Normative Narratives


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The Pope’s Quandary: Contraception and Poverty

To much fanfare, last week Pope Francis denounced the economic system which he believes perpetuates inequality and extreme poverty. Hopes are high that this progressive Pope can use his influential post to reform the Catholic Church. Already, Francis has gone on record saying that the church is “too obsessed” with birth control, abortion, and gay marriage:

“It is not necessary to talk about these issues all the time,” Pope Francis told an Italian outlet. “The dogmatic and moral teachings of the church are not all equivalent.”

In the new interview, Francis pointed out that the Church should be “a home for all, not a small chapel that can hold only a small group of selected people.”

However, saying it is “not necessary to talk about these issues all the time” is a bit of a cop-out, especially given overwhelming evidence that increased access to contraception can reduce poverty:

Some family planning proponents emphasize health and longevity benefits; others talk of human rights.

In the mix of available arguments, Population Action International has been focusing on the promise of economic prosperity. The organization advocates for women and families to have access to contraception in order to improve their health, reduce poverty and protect their environment.

“Right now, 222 million women, or 1-in-4 women of reproductive age, in the developing world do not want to become pregnant but need modern contraception,” said Dilly Severin, director of communications at the group, known as PAI. The organization “has a history of highlighting the common sense connections between fulfilling a woman’s right to contraception and the health, economic and other benefits that flow from it.” 

African political and cultural leaders made statements about the importance of youth to the demographic dividend, the economic growth that may result from changes in a country’s age structure, Weinstein-Levey said.

“They recognized that investing in youth’s sexual reproductive health and rights is critical to helping young people and to helping African economies reach their full potential. Many of these nations are on track to achieve the demographic dividend, but could significantly expedite progress with the boost of family planning,” she said.

Mothers and infants in sub-Saharan Africa face the greatest risks, according to Save the Children’s annual State of World’s Mothers report 2013, which assesses the well-being of mothers and children in 176 countries. The bottom 10 countries on the Mothers’ Index are all in sub-Saharan Africa, with infants in Somalia having the highest risk globally of dying on their birth day. First-day death rates are almost as high in the Democratic Republic of Congo, Mali and Sierra Leone. Meanwhile, mothers in Somalia and Sierra Leone face the second and third highest lifetime risk of maternal death in the world, respectively.

Surely, reducing infant and/or maternal mortality are at least as important in “protecting the sanctity of life” as contraception / abortion are…

The “common sense” benefits between fulfilling a women’s reproductive rights and poverty reduction are not new or novel–they are generally accepted in development economics. What is new / novel is a Pope who puts poverty alleviation above opulence, and human rights above religious dogma.

The Bible say’s “judge not lest ye be judged”. Pope Francis seems to be an accountable man; he has judged the global financial system, now he should judge the Catholic Church. It is hypocritical to blame the global economic system for perpetuating inequality, while ignoring the role his organization plays in allowing poverty to persist in the developing world.

Furthermore, while the Pope (and indeed any individual) has a very limited ability to affect the entire global economic system, it is very much within the Pope’s ability to shape the thinking and policies of the Catholic Church.  

It appears Pope Francis “practices what he preaches”, by living a humble life and even sneaking out at night to help the poor. I am not Catholic or even religious, but I support the stances Pope’s Francis has taken thus-far. However, instead of just finger-pointing, there are steps he can take that would allow the Catholic Church to take the lead in the battle against extreme poverty. 

 

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Economic Outlook: Quantitative Easing, Monetary Policy Coordination, and the IMF

I was going to write a  conflict watch about the chemical gas attack in Syria, but as different actors are aligning with their interest and using mostly circumstantial evidence (Russia / Assad Regime: rebels did it, why would we launch chem weapons while U.N inspectors here?; Opposition / Western governments: Assad did it, emboldened by lack of international intervention after previous chem attacks, Assad subsequently shelled area so time would pass, now UN inspectors cannot get reliable results), I will refrain from speculating on these troubling events until more information emerges.

Continuing the narrative that has come to the forefront since G-20 finance talks in Moscow and the focus surrounding extra-territorial consequences of loose monetary policy at the Fed’s annual Jackson Hole meeting, policy coordination between central banks and new policy responses by IMF are needed to ensure as smooth as possible a transition from Q.E. to Fed monetary policy tightening (exactly when this will occur is uncertain, I am of the mind that it will be later rather than sooner).

Original articles:

Reuters:

Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

“The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements,” Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

The Fed’s bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the “fragmentation” of global capital markets.

