Normative Narratives

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Economic Outlook: Magic Asterisks v. Cross-Country Analysis

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The Great Debate Continues–The Austerity v. Stimulus Referendum of 2014:

It has been over 6 years since the beginning of “The Great Recession”. As the stimulus vs. austerity debate rages on, it is worthwhile to evaluate the efficacy of these competing economic ideologies, as they are essentially up for referendum in the 2014 U.S. midterm elections.

It is almost impossible to find truly neutral economic analysis; there are experts and spin-doctors across the political spectrum, people whose jobs are to cherry-pick facts and provide anecdotes to vindicate their positions. I try my best to be objective, but I am sure that my progressive biases are evident to my readers.

One thing that cannot be faked, at least in modern democracies, is macroeconomic history (thanks to advances in data collection, government budgetary transparency / accountability and communications technologies). So what have the past 6 years taught us?

On one hand, the doctrine of “expansionary austerity” relies on “magic asterisks“–the math doesn’t add up. This is not just a liberal claim, it is backed up by the [absence of] economic growth in countries and states that have tried / been force-fed the bitter pill of “expansionary austerity”.

On the other hand, robust, cross-country analyses of post-Great Recession economic policies, carried out by the IMF, have [slowly] acknowledged the damage caused by austerity / benefits of stimulus spending (and this is the IMF here, not exactly a pro-poor institution).

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The Case For Austerity–Magic asterisks:

At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening, and in Kansas a rebellion by moderates may deliver the state to Democrats. But the true believers show no sign of wavering.

…the nature of the budget debate means that Republican leaders need to believe in the ways of magic. For years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?

Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming…

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The Case For Stimulus–IMF Cross Country Analysis:

The International Monetary Fund, showing heightened concern over a slowing world economy, said on Tuesday that cash-rich countries like Germany needed to step up large public investments to help keep the flagging global recovery on track.

Its estimate for United States growth in 2015, 3.1 percent, outpaces all major industrialized countries and exceeds as well a number of emerging markets, which in theory are supposed to grow at a substantially more rapid clip.

The fund unveiled this week a paper arguing that large-scale infrastructure investments, if properly undertaken, could bring relatively quick growth benefits — a message that seemed to be directed at deficit-obsessed eurozone governments, including Germany.

“Infrastructure investment, even if debt-financed, may well be justified,” Olivier Blanchard, the fund’s senior economist, said at the news conference on Tuesday.

Mr. Blanchard pointed out that with interest rates at modern-day lows — Germany can borrow money for 10 years at below 1 percent — taking on extra debt to stimulate the economy need not be seen as profligacy.

He offered up a brief economic primer to underscore his point. “It is an irony of macroeconomics,” he said with a small smile, “that for countries with too much debt, sometimes the solution is to create more debt.”

Mr. Blanchard, who oversees economic research at the I.M.F., was behind the fund’s public recognition two years ago that heavy-handed austerity policies in Europe had a larger-than-expected impact on economic growth.

Now, it seems, the global watchdog seems to be going one step further by urging eurozone officials to relax their rigid austerity measures.

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What Does “American Exceptionalism” Mean to You?:

In America, those who oppose stimulus spending–fiscal conservatives–also tend to believe in “American Exceptionalism”. What happens in other countries is not relevant to America; “we’re special”, they claim.

These same opponents of stimulus spending may also argue (with negative connotation) that “the U.S. is turning into Europe”. However,  as you can see from the graphs at the top of the post, the U.S. has far lower spending and unemployment rates than other wealthy economies.

The great irony, which I am sure is lost on those who worry about the “eurofication” of America, is that it was in large part our ability to pursue policies that they would consider “European” (the ARRA, QE), that enabled the U.S. to lead the global economic recovery.

I too believe in “American Exceptionalism”. To me, however, this exceptionalism is more about the extra-territorial obligations that come with being the world’s strongest economy, military, and reserve currency, than an heir of hubris which precludes considering the experiences of other countries when drafting policy. But that’s just my opinion.

