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Addressing America’s crisis of despair and economic recovery

Summary
Despair in American society is a barrier to reviving our labor markets and productivity, jeopardizing our well-being, health, longevity, families, and communities—and even our national security. The COVID-19 pandemic was a fundamental shock, exacerbating an already a growing problem of despair.
This despair in part results from the decline of the white working class. It contributes to our decreasing geographic mobility and has political spillovers, such as the recent increase in far-right radicalization. At the same time, other population groups are also suffering, for different reasons. Over past few years, for instance, suicides increased among minority youth and overdoses increased among Black urban males (starting from a lower level than whites but now exceeding it).
Policy responses have been fragmented, with much focus on interdiction or ex-post treatment rather than on the root causes of despair. There are local efforts to boost the well-being of vulnerable cohorts, but most are isolated silos. There is no federal level entity to provide the vulnerable with financial or logistical support, nor is there a system that can disseminate relevant information to other communities seeking solutions. While federal agencies—such as the Centers for Disease Control (CDC)—track mortality trends, no system tracks the underlying causes of these deaths. In contrast, many countries, such as the U.K. and New Zealand, track trends in well-being and ill-being as part of their routine national statistics collection and have key leadership positions focused exclusively on these issues.
This policy paper proposes a new federal interagency task force to address our nation’s crisis of despair as a critical first step to sustainable economic recovery. The task force would both monitor trends and coordinate federal and local efforts in this arena. We identify five key areas the task force could monitor and help coordinate: data collection; changing the public narrative; addressing community-wide despair as part of the future of work; private-public sector partnerships; and despair as a national security issue.
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Solidifying the DFC-USAID relationship

Transforming the Overseas Private Investment Corporation (OPIC) by expanding its resources and authorities while merging it with other financing mechanisms—including the U.S. Agency for International Development’s (USAID) Development Credit Authority (DCA)—to create the U.S. International Development Finance Corporation (DFC) understandably required a major sales effort. While the foreign policy elites saw the DFC as a counter to China’s massive Belt and Road Initiative, advocates for international development viewed the DFC as an expansion of U.S. development leadership. And while fiscal conservatives were sold on prospective cost savings through the elimination of duplication, OPIC management told affected staff at USAID (the DCA team that was transferred to the DFC) that all of them would be offered jobs at the new DFC. Meeting all the expectations was always going to prove difficult—but one of the trickiest topics is how to best solidify the DFC-USAID relationship in order to maximize development results.

The DFC and USAID have a long history. In 1971, when OPIC was created, it assumed investment guarantee and promotion functions formerly conducted by USAID. The USAID administrator has always been a member of the OPIC board of directors since its creation, and served as the initial chairman of the board. Over the years, coordination between the two agencies has ebbed and flowed. In 2018, when Congress merged OPIC with several other federal programs and expanded its capital and authorities to create the DFC through the Better Utilization of Investments Leading to Development (BUILD) Act, a cornerstone philosophy of the legislation was that a vibrant collaboration between USAID and the DFC would be crucial to achieving major development impact.
Eight challenges for collaboration

