Mon, 14 Jan 2013 14:27:00 -0500

In most advanced democracies, a large center-right party competes with a large center-left party. Of course, the extent to which an electoral system favors large parties – by having high popular-vote thresholds to enter parliament, or through winner-take-all constituencies – affects the degree of political fragmentation. But, by and large, the developed democracies are characterized by competition between large parties on the center left and center right. What, then, are true centrists like Mario Monti, Italy’s respected technocratic prime minister, to do?

To be sure, regional and ethnic allegiances play a greater role in some places in Europe – for example, Scotland, Belgium, and Catalonia – but far more so in emerging countries, where political cleavages also reflect specific post-colonial circumstances and often the legacy of single-party rule. Nonetheless, even in “emerging market” democracies, such as Chile, Mexico, South Korea, and India, a left-right cleavage plays an important role – while those who claim the political center generally remain weak.

The British Liberal Democrats, for example, have tried for decades to become a strong centrist third party, without success. While the political vocabulary in the United States is different, the Democratic Party, since Franklin Roosevelt’s presidency, is indeed a center-left force, the Republican Party occupies the right, and no other significant party exists.

In France and Germany, there is more fragmentation. Politics is still dominated by a large center-left party and a large center-right party, but smaller groups – some claiming the center and others the right and left extremes – challenge them to various degrees.

In France and Germany, there is more fragmentation. Politics is still dominated by a large center-left party and a large center-right party, but smaller groups – some claiming the center and others the right and left extremes – challenge them to various degrees. In some countries, the “Greens” have their own identity, close to the left; but, despite remarkable progress in Germany, they remain unable to reach the electoral size of the large center-right and center-left parties.

Variations of this basic structure exist in Spain, Portugal, Greece, Turkey, and the Nordic countries. The situation is particularly interesting in Italy, where Monti, having decided to contest the upcoming general election, has had to position himself on the right (which he signaled by attending a gathering of the leaders of Europe’s center-right parties). He and former Prime Minister Silvio Berlusconi are now fighting for space on the right, with the center-left Democrats leading in the polls.

There are at least four differences between center-right and center-left approaches to social and economic challenges. The right has greater confidence in markets to allocate resources and provide appropriate incentives; favors private consumption over public goods; is minimally concerned with economic inequality; and tends to be more nationalistic and less optimistic about international cooperation.

The left, by contrast, believes that markets, particularly financial markets, need considerable government regulation and supervision to function well; gives greater weight to public goods (for example, parks, a clean environment, and mass-transit systems); seeks to reduce economic inequality, believing that it undermines democracy and the sense of fairness that is important to well-being; and is more willing to pursue international cooperation as a means to secure peace and provide global public goods, such as climate protection.

When looking at actual economic policies as they have evolved over decades, we see that they always combine center-right and center-left elements. Repeated financial crises have tempered even the right’s faith in unregulated markets, while the left has become more realistic and cautious about state planning and bureaucratic processes. Likewise, the choice between privately consumed and publicly consumed “goods” is often blurred, as politicians tend to reinforce citizens’ understandable tendency to demand public goods while rejecting the taxes needed to pay for them.

As income inequality has increased – dramatically in some countries, such as the US – it is moving to the forefront of the debate, reinforcing the traditional political divide.

As income inequality has increased – dramatically in some countries, such as the US – it is moving to the forefront of the debate, reinforcing the traditional political divide. Nonetheless, the center right and the center left are arguing about the degree of redistribution, not about the need for some progressivity in taxes and transfers. Both also agree on the need for international cooperation in an increasingly interdependent world, with differences mainly concerning how much effort to spend on it.

So, given that differences in policies as they are implemented have become largely a matter of degree, why do centrist parties remain weak? Why have they failed to unite moderates on both sides of the ideological divide?

One reason is that only a minority of any population is active politically. Active party members hold more ideologically consistent views – and hold them more strongly – than most of those who are politically less engaged, giving activists disproportionate influence in the political process. After all, more nuanced ideas and policy proposals are relatively difficult to propagate effectively enough to generate broad and enthusiastic popular support.

But there also really are fundamental differences in values and economic philosophies, as well as in economic interests, leading to a fairly consistent positioning of voters on the right or left. Disagreement may lead to compromises, but that does not change the underlying differences in starting positions.

It is probably a good thing that structured competition between large center-right and center-left parties persists. Such parties can help to integrate the extremes into the political mainstream, while facilitating alternation in power, which is essential to any democracy’s dynamism; a system in which a large centrist party remained permanently in power would be far less desirable. Those, like Monti, who want to mount a challenge from the center, however personally impressive they may be, have steep obstacles to overcome, and for good reasons.

Authors

Kemal Derviş

Publication: Project Syndicate

Image Source: © Francois Lenoir / Reuters

Should Central Banks Target Employment?

Kemal Derviş — Wed, 19 Dec 2012 16:29:00 -0500

On December 12, US Federal Reserve Chairman Ben Bernanke announced that the Fed will keep interest rates at close to zero until the unemployment rate falls to 6.5%, provided inflation expectations remain subdued. While the Fed’s governing statutes, unlike those of the European Central Bank, explicitly include a mandate to support employment, the announcement marked the first time that the Fed tied its interest-rate policy to a numerical employment target. It is a welcome breakthrough, and one that should be emulated by others – not least the ECB.

Central banks’ statutes differ in terms of the objectives that they set for monetary policy. All include price stability. Many add a reference to general economic conditions, including growth and employment or financial stability. Some give the central bank the authority to set an inflation target unilaterally; others stipulate coordination with the government in setting the target.

There is no recent example, however, of a major central bank setting a numerical employment target. This should change, as the size of the employment challenge facing the advanced economies becomes more apparent. Weak labor markets, low inflation, and debt overhang suggest that a fundamental re-ordering of priorities is in order. In Japan, Shinzo Abe, the incoming prime minister, is signaling the same set of concerns, although he seems to be proposing a “minimum” inflation target for the Bank of Japan, rather than a link to growth or employment.

The spread of global value-chains that integrate hundreds of millions of developing-country workers into the global economy, as well as new labor-saving technologies, imply little chance of cost-push wage inflation. Likewise, the market for long-term bonds indicates extremely low inflation expectations (of course, interest rates are higher in cases of perceived sovereign default or re-denomination risk, such as in Southern Europe, but that has nothing to do with inflation). Moreover, the deleveraging underway since the 2008 financial implosion could be easier if inflation were moderately higher for a few years, a debate the International Monetary Fund encouraged a year ago.

Together with these considerations, policymakers should take into account the tremendous human and economic costs of high unemployment, ranging from the millions of shattered lives, skills erosion, and disappearance of opportunities for an entire generation, to the dead-weight loss of idle human resources. Is the failure to ensure that millions of young people acquire the skills required to participate in the economy not as great a liability for a society as a large stock of public debt?

Nowhere is this reordering of priorities more needed than in the eurozone. Yet, strangely, it is the Fed, not the ECB, that has set an unemployment target. The US unemployment rate has declined to around 7.7% and the current-account deficit is close to $500 billion, while eurozone unemployment is at a record high, near 12%, and the current account shows a surplus approaching $100 billion.