Stocks and currencies plunged in India, IndonesiaBrazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve’s monthly bond purchases.

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

“The system itself is producing more accommodative monetary conditions than warranted by the situation,” he said. “In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures.”

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Economix:

The stimulus campaigns of the Federal Reserve and the central banks of Europe and Japan, by depressing domestic interest rates, have helped to push trillions of dollars into developing markets in recent years.

The question of what central banks are supposed to do about it dominated the formal agenda here at the Kansas City Fed’s annual monetary policy conference.

The answers were surprisingly mellow. The rest of the world would like the Fed to explain its plans clearly, and then to travel slowly. Bankers from developing nations said they might need to impose some restrictions on the outflow of capital, but expressed little concern over the potential for serious economic disruptions.

Christine Lagarde, the managing director of the International Monetary Fund, struck the same sanguine tone in a Friday speech, declaring that “Central banks handled entry well, and we see no reason why they should not handle exit equally well.”

She added that the fund – and by extension, the major economies – accepted that some developing countries might need to impose some financial controls. “In some circumstances, capital flow management measures have been useful,” she said.

This is not the way that policymakers used to talk. The big countries and the I.M.F. spent the last few decades pushing for the liberalization of financial markets. They argued that developing nations were creating their own problems by failing to take the painful steps necessary to moderate capital inflows, notably by allowing their currencies to appreciate. And they showed no tolerance for capital controls.

The argument for global monetary policy coordination– mainly that in today’s globalized world, where unfathomable amounts of money can and do flow at the click of a mouse, that a large countries monetary policy choices have a direct impact on other countries–has already been explored in depth.One of the most important developments in monetary policy over the last generation is the conclusion that central banks can increase the power of their actions by talking about their goals, thereby shaping the expectations of investors.” Managing expectations and policy coordination are logically related and present a synergy point for global monetary policy coherence. 

Central banks historically have served a dual mandate, to manage unemployment and inflation. A 3rd (secondary) mandate has emerged since the Great Recession; to manage the extra-territorial effects of monetary policy decisions.

Two other interesting points are raised in these articles; the issue of capital controls and flexible credit lines.

Capital Controls:

International  capital investments are necessary for helping least developed countries (LDCs) escape poverty traps / expedite their development process. However, the mobility and liquidity of capital in today’s digital and globalized age make capital flows intrinsically volatile–capital controls help temper this volatility. IMF managing director Christie Lagarde has endorsed the use of capital controls in certain instances, which represents a complete 180 from the IMFs “Washington Consensus” policies of the 1980s and 90s. When money is “cheap” (as it is now), it flows to places that offer a higher rate of return (i.e. developing countries). Capital controls provide a buffer from capital flight when monetary policy tightens (which is inevitably as the global economy recovers), which can otherwise have devastating standard of living / human rights implications.

Capital flight may lead to less investment / higher “risk premium” (investors will not like the idea of not having complete control over their investment), but it is surely should be a countries own decision what investments it allows in its country and under what conditions, considering the destabilizing nature of unchecked financial inflows. If speculative money does not wish to come into a country, that may be in that countries best long term interests anyways. The failure of “Washington Consensus” policies, culminating in global financial contagion during the Great Recession, has led the international financial community (headed by the IMF) to reverse it’s previous stance on capital controls.

Flexible Credit Lines:

Jean Pierre-Landau alluded to flexible credit lines with this comment;

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Flexible Credit Lines are available to countries through the IMF if they meet certain preconditions (a shift by the IMF from imposing constitutionality on loans to having countries reach certain thresholds for eligibility, but after that providing assistance without conditions that can sometimes undermine development (see “Washington Consensus”). Countries gain access to funding by the IMF at an agreed upon rate (which is fairly low). By having this IMF insurance policies, countries are able to pursue policies in their best long-term interests (for example capital controls, or fiscal investments in public goods), as opposed to the short-term interests of speculative investors.

The existence of a FCL eases concerns of financial actors. The overall experience with FCL countries (to date Mexico, Columbia, and Poland, evidence suggests that Ireland will be next) has been overwhelmingly positive. These countries have been able to borrow at a lower risk premium without ever having to access FCL money–no FCL country has ever had to draw on FCL funds. The efficacy of FCLs is only amplified against the backdrop of the European Debt Crisis.

I am a strong advocate of both FCLs and capital controls for developing countries. Both policies are fully consistent with a human rights based approach to sustainable human development. Both policies can temper the destabilizing effects of capital inflows, giving governments the capital, policy, and fiscal space needed to respond to crisis situations. It is encouraging to see high level policy makers are of the same mind when it comes to monetary policy coordination, FCLs, and capital controls.