Mismatch of development sectors. The sectors (or subsectors) on which USAID is focusing at any given time, either as a result of Congressional and executive branch priorities or country-level strategies, may not always be sectors in which the DFC has deep investment expertise and/or in which there is large private sector interest (as expressed via applications submitted to the DFC).
Different approaches and metrics for success. Historically, OPIC has been a demand-driven organization that promptly responded to deals presenting themselves to its Washington-based staff. OPIC measured its success largely on its earnings and the amount of investment it facilitated. USAID, on the other hand, undertakes long-term development projects usually designed by staff in the field, in collaboration with host governments and other local stakeholders and subject to detailed Congressional oversight—resulting in long planning and budgetary timelines. Success of USAID projects has been measured by development outcomes and advancement of U.S. foreign policy goals.
Tension between positive earnings and development effectiveness. The priority placed by the DFC on returning funds to the U.S. Treasury ensures that the DFC often ignores smaller or riskier deals that may only break even, but which can yield significant development results. USAID uses 100 percent of its program funding for grants and contracts that are never repaid, so there is a natural disincentive for DFC staff to work on USAID-sponsored transactions that may only break even or earn negative returns, even though such deals would still be more cost-effective for American taxpayers than a grant or contract.This also means that the DFC “risk analysis models” are much more risk averse than those previously used by the USAID DCA, despite the fact that DCA had a perfectly decent credit history. As a result, DFC deals are more expensive. A DCA $15 million guarantee for a deal in Colombia could be funded with $250,000 (the so-called “subsidy” paid to cover the risks), but now a similar $8 million guarantee for a DFC deal in Columbia requires $340,000.
Misplaced focus on large deals. Some DFC staff currently mistakenly believe that the BUILD Act’s provision stating that the “Maximum contingent liability of the [DFC] outstanding at any one time shall not exceed in the aggregate $60,000,000,000” means that the DFC must reach that ceiling within the seven-year life of the BUILD Act or risk this ceiling being reduced. This is then cited as a reason why the DFC needs to focus on big deals regardless of the scale of development impact.
Different definitions of development success. USAID and DFC view the definition of “major development outcomes” differently. DFC Impact Quotients (IQ) scores can be quite high for projects that USAID might not see as having major development impacts in a sector or country.
Limited political incentives. While heads of U.S. government agencies care deeply about their organizations’ mission, some are also very focused on their agency’s reputation, as well as their personal legacy and reputation. As such, it is a rare DFC CEO or USAID administrator who has the time to spend on helping their colleague get a big “win” if the credit is not shared equally or if the project ranks very low on their own list of priorities.
Limited staff incentives. Currently, DFC-USAID collaboration is not prioritized in the performance evaluations of the staff of either agency. While the performance review systems at USAID vary by hiring type, for those involved in designing and running programs, reviews primarily focus on management and development success of programs. At the DFC, annual performance reviews largely focus on the number and size of deals closed and the performance of deals already on the books. There is little at either agency that would reward staff for collaborating and jointly advancing results, especially factors prioritized by the other agency.
Lack of cross-agency understanding. Significant numbers of staff in both organizations have significant gaps in their understanding of the other organization’s processes, incentives, and strategic orientation, making it difficult for them to understand how the two organizations might best work together and the benefits that can arise from such a collaboration.

Overcoming these challenges requires a sophisticated set of responses. Some can be legislated; others will depend on the commitment of USAID and DFC leadership to facilitate strong collaboration that persists across electoral cycles and changes in administration.
Recommendations
Joint strategy for collaboration. Once every four years (in the year following the presidential election), USAID and DFC should be required to prepare or update a joint strategy for collaboration.1 As part of the strategy, the two organizations should agree on at least three to five sectors of joint interest based on each of their overall sectoral priorities (and funding).2 Similarly, the two organizations should agree on at least five countries of joint interest based on each of their overall country priorities (and funding). The National Security Advisor can facilitate final decisions.
Once the sectors and countries of joint interest are identified, the DFC CEO should ensure sufficient staff expertise within nine months to process any proposed deals in the agreed-upon sectors and coordinate with relevant USAID staff. The USAID administrator should issue an Agency Notice requiring any and all programs in the sectors and countries to identify ways in which working with the DFC could enable achievement of some or all of the programs’ goals prior to using other programming tools. When these modalities of collaboration are identified, USAID should prioritize budget and efforts to support these approaches, and DFC investment papers should reflect that there has been early consultation with USAID and the CDO on each transaction.
Primacy of development. Congress needs to make clear that its number one priority for the DFC is achieving substantial development results. Financial losses on the overall portfolio are to be avoided, but earning a return for American taxpayers has never been mandated in either the OPIC or DFC statutes and should be seen as a nice bonus rather than essential. Positive returns within the portfolio should be used to create a potential fund that DFC could use to take on more risk for greater development impact than OPIC was willing to take on in the past, particularly in low-income countries. Similarly, Congress should clarify that reaching the contingent liability cap within seven years should not be used as a reason to focus on large transactions.