If the ECB’s inflation target were 3%, rather than close to but below 2%, and Germany, with the world’s largest current-account surplus, encouraged 6% wage growth and tolerated 4% inflation – implying modest real-wage growth in excess of expected productivity gains – the eurozone adjustment process would become less politically and economically costly. Indeed, the policy calculus in Northern Europe greatly underestimates the economic losses due to the disruptions imposed on the South by excessive austerity and wage deflation. The resulting high levels of youth unemployment, health problems, and idle production capacity also all have a substantial impact on demand for imports from the North.

Contrary to conventional wisdom, the ECB’s legal mandate would allow such a re-ordering of priorities, as, with reference to the ECB, the Treaty on the Functioning of the European Union states that “The primary (emphasis added) objective of the European System of Central Banks…shall be to maintain price stability,” and there is another part of the Treaty dealing with general eurozone economic policies that emphasizes employment. This would seem not to preclude a temporary complementary employment objective for the ECB at a time of exceptional challenge.

Moreover, the ECB has the authority to set the eurozone-wide inflation target, and could set it higher for two or three years, without any treaty violation. The real problem is the current political attitude in Germany. Somehow, the memory of hyperinflation in the early 1920’s seems scarier than that of massive unemployment in the early 1930’s, although it was the latter that fueled the rise of Nazism. Maybe the upcoming German elections will allow progressive forces to clarify what is at stake for Germany and Europe – indeed, the entire world.

In a more global context, none of this is to dismiss the longer-term dangers of inflation. In most countries, at most times, inflation should be kept very low – and central banks should anchor inflation expectations with a stable long-term target, although the alternative of targeting nominal GDP deserves to be discussed.

Moreover, monetary policy cannot be a long-term substitute for structural reforms and sustainable budgets. Long periods of zero real interest rates carry the danger of asset bubbles, misallocation of resources, and unintended effects on income inequality, as recent history – not least in the US and Japan – demonstrates.

For the coming 2-3 years, however, particularly in Europe, the need for deleveraging, the costs of widespread joblessness, and the risk of social collapse make the kind of temporary unemployment target announced by the Fed highly desirable.

Authors

Kemal Derviş

Publication: Project Syndicate

Image Source: © Thierry Roge / Reuters

The Inequality Challenge

Kemal Derviş and Uri Dadush — Thu, 29 Nov 2012 00:00:00 -0500

Editor's Note: This article will be published in the January 2013 issue of Current History.

High levels of inequality have become a subject of intense debate, particularly in the United States, where inequality has risen sharply over the past 30 years. The rise in inequality in most advanced countries and in many developing countries should be analyzed in the context of other big changes that have affected the global economy over the past three decades. These trends include major technological advances, mostly related to information technology; globalization, which has accelerated growth in many developing nations; and the changing role of the state.

Some degree of inequality is a natural part of a market economy—a reflection of the economic incentives that fuel it. For example, as the Harvard economist Simon Kuznets argued, rising inequality accompanies the initial stages of development, when workers attracted by higher wages in cities move from the countryside. The view that the efficient working of the market economy necessarily requires very high inequality, however, finds little empirical basis. There are well-functioning market economies, such as the Scandinavian countries, where income is quite equally distributed. Moreover, recent empirical work at the International Monetary Fund has shown that, on the contrary, growth appears to be more sustained when inequality is moderate than when it is extreme. Very high inequality, as well as raising troubling moral questions, can result in social divisions that reduce the efficiency of both government and the economic system. We believe that inequality in the United States and in many other countries has reached levels that are excessive on both equity and efficiency grounds. High and rising inequality is especially problematic when growth is slow and the living standards of the typical family are declining. Certainly the temptations of protectionism or retarding technology-induced shifts in employment must be resisted. But at the same time, as the trends that led to higher inequality appear set to persist or even intensify, it is important for policy makers to take corrective measures.

There is no secret to the recipes that governments can use to mitigate inequality; beginning in the 1920s and throughout the immediate post– World War II period, all advanced countries, including the United States, invested heavily in education, adopted more progressive taxation regimes, tightened labor and financial market regulations, and widened and deepened the social safety net. Most recently, governments in Latin America have shown how developing countries can use investments in education and small cash transfers to significantly reduce inequality, alleviate poverty, and improve health and education outcomes, even in an environment of very limited resources. With globalization, increased coordination across countries is needed to ensure that nations retain the capacity to tax corporations, mobile capital, and the highest earners.

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Kemal Derviş
Uri Dadush

Publication: Current History

Image Source: © Yuriko Nakao / Reuters

Rising Inequality in America and Around the World

Tue, 27 Nov 2012 15:30:00 -0500

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November 27, 2012
3:30 PM - 5:00 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Income inequality has been on the rise in the United States since the late 1970s— a trend that is also surfacing in many other countries around the world. Even among those who view inequality neutrally— or even positively— for economic growth, most agree that some of the features that accompany it, such as reduced opportunity and low social mobility, increased prevalence of poverty, and stagnation of the middle class, are undesirable.

On November 27, the Brookings Institution in cooperation with the Carnegie Endowment for International Peace and Oxfam America hosted a discussion on the implications of rising U.S. and global inequality. The discussion will examine the facts and trends underlying increasing inequality, and explore what kinds of policies are desirable for addressing inequality. Panelists included: Uri Dadush of the Carnegie Endowment for International Peace, co-author of Inequality in America: Facts, Trends, and International Perspectives (Brookings Press, 2012); Chrystia Freeland of Thomson Reuters, author of Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (Penguin Press, 2012); Branko Milanovic, author of The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (Basic Books, 2010); and Ray Offenheiser, president of Oxfam America. Vice President Kemal Derviş, director of Global Economy and Development at Brookings and a co-author of Inequality in America, moderated the discussion. The panelists discussed findings and observations from their respective books on inequality as well as those of other recent books on the topic by Joseph Stiglitz and Francois Bourguignon.

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Turkey on the Way to the 100th Anniversary of the Republic

Kemal Derviş — Tue, 13 Nov 2012 13:32:00 -0500

Editor's Note: On November 13, Kemal Derviş spoke at the Turkish Embassy in Washington, D.C. on Turkey's road to the 100th anniversary of the Republic. This lecture was hosted by the Turkish Embassy and the American Friends of Turkey.

It is a great honor and pleasure to be able to share some thoughts with this group of distinguished guests tonight. I am very grateful to the organizers, the AFT and Elizabeth Shelton, and to Ambassador Tan for hosting it. Turkey is about to embark on the decade leading to 2023, the 100th anniversary of the Republic founded by Atatürk and his companions. Prime Minister Erdoğan has set as a national objective to have Turkey in 2023 become one of the 10 largest economies in the world ( Turkey is ranked 16th today ). It is a good time to briefly look back at the last 90 years, but even more so, to look ahead 10 years and try to see what kind of Turkey is emerging in this first half of the 21st century. This lecture is about Turkey, not only about Atatürk. I am an economist, not a historian. But we are discussing the 100th anniversary of the Republic and I will start with a story about Atatürk, which is also a story about modern Turkey.

From 2005 to 2009, I was Executive Head of the United Nations Development Program, headquartered in New York. In 2007, I hired a new research analyst for my front office. She was a very bright young Turkish woman, perhaps about 25 years old. She was not from Istanbul, Ankara or Izmir, but from Samsun, on the eastern Black Sea coast in Anatolia. I went to her office to welcome her on her first day of work. She had not yet unpacked anything, the office was full of boxes, her table was empty and the walls were clear of posters or pictures. Clear, except for one picture which she had hung on the yet bare walls: a picture of Atatürk, of Mustafa Kemal Paşa.