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Debt Sustainability, MMT, and Context Sensitive Macroeconomics:

The issue of debt sustainability, however, is far less subjective. America’s relatively high growth rates, and historically low interest rates (thanks to central bank independence and a sterling history of honoring our debts), make stimulus spending both feasible and fiscally responsible.

I am not fully sold on the merits of Modern Monetary Theory (MMT), it seems too radical to me. I am, however, a proponent of context sensitive macroeconomics; expansionary fiscal policy (stimulus spending) is appropriate now, but may not always be. However, the temporal nature of democratic politics makes offering future deficit reductions in exchange for stimulus spending, impracticable (which is unfortunate, as this approach is just what the doctor ordered). 

Government spending need not take the form of “paying people to dig holes and then refill them”, a picture anti-government proponents love to paint. There are glaring infrastructure weaknesses that pose serious problems from both public safety and economic perspectives.

Furthermore, in the current context, government spending would not “crowd out” private investment. In fact, if properly enacted, stimulus spending should increase private spending. Governments around the world are increasingly embracing public private partnerships (PPP)–leveraging public money to raise private funds when it serves both sectors interests (such as infrastructure spending, job training, etc).

Corporate cash hording, despite very low interest rates, suggests that private companies are able and would be willing to spend more if either a) the government contributes funding (PPP), or b) aggregate demand increased (which in the short run can be catalyzed either by increasing government spending, or by putting more money in the hands of those with the highest marginal propensity to consume–poorer people).

Of course, there are limits to what stimulus spending can achieve. The “multiplier” effect of a stimulus program depends on the necessity, targetability, efficiency, and accountability of its components. Beyond government spending, major policy changes, such as tax reform and minimum wage increases, are also desperately needed.

Liberal economic policies in the U.S. cannot fix the world’s problems, but they can increase American growth, set our economy up for higher future growth rates, and rekindle “The American Dream”. The U.S can lead both by action and example, serving as a model for other countries to emulate as best they can.

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Economic Outlook: Public-Private Partnerships, for Better or for Worse

The following blog combines two previous topics discussed here at NN–Public-Private Partnerships (PPPs) and State subsidies to private corporations. While both technically represent a “pubic-private partnerships” (both public and private money going towards the same goal), that is where the similarities end.

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Public-private partnerships, as they are intended, leverage public (tax-payer) money to raise private sector money for a cause. These partnerships often raise money for innovative purposes, in order to help cultivate new industries which indirectly lead to future jobs and tax-revenue. Universities, as centers of R & D and learning / training, also have a role to play in PPPs teaching people the skills needed to take part in this innovation. An example of a PPP that functions this way are President Obama’s recently announced manufacturing institutes.

With less than two weeks till his State of the Union address on Jan. 28, Mr. Obama hastened to make good on a pledge from last year’s speech, announcing the creation of a high-tech manufacturing institute aimed at creating well-paying jobs.

Speaking to 2,000 students at North Carolina State University, which is leading a group of universities and companies that established the institute, Mr. Obama said it was the kind of innovation that would reinvigorate the nation’s manufacturing economy.

This is the first of three such institutes the White House plans to announce in the coming weeks. It will be financed by a five-year, $70 million grant from the Department of Energy, which will be matched by funding from the consortium members, including the equipment maker John Deere and Delphi, an auto-parts maker.

The institute will use advanced semiconductor technology to develop a new generation of energy-efficient devices for automobiles, consumer electronics and industrial motors. Earlier Wednesday, Mr. Obama toured a Finnish company, Vacon, that makes drives used to control the speed of electric motors, to increase their energy efficiency.

Confessing that there was “a lot of physics” in the company’s presentation, the president seemed most interested in which of the components were made in the United States.

The announcement Wednesday of the new manufacturing institute showcased the White House’s determination to press ahead with jobs programs, with or without Congress. Mr. Obama said he was determined to make 2014 “a year of action.”

But it also laid bare the limits of Mr. Obama’s authority, since Congress has stymied his more ambitious proposals that require legislation. In last year’s State of the Union address, the president announced a $1 billion plan, modeled on one in Germany, to create a network of 15 institutes that would develop new industries.