GHANA: Promise to stay on target, but fiscal risks loom large

On 29 July, Finance Minister Ken Ofori-Atta presented the mid-year budget review – an annual exercise mandated by law – in parliament. Unlike in previous years, Ofori-Atta did not introduce additional taxes to make up for a revenue shortfall incurred in H1, nor did he request a s… Become a member to read the […]

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EU growth resumes; US growth continues but leakages into imports are strong Macro-series-Key-Developments-Chart-of-the-week-30-July-2021 … Become a member to read the rest of this article

Is West Africa ready for a single currency?

Since the early 2000s, the 15-member Economic Community of West African States (ECOWAS) has been pursuing a common currency agenda, centered on the “eco,” with the intention of reducing barriers to doing business across the region and increasing trade overall. While the implementation of the new currency has been postponed due to hurdles in macroeconomic convergence across the countries and the disruptions caused by the COVID-19 pandemic, among other challenges, many policymakers remain keen to forge ahead, with implementation now tentatively set for 2027.

As the region considers steps toward this goal, Brookings scholars Eswar Prasad and Vera Songwe have written an ambitious book on the regional integration agenda in West Africa and the role for a single currency in which they consider important questions concerning how ECOWAS could achieve greater trade and financial integration, with or without a currency union, as well as the ramifications of the agenda for the African continent. Three key contributions emerge from the book.
First, this book by Prasad and Songwe stands out for the methodical thoroughness of the analysis. The authors outline the factors that conventional theory sees as critical for an “optimal currency area” (OCA), originally conceived by Robert Mundell in his 1961 article, “A theory of optimum currency areas.” The authors compare these factors to the data and essentially conclude that “ECOWAS is not equal to an OCA.” As we have learned from Ashoka Mody’s 2018 book, “Euro Tragedy: A drama in nine acts,” Europe also did not meet the ideal conditions for OCA when the European Union (EU) embarked on its monetary union experiment. Drawing on a broad array of theoretical literature and applied policy analysis, Prasad and Songwe outline both the potential benefits and the significant costs of monetary integration. The book highlights how differences in economic structure and macroeconomic convergence can and might deter the ECOWAS common currency project and how a strong institutional framework is necessary, especially in terms of regional financial market development and unified legislation.