I asked myself, is there any other leader who passed away decades ago, in the first half of the 20th century, the picture of whom would be the first thing a young research analyst would hang on her bare walls, by her own initiative, outside of her own country, the minute she started a new job, in the first decade of the 21st century? I could not come up with any other example that even came close. This is not to say that there have not been very great leaders in the 20th century, whose names emerge forcefully from history books and who have had a determining impact on their countries and the world. But the association between the Turkish Republic and Mustafa Kemal Atatürk has been particularly strong. I should add that Nergis was certainly patriotic, she loved Turkey and her “Turkishness”, but not at all in a narrow excessively nationalistic way. She was open to the world, an excellent economist, loving New York, as an American and also global city, loving the United Nations where she still works in a more senior position, hoping that Turkey could join the European Union, but also very interested in helping the poorest countries of the world, eager to know Africa, Asia and Latin America. She was also a woman.

Millions of Turkish women, in particular, carry deep in their hearts a lasting gratitude for the revolutionary changes Atatürk introduced to make it possible for them to become equal citizens, equal human beings.

Millions of Turkish women, in particular, carry deep in their hearts a lasting gratitude for the revolutionary changes Atatürk introduced to make it possible for them to become equal citizens, equal human beings. Putting Atatürk on the wall as the first thing she did was symbolic of how his name and the history of the struggle to establish the Turkish Republic remains part of the identity of so many of Turkey’s citizens. While in the 1930s, and later, there have been strong attempts to fabricate an ethnic basis for Turkish identity, the association between Atatürk and identity is far from one based on ethnicity. On the contrary, it is based on two other dominant dimensions. I will try to explain what I mean.

One of the Turkish novels that impressed me the most as a young man was Kemal Tahir’s novel entitled “Yorgun Savaşçı”, in English, the “Tired Warrior”. It is a novel about the catastrophic defeat of the Ottoman Empire, it’s tearing apart by the Western powers after World War I, the terrible feeling of loss in the hearts of an officer of the Ottoman army, and despite all this, the will to survive, the will to resist, the will to rise again. It is this will that Mustafa Kemal catalyzed, harnessed, and led to victory. At stake was survival and self determination, including the future of millions of Moslem refugees from the Balkans, the Aegean islands, Crimea and the Caucasus. Many spoke the Turkish of those times, but many others spoke Bosnian, Greek, Kurdish, Albanian, Arabic or Bulgarian, or the languages of Circassians, Georgians or Tatars as their mother tongues.

Despite the ethnic ideology that some later tried to impose, Atatürk’s Republic was founded on a multi-ethnic basis – indeed there is his famous answer to the question of who is a Turk: A Turk is a citizen of the Turkish Republic. Just like an American is a citizen of the United States, whatever her or his origin.

Despite the ethnic ideology that some later tried to impose, Atatürk’s Republic was founded on a multi-ethnic basis – indeed there is his famous answer to the question of who is a Turk: A Turk is a citizen of the Turkish Republic. Just like an American is a citizen of the United States, whatever her or his origin. But, to be honest, while definitely multi-ethnic, this “founding identity” was not really multi-religious. The western powers and Russia had encouraged the Christian minorities to side with them against the Ottomans. There had been terrible ethnic cleansing and massacres on a grand scale by all sides throughout the Balkan Wars and World War I. The refugees from Crimea, from the Caucasus, from the Balkans were Moslem refugees, who had fled ethnic cleansing campaigns against Moslems in their homelands. During the sad population exchange agreed between Turkey and Greece after the independence war, Greek speaking Moslems from Greece had to come to Turkey, and Turkish speaking Orthodox Christians, had to resettle in Greece. The Republic became a secular Republic, and all citizens had indeed the same legal rights, but there were to be officially recognized non-Moslem minorities, but no Moslem minorities, since the very construction of the Republic was based on the assembly of various largely Moslem groups into Turkey and “Turkishness”. So at the very root of Turkish republican identity there was the memory of the heroic resistance against huge odds by the “tired warriors”, the construction of a new homeland for Moslem populations from all over the larger region and their merging into a new “Turkishness”. The misguided attempts to translate this identity into some ethnic-racial concept later on in the 1930s, became a source of confusion and problems. But I think one should not forget that Atatürk’s Republic was a direct successor of a multi-ethnic Ottoman empire, and provided safe haven to millions of people fleeing persecution from various ethnic origins, refugees who were, however, all Moslems. It is this collective memory of survival in the face of a threat of annihilation that is the first strong dimension of identity that leads to the extraordinary longevity of Atatürk’s memory. It also explains the strange co-existence in the Republican tradition, between assertive secularism and, yet, a “de facto” state religion. Note that this is in the end not that different from what was the situation in the United States for a long time: a definitely multi-ethnic nation, although it took a long time for African-Americans to become full citizens, but also a nation both secular and with a “Christian” identity, despite the many non-Christians who lived in it. Even today in some circles there remains the perception of a link between being an American and a having a Christian faith.

The second dimension of this feeling of identity linked to Atatürk is rooted in the impressive modernization that he led from above and that was, despite its critics, amazingly successful. Anatolia had been one of the poorest and least developed parts of the late Ottoman Empire. Places like Egypt, Syria, Bosnia or Macedonia, were much richer than the Anatolian heartland. The economic measures and reforms of the 1920s and 1930s, including the mixed economy, public and private sector economic strategy followed, allowed Turkey to emerge into the second half of the 20th century as an increasingly dynamic country, still with low incomes, but doing much better than most other parts of the ex-Ottoman Empire.

Even before the Second World War, Turkey became a respected, modern and independent nation, no longer the “sick man of Europe”, able to give its educated elites at least, a feeling of “equality” with the citizens of the most advanced parts of the world. Turkey was not a colony. Turkey was not dominated by others. Turkey was respected and controlled its own destiny.

Even before the Second World War, Turkey became a respected, modern and independent nation, no longer the “sick man of Europe”, able to give its educated elites at least, a feeling of “equality” with the citizens of the most advanced parts of the world. Turkey was not a colony. Turkey was not dominated by others. Turkey was respected and controlled its own destiny. Turkey participated in a “world civilization” which had succeeded in producing scientific, technological and economic progress, but it was not dominated by the countries who had been leading technological progress. That gave our parents and ourselves, a pride that carries Atatürk’s memory through the generations.

Of course these two dimensions were strongly linked in the minds of the “tired warriors” who found the strength to rise again and create the Republic. Professor Şükrü Hanioğlu, in his book on Atatürk, tells us that after attending a western opera in Sofia as a young military attaché, an impressed Mustafa Kemal is said to have remarked that he now understood how the Bulgarians had defeated the Ottomans the previous year. Turkey had to modernize, western style, so it would never be defeated again!

I think it is these two dimensions, the memory of sheer survival, and the feeling of participating as an equal in global progress, that explains why the young woman in New York wanted Atatürk on her office’s wall, before anything else. Nobody was forcing her, nobody was telling her to do it, she wanted to do it because it was part of the perception she has of her identity.