But setting up 15 institutes would require congressional authorization. So last year, Mr. Obama narrowed his focus to establishing three institutes using existing funds and executive authority. At the same time, he increased his long-term goal to 45 institutes over 10 years, while acknowledging this would require congressional action.

To be clear, PPPs are not a call for charity–they represent mutually beneficial and sustainable economic arrangements. Businesses need future employees and customers, governments need non-dependent tax payers, a Universities future success is linked to it’s graduate employment rate, and people need jobs. If these projects prove successful, it will be difficult for congress to block the programs expansion.

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Subsidizing individual corporate initiatives, on the other hand, does not lead to many of the positive externalities associated with PPPs. Unlike traditional PPPs, it does not give the government any ownership of a project–a company is free to leave for greener pastures if it receives a better offer after the terms of an agreement end, leaving a municipality with nothing but a large bill. Furthermore, this practice represent one aspect of a “race-to-the bottom” that pits the private sector against workers and society as a whole:

Boeing is a company that pits state governments against one another to compete for larger subsidies and forces communities into a race to the bottom to see who can fight unions and lower wages the fastest. It is a prime example of 21st century business in the United States. As a result of these tactics, American workers, both unionized and independent, have little choice but to accept the lowered living standards their employers offer as conditions for their doing business.

This practice has become common. In the last year alone, 13 states granted corporate subsidy packages of over $100 million to companies like Toyota, Yokohama Rubber, Boeing and MetLife. Many of these subsidies are not for job creation but for job relocation — to lure business over to one state at the expense of its friends and neighbors.

The story of Boeing is an example of how ruthlessly U.S. businesses use the needs of some workers to justify lowering the standards of others, to the ultimate detriment of both.

Boeing’s strategy is a profitable one. It saves the company money, reduces wages and benefits for workers and ultimately absolves the company of any financial responsibility to take care of its retirees. As a result, production workers, regardless of their state, are left with a smaller slice of a bigger pie. This is, of course, the point: “Now that we have internal competition (among production sites), we’re going to get much better deals,” Boeing CEO Jim McNerney explained in May.  The deals aren’t only on the price of labor, but on the size of subsidies, which states and municipalities must fit into their budgets by either raising taxes or cutting services.

Unless American workers miraculously rediscover collective bargaining or begin to lay claims on the government to promise what organized labor once provided, then their lives will continue to be shaped by companies like Boeing. Their wages will be taken out of their pockets, their tax money out of their schools and roads…

These initiatives, unlike PPPs which are aimed at innovation and job creation, only benefit a single corporation. Furthermore, these projects often amount to job relocation, as opposed to job creation. There are many good reasons for subsidies to exist; for example, subsidies can help promote “infant industries” and to reward positive externalities. However, giving tax-payer money to already profitable companies in order to lure jobs from one municipality to another is not one of them. Private sector job creation is not charity, it is a cost of doing business that companies would face regardless of a subsidy.

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The problem is this country has empowered corporations at the expense of workers and societies as a whole. Don’t believe me? There is ample evidence of the different “recoveries” experienced by the “haves” and the “have nots” in America (spoiler: the wealthiest have done great post-recession, while masses have seen declining wages and standards of living). There are no easy fixes to this reality; only by championing workers rights, increasing minimum wages, and ending the municipal “race-to-the-bottom” (perhaps by creating a federal oversight board with the exclusive power to negotiate private-sector subsidies, based on needs-based C-B analyses) can we hope to take America back for the average working man / woman. PPPs can play a positive role in this transition, if they are used to spur new investment and industry. On the other hand, taking money out of public programs and giving it to private corporations will only exacerbate the divergence between the “haves” and the “have-nots”.

It is true that we face a depressed labor market; in such an environment, people are afraid to speak up in fear of losing whatever job they do have. On a larger scale, politicians are unwilling to take any stand that may be met with retaliation by corporate interests. This fear is being used against the American public by corporations to further push down their costs even as they realize record profits. If we can overcome this fear, and challenge the bellicose rhetoric of private sector interests, we can begin to realize a redistribution of wealth which would benefit not only individuals but our economy as a whole.

