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Argentina: Special Analysis on the Equilibrium Real Exchange Rate

A Soft Transition to the Elections: The Calm That Precedes the Storm? I. Can anything go wrong before the elections? It seems that the government has enough instruments to maintain key economic variables under control until the elections. The official exchange rate should be m… Become a member to read the rest of this article […]

Figure of the week: The rise of African tech startups

Technology startups and the venture capital ecosystem that transforms ideas and fledgling companies into disruptive businesses are growing globally—a phenomenon that the Boston Consulting Group (BCG) explores in a recent report on the expansion and maturation of African tech startups. According to the authors, Africa enjoys a fertile environment for tech entrepreneurs due to the continent’s youthful and growing population, rising internet penetration, and the application of emerging technologies that have the potential to improve access to healthcare, financial services, education, and energy. As such, the research paper focuses on the meteoric growth of tech startups throughout the continent, persistent challenges and structural barriers stymying these firms’ further growth, and policy recommendations to overcome these obstacles and develop Africa’s innovation hubs.

Securing venture capital funding, according to BCG, is an important milestone for startups and is an important step that enables them to scale and develop novel products. In the study, BCG found that the number of African tech startups accomplishing this significant step experienced exponential growth between 2015 and 2020. In fact, over that time period, growth in the volume of African tech startups receiving financial backing was nearly six times faster than the global average (Figure 1).
Figure 1. Number of tech startups securing funding in Africa

Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
The trends in financing, though, do not reflect the overall performance of startups, as the continent’s record of scaling up and sustaining such businesses is not as promising. As shown in Figure 2, the vast majority of African tech startups do not survive beyond Series B venture capital funding—the second round of venture capital financing and the third stage of start-up financing (typically initiated by pre-venture seed and angel investor funding). As an indicator of their underperformance versus startups in industrialized countries, such as the United States, this trend suggests that African startups suffer from long-term instability, according to the authors. Indeed, compared to the United States, a greater proportion of African tech startups have yet to progress beyond early-stage seed funding—a trend that remained constant between 2014 and 2019. Figure 2 also reveals that, since 2014, some African tech startups have managed to progress beyond Series B VC funding—a positive trend that signals the maturation of African tech startups. However, as seen in Figure 3, only a few (though growing) African tech startups have successfully evolved into mature companies, as BCG’s analysis indicates venture capital investment in Africa suffers from relatively low average returns compared to other regions.
Figure 2. Percentage of startups receiving venture capital funding, by funding stage, in Africa and the United States

Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
Figure 3. Average return for venture capital investors after five years – by region

Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
According to the authors, a variety of factors make Africa an inhospitable startup environment, as the continent’s business environment is marred by pervasive structural barriers such as:

Low consumer purchasing power
Complex and inconsistent regulations
Inadequate data communications infrastructure
A fragmented marketplace of 54 countries
Scarce capital and digital talent

In addition to these structural barriers, startups face strong competition from large, established national firms and state monopolies. According to BCG, this concurrence of the continent’s structural barriers and entrenched competition risks “depriving [African countries and competing businesses] of crucial sources of innovative technologies, products, and business models.”

In order to unleash innovation that drives job creation, economic opportunities, and expansive access to finance, education, and health care throughout Africa, BCG advocates for corporate partnerships and government reform to generate strategic alliances with local startups. From the perspective of the private sector, strategic partnerships with local tech startups can introduce cutting-edge digital technologies and novel business models that benefit the firm, the startup enterprise, and consumers. From the perspective of the public sector, financial incentives for investors and large national companies to nurture and collaborate with fledgling startups have the potential to develop innovation hubs that draw foreign investment and talent to the country. In addition, BCG calls on African governments to improve the regulatory environment so that countries can better cultivate hospitable investment ecosystems for startups and venture capitalists.
For more on investment in Africa, read “Figures of the week: Venture capital trends in Africa,” “Figure of the week: Trends in mergers and acquisitions in Africa,” “Placing investment at the center of Africa’s development strategy,” and Africa Growth Initiative (AGI) Senior Fellow Landry Signé’s book, “Unlocking Africa’s Business Potential.”