Before turning to today and the future, let me touch on another important point. There is little doubt that the early Republican period was accompanied by sometimes bloody repression of rebellion and dissent, in very authoritarian ways, and by what quickly became a one party state led by a single man. One should not forget, however, that these were terrible times in Europe, with Stalin in Russia, Hitler in Germany, Mussolini in Italy and the fascists taking over in Spain. Taha Akyol, in his impressively researched latest book entitled “Atatürk’s Revolutionary Justice”, documents how arbitrary and politically motivated the judiciary operated in the 1920 and 1930s. But as Taha Akyol writes, there is no comparison between the extent of the totalitarian violence of other revolutions, starting with the French revolution, and the authoritarianism of Atatürk’s Turkey. This is not to excuse or belittle the violence and arbitrariness there was, but it is to remember that, while very radical, the Turkish revolution was not very violent by comparison to others. Moreover, Atatürk never looked to communist Russia or fascist Germany or Italy as long-term potential allies, but he looked to France and Great Britain instead, despite the rise of fascist ideology in the Europe of the 1930s, and despite the fact that the western democracies had been adversaries in World War I and had tried to essentially obliterate Turkey from the map of the world, with only US President Woodrow Wilson at the time trying to argue for less harsh a settlement.

Atatürk and his companions saw the one party state as a tool for the revolutionary period, not an end in itself. The long term objective, already at that time, was for Turkey to become a democracy like France, Britain or the United States. It should not be surprising, therefore, that the minute the Second World War ended, Atatürk’s closest friend and companion who had succeeded him in 1938, İsmet İnönü, moved Turkey to multi-party democracy, instead of trying to hang on to power, as Franco in Spain, or Salazar in Portugal did for many decades. Atatürk’s Republican Peoples Party led by İnönü, lost the 1950 election. Power, peacefully and democratically, passed to the opposition. İnönü had been Atatürk’s closest associate for two decades. Does this not show that Atatürk’s revolution was not totalitarian in its long-term goals, and that the founders of the Republic perceived the link between modernity, to which they were aspiring, and democracy? Later on, there were several military coups trying to legitimize themselves with reference to Kemalism, and the understanding of what it means to practice democracy remained weak and patchy in Turkey. But even the military, contrary to what we saw for decades in Latin America, Asia, and the Middle East, never tried to establish a full military dictatorship, although they wanted and managed to keep a lot of influence. A civilian government was restored each time in less than 3 years. Some officers had wanted to stay in power; they were quickly marginalized. Deeply influenced by the underlying ideology of the Republic, the military as an institution believed that modernity was linked to democracy, as it was practiced by all the truly advanced countries after the defeat of fascism. They would never try to put Turkey into the group of third world dictatorships away from “contemporary civilization” of which a Kemalist Turkey had to be a part. They viewed themselves as guardians of secularism and territorial integrity, they were suspicious of decisions civilian politicians might take and were able to constrain civilian power, and they made devastating and hurtful mistakes, but, as an institution, they did not betray Atatürk by aiming to establish a lasting military regime.

Let me now go fast forward and look at where Turkey is today, and how it is heading to 2023, on a journey that started almost a century ago.

Let me begin by the economy. Economic success is crucial on the road to 2023. For many decades Turkey has been one of the more dynamic economies of the world, starting form a very low income base. The average GDP growth rate from 1946 to 2002 was about 5 percent, on the middle to high end of international experience. But while there were years of very rapid growth, there were also years of crisis and negative growth, such as for example in 1980, in 1994, in 1999, in 2001 and then again in 2009. These bad years lowered the average performance. Without them Turkey would have been one of the fastest growing economies in the world. In the last decade, (2003-2012), average growth was again about 5 percent ( 3.7 percent per capita: with population growth much lower now, a 5 percent growth rate is a better per capita achievement than it was 20 or 30 years ago). If we take out 2008 and 2009, the years of the world crisis associated with the US sub-prime mortgage disaster, GDP growth in Turkey would have averaged a spectacular 7 percent. But the high current account deficit reflecting too low a private domestic savings rate, still makes the Turkish economy vulnerable to outside shocks. Turkey has been able to reduce very substantially the public debt-to-GDP ratio thanks to the reforms of 2001-2002 and the strict fiscal policy also pursued by the Justice and Development Party governments.

Turkey’s public debt now stands at about 38 percent of GDP. Compare that to the more than 80 percent public debt ratios in the United States and in most European countries, with some, such as Italy, reaching 120 percent.

Turkey’s public debt now stands at about 38 percent of GDP. Compare that to the more than 80 percent public debt ratios in the United States and in most European countries, with some, such as Italy, reaching 120 percent. The Turkish household and private sector, however, have very low savings rates by international standards. The economy has therefore been very dependent on foreign capital inflows. When these inflows take the form of long-term investments in productive capacity, there is not much of a problem. But about two thirds of the inflows are much more speculative and short term, leading to an uncomfortable degree of potential volatility. To become one of the 10 largest economies in the world by 2023, Turkey needs to grow at an average of about 7 percent a year, with this growth complemented by some further appreciation of the Turkish Lira, reflecting not speculative capital inflows, but superior long term productivity performance. Moreover growth alone cannot be the sole objective. Equitable distribution of the fruits of growth should be more explicitly a part of the 2023 vision.

For the 2023 objective to be met, or for Turkey to come very close to it, there are several key conditions that must be fulfilled. The investment rate has to average not less than 23-24 percent, with domestic savings at about 18-19 percent, so that the current account deficit can stay below the 5 percent mark, which I consider the prudent upper limit for rapidly growing emerging market economies in general. This implies a 5 to 6 percentage point increase in Turkey’s savings rate, compared to its current level, a feasible, but difficult to attain objective. There is no magic recipe for increasing a country’s savings rate. A stable macro-economy, a strong and well regulated financial sector, a good return on investment, including a system of taxation that rewards long term savings and investment, are all desirable features. Other important conditions, for good resource allocation and a high investment rate, are clear rules of the game so that the economy can function without arbitrary and partisan political interventions. Establishing Independent and professional regulatory institutions, including an independent and strong Central Bank, ensuring transparent and competitive public procurement, and insisting on an arms- length distance between day to day politics and the workings of the marketplace, were key reforms we undertook in 2001 and 2002. This is not at all to say that regulatory institutions should function without reference to and supervision by the democratic process. But the democratic process and the governments of the day have to show the maturity of encouraging real competition in the economy, chose the regulators for their competence and independent judgment, and allow the best entrepreneurs and firms to invest and to succeed, whatever their political views. Progressive taxation and an increasingly strong social solidarity system can then aim at an equitable distribution of the gains from growth.

Beyond these factors having to do with economic management as such, the overall confidence citizens have in the future is of course also a key factor for economic success.