It is up to Americans to decide what role we want the private sector to play in our economy, and elect leaders who will fight for those goals. Will we support corporations that share in the costs of sustainable human development, or will we continue to reward corporations that value short-term profits above all else?


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Transparency Report: Notification, You Have 5 Billion New FB Friends; The Human Right To Internet Access

At the beginning of my internship at the UNDP, I was lucky enough to get the chance to volunteer at and then attend the ECOSOC Partnerships forum. I was assigned to write a few blogs for the event, among a number of other blogs I have written about events at  the UN which for some reason I have never shared on NN. Perhaps someday I will release the rest of the “lost UNDP blogs”, but that day is not today. Here are notes from the event Policy Dialogue: “The Changing Face of Technology and Innovation” (full blog):

The second policy dialogue at the ECOSOC youth forum focused on how technological innovations in recent years have helped bridge the “digital-divide” between developed and developing countries. While the gap has not been fully closed, partnerships between the private sector, governments, non-governmental organizations and civil society groups have helped identify challenges and opportunities in the developing world. By creating differentiated products at lower costs, private companies can gain access to new markets while simultaneously empowering the people in those markets.

Internet access is considered one of the great technological advances of our time. Internet access empowers people; the possibilities are constantly evolving and literally endless. It is an essential component of “E-Governance”, which includes the dissemination of information and a more inclusive and democratic government agenda-setting process. With a greater push for accountability and inclusiveness mechanisms in the Post-2015 Development Agenda, internet access, bolstered by innovations in mobile technology, has become an increasingly important tool for achieving sustainable human development.

But not enough has been done to make internet access affordable for a large portion of the world’s population. According to Mr. Tuli, 3 billion people have mobile phones but no internet access. This is not because of a lack of electricity or communication networks (as evidenced by the fact that they do have cell phones), but because they are priced out of the market. Mr. Tuli went on to call basic internet access a “human right”, to resounding applause from the hundreds of participants in the ECOSOC chamber.

While mobile technology was originally thought of as an educational tool, it has since evolved beyond that (although mobile education is still a proposed root for overcoming education deficits in Least Developed Countries (LDCs)). E-Governance can help disseminate information and promote inclusive governance, creating an enabling environment for sustainable human development. Healthcare providers can connect to information and expert advice in ways that can save lives. E-Finance can help provide capital in a much cheaper and convenient way to previously isolated groups, unlocking the entrepreneurial spirit in the developing world (and making such endeavors potentially much more profitable). Even people who are off traditional power grids (the least developed places in the world without basic infrastructure), mobile renewable energy generators and wireless internet capabilities can help bring ICTs virtually anywhere in the world.

Mobile technology penetration can be very rapid. Competition between private sector actors can drive prices down to affordable levels, and in some cases subsidies can help. Mr. Ogutu told the story of mobile phone penetration in Kenya; 5 years ago there were 20,000 users, today there are over 30 million users. This was made possible by M-Kopa, a company that utilized E-finance to provide pay-as-you-go mobile solar powered electricity to poor people who are not on a conventional power grid. Financing—secured through PPPs—allowed the founders of M-Kopa turn their vision into reality.

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The narrative on bringing internet access to the least developed areas of the world continues a few months later. Not surprisingly, behind the initiative is a large-scale public-private partnership, with publicity magnet Facebook at its core (original article):

Mark Zuckerberg, chief executive of Facebook, announced the launch of Internet.org Wednesday, a project aimed at bringing Internet access to the 5 billion people around the world who can’t afford it. The project is the latest initiative led by global-communications giants to combat market saturation in the developed world by introducing the Internet to remote and underprivileged communities.

“The goal of Internet.org is to make Internet access available to the two-thirds of the world who are not yet connected and to bring the same opportunities to everyone that the connected third of the world has today,” Zuckerberg said.

“There are huge barriers in developing countries to connecting and joining the knowledge economy,” he added. “Internet.org brings together a global partnership that will work to overcome these challenges.”

The project will develop lower-cost, higher-quality smartphones and deploy Internet access in underserved communities, while reducing the amount of data required to surf the Web. Other founding partners include Samsung, Qualcomm, Ericsson, MediaTek, Nokia and Opera.