Fiscal policies for a low-carbon economy

Global warming is real and climate disasters are believed to be occurring with higher frequency. The heightened risks and sizeable setbacks can move economies onto trajectories characterized by lower growth rates, greater financial and fiscal instability, and even poverty traps. This is especially true for more vulnerable developing countries. Our recent report, Fiscal Policies for a Low-Carbon Economy, suggests how a mix of carbon taxation and green bonds can address climate-related risks, improve economic recovery plans, and facilitate a transition to a low-carbon economy.

Research on climate economics finds that green bonds can accelerate a low-carbon transition, may have a positive impact on aggregate output and employment, help to advance renewable energy technology, address better the issue of fair transition, and be a stabilizing force on the financial market compared to conventional, in particular fossil fuel-based, assets. Our research confirms these findings.
Figure 1. Global renewable energy investment and green bond issuance, 2004-2019

Source: Bloomberg and Bloomberg New Energy Finance.
The growth of green bonds
New green bond issues reached over $250 billion globally in 2019, up from about $30 billion in 2014 and now on par with global renewable energy investment (Figure 1). The impressive increase in and diversification of green bonds since the first issuance by the World Bank in 2008 confirms the potential of this instrument to help finance the low-carbon transition. These assets are in high demand in many countries: Oversubscriptions, for example, were reported in 2020 for German as well as Egyptian green sovereign bonds and in 2019 for Chilean green bonds.
Green bonds help meet the financing requirements of the low-carbon transition but can also help accelerate the transition itself. In practice, green bonds can mobilize private capital and act as bridge financing at the project level to increase the availability of low-carbon technologies, filling the gap until carbon pricing initiatives can be sufficiently scaled up. One of the largest solar plants in the world, Noor-Ouarzazate Solar Power Station, leveraged more than $2.5 billion in financing, in part through green bonds. This project will substantially help Morocco reach its climate targets, increasing the share of renewable energy in its total energy mix to more than 40 percent with 2624 GWh of clean energy generation. By providing additional financing, green bonds can accelerate the mitigation process. This mobilization has been the most impressive in China, where the green bond market has grown to about $120 billion, quadrupling in size over four years.
Green bonds also have several characteristics that make them attractive to financial market investors and issuers. In particular, green bonds can act as a stabilizing force on the financial market compared to conventional (e.g., fossil fuel) assets. The report presents initial evidence that issuing green bonds may have favorable effects on risk control for asset and portfolio holdings, as well as broaden and diversify the investor base. For example, Figure 2 shows that a larger share of green bonds leads to lower variance in portfolio returns during recessions (or negative oil price shocks), confirming their benefit as a hedging instrument, in particular in recessions or periods of declining fossil fuel prices.
Figure 2. Portfolio variance of different shares of green and fossil fuel bonds

Source: Author calculations based on S&P data.
But while Figure 1 shows that green bond issuance has increased together with renewable energy investment in recent decades, green bonds still represent a tiny share of financial market assets.
Price carbon better, and add green finance
To accelerate the low carbon transition, carbon pricing has been widely proposed, with many researchers and policymakers supporting this approach. Carbon pricing supports a low carbon transition by making fossil fuel energy more expensive and subsidizing renewable energy production and use. In practice, carbon pricing has come in different forms such as an Emission Trading Scheme (ETS) and a carbon tax.
Financial market instruments have also been used to encourage the growth of renewable energy to achieve climate objectives. There has been an extensive flow of financial equity funds geared toward climate mitigation and adaptation policies, for example through alternative energy Exchange Traded Funds (ETFs). There is evidence that green assets have recently outperformed carbon-intensive assets (Figure 3). The report adds evidence confirming the benefits of issuing green bonds and investigates the combination of carbon taxes (e.g., a Pigouvian tax imposed on carbon-intensive goods and services) with green bonds (a market debt instrument to fund low-carbon investments).
Figure 3. Market performance of MSCI financial market indices

Source: MSCI.
There are three benefits of combining carbon tax and climate bonds to accelerate climate mitigation and adaptation efforts:

Carbon pricing relies on substitution effects, but substitutes may not be currently available and need to be produced through private or private-public partnership investments. Green bonds can work as bridge finance for low carbon substitutes.
Whereas carbon taxes can reduce negative externalities (and incentivize investments to reduce them), green bonds help to generate positive externality effects – both appear to be needed.
Green bonds can bring about more financial stability when held as an asset class in portfolios and reduces the problem of “stranded assets.”