This brings me to the second precondition for reaching the goals set for 2023. There has to be true internal peace and social cohesion. The fact that a party with strong references to religion is now in government for a decade, and is making plans for the hundredth anniversary in 2023, shows how Turkish democracy has evolved and developed since the early years. A whole conservative and religious current in society, that had been legally and politically constrained until the early part of our 21st century, has been able to organize itself politically, broaden its base by reaching out to the moderate center-right, and get elected with increasing majorities. Until a very few years ago, the army still constituted a politically influential counterweight to this powerful current. That is no longer the case. For the first time since the Republic’s creation, civilian power is fully established and essentially unconstrained. In that sense Turkey is no longer different from the United States or the United Kingdom, to give just two examples. Successful democracy, however, is not just a “winner take all” system, where those who win elections, can do as they please. It has to include a system of checks and balances in a way that protects individual citizens, opposition groups, and whoever is in the minority. On the road to the hundredth anniversary of the Republic, Turkey now has the chance to show its citizens and the world that it has achieved what the founding fathers ultimately wanted, even though they did not practice it, namely that the country has become a full, normally functioning democracy. We have a chance to become just that, but we are unfortunately not there yet. It is not just that there is need for a new constitution and new laws offering much stronger protection to dissent and individual rights, it is also a question of behavior and socio-political norms.

Two more underlying structural challenges still stand in the way of a fully developed democracy. First, Turkey has to not only remain, but also to redefine secularism. I referred at the beginning of my lecture to the reason why, despite Atatürk’s secularism, Islam, and in fact Sunni Islam, was treated as a “de facto” if not “de jure” state religion. That was probably unavoidable given the circumstances at the time the Republic was founded. Survival required cohesion in a society where the State was closely identified with religious authority for centuries. Times have fortunately changed and Turkey’s survival is no longer at stake. Turkey, now, can re-define secularism, as a much more total separation of religion and state. Individuals are and can be religious as they please, the State should not be. It should also not interfere with, or try to constrain the forms in which religion is practiced, or not, as long as they are peaceful. If the governing party and the main opposition, which is the party founded by Mustafa Kemal, can truly agree on this kind of secularism, Turkey will have solved a huge social problem that was lingering under the surface throughout the last decades.

The second, equally important challenge, is related to the Kurdish issue. The Republic was founded as a multi-ethnic nation-sate, like the United States. But it was at a time when nationalism was reaching its peak in Europe. The founders of the Republic understandably thought they had to, and they largely succeeded in, creating a cohesive Turkish nation form its various diverse parts. The Bosnians, Tatars, Circassians, Albanians, Laz and other groups merged with the Turks of Anatolia into a new “Turkishness”, quite easily. Since writing these lines I discovered that Strobe Talbott, then Deputy Secretary of State, now President of the Brookings Institution, had made the same point 14 years ago, in his Turgut Özal Memorial lecture. The Republic had saved all these groups, and each was relatively small, although not at all insignificant in number. While there are probably close to 4 million citizens of Bosnian origin in Turkey today, they do not feel the need for Bosnian being taught in schools, or being taught in Bosnian. The situation is different for Turkey’s Kurdish citizens. From the beginning they were large in numbers and they grew even larger. The majority of them, lived in a less accessible part of the country, and those regions remained the poorest and were neglected by the central administration. There is today a Kurdish identity that has developed besides the Turkish identity, and there is not much point in debating why this happened, while something analogous did not happen for any of the other groups. It is there, it is growing and it must be accepted. There are, however, no clear-cut geographical boundaries between Kurds and other citizens in Turkey. Citizens of Kurdish origin live side by side with citizens of different ancestries. Migration and a dynamic economy have created a society where Turkey’s Kurds live and work all over Turkey, many of them participating in the rapid economic growth of the country. In the cities there is widespread marriage across all groups.

There is therefore only one solution. Turkey’s Kurds must not engage in violence and must seek their goals within Turkey’s democracy, while Turkey must become a country where Kurds can fully live their culture and identity as they perceive it and want to live it, as citizens of Turkey.

There is therefore only one solution. Turkey’s Kurds must not engage in violence and must seek their goals within Turkey’s democracy, while Turkey must become a country where Kurds can fully live their culture and identity as they perceive it and want to live it, as citizens of Turkey. As long as they respect democratic procedures and do not engage in violence, it is up to them to decide how they want to live their identity, not up to others. I am truly optimistic that this can happen over the next ten years. Despite a sad and unacceptable degree of recent violence and terror, there is actually a feeling of belonging together, dating all the way back to the great Saladin, and rooted in centuries of living together. The Kurds played a critical role in Turkey’s war of independence. All citizens have a stake in the economy, and all know that violence is the biggest obstacle to investment and development. National cohesion will increase, not decrease, if full cultural rights and strengthened local government allow our Kurdish citizens to thrive, prosper and be free to speak and learn their language in a self-confident, democratic, and undivided Turkey, where public discourse relates national belonging to citizenship and not to ethnicity. Prime Minister Recep Tayyip Erdoğan’s government has made genuine efforts in that direction over the past several years. I think much more is needed, but a positive mature response is also needed from the Kurdish side. President Abdullah Gül, in two very important recent speeches, on the occasion of the opening of Parliament and on the occasion of Republic Day on October 29th, forcefully stressed the need for a new constitution that much more effectively than today, protects freedom of speech and freedom of opinion, an area where very unfortunately, on some metrics at least, Turkey has moved backwards in the last two years. Three weeks ago, the new leader of Atatürk’s party, Kemal Kılıçdaroğlu, visited the Kurdish mayor of Diyarbakır, Osman Baydemir, a strong and controversial proponent of Kurdish interests and issues, on the occasion of the religious holiday, the Kurban Bayram. I believe that this was an appropriate and courageous signal that those who cherish the memory of Mustafa Kemal as perhaps the most successful modernizer of the 20th century, realize that modernization and progress is a dynamic process that changes form and priorities, as history advances. I do believe that Mustafa Kemal, the visionary and at the same time very pragmatic leader, would have visited the mayor of Diyarbakır, just as today’s CHPs leader did, if he had lived in 2012. By this effort for internal peace, as well as many other efforts to modernize and strengthen the main opposition party, Kemal Kılıçdaroğlu is contributing to democracy, which has to be a system where a credible opposition has to be an alternative to whoever has won the last elections.

Finally let me conclude with a few words on a third element the successful journey to 2023 must encompass, that has to do with Turkey’s place in the world, foreign policy and Turkish-American relations. Again these are not my areas of professional specialization, but it is not possible to separate economic, democratic and foreign policy success. A joyful celebration of the 100th anniversary of the Republic will have to be built on success in all three areas. The economic goal of becoming, or getting close to becoming, one of the 10 largest economies in the world, needs “peace at home and peace in the world”, as Atatürk had stressed. It is interesting, for example, that in the memoirs of Ali Fuat Cebesoy, one of Atatürk’s close early companions, as quoted by Taha Akyol, Mustafa Kemal, defending peace negotiator İsmet İnönü, who had asked for “accelerating the pace of the negotiations”, tells Ali Fuat Paşa, that he also regrets that the new Turkey could not achieve all its territorial claims at the Lausanne peace negotiations after the war of independence, but that peace required compromise and that “ the important things we have to do at home …could not be achieved without peace”. Atatürk could not have succeeded at home if he had not been at crucial times a pragmatist and realist, and very much committed to peace. Revenge for past wars, territorial expansion, ill feelings towards other nations because of past events, were far from his forward looking mind. Despite the Greek invasion of Anatolia after the Great War, and the thousands of lives lost, Turkey signed a peace and friendship treaty with Greece quickly after the Republic was established. Indeed, the friendship with Greece progressed so much, that the great Greek statesman Venizelos, formally nominated Ataturk for the Nobel Peace Prize in 1934!