I invite my readers to view a PPT presentation (FCL Final) I did last year on FCLs. The study shows graphically the experiences of Mexico, Columbia and Poland before, during, and after the Great Recession (these three countries all performed very well compared to comparable countries). It concludes by arguing for “scaling-up” of FCLs by offering them to more countries as a potential development tool.

 


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Economic Outlook: Tax Dodging, Tax Havens, Fiscal Space and Human Rights

Two related pieces caught my eye this morning. Both pieces explore how owners of wealth (be it large corporations, wealthy individuals, or autocratic rulers) benefit from “offshore” financial centers.

The first piece, from the NYT, emphasizes how corporate tax avoidance disproportionately shifts the burden of paying for government services to regular people:

“As muddled and broken as the individual income tax system may be, the rules under which the government collects corporate levies are far more loophole-ridden and counterproductive.

That’s not entirely Washington’s fault. Unlike individuals, multinational corporations can shuttle profits — and sometimes even their headquarters — around the globe in search of the jurisdiction willing to cut them the best deal on taxes (and often other economic incentives).

Much of this occurs under the guise of “transfer pricing,” the terms under which one subsidiary of a multinational sells products to another subsidiary. The goal is to generate as high a share of profit as possible in the lowest-taxed jurisdictions.

A study by the Congressional Research Service found that subsidiaries of United States corporations operating in the top five tax havens (the Netherlands, Ireland, Bermuda, Switzerland and Luxembourg) generated 43 percent of their foreign profits in those countries in 2008, but had only 4 percent of their foreign employees and 7 percent of their foreign investment located there.

All in all, it is a race to the bottom on the part of revenue-starved governments eager to attract even a relatively small number of new jobs.

As a consequence, the effective corporate tax rate in the United States fell to 17.8 percent in 2012 from 42.5 percent in 1960, according to the Federal Reserve Bank of St. Louis. (The share of federal revenues arriving at the Treasury from companies has fallen even more sharply, in part because an increasing number of businesses are taxed as individuals rather than as corporations.)

That’s just not fair at a time of soaring corporate profits and stagnant family incomes.”

“Happily, the gaming of the tax system is becoming a global concern, with an action plan coming from the Organization for Economic Cooperation and Development in July. The O.E.C.D. should work toward taxing business profits where they actually occur, not where they’ve been shifted by some tax adviser.

As we strive for a global solution, we should take a number of interim steps, including better policing of transfer pricing.”

Another piece, written by Jeff Sachs at the Earth Institute, expands on this topic to bring other forms of money-laundering into the mix, as well as crystallizing the fiscal space / austerity argument against tax evasion:

“In recent weeks, citizens in many countries suffering from government budget cutbacks have been learning more and more about one of the biggest and most dangerous scams in the world: the global web of tax havens that U.S. and European politicians and bankers have nurtured over the years. The only real purpose of these havens is to facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities inflicted by international companies.”

“During the boom years, the rich and powerful kept the public distracted from the tax haven reality. Yet now with budget austerity, the public is having a close look at tax evasion by the rich and powerful. As a result, the veil over the tax havens has started to slip, and the sight is not lovely.”

“The politicians of rich nations who protect the exorbitant privileges of bankers and hedge-fund managers, who wink at mega-tax evasion by billionaires, and who tolerate unpardonable games played by major companies, are playing with fire. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.”

“Developing countries too are saying that enough is enough. For decades they’ve been on the receiving end of hypocritical lectures about good governance. For them, the tax havens have served the purpose of paying bribes to potentates, and providing easy ways for elites to keep their money safe from tax collectors. Yet it is the rich countries that have fostered that system.”

The existence of tax havens represent the political power of the ultra-wealthy and the collective-action problem facing the rest of the world. However, the internet and watchdog groups, along with crushing austerity programs in the wake of The Great Recession, have thrust tax-avoidance into the spotlight. This is the first step towards pressuring governments for real, coordinated action against this unfair practice. 

At best, tax-havens allow wealthy people to avoid paying their fair share of taxes. Every dollar not paid in taxes is a dollar more of debt for a government, a dollar less available for an important social program. Forget the moral and ethical implications of this “reverse-Robin-Hood” system for a minute. Economically speaking, this system leads to stagnant growth. Less wealthy people have a higher average and marginal propensity to consume, and tend to keep their money in their home country. Also, diminishing marginal utility of money states that less wealthy people (in the aggregate, there is of course there is anecdotal evidence against this point), spend a greater percentage of their money on things that are beneficial for social welfare. The current system provides for less, more wasteful consumption. It corrodes the “American Dream” by reducing social mobility and perpetuates income inequality. And this is what I would consider the “best case scenario”.