Facebook and other tech giants, of course, have a significant financial stake in expanding in the developing world. With tech companies reaching market saturation in the United States, countries in Latin America and Africa, for example, offer a big opportunity to attract a steady stream of new users, whose data can be mined by advertisers.

Connecting more people globally has important implications for how people organize their lives, said Patrick Meier, co-founder of the Harvard Humanitarian Initiative’s program on Crisis Mapping and Early Warning. Social media has become a lifeline to people affected by earthquakes, floods and conflicts in the developing world, he added.

In places where the state is limited, Meier added, the Internet becomes a way to make up for services the government fails to provide. “When the state is not there, when you talk about limited statehood, you get a void,” he said.

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In addition to acting as a substitute for the state in the context of “bad governance” / conflict / crisis environments, mobile technology should be a tool utilized by the state to promote inclusive and indiscriminate human rights based governance for sustainable human development. ICT connects people, enabling social accountability (people claiming their rights) by overcoming collective action problems. There are also myriad standard of living benefits associated with bringing ICT in the developing world–micro-financing, healthcare, education, media, etc. (OK maybe I am a little biased, I want those 5 billion readers too 😛 ).

Furthermore, by utilizing open-source technology and the collective will and creativity of 5 billion people facing similar problems, innovations in one part of the developing world can be adapted to the local needs of other developing regions. This would further expedite the global development process–open-source technology should be a core feature of the global internet connectivity push.

The possibilities are literally endless, as the utility and functions of the internet continue to evolve at ever faster rates. It should also be noted that new technological capabilities in LDCs will necessitate new policies, laws and oversight mechanisms to ensure gains are shared fairly. However, since these technologies are only new to certain regions, digital accountability mechanisms already exist for these regions to build on.   

I cannot stress enough how important bringing mobile ICTs to least developed countries is for sustainable human development, nor can I know how the technology will evolve in the future. Providing access to mobile information and communications technology empowers people, creating an enabling environment for a multitude of interrelated development objectives. These positive forces will naturally synergize, empowering people to challenge power-imbalances and hold powerful groups accountable for their human rights obligations.

ICTs are a natural fit for a large scale public-private-partnership (PPP). Companies can provide most of the start-up capital and technical know-how. Governments can create an education campaign about the benefits of ICTs and how to use them, while also guaranteeing companies market access and security of any capital / infrastructure installations (extremist groups will not like this idea as closing government service gaps will restrict their ability to buy goodwill and recruit new members). As ICTs help sustain the development process, new markets will emerge for communications companies to sell their products and services. This means more profits for companies, more tax revenue for governments, and a higher standard of living for people in LDCs. Not to suggest vested interests will not try to play spoiler (my regular readers by now know this is not the case), but overall a this is a win-win-win partnership.

Due to the indisputable importance of ICTs for sustainable human development, internet access should become an internationally recognized human right. Human rights obligations are primarily the responsibility of the state; in this case however, it seems that states have a willing and capable partner in the private sector. I will continue to keep the NN community up-to-date on this potentially-world-changing initiative.


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Economic Outlook: In a Well Timed Shift, Mexican President Embraces FDI in Energy Sector

Total Oil Produced in barrels per day(bbl/day) Mexico

Original Article:

President Enrique Peña Nieto of Mexico on Monday, pushing one of the most sweeping economic overhauls here in the past two decades, proposed opening his country’s historically closed energy industry to foreign investment.

Mr. Pena Nieto’s goal, like those of presidents before him, is to recharge Mexico’s economy by tackling areas that analysts agree hinder its expansion, which has averaged just 2.2 percent a year since 2001, according to the Organization for Economic Cooperation and Development.

Perhaps the worst of those is the creaky energy sector. Demand for energy in the country is growing so fast that Mexico could turn from an energy exporter to an energy importer by 2020, the government says.

Already, Mexico must import almost half its gasoline, mostly from the United States. Mexican companies pay 25 percent more for electricity than competitors in other countries, the government says. Although Mexico has some of the world’s largest reserves of shale gas, it imports one-third of its natural gas.