As time is short I just want to make three points on these issues, which are crucial, however. They reflect in many ways, views you can also find in President Abdullah Gül’s two impressive speeches referred to already above, although I cannot of course pretend to speak for him. I recommend to all who are interested in Turkish affairs to read these two Presidential speeches and see and judge by yourselves.

The first and most important point relates to Turkish “soft power”, particularly in the Middle East and the Moslem world. It is already very effective, but it could grow even more, by an order of magnitude. Our historical, cultural and emotional links with the Arab countries in particular, are deep and strong. I had the privilege of being World Bank Vice-President for the Middle East and North Africa in the late 1990s. Nobody from Turkey can feel a stranger in these lands, marked by common architecture, familiar sounds of music, similar food and the celebration of common religious holidays. The same holds of course for Arab visitors to Turkey. Atatürk left a legacy of good neighborly relations, but also a strict legacy of peace and non-interference in other countries internal political affairs. Turkey’s influence in the region, greatly strengthened over the past ten years, should remain based on the power of our successful economic, cultural and democratic example, not on attempts to direct others in any way or to interfere beyond our borders. The Arab countries future is and should be in their hands. Neither Turkey nor the Unites States can shape that future. Particularly in the Middle East, which has suffered from colonial and imperial power coming from outside the region in the past, foreign interference will always end up being resented, even if it comes with the best of intentions. No people or country in the long run likes interference coming from outside, even if, in the short term, various factions may appeal for it to further their cause. This is not to say that any of us can remain unaffected by people dying and suffering. Help in the form of attempts at impartial mediation as well as humanitarian aid, may often be necessary and highly desirable. Turkey can and is already playing an important humanitarian role, as far as Somalia. There is also the responsibility to protect all human beings under severe threat, within the framework of the United Nations. But Turkey should not appear to want to become a kind of neo-imperial power in the Middle East. This would badly misfire and undermine the real and positive soft power Turkey can deploy in the service of peace, economic development, human rights and democracy. It is on this that the United States and Turkey can work together. If Turkey can provide a shining example of economic success and internal peace and freedom, this will have a much greater impact on the region, then any foreign policy that borders on direct interventionism.

The second dimension here relates to Europe. The whole European project and its institutional architecture is going through a severe crisis these days, triggered initially by the Greek crisis, and then by the more general problems of the Euro-zone. Europe remains, however, taken as a whole, an economy roughly as large as the United States, with the euro-zone actually running a significant current account surplus, and an area of impressive social achievements, peace and cooperation. I do believe the current problems will eventually be overcome, but that there will be a Europe with concentric circles of cooperation. There is likely to be a politically much more integrated core with the euro as common currency, pursuing coordinated fiscal policies and a banking union complementing the monetary union. There will also be other countries, most notably the United Kingdom, countries that will not be part of the more tightly integrated Monetary Union, but that will be part of the European Union and of the single economic market. The European Union and the United Kingdom continue to need each other and I believe it is likely and desirable that the United Kingdom stay in the Union. There could also be much more advanced cooperation among the members of this larger European Union on matters of defense, foreign policy, science, the environment and education.

Turkey can and should join this re-structured European Union and be a member more like the United Kingdom or perhaps also Sweden, outside the Monetary Union, but a full member otherwise, with elected euro-parliamentarians, a Turkish member of the Commission and participation in the European Council, the same way the United Kingdom is likely to participate in the future.

Turkey can and should join this re-structured European Union and be a member more like the United Kingdom or perhaps also Sweden, outside the Monetary Union, but a full member otherwise, with elected euro-parliamentarians, a Turkish member of the Commission and participation in the European Council, the same way the United Kingdom is likely to participate in the future. This is what we should aim for. Such a redefinition of the objective could infuse both new dynamism and new credibility into the vital project of making Turkey a member of the European Union – a European Union that in any case, has to re-invent itself. In no way will this diminish Turkey’s influence in the Middle East. On the contrary, a recent poll found that more than 60 percent of Arab citizens want Turkey to be a member of the EU. Being part of Europe can only increase Turkey’s soft power in the world. On Turkey’s Republic Day, the President again forcefully re-affirmed what can rightly be seen as a continuity coming from Atatürk’s vision, and linked this objective to the challenges facing Turkey today. By 2023, I do believe Turkey can and should have become a full member of the new European Union, a Union that the whole world much needs in the 21st century.

Finally, let me share my perspective on the relations between Turkey and the United States, a topic on which many have spoken with great eloquence, including President Clinton when he visited Turkey, as well as president Obama soon after he was elected in 2008. Don’t worry, I am not going to start a whole new lecture at this late hour. I do want to stress, however that that the United States and Turkey share many characteristics, more than perhaps most people realize. There are now also several hundred thousand Turkish origin residents or citizens in the United States, feeling happy, productive and welcome. Of course the comparison must keep in mind that the United States is a much larger country, much richer, with an economic, political and military power equal to none other in the world. Turkey is a medium size, emerging economic power. So the comparison must keep that in mind.

The United States and Turkey are both countries and societies with a strong global dimension. The United States in its very social fabric, is linked to all parts of the world, with strong ties of course to Europe, but also to South and Central America, to Asia, with sizeable and growing Hispanic and Asian-American components of the American population, to Africa, with African Americans very much part of America’s past, present and future, to the Middle East, with strong ties to Israel, but also to the Arab world. Despite ever present isolationist feelings and the two large oceans that separate the US geographically from most of the world, economics, demography and technology mean that America will become ever more global, while all Americans, even when more and more of them will speak Spanish as their mother tongue, will retain a strong sense of American identity. The same can be said for Turkey, in a somewhat more regional sense. It has been, for centuries, part of Europe, particularly of the Balkans, what we still call Rumeli. It is a largely Moslem country with deep cultural and religious ties to the Arab world. It is the successor of the Ottoman Empire, a state that gave refuge and warmly welcomed the Jewish community that had to leave Spain many centuries ago. It is a country with linguistic and now strong economic ties to Central Asia. It is a country that is reaching out to, and investing in Africa. And it has been a strong ally and friend of the Unites States, at least since the Korean War in the early 1950s, when the Turkish contingent in Korea was second in number only to the American one. As of 2012, Turkish Airlines flies to more countries in the world than any other airline. Travelling way too much in my life, I can highly recommend it.

The world faces new, tremendous, global challenges. From climate change, to restoring solid and sustainable economic growth, from world trade and finance, to safety from terrorism or nuclear proliferation or to the control of infectious disease, many of the most difficult problems require strong global cooperation. In this day and age, nothing can be achieved any more by sheer force or be imposed from outside on other societies. Young people everywhere, however, are looking across borders, for examples of what works, what can bring happiness, freedom and prosperity. I do believe that for both the United States and Turkey there is a huge opportunity to set such examples, and to support each other in setting them. If we, both, succeed internally, we will succeed internationally. If on the other hand, we cannot solve our own internal problems, it is hard to see how we can help solve the problems of the world. Moreover, if Turkey and the Unites States strongly cooperate in the many venues and organizations that exist, in NATO, at the United Nations, at the G-20, the “soft power” of both countries can be leveraged in multiple ways for the benefit of citizens from both countries, and indeed for the benefit of the world as a whole.

The next decade will not be an easy one, for Turkey, for the United States or for the World. We will have to work hard, whether our activities are primarily economic, political, civil society oriented or academic. I do hope and trust however, that many of us, in 2023, will be able to celebrate, wherever we may be at the time, as citizens of, or friends of Turkey, a 21st century republic and democracy, that looks forward, while cherishing the best features of its past.