At worst, tax-havens offer a stable place for oppressive regimes to park their money. Elites can amass rents from a variety of places (most commonly extractive industries, or through black-markets / drug trade), and know that they have a safe place to keep that money. This money can then be used for personal reasons, or to build up a military to further entrench Elite control–particularly in less developed countries where democracy does not exist. It is not difficult to draw the link between entrenching autocratic, rent-seeking regimes, and human rights abuses.

A Reuters blog about the book “Treasure Islands”, by Nicholas Shaxton, articulates this point very well. “The broad brush — and this is a simplication of the overall argument — is that tax havens enable the flight of scarce capital from Africa to other regions, stunting the continent’s ability to develop on a range of fronts. Such havens inclue not only tropical destinations like the Cayman Islands but the City of London and the U.S. state of Delaware.” The book “Offshore: Tax Havens and the Rule of Global Crime”, by Alain Deneault, makes a similar argument.

The U.N. recently passed an Arms Treaty, with human rights considerations at it’s core. While arms trade was a natural starting point,  I believe this is a strong model for all international transactions. Any time large amounts of money are transferred, be it tax-avoidance or the hiding or ill-gotten gains, this money has the potential to fund / perpetuate human rights abuses. The sooner the international community realizes this, and acts in a coordinated fashion to review and (act on) the human rights implications of ALL financial flows, the sooner we will see a meaningful reduction in human rights abuses around the globe.

The U.S. famously prosecuted Al Capone, not for criminal activities, but because of tax avoidance. Autocratic regimes are in many ways similar to mafias, and they enjoy the additional protection of “national sovereignty” which allows them to continue to abuse human rights with relative impunity. Maybe we can take a page from history and allow the paper-trail bring down some of today’s worst human-rights abusers. Of course this would require a strong international justice system–with real punitive powers–which unfortunately does not currently exist.

The best case scenario of tax-avoidance is it unfairly shifts the burden of paying for government services from the wealthy to the not-wealthy, which compromises the ability of governments to pay for social programs. The worst case scenario is the perpetuation of human-rights violations. Obviously neither of these outcomes should be tolerable–we can only hope that a silver-lining of The Great Recession is that it will force governments to work together to tackle the issue of tax-avoidance and offshore financial centers, which affects developed and developing countries alike.          

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Transparency Thursday: Generic Drugs in the Developing World; Is Access to Quality Healthcare a “Human Right”?

As the partisan fight over the right to healthcare rages on in America, significant steps are being made to ensure that the world most impoverished receive access to life saving drugs at affordable prices:

“The two companies that make vaccines against cervical cancer announced Thursday that they would cut their prices to the world’s poorest countries below $5 per dose, eventually making it possible for millions of girls to be protected against a major cancer killer.

Thanks to Pap tests, fatal cervical cancers are almost unknown today in rich countries. But the disease kills an estimated 275,000 women a year in poor countries where Pap tests are impractical and the vaccine is far too expensive for the average woman to afford, so the price cut could lead to a significant advance in women’s health.”

“The low price will initially apply to a few million doses for demonstration projects in Kenya, Ghana, Laos, Madagascar and elsewhere, but Dr. Seth Berkley, the alliance’s chief executive officer, said he hoped that by 2020, 30 million girls in 40 countries would get the vaccine at that price or less.”

“The vaccines cost about $130 a dose in the United States, and each girl needs three doses. The lowest price that any other agency or government has negotiated, Dr. Berkley said, is the $13 paid by the Pan American Health Organization, which negotiates a bulk price for Latin American countries.

Since Latin America includes a mix of poor and middle-income countries, the manufacturers do not offer rock-bottom prices there, he said. The alliance subsidizes vaccine costs for the poorest countries in Africa, Asia and elsewhere, with the subsidies shrinking as the countries get richer.”

“Dr. Julie Gerberding, a former director of the Centers for Disease Control and Prevention who is president of Merck’s vaccine division, said $4.50 was Merck’s manufacturing cost, with no previous research, marketing or other costs built in.

‘The price is what we calculate to be our cost of goods — we could be off by a few cents but not more,”’ she said. ‘As we expand volumes, the cost per unit can go down. Our intent is to sell it to GAVI at a price that does not bring profit to Merck.’”