But in developing countries, carbon pricing and green bond initiatives are still in the initial stages (see Figure 4).
Figure 4. Countries with carbon pricing initiatives or green bonds

Source: Bloomberg Terminal data and World Bank Carbon Pricing Dashboard.Note: Data for 2017-2020. Countries in green are those which have implemented both green bonds and carbon pricing at the federal or local level; countries in light blue have implemented green bonds only; countries in dark blue have implemented carbon pricing only.
The demand for green bonds is quickly rising in middle-income countries, but there are significant roadblocks for green investment even in advanced countries such as short-termism, small markets, liquidity, and governance problems. The report finds, however, that sustainable finance in the form of green bonds is on a steep learning curve and is potentially complementary to carbon pricing—in particular to carbon taxation.
The market is still learning
The green bond portion of the asset market is still small, market participants are heterogeneous, and people are still learning. Though green bond performance depends on many factors—such as the issuer, rating, currency, bond maturity, and sector—our report provides some encouraging messages:

Green bonds appear to be less volatile than conventional bonds and assets, in particular those based on fossil-fired energy). Green bonds also appear to sell at a (negative) premium (see Kapraun and Scheins, 2019), while their Sharpe Ratio (the return-risk trade-off) is similar or even higher than that of conventional or fossil fuel-based bonds.
The literature and our study suggest a strong co-movement between oil price fluctuations and carbon-intensive security returns. Green bonds exhibit lower volatility and little co-movement with fossil fuel-based asset prices and returns, and can therefore be a good hedge for investors.

Lower volatility and yields may provide private as well institutional investors with superior asset diversification opportunities and steady returns for the investors, as well as lower capital costs for issuers. Whereas with fossil fuel-backed assets, co-movement with oil price fluctuations makes carbon-dependent countries’ income vulnerable and increases financial volatility in certain sectors and countries.
Given the potential benefits of green fiscal instruments, governments should consider including them in their economic recovery plans. The combination of carbon taxes with green bonds allows long-run climate externalities to be addressed, and possibly even incentivizes the emergence of positive externalities. Though, during business cycle downturns a carbon tax levy might be less advisable while green bonds (and green assets in general) appear to be a useful portfolio and macroeconomic stabilizer.

COTE D’IVOIRE: Gbagbo back, questions remain

Following the return of former president Laurent Gbagbo (2000-2011) last week, important questions concerning his political future remain unanswered. Chief among those is what kind of arrangement Gbagbo secured from President Alassane Ouattara concerning his pending prison senten… Become a member to read the rest of this article

Minding the gap: The disconnect between government bureaucracies and cultures of innovation in scaling

Many contemporary practitioners and researchers tasked with bringing proven education innovations to scale around the world know that scaling is less a technical activity, but a mindset as much as an implementation process. As an adaptive mindset, scaling shares myriad characteristics with its close cousin: innovation. Both are complex and demand creative thinking, their outcomes are never fully predictable, and both require flexibility and engagement with the “what-ifs?” of life.