“With the reform that we are presenting, we will make the energy sector one of the most powerful engines in the economy,” Mr. Peña Nieto said at a ceremony to present the plan on Monday.

Mexico’s left-wing parties have been adamant that the Constitution’s 75-year-old prohibition on private investment should remain ironclad. From the right, the National Action Party, or PAN, proposed energy reform last month that would go even further than Mr. Peña Nieto to invite in private investment.

Public opinion is also suspicious about opening up the industry. A survey last year by CIDE, a Mexico City university, found that 65 percent of the public opposed private investment in Pemex, the state-owned oil monopoly.

The proposal would allow private companies to negotiate profit-sharing contracts with the government to drill for oil and gas. Under such a scheme, the reserves would continue to belong to the Mexican state, but investors would get a share of the profits. Private investment would be allowed in refining, oil pipelines, and petrochemical production.

Since the 1994 North American Free Trade Agreement exempted energy from Mexico’s broad economic opening, presidents have attempted to loosen the prohibitions that give Pemex sole control over all oil and gas exploration and production. No joint ventures are allowed. Those past proposals have often withered in Congress.

But this time, the precipitous decline of Mexico’s energy industry may work in Mr. Peña Nieto’s favor.

Pemex, which was long an important source of crude imports into the United States, is spending more to pump less. As Mexico’s giant Cantarell oil field in the shallow waters of the Gulf of Mexico has declined, production has dropped 25 percent from the peak in 2004, to just over 2.5 million barrels of oil a day.

At the same time, the amount the government budgets for Pemex to invest has steadily climbed to $26 billion this year. To increase production and reserves, Pemex needs to drill in the deep waters of the Gulf of Mexico and in onshore deposits of shale oil and gas. But the company has neither the capital nor the expertise to increase production significantly, analysts say.

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There are a number of reasons why now is the proper time for Mexico to open up its energy industry to FDI. Mainly;

1) Economic: Loose monetary policy is conducive to FDI. Investors can borrow at historically low rates, while energy is a relatively safe investment (if anything energy prices will only go up as the global economy strengthens). Even if Mexico puts strict regulations and high taxes on foreign operations (which it certainly should, more about this later), the opportunities for a relatively low risk-high reward investment exist. These factors will attract many potential investors, allowing Mexico to drive a harder bargain and secure the best deal for the Mexican people.

2) Political: Political instability and armed conflict in the Middle-East and Northern Africa make Mexico’s main competition for FDI much less attractive. Venezuela and Russia ramped up anti-Western rhetoric in recent months; the trust needed for large-scale investments may be compromised. Look at the updated 2013 Political Risk Map;  Mexico is arguably the most politically stable major oil producing country, both in terms of internal stability and in a regional context. When considering investing in extractive industries–with high start-up costs and very asset-specific capital investments–peace, stability, and trust are very important components of any deal. These factors are often more important than traditional “race to the bottom” incentives.

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The Mexican people are right to be wary of private investment in their natural resources. Natural resource rents can be a powerful tool for human development, if they are used the right way. However, globalization in extractive industries in the past decades has been marked with human rights violations, corruption, exploitation, and violence. This so called “natural resource curse” is not inevitable, but without proper oversight and accountability, “bad” governments will always be willing to cut lucrative deals from themselves and private corporations, at the expense of society as a whole. 

I do not see this as an issue in Mexico for a few reasons. Primarily, the linkages between governance, extractive industries, corruption, and sustainable human development are now well understood by the international community. Mexico, by waiting to liberalize it’s energy sector, has the benefit of adopting best practices / avoiding worst practices from past ventures. There is also a strong belief in Mexico that the oil belongs to the people. Political opposition, once the energy sector is liberalized, will manifest itself as “watch-dog” organizations and other social accountability mechanisms. Social accountability (aided by social media and ICT), relatively good governance at the global and national level, alongside the comparative advantages addressed earlier, suggest that Mexico will have a very positive experience liberalizing its energy sector (assuming the political will to develop exists).