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Second, linked to the previous point, the book provides an academic framework in which all factors considered critical for the stability of a currency union (especially under macroeconomic stress) are identified and compared to econometric data as well as the institutional and policy realities in West Africa. These are the “hard factors” in the book. Notably, according to the authors, these hard factors do not yet support a transition to a single currency for West Africa. Policymakers might act regardless. They did so in the eurozone, which did not meet the criteria for an optimal currency area at the time of the implementation of the euro. “Soft factors” in the form of a regional vision extending far beyond the realms of monetary policy were used to cover over some of the concerns and hard gaps (correctly) identified during the run-up for monetary union. But these same soft factors subsequently proved to be the ultimate counterweight to the centrifugal forces unleashed by crisis and member state divergence (see Y. Varoufakis’ 2017 book, “Adults in the room”).
In that way, the book reiterates the importance of these soft factors when it highlights Nigeria’s monumental importance as an anchor, representing greater than 60 percent of the gross domestic product of ECOWAS, and compares that to Germany’s role as the eurozone’s main anchor. Germany—and specifically its export-oriented economy—derived benefits from the single currency but the country as a whole had to sacrifice its cherished conservative monetary policy and provide subsidies to weaker members of the euro area. This result appears to be not just the consequence of a cold cost-benefit analysis but also a commitment to Europe, which is broadly popular across the political center of gravity in the country, allowing for enough elasticity in what was perceived to be a rules-based project.
As we argued elsewhere (in “An evaluation of the single currency agenda in the ECOWAS region”):
“[T]he euro lessons show that even with robust institutions and strong political commitment, sustaining a single currency remains a challenge. These challenges are likely to be much more difficult to surmount in West Africa where the pre-conditions for success, including strong political will and robust institutions, are evidently absent. Let us also be clear that the euro was never just about monetary policy and trade. It was shaped by a vision of a united Europe. And this does not appear to be an entirely fruitless effort, especially in the eyes of Europeans coming of age in the new millennium.”
There are several areas where the book could provide a deeper analysis. First, the book is relatively silent on the geopolitics surrounding the currency reform. The book could discuss further the competing visions and perspectives of the anglophone bloc, led by Nigeria, and the francophone bloc, led by Côte d’Ivoire, as there appear to be two contrasting visions of the currency. For example, in January 2020, Nigeria criticized the December 2019 decision of French President Emmanuel Macron, Ivoirian President Alassane Ouattara, and the eight-member West African Economic and Monetary Union to replace the CFA franc (which is pegged to the euro) with the eco, saying that it conflicted with the ECOWAS broader vision of a single currency across all 15 West African countries. There also seem to be competing economic philosophies between the anglophone and francophone blocs, with Ghana, perhaps, as a potential bridge.
Second, the book leaves some questions unanswered. What is Nigeria’s perspective on the umbrella ECOWAS initiatives? What trade-offs and shared visions for the region can be identified? Fringe political movements in Europe may not threaten the single currency directly but their ascendance toward the center of political power could threaten the policy elasticity on which the euro’s survival, through all its recent upheavals, relied. How does the West African political landscape compare?
One issue in this context is the asymmetry between different interest groups: Owners of businesses with cross-border activities may derive benefits from a rule-based monetary union. Poor farmers may prefer a central bank with a domestic mandate to fund monetary stimulus. Nigeria’s multitier exchange rate mechanism highlights these policy dilemmas. Aside from the convergence of member states, which is analyzed by Prasad and Songwe, do we need to focus more on convergence criteria between different interest groups inside single countries, specifically inside Nigeria?
Third, the book highlights the various gaps without ranking them. Do the authors, nonetheless, have a view on policy priorities preceding a transition? How strong is the evidence that West Africa will derive benefits from a single currency? Most of the book focuses on impediments to a successful transition to and subsequent stability of a currency union. The benefits, such as growth of intra-regional trade and development of cross-border supply chains, are of a more general nature. Are there lessons from the West African Economic and Monetary Union or even from countries (e.g., the U.K.) that have chosen to stay out of currency unions among their main trading partners? Do we have to be conscious of the inherent dilemma that, although we have a good idea of what it takes to successfully transition (i.e., the outlined hard factors and maybe some of the soft factors), we cannot equate that to the quantifiable expectations of the benefits of a monetary union and their accrual over time? Are there specific risks to a transition in the context of West Africa? We know that potential benefits of economic integration are a consequence of transacting seamlessly in a single currency and eliminating exchange rate volatility. Are there potential risks such as portfolio flow volatility or trade deficits?
Fourth, when we talk about West Africa’s currency union, are we ultimately talking about promoting industrial growth and integration into the global supply chain? Asian economies grew into their dominant position along global supply chains without a currency union while their experiment with pegged currencies caused a temporary setback during the Asian Financial Crisis of 1997-1998. (See “Common currency? Well, region must first build trust and grow investment” in The East African.)
Against this background, one may argue that it was not monetary policy stability and integration that drove development. Do policymakers need to think about a future both inside and outside the framework discussed here?

Finally, let us not underestimate the importance of visionary leadership. In the EU, German Chancellors Helmet Kohl and Gerhard Schroder and France’s Jean Monnet were visionaries motivated by the quest for an integrated Europe—a Europe with no more wars. In West Africa, Presidents Yakubu Gowon (Nigeria) and Gnassingbe Eyadema (Togo) built trust and ensured the successful launch of the Treaty of Lagos that established ECOWAS on May 28, 1975. The primary motivation of these two visionary leaders was a united West Africa—not a conglomeration of anglophone, francophone, or lusophone blocs.
In sum, Prasad and Songwe have written a thoughtful book that explores many aspects of the common currency project in West Africa. The book can serve as a call to action for policymakers to seriously consider the hard questions posed by the authors.

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MALAYSIA: How much longer can Prime Minister Muhyiddin Yassin hold on?

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