And, yet, to be supported at scale by government, most education innovations first must be adopted by public-sector decisionmakers—a group that lives within a decidedly bureaucratic culture.
The contradiction between the government mechanics of adopting innovations and the culture of implementing them becomes a central barrier to education innovations being adopted at scale.
Barriers to scale
Nayer, Saleh, and Minj (2016) point out that many governments decentralize power, which therefore requires that a new intervention gain acceptance across several sectors and personnel within a bureaucratic system. Decentralizing power is necessary for democracy, but for the logistics of implementing social science innovations it can be challenging. The authors also argue that government bureaucracies prioritize routines, precedent, and decision-trees, but innovations need flexibility and some organizational freedom to flourish. “By conforming to bureaucracies’ design and following the decision-making priorities that result,” they write, “civil servants can internalize and institutionalize a risk-averse behavioral culture. This is not conducive to scaling innovation (p. 5).” Similarly, Al-Ubaydli, List, and Suskind (2019) note that bureaucracies centralize efficiency, but innovators centralize effectiveness.
So, there lies the rub: The very conditions that social science innovations need in order to flourish are the conditions that public bureaucracies repel.
Generally speaking, policymakers tend to be failure-avoidant, linear thinkers while innovators in social sciences work in an atmosphere of experimentation and learning-by-doing. Successful innovations often need a few failures along the way as they’re implemented, adjusted, and embedded into widespread practice.
So, there lies the rub: The very conditions that social science innovations need in order to flourish are the conditions that public bureaucracies repel.
Compounding this disconnect is decades of technical-rational social science innovators who falsely promised governments that “scaling up” was a simple process. Suskind and List (2020) point out that previous generations of implementers in education, public health, and poverty alleviation convinced policymakers that “rolling out” an intervention was straightforward—and yet that was rarely true. The resulting failures cost policymakers significant money and reputational capital over the years. As a result, government decisionmakers are now reluctant to trust social science innovators, implementers, or researchers. As Suskind and List tell us: Each generation of errors makes it harder for contemporary innovators and implementers to get policymakers to listen to them.
We offer a few recommendations.
Closing the culture gap
For policymakers and other public-sector decisionmakers: Don’t hold the mistakes of old scaling paradigms against the newer models. Many contemporary teams working to implement proven education innovations at scale have learned from the past and see scaling as complex, contextualized, in need of widespread support, and unpredictable—but absolutely necessary if we’re to ameliorate intractable social problems. This new generation of scaling impact deserves a chance.
Additionally, public-sector decisionmakers can push against an understandable but sometimes self-defeating bureaucratic machinery that craves technical-rationality and risk-aversion. Finding the political will to go against the grain and inject some tolerance for unpredictability, course correction during implementation, and managed risk might be just what is needed to pry open rigid decisionmaking structures. We’re not advocating that governments gamble on untested innovations but rather that decisionmakers understand that if you are to trust a proven innovation, you will need to accept that implementing and scaling it for deep impact won’t be a quick, linear, error-free process.
For implementers and researchers of education innovations to scale: Recognize that national and regional decisionmakers don’t always share your mindset. Rather than reinforcing the binary, perhaps consider yourself teachers as much as implementers: What do decisionmakers need to know to feel comfortable supporting your innovation? What would it take to develop a scaling strategy from the beginning that foregrounds a continuous learning system, ongoing data collection, and realistic goals at each step? One that treads that middle path between being too tight (breaking like a branch that can’t bend in a storm) or too loose (sacrificing too much fidelity to the original innovation)? And how could you articulate the innovation to decisionmakers in new ways to get past the research jargon or technical details and adopt user-friendly, politically appealing, community-minded language? There is value to building personal relationships across the gap, prioritizing informal dialog (not only technical presentations), and acknowledging the bind into which bureaucracies often put decisionmakers.
If each side took some responsibility for the lacuna between the two cultures and consciously moved a few paces toward the middle, we might improve things. Government decisionmakers could accept that changing education systems requires some risk and a different procedural approach. Innovation implementers and researchers could thoughtfully plan for unpredictability; study and learn from scaling effects at all phases; and cultivate a broad network of partners and allies both before and during the scaling process.
Maybe, just maybe, this new generation of scaling impact as recursive and mutually adaptive can meet a new generation of public decisionmakers ready to loosen the nuts and bolts of their bureaucracies, and together, can ensure that promising interventions and education programs flourish.

TURKEY: Some EU money while “swap line” talk makes a comeback

Despite the talk of a “positive agenda”, the 24-25 June European Council (EC) summit is unlikely to be a significant moment for the future development and improvement of Turkey-EU relations. Concrete progress in relation to the upgrading of the longstanding Turkey-EU customs unio… Become a member to read the rest of this article

GERMANY: A manifesto for the country’s last catch-all party

Chancellor Angela Merkel’s Christian alliance (CDU/CSU) has presented its manifesto, the cabinet has officially adopted the 2022 budget and the fiscal outlook until 2025, and the Bundestag is concluding its final session in this legislative period. With this week’s developments, … Become a member to read the rest of this article

Argentina: Of Economic Programs, Jobs, and Exchange Rates

Of Economic Programs, Jobs, and Exchange Rates This week the Undersecretary of the Treasury of the United States asked Argentina to make an economic plan that boosts private employment. That plan would count with the support of his country and therefore would easily go through t… Become a member to read the rest of […]

Argentina: Special Analysis on the Equilibrium Real Exchange Rate

Annual Economic Report 2021

The BIS is pre-releasing a chapter on CBDCs today; the remaining chapters of the Annual Economic Report 2021 and the Annual Report 2020/21 will be released on 29 June.