If Mexico’s natural resources stay underground, they cannot be utilized for development purposes. The article cites a lack of capital and expertise holding back the Mexican energy sector–FDI addresses both of these impediments.  A new trend Mexico may want to utilize is having private investors pay for development projects–such as schools, hospitals, or other human capital enhancing institutions–as a way of signalling the investors desire for a mutually beneficial and long term relationship. Furthermore, because of high taxes, private companies will make it a point to run operations as efficiently as possible, maximizing both their share and Mexico’s share of profits. A quadruple layer of private, governmental, international and social accountability will exist, diminishing opportunities for  embezzlement and corruption by state or private interests.

The time is right for Mexico to liberalize it’s energy sector from a policymaker and investors point of view. However, this does not necessarily mean that the Mexican lay-man will agree with this assessment. The Mexican people’s distrust of FDI in extractive industries is understandable; it is the Mexican governments job to educate the public, assuring them that policies and safeguards will be put in place to ensure that liberalizing the energy sector benefits society as a whole, not just vested interests.

“It is fine to appeal to rationality, but when it is about these issues, it’s indispensable to touch the audience’s heart,” wrote an analyst, María Amparo Casar, in the Excelsior newspaper last week.

In a democracy, big policy changes generally require popular support. The rational political economy argument for liberalizing Mexico’s energy sector is strong. The remaining road block is convincing the Mexican people that such liberalization is in their best interests.


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Economic Outlook: European Youth Unemployment, Public-Private Partnerships and the “Magic” of Fiscal Stimulus

Indepensible Taxing and Spending

Original Articles:

Reuters

“European leaders agreed on new steps to fight youth unemployment and promote lending to credit-starved small business on Thursday after deals on banking resolution and the long-term EU budget gave their summit a much needed lift.

The 27 leaders resolved to spend 6 billion euros over the next two years to support job creation, training and apprenticeships for young people, and to raid unspent EU budget funds to keep the effort going thereafter.

Critics say the money is a drop in the ocean with more than 19 million people unemployed in the EU, and more than half of all young people under 25 without a job in Spain and Greece.”

“Separately, negotiators for the European Parliament, the European Commission and EU member governments clinched a deal on a 960 billion euro ($1.25 trillion) seven-year budget for the bloc for the period 2014-20, ending months of squabbling.”

“The leaders unanimously endorsed the agreement, EU Council President Herman Van Rompuy said, overcoming a last minute snag over Britain’s rebate, which will remain intact. The European Parliament must approve the deal next month so the new budget can take effect next January.

The banking resolution agreement designed to shield European taxpayers from having to foot the bill for rescuing troubled banks will be implemented on a national basis from 2018.

It lays the ground for a single system to resolve failed banks in the euro zone and the 27-nation EU, the second stage of what policymakers call a European banking union, meant to strengthen supervision and stability of the financial sector.”

“Most of Europe has been either in recession or on the brink for the past three years, while unemployment has steadily risen. EU unemployment now stands at 11 percent, the highest since records began, with youth unemployment a particular problem, especially in Spain, Greece, Italy, Portugal and Cyprus.

The new EU fund will back a “youth employment initiative” that would offer people under 25 a promise of a job, training or apprenticeship within four months of leaving education or becoming unemployed.

Politicians and sociologists are worried that extended unemployment for young Europeans will lead to a “lost generation” that never gets fully incorporated into economic life, with deep psychological and financial implications.”

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NYT

“The European Union may soon have a new budget — including the first cut to spending in its history — after a surprise breakthrough deal on Thursday.”

“The budget still needs final approval by the European Parliament, but that is looking more likely thanks to this agreement. The European Parliament president, Martin Schulz, called the deal “acceptable” and said he was optimistic that he would have a majority of Parliament members backing it at a vote next week.”

“Separate from national spending, the budget is designed in part to balance out the economic development of its members by giving funding to poorer countries. The European Union has funded thousands of infrastructure and capital projects over the years, from the installation of broadband networks to the upgrade of road networks.

The budget also includes items meant to generate economic growth, like research and development and a new, more accurate satellite navigation system. It also funds regulation and administration in such areas as mergers and competition, the review of national budgets to ensure they do not include excessive deficits, and banking supervision.