Thank you all for your patience and for giving me the privilege of sharing my perspectives with you this evening.

Authors

Kemal Derviş

Publication: Turkish Embassy in Washington D.C.

The Global Economy in Barack Obama’s Second Term

Kemal Derviş — Wed, 07 Nov 2012 14:18:00 -0500

The race was tough, but U.S. President Barack Obama has won re-election. The question now, for the United States and the world, is what will he do with a fresh four-year term?

To win re-election with a still-weak economy and unemployment close to 8% was not easy. Many leaders – Nicolas Sarkozy, Gordon Brown, and José Luis Rodríguez Zapatero come to mind – have been swept away by economic discontent in recent years. Although the financial disaster erupted on George W. Bush’s watch, after eight years of a Republican presidency, Obama had to carry the burden of an anemic recovery.

Obama won not only because of his extraordinary personal resilience, but also because a sufficient number of middle-class voters, while unhappy with the pace of economic progress, sensed that an Obama presidency would help them more than the policies championed by his Republican challenger, Mitt Romney, which were perceived as tilted to the affluent. Moreover, America’s ongoing demographic transformation makes it harder for candidates who are unable to reach out strongly to Latinos and other minority communities – something that Romney singularly failed to do – to carry the country.

Some aspects of the campaign, particularly the amount of money spent and its negative tone, struck many observers as objectionable. But the competitiveness of American democracy – the fact that an alternative always exists, and that those in power have to fight hard to stay there – was on admirable display for the whole world to see.

Obama will embark on his second term with the global economy at a crossroads. In the United States, the uneven and weak recovery has been sustained by extraordinarily expansive monetary policies and ongoing large fiscal deficits. While corporate coffers hold mountains of cash, private investment stagnates. In Japan, solid economic performance remains elusive, while prime ministers succeed each other at a breathtaking pace.

Likewise, Europe is on life support, thanks to European Central Bank President Mario Draghi’s astute maneuvering and promises of unlimited intervention in sovereign-debt markets. But unemployment is at its highest in decades and growth has essentially stalled, even in Germany, while the troubled southern economies are mired in deep recession. The situation in Greece, moreover, has become socially unsustainable; Greece is small, but a total collapse there could have very negative financial and psychological effects elsewhere.

The world’s emerging-market economies are in better shape; but, while their underlying trend growth in potential output is much higher than that of the advanced economies, there is no cyclical de-coupling. The world economy is an interdependent whole: trouble in any important part of it is transmitted globally. That is true beyond the purview of narrowly macroeconomic problems as well: for example, the need to address climate change can no longer be ignored.

The United States cannot determine the world economy’s future on its own, but the course taken by America nonetheless has huge global importance, given that it remains the largest economy and retains considerable influence in venues such as the International Monetary Fund, the World Bank, and the G-20. American ideas continue to affect the policy debate worldwide.

So, what should Obama’s top economic-policy priorities be in his second term? Despite the difficulties facing the global economy, there are huge investible resources in the United States, China, Germany, and elsewhere. While there are climate and resource constraints, we are still at the beginning of a technological revolution that holds tremendous potential for higher productivity and greater prosperity, along with challenging implications for labor and employment.

But sustainable economic growth requires that those with investible resources actually invest them. And that will not happen unless and until a broad-based recovery of the middle- and lower-income groups in advanced economies, including the United States, delivers the prolonged rebound in demand for which investors are waiting.

There are plenty of profits to be made – actual taxes on capital are not too high, and cheap finance is available to the corporate sector. But the concentration of income at the top – more than 90% of the gains from U.S. economic growth in 2011, for example, went to the top 1% – is constraining broad-based recovery and leaving macroeconomic policy caught between the need for continued “stimulus” and the dangers of growing public debt and asset bubbles inflated by record-low interest rates.

In other words, a more balanced income distribution is not only a social or ethical issue; it is crucial for macroeconomic and, indeed, long-term corporate success. This is vital for many countries, above all the United States and China.

Then there is the pressing need – in the United States and globally – for education and appropriate skill formation. Without the skills required by new and incipient technologies, too many workers will simply be unemployable. A key benefit of prioritizing broad-based quality education is that it also helps to solve the income-distribution problem.

Finally, there is the need for effective international cooperation. China’s current-account surplus has declined, but now northern Europe runs a $500 billion surplus, while demand in southern Europe is collapsing and the US is running a deficit that is close to $500 billion. The longer-term challenge of climate change and extreme weather patterns also requires global cooperation and a post-election shift toward much stronger U.S. engagement, which could unleash a multifaceted clean-energy revolution, fueling large job-creating investments and a new cycle of growth.

After America’s long, hard-fought election campaign, it is time for comprehensive policy reforms. One hopes that the U.S. Congress will recognize this as well, leading to support for measures that could help hundreds of millions of people in the United States and around the world.

Authors

Kemal Derviş

Publication: Project Syndicate

Back to the Brink for the Eurozone?

Kemal Derviş — Wed, 10 Oct 2012 11:55:00 -0400

When European Central Bank President Mario Draghi announced in late July that the ECB would “do whatever it takes” to prevent so-called “re-denomination risk” (the threat that some countries might be forced to give up the euro and reintroduce their own currencies), Spanish and Italian sovereign-bond yields fell immediately. Then, in early September, the ECB’s Council of Governors endorsed Draghi’s vow, further calming markets.

The tide of crisis, it seemed, had begun to turn, particularly after the German Constitutional Court upheld the European Stability Mechanism, Europe’s bailout fund. Despite the ECB’s imposition of conditionality on beneficiaries of its “potentially unlimited” bond purchases, financial markets across Europe and the United States staged a major rally.

It seems, however, that the euphoria was short-lived. Yields on Spanish and Italian government bonds have been inching up again, and equity investors’ mood is souring. So, what went wrong?

When I welcomed Mario Draghi’s strong statement in August, I argued that the ECB’s new “outright monetary transactions” program needed to be complemented by progress toward a more integrated eurozone, with a fiscal authority, a banking union, and some form of debt mutualization. The OMT program’s success, I argued, presupposed a decisive change in the macroeconomic policy mix throughout the eurozone.

There has been some progress, albeit slow, toward agreement on the institutional architecture of a more integrated eurozone. The necessity of a banking union is now more generally accepted, and there is a move to augment the European budget with funds that could be deployed with policy or project conditionality, in addition to ESM resources. (Germany and its northern European allies, however, insist that this be an alternative to some form of debt mutualization, rather than a complement to it.)

The ESM, supported by the ECB, could become a European version of the International Monetary Fund, and the new funds in the European budget could become, with support from the European Investment Bank, Europe’s World Bank. All of this will take time, but there is some movement in the right direction.

Where there has been virtually no progress at all is in the recalibration of the macroeconomic policy mix. The prevailing strategy in Europe remains simply to force internal devaluation on the southern countries, with excessive austerity aimed at causing severe wage and price deflation. While some internal devaluation is being achieved, it is producing so much economic and social dislocation – and, increasingly, political upheaval – that there is no supply response, despite the accompanying structural reforms.