“Dr. Berkley described the new prices as a ceiling, and said he expected them to go down as millions more doses were ordered and as rival vaccine makers from lower-cost countries like India and China entered the field. Other companies, including the Serum Institute of India, the world’s largest vaccine manufacturer, are developing papillomavirus vaccines, but at the moment only the Glaxo and Merck vaccines have approval from the World Health Organization.

The alliance, Dr. Berkley said, has already negotiated sharp price drops in the cost of pentavalent vaccine, a shot that protects against diphtheria, tetanus, whooping cough, hepatitis B and Haemophilus influenzae B.

That shot costs about $30 in wealthy countries and the alliance first started purchasing it at $3.50. “Now we’ve got it down to $1.19,” he said.”

The “spotlight effect” continues to be one of the main drivers influencing prescription drug maker’s decisions in the developing world. The Access to Medicine Index is one example of how much company’s value the goodwill they receive from socially conscious operations. A Google search of “pharmaceuticals CSR” (corporate social responsibility) yields results from many major pharmaceutical companies highlighting their work in the field.

It is no secret that the Pharmaceutical industry, which is dominated by large multinational corporations, realizes very large profit margins. There is nothing wrong with large profit margins (despite what some may think based on the content of this website, I am a great supporter of capitalism and it’s self-perpetuating innovative mechanisms, as long as there are rules to make sure companies are not taking advantage of society as a whole in the name of maximizing shareholder earnings), as there are significant research and development costs associated with creating new medicines.

On moral, ethical, and even economic grounds, it is difficult to defend companies not allowing developing countries to produce generic versions of their drugs. There is no loss of revenue for the drug companies; these people are not sitting on cash waiting for handouts, they would not be able to afford the drugs at a higher cost. Economics calls this “third degree price discrimination”; selling a good at a lower cost based on the realities of the targeted market. The goodwill and positive press these companies receive is just icing on the cake if pharmaceutical companies sell their drugs at cost (zero profits, but all costs are covered; financially it is a wash and in so many other ways beneficial).

One of the main concerns is that, by allowing developing countries to produce generic versions of drugs, “black markets” will form as criminals in these countries–which tend to lack the oversight capacity—will export these cheaper drugs to wealthy nations. A study by the Universities Allied for Essential Medicines refutes these claims, “pharmaceutical arbitrage from poor countries to the high income was “still largely theoretical.”

But the “spotlight effect” is not a sustainable way to ensure the poor have access to life saving vaccines. “According to the WHO, 10 million people die every year that could be saved by existing drugs.” To this end, India’s Supreme Court recently set legal precedent for protecting generic drug producers:

“Production of the generic drugs in India, the world’s biggest provider of cheap medicines, was ensured on Monday in a ruling by the Indian Supreme Court.”

“The ruling will also help India maintain its role as the world’s most important provider of inexpensive medicines, which is critical in the global fight against deadly diseases. Gleevec, for example, can cost as much as $70,000 a year, while Indian generic versions cost about $2,500 a year.”

“In Monday’s decision, India’s Supreme Court ruled that the patent that Novartis sought for Gleevec did not represent a true invention.”

“I think other countries will now be looking at India and saying, ‘Well, hold on a minute — India stuck to its guns,’ ” said Tahir Amin, a director of the Initiative for Medicines, Access and Knowledge, a group based in New York that works on patent cases to foster access to drugs.”

Essentially, the Indian Supreme Court ruled that in order for a drug to receive a renewed patent (and thereby disallowing generic version to be produced), a “true innovation” in the drug has to be proven. Simply changing proportions of minor ingredients, or repackaging an existing drug as something new, will not allow companies to get new patents.

Some in the pharmaceutical industry have tried to protect their interests, saying this ruling will compromise their “ability to develop and manufacture innovative medicines.” I believe we will see the opposite effect. Companies, knowing they need truly innovative breakthroughs to receive new patents, will focus their efforts on creating these new drugs, instead of tinkering with existing drugs in hopes of extending their IP rights on drugs they have already greatly profited off of.

What do you think? Certainly Pharmaceutical companies have reaped huge profit margins, and benefit from an implicit oligopoly (various barriers to entry make new Pharmaceutical companies almost non-existent).

Is there a moral obligation for pharmaceutical comapnies to allow cheap generic alternatives to be produced for people in the developing world? Or is it just an act of charity when these companies do something socially responsible, but not something those in the developing world should count on? Or is it up to the legal systems in the developing world to stand up to vested interested, and uphold the right to access to affordable medicine for their citizens, as the Indian Supreme Court recently has done?