If the European Union fails to get a seven-year deal passed by Parliament before the end of the year, the bloc would have to revert to annual budgets, which would make long-term planning difficult.”

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It seems as if the leaders of the European Union–much of which has been mired by historically high unemployment and stagnant growth / recession since 2008–are finally realizing that greater fiscal coordination is needed in order to sustain the Monetary Union.

While it is true that the 7 year, 960 billion euro budget proposal represents an austerity program, in reality coming to an agreement creates the certainty and stability needed for businesses to make long term decisions (and thereby stimulating the economy more as opposed to hoarding cash for instance). It also allows for targeted long term spending, as opposed to a year-by-year budget which would complicate meaningful long-term investments in human and physical capital.

By concentrating on lower income European countries, the European Union will be picking the “low hanging fruit”, realizing a greater return on investment as these countries grow at faster rates. As these countries fully modernize, social spending will go down and new markets will open up, stimulating aggregate demand in the European Union as a whole.

In countries where such “low hanging fruit” does not exist, more specialized growth-targeting projects will help Europe’s higher income countries stay competitive in cutting edge fields going forward.

The plan also sets aside funding for administrative expenses, which will be important in ensuring compliance and accountability from the financial industries / MNCs (which is itself an important aspect in correcting Europe’s fiscal outlook). Managing too-big-too-fail financial institutions and tax evasions / illicit financial flows will be the two most important regulatory steps the EU can take to hold the ultra-wealthy accountable for their role in the current economic crisis and help prevent future crises.

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Targeting youth unemployment has particularly significant implications for sustainable growth in Europe. While it is true $ 6 billion is not a lot of money, I believe that this small “drop in the bucket” can have a large impact. The reason for this optimism is the ability to augment public spending through “public-private partnerships” (PPP).

Public-private partnerships are particularly suited for targeting youth unemployment. The private sector is uniquely positioned to give insight into exactly what skills young people will need for the jobs of today and tomorrow. The government is uniquely positioned to implement these programs into school curricula and unemployment conditions–targeting non-workers with skills needed to obtain jobs. The question is how much money can $6 billion in public investment leverage in private investment?

While there is no exact formula, at the ECOSOC Partnerships forum this past April, Mr. Chirstian Friis Bach, the Minister for Economic Development Coordination in Denmark, told the audience (including myself) how he was able to leverage over 500 million euros in private money from 40 million euros in public investment for various sustainable development initiatives. While the scale is not the same (40 million v. 6 billion initial public investment), this still suggests that leveraging a few hundred to a thousand percent in private funding is not an unrealistic expectation–especially considering the importance of Europe’s youth as a future employment pool / consumption engine, and evidence of large cash reserves held by MNCs.

As the yearly ECOSOC forum in Geneva kicks off July 1st, a golden opportunity presents itself to frame this youth-employment initiative as a large scale public-private partnership. If that $6 billion turns into $60 billion, suddenly that “drop in the ocean” represents a much more meaningful investment.

There is also the importance of proving to employers that the youth is ready and able to work. Employers may believe young people are unemployed because they are lazy or incompetent, leading to the passing over of an otherwise qualified younger person for an older more experienced worker–youth uneployment becomes a self-fulfilling prophecy. If the youth employment program can show that young people indeed posses the skills, passion, energy and innovative ideas needed to be productive workers, then young people will be able to shed the negative stigmas associated with unemployment.

As youth salaries and consumption increase aggregate demand, businesses will have to expand to meet that demand, creating even more jobs which would be more likely to be filled by younger candidates (an example of how the fiscal multiplier is currently >1, as public investment will not crowd out private investment but rather they are be mutually reinforcing).

The Great Recession has turned into a full blown economic Depression throughout much of Europe. To address this, fewer public funds must be channeled in a more concentrated way and supplemented by private funds. Governments bailed-out large private sector actors in the wake of the Great Recession because they understood the interdependence of people, government and the private sector. Now it is time for the private sector to return the favor by augmenting sustainable development initiatives.

To be clear, PPPs are not a call for charity–they represent mutually beneficial and sustainable economic arrangements. Businesses need future employees and customers, governments need non-dependent tax payers, and young people need jobs.