Indeed, the deflationary spiral, particularly in Greece and Spain, is causing output to contract so rapidly that further spending cuts and tax increases are not reducing budget deficits and public debt relative to GDP. And Europe’s preferred solution – more austerity – is merely causing fiscal targets to recede faster. As a result, markets have again started to measure GDP to include some probability of currency re-denomination, causing debt ratios to look much worse than those based on the certainty of continued euro membership.

While all of this is happening in Europe’s south, most of the northern countries are running current-account surpluses. Germany’s surplus, at $216 billion, is now larger than China’s – and the world’s largest in absolute terms. Together with the surpluses of Austria, the Netherlands, and most non-eurozone northern countries – namely, Switzerland, Sweden, Denmark, and Norway – northern Europe has run a current-account surplus of $511 billion over the last 12 months. That is larger than the Chinese surplus has ever been – and scary because it subtracts net demand from the rest of Europe and the world economy.

Inflicting excessive austerity on the southern European countries while limiting their exports by restricting effective demand in the north is like administering an overdose to a patient while withholding oxygen. The political and economic success of southern Europe’s much-needed structural reforms requires the proper dose and timing of budgetary medicine and buoyant demand in the north.

The northern countries argue that permitting wage growth and boosting domestic demand would reduce their competitiveness and trade surplus. But that misses the entire point: surplus countries must contribute no less than deficit countries to global and regional rebalancing, because the world economy cannot export to outer space. This argument was always emphasized when the Chinese surplus was deemed excessive, but it is virtually ignored when it comes to northern Europe.

If conservative politicians and economists in Europe’s north continue to insist on the wrong overall macroeconomic policy mix in Europe, they could yet bring about the end of the eurozone, and, with it, the end of the European project of peace and integration as we have known it for decades. This is not to argue against the need for vigorous structural and competitiveness-enhancing reforms in the south; it is to give those reforms a chance to succeed.

Authors

Kemal Derviş

Publication: Project Syndicate

The Future of Trade: A Conversation with World Trade Organization Director-General Pascal Lamy

Mon, 01 Oct 2012 16:15:00 -0400

Event Information

October 1, 2012
4:15 PM - 5:45 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

On October 1, Global Economy and Development at Brookings hosted the director-general of the World Trade Organization (WTO), Pascal Lamy, for a conversation about the future of international trade. As production and supply become ever more global, the paradigm for trade is shifting rapidly away from mercantilism to "made in the world." The conversation focused on the evolving patterns and methods of trade, global value chains, the rise of non-tariff measures, and recent trends in regionalism in trade.

Pascal Lamy has served as the director-general of the WTO since September 2005. Prior to his appointment, he was the trade commissioner at the European Commission. His civil service career began in the French Inspection Générale des Finances and at the French Treasury. For nine years from the mid-1980s to the mid-1990s, he served as chief of staff for the president of the European Commission, Jacques Delors. Lamy has also worked in the private sector as part of the team to rescue the struggling Crédit Lyonnais, as well as in academia as the president of the European integration-focused think tank “Notre Europe.”

Brookings Managing Director William Antholis provided introductory remarks. Kemal Derviş, vice president and director of Global Economy and Development, moderated the discussion with Director-General Lamy, which included questions from the audience.

You can follow the conversation on this event on Twitter at hashtag #BILamy.

Video

Audio

The Future of Trade: A Conversation with World Trade Organization Director-General Pascal Lamy

Transcript

Uncorrected Transcript (.pdf)

Event Materials

20121001_trade_lamy

Europe’s Vital French Connection

Kemal Derviş — Wed, 12 Sep 2012 10:40:00 -0400

In the debates raging over the future of the European Union and the eurozone, Germany always takes center stage. It has the largest economy, accounting for 28% of eurozone GDP and 25% of the eurozone’s population. It is running a current-account surplus that is now larger than China’s – indeed, the largest in the world in absolute value. And, while weighted majorities can overrule it on some issues, everyone acknowledges that little can be done in the eurozone unless Germany agrees.

But the emphasis on Germany, though justified, should not lead to an underestimation of France’s critical role. France not only accounts for roughly 22% of eurozone GDP and 20% of its population – behind only Germany – but also has the healthiest demography in the eurozone, whereas the German population is projected to decline over the next decade.

At the same time, France’s critical role reflects more than its size. Indeed, in terms of influencing outcomes in Europe, France is as important as Germany, for three reasons.

First, France is an indispensable link between southern and northern Europe at a time of growing economic and financial division between creditors and debtors (a fissure that has begun to assume a cultural dimension). An active France can play a bridging role, leveraging its strong relationship with Germany (a friendship that is a pillar of the EU) and its proximity and cultural affinities to the Mediterranean.

France is “southern” in its current-account deficit, but “northern” in its borrowing costs (slightly above Germany’s), owing partly to inflows of capital fleeing the south, as well as to modest but positive economic growth. Moreover, there is no perceived “re-denomination” risk affecting French assets, given markets’ confidence that France will retain the euro. So, while France faces huge economic challenges, its northern and southern features permit it to play a proactive role in the European project’s survival.

French President François Hollande has already given a rather successful preview of this role, meeting German Chancellor Angela Merkel in Berlin on his first day in office, and, a month later, participating in a high-profile meeting with the Italian and Spanish prime ministers in Rome. Indeed, he took the lead in adding a “growth pact” to the “stability pact” that had been negotiated under Merkel’s leadership.

Second, France, under its new center-left government, must demonstrate that the “European model” of a market economy coupled with strong social solidarity can be reformed and strengthened, rather than abandoned – not just in Europe’s more pragmatic north, but also in its more ideological south. French Socialists will not renounce their traditional commitments; nor should they. But they now have the opportunity to contribute to the European model’s renewal.

Under Hollande, France’s Socialists favor achieving that renewal through a process of social dialogue that convinces rather than imposes, that focuses both on revenue measures and on boosting government efficiency, and that may adopt some of northern Europe’s more successful “flexicurity” policies, which combine greater labor-market flexibility with strong social protection. The reforms should also introduce much greater individual choice, permitting solutions to retirement, education, health, and lifestyle issues that can be more easily tailored to citizens’ specific circumstances and needs.

The government of Hollande and Prime Minister Jean-Marc Ayrault has strong majorities at all executive and legislative levels, giving it a rare opportunity to act. If it can renew the European model at home, it will be able to project that success much more widely, particularly in southern Europe, in turn reinforcing confidence and belief in the EU, particularly among the young generation. The French center-left must lead in conceiving a vision for Europe in which solidarity and equity reinforce long-term economic strength.

Finally, along with the United Kingdom among European countries, France retains more of a global role than Germany has yet acquired. While the United Nations Security Council is outdated in its structure, it still plays a crucial legitimizing role; and France, not Germany, is a member. In many other international organizations as well, France punches above its weight.

Similarly, while France exports much less than Germany outside the EU, many large French enterprises rival Germany’s in global reach and technical know-how. And French is still a global language. In other words, France not only is a link between Europe’s north and south, but also contributes substantially to linking Europe to the rest of the world.

Europe needs a renewed vision and effective policies to realize that vision. France’s Socialist-Green government can play a critical unifying role as Europeans confront their biggest challenge in decades. Its success will be highly consequential – not least for the political debate that will inform the outcome of Germany’s elections in 2013.

Authors

Kemal Derviş

Publication: Project Syndicate